As Filed With The Securities And Exchange Commission On February 5, 1998.
File Nos. 333-03093 and 811-07615
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
---
Post-Effective Amendment No. 5 (X)
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 7 (X)
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
GREAT AMERICAN RESERVE INSURANCE COMPANY
(Name of Insurance Company)
11815 North Pennsylvania Street, Carmel, Indiana 46032
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
(800) 437-3506
(Insurance Company's Telephone Number, Including Area Code)
Karl W. Kindig, Esq.
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
(Name and Address of Agent for Service of Process)
Copies to:
Michael Berenson, Esq.
Ann B. Furman, Esq.
Jorden Burt Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Suite 400 East
Washington, D. C. 20007-0805
Approximate Date of Commencement of the Proposed Public Offering of the
Securities:
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of rule 485
on (date) pursuant to paragraph (b)(1)(v) of rule 485
X 60 days after filing pursuant to paragraph (a)(1) of rule 485 on (date)
pursuant to paragraph (a)(1) of rule 485 75 days after filing pursuant to
paragraph (a)(2) of rule 485 on (date) pursuant to paragraph (a)(2) of
rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously-filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
declares that an indefinite amount of individual variable annuity contracts is
being registered under the Securities Act of 1933.
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RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
REGISTRATION STATEMENT ON FORM N-3
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-3 Location in
Item No. Registration Statement
<S> <C>
Part A: Information Required In Prospectus
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis or Highlights Prospectus Summary; Fees and Expenses of the
Subaccounts
4. Condensed Financial Information Financial Statements; Financial Highlights of the
Subaccounts
5. General Description of Registrant Great American Reserve Insurance Company;
and Insurance Company The Separate Account; Investment Objectives
and Policies of the Subaccounts; Investment
Techniques and Other Investment Policies
6. Management Management of the Separate Account
7. Deductions and Exchanges Charges and Deductions; Management of the
Separate Account
8. General Description of Variable Description of the Contract; Separate
Annuity Contracts Account Voting Rights
9. Annuity Period Description of the Contract -- Annuity Period
10. Death Benefit Description of the Contract -- Payment on Death
11. Purchases and Contract Value Description of the Contract -- Purchase
Payments, Accumulation Provisions; Distribution
of Contracts
12. Redemptions Description of the Contract -- Withdrawals,
Suspension of Payments, Ten Day Right to
Review
13. Taxes Federal Income Taxes
14. Legal Proceedings Legal Proceedings
15. Table of Contents of Statement of Table of Contents of Statement of
Additional Information Additional Information
</TABLE>
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<TABLE>
<CAPTION>
N-3 Location in
Item No. Registration Statement
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Part B: Information Required In
Statement of Additional Information
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information and History General Information and History
19. Investment Objectives and Policies Investment Policies and Techniques of the
Subaccounts; Investment Restrictions of the
Subaccounts
20. Management Management of the Separate Account
21. Investment Advisory and Other Management of the Separate Account; Custody
Services
22. Brokerage Allocation Portfolio Transactions and Brokerage
23. Purchase and Pricing of Securities Determination of Accumulation Unit Values
Being Offered
24. Underwriters Underwriter of the Contracts
25. Calculation of Performance Data Performance Information; Calculation of
Return Quotations
26. Annuity Payments Not Applicable
27. Financial Statements Financial Statements; Independent
Accountants
</TABLE>
<PAGE>
<TABLE>
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N-3 Location in
Item No. Registration Statement
<S> <C>
Part C: Other Information
28. Financial Statements and Exhibits Financial Statements and Exhibits
29. Directors and Officers of the Directors and Officers of the
Insurance Company Insurance Company
30. Persons Controlled by or Under Persons Controlled by or Under
Common Control with the Insurance Common Control with the Insurance
Company or Registrant Company or Registrant
31. Number of Contract Owners Number of Contract Owners
32. Indemnification Indemnification
33. Business and Other Connections Business and Other Connections
of Investment Adviser of Investment Adviser
34. Principal Underwriters Principal Underwriters
35. Location of Accounts and Records Location of Accounts and Records
36. Management Services Management Services
37. Undertakings Undertakings
38. Signatures Signatures
</TABLE>
<PAGE>
PART A
PROSPECTUS
<PAGE>
Rydex Advisor Variable Annuity Account
of
Great American Reserve Insurance Company
Administrative Office: 11815 North Pennsylvania Street, Carmel, Indiana 46032
Phone: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS - NONPARTICIPATING
Offered through
PADCO Financial Services, Inc.
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
Phone: (888) 667-4936
The variable annuity contract described in this Prospectus (the "Contract") is
designed to provide retirement benefits for certain types of purchasers. This
Contract is intended for use by Contract Owners who intend to invest as part of
a "tactical asset allocation" or "market timing" investment strategy advised by
professional money managers. Tactical asset allocation involves moving assets
among several or all of the investment portfolios available for investment under
the Contracts (the "Subaccounts"); market timing involves moving assets between
the Nova and Money Market Subaccounts. The investment options available under
the Contract involve certain aggressive investment techniques, which may include
engaging in short sales and transactions in futures contracts and options on
securities, stock indexes, and futures contracts. As discussed more fully below,
these techniques are specialized and involve risks that are not traditionally
associated with otherwise similar contracts.
Accumulation of the Contract values may be on either a fixed or variable basis,
or on a combination fixed and variable basis. Accumulation on a variable basis
is provided by allocations to the Rydex Advisor Variable Annuity Account (the
"Separate Account"). Variable benefits are not guaranteed and will vary
according to investment performance. Accumulation on a fixed basis is provided
by allocations to the General Account of Great American Reserve Insurance
Company. (See "The Fixed Account" on page I-__.) Annuity payments are only
available on a fixed basis. This Prospectus describes only the Separate Account
features of the Contract except where specific reference is made to the Fixed
Account.
The Separate Account is a segregated investment account of Great American
Reserve Insurance Company ("Great American Reserve"), and is comprised of seven
investment portfolios each of which is managed by PADCO Advisors II, Inc.
("PADCO"). Allocations to the Separate Account will be invested in the separate
investment portfolios ("Subaccounts") selected. You bear the full investment
risk with respect to the Separate Account. Seven Subaccounts are currently
available under the Contract with the following investment objectives:
The Nova Subaccount - To provide investment returns that correspond to the
performance of a benchmark for common stock securities.
The Ursa Subaccount - To provide investment results that will inversely
correlate to the performance of a benchmark for common stock securities.
The OTC Subaccount - To attempt to provide investment results that correspond to
the performance of a benchmark for over-the-counter securities.
The Precious Metals Subaccount - To attempt to provide investment results that
correspond to the performance of a benchmark primarily for metals-related
securities.
<PAGE>
The U.S. Government Bond Subaccount - To provide investment results that
correspond to the performance of a benchmark for U.S. Government securities.
The Juno Subaccount - To provide total return before expenses and costs that
inversely correlates to the price movements of a benchmark for U.S. Treasury
debt instruments or futures contracts on a specified debt instrument.
The Money Market Subaccount - To provide current income consistent with
stability of capital and liquidity.
Six of these Subaccounts seek investment results that correspond over time to a
specified benchmark, as follows:
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SUBACCOUNT BENCHMARK
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- ---------------------------------------------- --------------------------------------------------------------------
The Nova Subaccount 125% of the performance of the S&P500 Composite Stock
Price Index(TM)
- ---------------------------------------------- --------------------------------------------------------------------
The Ursa Subaccount Inverse (opposite) of the S&P500 Composite Stock Price
Index(TM)
- ---------------------------------------------- --------------------------------------------------------------------
The OTC Subaccount NASDAQ 100 Index(TM)(NDX)
- ---------------------------------------------- --------------------------------------------------------------------
The Precious Metals Subaccount Philadelphia Stock Exchange Gold/Silver Index(TM) (XAU)
- ---------------------------------------------- --------------------------------------------------------------------
The U.S. Government Bond 120% of the price movement of current Long Treasury Bond
Subaccount
- ---------------------------------------------- --------------------------------------------------------------------
The Juno Subaccount Inverse (opposite) of the price movement of the current Long
Treasury Bond
- ---------------------------------------------- --------------------------------------------------------------------
</TABLE>
This Contract is designed to be used with tactical asset allocation or
market-timing investment services. Providers of such services are engaged by you
to make allocation and transfer decisions on your behalf. You should consider
whether this Contract with such services is appropriate for your needs as well
as the tax consequences related to such services (see "Tactical Allocation
Services" and "Federal Income Taxes").
Investments in the Money Market Subaccount are neither insured nor guaranteed by
the U.S. Government.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus contains information about the Contract and the Separate Account
that a prospective Contract Owner should know before investing. It should be
read and retained for future reference. Additional information about the
Contract and the Separate Account is contained in a Statement of Additional
Information, dated February ____, 1998, 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 February ____, 1998.
I-2
<PAGE>
TABLE OF CONTENTS
Page
PART I
DEFINITIONS..................................................................I-
PROSPECTUS SUMMARY...........................................................I-
FEES AND EXPENSES OF THE
SUBACCOUNTS................................................................I-
FINANCIAL STATEMENTS.........................................................I-
FINANCIAL HIGHLIGHTS OF THE SUBACCOUNTS......................................I-
GREAT AMERICAN RESERVE
INSURANCE COMPANY...........................................................I-
THE SEPARATE ACCOUNT.........................................................I-
INVESTMENTS OF THE
SUBACCOUNTS.................................................................I-
Eligible Investments.......................................................I-
Investment Objectives......................................................I-
The Nova Subaccount.....................................................I-
The Ursa Subaccount.....................................................I-
The OTC Subaccount......................................................I-
The Precious Metals
Subaccount...........................................................I-
The U.S. Government
Bond Subaccount......................................................I-
The Juno Subaccount.....................................................I-
The Money Market Subaccount.............................................I-
Special Risk Considerations................................................I-
Addition or Deletion of
Subaccounts...............................................................I-
TACTICAL ALLOCATION
SERVICES...................................................................I-
CHARGES AND DEDUCTIONS.......................................................I-
Withdrawal Charge...........................................................I-
Mortality and Expense
Risk Charge...............................................................I-
Administrative Fee..........................................................I-
Investment Advisory Fee
and Other Expenses.........................................................I-
I-3
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Page
Subaccount Administration Fee...............................................I-
Payments of Certain Charges
and Deductions............................................................I-
Premium Taxes...............................................................I-
DESCRIPTION OF THE
CONTRACT.....................................................................I-
Purchase Payments..........................................................I-
Changing Financial Advisors................................................I-
Accumulation Provisions....................................................I-
Accumulation Units......................................................I-
Value of an Accumulation Unit...........................................I-
Valuation Periods.......................................................I-
The Fixed Account..........................................................I-
Payment on Death...........................................................I-
Beneficiary................................................................I-
Ownership..................................................................I-
Account Transfers..........................................................I-
Withdrawals................................................................I-
Systematic Withdrawal Plan.................................................I-
Suspension or Deferral
of Payments...............................................................I-
Annuity Provisions.........................................................I-
General.................................................................I-
Selection of Annuity Date and
Annuity Options.......................................................I-
Change of Annuity Date or
Annuity Option........................................................I-
Annuity Options.........................................................I-
Minimum Annuity Payments................................................I-
Proof of Age, Sex, and
Survival..............................................................I-
Notices and Elections...................................................I-
Amendment of Contract...................................................I-
Ten-Day Right to Review.................................................I-
FEDERAL INCOME TAXES.........................................................I-
Pre-Retirement Distributions...............................................I-
General....................................................................I-
Diversification............................................................I-
Multiple Contracts.........................................................I-
Contracts Owned by Non-
Natural Persons..........................................................I-
Tax Treatment of Assignments...............................................I-
Income Tax Withholding.....................................................I-
Tax Treatment of Withdrawals;
Non-Qualified Contracts..................................................I-
I-4
<PAGE>
Page
Tax Treatment of Withdrawals;
Qualified Plans...........................................................I-
Tax Treatment of Withdrawals;
Qualified Contracts.......................................................I-
Tax-Sheltered Annuities;
Withdrawal Limitations....................................................I-
SEPARATE ACCOUNT VOTING
RIGHTS......................................................................I-
REPORTS TO CONTRACT
OWNERS......................................................................I-
DISTRIBUTION OF CONTRACTS....................................................I-
STATE REGULATION.............................................................I-
LEGAL PROCEEDINGS............................................................I-
INDEPENDENT ACCOUNTANTS......................................................I-
REGISTRATION STATEMENT.......................................................I-
LEGAL MATTERS................................................................I-
PART II
THE SEPARATE ACCOUNT.........................................................II-
INVESTMENT OBJECTIVES AND
POLICIES OF THE SUBACCOUNTS.................................................II-
General....................................................................II-
The Nova Subaccount........................................................II-
The Ursa Subaccount........................................................II-
The OTC Subaccount.........................................................II-
The Precious Metals Subaccount.............................................II-
The U.S. Government Bond
Subaccount...............................................................II-
The Juno Subaccount........................................................II-
The Money Market Subaccount................................................II-
The Benchmarks.............................................................II-
SPECIAL RISK CONSIDERATIONS..................................................II-
Portfolio Turnover.........................................................II-
Tracking Error.............................................................II-
Aggressive Investment
Techniques...............................................................II-
Trading Halts..............................................................II-
Early NASDAQ Closings......................................................II-
<PAGE>
INVESTMENT TECHNIQUES AND
OTHER INVESTMENT POLICIES...................................................II-
PERFORMANCE INFORMATION......................................................II-
PORTFOLIO TRANSACTIONS
AND BROKERAGE...............................................................II-
MANAGEMENT OF THE
SEPARATE ACCOUNT............................................................II-
Board of Managers........................................................II-
PADCO Advisors II, Inc...................................................II-
PADCO Service Company, Inc...............................................II-
Costs and Expenses.......................................................II-
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL
INFORMATION.................................................................II-
I-4
<PAGE>
PART I
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any variable annuity contracts offered by this Prospectus in any
jurisdiction to anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
DEFINITIONS
Accumulation Unit: An accounting unit of measure used to compute the value of
your interest in a Subaccount prior to the Annuity Date. (See page I-__.)
Accumulation Unit Value: For any Valuation Period, the current market value of
the total assets of a Subaccount, less liabilities, divided by the number of
units of that Subaccount outstanding.
Administrative Office: The office indicated on the cover page of this Prospectus
to which notices and Purchase Payments must be sent. All sums payable to Great
American Reserve under the Contract are payable at the Administrative Office or
an address designated by Great American Reserve.
Age: The age of any Contract Owner or Annuitant on his or her last birthday. For
Joint Contract Owners, all provisions which are based on age are based on the
age of the older of the Joint Contract Owners.
Annuitant: The named individual on whose continuation of life under the Contract
annuity payments may de pend.
Annuity: A series of payments for life; or for life with guaranteed periods; or
for the installment refund period; or for a certain period; or to a joint and
surviving annuitant.
Annuity Date: The date on which annuity payments of the Contract begin. (See
page I-__.)
Beneficiary: The persons to whom payment is to be made on the death of the
Contract Owner.
Code: The Internal Revenue Code of 1986, as amended.
Contract: The annuity contract offered by this Prospectus.
Contract Date: The date a Contract is issued to a Contract Owner.
Contract Owner: The person entitled to exercise all rights under a Contract.
This person is also referred to in this Prospectus as "you." A Contract Owner
may be a non-natural person (e.g., a corporation, trust, or certain other
entities). (See page I-__.)
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.
I-5
<PAGE>
Fixed Account Value: The value of the portion of your Contract Value allocated
to the Fixed Account.
Fixed Annuity: A series of periodic payments of predetermined amounts beginning
with the Annuity Date that do not vary with investment experience.
General Account: The assets of Great American Reserve with the exception of the
Separate Account and other segregated asset accounts.
Great American Reserve: Great American Reserve Insurance Company.
Joint Contract Owner: If named, a person entitled to exercise all rights under a
Contract along with the Contract Owner. Any Joint Contract Owner must be the
spouse of the Contract Owner.
Market Timing: An investment strategy involving potentially frequent shifting of
assets between investments in domestic equity securities (e.g., the Nova
Subaccount) and investments in cash items (e.g., the Money Market Subaccount).
Non-Qualified Contract: A Contract issued under a non-qualified plan, which is
not a Qualified Contract.
PADCO: PADCO Advisors II, Inc.
PFS: PADCO Financial Services, Inc.
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
I-6
<PAGE>
Account, this time is 4:00 P.M., Eastern Time. For transfers involving different
transaction end times, the earlier of the times indicated above applies.
Telephone and electronic withdrawal and transfer orders will be accepted only
prior to the Transaction Cut-Off Times. If the primary exchange or market on
which a Subaccount transacts business closes early, the above cut-off time will
be approximately thirty minutes (forty-five minutes, in the case of the Precious
Metals Subaccount) prior to the close of such exchange or market. Telephone and
electronic withdrawal and transfer privileges may be terminated or modified by
the Separate Account at any time. (See page I-__.)
Valuation Date: Each day the New York Stock Exchange (the "NYSE") is open for
business.
Valuation Period: The interval from one valuation day of any Subaccount to the
next valuation day, measured from the time each day the Subaccount is valued.
(See page I-__.)
Written Request: A request in writing, in a form satisfactory to Great American
Reserve.
I-7
<PAGE>
PROSPECTUS SUMMARY
"You" refers to the Contract Owner. "We," "us," or "Great American
Reserve" refers to Great American Reserve Insurance Company.
The Separate Account
The Separate Account is currently divided into seven Subaccounts in
which Purchase Payments under this Contract may be invested. Initial Purchase
Payments allocable to the Separate Account will first be allocated to the Money
Market Subaccount. During the first 14 days following the date of issue of the
Contract (the "Contract Date"), no transfers will be allowed. Subsequently,
transfers may only be made by your Financial Advisor. Your Contract Value will
reflect the investment performance of your Subaccounts. (See "The Separate
Account" on page I-__, "Investments of the Subaccounts" on page I-__, "Account
Transfers" on page I-__, and "Tactical Allocation Services" on page I-__.)
The seven Subaccounts, including the Money Market Subaccount, are
managed by PADCO. (See "PADCO" in Part II of this Prospectus.)
Retirement Plans
The Contract may currently be issued pursuant to nonqualified
retirement plans, individual retirement annuities ("IRAs"), or Section 403(b)
Annuities ("TSAs").
Purchase Payments
The Contract permits Purchase Payments to be paid on a flexible basis
at any time in any amount meeting specified minimum requirements. The minimum
initial Purchase Payment that Great American Reserve will accept is $25,000. The
minimum subsequent Purchase Payment is $1,000. (See "Purchase Payments" on page
I-__.)
The full amount of your Purchase Payments, less applicable premium tax
due, if any, will be invested. However, certain charges and deductions will be
made from your Contract Value. (See "Charges and Deductions" on page I-__.)
Charges and Deductions
Withdrawal Charge. A withdrawal charge is deducted in the event of
withdrawal of Contract Values, subject to certain exceptions. If the withdrawal
charge applies, it will equal a specified percentage of each Purchase Payment
paid under the Contract within seven complete years prior to the date of
withdrawal. This charge permits Great American Reserve to recover a portion of
the sales expenses that it has incurred. (See "Withdrawal Charge" on page I-__.)
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-__.)
I-8
<PAGE>
Subaccount Administration Fee. Various Subaccount administration fees,
with maximum annual rates ranging from 0.20% to 0.25% of a Subaccount's average
daily net assets, also are payable by the Subaccounts to PADCO Service Company,
Inc. (the "Servicer"), for expenses related to tactical allocation
administrative services provided by the Servicer under the Contracts. (See
"Subaccount Administration Fee" on page I-__.)
Investment Advisory Fee. Various investment advisory fees, with maximum
annual rates ranging from 0.50% to 0.90% of the average daily net assets of the
Subaccounts, are payable by the Subaccounts to PADCO. The Subaccounts also bear
certain of the expenses incurred in their operations. (See "Investment Advisory
Fee and Other Expenses" on page I-__.)
Premium Taxes. Premium taxes or similar assessments payable to any
government entity may be deducted from Purchase Payments or from Contract Values
when paid by Great American Reserve or at a later date. Currently, state premium
taxes range from 0% to 3.5%. (See "Premium Taxes" on page I-__.)
Tactical Allocation Services
This Contract is sold only to Contract Owners who are provided tactical
allocation or market-timing services by investment advisers registered, or
excluded from registration, under the Investment Advisers Act of 1940. Tactical
Allocation Services consist of making allocation and transfer decisions. You are
responsible for selecting, supervising, and paying your Financial Advisor and
must execute a power of attorney authorizing your Financial Advisor to provide
Tactical Allocation Services. In this regard, you may redeem your Contract in
whole or in part, but only your Financial Advisor may contact the Servicer with
allocation and transfer decisions. The Board of Managers of the Separate Account
(the "Managers") has not reviewed the qualifications of any Financial Advisor
and has not considered payments to Financial Advisors in connection with its
review of investment advisory contracts for the Separate Account. (See "Tactical
Allocation Services" at page I-__.)
Upon notification to the Servicer of the death, termination, or
resignation of your Financial Advisor, your Separate Account Value will
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-__.)
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<PAGE>
Account Transfers
All or part of your Contract Value may be transferred among the
Subaccounts by your Financial Advisor at any time and without charge prior to
the Annuity Date. Transfers to and from the Fixed Account are also permitted,
but are subject to certain limitations. (See "Account Transfers" on page I-__.)
Payment on Death
If the Contract Owner dies prior to the Annuity Date, Great American
Reserve will pay the greater of Purchase Payments (less withdrawals) or the
Contract Value (subject to certain state variations). (See "Payment on Death" on
page I-__.)
Withdrawals
You may withdraw all or part of your accumulated Contract Value prior
to the Annuity Date. The amount withdrawn must be at least $500. If your
Contract is to continue in force, the remaining Contract Value must be at least
$10,000. A withdrawal charge may be imposed. (See "Withdrawals" on page I-__.)
Withdrawals may be subject to a 10% penalty tax under the Code. (See "Tax
Treatment of Withdrawals; NonQualified Contracts" at page I-__ and "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-__.)
Ten-Day Review Period
Within 10 days of your receipt of an issued Contract you may return it
to Great American Reserve for cancellation. This period may be longer in certain
states. (See "Ten Day Right to Review" on page I-__.)
Special Risks
The strategies employed by a Contract Owner's Financial Advisor may
result in considerable assets moving in and out of each Subaccount.
Consequently, PADCO expects that each Subaccount will generally experience
significant portfolio turnover, which will likely result in higher expenses,
transaction costs, and additional costs and may also adversely affect the
ability of the Subaccount to meet its investment objective. Each Subaccount's
investments will be managed without regard to portfolio turnover rates. The
Subaccounts (other than the Money Market Subaccount) also may engage in certain
aggressive investment techniques, which may include engaging in short sales and
transactions in futures contracts and options on securities, stock indexes, and
futures contracts.
Although liquidity risks are often inherent in market timing
arrangements, the Subaccounts have procedures designed to maximize liquidity of
the Subaccounts. In particular, the Subaccounts' use of futures contracts and
options on securities, stock indexes and futures contracts offer a highly
liquid, cost-effective method of investing in securities and are an effective
means by which to accommodate the massive switching and high portfolio turnover
rates that may result from asset allocation and market timing investment
strategies. A discussion of the special risks associated with the investment in
the Subaccounts is provided under "Special Risk Considerations" under
"Investments of the Subaccounts" in Part I and in Part II of this Prospectus.
For further information concerning the investment policies and strategies of the
Subaccounts, see "Investments of the Subaccounts" in Part I and "Investment
Objectives and Policies" and "Investment Techniques and Other Policies" in Part
II of this Prospectus and "Investment Policies and Techniques of the
Subaccounts" in the Statement of Additional Information.
I-10
<PAGE>
FEES AND EXPENSES OF THE SUBACCOUNTS
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%
- -----------------
1/ Neither state premium taxes nor fees that you pay to your Financial
Advisor are shown. Any premium tax due will be deducted from Purchase
Payments or from Contract Values at a later date. Currently, state
premium taxes range from 0% to 3.5%.
I-11
<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Precious Money
Nova Ursa OTC Metals Bond Juno Market
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment
Advisory Fees 0.75% 0.90% 0.75% 0.75% 0.50% 0.90% 0.50%
Subaccount
Administration Fees 0.25% 0.25% 0.20% 0.20% 0.20% 0.25% 0.20%
Other Expenses (after
reimbursement)2/ 1.20% 1.15% 1.25% 1.25% 1.10% 1.15% 0.90%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Separate Account
Annual Expenses (after
reimbursement)3/ 3.60% 3.70% 3.60% 3.60% 3.20% 3.70% 3.00%
=========== =========== =========== =========== =========== =========== ===========
<FN>
- ----------------------
2/ Other Expenses are based on estimates.
3/ Effective January 1, 1998, PADCO and the Servicer have voluntarily agreed to waive their respective advisory and subaccount
administration fees and to bear any Subaccount - expenses 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 3.60%, 3.70%, 3.60%, 3.60%, 3.20%,
3.70%, and 3.00% (collectively, the "Adjusted Expense Ratios"). Prior to January 1, 1998, PADCO and the Servicer voluntarily
agreed to waive their respective fees and to bear any Subaccount expenses 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% (collectively, the "Initial Expense Ratios"). Absent this voluntary waiver and reimbursement,
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. During the period
from October 24, 1997 to October 24, 1999, fees waived or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements are subject to reimbursements, as described below under "Costs and Expenses" in Part II of this
Prospectus. No reimbursement will be made by a Subaccount after October 24, 1999.
</FN>
</TABLE>
I-12
<PAGE>
EXAMPLES
1. If you surrender your Contract, or if you annuitize, at the end of the
applicable period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets: 1 year 3 years
------ -------
The Nova Subaccount $106 $163
The Ursa Subaccount $107 $166
The OTC Subaccount $106 $163
The Precious Metals Subaccount $106 $163
The Bond Subaccount $102 $151
The Juno Subaccount $107 $166
The Money Market Subaccount $100 $145
2. If you do not surrender at the end of the applicable period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets: 1 year 3 years
------ -------
The Nova Subaccount $36 $110
The Ursa Subaccount $37 $112
The OTC Subaccount $36 $110
The Precious Metals Subaccount $36 $110
The Bond Subaccount $32 $98
The Juno Subaccount $37 $112
The Money Market Subaccount $30 $92
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 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-__.
I-13
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements of Great American Reserve, for the fiscal
year ended December 31, 1996, and unaudited financial statements of Great
American Reserve, for the nine-month period ended September 30, 1997, 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 December 31, 1997, are included in the Statement of
Additional Information.
I-14
<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
periods identified, are unaudited. This information should be read in
conjunction with the financial statements and related notes included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
The Nova Subaccount The Ursa Subaccount
------------------- -------------------
For the Period From For the Period From
May 7, 1997, to May 7, 1997, to
December 31, 1997 December 31, 1997
----------------- -----------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at Beginning of Period $ 10.00 $ 10.00
---------- ----------
Investment Income 0.29 0.14
Expenses 0.22 0.16
Net Investment Income (Loss) 0.07 (0.02)
Net Realized and Unrealized Gains (Losses)
on Securities 2.14 (1.91)
---------- ----------
Net Increase (Decrease) in Accumulation
Unit Value 2.21 (1.93)
Accumulation Unit Value at End of Period $ 12.21 $ 8.07***
========= ==========
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.90%
Net Investment Income 0.91% (0.34%)
Supplementary Data
Portfolio Turnover Rate** 164.30% 0.00%
Number of Accumulation Units Outstanding
at End of Period 855,862 356,784
Net Assets at End of Period
(000's omitted) $ 10,448 $ 2,879
<FN>
- --------------------
+ The annualized ratios of gross expenses to average net assets for the Nova
Subaccount and the Ursa Subaccount are 9.09% and 9.29%, respectively, for
the period from May 7, 1997 to December 31, 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.
*** End of period accumulation unit value for the Ursa Subaccount reflects
changes based upon the same-day changes in the net asset value for the Ursa
Fund series of Rydex Series Trust for 6 business days during the period
from May 7, 1997 through December 31, 1997 when the assets of the Ursa
Subaccount were at zero. (See "Value of an Accumulation Unit" at page
I-____ .)
</FN>
</TABLE>
I-15
<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
December 31, 1997 December 31, 1997
----------------- -----------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at Beginning of Period $ 10.00 $ 10.00
----------- -----------
Investment Income 0.12 0.03
Expenses 0.21 0.14
Net Investment Income (Loss) (0.09) (0.11)
Net Realized and Unrealized Gains (Losses)
on Securities 0.74 (2.87)
---------- -----------
Net Increase (Decrease) in Accumulation
Unit Value 0.65 (2.98)
Accumulation Unit Value at End of Period $ 10.65 $ 7.02
========== ===========
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.80%
Net Investment Income (1.22%) (2.19%)
Supplementary Data
Portfolio Turnover Rate** 399.92% 828.23%
Number of Accumulation Units Outstanding
at End of Period 222,217 73,827
Net Assets at End of Period
(000's omitted) $ 2,367 $ 518
<FN>
- --------------------
+ The annualized ratios of gross expenses to average net assets for the OTC
Subaccount and the Precious Metals Subaccount are 9.07% and 9.76%,
respectively, for the period from May 7, 1997 to December 31, 1997 (for the
OTC Subaccount), and the period from May 29, 1997 to December 31, 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.
</FN>
</TABLE>
I-16
<PAGE>
<TABLE>
<CAPTION>
The U.S. Government
Bond Subaccount The Juno Subaccount
------------------- -------------------
For the Period From For the Period From
May 29, 1997, to May 7, 1997, to
December 31, 1997 December 31, 1997
----------------- -----------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at Beginning of Period $ 10.00 $ 10.00
----------- -----------
Investment Income 0.41 0.33
Expenses 0.16 0.25
Net Investment Income (Loss) 0.25 0.08
Net Realized and Unrealized Gains (Losses)
on Securities 1.57 (1.07)
----------- -------------
Net Increase (Decrease) in Accumulation
Unit Value 1.82 (0.99)
Accumulation Unit Value at End of Period $ 11.82*** $ 9.01****
========== ============
Ratios to Average Net Assets*
Net Expenses+ 2.40% 2.90%
Net Investment Income 3.69% 1.23%
Supplementary Data
Portfolio Turnover Rate** 846.49% 0.00%
Number of Accumulation Units Outstanding
at End of Period 75,493 0
Net Assets at End of Period
(000's omitted) $ 892 $ 0.00
<FN>
- ---------------------
+ The annualized ratios of gross expenses to average net assets for the Bond
Subaccount and the Juno Subaccount are 9.42% and 9.31%, respectively, for
the period from May 29, 1997 to December 31, 1997 (for the Bond
Subaccount), and May 7, 1997 to December 31, 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.
*** End of period accumulation unit value for the Bond Subaccount reflects
changes based upon the same-day changes in the net asset value for the
Rydex U.S. Government Bond Fund series of Rydex Series Trust for 25 days
during the period from May 29, 1997 through December 31, 1997 when the
assets of the Bond Subaccount were at zero. (See "Value of an Accumulation
Unit" at page I-____.)
**** End of period accumulation unit value for the Juno Subaccount reflects
changes based upon the same-day changes in the net asset value for the
Juno Fund series of Rydex Series Trust for 45 days during the period from
May 7, 1997 through December 31, 1997 when the assets of the Juno
Subaccount were at zero (the assets of the Juno Subaccount were at zero
for the period from December 12, 1997 through December 31, 1997). (See
"Value of an Accumulation Unit" at page I-____.)
</FN>
</TABLE>
I-17
<PAGE>
The Money Market
Subaccount
For the Period From
May 7, 1997, to
December 31, 1997
(Unaudited)
Per Accumulation Unit Income Performance:
Accumulation Unit Value at Beginning of Period $ 10.00
-----------
Investment Income 0.52
Expenses 0.21
Net Investment Income (Loss) 0.31
Net Realized and Unrealized Gains (Losses)
on Securities 0.01
Net Increase (Decrease) in Accumulation
Unit Value 0.32
Accumulation Unit Value at End of Period $ 10.32
============
Ratios to Average Net Assets*
Net Expenses+ 2.20%
Net Investment Income 3.34%
Supplementary Data
Portfolio Turnover Rate** 0%
Number of Accumulation Units Outstanding
at End of Period 1,734,974
Net Assets at End of Period
(000's omitted) $ 17,903
- ----------------------
+ The annualized ratio of gross expenses to average net assets for the Money
Market Subaccount is 6.82% for the period from May 7, 1997 to December 31,
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.
I-19
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Great American Reserve, originally organized in 1937, is principally
engaged in the life insurance business in 48 states and the District of
Columbia. Great American Reserve is a stock company organized under the laws of
the State of Texas and a wholly-owned subsidiary of Conseco, Inc. ("Conseco").
The operations of Great American Reserve are handled by Conseco. Conseco is a
publicly-owned financial services holding company, the principal operations of
which are the development, marketing and administration of specialized annuity
and life insurance products. Conseco is located at 11825 N.
Pennsylvania Street, Carmel, Indiana 46032.
All inquiries regarding the Separate Account, the Contracts, or any
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 Great
American Reserve's property, the Subaccounts, as segregated investment accounts
of the Separate Account, are not chargeable with liabilities arising out of any
other business that Great American Reserve may conduct. Obligations of the
Subaccounts, however, are obligations of Great American Reserve. Income, gains,
or losses, whether or not realized, from assets allocated to each of the
Subaccounts, in accordance with the Contracts, are credited to or charged
against that Subaccount without regard to other income, gains, or losses of
Great American Reserve or any other Subaccount. Great American Reserve does not
guarantee the investment performance of any Subaccount. The Separate Account has
seven separate Subaccounts, which are modeled after seven existing funds (the
"Rydex Funds") of Rydex Series Trust (the "Trust"), an investment company
managed by an affiliate of PADCO (see "Management of the Seperate Account" at
page II-___ of this Prospectus). 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.
I-20
<PAGE>
All of your Purchase Payments allocable to the Separate Account will
first be allocated to the Money Market Subaccount. No transfers will be allowed
for the first 14 days following the Contract Date. After this 14-day period,
transfers may only be made by your Financial Advisor. All or part of your
Contract Value may be transferred from one Subaccount to another at any time and
without charge after the first 14 days following the Contract Date. (See
"Account Transfers" at page I-__.)
A summary of the investment objectives of each Subaccount follows. More
detailed information, including risks of investing in, deductions from, and
expenses paid out of the assets of the Separate Account and of the Subaccounts,
may be found in Part II of this Prospectus. Part II of this Prospectus should be
read in full for a complete evaluation of the Contract and related investment
risks.
Investment Objectives
Each Subaccount has its own distinct investment objective. There is, of
course, no guarantee that any Subaccount will achieve its investment objective.
The investment objectives of the Subaccounts and certain investment restrictions
are fundamental policies and may not be changed without the affirmative vote of
the majority of the Contract Owners of that Subaccount. Except for the Money
Market Subaccount, each Subaccount is intended to provide investment exposure
with respect to a particular segment of the securities markets. These
Subaccounts seek investment results that correspond over time to a specified
"benchmark." A Subaccount's benchmark may be changed by the Managers. For
further information regarding the investment objectives and benchmarks of the
Subaccounts, see "Investment Objectives and Policies of the Subaccounts" at page
II-__. The investment objectives of the Subaccounts are as follows:
The Nova Subaccount. The Nova Subaccount's investment objective is to
provide investment returns that correspond to the performance of a benchmark for
common stock securities. The Nova Subaccount's current benchmark is 125% of the
performance of the Standard & Poor's 500 Composite Stock Price Index(TM) (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 trading day, the Accumulation Unit Value of
the Ursa Subaccount would increase for that day in direct proportion to any
decrease in the level of the S&P500 Index, or decrease for that day in direct
proportion to any increase in the level of the S&P500 Index. While a close
correlation can be achieved on any single trading day, over time the cumulative
percentage increase or decrease in the Accumulation Unit Value of the Ursa
Subaccount may diverge significantly from the respective cumulative percentage
decrease or increase in the S&P500 Index due to a compounding effect. In seeking
to achieve its objective, the Ursa Subaccount primarily engages in short sales
and certain transactions in stock index futures contracts, options on stock
index futures contracts, and option on securities and stock indexes. The Ursa
Subaccount involves special risks not traditionally associated with annuity
I-21
<PAGE>
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 benchmark for over-the-counter securities. The OTC
Subaccount's current benchmark is the NASDAQ 100 Index(TM). The OTC Subaccount
does not aim to hold all of the 100 securities included on the NASDAQ 100
Index(TM). Instead, the OTC Subaccount intends to hold representative securities
included in the NASDAQ 100 Index(TM) or other instruments which are expected to
provide returns that correspond to those of the NASDAQ 100 Index(TM). 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(TM) 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 securities. The Precious Metals Subaccount's current
benchmark is the Philadelphia Stock Exchange Gold/Silver Index(TM) (the "XAU
Index"). To achieve its objective, the Precious Metals Subaccount invests in
securities included in the XAU Index. In addition, the Precious Metals
Subaccount may invest in other securities that are expected to perform in a
manner that will permit the Precious Metals Subaccount's performance to track
closely the XAU Index. The Precious Metals Subaccount may invest in securities
of foreign issuers. These securities present certain risks not present in
domestic investments and expose the investor to general market conditions which
differ significantly from those in the United States. The XAU Index is a
capitalization-weighted index featuring eleven widely-held securities in the
gold and silver mining and production industry or companies investing in such
mining and production companies. The Precious Metals Subaccount is not
sponsored, endorsed, sold, or promoted by the Philadelphia Stock Exchange and
the Philadelphia Stock Exchange makes no representation regarding the
advisability of investing in the Precious Metals Subaccount through the Contract
or otherwise (see "The Benchmarks" at page II-__).
The U.S. Government Bond Subaccount. The investment objective of the
U.S. Government Bond Subaccount (the "Bond Subaccount") is to provide investment
results that correspond to the performance of a benchmark for U.S. Government
securities. The Bond Subaccount's current benchmark is 120% of the price
movement of the current Long Treasury Bond (the "Long Bond"), without
consideration of interest paid. In attempting to achieve its objective, the Bond
Subaccount invests primarily in obligations of the U.S. Treasury or obligations
either issued or guaranteed, as to principal and interest, by agencies or
instrumentalities of the U.S. Government ("U.S. Government Securities"). The
Bond Subaccount may engage in transactions in futures contracts and options on
futures contracts on U.S. Treasury bonds. The Bond Subaccount also may invest in
U.S. Treasury zero coupon bonds.
The Juno Subaccount. The Juno Subaccount's investment objective is to
provide total return before expenses and costs that inversely correlate to the
price movements of a benchmark for U.S. Treasury debt instruments or futures
contracts on a specified debt instrument. The Juno Subaccount's current
benchmark is the Long Bond. In seeking its objective, the Juno Subaccount will
employ certain investment techniques including engaging in short sales and
transactions in futures contracts on U.S. Treasury bonds and options thereon. If
the Juno Subaccount is successful in meeting its objective for any single
trading day, the Juno Subaccount's total return before expenses and costs would
I-22
<PAGE>
increase for that day proportionally to any decreases in the price of the Long
Bond, or decrease for that day proportionally to any increases in the price of
the Long Bond. Contract Owners with Contract Value allocated to the Juno
Subaccount may experience substantial losses during periods of falling interest
rates/rising bond prices.
The Money Market Subaccount. The investment objective of the Money
Market Subaccount is to seek current income consistent with stability of capital
and liquidity. To achieve its objective, the Money Market Subaccount invests
primarily in money market instruments which are issued or guaranteed, as to
principal and interest, by the U.S. Government, its agencies or
instrumentalities, as well as in repurchase agreements collateralized fully by
U.S. Government Securities, and in bank money market instruments and commercial
paper.
Special Risk Considerations
The assets of the Subaccounts will be derived from Contract Owners who
use the Subaccounts as part of a tactical allocation or market-timing investment
strategy pursuant to advice received from professional money managers. In that
circumstance, Subaccount values may be transferred frequently to take advantage
of anticipated changes in market conditions. The strategies employed by a
Contract Owner's Financial Advisor may result in considerable assets moving in
and out of the Subaccounts. Consequently, PADCO expects that the Subaccounts
will generally experience significant portfolio turnover, which will likely
cause higher expenses and additional costs and may also adversely affect the
ability of the Subaccount to meet its investment objective. For further
information concerning the portfolio turnover of the Subaccounts, see "Financial
Highlights of the Subaccounts;" "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
"Investment Objectives and Policies" and "Special Risk Considerations" in Part
II of this Prospectus for a discussion of these factors.
The Subaccounts (other than the Money Market Subaccount) may engage in
certain aggressive investment techniques, which may include engaging in 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 Considerations," and "Investment
Techniques and Other Investment Policies" in Part II of this Prospectus, these
techniques are specialized and involve risks that are not traditionally
associated with similar contracts.
Under certain circumstances, trading on an exchange on which portfolio
instruments of a Subaccount are traded may be halted or closed early, resulting
in a Subaccount being unable to execute buy or sell orders that day. If such a
trading halt occurs, and a Subaccount needs to execute a high volume of trades
on that trading day, a Subaccount may incur substantial trading losses. See
"Special Risk Considerations; Trading Halts" in Part II of this Prospectus.
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.
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TACTICAL ALLOCATION SERVICES
This Contract is sold only to Contract Owners who are provided tactical
allocation or market-timing investment services by Financial Advisors to whom
fees may be paid by Contract Owners. The Servicer maintains a list of Financial
Advisors, but does not recommend any particular Financial Advisor. Each
Financial Advisor, before serving as such, must represent that it is registered,
or otherwise excluded from registration, as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is not subject to any federal
or state regulatory agency action that would prevent it from providing Tactical
Allocation Services. Tactical Allocation Services consist of making allocation
and transfer decisions. You are responsible for selecting, supervising, and
paying your Financial Advisor and must execute a power of attorney authorizing
your Financial Advisor to provide Tactical Allocation Services. In this regard,
you may redeem your Contract in whole or in part, but only your Financial
Advisor may contact the Servicer with allocation and transfer decisions. The
Servicer or Great American Reserve must be provided with a copy of a written
power of attorney from each Contract Owner for whom the Financial Advisor has
been granted the power to direct the allocation and transfer of funds under the
Contract.
Neither Great American Reserve, PFS, the Servicer, nor PADCO selects,
supervises, or recommends any Financial Advisor to you, nor does Great American
Reserve, PFS, the Servicer, or PADCO provide tactical allocation advice to you.
Accordingly, neither Great American Reserve, PFS, the Servicer, nor PADCO is
responsible for any advice provided by any Financial Advisor. There can be no
assurance that any Financial Advisor will be able to predict market moves
successfully. You should carefully consider: (a) the nature and quality of the
Tactical Allocation Services or any other services proposed to be rendered by
your Financial Advisor or a prospective Financial Advisor; (b) the business
relationships of your Financial Advisor or affiliates of that Financial Advisor
with any entity that may be authorized to offer Contracts or services on Great
American Reserve's behalf or on behalf of any of its affiliates or of PADCO or
its affiliates; and (c) the effects on your Contract at any time your Financial
Advisor dies, resigns, or is terminated.
The Servicer will transfer your Separate Account Value into the Money
Market Subaccount when the Servicer receives notice of the death of your
Financial Advisor, when the Servicer receives notice from you or your Financial
Advisor terminating the relationship, or when the Servicer receives notice from
either a court of competent jurisdiction or an applicable regulatory authority
terminating such relationship. Great American Reserve will send you a notice not
more than five business days after receipt of information from the Servicer that
no Financial Advisor is serving in relation to your Contract. This notice will
include a reminder that you will be required to notify the Servicer of the name
of your new Financial Advisor and that until you designate a new Financial
Advisor, you may (i) keep your Separate Account Value in the Money Market
Subaccount until you appoint a new Financial Advisor, (ii) transfer all or part
of your Separate Account Value to the Fixed Account and become subject to the
Fixed Account transfer restrictions, or (iii) surrender your Contract, subject
to applicable withdrawal charges and tax penalties.
CHARGES AND DEDUCTIONS
Withdrawal Charge
The withdrawal charge, when applicable, permits Great American Reserve
to recover a portion of its expenses relating to the sale of the Contract. Great
American Reserve may assess a withdrawal charge against the Purchase Payments
when the payments are withdrawn. Subject to certain state variations, the
withdrawal charge will be a specified percentage of the sum of the Purchase
Payments paid within seven years prior to the date of withdrawal, adjusted for
any prior withdrawals. There is no charge on withdrawals of (a) Purchase
Payments that have been in the Contract more than seven complete Contract years
or (b) free withdrawal amounts described below. The length of time from receipt
of a Purchase Payment to the time of withdrawal determines the withdrawal
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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:
Complete Years
Withdrawal Charge Since Receipt of Payment
7% 0
7% 1
6% 2
5% 3
4% 4
3% 5
2% 6
0% 7 and thereafter
In addition, in certain states the following circumstances further
limit or reduce withdrawal charges: for issue ages up to 56, there is no
withdrawal charge made after you attain age 67 and later; for issue ages 57 and
later, any otherwise applicable withdrawal charge will be multiplied by a factor
ranging from 0.9 to 0 for Contract years one through 10.
A Contract Owner may make one free withdrawal per Contract year from
Contract Value of an amount up to 10% of the Contract Value (as determined on
the date of receipt of the withdrawal request). Additional withdrawals in excess
of that amount in any Contract year during the period when any withdrawal charge
is applicable will be subject to the appropriate charge as set forth above.
Withdrawals which are authorized by you to remit fees paid 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" on page I-__.) In addition, with respect to any Contract
which is owned by a "charitable remainder unitrust" or a "charitable remainder
annuity trust" within the meaning of Section 664(d) of the Code ("Charitable
Remainder Trust"), Great American Reserve may, in its discretion, permit an
additional free withdrawal necessary to fund required distributions by the
Charitable Remainder Trust in any contract year. In order for a Charitable
Remainder Trust to qualify for such an increase, the trustee or trustees of the
Charitable Remainder Trust will be required to certify: (i) that such trust is a
bona fide "charitable remainder unitrust" or a "charitable remainder annuity
trust" within the meaning of Section 664 of the Code, and that all amounts
proposed to be withdrawn will be used to make distributions required under
Section 664 of the Code for the year in which such amounts are withdrawn or for
a prior year; (ii) that the required distribution exceeds the one free
withdrawal of 10% of the Contract Value which is permitted without a withdrawal
charge; and (iii) that the funds necessary to make the required distribution
could not otherwise be made available without hardship to the trust or its
beneficiaries. (See "Withdrawals" on page I-__.)
Great American Reserve also reserves the right to reduce the withdrawal
charge under certain circumstances when sales of Contracts are made to a
trustee, employer, or similar party pursuant to a retirement plan or similar
arrangement for sales of Contracts to a group of individuals if the program
results in a savings of sales expenses. The amount of reduction will depend on
such factors as the size of the group, the total amount of Purchase Payments,
and other factors that might tend to reduce expenses incurred in connection with
such sales. This reduction will not be unfairly discriminatory to any Contract
Owner.
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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 to increase over the life of the
Contract, will be insufficient to cover Great American Reserve's actual
expenses.
The mortality and expense risk charge, which is computed and deducted
on a daily basis from each Subaccount, is equal to an annual rate of 1.25% of
the daily net assets of each Subaccount. If that amount is insufficient to cover
the actual cost of the mortality and expense risks, Great American Reserve bears
the loss. Conversely, if the amount proves more than sufficient, the excess will
be part of Great American Reserve's surplus and can be used for any purpose
including payment of sales expenses not recovered through the withdrawal charge.
Administrative Fee
Great American Reserve deducts an administrative fee from each
Subaccount to reimburse Great American Reserve for administrative expenses. This
charge is equal to an annual rate of 0.15% of the daily net assets of each
Subaccount. The fee reimburses Great American Reserve for, among other expenses,
preparation of the Contracts, confirmations, annual reports and statements,
maintenance of Contract Owner records and other Contract Owner servicing. This
administrative fee will not be deducted from the Fixed Account.
Investment Advisory Fee and Other Expenses
Each Subaccount pays investment advisory fees to PADCO. Pursuant to an
investment advisory agreement between the Separate Account and PADCO, the
Subaccounts pay PADCO fees at an annual rate applied to the daily net assets of
each Subaccount. The Separate Account and the Subaccounts also bear certain
expenses incurred in their operations. Information on the investment advisory
fees and other expenses payable by the Separate Account is set forth under
"Management of the Separate Account" in Part II of this Prospectus and "Board of
Managers of the Separate Account" in the Statement of Additional Information.
Subaccount Administration Fee
The Subaccounts also pay Subaccount administration fees to the
Servicer. Pursuant to a subaccount administration agreement between the 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 of
Accumulation Unit Values, and Subaccount accounting services. Information on the
Subaccount administration fee payable by the Subaccounts is set forth under
"Management of the Separate Account" in Part II of this Prospectus and "Board of
Managers of the Separate Account" in the Statement of Additional Information.
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Payments of Certain Charges and Deductions
The mortality and expense risk charge, the administrative fee, the
investment advisory fees, and the Subaccount administration fee will be computed
for each day prior to the Annuity Date the Contract is in force. The withdrawal
charge will be deducted, when applicable, from the Fixed Account and/or from
each Subaccount from which amounts are withdrawn.
Premium Taxes
Some states and municipalities impose a premium tax on annuity purchase
payments received by insurance companies. These taxes may be deducted by Great
American Reserve when paid by Great American Reserve or at a later date. It is
currently Great American Reserve's practice to deduct premium taxes at the time
annuity payments begin or when amounts are withdrawn. State premium taxes
currently range from 0% to 3.5%.
Premium tax rates are subject to change by law, administrative
interpretations, or court decisions. Premium tax amounts will depend on, among
other things, your state of residence, Great American Reserve's status within
your state, and the premium tax laws of your state.
DESCRIPTION OF THE CONTRACT
Purchase Payments
The minimum initial Purchase Payment for a Contract is $25,000. The
minimum subsequent Purchase Payment is $1,000. Subsequent Purchase Payments may
be paid at any time to the Administrative Office. The maximum deposit without
prior approval from Great American Reserve is $500,000.
Application for a Contract or acceptance of the first Purchase Payment
is subject to Great American Reserve's underwriting rules for such transactions.
Great American Reserve reserves the right to reject any application. A
properly-completed application that is accompanied by the initial Purchase
Payment and all information necessary for the processing of the application will
be accepted within two business days of Great American Reserve's receipt of the
properly- completed application (i.e., information sufficient to permit Great
American Reserve to determine to issue a Contract). Great American Reserve may
retain an initial Purchase Payment for up to five business days while attempting
to obtain information sufficient to issue the Contract. If an application is not
completed properly and cannot be processed and necessary information obtained
within five business days, Great American Reserve will inform you of the reasons
for the delay and offer to return your Purchase Payment unless you consent to
Great American Reserve retaining the initial Purchase Payment until we have
received the information we require.
Changing Financial Advisors
You may change your Financial Advisor. However, prior to a change
taking effect, the new Financial Advisor must satisfy the requirements of Great
American Reserve, the Servicer, and PADCO, as set forth in the Contract
application, and you must execute a new power of attorney authorizing a new
Financial Advisor to provide Tactical Allocation Services with respect to your
Contract or select one of the options discussed below. After the Servicer
receives notification from you, your Financial Advisor, or a court of competent
jurisdiction or an applicable regulatory authority of the death, resignation, or
termination of your Financial Advisor, the Servicer will (unless the Servicer
concurrently receives the name of your new Financial Advisor) transfer all of
your Separate Account Value into the Money Market Subaccount. Until you
designate a new Financial Advisor, you may (i) keep your Separate Account Value
in the Money Market Subaccount, (ii) transfer all or part of your Separate
Account Value to the Fixed Account and become subject to Fixed Account transfer
restrictions, or (iii) surrender your Contract, subject to applicable withdrawal
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charges and tax penalties. Great American Reserve will notify you upon receipt
of notification from the Servicer that the Servicer has received notice
terminating the relationship, or if the Servicer receives notice from either a
court of competent jurisdiction or the applicable regulatory authority
terminating such relationship. (See "Tactical Allocation Services" on page
I-__.)
Accumulation Provisions
Accumulation Units
Purchase Payments may be allocated to the Fixed Account or the Separate
Account. Initial Purchase Payments allocated to the Separate Account will first
be deposited in the Money Market Subaccount. During the first 14 days following
the Contract Date, no transfers are allowed. (See discussion under "Eligible
Investments" on page I-__.) After this 14-day period, the Separate Account Value
may be transferred to the Subaccounts selected pursuant to instructions from the
Financial Advisor. Upon allocation, Purchase Payments are converted into
Accumulation Units for that Subaccount. The number of Accumulation Units is
determined by dividing the amount allocated to the Subaccount by the dollar
value of an Accumulation Unit for that Subaccount for the Valuation Period in
which the Purchase Payment is received at Great American Reserve's
Administrative Office or, in the case of the initial Purchase Payment in
accordance with the procedures described above under "Purchase Payments." The
number of Accumulation Units will not change as a result of investment
experience.
Value of an Accumulation Unit
For each Subaccount, the value of an Accumulation Unit was arbitrarily
set at $10 when the Subaccount was established. The value of an Accumulation
Unit may increase or decrease from one Valuation Period to the next. The value
for any Valuation Period is determined by dividing the current market value of
total Subaccount assets, less liabilities, by the total number of units of that
Subaccount outstanding. When the asset level of a Subaccount is at zero, the
Separate Account's policy is to calculate the Accumulation Unit Value for that
Subaccount each day that the asset level of that Subaccount is at zero based on
the same-day change in the net asset value of the Rydex Fund comparable to that
Subaccount.
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
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investment company under the Investment Company Act of 1940. Accordingly, the
Fixed Account values are not subject to the provisions that would apply if
registration under those acts were required.
Great American Reserve has been advised that the staff of the SEC has
not reviewed the disclosures in this Prospectus that relate to the Fixed
Account. Disclosures regarding the Fixed Account and Great American Reserve's
general account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in the Prospectus.
Payment on Death
If a Contract Owner, or any Joint Contract Owner, dies prior to the
Annuity Date, Great American Reserve will pay to the Beneficiary, upon receipt
of due proof of death, the death benefit representing the Contract Owner's
interest in the Contract. Upon the death of any Joint Contract Owner, the
surviving Joint Contract Owner, if any, will be treated as the Beneficiary. The
death benefit is the greater of the Contract Value or the Purchase Payments less
any applicable withdrawals on the date due proof of death (as specified in your
Contract) is received at Great American Reserve's Administrative Office (subject
to certain state variations). Upon Great American Reserve's receipt of
notification of a Contract Owner's death, the Separate Account Value under the
Contract will be transferred to the Money Market Subaccount. Payment will be in
a lump sum unless an annuity option is chosen. A Beneficiary other than the
surviving spouse of the deceased Contract Owner may choose only an annuity
option providing for full payout within five years of death, or for the life or
within the life expectancy of the Beneficiary. The life or life expectancy
option generally must be chosen within one year of the Contract Owner's death.
If the surviving spouse of a deceased Contract Owner is the beneficiary, he or
she may choose to continue the Contract in force after the Contract Owner's
death. If so, the surviving spouse must execute a new power of attorney in order
to appoint a Financial Advisor to provide tactical allocation services. (For
information regarding the tax consequences of a lump sum 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 continue at least as rapidly as under the method of
distribution in effect at such Contract Owner's or Joint Contract Owner's death.
Upon the death of any Contract Owner during the Annuity Period, the Beneficiary
becomes the Contract Owner. Upon the death of any Joint Contract Owner during
the Annuity Period, the surviving Joint Contract Owner, if any, will be treated
as the Primary Beneficiary. Any other Beneficiary designation on record at the
time of death will be treated as a Contingent Beneficiary.
If the Contract Owner is not the Annuitant and the Annuitant dies prior
to the Annuity Date, the Contract will continue in force on the same terms and
the Contract Owner shall thereafter be the Annuitant, unless another person is
designated by the Contract Owner to Great American Reserve's Administrative
Office within thirty days. If the Contract Owner is not an individual, this
paragraph shall not apply and the first paragraph of this section shall apply as
if the Annuitant were the Contract Owner.
If the Annuitant dies after the Annuity Date, any guaranteed amounts
remaining unpaid will continue to be paid pursuant to the annuity option in
force at the date of death, unless the Beneficiary chooses to receive the
present value of the remaining guaranteed payments in a lump sum. (See "Annuity
Provisions" on page I-__.)
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Beneficiary
The Beneficiary and any Contingent Beneficiary are named in the
application. Unless the Beneficiary has been irrevocably designated, the
Beneficiary may be changed upon written request to Great American Reserve's
Administrative Office. If acceptable to Great American Reserve, a change of
Beneficiary will take effect as of the date signed, unless Great American
Reserve has already acted in reliance on the prior status. The estate or heirs
of a Beneficiary who dies before the annuity payment is due have no rights under
the Contract. If no Beneficiary survives when the annuity payment is due,
payment will be made to the Contract Owner's estate.
Ownership
The Contract Owner is the person entitled to all rights under the
Contract. The Annuitant is the Contract Owner unless otherwise designated in the
application or by endorsement. No contingent owner may be named. Ownership of
the Contract may be transferred to a new Contract Owner. A transfer of ownership
must be in writing and a new power of attorney to appoint a Financial Advisor
must be executed. These documents must be received by Great American Reserve's
Administrative Office before the transfer of ownership becomes effective. Such a
transfer of ownership does not affect a designation of Beneficiary. Contracts
may not be assigned, pledged, or transferred, unless permitted by law. A
collateral assignment does not change contract ownership. The rights of a
collateral assignee have priority over the rights of a Beneficiary. Any
assignment may have adverse tax consequences. You should consult a competent tax
adviser before making any such designations, transfers, or assignments.
Account Transfers
Before the Annuity Date, Separate Account Value may be transferred from
one Subaccount to another Subaccount and/or to the Fixed Account. The Contract
allows an unlimited number of Subaccount transfers so long as a Financial
Advisor is performing services under the Contract. Without the services of a
Financial Advisor, your Separate Account Value will be automatically transferred
into the Money Market Subaccount. Until you designate a new Financial Advisor,
you may: (i) keep your Separate Account Value in the Money Market Subaccount;
(ii) transfer all or part of your Separate Account Value to the Fixed Account
and become subject to Fixed Account transfer restrictions; or (iii) surrender
your Contract, subject to applicable withdrawal charges and tax penalties. The
Servicer maintains a list of Financial Advisors, but does not recommend any
particular Financial Advisor. (See "Federal Income Taxes" 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
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business closes early, the above Transaction Cut-Off Times will be approximately
thirty minutes (forty-five minutes, in the case of the Precious Metals
Subaccount) prior to the close of such exchange or market. Telephone and
electronic transfer privileges may be terminated or modified by the Separate
Account at any time.
When acting on instructions believed to be genuine, neither Great
American Reserve nor the Servicer will be liable for any loss resulting from a
fraudulent telephone or electronic transaction request and the Contract Owner
would bear the risk of any such loss. The Servicer will employ reasonable
procedures to confirm that any instructions communicated by telephone or
electronic medium are genuine; and if the Servicer does not employ such
procedures, then Great American Reserve and the Servicer, as 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" at page I-___.) There is no charge on
withdrawals of (a) Purchase Payments that have been in the Contract more than
seven complete Contract years or (b) free withdrawal amounts described above.
(See "Charges and Deductions -- Withdrawal Charge" at page I-___.) A Contract
Owner's election to withdraw must be in writing. The withdrawal election must be
received by Great American Reserve prior to the Annuity Date. Under certain
Qualified Plans, withdrawals by Contract Owners prior to age 59 1/2 may be
restricted and the consent of your spouse may be required.
On receipt of a Contract Owner's election, Great American Reserve will
cancel the number of Accumulation Units necessary to equal the dollar amount of
the withdrawal plus any applicable withdrawal charge. (See "Charges and
Deductions" on page I-__.) Unless a Contract Owner instructs otherwise, a
partial withdrawal made by a Contract Owner (including any withdrawals to remit
fees payable to a Financial Advisor) will be made pro rata among the Subaccounts
and the Fixed Account in which the Contract Owner is invested. Withdrawals and
related charges will be based on values for the Valuation Period in which the
withdrawal election (and the Contract, if required) are received by written
request at Great American Reserve's Administrative Office. Withdrawal requests
may be made only between 8:30 A.M., Eastern Time, and 2:30 P.M., Eastern Time;
withdrawal elections received after 2:30 P.M., Eastern Time, will be initiated
at the close of business on the next business day.
A partial withdrawal must be at least $500, and the remaining Contract
Value must be at least $10,000 ($3,500 for Qualified Contracts); otherwise Great
American Reserve reserves the right to treat the partial withdrawal as a total
withdrawal of the Contract Value. Payment of withdrawals may be deferred (see
"Suspension or Deferral of Payments" below and "Federal Income Taxes" on page
I-__).
Systematic Withdrawal Plan
Great American Reserve administers a systematic withdrawal plan (the
"SWP") which enables a Contract Owner to pre-authorize a periodic exercise of
the contractual withdrawal rights described above. Contract Owners entering into
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an SWP agreement with Great American Reserve instruct Great American Reserve to
withdraw a level dollar amount from specified investment options on a periodic
basis. The total of SWP withdrawals by a Contract Owner in a Contract year is
limited to free withdrawal amounts to ensure that no withdrawal charge will ever
apply to an SWP withdrawal (see "Charges and Deductions -- Withdrawal Charge" at
page I-___). If an additional withdrawal is made from a Contract by a Contract
Owner participating in an SWP, the SWP will terminate automatically and may be
reinstated only on or after a written request to Great American Reserve. SWP
withdrawals, however, may be subject to the ten percent (10%) federal tax
penalty imposed on withdrawals, which penalty generally will apply to the income
portion of any distribution (see "Federal Income Taxes -- Tax Treatment of
Withdrawals; Non-Qualified Contracts" at page I-___). Contract Owners interested
in participating in an SWP may elect to participate in this program by written
request to Great American Reserve's Administrative Office.
Suspension or Deferral of Payments
Payment of withdrawals will normally be made within seven days of Great
American Reserve's receipt of a written request for withdrawal. However, Great
American Reserve reserves the right to suspend or defer any withdrawal payment
or transfer of values if: (a) the NYSE, the Federal Reserve Bank of New York
(the "New York Fed"), the NASDAQ, the Chicago Board of Trade (the "CBOT"), the
Chicago Mercantile Exchange (the "CME"), or the Chicago Board of Options
Exchange (the "CBOE"), as appropriate, is closed (other than customary weekend
and holiday closings); (b) trading on the NYSE, the NASDAQ, the CBOT, the CME,
or the CBOE, 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. See "Special Risk Considerations; Trading
Halts" in Part II of this Prospectus.
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.
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.)
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Change of Annuity Date or Annuity Option
You may change the Annuity Date or the annuity option upon written
notice received at Great American Reserve's Administrative Office at least 30
days prior to the current Annuity Date.
Annuity Options
You may select any one of the following annuity options which currently
are available on a fixed basis only or any other option satisfactory to you and
Great American Reserve.
First Option--Life Annuity. An Annuity payable monthly during the
lifetime of the Annuitant and ceasing with the last monthly payment due prior to
the death of the Annuitant. This option offers a greater level of monthly
payments than the second option, since there is no minimum number of payments
guaranteed (nor a provision for a death benefit payable to a Beneficiary). It
would be possible under this option to receive only one annuity payment if the
Annuitant died prior to the due date of the second annuity payment. This option
is generally not available for Contract Owners annuitizing over the age of 85.
Second Option--Life Annuity With Guaranteed Periods. An Annuity payable
monthly during the lifetime of the Annuitant with the guarantee that if, at the
death of the Annuitant, payments have been made for less than 5, 10, or 20
years, as elected, annuity payments will be continued during the remainder of
such period to the Beneficiary designated by the Contract Owner. If no
Beneficiary is designated, Great American Reserve will, in accordance with the
Contract provisions, pay in a lump sum to the Annuitant's estate the present
value, as of the date of death, of the number of guaranteed annuity payments
remaining after that date, computed on the basis of the assumed net investment
rate used in determining the first monthly payment.
Because it provides a specified minimum number of annuity payments,
this option results in somewhat lower payments per month than the First Option.
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 662/3% 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-__.
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Proof of Age, Sex, and Survival
Great American Reserve may require proof of age, sex, or survival of
any person upon whose continuation of life annuity payments depend.
Notices and Elections
All notices and elections under the Contract must be in writing, signed
by the proper party, and be received at Great American Reserve's Administrative
Office to be effective, except that account transfers may be made by telephone
pursuant to procedures specified above (see "Account Transfers" at page I-__).
Great American Reserve is not responsible for the validity of any notices or
elections. If acceptable to Great American Reserve, notices or elections
relating to beneficiaries and ownership will take effect as of the date signed
unless Great American Reserve has already acted in reliance on the prior status.
Amendment of Contract
At any time, Great American Reserve may amend the Contract as required
to make it conform with any law, regulation, or ruling issued by any government
agency to which the Contract is subject.
Ten-Day Right to Review
Within 10 days of your receipt of an issued Contract you may cancel the
Contract by returning it to Great American Reserve for cancellation. Great
American Reserve deems this period as ending 14 days after the Contract Date.
This period may be longer in certain states, as required. If the Contract is
returned under the terms of the Ten Day Right to Review, Great American Reserve
will refund either the Contract Value or all your Purchase Payments within seven
days in compliance with State requirements, if any. Any amounts refunded in
excess of your Contract Value will be at Great American Reserve's expense, not
the expense of the Subaccounts.
FEDERAL INCOME TAXES
THE FOLLOWING DESCRIPTION IS BASED UPON GREAT AMERICAN RESERVE'S
UNDERSTANDING OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN
GENERAL. GREAT AMERICAN RESERVE CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES
IN SUCH LAWS WILL BE MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE
REGARDING THE TAXATION OF THE CONTRACTS. GREAT AMERICAN RESERVE DOES NOT
GUARANTEE THE TAX STATUS OF THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK
THAT THE CONTRACTS MAY NOT BE TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL
INCOME TAX LAWS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION
IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE
APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER
ANY APPLICABLE STATE OR OTHER TAX LAWS.
Pre-Retirement Distributions
Pre-retirement distributions can disqualify a pension plan, because
such distributions are inconsistent with the purpose of such a plan which is to
provide a retirement income, or a Section 403(b) tax-sheltered annuity, because
Section 403(b)(11) of the Code prohibits distributions from such annuities under
the circumstances described above. You should consult with a competent tax
counselor regarding the use of the Contract in relation to such retirement
plans. Great American Reserve cannot take any responsibility for the tax
consequences resulting from deductions that you may authorize in connection with
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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
income tax rates. Contract Owners, Annuitants and Beneficiaries under the
Contracts should seek competent financial advice about the tax consequences of
any distributions.
Great American Reserve is taxed as a life insurance company under the
Code. For federal income tax purposes, the Separate Account is not a separate
entity from Great American Reserve and its operations form a part of Great
American Reserve.
Diversification
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States 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 underlying investments of each Subaccount will
remain "adequately diversified" in accordance with the diversification
requirements of Section 817(h) of the Code.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg. ss. 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be
adequately diversified if: (1) no more than 55% of the value of the total assets
of the subaccount is represented by any one investment; (2) no more than 70% of
the value of the total assets of the subaccount is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
subaccount is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the subaccount is represented by any four
investments.
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The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, each United States government
agency or instrumentality shall be treated as a separate issuer.
The Treasury Department has indicated that guidelines may be issued
concerning the extent to which variable annuity contract owners may direct their
investments to particular divisions of a separate account. It is possible that
if and when such guidelines are issued, the Contract may need to be modified to
comply with such guidelines. For these reasons, Great American Reserve reserves
the right to modify the Contract as necessary to prevent the Contract Owner from
being considered the owner of the assets of the Separate Account.
Multiple Contracts
The Code provides that multiple non-qualified annuity contracts which
are issued within a calendar year to the same contract owner by one company or
its affiliates are treated as one annuity contract for purposes of determining
the tax consequences of any distribution. Such treatment may result in adverse
tax consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Contract Owners should consult a tax adviser
prior to purchasing more than one non-qualified annuity contract in any calendar
year.
Contracts Owned by Non-Natural Persons
Under Section 72(u) of the Code, the investment earnings on premiums
paid for the Contracts generally will be taxed currently to the Contract Owner
if the Contract Owner is a non-natural person (e.g., a corporation, a trust, or
certain other entities). Such Contracts generally will not be treated as
annuities for federal income tax purposes. However, this treatment is not
applied to Contracts which are held by (a) a trust or other entity as agent for
a natural person; (b) Qualified Plans; or (c) the estate of a decedent by reason
of the death of the decedent. Additionally, this treatment is not applied to a
Contract which is a qualified funding asset for a structured settlement under
Section 130(d) of the Code. If the Contract Owner is a charitable remainder
trust (a "CRT"), it is probable that the CRT will not be treated as holding the
Contract as an agent for a natural person. A CRT is generally exempt from
federal income tax, but the provisions of Section 72(u) of the Code may affect
the computation and taxation of the distributions to the income beneficiary.
Purchasers should consult their own tax counsel or other adviser before
purchasing a Contract to be owned by a non-natural person.
Tax Treatment of Assignments
An assignment or pledge of all or any portion of a Contract may be
treated as a taxable event. Any gain in the Contract subsequent to the
assignment may also be treated as taxable income in the year in which it is
earned. Contract Owners should therefore consult competent tax advisers should
they wish to assign or pledge their Contracts.
Income Tax Withholding
Section 3405(a) of the Code generally requires the payor of certain
"designated distributions" from any (i) pension, profit-sharing, stock bonus, or
other deferred compensation plan, (ii) IRA, or (iii) annuity contract to
withhold certain taxes from its payments. Generally, amounts are withheld from
periodic payments at the same rate as wages and at the rate of 10% from
non-periodic payments. If the payments that you may authorize to your Financial
Advisor are treated as distributions, but are not treated as eligible rollover
distributions, then these distributions would be considered non-periodic
payments and subject to withholding at a rate of 10%. Subject to certain
exceptions, some of which are discussed immediately below, Contract Owners may
elect not to have such withholding apply to designated distributions.
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Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 and 403(b) annuity contracts which are not directly
rolled over to another eligible retirement plan or individual retirement account
or individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
(a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary or for a specified period of 10
years or more; or (b) distributions which are required minimum distributions; or
(c) the portion of the distributions not includible in gross income (i.e.,
return of after-tax contributions).
If the payment of tactical allocation advisory fees from retirement
plans qualified under Section 401 and Section 403(b) annuity contracts are
treated as distributions, then Great American Reserve believes that the payment
of such fees will be treated as "eligible rollover distributions," which are
subject to mandatory 20% withholding.
Furthermore, payments from Section 457 plans are wages subject to
mandatory regular income tax withholding, rather than the pension withholding
rules described above.
Participants should consult their own tax counsel or other tax advisor
regarding withholding requirements.
Tax Treatment of Withdrawals; Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions from annuity
contracts. It generally provides that if the Contract Value exceeds the
aggregate Purchase Payments made, any amount withdrawn will be treated as coming
first from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income. It
further provides that a ten percent (10%) penalty generally will apply to the
income portion of any distribution. However, the penalty is not imposed on
amounts received: (a) on or after the taxpayer reaches age 59 1/2; (b) after the
death of the Contract Owner; (c) if the taxpayer is totally disabled (as defined
in Section 72(m)(7) of the Code); (d) in a series of substantially equal
periodic payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his or 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 Reserve's administrative
procedures. Contract Owners, participants, and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contract comply with applicable law. Following are general
descriptions of the types of qualified plans, although, at the present time, the
Contract only is issued to Tax-Sheltered Annuities and Individual Retirement
Accounts. The tax rules presented here are not exhaustive and are for general
informational purposes only. The tax rules regarding qualified plans are very
complex and will have differing applications depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a qualified plan.
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Generally, Contracts issued pursuant to qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-__.)
A. Tax-Sheltered Annuities. Section 403(b) of the Code permits the
purchase of "tax-sheltered annuities" by public schools and certain charitable,
educational scientific organizations described in Section 501(c)(3) of the Code.
These qualifying employers may make contributions to the Contracts for the
benefit of their employees. Such contributions are not includible in the gross
income of the employees until the employees receive distributions from the
Contracts. The amount of contributions to the tax-sheltered annuity is limited
to certain maximums imposed by the Code. Furthermore, the Code sets forth
additional restrictions governing 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 individual retirement program known as
an "Individual Retirement Annuity" ("IRA"). Under applicable limitations,
certain amounts may be contributed to an IRA which will be deductible from the
individual's gross income. These IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. (See "Tax Treatment of
Withdrawals; Qualified Contracts," below.) Under certain conditions,
distributions from other IRAs and other qualified plans may be rolled over or
transferred on a tax-deferred basis into an IRA. Sales of Contracts for use with
IRAs are subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure be given to persons desiring
to establish an IRA. Purchasers of Contracts to be qualified as Individual
Retirement Annuities should obtain competent tax advice as to the tax treatment
suitability of such an investment.
C. Qualified Pension and Profit-Sharing Plans for Corporations and
Self-Employed Individuals. Sections 401(a) and 403(a) of the Code permit
employers to establish various types of retirement plans for employees, and
permit self-employed individuals to establish retirement plans for themselves
and their employees which qualify for special federal income tax treatment.
These retirement plans may permit the purchase of the Qualified Contracts to
provide benefits under the plans. The Code sets forth restrictions on
contributions and distributions which depend on the design of the specific plan.
Any purchaser should obtain competent tax advice as to the suitability of such
an investment.
D. Section 457 Plans. Section 457 of the Code provides for certain
deferred compensation plans which qualify for special federal income tax
treatment and which may be offered with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. All investments are owned by
the sponsoring employer and are subject to the claims of the general creditors
of the employer, until December 31, 1998, or such earlier date as may be
established by plan amendment. However, amounts deferred under a plan created on
or after August 20, 1996, and amounts deferred under any Section 457 plan after
December 31, 1998, must be held in a trust, a custodial account, or an annuity
contract for the exclusive 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.
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Tax Treatment of Withdrawals; Qualified Contracts
In the case of a withdrawal under a Qualified Contract other than a
Section 457 Plan, a ratable portion of the amount received is taxable, generally
based on the ratio of the individual's cost basis to the individual's total
accrued benefit under the retirement plan. Special tax rules may be available
for certain distributions from a Qualified Contract. Section 72(t) of the Code
imposes a 10% penalty tax on the taxable portion of any distribution from
qualified plans, including Contracts issued and qualified under Code Sections
403(b) (Tax-Sheltered Annuities) and 408(b) (Individual Retirement Annuities).
To the extent amounts are not includible in gross income because they have been
rolled over to an IRA or to another eligible qualified plan, no tax penalty will
be imposed. The tax penalty will not apply to the following distributions: (a)
if any distribution is made on or after the date on which the Contract Owner or
Annuitant (as applicable) reaches age 59 1/2; (b) distributions following the
death or disability of the Contract Owner or Annuitant (as applicable) (for this
purpose disability is as defined in Section 72(m)(7) of the Code); (c) after
separation from service, distributions that are part of substantially equal
periodic payments made not less frequently than annually for the life (or life
expectancy) of the Contract Owner or Annuitant (as applicable) or the joint
lives (or joint life expectancies) of such Contract Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an
Contract Owner or Annuitant (as applicable) who has separated from service after
he or she has attained age 55; (e) distributions made to the Contract Owner or
Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Contract Owner or
Annuitant (as applicable) for amounts paid during the taxable year for medical
care; and (f) distributions made to an alternate payee pursuant to a qualified
domestic relations order. The exceptions stated in (d), (e) and (f) above do not
apply in the case of an Individual Retirement Annuity. The exception stated in
(c) above applies to an Individual Retirement Annuity without the requirement
that there be a separation from service.
Generally, distributions from a qualified plan must commence no later
than April 1 of the first calendar year following the later of (i) the calendar
year in which the employee attains 70 1/2 or (ii) the calendar year in which the
employee retires. Distributions from an IRA must begin no later than April 1 of
the calendar year following the calendar year in which the IRA holder attains
age 70 1/2. Required distributions must be made over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. In addition, distributions in excess of $150,000 per year may be
subject to an additional 15% excise tax unless an exemption applies.
Tax-Sheltered Annuities; Withdrawal Limitations
Section 403(b)(11) of the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement to
circumstances only on or after the Contract Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Contract Owner's
Contract Value which represents contributions made by the Contract Owner and
does not include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The limitations
on withdrawals do not affect transfers between certain qualified plans. Contract
Owners should consult their own tax counsel or other tax adviser regarding any
distributions.
SEPARATE ACCOUNT VOTING RIGHTS
Prior to the Annuity Date, Contract Owners participating in the
Separate Account will have certain voting rights with respect to (i) the
election of the Managers, (ii) the removal of such members and of officers of
the Separate Account elected or appointed by the Managers, (iii) the
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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 poli cies 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 Exchange Act of 1934, as amended (the "1934 Act"), and a
member of the National Association of Securities Dealers, Inc. Sales of the
Contracts will be made by authorized broker-dealers and their registered
representatives, including registered representatives of PFS. These registered
representatives are also Great American Reserve's licensed insurance agents. See
"Underwriter of the Contracts" in the Statement of Additional Information for
more information.
STATE REGULATION
Great American Reserve is subject to the laws of the State of Texas
governing insurance companies and to the regulations of the Texas Insurance
Department (the "Insurance Department"). An annual statement in the prescribed
form is filed with the Insurance Department each year covering Great American
Reserve's operation for the preceding year and its financial condition as of the
end of such year. Regulation by the Insurance Department includes periodic
examination to determine Great American 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 operations is conducted periodically by the National Association of
Insurance Commissioners. Such regulation does not, however, involve any
supervision of management or Great American Reserve's investment practices or
policies. In addition, Great American Reserve is subject to regulation under the
insurance laws of other jurisdictions in which it operates.
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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.
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.
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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 specified
benchmark. The Subaccounts may be used independently or in combination with each
other as part of an overall investment strategy. Additional Subaccounts may be
created from time to time.
The following are the Subaccounts and their investment objectives:
Subaccount Investment Objective
- ------------------------------------ -------------------------------------
The Nova Subaccount To provide investment returns that
correspond to a specified percentage
of the performance of a benchmark for
common stock securities.
- ------------------------------------ -------------------------------------
The Ursa Subaccount To provide investment results that
will inversely correlate to the
performance of a benchmark for common
stock securities.
- ------------------------------------ -------------------------------------
The OTC Subaccount To attempt to provide investment
results that correspond to the
performance of a benchmark for
over-the-counter securities.
- ------------------------------------ -------------------------------------
The Precious Metals 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 To provide investment results that
correspond to the performance Sub-
account of a benchmark for U.S.
Government securities.
- ------------------------------------ -------------------------------------
The Juno Subaccount To provide total return before
expenses and costs that inversely
correlates to the price movements
of a benchmark for U.S. Treasury
debt instruments or futures contracts
on a specified debt instrument.
- ------------------------------------ -------------------------------------
The Money Market Subaccount To provide current income consistent
with stability of capital and
liquidity.
- ------------------------------------ -------------------------------------
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,
respectively. Because of the inherent risks in any investment, there can be no
assurance that any Subaccount's investment objective will be achieved. See
"Investment Objectives and Policies" at page II-_.
None of the Subaccounts alone constitutes a balanced investment plan,
and certain of the Subaccounts involve special risks not traditionally
associated with variable annuity contracts. The nature of the Subaccounts
generally will result in significant portfolio turnover which would likely cause
higher expenses and additional costs. The Separate Account is not intended for
Contract Owners whose principal objective is current income or preservation of
capital and may not be a suitable investment for persons who intend to follow an
"invest and hold" strategy. See "Special Risk Considerations" at page II-_.
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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 provides investment advisory
services to an open-end management investment company (the "Rydex Series Trust")
that consists of nine publicly-available no-load mutual funds having, as of
December 31, 1997, aggregate net assets in excess of $1.75 billion.
This Part II of the Prospectus sets forth information relating to the
Separate Account, particularly information on the investment objectives,
policies, and restrictions of the Subaccounts and on PADCO. Additional
information concerning the Separate Account and the Subaccounts is also
contained in the Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
OF THE SUBACCOUNTS
General
The Subaccounts are designed for Contract Owners who intend to follow a
tactical allocation or market-timing investment strategy. Except for the Money
Market Subaccount, each Subaccount is intended to provide investment exposure
with respect to a particular segment of the securities markets. These
Subaccounts seek investment results that correspond over time to a specified
"benchmark." The Subaccounts may be used independently or in combination with
each other as part of an overall investment strategy. Additional Subaccounts may
be created from time to time.
Fundamental securities analysis is not generally used by PADCO in
seeking to correlate with the respective benchmarks. Rather, PADCO primarily
uses statistical and quantitative analysis to determine the investments the
Subaccount makes and techniques the Subaccount employs. While PADCO attempts to
minimize any "tracking error" (that statistical measure of the difference
between the investment results of a Subaccount and the performance of its
benchmark), certain factors will tend to cause the Subaccount's investment
results to vary from a perfect correlation to the Subaccount's benchmark. PADCO
does not expect that the total returns of the Subaccounts will vary adversely
from their respective current benchmarks by more than ten percent over a year.
See "Special Risk Considerations" at page II-__. It is the policy of these
Subaccounts to pursue their investment objectives regardless of market
conditions, to remain nearly fully invested, and not to take defensive
positions.
The investment objectives and certain investment restrictions of the
Subaccounts are fundamental policies and may not be changed without the
affirmative vote of the majority of the Contract Owners of that Subaccount. All
other investment policies of the Subaccounts not specified as fundamental
(including the benchmarks of the Subaccounts) may be changed by the Managers of
the Separate Account without the approval of Contract Owners.
None of the Subaccounts will invest 25% or more of the value of the
Subaccount's total assets in the securities of one or more issuers conducting
their principal business activities in the same industry; except, that to the
extent that the benchmark index selected for a particular Subaccount is
concentrated in a particular industry, that Subaccount will be concentrated in
that industry, but will not otherwise be concentrated.
The Managers may consider changing a Subaccount's benchmark (to the
extent permitted) if, for example, the current benchmark becomes unavailable;
the Managers believe the current benchmark no longer serves the investment needs
of a majority of Contract Owners or another benchmark better serves their needs;
or the financial or economic environment makes it difficult for the Subaccount's
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<PAGE>
investment results to correspond sufficiently to the Subaccount's current
benchmark. If believed appropriate, the Managers may pecify 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(TM) (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 approximate the
return of the S&P500 Index, the Nova Subaccount should increase gains to
Contract Owners invested in the Nova Fund during periods when the prices of the
securities in the S&P500 Index are rising and increase losses to Contract Owners
invested in the Nova Fund during periods when they are declining. Contract
Owners invested in the Nova Subaccount could experience substantial losses
during sustained periods of falling equity prices.
The Ursa Subaccount
The Ursa Subaccount's investment objective is to provide investment
results that will inversely correlate to the performance of a benchmark for
common stock securities. The S&P500 Index is the Ursa Subaccount's current
benchmark. (See "The Benchmarks" at page II-__.) The Ursa Subaccount seeks to
achieve this inverse correlation result on each trading day. While a close
correlation can be achieved on any single trading day, over time the cumulative
percentage increase or decrease in the Accumulation Unit Value of the Ursa
Subaccount may diverge significantly from the cumulative percentage decrease or
increase in the S&P500 Index due to a compounding effect.
If the Ursa Subaccount achieved a perfect inverse correlation for any
single trading day, the Accumulation Unit Value of the Ursa Subaccount would
increase for that day in direct proportion to any decrease in the level of the
S&P500 Index, or decrease for that day in direct proportion to any increase in
the level of the S&P500 Index. For example, if the S&P500 Index were to decrease
by 1% by the close of business on a particular trading day, Contract Owners
invested in the Ursa Subaccount would experience a gain in Accumulation Unit
Value of approximately 1% for that day. Conversely, if the S&P500 Index were to
increase by 1% by the close of business on a particular trading day, Contract
Owners with Contract Value allocated to the Ursa Subaccount would experience a
loss in Accumulation Unit Value of approximately 1% for that day.
Even if there is a perfect inverse correlation between the Ursa
Subaccount and the S&P500 Index on a daily basis, however, the symmetry between
the changes in the S&P500 Index and the changes in the Accumulation Unit Value
in the Ursa Subaccount can be significantly altered over time by a compounding
effect. Thus, if the Ursa Subaccount achieved a perfect inverse correlation with
the S&P500 Index on every trading day over an extended period, and if there were
a significant decrease in the level of the S&P500 Index during that period,
there would be a compounding effect with the result that the Accumulation Unit
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<PAGE>
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.
The Ursa Subaccount involves special risks not traditionally associated
with annuity contracts, and intends to pursue its investment objective
regardless of market conditions and does not intend to take defensive positions
in anticipation of rising equity prices. Consequently, Contract Owners invested
in the Ursa Subaccount may experience substantial losses during sustained
periods of rising equity prices.
In pursuing its investment objective, the Ursa Subaccount generally
does not invest in traditional securities, such as common stock of 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(TM). (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(TM). Instead, the OTC Subaccount intends to hold representative securities
included in the NASDAQ 100 Index(TM) or other instruments which PADCO believes
will provide returns that correspond to those of the NASDAQ 100 Index(TM). The
OTC Subaccount may engage in transactions on stock index futures contracts,
options on stock index futures contracts, and options on securities and stock
indexes.
Companies whose securities are traded on the over-the-counter ("OTC")
markets may include smaller market-capitalization or newer companies than those
listed on the New York Stock Exchange (the "NYSE") or the American Stock
Exchange (the "AMEX"). OTC companies may have limited product lines, or
relatively new products or services, and may lack established markets, depth of
experienced management, or financial resources and the ability to generate
funds. The securities of these companies also may have limited marketability and
may be more volatile in price than securities of larger-capitalized or more
well-known companies. Among the reasons for the greater price volatility of
securities of certain smaller OTC companies are the less certain growth
prospects of comparably smaller firms and the greater sensitivity of
smaller-capitalized companies to changing economic conditions than
larger-capitalized, exchange-traded securities. Conversely, because many of
these OTC securities may be overlooked by investors and undervalued in the
marketplace, there may be potential for significant capital appreciation.
The Precious Metals Subaccount
The investment objective of the Precious Metals Subaccount is to
attempt to provide investment results that correspond to the performance of a
benchmark primarily for metals-related securities. The Precious Metals
Subaccount's current benchmark is the Philadelphia Stock Exchange Gold/Silver
Index(TM) (the "XAU Index"). (See "The Benchmarks" at page II-__.) To achieve
<PAGE>
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 countries. Foreign companies may not be subject to accounting
standards or governmental regulations comparable to those that affect United
States companies, and there may be less public information about the operations
of foreign companies. Foreign securities also may be subject to foreign
government taxes that could reduce the yield on such securities.
The U.S. Government Bond Subaccount
The investment objective of the Bond Subaccount is to provide investment
results that correspond to the performance of a benchmark for U.S. Government
Securities. The Bond Subaccount's current benchmark is 120% of the price
movement of the current Long Treasury Bond (the "Long Bond"), without
consideration of interest paid. (See "The Benchmarks" at page II-__.) In
attempting to achieve this objective, the Bond Subaccount invests primarily in
obligations of the U.S. Treasury or obligations either issued or guaranteed, as
to principal and interest, by agencies or instrumentalities of the U.S.
Government ("U.S. Government Securities"). U.S. Government Securities are
obligations of the U.S. Treasury or obligations either issued or guaranteed, as
to principal and interest, by agencies or instrumentalities of the U.S.
Government.
The Bond Subaccount also may engage in transactions in futures
contracts and options on futures contracts on U.S. Treasury bonds. The Bond
Subaccount also may invest in U.S. Treasury zero coupon bonds. While U.S.
Government Securities provide substantial protection against credit risk,
investment in those securities do not protect against price changes due to
changing interest rate levels and, as such, the unit price of the Bond
Subaccount is not guaranteed and will fluctuate over time. Accordingly, the
return of the Bond Subaccount should move inversely with movements in prevailing
interest rates on the Long Bond. The Subaccount intends to adjust its portfolio
each time the Long Bond is issued (currently three times a year) in an attempt
to track the price movement of the newly-issued Long Bond.
The Juno Subaccount
The Juno Subaccount's investment objective is to provide total return
before expenses and costs that inversely correlates to the price movements of a
benchmark debt instrument or futures contract on a specified debt instrument.
The Juno Subaccount's current benchmark is the Long Bond. (See "The Benchmarks"
at page II-__.) In attempting to achieve its objective, the Subaccount intends
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to devote its assets primarily to employing certain investment techniques,
including engaging in short sales and transactions in futures contracts on U.S.
Treasury bonds and options on such contracts. These techniques are highly
specialized and involve certain risks not traditionally associated with variable
annuity contracts. Under these techniques, the Subaccount will generally incur a
loss if the price of the underlying security or futures contract increases
between the date of the employment of the technique and the date on which the
Subaccount terminates the position. The Subaccount will generally realize a gain
if the underlying security or futures contract declines in price between those
dates.
If the Juno Subaccount is successful in meeting its objective for any
single trading day, the Juno Subaccount's total return before expenses and 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 in repurchase agreements collateralized fully
by U.S. Government Securities. An investment in the Money Market Subaccount is
neither insured nor guaranteed by the U.S. Government.
The Money Market Subaccount may invest in securities that take the form
of participation interests in, and may be evidenced by deposit or safekeeping
receipts for, any of the foregoing securities. Participation interests are pro
rata interests in U.S. Government Securities; and instruments evidencing deposit
or safekeeping are documentary receipts for such original securities held in
custody by others.
The Money Market Subaccount also may purchase bank money market
instruments, including certificates of deposit, time deposits, bankers'
acceptances, and other short-term obligations issued by United States banks
which are members of the Federal Reserve System. Certificates of deposit are
negotiable certificates evidencing the obligation of a bank to repay funds
deposited with the bank for a specified period of time. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time (in no event longer than seven days) at a stated interest rate.
Time deposits which may be held by the Money Market 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
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maturity. Other short-term bank obligations in which the Money Market Subaccount
may invest include uninsured, direct obligations of a bank that bear fixed,
floating, or variable interest rates.
The Money Market Subaccount also may invest in commercial paper,
including corporate notes. These instruments are short-term obligations issued
by banks and corporations that have maturities ranging from two to 270 days.
Each commercial paper instrument may be backed only by the credit of the issuer
or may be backed by some form of credit enhancement, typically in the form of a
guarantee by a commercial bank. Investments in commercial paper and other
short-term promissory notes issued by corporations (including variable and
floating rate instruments) must be rated at the time of purchase "A-2" or better
by Standard & Poor's Ratings Group, "Prime-2" or better by Moody's Investors
Service, Inc. ("Moody's"), "F-2" or better by Fitch Investors Service, Inc.
("Fitch"), "Duff 2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or
"A2" or better by IBCA, Inc., or, if not rated by Standard & Poor's Ratings
Group, Moody's, Fitch, Duff, or IBCA, Inc., must be determined by PADCO Advisors
II, Inc. ("PADCO"), the Separate Account's investment adviser, to be of
comparable quality pursuant to guidelines approved by the managers of the
Separate Account (the "Managers"). Please refer to Appendix A to the Statement
of Additional Information for more detailed information concerning commercial
paper ratings.
The Money Market Subaccount also may make limited investments in
guaranteed investment contracts ("GICs") issued by United States insurance
companies. The Money Market Subaccount will purchase a GIC only when PADCO has
determined, under guidelines established by the Managers of the Separate
Account, that the GIC presents minimal credit risks to the Money Market
Subaccount and is of comparable quality to instruments that are rated "high
quality" by certain nationally-recognized statistical rating organizations.
Money market instruments are generally described as short-term debt
obligations having maturities of 13 months or less. Yields on such instruments
are very sensitive to short-term lending conditions. The principal value of such
instruments tends to decline as interest rates rise and conversely tends to rise
as interest rates decline. In addition, there is an element of risk in money
market instruments that the issuer may become insolvent and may not make timely
payment of interest and principal obligations.
The Benchmarks
The S&P500 Index. The S&P500 Index is composed of 500 common stocks,
which are chosen by Standard & Poor's Corporation ("S&P"), a division of The
McGraw-Hill Companies, Inc., on a statistical basis to be included in the S&P500
Index. The inclusion of a stock in the S&P500 Index in no way implies that the
S&P believes the stock to be an attractive investment. The 500 securities, most
of which trade on the NYSE, represented, as of December 31, 1997, 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.
The NASDAQ 100 Index(TM). The NASDAQ 100 Index(TM) (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(TM), which was created in 1985, is
limited to one issue per company. At the time of inclusion in the NASDAQ 100
Index(TM), index securities must have a minimum market value of at least $500
million. Only domestic issues are included in the NASDAQ 100 Index(TM).
The XAU Index. The Philadelphia Stock Exchange (the "XAU") Gold/Silver
Index(TM) (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
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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.
NEITHER THE NOVA SUBACCOUNT NOR THE URSA SUBACCOUNT IS SPONSORED,
ENDORSED, SOLD, OR PROMOTED BY THE S&P; THE OTC SUBACCOUNT IS NOT SPONSORED,
ENDORSED, SOLD, OR PROMOTED BY THE NASDAQ OR ANY OF THE NASDAQ'S AFFILIATES (THE
NASDAQ AND ITS AFFILIATES HEREINAFTER COLLECTIVELY REFERRED TO AS THE "NASDAQ");
AND THE PRECIOUS METALS SUBACCOUNT IS NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED
BY THE XAU. NONE OF THE S&P, THE NASDAQ, AND THE XAU MAKES ANY REPRESENTATION OR
WARRANTY, IMPLIED OR EXPRESS, TO THE CONTRACT OWNERS INVESTED IN THE
SUBACCOUNTS, OR ANY MEMBER OF THE PUBLIC, REGARDING THE ADVISABILITY OF
INVESTING IN INDEX FUNDS OR THE ABILITY OF THE S&P500 INDEX, NASDAQ 100
INDEX(TM), 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(TM),
AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN.
NONE OF THE S&P, THE NASDAQ, AND THE XAU MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY ANY OF THE SUBACCOUNTS, THE CONTRACT
OWNERS OF THE SUBACCOUNTS, OR ANY PERSON OR ENTITY FROM THE USE OF THE S&P500
INDEX, THE NASDAQ 100 INDEX(TM), 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(TM), 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;
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
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adversely affect the ability of a Subaccount to meet its investment objective.
Because each Subaccount's portfolio turnover rate to a great extent will depend
on the purchase, redemption, and exchange activity of the Subaccount's Contract
Owners, it is very difficult to estimate what the Subaccount's actual turnover
rate will be. Pursuant to the formula prescribed by the SEC, the portfolio
turnover rate for each Subaccount is calculated without regard to securities,
including options and futures contracts, having a maturity of less than one
year. The Nova Subaccount, the Ursa Subaccount, and the Juno Subaccount
typically hold most of their investments in short-term options and futures
contracts, which, therefore, are excluded for purposes of computing portfolio
turnover.
A higher portfolio turnover rate would likely involve correspondingly
greater brokerage commissions and other expenses which would be borne by a
Subaccount, and would directly reduce the return to a Contract Owner from an
investment in the Subaccount. Furthermore, a Subaccount's portfolio turnover
level may adversely affect the ability of the Subaccount to achieve its
investment objective. For further information concerning the portfolio turnover
of the Subaccounts, see "Financial Highlights of the Subaccounts" in Part I of
this Prospectus and "Investment Policies and Techniques" in the Statement of
Additional Information.
Tracking Error
While PADCO does not expect that the returns of the Subaccounts over a
year will deviate adversely from their respective benchmarks by more than ten
percent, several factors may affect their ability to achieve this correlation,
especially during the commencement of operations of a Subaccount when the level
of assets of the Subaccount may be relatively small. Among these factors are:
(1) Subaccount expenses, including brokerage (which may be increased by high
portfolio turnover); (2) less than all of the securities in the benchmark being
held by a Subaccount and securities not included in the benchmark being held by
a Subaccount; (3) an imperfect correlation between the performance of
instruments held by a Subaccount, such as futures contracts and options, and the
performance of the underlying securities in the cash market; (4) bid-ask spreads
(the effect of which may be increased by portfolio turnover); (5) holding
instruments traded in a market that has become illiquid or disrupted; (6)
changes to the benchmark index that are not disseminated in advance; (7) the
need to conform a Subaccount's portfolio holdings to comply with investment
restrictions or policies or regulatory or tax law requirements; or (8) market
movements that run counter to a leveraged Subaccount's investments (which will
cause divergence between the Subaccount and its benchmark over time due to the
mathematical effects of leveraging).
Aggressive Investment Techniques
Each of the Subaccounts (other than the Money Market Subaccount) may
engage in certain aggressive investment techniques which may include engaging in
short sales and transactions in futures contracts and options on securities,
securities indexes, and futures contracts. These techniques are specialized and
involve risks that are not traditionally associated with variable annuity
contracts. The Separate Account expects that the Nova Subaccount, the Ursa
Subaccount, and the Juno Subaccount will primarily use these techniques in
seeking to achieve their objectives and that a significant portion (up to 100%)
of the assets of these Subaccounts will be held in cash or liquid securities in
a segregated account by these Subaccounts as "cover" for these investment
techniques.
Participation in the options or futures markets by a Subaccount
involves investment risks and transaction costs to which the Subaccount would
not be subject absent the use of these strategies. Risks inherent in the use of
options, futures contracts, and options on futures contracts include: (1)
adverse changes in the value of such instruments; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the price of the underlying securities, index, or futures
contracts; (3) the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; and (4) the possible
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absence of a liquid secondary market for any particular instrument at any time.
For further information regarding these investment techniques, see "Investment
Techniques and Other Investment Policies" in this Part II of the Prospectus.
Trading Halts
All of the Subaccounts (other than the Money Market Subaccount)
typically will hold most of their investments in short-term options and futures
contracts. The major exchanges on which these contracts are traded, principally
the CME, the CBOE, and the CBOT, have established limits on how much an option
or futures contract may decline over various time periods within a day. If an
option or futures contract's price declines more than the established limits,
trading on the exchange is halted on that instrument. If such trading halts are
instituted by an options or futures exchange at the close of a trading day, a
Subaccount will not be able to execute purchase or sales transactions in the
specific options or futures contracts affected. In such an event, a Subaccount
also may be required to use a fair-value method to price its outstanding
contracts. A trading halt at the end of a business day may constitute an
emergency situation under SEC regulations.
Early NASDAQ Closings
The normal close of trading of securities listed on the NASDAQ, which
is operated by the National Association of Securities Dealers, Inc. (the
"NASD"), is 4:00 P.M. While an infrequent occurrence, the NASD has closed
trading on the NASDAQ as much as 15 minutes prior to the normal close because of
computer systems failures. Early closing of the NASDAQ may result in a
Subaccount being unable to sell (or buy) OTC securities traded on the NASDAQ on
that day. If the NASDAQ closes prior to the close of business on a day when one
or more of the Subaccounts needs to execute a high volume of trades late in a
trading day, a Subaccount, in particular the OTC Subaccount, might incur
substantial trading losses.
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES
Futures Contracts and Options Thereupon
The Nova Subaccount and the OTC Subaccount may purchase stock index
futures contracts as a substitute for a comparable market position in the
underlying securities. The Ursa Subaccount may sell stock index futures
contracts. The Bond Subaccount may purchase futures contracts on U.S. Government
Securities as a substitute for a comparable market position in the cash market.
The Juno Subaccount may sell futures contracts on U.S. Government Securities.
A futures contract obligates the seller to deliver (and the purchaser
to take delivery of) the specified commodity on the expiration date of the
contract. A stock index futures contract obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. It is the
practice of holders of other futures contracts to close out their positions on
or before the expiration date by use of offsetting contract positions and
physical delivery is thereby avoided.
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
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futures contract for a specified price upon exercise at any time during the
option period. By writing a put or call option on a futures contract, a
Subaccount receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the Subaccount the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a Subaccount realizes a gain or loss from futures activities
depends generally upon movements in the underlying commodity. The extent of the
Subaccount's loss from an unhedged short position in futures contracts or from
writing call options on futures contracts is potentially unlimited. The
Subaccounts may engage in related closing transactions with respect to options
on futures contracts. The Subaccounts will only engage in transactions in
futures contracts and options thereupon that are traded on a United States
exchange or board of trade. In addition to the uses set forth hereunder, each
Subaccount may also engage in futures and futures options transactions in order
to hedge, or limit the exposure of its position, or to create a synthetic money
market position.
The Subaccounts may purchase and sell futures contracts, index futures
contracts, and options thereon only to the extent that such activities would be
consistent with the requirements of Section 4.5 of the regulations under the
Commodity Exchange Act promulgated by the Commodity Futures Trading Commission
(the "CFTC Regulations"), under which each of these Subaccounts would be
excluded from the definition of a "commodity pool operator." Under Section 4.5
of the CFTC Regulations, a Subaccount may engage in futures transactions, either
for "bona fide hedging" purposes, as this term is defined in the CFTC
Regulations, or for non-hedging purposes to the extent that the aggregate
initial margins and premiums required to establish such non-hedging positions do
not exceed 5% of the liquidation value of the Subaccount's portfolio. In the
case of an option on a futures contract that is "in-the-money" at the time of
purchase (i.e., the amount by which the exercise price of the put option exceeds
the current market value of the underlying security or the amount by which the
current market value of the underlying security exceeds the exercise price of
the call option), the in-the-money amount may be excluded in calculating this 5%
limitation.
When a Subaccount purchases or sells a stock index futures contract, or
sells an option thereon, the Subaccount "covers" its position. To cover its
position, a Subaccount may maintain with its custodian bank (and mark to market
on a daily basis) a segregated account consisting of cash or liquid securities,
including U.S. Government Securities or repurchase agreements collateralized by
U.S. Government Securities, that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position. If the Subaccount continues
to engage in the described securities trading practices and properly segregates
assets, the segregated account will function as a practical limit on the amount
of leverage which the Subaccount may undertake and on the potential increase in
the speculative character of the Subaccount's outstanding portfolio securities.
Additionally, such segregated accounts will generally assure the availability of
adequate funds to meet the obligations of the Subaccount arising from such
investment activities. For additional information regarding the methods by which
a Subaccount covers its position in stock index futures contracts and options
thereon, see "Investment Policies and Techniques of the Subaccounts; Futures
Contracts and Options Thereupon" in the Statement of Additional Information.
Although the Subaccounts intend to sell futures contracts only if there
is an active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a Subaccount to substantial losses.
If trading is not possible, or a Subaccount determines not to close a futures
position in anticipation of adverse price movements, the Subaccount will be
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required to make daily cash payments of variation margin. The risk that the
Subaccount will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
Index Options Transactions
The Nova Subaccount, the OTC Subaccount, and the Precious Metals
Subaccount may purchase call options and write (sell) put options, and the Ursa
Subaccount may purchase put options and write call options, on stock indexes.
All of the Subaccounts may write and purchase put and call options on stock
indexes in order to hedge or limit the exposure of their positions.
A stock index fluctuates with changes in the market values of the
stocks included in the index. Options on stock indexes give the holder the right
to receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received, if
any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. Unlike the options on securities discussed below, all settlements of
index options transactions are in cash.
Some stock index options are based on a broad market index such as the
S&P500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the 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 on investment in illiquid securities. See "Illiquid
Securities," below.
Each of the Exchanges has established limitations (i.e., position
limits) governing the maximum number of call or put options on the same index
which may be bought or written (sold) by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on the
same or different Exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of all
investment companies advised by the same investment adviser are combined for
purposes of these limits. Pursuant to these limitations, an Exchange may order
the liquidation of positions and may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which a
Subaccount and other investment companies advised by PADCO and its affiliates
may buy or sell; however, PADCO intends to comply with all limitations. For
additional information regarding the risks to which index options transactions
are subject, see "Investment Policies and Techniques of the Subaccounts; Options
Transactions" in the Statement of Additional Information.
Options on Securities
The Nova Subaccount, the OTC Subaccount, and Precious Metals Subaccount
may buy call options and write (sell) put options on securities, and the Ursa
Subaccount may buy put options and write call options on securities. By buying a
call option, a Subaccount has the right, in return for a premium paid during the
term of the option, to buy the securities underlying the option at the exercise
price. By writing a call option and receiving a premium, a Subaccount becomes
obligated during the term of the option to deliver the securities underlying the
option at the exercise price if the option is exercised. By buying a put option,
a Subaccount has the right, in return for a premium paid during the term of the
option, to 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.
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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.
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. For additional information regarding options on securities,
including other risks and closing transactions related to options on securities,
see "Investment Policies and Techniques of the Subaccounts; Options
Transactions" in the Statement of Additional Information.
Short Sales
The Ursa Subaccount and the Juno Subaccount also may engage in short
sales transactions under which the Subaccount sells a security it does not own.
To complete such a transaction, the Subaccount must borrow the security to make
delivery to the buyer. The Subaccount then is obligated to replace the security
borrowed by purchasing the security at the market price at the time of
replacement. The price at that time may be more or less than the price at which
the security was sold by the Subaccount. Until the security is replaced, the
Subaccount is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security, the
Subaccount also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet the margin requirements, until the short
position is closed out.
Until the Ursa Subaccount or Juno Subaccount closes its short position
or replaces the borrowed security, the Subaccount will: (a) maintain a
segregated account containing cash or liquid securities at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short, or (b)
otherwise cover the Subaccount's short position.
The Nova Subaccount, the OTC Subaccount, and the Metals Subaccount each
may engage in short sales if, at the time of the short sale, the Subaccount owns
or has the right to acquire an equal amount of the security being sold at no
additional cost. These Subaccounts may make a short sale when the Subaccount
wants to sell the security the Subaccount owns at a 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
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generally have maturities of greater than ten years at the date of issuance.
Yields on short-, intermediate-, and long-term U.S. Government Securities are
dependent on a variety of factors, including the general conditions of the money
and bond markets, the size of a particular offering, and the maturity of the
obligation. Debt securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market value of U.S. Government Securities generally varies inversely with
changes in market interest rates. An increase in interest rates, therefore,
would generally reduce the market value of a Subaccount's portfolio investments
in U.S. Government Securities, while a decline in interest rates would generally
increase the market value of a Subaccount's portfolio investments in these
securities.
Certain U.S. Government Securities are issued or guaranteed by agencies
or instrumentalities of the U.S. Government including, but not limited to,
obligations of U.S. Government agencies or instrumentalities such as the Federal
National Mortgage Association, the Government National Mortgage Association, the
Small Business Administration, the Federal Farm Credit Administration, the
Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States, the
Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, and the National Credit Union Administration.
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 agreement, a Subaccount purchases
a debt security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or a
few days later. The resale price is greater than the purchase price, reflecting
an agreed-upon market interest rate during the purchaser's holding period. While
the maturities of the underlying securities in repurchase transactions may be
more than one year, the term of each repurchase agreement will always be less
than one year. A Subaccount will enter into repurchase agreements only with
member banks of the Federal Reserve System or primary dealers of U.S. Government
Securities. PADCO will monitor the creditworthiness of each of the firms which
is a party to a repurchase agreement with any of the Subaccounts. In the event
of a default or bankruptcy by the seller, the Subaccount will liquidate those
securities (whose market value, including accrued interest, must be at least
equal to 100% of the dollar amount invested by the Subaccount in each repurchase
agreement) held under the applicable repurchase agreement, which securities
constitute collateral for the seller's obligation to pay.
A Subaccount will not enter into repurchase agreements of more than
seven days duration if more than 15% (10% with respect to the Money Market
Subaccount) of the market value of the Subaccount's net assets would be so
invested together with any other investment the Subaccount may hold which is
illiquid. For additional information regarding repurchase agreements, see
"Investment Policies and Techniques of the Subaccounts; Repurchase Agreements"
in the Statement of Additional Information.
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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 Registered Interest and Principal of Securities" (or
"STRIPS"). While zero coupon bonds eliminate the reinvestment risk of regular
coupon issues, that is, the risk of subsequently investing the periodic interest
payments at a lower rate than that of the security held, zero coupon bonds
fluctuate much more sharply than regular coupon-bearing bonds. Thus, when
interest rates rise, the value of zero coupon bonds will decrease to a greater
extent than will the value of regular bonds having the same interest rate.
Reverse Repurchase Agreements
The Ursa Subaccount, the Juno Subaccount, and the Money Market
Subaccount each may also use reverse repurchase agreements as part of the
Subaccount's investment strategy. Reverse repurchase agreements involve sales by
the Subaccount of portfolio assets concurrently with an agreement by the
Subaccount to repurchase the same assets at a later date at a fixed price.
Generally, the effect of such a transaction is that the Subaccount can recover
all or most of the cash invested in the portfolio securities involved during the
term of the reverse repurchase agreement, while the Subaccount will be able to
keep the interest income associated with those portfolio securities. Such
transactions are advantageous only if the interest cost to the Subaccount of the
reverse repurchase transaction is less than the cost of obtaining the cash
otherwise. Opportunities to achieve this advantage may not always be available,
and the Subaccounts intend to use the reverse repurchase technique only when it
will be to the Subaccount's advantage to do so. Each Subaccount will establish a
segregated account with the Separate Account's custodian bank in which the
Subaccount will maintain cash or cash equivalents or other portfolio securities
equal in value to the Subaccount's obligations in respect of reverse repurchase
agreements.
Borrowing
Each Subaccount may borrow money to facilitate management of the
Subaccount's portfolio by enabling the Subaccount to meet transfer or withdrawal
requests when the liquidation of portfolio instruments would be inconvenient or
disadvantageous. Such borrowing is not for investment purposes and will be
repaid by the borrowing Subaccount promptly.
As required by the 1940 Act, a Subaccount must maintain continuous
asset coverage (total assets, including assets acquired with borrowed funds,
less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If,
at any time, the value of the Subaccount's assets should fail to meet this 300%
coverage test, the Subaccount, within three days (not including Sundays and
holidays), will reduce the amount of the Subaccount's borrowings to the extent
necessary to meet this 300% coverage. Maintenance of this percentage limitation
may result in the sale of portfolio securities at a time when investment
considerations otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Subaccounts are authorized to borrow
money from a bank as a temporary measure for extraordinary or 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.
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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 331/3% of the value of the Subaccount's total
assets, except that the Money Market Subaccount will not lend more than 10% of
its total assets. Loans of portfolio securities are subject to termination by
the lending Subaccount on four business days' notice, or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to the lending Subaccount. A lending
Subaccount may pay reasonable finders, borrowers, administrative, and custodial
fees in connection with a loan.
Investments in Other Investment Companies
The Subaccounts (other than the Bond Subaccount and the Money Market
Subaccount) may invest in the securities of another investment company (the
"acquired company") provided that the Subaccount, immediately after such
purchase or acquisition, does not own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of the Subaccount; or (iii) securities issued by the
acquired company and all other investment companies (other than Treasury stock
of the Subaccount) having an aggregate value in excess of 10% of the value of
the total assets of the Subaccount. The Bond Subaccount and the Money Market
Subaccount may invest in the securities of other investment companies only as
part of a merger, reorganization, or acquisition, subject to the requirements of
the 1940 Act.
If a Subaccount invests in, and, thus, is a shareholder of, another
investment company, the Subaccount's Contract Owners will indirectly bear the
Subaccount's proportionate share of the fees and expenses paid by such other
investment company, including advisory fees, in addition to both the advisory
fees payable directly by the Subaccount to PADCO and the other expenses that the
Subaccount bears directly in connection with the Subaccount's own operations.
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Illiquid Securities
While none of the Subaccounts anticipates doing so, each Subaccount may
purchase illiquid securities. 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. 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. For additional information regarding illiquid securities, see
"Investment Policies and Techniques of the Subaccounts; Illiquid Securities" in
the Statement of Additional Information.
Restricted Securities
While none of the Subaccounts anticipates doing so, each Subaccount may
purchase securities that are not readily-marketable and securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("restricted securities"). Institutional markets for
restricted securities have developed as a result of the promulgation of Rule
144A under the 1933 Act, which provides a "safe harbor" from 1933 Act
registration requirements for qualifying sales to institutional investors. When
Rule 144A restricted securities present an attractive investment opportunity and
otherwise meet selection criteria, a Subaccount may make such investments.
Whether or not such securities are "illiquid" depends on the market that exists
for the particular security. The SEC staff has taken the position that the
liquidity of Rule 144A restricted securities is a question for a board of
managers to determine, such determination to be based on a consideration of the
trading markets and the review of any contractual restrictions. The staff also
has acknowledged that, while a board of managers retains ultimate
responsibility, the managers may delegate this function to an investment adviser
and/or a sub-adviser. The Managers have delegated this responsibility for
determining the liquidity of Rule 144A restricted securities which may be
invested in by a Subaccount to PADCO. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. A security which when purchased was marketable may
subsequently become illiquid and, accordingly, a security which was deemed to be
liquid at the time of acquisition may subsequently become illiquid. In such
event, appropriate remedies will be considered to minimize the effect on the
Subaccount's liquidity.
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 hypothetical investment in the Subaccounts during the
particular time period on which the calculations are based. Performance
information will include average annual total return quotations reflecting the
deduction of all applicable charges for recent one-year and, when applicable,
five- and ten-year periods and, where less than ten years, for the period
subsequent to the date each Subaccount first became available for investment.
Additional total return quotations may be made that do not reflect a surrender
charge deduction (assuming no surrender at the end of the illustrated period).
Performance information may be shown by means of schedules, charts, or graphs.
Past performance information is based on historical earnings and is not intended
to indicate future performance. See "Performance Information" and "Calculation
of Return Quotations" in the Statement of Additional Information for a
description of the methods used to determine total return information for the
Subaccounts.
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PORTFOLIO TRANSACTIONS AND
BROKERAGE
Subject to policies established by the Managers, PADCO determines which
securities to purchase and sell for each Subaccount, selects brokers and dealers
to effect the transactions, and negotiates commissions. PADCO expects that the
Subaccounts may execute brokerage or other agency transactions through
registered broker-dealers, for a commission, in conformity with the 1940 Act,
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. In placing orders for portfolio transactions, PADCO's policy is to
obtain the most favorable price and efficient execution available. Brokerage
commissions are normally paid on exchange-traded securities transactions and on
options and futures transactions, as well as on common stock transactions. In
order to obtain the brokerage and research services described below, a higher
commission may sometimes be paid.
When selecting broker-dealers to execute portfolio transactions, PADCO
considers many factors, including the rate of commission or size of the
broker-dealer's "spread," the size and difficulty of the order, the nature of
the market for the security, the willingness of the broker-dealer to position,
the reliability, financial condition, general execution and 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 Subaccounts are being managed in accordance
with the investment objectives and policies of the Subaccounts; (v) to make
findings or determinations contemplated for an investment company's board of
directors by the 1940 Act or rules or interpretations thereunder; and (vi) to
approve agreements, acts, or transactions respecting the Separate Account that
are submitted to the Separate Account by Great American Reserve. The identity
and principal occupations of the initial members of the Managers appointed by
Great American Reserve and certain officers of the Separate Account elected or
appointed by the Managers are set forth in the Statement of Additional
Information.
PADCO Advisors II, Inc.
As discussed above, PADCO provides the Subaccounts in the Separate
Account investment advice. PADCO is a Maryland corporation with offices at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852. PADCO was
incorporated in the State of Maryland on July 5, 1994. Albert P. Viragh, Jr.,
the Chairman of the Board and the President of PADCO, owns a controlling
interest in PADCO and in PADCO Advisors, Inc. ("PADCO I"), an affiliated person
of PADCO that serves as the investment adviser to Rydex Series Trust (the
"Trust"), a registered, open-end management investment company. From 1985 until
the incorporation of PADCO I, Mr. Viragh was a Vice President of Money
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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.
Because the Subaccounts have only recently been offered through the
Separate Account, these Subaccounts, as of the date of this Prospectus, have
limited prior operating history or performance. The Subaccounts, however, are
modeled after seven existing funds (the "Rydex Funds") of the Trust, which
commenced operations on July 12, 1993 (the Money Market Subaccount is modeled
after the Rydex U.S. Government Money Market Fund (the "Money Market Fund")
series of the Trust). These comparable Rydex Funds (including the Money Market
Fund) are managed by PADCO I and have investment objectives and policies
substantially similar to the corresponding Subaccounts. In addition, PADCO
employs the same portfolio managers to manage the Subaccounts as PADCO I employs
to manage the corresponding Rydex Funds. The Rydex Funds are publicly-available
mutual funds and, similar to the Subaccounts, are principally designed for money
managers and investors who intend to invest as part of an asset allocation or
market timing investment strategy.
The portfolio manager for the Ursa Subaccount and the OTC Subaccount is
Michael P. Byrum, who is PADCO's senior portfolio manager. Mr. Byrum has served
as the portfolio manager for the Ursa Fund since June 1996, the Rydex Precious
Metals Fund since December 1993, the Juno Fund since March 1995, and the Rydex
U.S. Government Money Market Fund since December 1993 (each of these mutual
funds is a series of Rydex Series Trust). Prior to July 1993, Mr. Byrum worked
for one year as an investor representative with MMA. Mr. Byrum's
responsibilities at MMA included brokerage solicitation and investor relations.
Mr. Byrum received his bachelor's degree in Business Administration from Miami
University, of Oxford, Ohio, in 1992.
The portfolio manager for the Nova Subaccount and the Juno Subaccount
is Thomas Michael, who joined PADCO in March 1994. Since March 1994, Mr. Michael
has served as the portfolio manager for the Nova Fund, a series of Rydex Series
Trust. Since September 1995, Mr. Michael also has served as the portfolio
manager for the Juno Fund, also a series of Rydex Series Trust. From 1992 to
February 1994, Mr. Michael was a financial markets analyst at Cedar Street
Investment Management Co., of Chicago, Illinois, an institutional consulting
firm specializing in developing hedging and speculative strategies in stock
index futures contracts and U.S. Treasury bond futures contracts. From 1989 to
1991, Mr. Michael was the Director of Research for Chronometrics, Inc., of
Chicago, Illinois, a registered commodity trading adviser and was responsible
for managing the firm's proprietary, on-line trading model for twelve financial
futures contracts. Mr. Michael received his bachelor of arts degree in Geology
from Colgate University, of Hamilton, New York, in 1974.
The portfolio manager of the Previous Metals Subaccount is T. Daniel
Gillespie, who joined the Advisor in January 1997. From July 1994 to January
1997, Mr. Gillespie was a portfolio manager for GIT Investment Funds, a
registered investment company in Arlington, Virginia, where Mr. Gillespie
managed over $160 million in equity, bond, and money market mutual fund assets.
From 1991 to 1994, Mr. Gillespie worked as a portfolio manager for The Rushmore
Funds, Inc., in Bethesda, Maryland, a registered investment company, where Mr.
Gillespie managed over $900 million in mutual fund assets. From 1988 to 1991,
Mr. Gillespie worked as an account executive and stock broker for Wheat First
Securities, of Bethesda, Maryland, where Mr. Gillespie managed portfolios for
individual investors. From 1986 to 1988, Mr. Gillespie worked as an account
executive and stock broker with Smith Barney, Inc., of Washington, D. C. Mr.
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Gillespie received his bachelor of arts degree in Accounting from the University
of Maryland, at College Park, Maryland, in 1980, and received a masters degree
in Business Administration from Averett College, at Danville, Virginia, in 1997.
The portfolio manager of the Bond Subaccount and the Money Market
Subaccount is Anne H. Ruff, who joined the Advisor in August, 1996. From 1989 to
1995, Ms. Ruff worked as a portfolio manager for United Services Life Insurance
Company ("USLICO"), in Arlington, Virginia, where Ms. Ruff managed $2.5 billion
in fixed-income portfolios. From 1985 to 1989, Ms. Ruff worked as an assistant
portfolio manager/securities analyst for USLICO. From 1979 to 1985, Ms. Ruff
worked as a bank investment officer for First Union Corp. (formerly, First
American Bank of Virginia) in McLean, Virginia, where Ms. Ruff managed the
bank's federal funds and investment portfolio operations. Ms. Ruff received her
bachelor of arts degree in French and Economics from Mary Grove College, at
Detroit, Michigan, in 1966.
Pursuant to an investment advisory agreement between the Separate
Account and PADCO, dated November 1, 1996 (the "PADCO Advisory Agreement"),
subject to the general supervision and control of the Separate Account's Board
of Managers and the officers of the Separate Account, and in conformity with the
stated investment objectives, policies, and restrictions of the Separate
Account, PADCO will manage the investment and reinvestment of the assets of each
of the Subaccounts and determine the composition of assets of each Subaccount,
including the purchase, retention, and disposition of securities and other
investments. Under the PADCO Advisory Agreement, the Subaccounts each pay PADCO
a fee at an annualized rate, based on the average daily net assets of each
respective Subaccount, of 0.75% for the Nova Subaccount, the OTC Subaccount, and
the Precious Metals Subaccount, 0.90% for the Ursa Subaccount and the Juno
Subaccount, and 0.50% for the Bond Subaccount and the Money Market Subaccount.
The advisory fee paid by each of the Nova Subaccount, the OTC Subaccount, the
Precious Metals Subaccount, the Juno Subaccount, and the Ursa Subaccount, is
higher than the advisory fee paid by most other investment companies. See "Costs
and Expenses."
PADCO bears all costs associated with providing these advisory services
to the Subaccounts and the expenses of the Managers who are affiliated persons
of PADCO. Additional information concerning the PADCO Advisory Agreement and
PADCO is set forth in the Statement of Additional Information.
PADCO Service Company, Inc.
As discussed above, the Subaccounts are provided Contract Owner
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; 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
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under the Subaccount Administration Agreement. Additional information concerning
the Subaccount Administration Agreement and the Servicer is set forth in the
Statement of Additional Information.
Costs and Expenses
Each Subaccount bears all expenses of its operations other than those
assumed by PADCO or the Servicer. Subaccount expenses include: the advisory fee;
the Subaccount administration fee; custodian and accounting fees and expenses;
legal and auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and Contract Owner reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any; all
federal, state, and local taxes (including, 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.
During the period from October 24, 1997 to December 31, 1997, fees
waived or expenses paid or assumed by PADCO and the Servicer under voluntary
agreements described above in Footnote 3 to the "Fees and Expenses of the
Subaccounts" table, at page I-11 in Part I of this Prospectus, are subject to
full reimbursements whenever the expense ratio of a Subaccount is below the
Initial Expense Ratio for that Subaccount or to partial reimbursements whenever
the expense ratio of a Subaccount is below the Adjusted Expense Ratio for that
Subaccount. During the period from January 1, 1998 to October 24, 1999, fees
waived or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements are subject to full reimbursements whenever the expense
ratio of a Subaccount is below the Adjusted Expense Ratio for that Subaccount.
Under no circumstances would such reimbursements cause a Subaccount expense
ratio to exceed the Initial Expense Ratio or the Adjusted Expense Ratio, as
applicable. 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 expenses (a total of approximately
$821,573) 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.
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TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
Page
GENERAL INFORMATION AND HISTORY............................................
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS......................
General...........................................................
Futures Contracts and Options Thereupon...........................
Options Transactions..............................................
Foreign Securities................................................
U.S. Government Securities........................................
Repurchase Agreements.............................................
Borrowing.........................................................
When-Issued and Delayed-Delivery Securities.......................
Illiquid Securities...............................................
Restricted 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.................................................................
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PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February ____, 1998
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
February ____, 1998. The Prospectus may be obtained without charge by writing or
calling PADCO Financial Services, Inc., at the addresses or phone numbers set
forth above.
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TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
Page
GENERAL INFORMATION AND HISTORY............................................
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS......................
General...........................................................
Futures Contracts and Options Thereupon...........................
Options Transactions..............................................
Foreign Securities................................................
U.S. Government Securities........................................
Repurchase Agreements.............................................
Borrowing.........................................................
When-Issued and Delayed-Delivery Securities.......................
Illiquid Securities...............................................
Restricted 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.................................................................
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GENERAL INFORMATION AND HISTORY
Great American Reserve, originally organized in 1937, is principally
engaged in the life insurance business in 47 states and the District of
Columbia. Great American Reserve is a stock company organized under the laws of
the State of Texas and a wholly-owned subsidiary of Conseco, Inc. ("Conseco").
The operations of Great American Reserve are handled by Conseco. Conseco is a
publicly-owned financial services holding company, the principal operations of
which are in the development, marketing, and administration of specialized
annuity and life insurance products. Conseco is located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032.
The Separate Account was established by Great American Reserve.
INVESTMENT POLICIES AND TECHNIQUES
OF THE SUBACCOUNTS
The following discussion supplements the discussion under "Investment
Objectives and Policies of the Subaccounts" and "Investment Techniques and Other
Investment Policies" in Part II of the Prospectus.
General
Set forth below is further information relating to the Subaccounts.
Portfolio investment advice is provided to each Subaccount by PADCO Advisors II,
Inc. ("PADCO"), a Maryland corporation with offices at 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852. The investment strategies of the
Subaccounts discussed below, and as discussed in the Separate Account's
Prospectus, may be used by a Subaccount if, in the opinion of PADCO, these
strategies will be advantageous to the Subaccount. A Subaccount is free to
reduce or eliminate the Subaccount's activity in any of those areas without
changing the Subaccount's fundamental investment policies. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to a Subaccount will result in the achievement of the Subaccount's
objectives.
Futures Contracts and Options Thereupon
The Nova Subaccount and the OTC Subaccount may purchase stock index
futures contracts as a substitute for a comparable market position in the
underlying securities. The Ursa Subaccount may sell stock index futures
contracts. The Bond Subaccount may purchase futures contracts on 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"), as a substitute for a comparable market position in the
cash market. The Juno Subaccount may sell futures contracts on U.S. Government
Securities. The principal trading markets for Standard & Poor's 500 Composite
Stock Price Index(TM) (the "S&P500 Index") futures contracts and U.S. Treasury
bond futures contracts are the Chicago Mercantile Exchange (the "CME") and the
Chicago Board of Trade (the "CBOT"), respectively.
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.
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The Nova Subaccount and the OTC Subaccount may purchase call options
and write (sell) put options, and the Ursa Subaccount may purchase put options
and write call options, on stock index futures contracts. The Bond Subaccount
may purchase call options and write put options on U.S. Government Securities
futures contracts and the Juno Subaccount may write call options and purchase
put options on futures contracts on U.S. Government Securities.
When a Subaccount purchases a put or call option on a futures contract,
the Subaccount pays a premium for the right to sell or purchase the underlying
futures contract for a specified price upon exercise at any time during the
option period. By writing a put or call option on a futures contract, a
Subaccount receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the Subaccount the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a Subaccount realizes a gain or loss from futures activities
depends generally upon movements in the underlying commodity. The extent of the
Subaccount's loss from an unhedged short position in futures contracts or from
writing call options on futures contracts is potentially unlimited. The
Subaccounts may engage in related closing transactions with respect to options
on futures contracts. The Subaccounts will only engage in transactions in
futures contracts and options thereupon that are traded on a United States
exchange or board of trade. In addition to the uses set forth hereunder, each
Subaccount may also engage in futures and futures options transactions in order
to hedge, or limit the exposure of its position, or to create a synthetic money
market position.
The Subaccounts may purchase and sell futures contracts, index futures
contracts, and options thereon only to the extent that such activities would be
consistent with the requirements of Section 4.5 of the regulations under the
Commodity Exchange Act promulgated by the Commodity Futures Trading Commission
(the "CFTC Regulations"), under which each of these Subaccounts would be
excluded from the definition of a "commodity pool operator." Under Section 4.5
of the CFTC Regulations, a Subaccount may engage in futures transactions, either
for "bona fide hedging" purposes, as this term is defined in the CFTC
Regulations, or for non-hedging purposes to the extent that the aggregate
initial margins and premiums required to establish such non-hedging positions do
not exceed 5% of the liquidation value of the Subaccount's portfolio. In the
case of an option on a futures contract that is "in-the-money" at the time of
purchase (i.e., the amount by which the exercise price of the put option exceeds
the current market value of the underlying security or the amount by which the
current market value of the underlying security exceeds the exercise price of
the call option), the in-the-money amount may be excluded in calculating this 5%
limitation.
When a Subaccount purchases or sells a stock index futures contract, or
sells an option thereon, the Subaccount "covers" its position. To cover its
position, a Subaccount may maintain with its custodian bank (and mark to market
on a daily basis) a segregated account consisting of cash or liquid securities,
including U.S. Government Securities or repurchase agreements collateralized by
U.S. Government Securities, that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position. If the Subaccount continues
to engage in the described securities trading practices and properly segregates
assets, the segregated account will function as a practical limit on the amount
of leverage which the Subaccount may undertake and on the potential increase in
the speculative character of the Subaccount's outstanding portfolio securities.
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 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
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futures contract, or by taking positions in instruments the prices of which are
expected to move relatively consistently with the futures contract.
A Subaccount may cover its short position in a futures contract by
purchasing a call option on the same futures contract with a strike price (i.e.,
an exercise price) that is less than or equal to the price of the futures
contract, or, if the strike price of the call is greater than the price of the
futures contract, the Subaccount will maintain in a segregated account cash or
liquid securities equal in value to the difference between the strike price of
the call and the price of the futures contract. A Subaccount may also cover its
short position in a futures contract by taking a long position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively consistently
with the futures contract.
A Subaccount may cover its sale of a call option on a futures contract
by taking a long position in the underlying futures contract at a price less
than or equal to the strike price of the call option, or, if the long position
in the underlying futures contract is established at a price greater than the
strike price of the written call, the Subaccount will maintain in a segregated
account cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the future. A Subaccount may also
cover its sale of a call option by taking positions in instruments the prices of
which are expected to move relatively consistently with the call option. A
Subaccount may cover its sale of a put option on a futures contract by taking a
short position in the underlying futures contract at a price greater than or
equal to the strike price of the put option, or, if the short position in the
underlying futures contract is established at a price less than the strike price
of the written put, the Subaccount will maintain in a segregated account cash or
liquid securities equal in value to the difference between the strike price of
the put and the price of the future. A Subaccount may also cover its sale of a
put option by taking positions in instruments the prices of which are expected
to move relatively consistently with the put option.
Although the Subaccounts intend to sell futures contracts only if there
is an active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a Subaccount to substantial losses.
If trading is not possible, or a Subaccount determines not to close a futures
position in anticipation of adverse price movements, the Subaccount will be
required to make daily cash payments of variation margin. The risk that the
Subaccount will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
Options Transactions
Options on Securities. The Nova Subaccount, The OTC Subaccount, and the
Precious Metals Subaccount may buy call options and write (sell) put options on
securities, and the Ursa Subaccount may buy put options and write call options
on securities for the purpose of realizing the Subaccount's investment
objective. By writing a call option on securities, a Subaccount becomes
obligated during the term of the option to sell the securities underlying the
option at the exercise price if the option is exercised. By writing a put
option, a Subaccount becomes obligated during the term of the option to purchase
the securities underlying the option at the exercise price if the option is
exercised.
During the term of the option, the writer may be assigned an exercise
notice by the broker-dealer through whom the option was sold. The exercise
notice would require the writer to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates upon expiration of the option, or
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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.
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 OCC. However, a
writer may not effect a closing purchase transaction after the writer has been
notified of the exercise of an option. Likewise, a Subaccount which is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." The Subaccount accomplishes this by selling an option of the same
series as the option previously purchased by the Subaccount. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. If any call or put option is not exercised or sold, the option will
become worthless on its expiration date.
A Subaccount will realize a gain (or a loss) on a closing purchase
transaction with respect to a call or a put option previously written by the
Subaccount if the premium, plus commission costs, paid by the Subaccount to
purchase the call or put option to close the transaction is less (or greater)
than the premium, less commission costs, received by the Subaccount on the sale
of the call or the put option. The Subaccount also will realize a gain if a call
or put option which the Subaccount has written lapses unexercised, because the
Subaccount would retain the premium.
A Subaccount will realize a gain (or a loss) on a closing sale
transaction with respect to a call or a put option previously purchased by the
Subaccount if the premium, less commission costs, received by the 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.
Options on Security Indexes. 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
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from the purchaser of the option, to make delivery of this amount to the
purchaser. Unlike the options on securities discussed below, all settlements of
index options transactions are in cash.
Some stock index options are based on a broad market index such as the
S&P500 Index, the New York Stock Exchange (the "NYSE") Composite Index, or the
American Stock Exchange (the "AMEX") Major Market Index, or on a narrower index
such as the Philadelphia Stock Exchange Over-the-Counter Index. Options
currently are traded on the Chicago Board of Options Exchange (the "CBOE"), the
AMEX, and other exchanges (collectively, the "Exchanges"). Purchased
over-the-counter options and the cover for written over-the-counter options will
be subject to the respective Subaccount's 15% limitation on investment in
illiquid securities. See "Illiquid Securities," below.
Each of the Exchanges has established limitations (i.e., position
limits) governing the maximum number of call or put options on the same index
which may be bought or written (sold) by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on the
same or different Exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of all
investment companies advised by the same investment adviser are combined for
purposes of these limits. Pursuant to these limitations, an Exchange may order
the liquidation of positions and may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which a
Subaccount and other investment companies advised by PADCO and its affiliates
may buy or sell; however, PADCO intends to comply with all limitations.
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.
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.
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Investing in foreign companies may involve risks not typically
associated with investing in United States companies. The value of securities
denominated in foreign currencies, and of dividends from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than United States markets, and prices in some foreign
markets can be very volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those that apply to United States companies,
and it may be more difficult to obtain reliable information regarding a foreign
issuer's financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions, and custodial
fees, generally are higher than for United States investments.
Investing in companies located abroad carries political and economic
risks distinct from those associated with investing in the United States.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of United States Contract Owners, including the possibility of
expropriation or nationalization of assets, confiscatory taxation, restrictions
on United States investment, or on the ability to repatriate assets or to
convert currency into U.S. dollars. There may be a greater possibility of
default by foreign governments or foreign-government sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments.
At the present time, there are five major producers and processors of
gold bullion and other precious metals and minerals. In order of magnitude,
these producers and processors are: the Republic of South Africa, the former
republics of the former Soviet Union, Canada, the United States, and Australia.
Political and economic conditions in several of these countries may have a
direct effect on the mining, distribution, and price of precious metals and
minerals, and on the sales of central bank gold holdings, particularly in the
case of South Africa and the former republics of the former Soviet Union. South
African mining stocks represent a special risk in view of the history of
political unrest in that country. Besides that factor, various government bodies
such as the South African Ministry of Mines and the Reserve Bank of South Africa
exercise regulatory authority over mining activity and the sale of gold. The
policies of these South African government bodies in the future could be
detrimental to the Precious Metals Subaccount's objectives.
U.S. Government Securities
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"), and each of the other Subaccounts also may invest in
U.S. Government Securities. The Juno Subaccount may enter into short
transactions on U.S. Government Securities. Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities include U.S. Treasury
securities, which are backed by the full faith and credit of the U.S. Treasury
and which differ only in their interest rates, maturities, and times of
issuance. U.S. Treasury bills have initial maturities of one year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S.
Government Securities are issued or guaranteed by agencies or instrumentalities
of the U.S. Government including, but not limited to, obligations of U.S.
Government agencies or instrumentalities such as the Federal National Mortgage
Association, the Government National Mortgage Association, the Small Business
Administration, the Federal Farm Credit Administration, the Federal Home Loan
Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the
Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley
Authority, the Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan Marketing Association,
and the National Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
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federal agencies, such as those securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the federal agency, while other
obligations issued by or guaranteed by federal agencies, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the U.S. Treasury. While the U.S. Government provides financial support to such
U.S. Government-sponsored federal agencies, no assurance can be given that the
U.S. Government will always do so, since the U.S. Government is not so obligated
by law. U.S. Treasury notes and bonds typically pay coupon interest
semi-annually and repay the principal at maturity. The Bond Subaccount will
invest in such U.S. Government Securities only when PADCO is satisfied that the
credit risk with respect to the issuer is minimal.
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 agreed-upon repurchase price, the Subaccount could 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. It is also the current policy of each of the Subaccounts not to invest
in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Subaccount,
amounts to more than 15% (10% with respect to the Money Market Subaccount) of
the Subaccount's total assets. The investments of each of the Subaccounts in
repurchase agreements, at times, may be substantial when, in the view of PADCO,
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 assets
increase in value and decrease more when the Subaccount's portfolio assets
decrease in value than would otherwise be the case. Moreover, interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the returns on the borrowed funds. Under adverse
conditions, the Nova Subaccount and the Bond Subaccount might have to sell
portfolio securities to meet interest or principal payments at a time investment
considerations would not favor such sales. The Nova Subaccount and the Bond
Subaccount intend to use leverage during periods when PADCO believes that the
respective Subaccount's investment objective would be furthered.
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When-Issued and Delayed-Delivery Securities
As discussed in the Separate Account's Prospectus, each Subaccount,
from time to time, in the ordinary course of business, may purchase securities
on a when-issued or delayed-delivery basis, (i.e., delivery and payment can take
place between a month and 120 days after the date of the transaction). At the
time of delivery of the securities, the value of the securities may be more or
less than the purchase price. The Subaccount will also establish a segregated
account with the Subaccount's custodian bank in which the Subaccount will
maintain cash or cash equivalents or other portfolio securities equal in value
to commitments for such when-issued or delayed-delivery securities.
Illiquid Securities
While none of the Subaccounts anticipates doing so, each Subaccount may
purchase illiquid securities. 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. 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 staff of the Securities and
Exchange Commission (the "SEC"), illiquid securities also are considered to
include, among other securities, purchased over-the-counter options, certain
cover for over-the-counter options, repurchase agreements with maturities in
excess of seven days, and certain securities whose disposition is restricted
under the federal securities laws. The Subaccount may not be able to sell
illiquid securities when PADCO considers it desirable to do so or may have to
sell such securities at a price that is lower than the price that could be
obtained if the securities were more liquid. In addition, the sale of illiquid
securities also may require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities that are not
illiquid. Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on net asset value.
Restricted Securities
While none of the Subaccounts anticipates doing so, each Subaccount may
purchase securities that are not readily-marketable and securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("restricted securities"). Institutional markets for
restricted securities have developed as a result of the promulgation of Rule
144A under the 1933 Act, which provides a "safe harbor" from 1933 Act
registration requirements for qualifying sales to institutional investors. When
Rule 144A restricted securities present an attractive investment opportunity and
other meet selection criteria, a Subaccount may make such investments. Whether
or not such securities are "illiquid" depends on the market that exists for the
particular security. The SEC staff has taken the position that the liquidity of
Rule 144A restricted securities is a question for a board of managers to
determine, such determination to be based on a consideration of the trading
markets and the review of any contractual restrictions. The staff also has
acknowledged that, while a board of managers retains ultimate responsibility,
the managers may delegate this function to an investment adviser. The managers
of the Separate Account (the "Managers") have delegated this responsibility for
determining the liquidity of Rule 144A restricted securities which may be
invested in by a Subaccount to PADCO. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. A security which when purchased was marketable may
subsequently become illiquid and, accordingly, a security which was deemed to be
liquid at the time of acquisition may subsequently become illiquid. In such
event, appropriate remedies will be considered to minimize the effect on the
Subaccount's liquidity.
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Portfolio Turnover
As discussed in the Separate Account's prospectus, PADCO anticipates
that owners of the Contract ("Contract Owners") whose Purchase Payments are
being allocated to the Subaccounts, as part of an asset allocation or
market-timing investment strategy, will frequently transfer amounts allocated
under the Contract ("Contract Values") among the Subaccounts. Because each
Subaccount's portfolio turnover rate to a great extent will 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 SEC as the
value of the securities purchased or securities sold, excluding all securities
whose maturities at time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. Based on this
definition, instruments with remaining maturities of less than one year are
excluded from the calculation of portfolio turnover rate. Instruments excluded
from the calculation of portfolio turnover generally would include the futures
contracts and option contracts in which the Subaccounts invest since such
contracts generally have a remaining maturity of less than one year. All
instruments held by a Subaccount during a specified period may have a remaining
maturity of less than one year in which case the portfolio turnover rate for
that period, under the definition, would be equal to zero. However, because of
the nature of the Subaccounts, as described above, it is anticipated that their
portfolio turnover will be unusually high.
The Benchmarks
The S&P500 Index. Standard & Poor's Corporation ("S&P"), a division of
The McGraw-Hill Companies, Inc., chooses the 500 stocks comprising the S&P500
Index on the statistical basis of market values and industry diversification.
Most of the stocks in the S&P500 Index are issued by the 500 largest companies,
in terms of the aggregate market value of their outstanding stock, and these
companies are generally listed on the NYSE. Additional stocks that are not among
the 500 largest companies in terms of the aggregate market value of their
outstanding stock, are included in the S&P500 Index for diversification
purposes. Each stock in the S&P500 Index is weighted by its market value, and
inclusion of a stock in the S&P500 Index in no way implies an opinion by the S&P
as to the stock's attractiveness as an investment. A Subaccount may use the
S&P500 Index as 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(TM)," "S&P(TM)," "S&P 500(TM),"
"Standard & Poor's 500(TM)," and "500(TM)" are trademarks, trade names, and
service marks of The McGraw-Hill Companies, Inc.
Because of the market-value weighting, the 50 largest companies
included in the S&P500 Index currently account for approximately 47% of the
S&P500 Index. Typically, companies included in the S&P500 Index are the largest
and most dominant firms in their respective industries. As of December 31, 1996,
the five largest companies in the S&P500 Index were: General Electric (2.9%);
Coca Cola (2.3%); Exxon Corporation (2.2%); Intel Corporation (1.9%); and
Microsoft Corporation (1.7%). The largest industry categories for the S&P500
Index were: banks (7.7%); telephone companies (6.6%); pharmaceutical companies
(6.4%); international oil companies (5.8%); and computer companies (4.6%).
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(TM), S&P(TM), S&P 500(TM), Standard & Poor's 500(TM), and 500(TM)
trademarks or service marks, and certain trade names of the S&P, and the use by
these Subaccounts of the S&P500 Index, which is determined, composed, and
calculated by the S&P without regard to the Servicer or these Subaccounts, but
which is used by these Subaccounts as the benchmark of these Subaccounts.
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The NASDAQ 100 Index(TM). The NASDAQ 100 Index(TM) (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(TM), which was created in 1985, is
limited to one issue per company. "NASDAQ(TM)," "NASDAQ 100(TM)," "NASDAQ 100
Index(TM)," and "NASD(TM)" are trademarks, trade names, and service marks of the
Nasdaq.
At the time of inclusion in the NASDAQ 100 Index(TM), index securities
must have a minimum market value of at least $500 million. Only domestic issues
are included in the NASDAQ 100 Index(TM). As of January 31, 1997, the NASDAQ 100
Index(TM) was comprised of the following industry sectors: electronic technology
(36.35%); technology services (29.9%); industrial services (20.83%);
telecommunications (8.36%); health technology (3.79%); and transportation
(0.74%). As used herein, electronic technology describes companies that
manufacture computer chips and other computer hardware (such as Intel
Corporation, Cisco Systems, Inc., and Apple Computer, Inc.), whereas technology
services describes publishers of computer software and operating systems (such
as Microsoft Corporation and Oracle Corporation).
In the event that a security is deleted from the NASDAQ 100 Index(TM),
the largest non-financial issue not then included in the NASDAQ 100 Index(TM)
which meets the applicable criteria of the NASDAQ 100 Index(TM) 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(TM) will more accurately reflect the overall
composition of the non-financial sector of the Nasdaq. Each security in the
NASDAQ 100 Index(TM) is represented by the security's market capitalization in
relation to the total market value of the NASDAQ 100 Index(TM). Companies are
selected for inclusion in the NASDAQ 100 Index(TM) using criteria that includes
company trading volume, company visibility, continuity of the components in the
NASDAQ 100 Index(TM), and a good mix of industries represented on the Nasdaq.
The CBOE, the largest options exchange in the world, began trading NASDAQ 100
Index(TM) 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(TM), NASDAQ 100 Index(TM), NASDAQ(TM), and NASD(TM) trademarks or
service marks, and certain trade names of the NASDAQ, and the use of the NASDAQ
100 Index(TM), which is determined, composed, and calculated by the NASDAQ
without regard to the Servicer or the Subaccounts, but which is used by the OTC
Subaccount as the OTC Subaccount's benchmark.
The XAU Index. The Philadelphia Stock Exchange (the "XAU") Gold/Silver
Index(TM) (the "XAU Index") is a capitalization-weighted index featuring eleven
widely-held securities in the gold and silver mining and production industry or
companies investing in such mining and production companies. The XAU Index was
set to an initial value of 100 in January 1979. The following issuers are
currently included in the XAU Index: ASA Limited; Barrick Gold Corp.; Battle
Mountain Gold Co.; Echo Bay Mines Limited; Hecla Mining Co.; Homestake Mining
Co.; Newmont Mining Corp.; Placer Dome Inc.; Pegasus Gold, Inc.; TVX Gold, Inc.;
and Coeur D'Alene Mines Corp. While the majority of these companies are based in
North America, these companies generally also have operations in countries based
outside North America. "Philadelphia Stock Exchange Gold/Silver Index(TM),"
"Philadelphia Stock Exchange(TM)," "PHLX(TM)," and "XAU Index" are trademarks,
trade names, and service marks of the XAU.
The Precious Metals Subaccount is not sponsored, endorsed, sold, or
promoted by the XAU. The XAU's only relationship to the Precious Metals
Subaccount is the use by the Precious Metals Subaccount of the Philadelphia
Stock Exchange Gold/Silver Index(TM), Philadelphia Stock Exchange(TM), PHLX(TM),
and XAU Index trademarks or service marks, and certain trade names of the XAU,
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and the use of the XAU Index, which is determined, composed, and calculated by
the XAU without regard to the Servicer or the Subaccounts, but which is used by
the Precious Metals Subaccount as the Precious Metals Subaccount's benchmark.
The Long Bond. The Long Bond is the current U.S. Treasury bond with the
longest maturity. Currently, the longest maturity of a U.S. Treasury bond is 30
years. At this time, the 30-year U.S. Treasury bond is issued three times a
year. In the future, the U.S. Treasury may change the number of times each year
that the Long Bond is issued.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) HAS ANY OBLIGATION TO
TAKE THE NEEDS OF THE SUBACCOUNTS OR THE CONTRACT OWNERS OF THE SUBACCOUNTS INTO
CONSIDERATION IN DETERMINING, COMPOSING, OR CALCULATING THE S&P500 INDEX, THE
NASDAQ 100 INDEX, AND THE XAU INDEX, RESPECTIVELY; (2) IS RESPONSIBLE FOR OR HAS
PARTICIPATED IN THE CALCULATION OF ANY SUBACCOUNT'S ACCUMULATION UNIT VALUE, IN
THE DETERMINATION OF THE TIMING OR PRICES AT, OR QUANTITIES OF THE SUBACCOUNTS
OR THE ACCUMULATION UNITS TO BE ISSUED, OR IN THE DETERMINATION OR CALCULATION
OF THE EQUATION BY WHICH ACCUMULATION UNITS MAY BE CONVERTED INTO CASH; (3) IS A
DISTRIBUTOR OF THE SUBACCOUNTS; (4) HAS ANY OBLIGATION OR LIABILITY IN
CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE SUBACCOUNTS;
AND (5) HAS NOT PASSED ON THE LEGALITY OR SUITABILITY OF, OR THE ACCURACY OR
ADEQUACY OF DESCRIPTIONS AND DISCLOSURES RELATING TO, THE SUBACCOUNTS.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) GUARANTEES THE ACCURACY,
COMPLETENESS, AND/OR THE UNINTERRUPTED CALCULATIONS OF THE S&P500 INDEX, THE
NASDAQ 100 INDEX(TM), 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(TM), AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED
THEREIN, REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN
THE SUBACCOUNTS PARTICULARLY, OR THE ABILITY OF THE S&P500 INDEX, THE NASDAQ 100
INDEX(TM), 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(TM), 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(TM), 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(TM), 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.
The following restriction is applicable to all Subaccounts:
A Subaccount shall not:
1. Purchase the securities of any issuer if the purchase would
cause more than 5% of the value of the Subaccount's total
assets to be invested in the securities of any one issuer
(excluding U.S. Government Securities) or cause more than 10%
of the voting securities of the issuer to be held by the
Subaccount, except that up to 25% of the value of each
Subaccount's total assets may be invested without regard to
these restrictions.
2. Invest 25% or more of the value of the Subaccount's total
assets in the securities of one or more issuers conducting
their principal business activities in the same industry;
except that the Precious Metals Subaccount will invest 25% or
more of the value of the Precious Metals Subaccount's total
assets in the securities in the metals-related and
minerals-related industries; and except that, to the extent
that the benchmark index selected for a particular Subaccount
is concentrated in a particular industry, that Subaccount will
be concentrated in that industry, but will not otherwise be
concentrated. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or
instrumentalities.
The following restrictions are applicable to all Subaccounts other than
the Money Market Subaccount:
A Subaccount shall not:
3. Lend any security or make any other loan if, as a result, more
than 331/3% of the value of the Subaccount's total assets
would be lent to other parties, except (i) through the
purchase of a portion of an issue of debt securities in
accordance with the Subaccount's investment objective,
policies, and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities, or (iii)
through the loans of portfolio securities provided the
borrower maintains collateral equal to at least 100% of the
value of the borrowed security and marked-to-market daily.
4. Underwrite securities of any other issuer.
5. Purchase, hold, or deal in real estate or oil and gas
interests, although the Subaccount may purchase and sell
securities that are secured by real estate or interests
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therein and may purchase mortgage-related securities and may
hold and sell real estate acquired for the Subaccount as a
result of the ownership of securities.
6. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act) (including the amount of senior
securities issued but excluding liabilities and indebtedness
not constituting senior securities), except that the
Subaccount may issue senior securities in connection with
transactions in options, futures, options on futures, and
other similar investments, and except as otherwise permitted
herein and in Investment Restriction Nos. 6, 8, 9, 10, 11, and
12, as applicable to the Subaccount.
7. Pledge, mortgage, or hypothecate the Subaccount's assets,
except to the extent necessary to secure permitted borrowings
and to the extent related to the deposit of assets in escrow
in connection with (i) the writing of covered put and call
options, (ii) the purchase of securities on a
forward-commitment or delayed-delivery basis, and (iii)
collateral and initial or variation margin arrangements with
respect to currency transactions, options, futures contracts,
including those relating to indexes, and options on futures
contracts or indexes.
8. Invest in commodities except that (i) the Subaccount may
purchase and sell futures contracts, including those relating
to securities, currencies, indexes, and options on futures
contracts or indexes and currencies underlying or related to
any such futures contracts, and purchase and sell currencies
(and options thereon) or securities on a forward-commitment or
delayed-delivery basis, and (ii) the Precious Metals
Subaccount may invest in precious metals and precious
minerals.
The following restriction is applicable to the Ursa Subaccount, the OTC
Subaccount, the Precious Metals Subaccount, the Juno Subaccount, and the Money
Market Subaccount:
A Subaccount shall not:
9. 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 amount 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 invested in reverse repurchase
agreements are included in the amounts borrowed.
The following restriction is applicable to the Nova Subaccount, the OTC
Subaccount, the Precious Metals Subaccount, and the Bond Subaccount:
A Subaccount shall not:
10. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for short-term credits
necessary for the clearance of transactions. The deposit or
payment by the Subaccount of initial or variation margin in
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.
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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 331/3% of the total value
of the Subaccount's assets (including the amount borrowed)
less the Subaccount's liabilities (not including the
Subaccount's borrowings), and (ii) for temporary purposes in
an amount not in excess of 5% of the total value of the
Subaccount's assets.
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 same issue as,
and equal in amount to, the securities sold short.
The following restrictions are applicable to the Money Market
Subaccount:
The Subaccount shall not:
13. Make loans to others except through the purchase of qualified
debt obligations, loans of portfolio securities and entry into
repurchase agreements.
14. Lend the Subaccount's portfolio securities in excess of 15% of
the Subaccount's total assets. Any loans of the Subaccount's
portfolio securities will be made according to guidelines
established by the Board of Managers of the Separate Account,
including maintenance of cash collateral of the borrower equal
at all times to the current market value of the securities
loaned.
15. 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 hypothecate assets having
a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets of the Subaccount
at the time of the borrowing.
19. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for short-term credits
necessary for the clearance of transactions.
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
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the Subaccounts, except as otherwise indicated, these additional investment
restrictions adopted by the Managers, to date, are as follows:
1. The Subaccount will not invest in warrants.
2. The Subaccount will not invest in real estate limited
partnerships.
3. The Subaccount will not invest in mineral leases; except that
the Precious Metals Subaccount may invest in mineral leases
although the Precious Metals Subaccount does not presently
intend to invest in such leases.
In addition, none of the Subaccounts presently intends:
1. To enter into currency transactions; except that the Precious
Metals Subaccount may enter into currency transactions
although the Precious Metals Subaccount does not presently
intend to enter into such transactions.
2. To purchase illiquid securities. If in the future, a
Subaccount does purchase illiquid securities, the Subaccount
will not invest more than 15% of its assets in illiquid
securities; except that 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 an investment,
a later increase or decrease in the investment's percentage of the value of the
Subaccount's total assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
MANAGEMENT
OF THE SEPARATE ACCOUNT
The Board of Managers of the Separate Account (the "Managers") are
responsible for the general supervision of the Separate Account's business. The
day-to-day operations of the Separate Account are the responsibilities of the
Separate Account's officers. The names, addresses, and ages of the Managers of
the Separate Account and the officers of the Separate Account, together with
information as to their principal business occupations during the past five
years, are set forth below. Fees and expenses for non-interested Managers will
be paid by the Separate Account.
Managers
Albert P. Viragh, Jr. (56)*
Chairman of the Board of Managers and the President of the Separate
Account; Chairman of the Board, President, and Treasurer of PADCO
Advisors II, Inc., the investment adviser to the Separate Account, 1996
to the 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., the investment
adviser to Rydex Series Trust, 1993 to the present; Chairman of the
Board, President, and Treasurer of PADCO Service Company, Inc., the
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subaccount administrative agent for the Separate Account, 1993 to the
present; Chairman of the Board, President, Treasurer, and Principal of
PADCO Financial Services, Inc., a registered broker-dealer firm and
the Separate Account's principal underwriter, 1996 to the present;
Vice President of Rushmore Investment Advisors Ltd., a registered
investment adviser, 1985 to 1993. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (52)
Manager of the Separate Account; Trustee of Rydex Series Trust, 1993
to the present; Senior Vice President of Marketing of Schield
Management Company, a registered investment adviser, 1985 to the
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 the present; Mortgage Banking Consultant and Investor, The Dalton
Group, April 1995 to the present; President, CRAM Mortgage Group, Inc.
1966 to April 1995. Address: 3613 Lands Ends, Fort Worth, Texas 76109.
John O. Demaret (57)
Manager of the Separate Account; Trustee of Rydex Series Trust,
December 1997 to the present; Retired, 1996 to the present; Founder and
Chief Executive Officer, Health Cost Controls America, Chicago,
Illinois, 1987 to 1996; sole practitioner, Chicago, Illinois, 1984 to
1987; General Counsel, for the Chicago Transit Authority, 1981 to 1984;
Senior Partner, O'Halloran, LaVarre & Demaret, Northbrook, Illinois,
1978 to 1981. Address: 1415 Redbud Lane, Glenview, Illinois 60025.
L. Gregory Gloeckner (44)*
Manager of the Separate Account; Senior Vice President, Conseco, Inc.,
October 1994 to the present; Vice President, Continuum, August to
October 1994; Vice President, Variable Product Administration, Monarch
Life Insurance Company and First Variable Life Company, 1993 to 1994;
self-employed consultant from 1991 to 1993; and Vice President,
Beneficial Standard Life Insurance Company, 1989 to 1991. Address:
11815 North Pennsylvania Street, Carmel, Indiana 46032.
Patrick T. McCarville (55)
Manager of the Separate Account; Trustee of Rydex Series Trust,
December 1997 to the present; Founder and Chief Executive Officer, Par
Industries, Inc., Northbrook, Illinois, 1977 to the present; President
and Chief Executive Officer, American Health Resources, Northbrook,
Illinois, 1984 to 1986. Address: 3069 Plum Island Drive, Northbrook,
Illinois 60062.
Roger Somers (53)
Manager of the Separate Account; Trustee of Rydex Series Trust, 1993 to
the present; President, Arrow Limousine, 1963 to the present. Address:
72 Sugar Maple Lane, Tinton Falls, New Jersey 07724.
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* 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.
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Officers
Robert M. Steele (39)
Vice President of Marketing and Secretary of the Separate Account, June
1996 to the present; Vice President of PADCO Advisors II, Inc., 1995 to
the present; Secretary and Vice President of Marketing of Rydex Series
Trust, 1995 to the present; Vice President of PADCO Advisors, Inc.,
1994 to the present; Vice President of PADCO Financial Services, Inc.,
1996 to the 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.
Carl G. Verboncoeur (45)
Vice President of Operations and Treasurer of the Separate Account,
since June 1997; Vice President of Operations of Rydex Series Trust,
since June 1997; Vice President of PADCO Service Company, Inc., since
June 1997; Senior Vice President, Crestar Bank, 1995 to 1997; Senior
Vice President, Crestar Asset Management Company, a registered
investment adviser, 1993 to 1995; Vice President, Perpetual Savings
Bank, 1987 to 1993. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Michael P. Byrum (27)
Vice President of Portfolio Management of the Separate Account, since
December 1997, and Assistant Secretary of the Separate Account, June
1996 to the present; Employee and senior portfolio manager of PADCO
Advisors II, Inc., 1995 to the present; Vice President of Portfolio
Management and Assistant Secretary of Rydex Series Trust, 1993 to the
present; Employee and senior portfolio manager of PADCO Advisors, Inc.,
1993 to the present; Secretary and Principal of PADCO Financial
Services, Inc., 1996 to the present; Investment Representative, Money
Management Associates, a registered investment adviser, 1992 to 1993;
Student, Miami University, of Oxford, Ohio (B.A., Business
Administration, 1992). Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Thomas H. Reed (37)
Controller of the Separate Account, November 1997 to the present;
Controller of the Trust, November 1997 to the present; Controller of
PADCO Service Company, Inc., November 1997 to the present; Controller
of PADCO Financial Services, Inc., November 1997 to the present;
Assistant Controller, Connie Lee Insurance Company, Washington, D. C.,
December 1991 until November 1997; Director of Accounting, Perpetual
Savings Bank, F.S.B., Alexandria, Virginia, February 1991 to December
1991; Assistant Director of Accounting, Perpetual Savings Bank, F.S.B.,
Alexandria, Virginia, March 1989 to February 1991; Certified Public
Accountant, 1985 to the present. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
Scott E. Whaley (32)
Assistant Controller of the Separate Account, September 1997 to the
present; Assistant Controller of the Trust, September 1997 to the
present; Assistant Controller of PADCO Service Company, Inc., September
1997 to the present; Assistant Controller of PADCO Financial Services,
Inc., September 1997 to the present; Senior Accountant, Young, Brophy &
Co., P.C., Certified Public Accountants, November 1992 until September
1997; Student, Liberty University, Lynchburg, Virginia (B.S.,
Accounting, 1992); Certified Public Accountant, 1993 to the present.
Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
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Sothara Chin (31)
Compliance Officer of the Separate Account, June 1996 to the present;
Compliance Officer of PADCO Advisors II, Inc., 1996 to the present;
Compliance Officer of Rydex Series Trust, 1996 to the present;
Compliance Officer of PADCO Advisors, Inc., 1996 to the present;
Compliance Officer of PADCO Service Company, Inc., 1996 to the present;
Compliance Officer and Principal of PADCO Financial Services, Inc.,
1996 to the 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, Demaret, McCarville, and Somers comprise the
Audit Committee of the Managers. The Audit Committee reviews, and reports to the
Managers on the scope and results of, the Separate Account's audits and related
matters.
The Separate Account pays each Manager who is not an interested person
of the Separate Account and Great American Reserve $1,500 per meeting attended
and reimbursement for actual out-of-pocket expenses relating to attendance at
meetings.
PADCO Advisors II, Inc.
PADCO, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, provides the Subaccounts with investment advisory
services. PADCO was incorporated in the State of Maryland on July 5, 1994.
Albert P. Viragh, Jr., the Chairman of the Board of Managers of the Separate
Account and the President of PADCO, owns a controlling interest in PADCO.
Because the Subaccounts have only recently been offered through the
Separate Account, these Subaccounts, as of the date of this Prospectus, have
limited prior operating history or performance. The Subaccounts, however, are
modeled after seven existing funds (the "Rydex Funds") of Rydex Series Trust
(the "Trust"), a registered, open-end management investment company that
commenced operations on July 12, 1993 (the Money Market Subaccount is modeled
after the Rydex U.S. Government Money Market Fund (the "Money Market Fund")
series of the Trust). These comparable Rydex Funds (including the Money Market
Fund) are managed by an affiliate of PADCO, PADCO Advisors, Inc. ("PADCO I"),
and have investment objectives and policies substantially similar to the
corresponding Subaccounts. In addition, PADCO employs the same portfolio
managers to manage the Subaccounts as PADCO I employs to manage the
corresponding Rydex Funds. The Rydex Funds are publicly-available mutual funds
and, similar to the Subaccounts, are principally designed for money managers and
investors who intend to invest as part of an asset allocation or market timing
investment strategy. Except for the Money Market Fund, each Rydex Fund, as is
each Subaccount other than the Money Market Subaccount, is intended to provide
investment exposure with respect to a particular segment of the securities
markets and seeks investment results that correspond over time to a specified
benchmark. Similar to the Subaccounts, the Rydex Funds may be used independently
or in combination with each other as part of an overall investment strategy.
Under an investment advisory agreement with PADCO, dated November 1,
1996, PADCO serves as the investment adviser for each Subaccount and provides
investment advice to the Subaccounts and oversees the day-to-day operations of
the Subaccounts, subject to direction and control by the Managers. Pursuant to
the advisory agreement with PADCO, the Subaccounts pay PADCO the following fees
at an annual rate based on the average daily Accumulation Units for each
respective Subaccount, as set forth below:
Nova Subaccount 0.75%
Ursa Subaccount 0.90%
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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.
Effective January 1, 1998, PADCO and the Servicer have voluntarily
agreed to waive their respective advisory and subaccount administration fees and
to bear any Subaccount expenses 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 3.60%, 3.70%, 3.60%, 3.60%, 3.20%, 3.70%, and
3.00% (collectively, the "Adjusted Expense Ratios"). Prior to January 1, 1998,
PADCO and the Servicer voluntarily agreed to waive their respective fees and to
bear any Subaccount expenses 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%
(collectively, the "Initial Expense Ratios"). Absent this voluntary waiver and
reimbursement, 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.
During the period from October 24, 1997 to October 24, 1999, fees
waived or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements are subject to full reimbursements whenever the expense
ratio of a Subaccount is below the Initial Expense Ratio for that Subaccount or
to partial reimbursements whenever the expense ratio of a Subaccount is below
the Adjusted Expense Ratio for that Subaccount. During the period from January
1, 1998 to October 24, 1999, fees waived or expenses paid or assumed by PADCO
and the Servicer under these voluntary agreements are subject to full
reimbursements whenever the expense ratio of a Subaccount is below the Adjusted
Expense Ratio for that Subaccount. Under no circumstances would such
reimbursements cause a Subaccount expense ratio to exceed the Initial Expense
Ratio or the Adjusted Expense Ratio, as applicable. 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 execute brokerage or other agency transactions through
registered broker-dealers, for a commission, in conformity with the 1940 Act,
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder.
PADCO, and its affiliates (collectively, the "PADCO Advisors"), may
serve as investment managers to a number of clients, including other investment
companies. It is the practice of the PADCO Advisors to cause purchase and sale
transactions to be allocated among the Subaccounts and others whose assets the
PADCO Advisors manage as the PADCO Advisors deem equitable. The main factors
considered by the PADCO Advisors in making such allocations among the
Subaccounts and other client accounts of the PADCO Advisors are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
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investment commitments generally held, and the opinions of the person(s)
responsible, if any, for managing the portfolios of the Subaccounts and the
other client accounts.
The policy of each Subaccount regarding purchases and sales of
securities for the Subaccount's portfolio is that primary consideration will be
given to obtaining the most favorable prices and efficient executions of
transactions. Consistent with this policy, when securities transactions are
effected on a stock exchange, each Subaccount's policy is to pay commissions
which are considered fair and reasonable without necessarily determining that
the lowest possible commissions are paid in all circumstances. Each Subaccount
believes that a requirement always to seek the lowest possible commission cost
could impede effective portfolio management and preclude the Subaccount and the
PADCO Advisors from obtaining a high quality of brokerage and research services.
In seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the PADCO Advisors rely upon their experience and knowledge
regarding commissions generally charged by various brokers and on their judgment
in evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
Purchases and sales of obligations of the U.S. Treasury, or obligations
either issued or guaranteed, as to principal and interest, by agencies or
instrumentalities of the U.S. Government ("U.S. Government Securities"), are
normally transacted through issuers, underwriters, or major dealers in U.S.
Government Securities acting as principals. These transactions are made on a net
basis and do not involve payment of 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 securities
purchased or securities sold, excluding all securities whose maturities at time
of acquisition were one year or less, divided by the average monthly value of
such securities owned during the year. Based on this definition, it is
anticipated that a Subaccount's policy of investing in government securities
with remaining maturities of less than one year will not result in a
quantifiable portfolio turnover rate. However, because of the short-term nature
of a Subaccount's portfolio securities, it is anticipated that the number of
purchases and sales or maturities of such securities will be substantial.
Nevertheless, as brokerage commissions are not normally charged on purchases and
sales of these securities, the large number of these transactions does not have
an adverse effect upon the net yield and the current market value of the
Accumulation Units of the Subaccount. See "Determination of Accumulation Unit
Values" in this Statement of Additional Information.
In seeking to implement a Subaccount's policies, the PADCO Advisors
effect transactions with those brokers and dealers whom the PADCO Advisors
believe provide the most favorable prices and are capable of providing efficient
executions. If the PADCO Advisors believe such prices and executions are
obtainable from more than one broker or dealer, the PADCO Advisors may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Subaccount or the PADCO
Advisors. These services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities.
If the broker-dealer providing these additional services is acting as a
principal for its own account, no commissions would be payable. If the
broker-dealer is not a principal, a higher commission may be justified, at the
determination of the PADCO Advisors, for the additional services.
The information and services received by the PADCO Advisors from
brokers and dealers may be of benefit to the PADCO Advisors in the management of
accounts of some of the PADCO Advisors' other clients and may not in all cases
benefit a Subaccount directly. While the receipt of such information and
services is useful in varying degrees and would generally reduce the amount of
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research or services otherwise performed by the PADCO Advisors and thereby
reduce the PADCO Advisors' expenses, this information and these services are of
indeterminable value and the advisory fees paid to the PADCO Advisors are not
reduced by any amount that may be attributable to the value of such information
and services.
DETERMINATION OF ACCUMULATION UNIT VALUES
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 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.
23
<PAGE>
determined in good faith by the Managers. Dividend income and other
distributions are recorded on the ex-dividend date, except for certain dividends
from foreign securities which are recorded as soon as the Separate Account is
informed after the ex-dividend date.
Illiquid securities, securities for which reliable quotations or
pricing services are not readily available, and all other assets will be valued
at their respective fair value as determined in good faith by, or under
procedures established by, the Managers, which procedures may include the
delegation of certain responsibilities regarding valuation to PADCO or the
officers of the Separate Account. PADCO and officers of the Separate Account
report, as necessary, to the Managers regarding portfolio valuation
determination. The Managers, from time to time, will review these methods of
valuation and will recommend changes which may be necessary to assure that the
investments of the Subaccounts are valued at fair value.
Rule 2a-7 under the 1940 Act (the "Rule") requires that the Money
Market Subaccount limit its investments to U.S. dollar-denominated instruments
which the Managers determine present minimal credit risks and which are Eligible
Securities (as defined below). The Rule also requires the Money Market
Subaccount to maintain a dollar-weighted average portfolio maturity (not more
than ninety days) appropriate to the Money Market Subaccount's objective of
seeking to provide current income consistent with stability of capital and
liquidity and precludes the purchase of any instrument with a remaining maturity
of more than thirteen months. Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than ninety days,
the Money Market Subaccount would be required to invest its available cash in
such a manner as to reduce such maturity to ninety days or less as soon as
reasonably practicable.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Money Market
Subaccount's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or, in the case of an instrument called for redemption, the
date on which the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand. A floating rate instrument
that is subject to a demand feature is deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand.
An Eligible Security is defined in the Rule to mean a security which:
(a) has a remaining maturity of thirteen months or less; (b) either (i) is rated
in the two highest short-term rating categories by any two nationally-recognized
statistical rating organizations ("NSROs") that have issued a short-term rating
with respect to the security or class of debt obligations of the issuer, or (ii)
if only one NSRO has issued a short-term rating with respect to the security,
then by that NSRO; (c) was a long-term security at the time of issuance whose
issuer has outstanding a short-term debt obligation which is comparable in
priority and security and has a rating as specified in clause (b) above; or (d)
if no rating is assigned by any NSRO as provided in clauses (b) and (c) above,
the unrated security is determined by the Managers to be of comparable quality
to any such rated security.
As permitted by the Rule, the Managers have delegated to PADCO, the
Separate Account's investment adviser, subject to oversight by the Managers
pursuant to guidelines and procedures adopted by the Managers, the authority to
determine which securities present minimal credit risks and which unrated
securities are comparable in quality to rated securities.
24
<PAGE>
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."
Comparisons of Investment Performance
Performance information for each of the Subaccounts contained in
reports to Contract Owners or prospective Contract Owners, advertisements, and
other promotional literature may be compared to the record of various unmanaged
indexes for the same period. In conjunction with performance reports,
promotional literature, and/or analyses of Contract Owner service for a
Subaccount, comparisons of the performance information of the Subaccount for a
given period to the performance of recognized, unmanaged indexes for the same
period may be made. Such indexes include, but are not limited to, ones provided
by Dow Jones & Company, Standard & Poor's Corporation, Lipper Analytical
Services, Inc., Shearson Lehman Brothers, National Association of Securities
Dealers, Inc., The Frank Russell Company, Value Line Investment Survey, the
American Stock Exchange, the Philadelphia Stock Exchange, Morgan Stanley Capital
International, Wilshire Associates, the Financial Times-Stock Exchange, and the
Nikkei Stock Average and Deutcher Aktienindex, all of which are unmanaged market
indicators. Such comparisons can be a useful measure of the quality of a
Subaccount's investment performance.
In particular, performance information for the Nova Subaccount, the
Ursa Subaccount, and the Precious Metals Subaccount may be compared to various
unmanaged indexes, including, but not limited to, the Standard & Poor's 500
Composite Stock Price Index(TM) (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(TM) (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(TM), and the NASDAQ Composite Index(TM).
The NASDAQ Composite Index(TM) 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(TM) or the
25
<PAGE>
NASDAQ Composite Index(TM), and the OTC Subaccount's investment portfolio may or
may not be similar in composition to NASDAQ 100 Index(TM) or the NASDAQ
Composite Index(TM). The NASDAQ Composite Index(TM) 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(TM), and such other unmanaged indexes, may assume
the reinvestment of dividends, but generally do not reflect payments of
brokerage commissions or deductions for operating costs and other expenses of
investing. Performance information for the Bond Subaccount and the Juno
Subaccount may be compared to the price movement of the current Long Treasury
Bond (the "Long Bond") and to various unmanaged indexes, including, but not
limited to, the Shearson Lehman Government (LT) Index(TM). Such unmanaged
indexes may assume the reinvestment of dividends, but generally do not reflect
deductions for operating costs and expenses.
In addition, rankings, ratings, and comparisons of investment
performance and/or assessments of the quality of Contract Owner service
appearing in publications such as Money, Forbes, Kiplinger's Magazine, Personal
Investor, Morningstar, Inc., the Morningstar Variable Annuity/Life Reporter,
VARDS, and similar sources which utilize information compiled (i) internally,
(ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by other
recognized analytical services, may be used in sales literature. The Morningstar
Variable Annuity/Life Reporter consists of nearly 700 variable life and annuity
funds, all of which report their data net of investment advisory fees, direct
operating expenses, and separate account charges. VARDS is a monthly reporting
service that monitors approximately 760 variable life and variable annuity funds
on performance and account information. The total return of each Subaccount
(other than the Money Market Subaccount) may be compared to the performance of
broad groups of comparable subaccounts or mutual funds with similar investment
goals, as described below, and as such performance is tracked and published 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 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:
26
<PAGE>
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending Contract Value available for withdrawal of a
hypothetical $1,000 payment, made at the beginning of
the 1, 5, or 10 year periods, at the end of the 1, 5,
or 10 year periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover 1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Separate Account. In
calculating the ending redeemable value, all dividends and distributions by a
Subaccount are assumed to have been reinvested. Total return, or "T" in the
formula above, is computed by finding the average annual compounded rates of
return over the 1, 5, and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value. The
deduction for the asset allocation on advisory fee will be included in the
determination of standard total return in any performance advertising for the
Subaccounts.
From time to time, each Subaccount, other than the Money Market
Subaccount, also may include in such advertising a total return figure that is
not calculated according to the formula set forth above in order to compare more
accurately the performance of the Subaccount with other measures of investment
return. For example, in comparing the total return of a Subaccount with data
published by Lipper Analytical Services, Inc., or with the performance of the
S&P500 Index or the Dow Jones Industrial Average for each of the Nova Subaccount
and the Ursa Subaccount, the NASDAQ 100 IndexTM for the OTC Subaccount, the XAU
Index for the Metals Subaccount, and the Lehman Government (LT) Index for the
Bond Subaccount and the Juno Subaccount, each respective Subaccount calculates
its aggregate total return for the specified periods of time by assuming the
allocation of $10,000 to the Subaccount and assuming the reinvestment of each
dividend or other distribution at Accumulation Unit Value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value. Each Subaccount may show non-standardized total returns and
average annual total returns that do not include sales loads, which, if
included, would reduce the percentage reported. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC Rules.
UNDERWRITER OF THE CONTRACTS
PADCO Financial Services, Inc. ("PFS"), 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852, is the principal underwriter of the Contracts.
The offering of the Contracts is continuous, although Great American Reserve has
reserved the right to suspend the offer and sale of the Contracts whenever, in
its opinion, market or other conditions make a suspension appropriate. The
Contracts are sold by authorized broker-dealers, including registered
representatives of PFS. These registered representatives are also Great American
Reserve's licensed insurance agents. Great American Reserve, from its general
account, pays commissions to PFS not to exceed 6.0% of Purchase Payments.
27
<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve and the Statement of
Assets and Liabilities of the Separate Account included in the Prospectus and
the Statement of Additional Information have been examined by Coopers & Lybrand
L.L.P., 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
Audited financial statements of Great American Reserve, for the fiscal
year ended December 31, 1996, and unaudited financial statements of Great
American Reserve, for the nine-month period ended September 30, 1997, 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 December 31, 1997, are
included at the end of this Statement of Additional Information. A copy of the
Separate Account's Semi-Annual Report (for the period from May 7, 1997 through
June 30, 1997), which was filed on Form N-30D with the SEC via EDGAR
transmission on September 2, 1997, may be obtained without charge by contacting
the Separate Account at 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852, or by telephoning the Separate Account at (888) 667-4936.
28
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors Service, Inc.
("Moody's"), is based upon Moody's evaluation of many factors including: (1) the
management of the issuer; (2) the issuer's industry or industries and the
speculative-type risks which may be inherent in certain areas; (3) the issuer's
products in relation to competition and customer acceptance; (4) liquidity; (5)
amount and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships which
exist with the issue; and (8) recognition by the management of obligations which
may be present or may arise as a result of public interest questions and
preparations to meet such obligations. Relative differences in these factors
determine whether the issuer's commercial paper is rated "Prime-1," "Prime-2,"
or "Prime-3" by Moody's.
"Prime-1" indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced by
the following characteristics: (1) leading market positions in well-established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well-established access to a range of
financial markets and assured sources of alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of short-term
promissory obligations. This repayment capacity normally will be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group has the
following characteristics: (1) liquidity ratios adequate to meet cash
requirements; (2) long-term senior debt is rated "A" or better; (3) the issuer
has access to at least two additional channels of borrowing; (4) basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; (5) typically, the issuer's industry is well-established and the
issuer has a strong position within the industry; and (6) the reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated "A-1,"
"A-2," or "A-3."
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."
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<PAGE>
F-1 -- This designation rating indicates that the commercial paper is
regarded as having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this designation rating reflect
an assurance of timely payment only slightly less in degree than those issues
rated "F-1."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co. ("Duff") are
consistent with the rating criteria utilized by money market participants. The
ratings apply to all obligations with maturities of under one year, including
commercial paper, the uninsured portion of certificates of deposit, unsecured
bank loans, master notes, bankers acceptances, irrevocable letters of credit,
and current maturities of long-term debt. Asset-backed commercial paper is also
rated according to this scale.
An emphasis of Duff's short-term ratings is placed on "liquidity,"
which is defined as not only cash from operations, but also access to
alternative sources of funds including trade credit, bank lines, and the capital
markets. An important consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff's short-term ratings is the
refinement of the traditional "1" category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff has incorporated gradations of "1+" (one plus) and
"1-" (one minus) to assist investors in recognizing those differences.
Duff 1+ -- This designation rating indicates the highest certainty of
timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 -- This designation rating indicates a very high certainty of
timely payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
Duff 2 -- This designation rating indicates a good certainty of timely
payment. Liquidity factors and company fundamental are sound. Although ongoing
funding needs may enlarge total financing requirements, access capital markets
is good. Risk factors are small.
IBCA, Inc.
In addition to conducting a careful review of an institution's reports
and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies that the analysts cover.
IBCA's analysts speak the languages of the countries that the analysts
cover, which is essential to maximize the value of their meetings with
management and to analyze properly a company's written materials. IBCA's
analysts also have a thorough knowledge of the laws and accounting practices
that govern the operations and reporting of companies within the various
countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, these data are taken into account by IBCA when assigning
IBCA's ratings. Before dispatch to subscribers, a draft of the report is
submitted to each company to permit the correction of any factual errors and to
enable the clarification of issues raised.
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<PAGE>
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.
31
<PAGE>
AUDITED FINANCIAL STATEMENTS OF
GREAT AMERICAN RESERVE INSURANCE COMPANY
(For Great American Reserve Insurance Company's
Fiscal Year Ended December 31, 1996)
<PAGE>
AUDITED FINANCIAL STATEMENTS OF
GREAT AMERICAN RESERVE INSURANCE COMPANY
(For Great American Reserve Insurance Company's
Fiscal Year Ended December 31, 1996)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1996 and the four months ended December 31, 1995. We
have also audited the accompanying statements of operations, shareholder's
equity and cash flows of the Company for the eight months ended August 31, 1995,
and the year ended December 31, 1994, based on the basis of accounting
applicable to periods prior to the adoption of push down accounting upon
Conseco, Inc.'s purchase of all common shares of the Company it did not
previously own (see note 1 of the notes to financial statements regarding the
adoption of push down accounting). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, the four
months ended December 31, 1995, the eight months ended August 31, 1995 and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1996 and 1995
(Dollars in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1996 - $1,810.8; 1995 - $1,980.1)............................................... $1,795.1 $2,030.9
Mortgage loans..................................................................... 77.3 95.5
Credit-tenant loans................................................................ 93.4 79.4
Policy loans....................................................................... 80.8 84.7
Other invested assets ............................................................. 89.0 37.8
Short-term investments............................................................. 14.8 19.0
Assets held in separate accounts................................................... 232.4 137.5
-------- --------
Total investments............................................................ 2,382.8 2,484.8
Accrued investment income.............................................................. 32.9 34.0
Cost of policies purchased............................................................. 143.0 120.0
Cost of policies produced.............................................................. 38.2 24.0
Reinsurance receivables................................................................ 25.7 27.0
Goodwill (net of accumulated amortization: 1996 - $11.7; 1995 - $10.2)................. 49.7 53.0
Other assets........................................................................... 8.2 14.0
-------- --------
Total assets................................................................. $2,680.5 $2,756.8
======== ========
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1996 and 1995
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................................. $1,957.5 $2,039.1
Income tax liabilities............................................................. 29.8 39.0
Investment borrowings.............................................................. 48.4 84.2
Other liabilities.................................................................. 15.5 14.4
Liabilities related to separate accounts .......................................... 232.4 137.5
-------- --------
Total liabilities.......................................................... 2,283.6 2,314.2
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).................... 380.8 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $(2.4); 1995 - $6.8).................................................. (4.4) 11.8
Other investments (net of applicable deferred income taxes:
1996 - $(.1); 1995 - $.4).................................................... (.2) .6
Retained earnings.................................................................. 20.7 49.4
-------- --------
Total shareholder's equity................................................. 396.9 442.6
-------- --------
Total liabilities and shareholder's equity................................. $2,680.5 $2,756.8
======== ========
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
Prior basis
---------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income................................. 218.4 74.2 136.4 187.9
Net investment gains.................................. 2.7 12.5 7.3 .2
------- ------ ------ ------
Total revenues................................ 302.5 118.5 204.2 286.7
------- ------ ------ ------
Benefits and expenses:
Insurance policy benefits............................. 54.9 18.9 45.9 66.2
Change in future policy benefits...................... (3.7) .2 (4.3) (1.3)
Interest expense on annuities and financial products.. 129.4 44.2 74.6 101.4
Interest expense on investment borrowings............. 6.2 1.0 3.6 2.9
Amortization related to operations.................... 17.8 5.3 11.7 16.0
Amortization related to investment gains............. 2.5 10.0 4.3 2.7
Other operating costs and expenses.................... 54.3 13.1 23.7 37.3
------- ------ ------ ------
Total benefits and expenses................... 261.4 92.7 159.5 225.2
------- ------ ------ ------
Income before income taxes.................... 41.1 25.8 44.7 61.5
Income tax expense........................................ 15.4 9.7 16.5 22.7
------- ------ ------ ------
Net income.................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
======= ====== ====== ======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period........................... $380.8 $380.8 $339.7 $339.7
Adjustment of balance due to new accounting basis... - - 41.1 -
------ ------ ------ ------
Balance, end of period................................. $380.8 $380.8 $380.8 $339.7
====== ====== ====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period........................ $ 11.8 $ 1.3 $ (53.0) $ 33.3
Change in unrealized appreciation (depreciation).. (16.2) 10.5 55.7 (86.3)
Adjustment of balance due to new
accounting basis................................ - - (1.4) -
------ ------ ------- ------
Balance, end of period.............................. $ (4.4) $ 11.8 $ 1.3 $(53.0)
====== ====== ======= ======
Other investments:
Balance, beginning of period........................ $ .6 $ .6 $ (2.1) $ (.1)
Change in unrealized appreciation (depreciation).. (.8) - 3.3 (2.0)
Adjustment of balance due to new
accounting basis................................ - - (.6) -
------ ------ ------- ------
Balance, end of period.............................. $ (.2) $ .6 $ .6 $ (2.1)
====== ====== ======= ======
Retained earnings:
Balance, beginning of year............................. $ 49.4 $ 33.3 $ 80.3 $ 75.6
Net income ......................................... 25.7 16.1 28.2 38.8
Dividends on common stock........................... (54.4) - (41.2) (34.1)
Adjustment of balance due to new
accounting basis.................................. - - (34.0) -
------ ------ ------- ------
Balance, end of year................................... $ 20.7 $ 49.4 $ 33.3 $ 80.3
======= ====== ======= =======
Total shareholder's equity........................ $ 396.9 $442.6 $ 416.0 $ 364.9
======= ====== ======= =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 25.7 $ 16.1 $ 28.2 $ 38.8
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization................................... 20.4 15.3 16.0 18.7
Income taxes................................... (3.9) 2.3 2.9 1.3
Insurance liabilities.......................... (40.5) (25.8) (14.0) (10.5)
Interest credited to insurance liabilities..... 129.4 44.2 74.6 101.4
Fees charged to insurance liabilities ......... (32.8) (10.3) (22.2) (36.5)
Accrual and amortization of investment income.. 3.1 3.2 (1.8) (1.2)
Deferral of cost of policies produced.......... (13.2) (3.0) (6.6) (9.4)
Investment gains............................... (2.7) (12.5) (7.3) (.2)
Other.......................................... (8.9) (8.9) (3.2) 5.0
-------- -------- ------- -------
Net cash provided by operating activities...... 76.6 20.6 66.6 107.4
-------- -------- ------- -------
Cash flows from investing activities:
Sales of investments................................... 988.9 513.2 406.5 586.0
Maturities and redemptions............................. 101.7 60.4 57.5 118.4
Purchases of investments............................... (954.2) (532.2) (476.2) (786.9)
-------- -------- ------- -------
Net cash provided (used) by investing
activities................................. 136.4 41.4 (12.2) (82.5)
-------- -------- ------- -------
Cash flows from financing activities:
Deposits to insurance liabilities...................... 169.8 50.8 104.4 146.0
Cash paid in reinsurance recapture .................... - (71.1) - -
Investment borrowings.................................. (35.8) (36.8) 121.0 (58.3)
Withdrawals from insurance liabilities................. (306.7) (71.9) (166.3) (171.4)
Dividends paid on common stock......................... (44.5) - (41.2) (34.1)
-------- -------- ------- -------
Net cash provided (used) by
financing activities....................... (217.2) (129.0) 17.9 (117.8)
-------- -------- ------- -------
Net increase (decrease) in short-term
investments................................ (4.2) (67.0) 72.3 (92.9)
Short-term investments, beginning of period................ 19.0 86.0 13.7 106.6
-------- -------- ------- -------
Short-term investments, end of period...................... $ 14.8 $ 19.0 $ 86.0 $ 13.7
======== ======== ======= =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-6
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit- related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts on August 31, 1995, was as follows (dollars in millions):
<TABLE>
<CAPTION>
Debit
(Credit)
--------
<S> <C>
Cost of policies purchased.............................................. $ 59.0
Cost of policies produced .............................................. (27.0)
Goodwill................................................................ (15.1)
Insurance liabilities................................................... (1.2)
Income tax liabilities.................................................. (11.9)
Other................................................................... 1.3
Common stock and additional paid-in capital............................. (41.1)
Net unrealized appreciation of fixed maturity securities................ 1.4
Net unrealized appreciation of other investments........................ .6
Retained earnings....................................................... 34.0
</TABLE>
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National Life Insurance Company
("Jefferson National", which was acquired by the Partnership in 1990) into the
Company. This merger has been accounted for as a pooling of interests;
therefore, the assets and liabilities of each company have been combined at
their book values and the statements of operations, shareholder's equity and
cash flows have been reported as if the merger had occurred on January 1, 1994.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The financial statements
prepared in conformity with GAAP include amounts based on informed estimates and
judgment of management, with consideration given to materiality. Significant
estimates and assumptions are utilized in the calculation of cost of policies
produced, cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. Actual experience may differ from
those estimates. Certain amounts from the 1995 and 1994 financial statements and
notes have been reclassified to conform with the 1996 presentation.
F-7
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investments
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed - fixed maturity securities that may be sold prior to
maturity due to changes that might occur in market interest rates,
issuer credit quality or the Company's liquidity requirements. Actively
managed fixed maturity securities are carried at estimated fair value
and the unrealized gain or loss is recorded net of tax and related
adjustments described below as a component of shareholder's equity.
Trading account - fixed maturity securities are bought and held
principally for the purpose of selling them in the near term. Trading
account securities are carried at estimated fair value. Unrealized
gains or losses are included in net investment gains (losses). The
Company did not hold any trading account securities during 1996, 1995
or 1994.
Held to maturity - (all other fixed maturity securities) are those
securities which the Company has the ability and positive intent to
hold to maturity, and are carried at amortized cost. The Company may
dispose of these securities if the credit quality of the issuer
deteriorates, if regulatory requirements change or under other
unforeseen circumstances. The Company has not held any securities in
this classification during 1996, 1995 or 1994.
Anticipated returns, including investment gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at
estimated fair value, an adjustment to the cost of policies purchased and the
cost of policies produced may be necessary if a change in amortization would
have been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows (including investment income),
are insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following table summarizes the effect
of these adjustments as of December 31, 1996:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,810.8 $(15.7) $1,795.1
Cost of policies purchased.................................... 135.2 7.8 143.0
Cost of policies produced..................................... 37.1 1.1 38.2
Income tax liabilities........................................ 32.2 (2.4) 29.8
Net unrealized depreciation of fixed maturities............... - (4.4) (4.4)
</TABLE>
When changes in conditions cause a fixed maturity investment to be
transferred to a different category (e.g. actively managed, held to maturity or
trading), the security is transferred to the new category at its fair value at
the date of the transfer. There were no such transfers in 1996, 1995 or 1994. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
o For transfers to the trading category, the unrealized gain or loss
is recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
F-8
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
recognized in shareholder's equity, but is amortized as a yield
adjustment until ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be collateralized by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months and are carried
at amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as investment gains and losses, or as adjustments to investment income
if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates investment securities, credit-tenant loans
and mortgage loans based on current economic conditions, past credit loss
experience and other circumstances of the investee. A decline in a security's
net realizable value that is other than temporary is treated as an investment
loss and the cost basis of the security is reduced to its estimated fair value.
Impaired loans are revalued at the present value of expected cash flows
discounted at the loan's effective interest rate when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the agreement. The Company accrues interest on the net carrying amount
of impaired loans.
As part of the Company's investment strategy, the Company may enter into
reverse repurchase agreements and dollar-roll transactions to increase its
investment return or to improve liquidity. These transactions are accounted for
as collateral borrowings, where the amount borrowed is equal to the sales price
of the underlying securities.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities equals their carrying
amount.
F-9
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Cost of Policies Purchased
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased is the actuarially determined
present value of the projected future cash flows from the insurance contracts
existing at the acquisition date. The method used to value the cost of policies
purchased is consistent with the valuation methods used most commonly to value
blocks of insurance business, which is also consistent with the basic
methodology generally used to value assets. The method used is summarized as
follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
o Determine the value of the policies by discounting the expected future
cash flows by the discount rate required.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of the Company's management.
Actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order to invest in the business
being acquired. In determining this required rate of return, the following
factors are considered:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
o The cost of capital required to fund the acquisition.
o The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
o The acquired business compatibility with other activities of the
Company that may favorably affect future cash flows.
<PAGE>
o The complexity of the acquired business.
o Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After the cost of policies purchased is determined, it is amortized based
on the incidence of the expected cash flows. This asset is amortized using the
interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from expectations,
amortization of the cost of policies purchased is adjusted. For example, the
sale of a fixed maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there may also be
a reduction (or increase) in future investment spread. Amortization must be
increased (decreased) to reflect the change in the incidence of expected cash
flows consistent with the methods used with the cost of policies produced
(described below).
F-10
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Each year, the recoverability of the cost of policies purchased is
evaluated by line of business within each block of purchased insurance business.
If current estimates indicate that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
purchased, will be insufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is adjusted consistent with the
methods used with the cost of policies produced (as described below).
The cost of policies purchased related to the original acquisition of the
Company by the Partnership in 1990 is amortized under a slightly different
method than that described above. However, the effect of the different method on
1996 net income was insignificant.
Cost of Policies Produced
Costs which vary with and are primarily related to the acquisition of
new business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For immediate annuities with mortality
risks, deferred costs are amortized in relation to the present value of benefits
to be paid. For universal life-type, interest-sensitive and investment-type
contracts, deferred costs are amortized in relation to the present value of
expected gross profits from these contracts, discounted using the interest rate
credited to the policy (currently, 5 percent to 8 percent).
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
Goodwill
The excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the
acquired business. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
acquired business over the remaining amortization period. If future evaluations
of goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened (no such changes have
occurred).
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method based on assumptions as
to investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy
F-11
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
administration and surrender penalties are recorded as revenues. Interest
credited to the liability account and benefit payments made in excess of the
contract liability account balance are charged to expense.
For traditional life insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums resulting in
their level recognition over the premium paying period of the contracts. Such
recognition is accomplished through the provision for future policy benefits and
the amortization of deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
Income Taxes
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, the estimated fair values are
determined using values obtained from broker-dealer market makers or by
discounting expected future cash flows using current market interest rates
applicable to the yield, credit quality of the investments and maturity of
the investments.
F-12
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Mortgage loans, credit-tenant loans and policy loans: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are
determined by discounting future expected cash flows using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of
the calculations.
Other invested assets: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
Short-term investments: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount
reported in the balance sheet for these assets approximates their estimated
fair value.
Insurance liabilities for investment contracts: The estimated fair values
of liabilities under investment-type insurance contracts are determined
using discounted cash flow calculations based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturity securities........... $1,795.1 $1,795.1 $2,030.9 $2,030.9
Mortgage loans....................................... 77.3 77.0 95.5 108.9
Credit-tenant loans.................................. 93.4 92.5 79.4 79.7
Policy loans......................................... 80.8 80.8 84.7 84.7
Other invested assets................................ 89.0 89.0 37.8 37.8
Short-term investments............................... 14.8 14.8 19.0 19.0
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts (1)... $1,282.1 $1,282.1 $1,346.5 $1,346.5
Investment borrowings................................ 48.4 48.4 84.2 84.2
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1996
and 1995, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar
investments and because these rates are not generally guaranteed
beyond one year. The Company is not required to disclose fair values
for insurance liabilities, other than those for investment contracts.
However, the Company takes into consideration the estimated fair
values of all insurance liabilities in its overall management of
interest rate risk. The Company attempts to minimize exposure to
changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</FN>
</TABLE>
F-13
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. The merger has been accounted for
as a pooling of interests and, accordingly, the financial statements for 1994
have been restated to include the accounts of Jefferson National. Certain 1994
balances for the separate companies are as follows:
<TABLE>
<CAPTION>
Amount prior to Jefferson
effect of merger National Combined
---------------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Insurance policy income................................................... $ 53.2 $ 45.4 $ 98.6
Net investment income..................................................... 101.9 86.0 187.9
Total revenues............................................................ 154.1 132.6 286.7
Income before income taxes................................................ 25.9 35.6 61.5
Net income................................................................ 16.7 22.1 38.8
</TABLE>
3. INVESTMENTS
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 29.9 $ .3 $ .3 $ 29.9
Obligations of state and political subdivisions........ 6.1 .1 .1 6.1
Debt securities issued by foreign governments.......... 11.6 - .5 11.1
Public utility securities.............................. 234.8 2.4 7.0 230.2
Other corporate securities............................. 950.1 10.9 17.6 943.4
Mortgage-backed securities............................. 578.3 2.3 6.2 574.4
-------- ----- ----- --------
Total............................................... $1,810.8 $16.0 $31.7 $1,795.1
======== ===== ===== ========
</TABLE>
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 59.2 $ 2.1 $ - $ 61.3
Obligations of state and political subdivisions........ 9.3 .2 .1 9.4
Debt securities issued by foreign governments.......... 8.3 .3 - 8.6
Public utility securities.............................. 351.6 11.4 2.0 361.0
Other corporate securities............................. 888.0 34.0 6.4 915.6
Mortgage-backed securities ............................ 663.7 12.2 .9 675.0
-------- ----- ---- --------
Total........................................... $1,980.1 $60.2 $9.4 $2,030.9
======== ===== ==== ========
</TABLE>
F-14
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.......................................... $1,516.7 $1,500.4
Broker-dealer market makers..................................................... 242.9 243.6
Internally developed methods (calculated based
on a weighted-average current market yield of 10.2 percent).................. 51.2 51.1
-------- --------
Total ................................................................. $1,810.8 $1,795.1
======== ========
</TABLE>
The following table sets forth actively managed fixed maturity securities
at December 31, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $23.5 million fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------ ---------- -----------
<S> <C> <C>
AAA................................................................................... 37% 28%
AA ................................................................................. 6 5
A ................................................................................. 21 15
BBB+.................................................................................. 9 6
BBB................................................................................... 13 10
BBB-.................................................................................. 7 5
---- ----
Investment-grade................................................................. 93 69
---- ----
BB+................................................................................... 1 1
BB ................................................................................. 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 3 2
---- ----
Below investment-grade........................................................... 7 6
---- ----
Total actively managed fixed maturities...................................... 100% 75%
=== ==
</TABLE>
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by more than 15%.................................. $ 3.1 $ 1.7
Amortized cost exceeds fair value by more than 5% but not more than 15%............. 18.4 16.8
All others.......................................................................... 111.1 113.3
------- -------
Total...................................................................... $132.6 $131.8
====== ======
</TABLE>
F-15
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1996. The Company recorded writedowns of fixed
maturity investments and other invested assets totaling $.8 million in 1996,
$1.6 million in 1995 and $1.0 million in 1994, as a result of changes in
conditions which caused it to conclude the decline in the fair value of the
investment was other than temporary. As of December 31, 1996, there were no
fixed maturity investments about which the Company had serious doubts as to the
ability of the issuer to comply with the contractual terms of their obligations
on a timely basis. Investment income foregone due to defaulted securities was
$.2 million in 1996, $.1 million in the four months ended December 31, 1995 and
$1.3 million in 1994. There was no investment income foregone due to defaulted
securities during the eight months ended August 31, 1995.
Actively managed fixed maturity securities at December 31, 1996, summarized
by contractual maturity date, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties and because most
mortgage-backed securities provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less......................................................... $ 10.7 $ 10.6
Due after one year through five years........................................... 102.3 103.1
Due after five years through ten years.......................................... 314.7 313.5
Due after ten years............................................................. 804.8 793.5
-------- --------
Subtotal................................................................. 1,232.5 1,220.7
Mortgage-backed securities...................................................... 578.3 574.4
-------- --------
Total ................................................................... $1,810.8 $1,795.1
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities....... $146.4 $53.9 $110.2 $157.9
Mortgage loans................................... 11.8 4.8 8.0 13.0
Credit-tenant loans ............................. 7.2 1.7 4.1 3.8
Policy loans..................................... 5.0 1.9 3.5 5.2
Short-term investments........................... 2.3 .8 1.9 3.8
Other invested assets............................ 11.4 .3 1.6 3.2
Separate accounts................................ 35.6 11.3 7.9 2.3
------ ------ ------ -------
Gross investment income..................... 219.7 74.7 137.2 189.2
Investment expenses.............................. 1.3 .5 .8 1.3
------ ------ ------ -------
Net investment income....................... $218.4 $74.2 $136.4 $187.9
====== ===== ====== ======
</TABLE>
The Company did not have any fixed maturity investments and mortgage loans
not accruing investment income in 1996, 1995 and 1994.
F-16
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The proceeds from sales of actively managed fixed maturity securities were
$938.3 million in 1996, $512.5 million in the four months ended December 31,
1995, $406.0 million in the eight months ended August 31, 1995 and $578.3
million in 1994. Net investment gains consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains................................... $16.6 $16.5 $14.4 $17.6
Gross losses.................................. (9.2) (2.2) (2.3) (9.3)
Other than temporary decline in fair value.... (.2) (.4) (1.2) (1.0)
------ ------ ----- -----
Net investment gains from fixed maturities
before expenses........................... 7.2 13.9 10.9 7.3
Mortgage loans................................... - - (.2) -
Other .......................................... - - (1.0) (3.1)
Other than temporary decline in fair value....... (.6) - - -
------ ------ ----- -----
Net investment gains before expenses........ 6.6 13.9 9.7 4.2
Investment gain expenses......................... 3.9 1.4 2.4 4.0
------ ------ ----- -----
Net investment gains........................ $ 2.7 $12.5 $ 7.3 $ .2
====== ===== ===== ======
</TABLE>
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturities................ $(66.5) $45.5 $164.1 $(254.9)
Other invested assets............................ (1.3) .1 5.1 (3.2)
------ ----- ------ -------
Subtotal................................ (67.8) 45.6 169.2 (258.1)
Less effect on other balance sheet accounts:
Cost of policies purchased.................... 36.6 (26.3) (64.1) 93.1
Cost of policies produced..................... 4.5 (2.7) (12.0) 27.6
Income taxes.................................. 9.7 (6.1) (34.1) 49.1
------ ----- ------- -------
Change in net unrealized appreciation
(depreciation) of securities.................. $(17.0) $10.5 $ 59.0 $ (88.3)
====== ===== ======= =======
</TABLE>
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $221.6 million and
mortgage-backed pass-through securities of $352.8 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
F-17
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1996, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ..................................................... $209.6 $205.1 $201.5
7 percent - 8 percent................................................ 247.4 241.5 240.6
8 percent - 9 percent................................................ 70.9 69.7 69.3
9 percent and above.................................................. 60.1 62.0 63.0
------ ------ ------
Total mortgage-backed securities................................ $588.0 $578.3 $574.4
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
----------------------
Percent
Amortized of fixed
cost Amount maturities
---- ------ ----------
Type (Dollars in millions)
- ----
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes........... $458.7 $454.9 25%
Accrual (Z tranche) bonds................................................ 9.6 9.7 1
Planned amortization classes and accretion directed bonds................ 77.2 76.7 4
Subordinated classes .................................................... 32.8 33.1 2
------ ------ ---
Total mortgage-backed securities................................ $578.3 $574.4 32%
====== ====== ==
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1996, based upon the pricing
source used to determine estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services ............................................. $515.1 $511.3
Broker-dealer market makers......................................................... 52.7 52.5
Internally developed methods (calculated based on a
weighted-average current market yield of 7.4 percent)........................ 10.5 10.6
------ ------
Total mortgage-backed securities........................................... $578.3 $574.4
====== ======
</TABLE>
At December 31, 1996, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, were in
foreclosure, had been converted to foreclosed real estate or had been
restructured while the Company owned them. At December 31, 1996, the Company had
a loan loss reserve of $.9 million. Approximately 30 percent, 18 percent, 16
percent and 6 percent of the mortgage loan balance were on properties located in
California, Indiana, Texas and Florida, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term borrowings collateralized by pledged securities with book values
approximately equal to the loan value. Such borrowings averaged approximately
F-18
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
$115.3 million during 1996 compared to $84.4 million during 1995. The weighted
average interest rate on short-term collateralized borrowings was 5.3 percent
and 5.4 percent during 1996 and 1995, respectively. The primary risk associated
with short-term collateralized borrowings is that the counterparty will be
unable to perform under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1996). The Company believes that the counterparties to its reverse repurchase
and dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1996.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1996, other than investments issued or
guaranteed by the United States government.
4. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest December 31,
Withdrawal Mortality rate ---------------------
assumption assumption assumption 1996 1995
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts................ N/A N/A (b) $1,282.1 $1,346.5
Limited-payment contracts........... None (a) 8% 105.3 96.7
Traditional life insurance Company
contracts........................ experience (a) 8% 146.2 153.5
Universal life-type contracts....... N/A N/A N/A 354.4 367.6
Claims payable and other
policyholders' funds............... N/A N/A N/A 69.5 74.8
-------- --------
Total.......................... $1,957.5 $2,039.1
======== ========
<FN>
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1996 and 1995, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1996.
</FN>
</TABLE>
Participating policies represented approximately 3.5 percent, 3.7 percent
and 3.6 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively, and approximately 2.7 percent, 2.4 percent and 7.5 percent
of premium income for 1996, 1995 and 1994, respectively. Dividends on
participating policies amounted to $1.9 million, $1.8 million and $1.7 million
in 1996, 1995 and 1994, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $24.6 million in 1996, $29.1 million in 1995 and $35.3 million in
1994. This cost was deducted from insurance premium revenue. The Company is
contingently liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy benefits totaled
$19.4 million in 1996, $19.5 million in 1995 and $27.5 million in 1994.
Effective October 1, 1995, Western National Life Insurance Company, a
former subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
F-19
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's reinsurance receivable balance at December 31, 1996, relates
to many reinsurers. No balance from a single reinsurer exceeds $7.0 million.
6. INCOME TAXES
Income tax liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities (assets):
Cost of policies purchased and cost of policies produced.................. $ 60.3 $ 44.7
Investments............................................................... (3.3) 8.6
Insurance liabilities..................................................... (19.7) (21.7)
Unrealized appreciation (depreciation).................................... (2.5) 7.2
Other..................................................................... (5.0) (7.7)
------- ------
Deferred income tax liabilities....................................... 29.8 31.1
Current income tax liabilities............................................... - 7.9
------- ------
Income tax liabilities................................................ $ 29.8 $39.0
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current tax provision............................... $10.5 $11.9 $19.9 $20.0
Deferred tax provision (benefit).................... 4.9 (2.2) (3.4) 2.7
----- ------ ------ -----
Income tax expense........................... $15.4 $ 9.7 $16.5 $22.7
===== ====== ===== =====
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Federal tax on income before income taxes at
statutory rate.................................... $14.4 $9.0 $15.6 $21.5
State taxes and other................................ .6 .5 .4 .5
Nondeductible items.................................. .4 .2 .5 .7
----- ---- ----- -----
Income tax expense.............................. $15.4 $9.7 $16.5 $22.7
===== ==== ===== =====
</TABLE>
The Company is currently being examined by the Internal Revenue Service for
the 1994 tax year. The Company believes that the outcome of this examination
will not have a material impact on its financial position or results of
operations.
F-20
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
7. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees incurred by the Company under such agreements were $44.1 million in
1996, $26.6 million in 1995 and $25.1 million in 1994.
During 1996, the Company purchased $31.5 million par value of senior
subordinated notes issued by subsidiaries of Conseco. Such notes had a carrying
value of $34.7 million at December 31, 1996, and are classified as "other
invested assets" in the accompanying balance sheet. In addition, during 1996,
the Company forgave receivables from Conseco totaling $9.9 million. This
transaction is reflected as a dividend to Conseco in the accompanying statement
of shareholder's equity.
8. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected............................ $241.3 $ 82.8 $158.6 $ 240.3
Reinsurance assumed.................................. 1.7 .7 2.0 3.1
Reinsurance ceded.................................... (24.6) (11.2) (17.9) (35.3)
------ ------ ------ -------
Premiums collected, net of reinsurance.......... 218.4 72.3 142.7 208.1
Less premiums on universal life and products without
mortality risk which are recorded as additions to
insurance liabilities............................. (169.8) (50.8) (104.4) (146.0)
------- ------ ------- -------
Premiums on products with mortality and morbidity
risk, recorded as insurance policy income..... 48.6 21.5 38.3 62.1
Fees and surrender charges........................... 32.8 10.3 22.2 36.5
------- ------ ------- -------
Insurance policy income....................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
======= ====== ======= =======
</TABLE>
The four states with the largest shares of the Company's premiums collected
in 1996 were Texas (29 percent), Florida (19 percent), California (9 percent)
and Michigan (7 percent). No other state's share of premiums collected exceeded
5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Policy maintenance expense........................... $37.8 $ 6.5 $14.0 $19.0
State premium taxes and guaranty assessments......... 4.4 1.6 1.1 3.0
Commission expense................................... 12.1 5.0 8.6 15.3
----- ----- ----- -----
Other operating costs and expenses............ $54.3 $13.1 $23.7 $37.3
===== ===== ===== =====
</TABLE>
F-21
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments during 1996, 1995
and 1994, changed the incidence of profits on such policies because investment
gains and losses were recognized currently and the expected future yields on the
investment of policyholder balances were affected. Accordingly, amortization of
the cost of policies purchased and cost of policies produced was increased by
$2.5 million in 1996, $10.0 million in the four months ended December 31, 1995,
$4.3 million for the eight months ended August 31, 1995, and $2.7 million in
1994.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $120.0 $159.0 $173.9 $ 93.0
Amortization related to operations:
Cash flow realized.............................. (26.2) (9.4) (19.1) (30.4)
Interest added.................................. 13.1 5.0 12.7 20.8
Amortization related to sales of fixed maturity
investments..................................... (2.2) (8.3) (3.4) (2.6)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 36.6 (26.3) (64.1) 93.1
Adjustment of balance due to new accounting
basis and other................................. 1.7 - 59.0 -
------ ------ ------ ------
Balance, end of period............................... $143.0 $120.0 $159.0 $173.9
====== ====== ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 9.2 percent, 9.2 percent, 8.3 percent, 7.3
percent and 6.7 percent of the cost of policies purchased as of December 31,
1996, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the cost of policies
purchased ranged from 5 percent to 8 percent and averaged 5.5 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $24.0 $25.9 $ 63.2 $30.8
Additions......................................... 13.2 3.0 6.6 9.4
Amortization related to operations................ (3.2) (.5) (4.0) (4.5)
Amortization related to sales of fixed maturity
investments..................................... (.3) (1.7) (.9) (.1)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 4.5 (2.7) (12.0) 27.6
Adjustment of balance due to new accounting basis - - (27.0) -
----- ----- ------- -----
Balance, end of period............................... $38.2 $24.0 $ 25.9 $63.2
===== ===== ======= =====
</TABLE>
F-22
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
9. STATEMENT OF CASH FLOWS
Income taxes paid during 1996, 1995, and 1994, were $18.1 million, $19.3
million and $20.3 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
10. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $140.3 $156.2
Asset valuation reserve ("AVR")................................................ 28.7 26.2
Interest maintenance reserve ("IMR")........................................... 63.1 64.7
------ ------
Total...................................................................... $232.1 $247.1
====== ======
</TABLE>
The Company had statutory net income of $32.6 million, $38.4 million and
$37.7 million in 1996, 1995 and 1994, respectively.
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Pre-tax income as reported on a statutory accounting
basis before transfers to and from and
amortization of the IMR........................... $40.2 $ 33.6 $ 50.2 $ 58.6
GAAP adjustments:
Investments valuation............................. 4.9 (3.3) .8 7.5
Amortization related to operations................ (17.8) (5.3) (11.7) (16.0)
Amortization related to investment gains.......... (2.5) (10.0) (4.3) (2.7)
Deferral of cost of policies produced............. 13.2 3.0 6.6 9.4
Insurance liabilities............................. 3.2 5.1 2.5 2.5
Other ............................................ (.1) 2.7 .6 2.2
----- ------ ------ ------
Net effect of GAAP adjustments................ .9 (7.8) (5.5) 2.9
----- ------ ------ ------
GAAP pre-tax income........................... $41.1 $ 25.8 $ 44.7 $ 61.5
===== ====== ====== ======
</TABLE>
F-23
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.7 million of the
Company's net assets at December 31, 1996, are available for distribution in
1997 without permission of state regulatory authorities.
F-24
<PAGE>
UNAUDITED FINANCIAL STATEMENTS
OF
GREAT AMERICAN RESERVE INSURANCE COMPANY
(For the Nine-Month Period
Ended September 30, 1997)
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
September 30, 1997
(Dollars in millions)
(Unaudited)
ASSETS
Investments:
Actively managed fixed maturities at fair value
(amortized cost: $1,789.1)............................. $1,807.6
Mortgage loans............................................. 63.0
Credit-tenant loans........................................ 97.4
Policy loans............................................... 80.7
Other invested assets ..................................... 93.6
Short-term investments..................................... 64.2
Assets held in separate accounts........................... 366.1
----------
Total investments...................................... 2,572.6
Accrued investment income..................................... 31.4
Cost of policies purchased.................................... 119.2
Cost of policies produced..................................... 50.4
Reinsurance receivables....................................... 22.5
Goodwill (net of accumulated amortization: $12.8)............. 48.6
Other assets.................................................. 15.4
-----------
Total assets.......................................... $2,860.1
========
(continued on next page)
The accompanying notes are an integral part
of the financial statements.
F-1
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
September 30, 1997
(Dollars in millions, except per share amount)
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Insurance liabilities......................................... $1,858.2
Income tax liabilities........................................ 44.6
Investment borrowings......................................... 172.3
Other liabilities............................................. 13.1
Liabilities related to separate accounts ..................... 366.1
----------
Total liabilities....................................... 2,454.3
---------
Shareholder's equity:
Common stock and additional paid-in capital
(par value $4.80 per share, 1,065,000 shares authorized,
1,043,565 shares issued and outstanding)..................... 380.8
Unrealized appreciation of securities:
Fixed maturity securities (net of applicable
deferred income taxes: $2.9)............................... 5.3
Other investments (net of applicable deferred
income taxes: $.3)......................................... .5
Retained earnings.............................................. 19.2
-----------
Total shareholder's equity............................... 405.8
----------
Total liabilities and shareholder's equity............... $2,860.1
========
The accompanying notes are an integral part
of the financial statements.
F-2
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
(Unaudited)
Nine months
ended
September 30,
-----------------
1997 1996
---- ----
Revenues:
Insurance policy income...................... $ 57.4 $ 61.4
Net investment income........................ 155.3 156.5
Net investment gains......................... 6.6 .2
--------- ---------
Total revenues........................... 219.3 218.1
------- ------
Benefits and expenses:
Insurance policy benefits.................... 43.5 41.4
Change in future policy benefits............. (2.7) (5.5)
Interest expense on annuities and
financial products......................... 93.7 89.6
Interest expense on investment borrowings.... 1.8 4.7
Amortization................................. 11.4 14.1
Other operating costs and expenses........... 23.1 41.9
-------- -------
Total benefits and expenses.............. 170.8 186.2
------- ------
Income before income taxes............... 48.5 31.9
Income tax expense.............................. 17.5 12.0
-------- --------
Net income............................... $ 31.0 $ 19.9
======= ======
The accompanying notes are an integral part
of the financial statements.
F-3
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended
September 30,
--------------------
1997 1996
---- ----
<C> <S> <S>
Common stock and additional paid-in capital:
Balance, beginning and end of period....................... $380.8 $380.8
====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period............................. $ (4.4) $ 11.8
Change in unrealized appreciation (depreciation)....... 9.7 (25.2)
--------- --------
Balance, end of period................................... $ 5.3 $ (13.4)
======== =======
Other investments:
Balance, beginning of period............................. $ (.2) $ .6
Change in unrealized appreciation (depreciation)....... .7 (1.0)
---------- ---------
Balance, end of period................................... $ .5 $ (.4)
========= ==========
Retained earnings:
Balance, beginning of period............................... $ 20.7 $ 49.4
Net income ............................................ 31.0 19.9
Dividends on common stock.............................. (32.5) (54.4)
-------- --------
Balance, end of period..................................... $ 19.2 $ 14.9
======= =======
Total shareholder's equity............................. $405.8 $381.9
====== ======
</TABLE>
The accompanying notes are an integral part
of the financial statements.
F-4
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended
September 30,
---------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 31.0 $ 19.9
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Amortization............................................... 11.3 14.2
Income taxes............................................... 8.8 (3.2)
Insurance liabilities...................................... (103.6) (28.4)
Interest credited to insurance liabilities................. 93.7 89.6
Fees charged to insurance liabilities...................... (23.8) (24.7)
Accrual and amortization of investment income.............. .6 .1
Deferral of cost of policies produced...................... (17.9) (8.0)
Net investment gains....................................... (6.6) (.2)
Other...................................................... (12.3) (1.7)
--------- ---------
Net cash provided (used) by operating activities......... (18.8) 57.6
--------- --------
Cash flows from investing activities:
Sales of investments............................................. 631.2 668.3
Maturities and redemptions....................................... 86.6 97.1
Purchases of investments......................................... (679.5) (718.8)
-------- -------
Net cash provided by investing activities................ 38.3 46.6
--------- --------
Cash flows from financing activities:
Deposits to insurance liabilities................................ 172.6 124.7
Investment borrowings............................................ 123.9 35.7
Withdrawals from insurance liabilities........................... (234.1) (220.1)
Dividends paid on common stock................................... (32.5) (44.5)
--------- ---------
Net cash provided (used) by financing activities......... 29.9 (104.2)
--------- -------
Net increase in short-term investments.................. 49.4 -
Short-term investments, beginning of period......................... 14.8 19.0
--------- --------
Short-term investments, end of period............................... $ 64.2 $ 19.0
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
F-5
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
(Unaudited)
------------------------------
The following notes should be read in conjunction with the notes to audited
financial statements included elsewhere in this Prospectus.
SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The unaudited financial statements as of September 30, 1997 and 1996,
reflect all adjustments, consisting only of normal recurring items, which are
necessary to present fairly the Company's financial position and results of
operations on a basis consistent with that of prior audited financial
statements.
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and assumptions
that significantly affect various reported amounts. For example, the Company
uses significant estimates and assumptions in calculating the cost of policies
produced, the cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. If future experience differs
materially from these estimates and assumptions, the Company's financial
statements could be affected.
F-6
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
(Unaudited)
------------------------------
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
The Company classifies fixed maturity securities into three categories:
"actively managed", and "trading account" (which are carried at estimated fair
value) and "held to maturity" (which are carried at amortized cost). The Company
did not carry any fixed maturity securities in the trading account or held to
maturity categories at September 30, 1997. Adjustments to carry actively managed
fixed maturity securities at fair value have no effect on earnings, but are
recorded, net of tax, as a component of shareholder's equity. The following
table summarizes the effect of these adjustments as of September 30, 1997:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.... $1,789.1 $ 18.5 $1,807.6
Cost of policies purchased.................... 128.1 (8.9) 119.2
Cost of policies produced..................... 51.8 (1.4) 50.4
Income tax liabilities........................ 41.7 2.9 44.6
Net unrealized appreciation of fixed
maturity securities....................... - 5.3 5.3
</TABLE>
SHAREHOLDER'S EQUITY
The Company paid shareholder dividends of $32.5 million and $44.5 million
during the nine months ended September 30, 1997 and 1996, respectively. In
addition, during the first nine months of 1996, the Company forgave receivables
from Conseco totaling $9.9 million. This transaction is reflected as a dividend
to Conseco in the accompanying statement of shareholder's equity.
RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees paid to Conseco were $28.0 million and $32.6 million
during the nine months ended September 30, 1997 and 1996, respectively.
F-7
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
(For the Period from May 7, 1997 to December 31, 1997)
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
SUPPLEMENTARY INFORMATION
==================================================================================================================================
Period Ended December 31, 1997
==================================================================================================================================
Unaudited
Money
Nova Ursa Market
Subaccount* Subaccount* Subaccount*
===================== ===================== ==================
<S> <C> <C> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value-Beginning of Period $10.00 $10.00 $10.00
----------------- --------------------- ------------------
Investment Income 0.29 0.14 0.52
Expenses 0.22 0.16 0.21
----------------- --------------------- ------------------
Net Investment Income 0.07 -0.02 0.31
Net Realized and Unrealized
Gains (Losses) on Securities 2.14 -1.91 0.01
----------------- --------------------- ------------------
Net Increase (Decrease) in Accumulation
Unit Value 2.21 -1.93 0.32
----------------- --------------------- ------------------
Accumulation Unit Value-End of Period**** $12.21 $8.07 $10.32
================= ===================== ==================
Ratios to Average Net Assets **
Gross Expenses 9.09% 9.29% 6.82%
Net Expenses 2.80% 2.90% 2.20%
Net Investment Income 0.91% -0.34% 3.34%
Supplementary Data:
Portfolio Turnover Rate*** 164.30% 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
<FN>
*Commencement of Operations: Nova Subaccount and Ursa Subaccount-May 7, 1997;
Money Market Subaccount-May 7, 1997
** Annualized
***Portfolio turnover ratio 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.
****End of period accumulation unit value for the Ursa Subaccount reflects
changes based upon the same-day changes in the net asset value for the Ursa Fund
series of Rydex Series Trust for 6 business days during the period from May 7,
1997 through December 31, 1997 when the assets of the Ursa Subaccount were at
zero.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
SUPPLEMENTARY INFORMATION
=================================================================================================================================
Period Ended December 31, 1997
=================================================================================================================================
Unaudited
U.S.
Precious Government
OTC Metals Bond Juno
Subaccount* Subaccount* Subaccount* Subaccount*
=============== =============== ============= ==============
<S> <C> <C> <C> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value-Beginning of Period $10.00 $10.00 $10.00 $10.00
--------------- --------------- ------------- --------------
Investment Income 0.12 0.03 0.41 0.33
Expenses 0.21 0.14 0.16 0.18
--------------- --------------- ------------- --------------
Net Investment Income -0.09 -0.11 0.25 0.15
Net Realized and Unrealized
Gains (Losses) on Securities 0.74 -2.87 1.57 -1.14
--------------- --------------- ------------- --------------
Net Increase (Decrease) in Accumulation
Unit Value 0.65 -2.98 1.82 -0.99
--------------- --------------- ------------- --------------
Accumulation Unit Value-End of Period**** $10.65 $7.02 $11.82 $9.01
=============== =============== ============= ==============
Ratios to Average Net Assets **
Gross Expenses 9.07% 9.76% 9.42% 9.31%
Net Expenses 2.80% 2.80% 2.40% 2.90%
Net Investment Income -1.22% -2.19% 3.69% 2.39%
Supplementary Data:
Portfolio Turnover Rate*** 399.92% 828.23% 846.49% 0%
Net Assets,
End of Period (000's omitted) $2,367 $518 $892 $0
Number of Accumulation Units
Outstanding at End of Period 222,217 73,827 75,493 0
<FN>
*Commencement of Operations: OTC Subaccount-May 7, 1997; Precious Metals
Subaccount-May 29, 1997; U. S. Government Bond Subaccount-May 29, 1997; Juno
Subaccount-May 7, 1997
** Annualized
*** Portfolio turnover ratio 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.
****End of period accumulation unit value for the Bond Subaccount reflects
changes based upon the same-day changes in the net asset value for the Rydex
U.S. Government Bond Fund series of Rydex Series Trust for 25 days during the
period from May 29, 1997 through December 31, 1997 when the assets of the Bond
Subaccount were at zero. End of period accumulation unit value for the Juno
Subaccount reflects changes based upon the same-day changes in the net asset
value for the Juno Fund series of Rydex Series Trust for 45 days during the
period from May 7, 1997 through December 31, 1997 when the assets of the Juno
Subaccount were at zero (the assets of the Juno Subaccount were at zero for the
period from December 12, 1997 through December 31, 1997).
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
Nova Subaccount
SCHEDULE OF INVESTMENTS
==================================================================================================================================
December 31, 1997
==================================================================================================================================
Unaudited
Market
Shares Value
------------------- ------------------
<S> <C> <C>
COMMON STOCKS 8.9%
Standard & Poor's Depository Receipts (Cost $795,090) 9,120 $885,210
------------------
Contracts
-------------------
OPTIONS PURCHASED 14.8% Call Options on:
S&P 500 Index Expiring March 1998 at 700 (Cost $1,437,407) 53 1,470,087
------------------
Face Amount
-------------------
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
==================
================================================================================================================================
Contracts Unrealized Gain
------------------- ------------------
FUTURES CONTRACTS PURCHASED 14.8%
S&P 500 Futures Contracts Expiring March 1998
(Underlying Face Amount at Market Value $7,588,025) 31 $76,118
==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
Ursa Subaccount
SCHEDULE OF INVESTMENTS
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
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
=================
===============================================================================================================================
Shares Unrealized Loss
------------------- -----------------
COMMON STOCK SOLD SHORT
Standard & Poor's Depository Receipts
(Underlying Face Amount at Market Value $1,892,719) 19,500 ($63,495)
=================
Contracts Unrealized Loss
------------------- -----------------
FUTURES CONTRACTS SOLD
S&P 500 Future Contract Expiring March 1998
(Underlying Face Amount at Market Value $979,100) 4 ($13,828)
=================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
OTC Subaccount
SCHEDULE OF INVESTMENTS
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
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
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
<FN>
* Non-Income Producing Securities
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
OTC Subaccount
SCHEDULE OF INVESTMENTS (continued)
================================================================================================================================
December 31, 1997
================================================================================================================================
Unaudited
Market
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
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
------------
Market
Contracts Value
------------- ------------
OPTIONS PURCHASED 0.2% 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
------------
Face Amount
-------------
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
============
============================================================================================================================
Market
Contracts Value
------------- ------------
WRITTEN OPTIONS CONTRACTS Put Options On:
NASDAQ 100 Call Option Contract Expiring January 1998 at 990
(Proceeds $7,994) 2 $4,200
============
<FN>
* Non-Income Producing Securities
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
Precious Metals Subaccount
SCHEDULE OF INVESTMENTS
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
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
-------------
Market
Face Amount Value
------------ -------------
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
=============
<FN>
* Non-Income Producing Securities
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
U.S. Government Bond Subaccount
SCHEDULE OF INVESTMENTS
=============================================================================================================================
December 31, 1997
=============================================================================================================================
Unaudited
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
---------------
Market
Contracts Value
-------------- ---------------
OPTIONS PURCHASED 9.2% Call Options On:
U. S. Treasury Bond Futures Contract Expiring March 1998 at 100
(Cost $77,632) 4 81,875
---------------
Face Amount
--------------
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>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
Juno Subaccount
SCHEDULE OF INVESTMENTS
==================================================================================================================================
December 31, 1997
==================================================================================================================================
Unaudited
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>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
Money Market Subaccount
SCHEDULE OF INVESTMENTS
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
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>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
STATEMENT OF ASSETS AND LIABILITIES
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
Money Market
Nova Subaccount Ursa Subaccount Subaccount
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
ASSETS
Securities at Value -- See
Accompanying Schedules $9,929,193 $1,560,137 $17,605,331
Receivable for Securities Sold 0 0 0
Receivable from Advisor 0 0 3,505
Investment Income Receivable 4,829 282 3,179
Cash in Custodian Bank 168 27,564 5,803
Cash on Deposit with Broker 376,875 1,370,849 0
Receivable for Units Purchased 235,039 0 620,308
Receivable - Short Sales Open 0 1,829,224 0
Unamortized Organization Costs 102,062 102,062 102,062
Prepaid Expenses 0 0 165
Other Assets 0 650 0
-------------------- --------------------- ---------------------
Total Assets 10,648,166 4,890,768 18,340,353
-------------------- --------------------- ---------------------
LIABILITIES
Short Sale at Market 0 1,892,719 0
Payable for Units Redeemed 49,937 0 235,014
Organizational Fee Payable to Advisor 105,883 104,298 109,201
Amounts due to GARCO 38,935 13,934 92,766
Other Liabilities 5,375 973 0
-------------------- --------------------- ---------------------
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>
<PAGE>
<TABLE>
<CAPTION>
Rydex Advisor Variable Annuity
STATEMENT OF ASSETS AND LIABILITIES
=================================================================================================================================
December 31, 1997
=================================================================================================================================
Unaudited
Precious U.S.
OTC Metals Government Juno
Subaccount Subaccount Bond Subaccount Subaccount
-------------------- -------------------- ------------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Securities at Value -- See
Accompanying Schedules $2,450,706 $516,663 $884,508 $3,739
Receivable for Securities Sold 2,522 0 0 0
Receivable from Advisor 5,893 4,686 3,328 0
Investment Income Receivable 657 330 6,821 1
Cash in Custodian Bank 5,822 0 0 0
Cash on Deposit with Broker 15,010 0 0 0
Unamortized Organization Costs 102,062 102,136 102,062 102,126
Other Assets 0 78 0 0
--------------- -------------------- ---------------------- ----------------
Total Assets 2,582,672 623,893 996,719 105,866
--------------- -------------------- ---------------------- ----------------
LIABILITIES
Written Options at Market Value 4,200 0 0 0
Liability for Units Redeemed 90,730 0 0 0
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 0 336 50 222
--------------- -------------------- ---------------------- ----------------
Total Liabilities 215,267 105,983 104,700 105,866
--------------- -------------------- ---------------------- ----------------
NET ASSETS $2,367,405 $517,910 $892,019 $0.00
=============== ==================== ====================== ================
Units Outstanding 222,217 73,827 75,493 0.00
=============== ==================== ====================== ===============
Unit Value $10.65 $7.02 $11.82 $0.00
====== ===== ====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
=================================================================================================================================
Period Ended December 31, 1997
=================================================================================================================================
Unaudited
Money
Nova Ursa Market
Subaccount Subaccount Subaccount
--------------- ----------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $91,346 $25,037 $367,414
Dividends 11,944 0.00 0.00
--------------- ----------------- ---------------
Total Income 103,290 25,037 367,414
--------------- ----------------- ---------------
EXPENSES
Advisory Fees 20,858 8,957 33,131
Transfer Agent 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 25,410 (3,330) 221,638
--------------- ---------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net Realized Gain (Loss) on:
Investment Securities 122,727 (180,926) 0.00
Futures Contracts (10,350) 14,864 0.00
Securities Sold Short 0.00 (88,459) 0.00
--------------- ----------------- ---------------
Total Net Realized Gain (Loss) 112,377 (254,521) 0.00
Net Change in Unrealized Appreciation (Depreciation)
On Investments, Options and Futures Contracts 198,918 (77,323) 0.00
--------------- ----------------- ---------------
Net Gain (Loss) on Investments 311,295 (331,844) 0.00
--------------- ----------------- ---------------
Net Increase (Decrease) in Net Assets from Operations $336,705 ($335,174) $221,638
=============== ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
=================================================================================================================================
Period Ended December 31, 1997
=================================================================================================================================
Unaudited
U.S.
Precious Government
OTC Metals Bond Juno
Subaccount Subaccount Subaccount Subaccount
----------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $19,099 $430 $9,670 $13,970
Dividends 803 1,116 0.00 0.00
----------------- ----------------- ----------- -----------
Total Income 19,902 1,546 9,670 13,970
----------------- ----------------- ----------- -----------
EXPENSES
Advisory Fees 9,458 1,912 793 2,375
Transfer Agent 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 7,633 4,760 7,178
Audit Fees 9,296 2,070 1,291 1,947
Miscellaneous 4,876 (1,885) (1,105) (759)
----------------- ------------------------------- -----------
Total Expenses 114,300 24,853 14,963 24,568
Less Expenses Waived and Reimbursed by Investment Advisor 79,023 17,722 11,151 13,843
----------------- ------------------------------- -----------
Net Expenses 35,277 7,131 3,812 10,725
----------------- ------------------------------- -----------
NET INVESTMENT INCOME (15,375) (5,585) 5,858 3,245
----------------- ------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss) on:`
Investment Securities (117,977) (365,727) 14,916 (8,202)
Written Options 36,474 0 0 0
Futures Contracts 0 0 0 (15,207)
----------------- ----------------- ----------- -----------
Total Net Realized Gain (Loss) (81,503) (365,727) 14,916 (23,409)
Net Change in Unrealized Appreciation/(Depreciation)
on Investments, Options and Futures Contracts (105,801) 39,904 16,633 0.00
----------------- ----------------- ----------- -----------
(187,304) (325,823) 31,549 (23,409)
================= ================= =========== ===========
Net Increase (Decrease) in Net Assets from Operations ($202,679) ($331,408) $37,407 ($20,164)
================= ================= =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
================================================================================================================================
================================================================================================================================
Unaudited
Nova Subaccount Ursa Subaccount
Period Ended Period Ended
December 31,1997* December 31,1997*
----------------- -----------------
<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 0.00 0.00
------------------------- -----------------------
NET ASSETS-End of Period $10,448,036 $2,878,844
========================= =======================
<FN>
* Commencement Of Operations: May 7,1997- Nova Subaccount and Ursa Subaccount
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
===============================================================================================================================
===============================================================================================================================
Unaudited
Precious Metals
OTC Subaccount Subaccount
Period Ended Period Ended
December 31,1997* December 31,1997*
--------------- -----------------
<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 0.00 0.00
------------------------- -----------------------
NET ASSETS-End of Period $2,367,405 $517,910
========================= =======================
<FN>
* Commencement Of Operations: May 7,1997-OTC Subaccount, May 30,1997-Precious
Metals Subaccount
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
============================================================================================================================
============================================================================================================================
Unaudited
U.S. Government Juno
Bond Subaccount Subaccount
Period Ended Period Ended
December 31,1997* December 31,1997*
------------------------- -----------------------
<S> <C> <C>
Changes from Operations
Net Investment Income (Loss) $5,858 $3,245
Net Realized Gain (Loss) on Investments 14,916 (23,409)
Net Change in Unrealized Appreciation
(Depreciation) of Investments 16,633 0.00
------------------------- -----------------------
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 0.00
------------------------- -----------------------
NET ASSETS-Beginning of Period 0.00 0.00
------------------------- -----------------------
NET ASSETS-End of Period $892,019 $0
========================= =======================
<FN>
* Commencement Of Operations: May 29,1997-U.S. Government Bond Subaccount,
May 7, 1997-Juno Subaccount
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
============================================================================================================
============================================================================================================
Unaudited
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 0.00
Net Change in Unrealized Appreciation
(Depreciation) of Investments 0.00
-------------------------
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 0.00
-------------------------
NET ASSETS-End of Period $17,903,372
=========================
<FN>
* Commencement Of Operations: January 13,1997- Money Market Subaccount
</FN>
</TABLE>
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
PART C: OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) Financial Statements:
(1) Unaudited Financial Statements of the Registrant, the Rydex Advisor
Variable Annuity Account, for the period from May 7, 1997, the date
that the Registrant commenced operations, through December 31, 1997.5/
(2) Audited Financial Statements of the Insurance Company, Great American
Reserve Insurance Company, for the fiscal year ended December 31,
1996.5/
(3) Unaudited Financial Statements of the Insurance Company, Great American
Reserve Insurance Company, for the nine-month period ended September
30, 1997.5/
(b) Exhibits:
(1) Resolutions of the Executive Committee of the Board of Directors of
Great American Reserve Insurance Company.1/
(2) Separate Account Rules for the Rydex Advisor Variable Annuity
Account.2/
(3) Custodian Agreement Between the Rydex Advisor Variable Annuity Account
and Boston Safe Deposit and Trust Company.4/
(4) Investment Advisory Agreement Between the Rydex Advisor Variable
Annuity Account and PADCO Advisors II, Inc.4/
(5)(a) Underwriting Agreement Among Great American Reserve Insurance Company,
the Rydex Advisor Variable Annuity Account, and PADCO Financial
Services, Inc.4/
(5)(b) Form of Group Selling Agreement Among Great American Reserve Insurance
Company, PADCO Financial Services, Inc., Broker, and Insurance Agent.3/
(6) Form of Variable Annuity Contract Endorsement (regarding the Death
Benefit).4/
(7) Form of Applications for Variable Annuity Contract.4/
1/ Incorporated herein by reference to initial Registration Statement,
filed on May 2, 1996 (CIK No.
0001013169; Accession No. 0000906287-96-000070).
2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to
this Registration Statement, filed on September 27, 1996.
3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 to
this Registration Statement, filed on October 31, 1996.
4/ Incorporated herein by reference to Post-Effective Amendment No. 1 to
this Registration Statement, filed on September 24, 1997.
5/ Filed herewith.
C-1
<PAGE>
Item 28. Financial Statements and Exhibits (Continued)
(8) Certificate of Incorporation and Bylaws of Great American Reserve
Insurance Company.1/
(9) Not Applicable.
(10) Not Applicable.
(11)(a) Subaccount Administration Agreement Between the Rydex Advisor Variable
Annuity Account and PADCO Service Company, Inc.4/
(11)(b) Accounting Services Agreement Between the Rydex Advisor Variable
Annuity Account and PADCO Service Company, Inc.4/
(11)(c) Fidelity Bond Allocation Agreement Among the Rydex Advisor Variable
Annuity Account, PADCO Advisors II, Inc., Rydex Series Trust, PADCO
Advisors, Inc., and PADCO Service Company, Inc.4/
(11)(d) Joint Account Agreement Between the Rydex Advisor Variable Annuity
Account and PADCO Advisors II, Inc.4/
(12) Opinion of Great American Reserve Insurance Company Counsel.2/
(13)(a) Consent of Coopers & Lybrand LLP.5/
(13)(b) Consent of Jorden Burt Berenson & Johnson LLP.5/
(14) Not Applicable.
(15) Not Applicable.
(16) Schedules of Performance Quotations for the Rydex Subaccounts of the
Rydex Advisor Variable Annuity Account.4/
(17) Financial Data Schedules for Registrant.5/
1/ Incorporated herein by reference to initial Registration Statement,
filed on May 2, 1996 (CIK No. 0001013169; Accession No.
0000906287-96-000070).
2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to
this Registration Statement, filed on September 27, 1996.
3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 to
this Registration Statement, filed on October 31, 1996.
4/ Incorporated herein by reference to Post-Effective Amendment No. 1 to
this Registration Statement, filed on September 24, 1997.
5/ Filed herewith.
C-2
<PAGE>
Item 29. Directors and Officers of the Insurance Company
The following table sets forth certain information regarding the executive
officers of Great American Reserve who are engaged directly or indirectly in
activities relating to the Separate Account or the Contracts. Their principal
business address is 11815 North Pennsylvania Street, Carmel, Indiana 46032.
<TABLE>
<CAPTION>
Positions and Offices with
Name Great American Reserve
<S> <C>
Stephen C. Hilbert Chairman and Director
Donald F. Gongaware President, Chief Executive Officer and Director
Rollin M. Dick Chief Financial Officer and Director
James S. Adams Chief Accounting Officer
Ngaire E. Cuneo Director
</TABLE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant
The following information concerns those companies that may be deemed to be
controlled by or under common control with Great American Reserve Insurance
Company. Conseco, Inc. owns 100% of each of the companies listed below, unless
indicated otherwise:
Conseco, Inc.
Conseco Capital Management, Inc.
Conseco Private Capital Group, Inc.
Conseco Global Investments, Inc.
Conseco Risk Management, Inc.
Wells & Company
CRM Acquisition Company
Wellsco, Inc.
Conseco Mortgage Capital, Inc.
Lincoln American Life Insurance Company
Marketing Distribution Systems Consulting Group, Inc.
MDS Securities Incorporated
BankMark School of Business
Investment Services Center of Delaware, Inc.
Bankmark, Inc.
Community Insurance Agency, Inc. (NH)
InveStar Insurance Agency, Inc. (IN)
InveStar Insurance Agency, Inc. (OH)
Marketing Distribution Systems, Inc.
MDS of New Jersey, Inc.
C-3
<PAGE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant (Continued)
Investment & Insurance Services, Inc. (CT)
Community Insurance Agency, Inc. (MA)
CIHC, Incorporated
Conseco L.L.C.
Conseco Services, L.L.C.
Conseco Distribution Systems, L.L.C.
NACT, Inc.
Bankers National Life Insurance Company
National Fidelity Life Insurance Company
K.F. Agency Inc.
Bankers Life Insurance Company of Illinois
Bankers Life and Casualty Company
Certified Life Insurance Company
Jefferson National Life Insurance Company of Texas
Beneficial Standard Life Insurance Company
Great American Reserve Insurance Company
American Travellers Insurance Services Company, Inc.
American Travellers Life Insurance Company
American Travellers Insurance Company of New York
United General Life Insurance Company
TLSD, Inc.
THD, Inc.
TLIC Life Insurance Company
Transport Life Insurance Company
Continental Life Insurance Company
Capitol American Financial Corporation
Capitol Insurance Company of Ohio
Capital American Life Insurance Company
Capitol National Life Insurance Company
Frontier National Life Insurance Company
Conseco Equity Sales, Inc.
CNC Real Estate, Inc.
Conseco Entertainment, Inc.
Conseco Entertainment, L.L.C.
Conseco HPLP, L.L.C.
Conseco Partnership Management, Inc.
Conseco Capital Partners II, L.P.
American Life Holdings, Inc.
American Life Holding Company
American Life and Casualty Marketing Division Co.
American Life and Casualty Insurance Company
Vulcan Life Insurance Company*
C-4
<PAGE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant (Continued)
Life Partners Group, Inc.
Partners Risk Management Company
Eagles' National Management Company
Wabash Life Insurance Company
Travel Partners Group, Inc.
Independent Processing Services, Inc.
Stratford Capital Group, Inc.
Massachusetts General Life Insurance Company
Philadelphia Life Insurance Company
Lamar Life Insurance Company
Conseco Financial Services, Inc.
InvestCo, Inc.
* Conseco, Inc. owns 98% of Vulcan Life Insurance Company's voting securities.
C-5
<PAGE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant (Continued)
The following persons may be deemed to be directly or indirectly under the
common control with the Registrant, a managed separate account organized under
the laws of the State of Texas:
<TABLE>
<CAPTION>
Percentage of Voting
Securities Owned and/or
State of Organization Controlled By the
and Relationship Controlling Person or
(If Any) to Other Basis of
Company the Registrant Common Control
- ----------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
PADCO Advisors II, Inc. a Maryland corporation and 100% of the voting securities of
("PADCO II") the Registrant's investment PADCO II are owned by Albert P.
adviser Viragh, Jr., the Chairman of the
Board of Directors, the President,
and the Treasurer of PADCO II
PADCO Service a Maryland corporation, a 100% of the voting securities of the
Company, registered transfer agent, and Servicer are owned by Albert P.
Inc. (the "Servicer") the Registrant's shareholder Viragh, Jr., the Chairman of the
and transfer agent servicer Board of Directors, the President,
and the Treasurer of the Servicer
PADCO Financial a Maryland corporation, a 100% of the voting securities of the
Services, Inc. (the registered broker-dealer, and Distributor are owned by Albert P.
"Distributor") the distributor of the shares of Viragh, Jr., the Chairman of the
The Rydex Institutional Money Board of Directors, the President,
Market Fund and The Rydex and the Treasurer of the Distributor
High Yield Fund, each a
series of the Registrant
PADCO Advisors, Inc. a Maryland corporation and a 80% of the voting securities of
("PADCO I") registered investment adviser PADCO I are owned by Albert P.
Viragh, Jr., the Chairman of the
Board of Directors, the President,
and the Treasurer of PADCO I, and
100% of the voting securities are
controlled by Albert P. Viragh, Jr.
Rydex Series Trust a Delaware business trust the investment advisers for the Trust
(the "Trust") registered as an open-end and the Registrant are under the
management investment common control of Albert P. Viragh,
company and advised by Jr., the Chairman of the Board of
PADCO I Trustees, President, and Treasurer
of the Registrant
</TABLE>
C-6
<PAGE>
Item 31. Number of Contract Owners
As of December 31, 1997, there were 415 Contract Owners of variable annuity
contracts offered by the Rydex Advisor Variable Annuity Account.
Item 32. Indemnification
The Board of Managers of the Separate Account is indemnified by Great American
Reserve against claims and liabilities to which such person may become subject
by reason of having been a member of such Board or by reason of any action
alleged to have been taken or omitted by him as such member, and the member
shall be indemnified for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability; however, no indemnification
shall be made in connection with any claim or liability unless such person (i)
conducted himself in good faith, (ii) in the case of conduct in his official
capacity as a member of the Board of Directors, reasonably believed that his
conduct was at least not opposed to the best interests of the Separate Account,
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to members of the Board of
Managers, officers, and controlling persons of the Registrant pursuant to the
provisions described under "Indemnification" or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the Registrant of expenses incurred or
paid by a member of the Board of Managers, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such member of the Board of Managers, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 33. Business and Other Connections of Investment Adviser
Each of the directors of the Rydex Advisor Variable Annuity Account's investment
adviser, PADCO Advisors II, Inc. ("PADCO"), Albert P. Viragh, Jr., the Chairman
of the Board of Directors, President, and Treasurer of PADCO, and Amanda C.
Viragh, the Secretary of PADCO, is an employee of PADCO at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852. Albert P. Viragh, Jr. also has
served (and continues to serve) as: (i) the Chairman of the Board of Managers
and the President of the Rydex Advisor Variable Annuity Account since the Rydex
Advisor Variable Annuity Account's establishment as a separate account of Great
American Reserve Insurance Company on April 15, 1996; (ii) the Chairman of the
Board of Trustees and the President of Rydex Series Trust (the "Trust"), an
open-end management investment company, since the Trust's organization as a
Delaware business trust on March 9, 1993; (iii) the Chairman of the Board of
Directors, the President, and the Treasurer of PADCO Service Company, Inc. (the
"Servicer"), the Rydex Advisor Variable Annuity Account's asset allocation
administrative servicer and Contract Owner servicer, and the Trust's transfer
agent, since the incorporation of the Servicer in the State of Maryland on
October 6, 1993; (iv) the Chairman of the Board of Directors, the President, and
the Treasurer of PADCO Advisors, Inc. ("PADCO I"), a registered investment
adviser and the Trust's investment adviser, since the incorporation of PADCO I
in the State of Maryland on February 5, 1993; and (v) the Chairman of the Board
of Directors, the President, and the Treasurer of PADCO Financial Services, Inc.
(the "Distributor"), the Rydex Advisor Variable Annuity Account's principal
underwriter and the distributor of the shares of the Rydex High Yield Fund and
the Rydex Institutional Money Market Fund, each a series of the Trust, since the
incorporation of the Distributor in the State of Maryland on March 21, 1996.
Amanda C. Viragh also has served (and continues to serve) as the Secretary of
the Servicer and PADCO I, and as the Assistant Treasurer of the Servicer.
C-7
<PAGE>
Item 34. Principal Underwriters
(a) PADCO Financial Services, Inc. acts as principal underwriter for (i)
the Rydex Advisor Variable Annuity Account, and (ii) the Rydex
Institutional Money Market Fund and Rydex High Yield Fund, each a
series of Rydex Series Trust, a registered investment company advised
by PADCO I, but does not currently serve as the principal underwriter
for the securities of any other investment company.
(b) The following table sets forth certain information regarding directors
and officers of PADCO Financial Services, Inc. The principal business
address of these directors and officers is 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
<TABLE>
<CAPTION>
Positions and Offices with Positions and Offices with
Name Underwriter Registrant
------------------------- ------------------------------------ ----------
<S> <C> <C>
Albert P. Viragh, Jr. Director, Chairman of the Board of Chairman of the Board of
Directors, President, Treasurer, Managers and President
Chief Operating Officer, Chief
Financial Officer, and Principal
Amanda C. Viragh Director and Assistant Treasurer none
Robert M. Steele Vice President Secretary and Vice
President
Timothy M. Meyer Vice President and Principal none
Michael P. Byrum Secretary and Principal Assistant Secretary
Sothara Chin Compliance Officer and Principal Compliance Officer
</TABLE>
Item 35. Location of Accounts and Records
The accounts, books, or other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Great American Reserve
Insurance Company, 11815 North Pennsylvania Street, Carmel, Indiana 46032, or
PADCO Advisors II, Inc., 6116 Executive Boulevard, Suite 440, Rockville,
Maryland 20852.
Item 36. Management Services
There are no management-related service contracts other than those discussed in
Parts A and B.
C-8
<PAGE>
Item 37. Undertakings
(a) The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
Contracts may be accepted.
(b) The Registrant hereby undertakes to include, as part of any application
to purchase a Contract, a space that an applicant can check to request
a Statement of Additional Information.
(c) The Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request.
(d) The Registrant is relying on a no-action letter issued to the American
Council of Life Insurance, published November 28, 1988, relating to
Section 403(b)(11) of the Internal Revenue Code and Sections 22(e),
27(c)(1), and 27(d) of the Investment Company Act of 1940. The
Registrant hereby represents that it has complied with the provisions
of paragraphs (1) through (4) of said no-action letter.
(e) Great American Reserve Insurance Company hereby represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses to be
incurred, and the risks assumed by Great American Reserve Insurance
Company.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant's sponsor, GREAT AMERICAN RESERVE
INSURANCE COMPANY, has duly caused this post-effective amendment no. 5 to this
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized, and the seal of the sponsor to be hereunto affixed and
attested, all in the City of Carmel, State of Indiana, on the 4th day of
February, 1998.
GREAT AMERICAN RESERVE
INSURANCE COMPANY
By: /s/ Donald F. Gongaware
Donald F. Gongaware, President
Great American Reserve Insurance Company
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, RYDEX ADVISOR VARIABLE ANNUITY
ACCOUNT, has duly caused this post-effective amendment no. 5 to this
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized in the City of Rockville, State of Maryland, on the 4th day of
February, 1998.
RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT
/s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr., Chairman of the
Board of Managers,
Rydex Advisor Variable Annuity Account
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities with the Registrant
and on the dates indicated on this 4th day of February, 1998.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Albert P. Viragh, Jr. Chairman of the Board of Managers, February 4, 1998
Albert P. Viragh, Jr. Principal Executive Officer, and
President
Corey A. Colehour* Member of the Board of Managers February 4, 1998
Corey A. Colehour
J. Kenneth Dalton* Member of the Board of Managers February 4, 1998
J. Kenneth Dalton
John O. Demaret* Member of the Board of Managers February 4, 1998
John O. Demaret
/s/ L. Gregory Gloeckner Member of the Board of Managers February 4, 1998
L. Gregory Gloeckner
Patrick T. McCarville* Member of the Board of Managers February 4, 1998
Patrick T. McCarville
Roger Somers* Member of the Board of Managers February 4, 1998
Roger Somers
/s/ Carl G. Verboncoeur Vice President and Treasurer February 4, 1998
Carl G. Verboncoeur
*By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
Attorney-in-Fact
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Albert P. Viragh, Jr., and Carl G. Verboncoeur, and each of them, jointly and
severally, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in and all of his or her capacities as a Manager of the Rydex
Advisor Variable Annuity Account (the "Separate Account"), a managed segregated
investment account of the Great American Reserve Insurance Company, a stock
company organized under the laws of the State of Texas, to sign on his or her
behalf any and all Registration Statements (including any post-effective
amendments to Registration Statements) under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, filed by the
Separate Account and any amendments and supplements thereto, and other documents
in connection therewith, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in- fact and agent, and each of them, may
lawfully do or cause to be done by virtue hereof. This power of attorney hereby
revokes any and all powers of attorney previously granted by the undersigned in
connection with the aforementioned matters.
DATED this 22nd day of December, 1997.
/s/Corey A. Colehour
Corey A. Colehour
Member of the Board of Managers
The Rydex Advisor Variable Annuity Account
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Albert P. Viragh, Jr., and Carl G. Verboncoeur, and each of them, jointly and
severally, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in and all of his or her capacities as a Manager of the Rydex
Advisor Variable Annuity Account (the "Separate Account"), a managed segregated
investment account of the Great American Reserve Insurance Company, a stock
company organized under the laws of the State of Texas, to sign on his or her
behalf any and all Registration Statements (including any post-effective
amendments to Registration Statements) under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, filed by the
Separate Account and any amendments and supplements thereto, and other documents
in connection therewith, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in- fact and agent, and each of them, may
lawfully do or cause to be done by virtue hereof. This power of attorney hereby
revokes any and all powers of attorney previously granted by the undersigned in
connection with the aforementioned matters.
DATED this 22nd day of December, 1997.
/s/J. Kenneth Dalton
J. Kenneth Dalton
Member of the Board of Managers
The Rydex Advisor Variable Annuity Account
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Albert P. Viragh, Jr., and Carl G. Verboncoeur, and each of them, jointly and
severally, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in and all of his or her capacities as a Manager of the Rydex
Advisor Variable Annuity Account (the "Separate Account"), a managed segregated
investment account of the Great American Reserve Insurance Company, a stock
company organized under the laws of the State of Texas, to sign on his or her
behalf any and all Registration Statements (including any post-effective
amendments to Registration Statements) under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, filed by the
Separate Account and any amendments and supplements thereto, and other documents
in connection therewith, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in- fact and agent, and each of them, may
lawfully do or cause to be done by virtue hereof. This power of attorney hereby
revokes any and all powers of attorney previously granted by the undersigned in
connection with the aforementioned matters.
DATED this 22nd day of December, 1997.
/s/John O. Demaret
John O. Demaret
Member of the Board of Managers
The Rydex Advisor Variable Annuity Account
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Albert P. Viragh, Jr., and Carl G. Verboncoeur, and each of them, jointly and
severally, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in and all of his or her capacities as a Manager of the Rydex
Advisor Variable Annuity Account (the "Separate Account"), a managed segregated
investment account of the Great American Reserve Insurance Company, a stock
company organized under the laws of the State of Texas, to sign on his or her
behalf any and all Registration Statements (including any post-effective
amendments to Registration Statements) under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, filed by the
Separate Account and any amendments and supplements thereto, and other documents
in connection therewith, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in- fact and agent, and each of them, may
lawfully do or cause to be done by virtue hereof. This power of attorney hereby
revokes any and all powers of attorney previously granted by the undersigned in
connection with the aforementioned matters.
DATED this 22nd day of December, 1997.
/s/Patrick T. McCarville
Patrick T. McCarville
Member of the Board of Managers
The Rydex Advisor Variable Annuity Account
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Albert P. Viragh, Jr., and Carl G. Verboncoeur, and each of them, jointly and
severally, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in and all of his or her capacities as a Manager of the Rydex
Advisor Variable Annuity Account (the "Separate Account"), a managed segregated
investment account of the Great American Reserve Insurance Company, a stock
company organized under the laws of the State of Texas, to sign on his or her
behalf any and all Registration Statements (including any post-effective
amendments to Registration Statements) under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, filed by the
Separate Account and any amendments and supplements thereto, and other documents
in connection therewith, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in- fact and agent, and each of them, may
lawfully do or cause to be done by virtue hereof. This power of attorney hereby
revokes any and all powers of attorney previously granted by the undersigned in
connection with the aforementioned matters.
DATED this 22nd day of December, 1997.
/s/Roger Somers
Roger Somers
Member of the Board of Managers
The Rydex Advisor Variable Annuity Account
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
<PAGE>
Exhibit
Number Description of Exhibit
(13)(a) Consent of Coopers & Lybrand LLP
(13)(b) Consent of Jorden Burt Berenson & Johnson LLP
(17) Financial Data Schedules for Registrant
<PAGE>
EXHIBIT 13(a)
Consent of Coopers & Lybrand LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3
(File Nos. 333-03093 and 811-07615), of our report dated March 14, 1997 on our
audit of the financial statements of Great American Reserve Insurance Company.
We also consent to the reference to our firm under the caption "Independent
Accountants."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
February 5, 1998
<PAGE>
EXHIBIT 13(b)
Consent of Jorden Burt Berenson & Johnson LLP
<PAGE>
February 4, 1998
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Re: The Rydex Advisor Variable Annuity Account
Post-Effective Amendment No. 5 to
Registration Statement on Form N-3
File Nos. 333-03093 and 811-07615
Ladies and Gentlemen:
We hereby consent to the use of our name under the caption "Legal
Matters" in Part I of the Prospectus contained in Post-Effective Amendment No. 5
to the Registration Statement on Form N-3 (Registration Nos. 333-03093 and
811-07615) filed by Great American Reserve Insurance Company and The Rydex
Advisor Variable Annuity Account with the Securities and Exchange Commission on
or around February 5, 1998, under the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended.
Very truly yours,
/s/ Jorden Burt Berenson & Johnson LLP
Jorden Burt Berenson & Johnson LLP
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> THE NOVA SUBACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 9,806,393
<INVESTMENTS-AT-VALUE> 9,929,193
<RECEIVABLES> 239,868
<ASSETS-OTHER> 479,105
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,648,166
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 200,130
<TOTAL-LIABILITIES> 200,130
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,111,331
<SHARES-COMMON-STOCK> 855,862
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 25,410
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 112,377
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 198,918
<NET-ASSETS> 10,448,036
<DIVIDEND-INCOME> 11,944
<INTEREST-INCOME> 91,346
<OTHER-INCOME> 0
<EXPENSES-NET> 77,880
<NET-INVESTMENT-INCOME> 25,410
<REALIZED-GAINS-CURRENT> 112,377
<APPREC-INCREASE-CURRENT> 198,918
<NET-CHANGE-FROM-OPS> 336,705
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,454,734
<NUMBER-OF-SHARES-REDEEMED> 5,598,872
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10,448,036
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 20,858
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<GROSS-EXPENSE> 252,868
<AVERAGE-NET-ASSETS> 4,265,416
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> 2.14
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 12.21
<EXPENSE-RATIO> .028
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> THE URSA SUBACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,560,137
<INVESTMENTS-AT-VALUE> 1,560,137
<RECEIVABLES> 1,829,506
<ASSETS-OTHER> 1,501,125
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,890,768
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,011,924
<TOTAL-LIABILITIES> 2,011,924
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,214,019
<SHARES-COMMON-STOCK> 356,784
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (3,330)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (254,521)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (77,323)
<NET-ASSETS> 2,878,844
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25,037
<OTHER-INCOME> 0
<EXPENSES-NET> 28,367
<NET-INVESTMENT-INCOME> (3,330)
<REALIZED-GAINS-CURRENT> (254,521)
<APPREC-INCREASE-CURRENT> (77,323)
<NET-CHANGE-FROM-OPS> (335,174)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,384,612
<NUMBER-OF-SHARES-REDEEMED> 5,027,828
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,878,844
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,957
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 90,878
<AVERAGE-NET-ASSETS> 1,500,113
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> (1.91)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.07
<EXPENSE-RATIO> .029
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> THE OTC SUBACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,560,301
<INVESTMENTS-AT-VALUE> 2,450,706
<RECEIVABLES> 9,072
<ASSETS-OTHER> 122,894
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,582,672
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 215,267
<TOTAL-LIABILITIES> 215,267
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,570,084
<SHARES-COMMON-STOCK> 222,217
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (15,375)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81,503)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (105,801)
<NET-ASSETS> 2,367,405
<DIVIDEND-INCOME> 803
<INTEREST-INCOME> 19,099
<OTHER-INCOME> 0
<EXPENSES-NET> 35,277
<NET-INVESTMENT-INCOME> (15,375)
<REALIZED-GAINS-CURRENT> (81,503)
<APPREC-INCREASE-CURRENT> (105,801)
<NET-CHANGE-FROM-OPS> (202,679)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,654,828
<NUMBER-OF-SHARES-REDEEMED> 1,432,611
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,367,405
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,458
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 114,300
<AVERAGE-NET-ASSETS> 1,932,566
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.09)
<PER-SHARE-GAIN-APPREC> .74
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> .028
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> THE PRECIOUS METALS SUBACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 476,759
<INVESTMENTS-AT-VALUE> 516,663
<RECEIVABLES> 5,016
<ASSETS-OTHER> 102,214
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 623,893
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,983
<TOTAL-LIABILITIES> 105,983
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 849,318
<SHARES-COMMON-STOCK> 73,827
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (5,585)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (365,727)
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<NAME> THE U.S. GOVERNMENT BOND SUBACCOUNT
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<TABLE> <S> <C>
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<NAME> THE JUNO SUBACCOUNT
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<S> <C>
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<NUMBER> 7
<NAME> THE MONEY MARKET I SUBACCOUNT
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<PAGE>
</TABLE>
