<PAGE>
VARIABLE FUND D PROSPECTUS
MINNESOTA LIFE INSURANCE COMPANY
("MINNESOTA LIFE")
400 Robert Street North
St. Paul, Minnesota 55101-2098
Telephone: 1-800-362-3141
http://www.minnesotamutual.com
This Prospectus describes three contracts: an Individual, Flexible Payment
Variable Annuity contract ("Individual Accumulation Annuity"), a Group
Accumulation Annuity and a Group Deposit Administration contract.
Your contract values are invested in our Variable Fund D. Variable Fund D
invests in shares of Advantus Series Fund, Inc. ("Fund"). You contract's
accumulation value and the amount of each variable annuity payment will vary in
accordance with performance of the Fund investment portfolio(s) you select. You
bear the entire investment risk for any amounts you allocate to those
Portfolios.
This Prospectus includes the information you should know before purchasing a
contract. You should read it and keep it for future reference. A Statement of
Additional Information, bearing the same date, which contains further contract
information, has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus. A copy of the Statement
of Additional Information may be obtained without charge by calling
1-800-362-3141, or by writing us at our office at 400 Robert Street North, St.
Paul, Minnesota 55101-2098. Its Table of Contents may be found at the end of
this Prospectus.
THIS PROSPECTUS IS NOT VALID UNLESS ATTACHED TO A CURRENT
PROSPECTUS OF THE ADVANTUS SERIES FUND, INC.
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 SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus and of the Statement of Additional Information is:
May 1, 2000.
F.16106 Rev.5-2000
<PAGE>
THIS PROSPECTUS IS NOT AN OFFERING IN ANY JURISDICTION IN WHICH
THE OFFERING WOULD BE UNLAWFUL. WE HAVE NOT AUTHORIZED ANY
DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THE PROSPECTUS AND, IF GIVEN OR MADE,
SHOULD NOT BE RELIED UPON.
TABLE OF CONTENTS
DEFINITIONS 1
SYNOPSIS 2
EXPENSE TABLE 5
CONDENSED FINANCIAL INFORMATION AND FINANCIAL STATEMENTS 9
GENERAL DESCRIPTIONS 10
Minnesota Life Insurance Company 10
Variable Fund D 10
Advantus Series Fund, Inc. 11
Additions, Deletions or Substitutions 11
CONTRACT DEDUCTIONS 12
Sales Charges 12
Premium Taxes 12
Investment Management 12
Mortality and Expense Risks 13
Other Expenses 14
DESCRIPTION OF THE CONTRACTS 14
VOTING RIGHTS 18
ANNUITY PERIOD 18
DEATH BENEFITS 22
CREDITING ACCUMULATION UNITS 23
WITHDRAWALS AND SURRENDER 27
DISTRIBUTION 28
FEDERAL TAX STATUS 29
PERFORMANCE DATA 34
STATEMENT OF ADDITIONAL INFORMATION 35
APPENDIX A -- CONDENSED FINANCIAL INFORMATION A-1
APPENDIX B -- TYPES OF QUALIFIED PLANS B-1
<PAGE>
DEFINITIONS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: an accounting device used to determine the value of a
contract before annuity payments begin.
ACCUMULATION VALUE: the sum of the values under a contract in the General
Account and in Variable Fund D.
ANNUITY: a series of payments for life; for life with a minimum number of
payments guaranteed; for the joint lifetime of the annuitant and another person
and thereafter during the lifetime of the survivor; or for a period certain.
ANNUITY UNIT: an accounting device used to determine the amount of annuity
payments.
CODE: the Internal Revenue Code of 1986, as amended.
CONTRACT OWNER: the owner of the contract, which could be the annuitant, his or
her employer, or a trustee acting on behalf of the employer.
CONTRACT YEAR: a period of one year beginning with the contract date or a
contract anniversary.
FIXED ANNUITY: an annuity providing for payments of guaranteed amounts
throughout the payment period.
FUND: the mutual fund or separate investment portfolio within a series mutual
fund which has been designated as an eligible investment for Variable Fund D,
namely, Advantus Series Fund, Inc. and its Portfolios.
GENERAL ACCOUNT: all of our assets other than those in Variable Fund D or in
other separate accounts established by us.
PARTICIPANT: a person for whom an interest is maintained under a group annuity
contract, prior to the time that annuity payments begin.
PLAN: a tax-qualified employer pension, profit-sharing, or annuity purchase
plan under which benefits are to be provided by the variable annuity contracts
described herein.
PURCHASE PAYMENTS: amounts paid to us under a contract.
VALUATION DATE OR VALUATION DAYS: each date on which a Fund Portfolio is
valued.
VARIABLE ANNUITY: an annuity providing for payments varying in amount in
accordance with the investment experience of Variable Fund D.
VARIABLE FUND D: a separate investment account called Variable Fund D, where
the investment experience of its assets is kept separate from our other assets.
This separate account has several sub-accounts.
WE, OUR, US: Minnesota Life Insurance Company.
YOU, YOUR: the Contract Owner.
PAGE 1
<PAGE>
THIS SYNOPSIS CONTAINS A BRIEF SUMMARY OF SOME OF THE IMPORTANT FEATURES OF THE
VARIABLE ANNUITY CONTRACTS DESCRIBED IN THIS PROSPECTUS. THE SUMMARY DOES NOT
PROVIDE A FULL DESCRIPTION OF THE CONTRACTS, WHICH IS PROVIDED ONLY IN THE
PROSPECTUS.
WHAT IS AN ANNUITY?
An annuity is a series of payments by an insurance company to an "annuitant."
These payments may be made for the life of the annuitant; for life with a
minimum number of payments guaranteed; for the joint lifetime of the annuitant
and another person; or for a specified period of time. An annuity with payments
of a guaranteed amount is a fixed annuity. An annuity with payments which vary
with the investment experience of a separate account is a variable annuity.
WHAT TYPE OF CONTRACT IF OFFERED BY THIS PROSPECTUS?
We offer an Individual Accumulation Annuity, Group Accumulation Annuity and a
Group Deposit Administration contract by this prospectus. The contracts are
offered for use in connection with certain retirement plans including:
- employer premium or profit sharing plans qualified under
Section 401(a) or 403(a) of the Internal Revenue Code ("Code");
- H.R. 10 or Keogh Plans;
- annuity purchase plans adopted by public school systems and certain tax
exempt organization pursuant to Section 403(b) of the Code;
- individual retirement annuity plans under Section 408 of the Code; and
- eligible state deferred compensation plans under Section 457 of the Code.
The contracts are combined fixed and variable annuity contracts which provide
for monthly annuity payments. The contracts invest in one or more portfolios of
the Advantus Series Fund, Inc. ("Fund").
ARE THERE PURCHASE PAYMENT LIMITATIONS?
Yes. The minimum purchase payments for the first contract year under a Group
Deposit Administration Contract is $3,000. The minimum periodic purchase payment
under an Individual Accumulation Annuity Contract and as to each participant
under a Group Accumulation Annuity Contract is $10.
Purchase payments received under a contract are allocated either to our General
Account or to Variable Fund D. In the General Account, purchase payments receive
interest and principal guarantees. In Variable Fund D, your purchase payments
are invested in Advantus Series Fund, Inc.
This Prospectus describes only the variable aspects of the contracts, except
where fixed aspects are specifically mentioned. You may look to your contract
language for descriptions of the fixed portion of the contracts.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
Any purchase payments you allocate to Variable Fund D are invested exclusively
in shares of one or more Fund Portfolios. Not all of the Series Fund Portfolios
in existence are available to Variable Fund D. We reserve the right to add,
combine or remove other eligible Funds and Portfolios.
PAGE 2
<PAGE>
THE AVAILABLE PORTFOLIOS OF THE FUND ARE:
Growth Portfolio
Bond Portfolio
Money Market Portfolio
Asset Allocation Portfolio
Mortgage Securities Portfolio
Index 500 Portfolio
Small Company Growth Portfolio
There is no assurance that any Portfolio will meet its objectives. Detailed
information about the investment objectives and policies of the Portfolios can
be found in the current prospectus for each Fund, which are attached to this
Prospectus. You should carefully read each Fund prospectus before purchasing in
the contract.
CAN YOU CHANGE THE PORTFOLIO(S) THAT YOU SELECT?
Yes. You can change your allocation of future purchase payments by giving us
written notice or a telephone call notifying us of the change. Before annuity
payments begin, you may transfer all or a part of your accumulation value among
the Portfolios or between the General Account and the separate accounts. After
annuity payments begin, you may instruct us to transfer amounts held as annuity
reserves among the variable annuity sub-accounts, subject to some restrictions.
Annuity reserves may be transferred only from a variable annuity to a fixed
annuity during the annuity period. There is currently no charge to transfer
among Portfolios, however we reserve the right to impose a charge in the future.
WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACT?
We deduct a daily charge equal to an annual rate of .795% of the net asset value
of Variable Fund D for our mortality and expense risk guarantees. We reserve the
right to increase the charge to 1.40% on an annual rate.
A deferred sales charge of up to 7% of purchase payments may apply if you make
partial withdrawals or surrender your contract within seven or fewer years after
your last purchase payment. A portion of the sales charge may be used to pay
distribution costs. The principal underwriter may pay up to 3.75% of the amount
of purchase payments to broker-dealers who sell the contract.
Deductions for any applicable premium taxes may also be made (currently such
taxes range from 0.0% to 3.5%) depending upon applicable law.
There is a one time contract fee of $200 if you elect a fixed annuity.
The Portfolios pay investment advisory and other expenses. Total expenses of the
Portfolios range from .42% to .95% of average daily net assets of the Portfolios
on an annual basis. To the extent total expense of Growth Portfolio exceeds
.265%, Minnesota Life will make a reimbursement to Variable Fund D contracts.
We reserve the right to assess a $100 fee to cover administrative expenses if
you choose to exchange your contract for another of our variable annuity
contracts.
PAGE 3
<PAGE>
CAN YOU MAKE PARTIAL WITHDRAWALS OR SURRENDER THE CONTRACT?
Yes. You may surrender the contract in whole or in part, subject to any
limitations imposed by the retirement plan or program, before an annuity begins.
Your request for withdrawals must be in writing.
Partial withdrawals are generally subject to the deferred sales charge. In
addition, a penalty tax on the amount of the taxable distribution may be
assessed upon withdrawals from the contract in certain circumstances, including
distributions, made prior to the contract owner's attainment of age 59 1/2.
Once an annuity option has been elected and payments begin, payments will be
made only in accordance with the terms of that option.
DO YOU HAVE A RIGHT TO CANCEL YOUR CONTRACT?
The purchaser of an Individual Accumulation Annuity Contract may revoke the
contract within 10 days after its delivery by returning the contract to us or
your agent. In some states this "free look" period may be longer than 10 days.
For example, California's free look period is 30 days. These rights are subject
to change and may vary among the states.
WHAT IF THE CONTRACT OWNER OR ANNUITANT DIES?
Death benefits, if any, payable under Group Deposit Administration Contracts are
determined by the provisions of the applicable qualified trust or plan. If the
contract owner or participant of an Individual Accumulation Annuity or Group
Accumulation Annuity Contract dies prior to commencement of annuity payments,
death benefits will equal the value of the participant's individual account as
of the valuation date coincident with or next following the date proof of death
is received by us.
If the annuitant dies after annuity payments have begun, we will pay the
beneficiary any death benefit provided by the annuity option selected.
Certain group accumulation annuity contract have been endorsed to provide death
benefits differently from the description above. You should read your contract
and the "Death Benefit" section carefully.
WHAT ANNUITY OPTIONS ARE AVAILABLE?
The annuity options available are:
- a life annuity;
- a life annuity with a period certain of either 120 months, 180 months or
240 months;
- a joint and last survivor annuity and
- a period certain annuity.
Each annuity option may be elected as either a variable annuity or fixed annuity
or a combination of the two. Other annuity options may be available from us on
request.
WHAT VOTING RIGHTS DO YOU HAVE?
Contract owners and annuitants will be able to direct us as to how to vote
shares of the Funds held for their contracts where shareholder approval is
required by law in the affairs of the Funds.
PAGE 4
<PAGE>
EXPENSE TABLE
The tables below are to assist you in understanding the costs and expenses that
you will bear directly or indirectly. The table does not reflect deductions for
any applicable premium taxes which may be made from each purchase payment under
applicable law. The tables show the expenses after expense reimbursement.
The following contract expense information below is intended to illustrate the
expense of a Variable Fund D variable annuity contract. All expenses shown are
rounded to the nearest dollar. The information contained in the tables must be
considered with the narrative information which immediately follows them in this
heading.
INDIVIDUAL ACCUMULATION ANNUITY AND PARTICIPANT
INTERESTS UNDER THE GROUP ANNUITY CONTRACTS
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charges on Purchase Payments (as a 7%
percentage of purchase payments)
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES--GROWTH SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Investment Management Fee Reimbursement (.435)%
Mortality and Expense Risk Fees .795%
Other Expense Reimbursement (.030)%
-------
Total Sub-Account Annual Expenses .330%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Growth
Portfolio)
<TABLE>
<S> <C>
Growth Portfolio
Investment Management Fees .450%
Distribution Expenses .250%
Other Expenses .030%
-------
Total Growth Portfolio Annual Expenses .730%
=======
</TABLE>
EXAMPLE--For contracts using the Growth Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $80 $101 $124 $190
</TABLE>
PAGE 5
<PAGE>
SEPARATE ACCOUNT ANNUAL EXPENSES--BOND SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Bond
Portfolio)
<TABLE>
<S> <C>
Bond Portfolio
Investment Management Fees .300%
Distribution Expenses .250%
Other Expenses .060%
-------
Total Bond Portfolio Annual Expenses .610%
=======
</TABLE>
EXAMPLE--For contracts using the Bond Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $83 $111 $140 $227
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES--MONEY MARKET SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Money Market
Portfolio)
<TABLE>
<S> <C>
Money Market Portfolio
Investment Management Fees .250%
Distribution Expenses .250%
Other Expenses .060%
-------
Total Money Market Portfolio Annual .560%
Expenses
=======
</TABLE>
PAGE 6
<PAGE>
EXAMPLE--For contracts using the Money Market Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $83 $110 $139 $222
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES--ASSET ALLOCATION SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Asset
Allocation Portfolio)
<TABLE>
<S> <C>
Asset Allocation Portfolio
Investment Management Fees .350%
Distribution Expenses .250%
Other Expenses .030%
-------
Total Asset Allocation Portfolio Annual Expense .630%
=======
</TABLE>
EXAMPLE--For contracts using the Asset Allocation Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $83 $112 $142 $229
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES--MORTGAGE SECURITIES SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
PAGE 7
<PAGE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Mortgage
Securities Portfolio)
<TABLE>
<S> <C>
Mortgage Securities Portfolio
Investment Management Fees .300%
Distribution Expenses .250%
Other Expenses .060%
-------
Total Mortgage Securities Portfolio Annual Expenses .610%
=======
</TABLE>
EXAMPLE--For contracts using the Mortgage Securities Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $83 $111 $141 $227
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES--INDEX 500 SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Index 500
Portfolio)
<TABLE>
<S> <C>
Index 500 Portfolio
Investment Management Fees .120%
Distribution Expenses .250%
Other Expenses .050%
-------
Total Index 500 Portfolio Annual Expense .420%
=======
</TABLE>
EXAMPLE--For contracts using the Index 500 Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $82 $106 $132 $207
</TABLE>
PAGE 8
<PAGE>
SEPARATE ACCOUNT ANNUAL EXPENSES--SMALL COMPANY GROWTH SUB-ACCOUNT
(as a percentage of average daily sub-account net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .795%
-------
Total Sub-Account Annual Expenses .795%
=======
</TABLE>
ADVANTUS SERIES FUND, INC. ANNUAL EXPENSES
(as a percentage of Advantus Series Fund average net assets for the Small
Company Portfolio)
<TABLE>
<S> <C>
Small Company Growth Portfolio
Investment Management Fees .650%
Distribution Expenses .250%
Other Expenses .050%
-------
Total Small Company Growth Portfolio Annual Expense .950%
=======
</TABLE>
EXAMPLE--For contracts using the Small Company Growth Portfolio:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end
of the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets $86 $121 $158 $261
</TABLE>
The tables shown above are to assist a contract owner in understanding the costs
and expenses that a contract will bear directly or indirectly. The table does
not reflect deductions for any applicable premium taxes which may be made from
each purchase payment depending upon the applicable law. In addition, Variable
Fund D amounts in the Growth Portfolio are shown after the reimbursement (which
is made to the Separate Account Sub-Account for management fees). For additional
information on this reimbursement, the "Contract Deductions" section.
The previous examples should not be considered a representation of past or
future expenses and actual expenses may be greater or lesser than those shown.
CONDENSED FINANCIAL INFORMATION AND FINANCIAL
STATEMENTS
The financial history of each sub-account may be found in the Appendix entitled
"Condensed Financial Information." The complete financial statements of Variable
Fund D and Minnesota Life Insurance Company are included in the Statement of
Additional Information.
PAGE 9
<PAGE>
(SIDEBAR)
We are a life insurance company.
Variable Fund D is one of our separate accounts.
(END SIDEBAR)
GENERAL DESCRIPTIONS
A. MINNESOTA LIFE INSURANCE COMPANY
We are Minnesota Life Insurance Company ("Minnesota Life"), a life insurance
company organized under the laws of Minnesota. Minnesota Life was formerly known
as The Minnesota Mutual Life Insurance Company ("Minnesota Mutual"), a mutual
life insurance company organized in 1880 under the laws of Minnesota. On
October 1, 1998, a plan of reorganization created a mutual insurance holding
company named Minnesota Mutual Companies, Inc. Minnesota Mutual reorganized as
a stock insurance company subsidiary of the new holding company and took the
name Minnesota Life. Our home office is at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, telephone: (651) 665-3500. We are licensed to do a life
insurance business in all states of the United States (except New York where we
are an authorized reinsurer), the District of Columbia, Canada, Puerto Rico and
Guam.
B. VARIABLE FUND D
We established Variable Fund D on October 16, 1967, in accordance with certain
provisions of Minnesota Insurance Law. Variable Fund D was registered as an
open-end diversified management investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"). The separate account meets the
definition of a separate account under the federal securities laws.
The assets of Variable Fund D are not chargeable with liabilities arising out of
any other business which we may conduct. The investment performance of Variable
Fund D is entirely independent of both the investment performance of our general
account and of any of our separate accounts. All obligations under the contracts
are our general corporate obligations.
At a Special Meeting of contract owners and participants of Variable Fund D held
October 23, 1990, the contract owners and participants approved an Agreement and
Plan of Reorganization whereby Variable Fund D (which was a management
investment company investing primarily in a portfolio of equity securities,
mainly common stocks) transferred all of its assets to the Growth Portfolio of
the Advantus Series Fund, Inc. in exchange for shares of that Portfolio.
Variable Fund D was reconstituted and registered as a unit investment trust
under the 1940 Act. As part of that Reorganization it now consists of
sub-accounts, each investing its assets solely in the shares of one of the
Series Fund Portfolios. The Series Fund has a number of Portfolios which are not
available to Variable Fund D. Registration with the Securities and Exchange
Commission (the "Commission") does not involve supervision of the management or
investment policies or practices of Variable Fund D by the Commission.
PAGE 10
<PAGE>
(SIDEBAR)
Each of the sub-accounts of Variable Fund D invests in a different Fund
Portfolio.
We may change the Portfolios offered under the contract.
(END SIDEBAR)
C. ADVANTUS SERIES FUND, INC.
The Advantus Series Fund, Inc. ("Series Fund") is a mutual fund advised by
Advantus Capital. The Series Fund issues its shares only to us and our separate
accounts. It may be offered to separate accounts of insurance companies
affiliated with us in the future. Advantus Capital is a wholly-owned subsidiary
of Minnesota Life. Advantus Capital has retained Credit Suisse Asset Management,
LLC to sub-advise the Small Company Growth Portfolio.
A prospectus for the Series Fund is attached to this prospectus. You should
carefully read the prospectuses before investing in the Contract.
D. ADDITIONS, DELETIONS OR SUBSTITUTIONS
We retain the right, subject to any applicable law, to make substitutions with
respect to the investments of the sub-accounts of Variable Fund D. If investment
in a fund should no longer be possible or if we determine it becomes
inappropriate for contracts of this class, we may substitute another fund for a
sub-account. Substitution may be with respect to existing accumulation values,
future purchase payments and future annuity payments.
We may also establish additional sub-accounts in Variable Fund D and we reserve
the right to add, combine or remove any sub-accounts of Variable Fund D. Each
additional sub-account may be established when, in our sole discretion,
marketing, tax, investment or other conditions warrant such action. We will use
similar considerations in determining whether to eliminate one or more of the
sub-accounts of Variable Fund D. The addition of any investment option will be
made available to existing contract owners on such basis as may be determined by
us.
We also reserve the right, when permitted by law, to de-register Variable
Fund D under the Investment Company Act of 1940, to restrict or eliminate any
voting rights of the contract owners, and to combine Variable Fund D with one or
more of our other separate accounts.
Shares of the Funds are also sold to some of our other separate accounts, which
are used to receive and invest purchase payments paid under our variable life
policies. It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts and variable annuity separate accounts
to invest in a Portfolio simultaneously. Although neither we nor the
Series Fund currently foresee any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the
Series Funds' Board of Directors intend to monitor events in order to identify
any material conflicts between policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Possible
actions could include the sale of Fund shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example:
- changes in state insurance laws,
- changes in federal income tax laws,
PAGE 11
<PAGE>
(SIDEBAR)
A sales charge may apply.
(END SIDEBAR)
- changes in the investment management of any of the Portfolios of the
Fund, or
- differences in voting instructions between those give by policy owners
and those give by contract owners.
CONTRACT DEDUCTIONS
The Contract has several types of charges, which are discussed below.
SALES CHARGES
The sales charge is equal to 7% of purchase payments on all contracts. For the
treatment of certain Group Accumulation Annuity Contracts, see the section
"Participation".
To the extent that sales charges are insufficient to recover sales expenses,
Minnesota Life will pay sales expenses from its other assets or surplus. These
assets may include proceeds from the mortality and expense risk charge described
below.
We will waive the sales charge on amounts withdrawn because of an excess
contribution to a tax-qualified contract including IRAs and tax-sheltered
annuities.
Ascend Financial Services, Inc. acts as principal underwriter and performs all
sales functions relative to the contracts, for which a certain amount is
deducted from purchase payments received under the contracts.
We perform all administrative functions relative to the contracts. We bear all
expenses associated with the sale and administration of the contracts, such as
sales commissions, fees and expenses of the Committee, salaries, rent, postage,
telephone, travel, office equipment and stationery, and legal, actuarial and
auditing fees.
PREMIUM TAXES
Deductions for any applicable premium taxes may be made from each purchase
payment (currently such premium taxes range from 0% to 3.5%) depending upon the
applicable law.
INVESTMENT MANAGEMENT
All costs of operating Variable Fund D as an investment management company
originally were covered by an investment management fee of .265% of contract or
account values on an annual basis. As Variable Fund D is now a unit investment
trust rather than a managed investment company, that investment management fee
no longer will be paid. However, contract values that are allocated to sub-
accounts of Variable Fund D will be invested in Series Fund Portfolios that do
pay investment advisory fees (at a rate of .40% on an annual basis for the Index
500 Portfolio, .75% for the Small Company Growth Portfolio and .50% for each of
the
PAGE 12
<PAGE>
(SIDEBAR)
The mortality and expense risk charge is .795%.
(END SIDEBAR)
five other available Portfolios) and do incur other operating expenses. Prior to
May 1, 2000 those other operating expenses were voluntarily subsidized by us to
the extent that the expenses exceed .15% on an annual basis for any Portfolio.
After May 1, 2000, Advantus Capital has agreed to voluntarily subsidize expenses
exceeding .15% on an annual basis for these portfolios. Advantus Capital and
Minnesota Life are under no obligation to continue this practice.
To ensure that Contract Owners and Participants continue to get at least what
they originally expected under their contracts, we have agreed that, each
valuation period, in calculating the net investment factor for the Growth
Sub-Account of Variable Fund D, we will make adjustments that have the effect of
reimbursing the excess of any expenses indirectly incurred as a result of the
investment advisory fee paid and the operating expenses incurred by the Growth
Portfolio of the Series Fund over the former .265% investment management fee.
Accordingly, to the extent that the contract or account values continue to be
allocated to the sub-account that, in effect, continues the Variable Fund D
investment objective when it was operating as a management investment company,
there will be no change in the level of charges for the provision of investment
management services. In calculating the net investment factor for the other
sub-accounts of Variable Fund D, we will not make adjustments or reimburse the
excess of the investment advisory fees and the operating expenses incurred
through indirect investment in the Series Fund Portfolios and the former .265%
investment management fee. To the extent that a Contract Owner or Participant
chose to take advantage of the Variable Fund D sub-accounts other than the
Growth Sub-Account, you will incur additional expenses.
MORTALITY AND EXPENSE RISKS
We assume the mortality risk under the contract by our obligation to continue to
make monthly annuity payments, determined in accordance with the annuity rate
tables and other provisions contained in the contracts to each annuitant
regardless of how long he or she lives and regardless of how long all annuitants
as a group live. Neither an annuitant's own longevity nor an improvement in life
expectancy generally will have an adverse effect on the monthly annuity payments
an annuitant will receive under the contract.
We assume an expense risk by assuming the risk that deductions provided for in
the contracts for expenses may be insufficient to cover the actual expenses
incurred.
We currently make a deduction from Variable Fund D at the rate of .1325% per
annum for the mortality risk and .6625% per annum for the expense risk. These
deductions may be increased or decreased by resolution of our Board but not more
often than annually, and in no event will the combined deductions exceed the
amount of the present deduction of .795% per annum. If the sum of such
PAGE 13
<PAGE>
(SIDEBAR)
You can instruct us how to vote Fund shares.
(END SIDEBAR)
deductions is insufficient to cover the risks assumed, the loss will fall on us.
Conversely, if the deductions provide more than sufficient, any excess will be
profited to us.
Mortality and expense risk charges continue to be deducted throughout the
annuity period, including Annuity Option 4, under which there is no mortality
risk to us.
OTHER EXPENSES
Variable Fund D has no expenses which are not covered by the deductions listed
above. The underlying Portfolios however, also bear certain expenses. See the
Advantus Series Fund, Inc. prospectus for more information.
Minnesota Life also reserves the right to assess a fee of up to $100 to cover
administrative costs where you exchange this contract for another of our
variable contracts.
DESCRIPTION OF THE CONTRACTS
The following is intended to provide a general description of contract terms. In
the event that there are questions concerning the contracts which are not
discussed or should you desire additional information, then inquiries may be
addressed to us at: Minnesota Mutual Center, 400 Robert Street North, St. Paul,
Minnesota 55101-2098.
1. Types of Contracts
We continuously offer three types of variable annuity contracts pursuant to this
Prospectus:
- Individual Accumulation Annuity. This type of contract may be used in
connection with all types of qualified plans, state deferred compensation
plans or with individual retirement annuities adopted by or on behalf of
individuals pursuant to Section 408 of the Code. The contract provides
for a variable annuity or a fixed dollar annuity to begin at some future
date, the purchase payments for the contract to be paid prior to the
annuity commencement date in a series of payments flexible in respect to
the date and amount of payment. The amount of the first monthly annuity
payment at retirement is determined by the value of the contract at that
time.
- Group Accumulation Annuity. This type of contract may be used in
connection with any type of qualified plan and with state deferred
compensation plans. Purchase payments on behalf of each participant are
determined by a formula specified in the plan. Individual accounts are
maintained for each participant. The contract provides for a variable
annuity or a fixed dollar annuity to begin at a participant's annuity
PAGE 14
<PAGE>
(SIDEBAR)
We issue the contract to you and you select the annuitant.
You can cancel your contract within 10 days of receiving it and we will refund
you the greater of your surrender value or your purchase payments.
(END SIDEBAR)
commencement date. The amount of the first monthly annuity payment at
retirement is determined by the value of a participant's account at that
time.
- Under some circumstances group contract owners may limit purchase
payments, allocations and transfers only to a limited number of sub-
accounts. In those cases, not all of the sub-accounts offered under the
contracts will be available to participants in those groups.
- Group Deposit Administration. This type of contract is used in connection
with noncontributory pension plans qualified under Section 401(a) or
403(a) of the Code, and is designed to provide maximum flexibility to the
contract owner in funding the benefits promised by the plan. No
allocation of purchase payments is made for individual participants, and
individual accounts are not maintained. The amount of a participant's
first monthly annuity payment is determined by the terms of the plan.
Annuity payments to a participant may be provided on either a fixed
dollar or a variable annuity basis. The contract owner has wide latitude
in determining the appropriate level of purchase payments, including
assumptions with respect to discounts for mortality, turnover, and an
assumed rate of investment return.
2. Issuance of Contracts
The contracts are issued to the contract owner named in the application. The
contract owner may be the annuitant or someone else. Once the contract owner has
been named in the application the ownership of the contract may not be changed.
3. Right of Revocation
The purchaser of an Individual Accumulation Annuity Contract may revoke the
contract within ten days after its delivery, for any reason, on notice to
Minnesota Life at 400 Robert Street North, St. Paul, Minnesota, of his or her
intention to revoke. If the contract is revoked and returned, we will refund to
the purchaser the greater of the total amount of purchase payments or the
surrender value of the contract, adjusted in the latter case for deductions and
sales charges.
In some states, the free look period may be extended. In California, the free
look period is extended to thirty days' time. These rights are subject to
change, and may vary among other states.
4. Annuity Payments
Variable annuity payments are determined on the basis of:
- the mortality table specified in the contract, which reflects the age of
the annuitant,
- the type of annuity payment option selected, and
- the investment performance of Variable Fund D.
PAGE 15
<PAGE>
(SIDEBAR)
There may be limitations on purchase payments.
(END SIDEBAR)
The amount of the variable annuity payments will not be affected by adverse
mortality experience or by an increase in our expenses in excess of the expense
deductions provided for in the contract. The annuitant will receive the value of
a fixed number of annuity units each month. The value of such units and thus the
amounts of the monthly annuity payments will, however, reflect investment gains
and losses and investment income of Variable Fund D, and thus the annuity
payments will vary with the investment experience of the assets of Variable
Fund D.
5. Modification of the Contract
The contract may be modified at any time by written agreement between you and
us. No such modification will adversely effect the rights of a participant under
the contract unless the modification is made to comply with a law or government
regulation.
6. Assignment
The contract may not be assigned, sold, transferred, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose. To the maximum extent permitted by law, benefits payable
under the contract shall be exempt from the claims of creditors.
7. Limitations on Purchase Payments
The minimum purchase payment for the first contract year under a Group Deposit
Administration Contract is $3,000.
The minimum periodic purchase payment which may be allocated to Variable Fund D
on behalf of each participant under an Individual Accumulation Annuity Contract
and under a Group Accumulation Annuity Contract is $10. If purchase payments
under such contracts are allocated in part to Variable Fund D and in part to the
General account, the minimum which may be allocated on behalf of a participant
on either basis is $10. Currently, Minnesota Life is waiving the enforcement of
this provision.
Under the terms of the contracts, we may limit the amount of purchase payments
which will be accepted on behalf of a participant for any contract year to the
greater of:
- the purchase payments made under the contract on behalf of such
participant for the immediately preceding contract year, or
- the average purchase payments made under the contract on behalf of such
participant for all prior contract years.
There may be limits on the maximum contributions to retirement plans that
qualify for special tax treatment.
PAGE 16
<PAGE>
(SIDEBAR)
We normally pay lump sum payments within 7 days, but may delay payments in
certain circumstances.
The contract is non-participating.
(END SIDEBAR)
8. Discontinuance of Purchase Payments
Purchase payments for a contract may be discontinued under either of the
following circumstances:
- The contract owner may discontinue purchase payments as of a date
specified in a written notice to us, provided that such date may not be
earlier than the date we receive such notice.
- We may discontinue acceptance of purchase payments by giving written
notice to the contract owner if the contract is no longer part of a plan
qualified under Section 401(a), 403(a), 403(b), 408, 457 or other
provisions of the Code allowing similar tax treatment.
Upon discontinuance of purchase payments, the contract will continue in force in
a paid-up status. Purchase payments may subsequently be resumed under an
Individual Accumulation Annuity Contract at any date prior to the annuity
commencement date unless the contract value has previously been disbursed by us.
Under a group contract, purchase payments may be resumed only with our written
consent. Discontinuance of purchase payments will have no effect on participants
who are receiving annuity payments.
9. Contract Settlement
Whenever any payment under a contract is to be made in a single sum, payment
will be made within seven days after the date such payment is called for by the
terms of the contract, except as payment may be subject for postponement for:
- any period during which the New York Stock Exchange is closed other than
customary weekend and holiday closings, or during which trading on the
New York Stock Exchange is restricted, as determined by the Securities
and Exchange Commission;
- any period during which an emergency exists as determined by the
Commission as a result of which it is not reasonably practical to dispose
of securities in the Variable Fund D or to fairly determine the value of
the assets of Variable Fund D; or
- such other periods as the Commission may by order permit for the
protection of the contract owners.
10. Participation
The contract is non-participating. Contracts issued prior to October 1, 1998,
were participating.
No assurance can be given as to the amounts, if any, that will be distributable
under participating contracts in the future. When we make any distribution, it
may take the form of additional payments to annuitants or the crediting of
additional accumulation units. We do not anticipate making dividend payments
under this contract.
PAGE 17
<PAGE>
(SIDEBAR)
You instruct us how to vote Fund shares.
Each of the annuity options is available on a fixed, variable or combination
fixed and variable basis.
(END SIDEBAR)
VOTING RIGHTS
We will vote the Fund shares held in Variable Fund D at shareholder meetings of
the Series Fund. We will vote shares attributable to contracts in accordance
with instructions received from contract owners with voting interests in each
sub-account of Variable Fund D. We will vote shares for which no instructions
are received and shares not attributable to contract in the same proportion as
shares for which instructions have been received. The number of votes for which
a contract owner may provide instructions will be calculated separately for each
sub-account of Variable Fund D. If applicable laws should change so that we were
allowed to vote shares in our own right, then we may elect to do so.
During the accumulation period, the contract owner holds the voting interest in
the contract. The number of votes will be determined by dividing the
accumulation value of the contract attributable to each sub-account by the net
asset value per share of the Fund shares hold by that sub-account.
During the annuity period, the annuitant holds the voting interest in the
contract. The number of votes will be determined by dividing the reserve for
each contract allocated to each sub-account by the net asset value per share of
the Series Fund shares hold by that sub-account. After an annuity begins, the
votes attributable to any particular contract will decrease as the reserves
decrease. In determining any voting interest, fractional shares will be
recognized.
We shall notify each contract owner or annuitant of a Series Fund shareholders'
meeting if the shares held for the contract owner's contract may be voted at the
meeting. We will also send proxy materials and a form of instruction so that you
can instruct us with respect to voting.
ANNUITY PERIOD
1. Electing the Retirement Date and Form of Annuity
The contracts provide for four annuity options. Any one of them may be elected
if permitted by law. Each annuity option may be elected on either a variable
annuity or a fixed annuity basis, or a combination of the two. We may make other
annuity options available on request.
While the contracts require that we receive your notice of election to begin
variable annuity payments at least thirty days prior to the annuity commencement
date, we are currently waiving that requirement for variable annuity elections
received at least two valuation days prior to the fifteenth of the month. We
reserve the right to enforce the thirty day notice requirement at its option at
anytime in the future.
The contracts permit an annuity payment to begin on the first day of any month,
after the 50th birthday and before the 75th birthday of the annuitant. Minnesota
Life is currently waiving the 50th birthday limitation. Under the contract if
you do not make an election, and the plan does not specify otherwise, the
annuitant's retirement date shall be the first day of the month following
his/her 65th
PAGE 18
<PAGE>
birthday. The annuity option shall be Option 2A--a life annuity with a period
certain of 120 months. In this event, a fixed annuity will be provided by any
general account accumulation value and a variable annuity by any Variable
Fund D accumulation value. The minimum first monthly annuity payment is $20. If
the first months annuity payment would be less than $20, we may fulfill our
obligation by paying in a single sum, the surrender value of the contract which
would otherwise have been applied to provide annuity payments.
Except for Option 4, once annuity payments have commenced, the annuitant cannot
surrender his or her annuity benefit and receive a single sum settlement in lieu
thereof.
Benefits under retirement plans that qualify for special tax treatment generally
must commence no later than the April 1 following the year in which the
participant reaches age 70 1/2 and are subject to other conditions and
restrictions.
2. Optional Annuity Forms
OPTION 1 - LIFE ANNUITY This is an annuity payable monthly during the lifetime
of the annuitant and terminating with the last monthly payment preceding the
death of the annuitant. This option offers the maximum amount of monthly
payments since there is no guarantee of a minimum number of payments or
provision for a death benefit for beneficiaries. It would be possible under this
option for the annuitant to receive only one annuity payment if he or she died
prior to the due date of the second annuity payment, two if he or she died
before the due date of the third annuity payment, etc.
OPTION 2 - LIFE ANNUITY WITH A PERIOD CERTAIN OF 120 MONTHS (OPTION 2A), 180
MONTHS (OPTION 2B), OR 240 MONTHS (OPTION 2C) This is an annuity payable
monthly during the lifetime of the annuitant, with the guarantee that if the
annuitant dies before payments have been made for the period certain elected,
payments will continue to the beneficiary during the remainder of the period
certain; or if the beneficiary so elects at any time during the remainder of the
period certain, the present value of the remaining guaranteed number of
payments, based on the then current dollar amount of one such payment shall be
paid in a single sum to the beneficiary.
OPTION 3 - JOINT AND LAST SURVIVOR ANNUITY This is an annuity payable monthly
during the joint lifetime of the annuitant and a designated joint annuitant and
continuing thereafter during the remaining lifetime of the survivor. Under this
option there is no guarantee of a minimum number of payments or provision for a
death benefit for beneficiaries.
OPTION 4 - PERIOD CERTAIN ANNUITY This is an annuity payable monthly for a
Period Certain of from 3 to 15 years, as elected. If the annuitant dies before
PAGE 19
<PAGE>
(SIDEBAR)
The amount of your first annuity payment depends on the age of the annuitant and
the annuity option you select.
(END SIDEBAR)
payments have been made for the Period Certain elected, payments will continue
to the beneficiary during the remainder of such Period Certain. At any time
during the payment period, the payee may elect that:
- the present value of the remaining guaranteed number of payments, based
on the then current dollar amount of one such payment and using the same
interest rate which served as a basis for the annuity, shall be paid in a
single sum, or
- such commuted amount shall be applied to effect a life annuity under
Option 1 or Option 2.
3. Value of the Annuity Unit
The value of an annuity unit is determined monthly as of the first day of each
month. The value of the annuity unit on the first day of each month is
determined by multiplying the value on the first day of the preceding month by
the product of:
- .997137, and
- the ratio of the value of the accumulation unit for the valuation date
next following the fourteenth day of the preceding month to the value of
the accumulation unit for the valuation date next following the
fourteenth day of the second preceding month. (.997137 is a factor to
neutralize the assumed net investment rate, discussed in Section 4 below,
of 3.5% per annum built into the annuity rate tables contained in the
contract and which is not applicable because the actual net investment
rate is credited instead.)
The value of an annuity unit as of any date other than the first day of a month
is equal to its value as of the first day of the next succeeding month.
4. Determination of Amount of First Monthly Annuity Payment
- For Group Deposit Administration Contract, the amount of the first
monthly annuity payment is determined as provided in the plan.
- For Individual Accumulation Contracts and Group Accumulation Contracts
described in this Prospectus, the first monthly annuity payment is
determined by the value at retirement of the participant's individual
account.
In addition, a number of states impose a premium tax on the amount used to
purchase annuity benefits, depending on the type of plan involved. These taxes,
where applicable, currently range from 0% to 3.5% and are deducted from the
contract value applied to provide annuity payments. We reserve the right to make
such deductions from purchase payments as they are received.
PAGE 20
<PAGE>
When annuity payments commence, the value of the contract is determined as the
product of:
- the number of accumulation units credited to the individual account as of
the date annuity payments commence, and
- the value of an accumulation unit for the valuation date next following
the fourteenth day of the month prior to the month in which annuity
payments commence.
The amount of the first monthly payment depends on the optional annuity form
elected and the adjusted age of the annuitant.
The contracts contain tables indicating either (a) the dollar amount of the
first monthly payment under each optional annuity form for each $1,000 of value
applied, or (b) the dollar amount of value required to provide a first monthly
payment of $1.00 under each optional annuity form.
A formula for determining the adjusted age is contained in the contract. The
tables are determined from the Progressive Annuity Table with interest at the
rate of 3.5% per annum, assuming births in the year 1900. The total first
monthly annuity payment is determined by multiplying the number of thousands of
dollars of value applied (less any applicable premium taxes not previously
deducted) by the amount of the first monthly payment per $1,000 of value from
the tables in the contract. The 3.5% interest rate assumed in the annuity tables
would produce level annuity payments if the net investment rate remained
constant at 3.5% per year. Subsequent payments will be less than, equal to, or
greater than the first payment depending upon whether the actual net investment
rate is less than, equal to, or greater than 3.5%. A higher interest rate would
mean a higher initial payment, but a more slowly rising (or more rapidly
falling) series of subsequent payments. A lower assumption would have the
opposite effect.
Money will be transferred to the General Account for the purpose of electing
fixed annuity payments, or to the appropriate variable sub-accounts for variable
annuity payments. The transfer will occur on the valuation date on or next
following the date on which the request is received. The account value used to
determine the fixed annuity payment will be the value as of the last valuation
date of the month preceding the annuity commencement date. The account value
used to determine the initial variable annuity payment will be the value as of
the first valuation date following the fourteenth day of the month prior to the
annuity commencement date.
If the request for a fixed or variable annuity payment is not received at least
three valuation days prior to the date used to determine the account value as
described above, the annuity commencement date will be changed to the first of
the month following the requested annuity commencement date.
PAGE 21
<PAGE>
(SIDEBAR)
If you die prior to commencement of annuity payments, there may be a death
benefit. It will be determined by your plan.
(END SIDEBAR)
5. Amount of Second and Subsequent Monthly Annuity Payments
The amount of the first monthly annuity payment, is divided by the then current
annuity unit value on the date of the first payment to determine the number of
annuity units represented by the first payment. This number of annuity units
remains constant during the period of annuity payments. In each subsequent
month, the dollar amount of the annuity payment is determined by multiplying
this constant number of annuity units by the then current value of an annuity
unit.
The Statement of Additional Information contains an illustration of the
calculation of annuity unit values and of a variable annuity payment showing the
method used for the calculation of both the initial and subsequent payments.
DEATH BENEFITS
Death benefits payable under Group Deposit Administration Contracts if any,
shall be in such amount as is determined by the provisions of the applicable
qualified trust or plan.
The Individual Accumulation Annuity and Group Accumulation Annuity Contracts
provide that in the event of the death of the participant prior to the
commencement of annuity payments, death proceeds payable will be the value of
the participant's individual account next determined following the date proof of
death is received by us. Death benefits will be paid in a single sum to the
beneficiary designated by the contract owner, unless an annuity option is
elected by the beneficiary. Payment will be made within seven days after we
receive proof of death and return of the contract.
Except as noted below, the entire interest in the contract must be distributed
within five years of the contract owner's death. If the annuitant dies after
annuity payments have begun, we will pay to the beneficiary any death benefit
provided by the annuity option selected. The person selected by the contract
owner as the beneficiary of any remaining interest after the death of the
annuitant under the annuity option may be a person different from that person
designated as the contract beneficiary prior to the annuity commencement date.
Certain group accumulation annuity contracts have been endorsed to provide a
death benefit which is different from that described above. For those contracts,
the death benefit payable to the beneficiary on the death of a participant prior
to the annuity commencement date shall be determined separately for the
participant's general account and separate account accumulation values. For
general account accumulation values, the death benefit shall be the general
account accumulation value. For separate account accumulation values, the death
benefit shall be equal to the greater of: (1) the amount of the participant's
separate account accumulation value payable at death; or (2) the sum of all
purchase payments applied to the separate account by or on behalf of a
participant, plus transfers to the separate account, less all participant
withdrawals and transfers from that value.
PAGE 22
<PAGE>
(SIDEBAR)
Initial purchase payments are credited within 2 business days of our receipt of
a complete application.
(END SIDEBAR)
The beneficiary will be the person or persons named in the contract application
unless the contract owner subsequently changes the beneficiary. In that event,
we will pay the amount payable at death to the beneficiary named in your last
change of beneficiary request. The contract owner's written request to change
the beneficiary will not be effective until it is recorded in our home office
records. After it has been recorded, it will take effect as of the date the
contract owner signed the request. However, if the annuitant or the contract
owner dies before the request has been recorded, the request will not be
effective as to those death proceeds we have paid before the request was
recorded in our home office records.
CREDITING ACCUMULATION UNITS
During the accumulation period (the period before annuity payments begin) each
purchase payment is credited on the valuation date on or following the date we
receive the purchase payment at our home office. When the contract is originally
issued, application forms are completed by the applicant and forwarded to our
home office. We will review each application form for compliance with our issue
criteria and, if accepted we will issue a contract.
If the initial purchase payment is accompanied by an incomplete application, the
purchase payment will not be credited until the valuation date coincident with
or next following the date a completed application is received. We will
immediately return the initial purchase payment accompanying an incomplete
application if it appears that the application cannot be completed within five
business days. Purchase payments will be credited to the contract in the form of
accumulation units. The number of accumulation units credited with respect to
each purchase payment is determined by dividing the portion of the purchase
payment allocated to each sub-account by the then current accumulation unit
value for that sub-account. The total of these separate account accumulation
values in the sub-accounts will be the separate account accumulation value.
Interests in the sub-accounts will be valued separately.
The number of accumulation units so determined shall not be changed by any
subsequent change in the value of an accumulation unit, but the value of an
accumulation unit will vary from valuation date to valuation date to reflect the
investment experience of the Portfolios of the Series Fund.
We will determine the value of accumulation units on each day on which the
Portfolios of the Series Fund are valued. The net asset value of the
Series Fund's shares shall be computed once daily, and, in the case of Money
Market Portfolio, after the declaration of the daily dividend, as of the primary
closing time for business on the New York Stock Exchange as of the date hereof
the primary close of trading is 3:00 p.m. (Central time), on each day, Monday
through Friday, except:
- days on which changes in the value of such Series Fund's portfolio
securities will not materially affect the current net asset value of such
Series Fund's shares,
PAGE 23
<PAGE>
- days during which no such Series Fund's shares are tendered for
redemption and no order to purchase or sell such Series Fund's shares is
received by such Series Fund and
- customary national business holidays on which the New York Stock Exchange
is closed for trading.
Accordingly, the value of accumulation units so determined will be applicable to
all purchase payments we receive at our home office on that day prior to the
close of business of the Exchange. The value of accumulation units applicable to
purchase payments received after the close of business of the Exchange will be
the value determined on the next Valuation date.
TRANSFER OF VALUES
Upon your written request, values under the contract may be transferred among
the General Account and Variable Fund D or among the sub-accounts of Variable
Fund D. We will make the transfer on the basis of accumulation unit values on
the valuation date we receive the request at our home office. No deferred sales
charge will be imposed on such transfers. While the contracts currently provide
that transfer amounts must be of an amount not less than $250 we are waiving
this restriction and allowing transfers of any amount.
The contracts permit us to limit the frequency and amount of transfers from the
General Account to the Variable Fund D sub-accounts. Currently, except as
provided below, we limit such transfers to a single such transfer during any
calendar year and to any amount which is no more than 20% of the General Account
accumulation value at the time of the transfer. In the case of General Account
accumulation values of $1000 or less, we will allow a one-time transfer of the
entire accumulation value amount from the General Account to the Variable
Fund D sub-accounts.
Where the contract owner has established a systematic transfer arrangement with
us. The contract owner may transfer General Account current interest earnings or
a specified amount from the General Account on a monthly, quarterly, semi-
annual or annual basis. The maximum initial amount that may be transferred from
the General Account may not exceed 10% of the current General Account
accumulation value at the time of the first transfer. For contracts where the
General Account accumulation value is increased during the year because of
transfers into the General Account or additional purchase payments, made after
the program is established, systematic transfers are allowed to the extent of
the greater of the current transfer amount or 10% of the then current General
Account accumulation value. Even with respect to systematic transfer plans, we
reserve the right to alter the terms of such programs once established where
funds are being transferred out of the General Account. Our alteration of
existing systematic transfer programs will be effective only upon our written
notice to contract owners of changes affecting their election.
PAGE 24
<PAGE>
(SIDEBAR)
Systematic transfers and telephone transfers are available.
(END SIDEBAR)
Systematic transfer arrangements may be established to begin on the 10th or 20th
of any month and if a transfer cannot be completed because of a holiday or
weekend, it will be made on the next available transfer date. In the absence of
specific instructions, transfers will be made on a monthly basis and will remain
active until the appropriate General Account accumulation value or sub-account
is depleted.
As a type of systematic transfer arrangement for certain contracts, we will
offer automatic portfolio rebalancing ("APR") of amounts on a quarterly,
semi-annual and annual basis. Instructions to us must be in whole percentages
totaling 100%. They will be treated as instructions for transfers to and from
the various sub-accounts. Rebalancing instructions will not affect the current
allocation of future contributions; they may differ from those future
allocations and are not limited to any minimum or maximum number of
sub-accounts. There will be no charge for APR transfers. APR is not available
for values in the General Account. You or persons authorized by you may effect
transfers, or a change in the allocation of future premiums, by means of a
telephone call. Transfers and requests made pursuant to such a call are subject
to the same conditions and procedures as are outlined above for written transfer
requests. During periods of marked economic or market changes, contract owners
may experience difficulty in implementing a telephone transfer due to a heavy
volume of telephone calls. In such a circumstance, contract owners should
consider submitting a written transfer request while continuing to attempt a
telephone transfer. We reserve the right to restrict the frequency of--or
otherwise modify, condition, terminate or impose charges upon--telephone
transfer privileges. For more information on transactions related to your
Contract, you may contact us at 1-800-362-3141. In addition, you may be able to
contact us or your registered representative via Internet e-mail through our
website. Please remember that e-mail is not a valid substitute for a written
request that requires your signature.
We will employ reasonable procedures to satisfy ourselves that instructions
received from contract owners are genuine. We require contract owners to
identify themselves through contract numbers, social security numbers and such
other information as we may deem to be reasonable. We record telephone transfer
instruction conversations and we provide the contract owners with a written
confirmation of the telephone transfer.
The underlying funds may restrict the amounts or frequency of transfers to or
from a sub-account of the seperate account in order to protect fund
shareholders.
The interests of contract owners arising from the allocation of purchase
payments or the transfer of contract values to the general assets of Minnesota
Life are not registered under the Securities Act of 1933. Minnesota Life is not
registered as an investment company under the Investment Company Act of 1940.
Accordingly, Minnesota Life is not subject to the provisions of those acts that
would apply if registration under such acts were required.
PAGE 25
<PAGE>
(SIDEBAR)
Your contract's accumulation value varies with the performance of the Portfolios
you select and is not guaranteed.
(END SIDEBAR)
VALUE OF THE CONTRACT
The value of the contract at any time prior to the commencement of annuity
payments can be determined by multiplying the total number of accumulation units
credited to the contract by the current value of an accumulation unit. There is
no assurance that such value will equal or exceed the purchase payments made.
The contract owner and, where applicable, each participant will be advised
periodically of the number of accumulation units credited to the contract or to
the participant's individual account, the current value of an accumulation unit,
and the total value of the contract or the individual account.
ACCUMULATION UNIT VALUE
The value of an accumulation unit was set at $1.000000 on the first valuation
date of Variable Fund D. The value of an accumulation unit on any subsequent
valuation date is determined by multiplying the value of an accumulation unit on
the immediately preceding valuation date by the net investment factor (described
below) for the valuation period just ended. The value of an accumulation unit as
of any date other than a valuation date is equal to its value on the next
succeeding valuation date.
NET INVESTMENT FACTOR
The separate account net investment factor describes the investment performance
of a sub-account of Variable Fund D. It is for the period from one valuation
period to the next. For any such sub-account, the net investment factor for a
valuation period is the gross investment rate for such sub-account for the
valuation period less a deduction for the mortality and expense risk charge at
the rate of .795%. The net investment factor for the sub-account holding shares
of the Growth Portfolio of the Series Fund shall be adjusted by Minnesota Life.
It will be adjusted so that on an annual basis the expenses, including the
investment advisory fee, of that Portfolio, as a percentage of the average net
assets of such Portfolio, do not exceed .265% per annum. For purposes of this
computation, "expenses" shall be determined on the basis of generally accepted
accounting principles applicable to registered investment companies. However,
they shall exclude any expenses of the Growth Portfolio which are reimbursed by
Minnesota Life or any other person, any interest expense or amortization of debt
discount or any income tax expense.
The gross investment rate is equal to:
- the net asset value per share of a fund share held in a sub-account of
the separate account determined at the end of the current valuation
period; plus
- the per share amount of any dividend or capital gain distribution by such
fund if the "ex-dividend" date occurs during the current valuation
period; divided by
PAGE 26
<PAGE>
- the net asset value per share of that fund share determined at the end of
the preceding valuation period. The gross investment rate may be positive
or negative.
WITHDRAWALS AND SURRENDER
Under certain circumstances a contract owner may have the right to surrender his
or her contract in whole or in part, subject to possible adverse tax
consequences.
A. INDIVIDUAL ACCUMULATION ANNUITY CONTRACT
The Individual Accumulation Annuity Contract provides that at any time prior to
the death of the participant and prior to the commencement of annuity payments,
the contract owner may elect to surrender the contract and receive in a single
sum the value of the participant's individual account computed as of the
valuation date coincident with or next following the date of surrender. The
contract also provides for partial withdrawal of the value of the participant's
individual account, in amounts of at least $250. All such payments are subject
to any limitations contained in an applicable qualified trust or plan or in a
state deferred compensation plan.
B. GROUP ACCUMULATION ANNUITY CONTRACT
The Group Accumulation Annuity Contract provides that upon termination of
purchase payments for an individual participant prior to the commencement of
annuity payments. The participant shall have a vested interest in his or her
individual account to the extent specified in the plan. If purchase payments are
discontinued for all participants under the contract, each participant shall
have a vested interest in his or her individual account as specified in the
plan. The contract provides that the vested portion of the participant's
individual account may be surrendered. Minnesota Life will pay to the
participant in a single sum the value of such vested portion, computed as of the
valuation date coincident with or next following the date of surrender. The
contract also provides for partial withdrawal of the value of the vested portion
of a participant's individual account, in amounts of at least $250. The
provisions of the applicable qualified trust, plan or state deferred
compensation plan may limit the right of the participant to elect such payments.
C. GROUP DEPOSIT ADMINISTRATION CONTRACT
The Group Deposit Administration Contract does not provide for individual
allocation of purchase payments or maintenance of individual accounts for
participants. The dollar amount of any payment made on behalf of a participant
by reason of his or her individual termination of employment or termination
PAGE 27
<PAGE>
of participation in the plan shall be determined by the provisions of the
applicable qualified trust or plan. It is not dependent upon the provisions of
the contract. If discontinuance of purchase payments for all participants under
such a contract occurs, and the accumulated value of the contract is not
transferred to another funding vehicle, the participants in the plan as of the
date of discontinuance shall receive a 100% vested interest in all benefits
earned under the terms of the plan to the extent provided by the accumulated
value of the contract. The accumulated value may be transferred to another
funding vehicle if, prior to the date of discontinuance of purchase payments,
the contract owner gives written notice to us certifying that the plan is to be
continued as a qualified plan and requesting such transfer to be made. The
transfer date shall be the first valuation date to occur following the effective
date of discontinuance of purchase payments. Payment of the accumulated value of
the contract which is a part of Variable Fund D will be made in a single sum as
of the transfer date.
We will waive the applicable dollar amount limitation on withdrawals where a
systematic withdrawal program is in place and such a smaller amount satisfies
the minimum distribution requirements of the Code. We will also waive the
applicable dollar amount limitation on withdrawals due to an excess contribution
to a tax-qualified contract.
Under any contract, once annuity payments have commenced for a participant under
Options 1, 2 or 3 of the optional annuity forms, the participant cannot
surrender his or her annuity benefit and receive a single sum settlement in lieu
thereof.
Contract owners may also submit their signed written withdrawal or surrender
requests to us by facsimile (FAX) transmission. Our FAX number is:
(651) 665-7942, ATTN: U of M Plan Services. Transfer instructions or changes as
to future allocations of premium payments may be communicated to us by the same
means.
The surrender of a contract or a partial withdrawal thereunder may result in a
credit against Minnesota Life's premium tax liability. In such event, we will
pay in addition to the cash value paid in connection with the surrender or
withdrawal, the lesser of (1) the amount by which our premium tax liability is
reduced, or (2) the amount previously deducted from purchase payments for
premium taxes. No representation can be made that upon any such surrender or
withdrawal any such payment will be made, since applicable tax laws at the time
of surrender or withdrawal would be determinative.
DISTRIBUTION
The contracts will be sold by Minnesota Life, life insurance agents who are also
registered representatives of Ascend Financial Services, Inc. or other broker-
dealers who have entered into selling agreements with Ascend Financial
Services, Inc. Ascend Financial Services, Inc. ("Ascend Financial"), the
principal underwriter of the contract, may pay up to 3.75% of the amount of
purchase
PAGE 28
<PAGE>
(SIDEBAR)
We are not offering tax advice. You should consult your own tax adviser.
Taxes on gains under the contract are normally deferred until there is a
distribution of contract values.
(END SIDEBAR)
payments for Individual Accumulation Annuity Contracts to broker-dealers who
sell the contract. Commission on group cases may vary, but will not exceed
3.75%. In addition, either we or Ascend Financial will pay credits which allow
registered representatives who are responsible for sales of variable annuity
contracts to attend conventions and other meetings that we or our affiliates
sponsor, for the purpose of promoting the sale of the insurance and/or
investment products that we or our affiliates offer. Such credits may cover the
registered representatives' transportation, hotel accommodations, meals,
registration fees and the like. We may also pay those registered representatives
amounts based upon their productions and the persistency of life insurance and
annuity business they placed with us.
FEDERAL TAX STATUS
INTRODUCTION
The discussion contained herein is general in nature and is not intended as tax
advice. Each person concerned should consult a tax adviser. No attempt is made
to consider any applicable state or other tax laws. In addition, this discussion
is based on our understanding of federal income tax laws as they are currently
interpreted. No representation is made regarding the likelihood of continuation
of current income tax laws or the current interpretations of the Internal
Revenue Service. The Contract may be purchased on a non-tax qualified basis
("Non-Qualified Contract") or purchased and used in connection with certain
retirement arrangements entitled to special income tax treatment under
Section 401(a), 403(b), 408 or 457 of the Code ("Qualified Contracts"). The
ultimate effect of federal income taxes on amounts held under a Contract, on
Annuity Payments and on the economic benefit to the Contract Owner, the
Annuitant or the Beneficiary may depend on the tax status of the individual
concerned.
We are taxed as a "life insurance company" under the Internal Revenue Code. The
operations of Variable Fund D form a part of, and are taxed with, our other
business activities. Currently, no federal income tax is payable by us on income
dividends received by Variable Fund D or on capital gains arising from Variable
Fund D's investment activities. If changes in the federal tax laws or
interpretations thereof result in Minnesota Life being taxed on income or gains
to Variable Fund D, then we may impose a charge against Variable Fund D (with
respect to some or all Contracts) in order to set aside provisions to pay such
taxes.
TAXATION OF ANNUITY CONTRACTS IN GENERAL
Section 72 of the Internal Revenue Code governs taxation of nonqualified
annuities in general and some aspects of tax qualified programs. No taxes are
generally imposed on increases in the value of a contract until distribution
occurs, either in the form of a payment in a single sum or as annuity payments
under the annuity option elected.
PAGE 29
<PAGE>
(SIDEBAR)
Ordinary income tax rates apply to amounts distributed in excess of purchase
payments. Gains are assumed to be distributed before return of purchase
payments.
A penalty tax may apply to distributions prior to age 59 1/2.
Transfers, assignments and certain designations of annuitants can have tax
consequences.
(END SIDEBAR)
As a general rule, deferred annuity contracts held by a corporation, trust or
other similar entity, as opposed to a natural person, are not treated as annuity
contracts for federal tax purposes. The investment income on such contracts is
taxed as ordinary income that is received or accrued by the contract owner of
the contract during the taxable year.
For payments made in the event of a full surrender of an annuity, the taxable
portion is generally the amount in excess of the cost basis (i.e., purchase
payments) of the contract. Amounts withdrawn from the variable annuity contracts
not part of a qualified program are treated first as taxable income to the
extent of the excess of the withdrawal amount over the purchase payments made
under the contract. All taxable amounts received under an annuity contract are
subject to tax at ordinary rather than capital gain tax rates.
In the case of a withdrawal under an annuity that is part of a qualified
program, a portion of the amount received is taxable based on the ratio of the
"investment in the contract" to the individual's balance in the retirement plan,
generally the value of the annuity. The "investment in the contract" generally
equals the portion of any deposits made by or on behalf of an individual under
an annuity which was not excluded from the gross income of the individual. For
annuities issued in connection with qualified plans, the "investment in the
contract" can be zero.
For annuity payments, the taxable portion is generally determined by a formula
that establishes the ratio that the cost basis of the contract bears to the
expected return under the contract. Such taxable part is taxed at ordinary
income rates.
The Code imposes a 10% penalty tax on the taxable portion of certain
distributions from annuity contracts. This additional tax does not apply where
the taxpayer is
- 59 1/2 or older,
- where payment is made on account of the taxpayer's disability, or
- where payment is made by reason of the death of the contract owner, and
in certain other circumstances.
The Code also provides an exception to the penalty tax for distributions in
periodic payments, of substantially equal installments, be made for the life (or
life expectancy) of the taxpayer or the joint lives (or joint life expectancies)
of the taxpayer and beneficiary.
For some types of qualified plans, other tax penalties may apply to certain
distributions.
A transfer of ownership of a contract, a pledge of any interest in a contract as
security for a loan, the designation of an annuitant or other payee who is not
also the contract owner, or the assignment of a contract may result in certain
income or gift tax consequences to the contract owner that are beyond the scope
of this discussion. A contract owner who is contemplating any such transfer,
pledge, designation or assignment should consult a competent tax adviser with
respect to the potential tax effects of that transaction.
PAGE 30
<PAGE>
For purposes of determining a contract owner's gross income, the Code provides
that all nonqualified deferred annuity contracts issued by the same company (or
its affiliates) to the same contract owner during any calendar year shall be
treated as one annuity contract. Additional rules may be promulgated under this
provision to prevent avoidance of its effect through serial purchases of
contracts or otherwise. For further information on these rules, see your tax
adviser.
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of Variable Fund D to be "adequately
diversified" in order for the contract to be treated as an annuity contract for
Federal tax purposes. Variable Fund D, through the Series Fund, intends to
comply with the diversification requirements prescribed in Regulations
Section 1.817-5, which affect how the Series Fund's assets may be invested.
Although the investment adviser is an affiliate of ours, we do not have control
over the Series Fund or its investments. Nonetheless, we believe that each
Portfolio of the Series Fund in which Variable Fund D owns shares will be
operated in compliance with the requirements prescribed by the Treasury.
Prior to the enactment of Section 817(h), the IRS published several rulings
under which contract owners of certain variable annuity contracts were treated
as contract owners, for federal income tax purposes, of the assets held in a
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includable in the variable
annuity contract owner's gross income. However, the continued effectiveness of
the pre-Section 817(h) published rulings is somewhat uncertain. In connection
with its issuance of proposed regulations under Section 817(h) in 1986, the
Treasury Department announced that those regulations did not "provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the contract owner),
rather than the insurance company to be treated as the contract owner of the
assets in the account". While the Treasury's 1986 announcement stated that
guidance would be issued on the "extent to which the policyholders may direct
their investments to particular sub-accounts without being treated as contract
owners of the underlying assets", no such guidance has been forthcoming.
The ownership rights under the contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that contract owners were not owners of separate account assets. For example,
the owner of a contract has the choice of several sub-accounts in which to
allocate net purchase payments and contract values, and may be able to transfer
among sub-accounts more frequently than in such rulings. Minnesota Life does not
believe that the ownership rights of a contract owner under the Contract would
result in any contract owner being treated as the owner of the assets of
Variable Fund D. However, Minnesota Life does not know what standards would be
applied if the Treasury Department should proceed to issue regulations or
rulings
PAGE 31
<PAGE>
(SIDEBAR)
Congress may change the tax laws or reduce or eliminate any tax advantages of
the contract.
(END SIDEBAR)
on this issue. Minnesota Life therefore reserves the right to modify the
Contract as necessary to attempt to prevent a contract owner from being
considered the owner of a pro rata share of the assets of Variable Fund D.
REQUIRED DISTRIBUTIONS
In order to be treated as an annuity contract for Federal income tax purposes,
Section 72(s) of the Code requires any nonqualified contract issued after
January 18, 1985 to provide that (a) if an contract owner dies on or after the
annuity starting date but prior to the time the entire interest in the contract
has been distributed, the remaining portion of such interest will be distributed
at least as rapidly as under the method of distribution being used as of the
date of that contract owner's death; and (b) if an contract owner dies prior to
the annuity starting date, the entire interest in the contract must be
distributed within five years after the date of the contract owner's death.
These requirements shall be considered satisfied if any portion of the contract
owner's interest which is payable to or for the benefit of a "designated
beneficiary" is distributed over the life of such beneficiary or over a period
not extending beyond the life expectancy of that beneficiary and such
distributions begin within one year of that owner's death. The contract owner's
"designated beneficiary" is the person designated by such contract owner as a
beneficiary and to whom ownership of the contract passes by reason of death and
must be a natural person. However, if the contract owner's "designated
beneficiary" is the surviving spouse of the contract owner, the contract may be
continued with the surviving spouse as the new contract owner.
Nonqualified contracts issued after January 18, 1985 contain provisions which
are intended to comply with the requirements of Section 72(s) of the Code,
although no regulations interpreting these requirements have yet been issued. We
intend to review such provisions and modify them if necessary to assure that
they comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of the contract
owner. Generally, such amounts are includable in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender of the contract, as described above, or (2) if distributed
under an annuity option, they are taxed in the same manner as annuity payments,
as described above.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of there being any change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change). You should
consult a tax adviser with respect to legislative developments and their effect
on the Contract.
PAGE 32
<PAGE>
(SIDEBAR)
Distributions are subject to income tax withholding requirements unless you take
steps to prevent it.
(END SIDEBAR)
TAX QUALIFIED PROGRAMS
The annuity is designed for use with several types of retirement plans that
qualify for special tax treatment. The tax rules applicable to participants and
beneficiaries in retirement plans vary according to the type of plan and the
terms and conditions of the plan. Special favorable tax treatment may be
available for certain types of contributions and distributions. Adverse tax
consequences may result from:
- contributions in excess of specified limits;
- distributions prior to age 59 1/2 (subject to certain exceptions);
- distributions that do not conform to specified minimum distribution
rules;
- aggregate distributions in excess of a specified annual amount; and in
other specified circumstances.
We make no attempt to provide more than general information about use of
annuities with the various types of retirement plans. The rights of any person
to benefits under annuity contracts purchased in connection with these plans may
be subject to the terms and conditions of the plans themselves, regardless of
the terms and conditions of the annuity issued in connection with such a plan.
Some retirement plans are subject to transfer restrictions, distribution and
other requirements that are not incorporated into the annuity or our annuity
administration procedures. Contract Owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the annuities comply with applicable law. If you
intend to purchase a contract for use with any retirement plan you should
consult your legal counsel and tax adviser regarding the suitability of the
contract.
For qualified plans under Section 401(a), 403(b), and 457, the Code requires
that distributions generally must commence no later than April 1 of the calendar
year following the calendar year in which the Contract Owner (or plan
participant) (I) reaches age 70 1/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined by the Code), distributions generally must begin no later than April 1
of the calendar year following the calendar year in which the Contract Owner (or
plan participant) reaches age 70 1/2. For IRAs described in Section 408,
distributions generally must commence no later than April 1 of the calendar year
following the calendar year in which the Contract Owner (or plan participant)
reaches age 70 1/2. Roth IRAs under Section 408A do not require distributions at
any time prior to the Contract Owner's death.
WITHHOLDING
In general, distributions from annuities are subject to federal income tax
withholding unless the recipient elects not to have tax withheld. Different
rules may apply to payments delivered outside the United States. Some states
have enacted similar rules.
PAGE 33
<PAGE>
Recent changes to the Code allow the rollover of most distributions from tax-
qualified plans and Section 403(b) annuities directly to other tax-qualified
plans that will accept such distributions and to individual retirement accounts
and individual retirement annuities. Distributions which may not be rolled over
are those which are: (1) one of a series of substantially equal annual (or more
frequent) payments made (a) over the life or life expectancy of the employee,
(b) the joint lives or joint expectancies of the employee and the employee's
designated beneficiary, or (c) for a specified period of ten years or more;
(2) a required minimum distribution; or (3) the non-taxable portion of a
distribution.
Any distribution eligible for rollover, which may include payment to an
employee, an employee's surviving spouse or an ex-spouse who is an alternate
payee, will be subject to federal tax withholding at a 20% rate unless the
distribution is made as a direct rollover to a tax-qualified plan or to an
individual retirement account or annuity. It may be noted that amounts received
by individuals which are eligible for rollover may still be placed in another
tax-qualified plan or individual retirement account or individual retirement
annuity if the transaction is completed within thirty days after the
distribution has been received. Such a taxpayer must replace withheld amounts
with other funds to avoid taxation on the amount previously withheld.
SEE YOUR OWN TAX ADVISER
The foregoing description of the federal income tax consequences under these
contracts is not exhaustive. Special rules are provided with respect to
situations not discussed herein. Should a plan lose its qualified status,
employees will lose some of the tax benefits described. Statutory changes in the
Internal Revenue Code with varying effective dates, and regulations adopted
thereunder may also alter the tax consequences of specific factual situations.
Due to the complexity of the applicable laws, tax advice may be needed by a
person contemplating the purchase of a variable annuity contract or exercising
elections under such a contract. For further information a tax adviser should be
consulted.
PERFORMANCE DATA
From time to time Variable Fund D may publish advertisements containing
performance data relating to its sub-accounts. In the case of the Money Market
Sub-Account, Variable Fund D will publish yield or effective yield quotations
for a seven-day or other specified period. In the case of the other
sub-accounts, performance data will consist of average annual total return
quotations for a one-year period, five-year period, ten-year period, and for the
period since the sub-account became available pursuant to Variable Fund D's
registration statement. It may also include cumulative total return quotations
for the period since the sub-account became available pursuant to such
registration statement. The Money Market Sub-Account may also quote such average
annual and cumulative total return figures. Performance figures used by Variable
Fund D are based on historical information of the sub-accounts for specified
periods. The figures are
PAGE 34
<PAGE>
not intended to suggest that such performance will continue in the future.
Performance figures of Variable Fund D will reflect only charges made pursuant
to the terms of contracts offered by this prospectus and charges of Underlying
Funds. More detailed information on the computations is set forth in the
Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information, which contains additional contract and
Variable Fund D information including financial statements, is available from
the offices of Variable Fund D at your request. The Table of Contents for that
Statement of Additional Information is as follows:
Variable Fund D
Directors and Principal Management Officers of Minnesota Life
Other Contracts
Distribution of Contracts
Performance Data
Annuity Payments
Auditors
Financial Statements
Calculation of Unit Values
PAGE 35
<PAGE>
APPENDIX A -- CONDENSED FINANCIAL INFORMATION
The financial statements of Variable Fund D and Minnesota Life Insurance Company
may be found in the Statement of Additional Information.
The table below gives per unit information about the financial history of each
sub-account for the nine years ended December 31, 1999 and the period from
October 26, 1990 to December 31, 1990. This information should be read in
conjunction with the financial statements and related notes of Variable Fund D
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Growth Sub-Account:
Unit value at beginning of
period.......................... $24.63 $18.38 $13.84 $11.88 $9.60 $9.57
Unit value at end of period...... $30.79 $24.63 $18.38 $13.84 $11.88 $9.60
Number of units outstanding at
end of period................... 3,098,116 3,881,390 4,229,239 4,666,243 4,918,859 5,406,377
Bond Sub-Account:
Unit value at beginning of
period.......................... $1.84 $1.75 $1.60 $1.57 $1.32 $1.39
Unit value at end of period...... $1.78 $1.84 $1.75 $1.60 $1.57 $1.32
Number of units outstanding at
end of period................... 29,421 222,720 256,628 296,978 321,612 386,750
Money Market Sub-Account:
Unit value at beginning of
period.......................... $1.35 $1.29 $1.24 $1.19 $1.13 $1.10
Unit value at end of period...... $1.41 $1.35 $1.29 $1.24 $1.19 $1.13
Number of units outstanding at
end of period................... 434,563 279,497 309,546 395,596 352,735 457,011
Asset Allocation Sub-Account:
Unit value at beginning of
period.......................... $2.98 $2.42 $2.05 $1.83 $1.47 $1.50
Unit value at end of period...... $3.41 $2.98 $2.42 $2.05 $1.83 $1.47
Number of units outstanding at
end of period................... 1,310,008 2,377,329 2,564,823 2,804,901 2,960,127 3,175,751
Mortgage Securities Sub-Account:
Unit value at beginning of
period.......................... $1.77 $1.67 $1.54 $1.47 $1.26 $1.31
Unit value at end of period...... $1.80 $1.77 $1.67 $1.54 $1.47 $1.26
Number of units outstanding at
end of period................... 22,267 89,045 130,573 175,022 136,987 160,939
Index 500 Sub-Account:
Unit value at beginning of
period.......................... $4.34 $3.41 $2.60 $2.15 $1.58 $1.57
Unit value at end of period...... $5.18 $4.34 $3.41 $2.60 $2.15 $1.58
Number of units outstanding at
end of period................... 421,646 949,618 1,012,408 923,905 951,303 886,632
Small Company Growth
Sub-Account:
Unit value at beginning of
period.......................... $1.76 $1.74 $1.62 $1.54 $1.17 $1.11
Unit value at end of period...... $2.55 $1.76 $1.74 $1.62 $1.54 $1.17
Number of units outstanding at
end of period................... 111,546 177,501 109,961 114,187 124,882 72,272
<CAPTION>
PERIOD FROM
OCTOBER 26,
YEAR ENDED DECEMBER 31, 1990 TO
------------------------------- DECEMBER 31,
1993 1992 1991 1990*
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Growth Sub-Account:
Unit value at beginning of
period.......................... $9.20 $8.80 $6.60 $6.06
Unit value at end of period...... $9.57 $9.20 $8.80 $6.60
Number of units outstanding at
end of period................... 5,785,198 5,758,220 5,842,088 6,024,553
Bond Sub-Account:
Unit value at beginning of
period.......................... $1.26 $1.19 $1.02 $1.00
Unit value at end of period...... $1.39 $1.26 $1.19 $1.02
Number of units outstanding at
end of period................... 480,411 177,794 66,385 20,037
Money Market Sub-Account:
Unit value at beginning of
period.......................... $1.07 $1.05 $1.00 -- **
Unit value at end of period...... $1.10 $1.07 $1.05 --
Number of units outstanding at
end of period................... 774,078 357,877 171,773 --
Asset Allocation Sub-Account:
Unit value at beginning of
period.......................... $1.42 $1.33 $1.04 $1.00
Unit value at end of period...... $1.50 $1.42 $1.33 $1.04
Number of units outstanding at
end of period................... 2,903,712 1,463,845 364,314 13,616
Mortgage Securities Sub-Account:
Unit value at beginning of
period.......................... $1.20 $1.14 $1.00 -- **
Unit value at end of period...... $1.31 $1.20 $1.14 --
Number of units outstanding at
end of period................... 286,125 265,381 5,173 --
Index 500 Sub-Account:
Unit value at beginning of
period.......................... $1.44 $1.35 $1.05 $1.00
Unit value at end of period...... $1.57 $1.44 $1.35 $1.05
Number of units outstanding at
end of period................... 684,210 332,893 174,242 5,000
Small Company Growth
Sub-Account:
Unit value at beginning of
period.......................... $1.00
Unit value at end of period...... $1.11***
Number of units outstanding at
end of period................... 14,148
</TABLE>
* The condensed financial information is presented for the period from
October 26, 1990 to December 31, 1990. October 26, 1990 was the effective
date of the 1933 Act Registration for Variable Fund D after its
reorganization as a unit investment trust.
** As of December 31, 1990, no contract owners had elected to allocate payments
to the Money Market and Mortgage Securities sub-accounts; accordingly,
condensed financial information is not presented for the period from
October 26, 1990 to December 31, 1990.
*** The information for the sub-account is shown for the period May 3, 1993 to
December 31, 1993. May 3, 1993 was the effective date of the 1933 Act
Registration Statement for the sub-account.
PAGE A-1
<PAGE>
APPENDIX B -- TYPES OF QUALIFIED PLANS
PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX EXEMPT ORGANIZATIONS
Under Code Section 403(b), payments made by public school systems and certain
tax exempt organizations to purchase annuity contracts for their employees are
excludable from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social Security)
taxes.
Code Section 403(b)(11) restricts the distribution under Code Section 403(b)
annuity contracts of:
- elective contributions made in years beginning after December 31, 1988;
- earnings on those contributions; and
- earnings in such years on amounts held as of the last year beginning
before January 1, 1989.
Distribution of those amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
Individual Retirement Annuity, hereinafter referred to as an "IRA". Also,
distributions from certain other types of qualified plans may be "rolled over"
on a tax-deferred basis into an IRA. The sale of a Contract for use with an IRA
may be subject to special disclosure requirements of the Internal Revenue
Service. Purchasers of a Contract for use with IRAs will be provided with
supplemental information required by the Internal Revenue Services or other
appropriate agency. Such purchasers will have the right to revoke their purchase
within seven days of the earlier of the establishment of the IRA or their
purchase. A Qualified Contract issued in connection with an IRA will be amended
as necessary to conform to the requirements of the Code. Purchasers should seek
competent advice as to the suitability of the Contract for use with IRAs.
Earnings in an IRA are not taxed until distribution. IRA contributions are
limited each year to the lesser of $2,000 or 100% of the Contract Owner's
adjusted gross income and may be deductible in whole or in part depending on the
individual's income. The limit on the amount contributed to an IRA does not
apply to distributions from certain other types of qualified plans that are
"rolled over" on a tax-deferred basis into an IRA. Amounts in the IRA (other
than nondeductible contributions) are taxed when distributed from the IRA.
Distributions prior to age 59 1/2 (unless certain exceptions apply) are subject
to a 10% penalty tax.
PAGE B-1
<PAGE>
SIMPLIFIED EMPLOYEE PENSION (SEP) IRAS
Employers may establish Simplified Employee Pension (SEP) IRAs under Code
section 408(k) to provide IRA contributions on behalf of their employees. In
addition to all of the general Code rules governing IRAs, such plans are subject
to certain Code requirements regarding participation and amounts of
contributions.
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS
Code Section 401(a) permits employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish
retirement plans for themselves and their employees. These retirement plans may
permit the purchase of the contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the plan, to the participant
or to both may result if this annuity is assigned or transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all legal requirements applicable to such benefits prior to transfer of the
annuity.
DEFERRED COMPENSATION PLANS
Code Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and 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 with
respect to non-governmental Section 457 plans, all investments are owned by the
sponsoring employer and are subject to the claims of the general creditors of
the employer and, depending on the terms of the particular plan, the employer
may be entitled to draw on deferred amounts for purposes unrelated to its
Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
PAGE B-2
<PAGE>
Variable Fund D
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 2000
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands
upon subjects discussed in the Prospectus. Therefore, this Statement should
be read in conjunction with Variable Fund D's current Prospectus, bearing the
same date, which may be obtained by calling Variable Fund D at (651) 665-3500,
or writing Variable Fund D at Minnesota Mutual Center, 400 Robert Street
North, St. Paul, Minnesota 55101-2098.
TABLE OF CONTENTS
Variable Fund D
Board and Principal Management Officers of Minnesota Life
Other Contracts
Distribution of Contracts
Performance Data
Annuity Payments
Auditors
Financial Statements
Appendix A - Calculation of Unit Values
VARIABLE FUND D
Variable Fund D is a separate account of Minnesota Life Insurance Company
("Minnesota Life"). Variable Fund D is registered as a unit investment trust.
Prior to the Reorganization of the Fund in October of 1990 and the
establishment of its several sub-accounts, the Fund was a open-end,
diversified, management investment company investing in a diversified portfolio
of equity securities, mainly common stocks.
<PAGE>
DIRECTORS AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA LIFE
Directors Principal Occupation
--------- --------------------
Anthony L. Andersen Retired since November 1999, prior thereto
Chair-Board of Directors, H. B. Fuller
Company, St. Paul, Minnesota (Adhesive
Products), since June 1995, prior thereto
for more than five years President and Chief
Executive Officer, H. B. Fuller Company
Leslie S. Biller Vice Chairman and Chief Operating Officer,
Wells Fargo & Company, San Francisco,
California (Banking)
John F. Grundhofer President, Chairman and Chief Executive
Officer, U.S. Bancorp, Minneapolis, Minnesota
(Banking)
Robert E. Hunstad Executive Vice President, Minnesota Life
Insurance Company
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary, Minnesota Life Insurance Company
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, Minnesota Life Insurance
Company, since August 1995; prior thereto for
more than five years Vice President and
Actuary, Minnesota Life Insurance Company
Michael E. Shannon Retired since December 1999, prior thereto
for more than five years Chairman, Chief
Financial and Administrative Officer, Ecolab,
Inc., St. Paul, Minnesota (Develops and
Markets Cleaning and Sanitizing Products)
William N. Westhoff Senior Vice President and Treasurer,
Minnesota Life Insurance Company since April
1998, prior thereto from August 1994 to
October 1997, Senior Vice President, Global
Investments, American Express Financial
Corporation, Minneapolis, Minnesota
Frederick T. Weyerhaeuser Retired since April 1998, prior thereto
Chairman and Treasurer, Clearwater Investment
Trust since May 1996, prior thereto for more
than five years, Chairman, Clearwater
Management Company, St. Paul, Minnesota
(Financial Management)
2
<PAGE>
Principal Officers (other than Directors)
Name Position
---- --------
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
James E. Johnson Senior Vice President
Gregory S. Strong Senior Vice President and Chief Financial
Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
All Directors who are not also officers of Minnesota Life have had the principal
occupation (or employers) shown for at least five years. All officers of
Minnesota Life have been employed by Minnesota Life for at least five years.
OTHER CONTRACTS
In addition to the contracts described in the Prospectus, Minnesota Life
continually offers two types of Variable Fund D variable annuity contracts,
both incorporating a deferred sales charge. These contracts are the Single
Premium Deferred Variable Annuity Contract and the Flexible Payment Deferred
Variable Annuity Contract.
DISTRIBUTION OF CONTRACTS
The contracts will be continuously sold by Minnesota Life, life insurance
agents who are also registered representatives of Ascend Financial Services,
Inc. or other broker-dealers who have entered into selling agreements with
Ascend Financial. Ascend Financial acts as the principal underwriter of the
contracts. Ascend Financial Services, Inc. is a wholly-owned subsidiary of
Advantus Capital Management, Inc., which is a wholly-owned subsidiary of
Minnesota Life. Advantus Capital Management, Inc., serves as the investment
adviser for Variable Fund D. Ascend Financial is registered as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc.
Amounts paid by Minnesota Life for payment to the underwriter for 1999, 1998
and 1997 were, respectively, $119,984, $126,676 and $125,659. These include
payments made by Minnesota Life on behalf of the underwriter, as agents of
Minnesota Life who are also registered representatives of Ascend Financial are
compensated directly by Minnesota Life.
3
<PAGE>
PERFORMANCE DATA
CURRENT YIELD FIGURES FOR MONEY MARKET SUB-ACCOUNT
Current annualized yield quotations for the Money Market Sub-Account are
based on the sub-account's net investment income for a seven-day or other
specified period and exclude any realized or unrealized gains or losses on
sub-account securities. Current annualized yield is computed by determining
the net change (exclusive of realized gains and losses from the sale of
securities and unrealized appreciation and depreciation) in the value of a
hypothetical account having a balance of one accumulation unit at the
beginning of the specified period, dividing such net change in account value
by the value of the account at the beginning of the period, and annualizing
this quotient on a 365-day basis. Variable Fund D may also quote the
effective yield of the Money Market Sub-Account for a seven-day or other
specified period for which the current annualized yield is computed by
expressing the unannualized return on a compounded, annualized basis. The
yield and effective yield of the Money Market Sub-Account for the seven-day
period ended December 31, 1999 were 4.65% and 4.75%, respectively.
TOTAL RETURN FIGURES FOR ALL SUB-ACCOUNTS
Cumulative total return quotations for sub-accounts represent the total
return for the period since the sub-account became available pursuant to
Variable Fund D's registration statement. Cumulative total return is equal
to the percentage change between the net asset value of a hypothetical $1,000
investment at the beginning of the period and the net asset value of that
same investment at the end of the period.
The cumulative total return figures published by Variable Fund D relating
to the contracts described in the Prospectus will reflect Minnesota Life's
voluntary absorption of certain Fund expenses described below. The
cumulative total returns for the sub-accounts for the specified periods ended
December 31, 1999 are shown in the table below. The figures in parentheses
show what the cumulative total returns would have been had Minnesota Life not
absorbed Fund expenses as described above.
4
<PAGE>
Cumulative Total Return Figures
<TABLE>
<CAPTION>
7% Sales Load No Sales Load
Ten Years Cumulative Ten Years Cumulative
Ended 12/31/99* Ended 12/31/99* Ended 12/31/99* Ended 12/31/99*
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account (347.54%) 347.54% (373.70%) 373.70%
Bond Sub-Account (65.49%) 65.62% (77.93%) 78.09%
Money Market
Sub-Account (30.33%) 30.81% (40.02%) 40.66%
Asset Allocation
Sub-Account (217.39%) 217.39% (241.28%) 241.28%
Mortgage Securities
Sub-Account (67.18%) 67.28% (79.76%) 79.88%
Index 500
Sub-Account (381.97%) 382.35% (418.24%) 418.66%
Small Company Growth
Sub-Account (137.56%) 137.58% (155.44%) 155.46%
</TABLE>
* Ten year cumulative total return figures are not available for the Bond Sub-
Account, the Money Market Sub-Account, the Asset Allocation Sub-Account, the
Mortgage Securities Sub-Account, the Index 500 Sub-Account, and the Small
Company Growth Sub-Account as these sub-accounts first became available as a
result of Variable Fund D's reorganization in October 1990. The column above
entitled "Cumulative Ended 12/31/99" for these specified sub-accounts
illustrates the cumulative total return figures since Variable Fund D's
reorganization.
5
<PAGE>
Cumulative total return quotations for sub-accounts will be accompanied by
average annual total return figures for a one-year period, five-year period
and for the period since the sub-account became available pursuant to
Variable Fund D's registration statement. Average annual total return
figures are the average annual compounded rates of return required for an
initial investment of $1,000 to equal the surrender value of that same
investment at the end of the period. The average annual total return figures
published by Variable Fund D will reflect Minnesota Life's voluntary
absorption of certain Fund expenses. Prior to January 1, 1986, the Fund
incurred no expenses. During 1986 and from January 1 to March 8, 1987
Minnesota Life voluntarily absorbed all fees and expenses of any Fund
portfolio that exceeded .75% of the average daily net assets of such Fund
portfolio. For the period subsequent to March 9, 1987, Minnesota Life is
voluntarily absorbing the fees and expenses that exceed .65% of the average
daily net assets of the Growth, Bond, Money Market, Asset Allocation and
Mortgage Securities Portfolios of the Fund, .55% of the average daily net
assets of the Index 500 Portfolio of the Fund, and .90% of the average daily
net assets of the Small Company Growth Portfolio. Advantus Capital
Management, Inc. ("Advantus Capital") intends to waive other fund expenses
during the current fiscal year which exceed, as a percentage of average daily
net assets .15%. There is no specified or minimum period of time during which
it has agreed to continue its voluntary absorption of these expenses, and may
in its discretion cease its absorption of these expenses at any time. Should
Advantus Capital cease absorbing expenses, the effect would be to increase
substantially Fund expenses and thereby reduce investment return. There is no
specified or minimum period of time during which Advantus Capital has agreed
to continue its voluntary absorption of these expenses, and Advantus Capital
may in its discretion cease its absorption of expenses at any time. Should
Advantus Capital cease absorbing expenses the effect would be to increase
Fund expenses and thereby reduce investment return.
6
<PAGE>
The average annual total return figures described above may be accompanied by
other average annual total return quotations for the same or other periods.
Such other average annual total return figures will be calculated as
described above. The average annual rates of return, as thus calculated, for
the sub-accounts of the contracts described in the Prospectus for the
specified periods ended December 31, 1999 are shown in the tables below.
They are the same for the individual accumulation annuity, group accumulation
annuity and group deposit administration contracts. The figures in
parentheses show what the average annual rates of return would have been had
Minnesota Life not absorbed Fund expenses as described above.
<TABLE>
<CAPTION>
Average Annual Total Return
7% Sales Load
One Year Five Years Ten Years Since Inception
Ended 12/31/99 Ended 12/31/99 Ended 12/31/99* Ended 12/31/99*
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account (16.25%) 16.25% (24.42%) 24.42% (15.98%) 15.98% -- --
Bond Sub-Account (-10.04%) -10.04% (4.71%) 4.71% (5.63%) 5.65%
-- --
Money Market
Sub-Account (-3.17%) -3.17% (2.95%) 2.95% -- -- (2.81%) 2.97%
Asset Allocation
Sub-Account (6.51%) 6.51% (16.60%) 16.60% -- -- (13.40%) 13.40%
Mortgage Securities
Sub-Account (-5.68%) -5.68% (5.91%) 5.91% -- -- (5.75%) 5.76%
Index 500
Sub-Account (11.12%) 11.12% (25.00%) 25.00% -- -- (18.68%) 18.69%
Small Company Growth
Sub-Account (35.02%) 35.02% (15.24%) 15.24% -- -- (13.86%) 13.86%
</TABLE>
*Ten year average annual total return figures are not available for the Bond
Sub-Account the Money Market Sub-Account, the Asset Allocation Sub-Account,
the Mortgage Securities Sub-Account, the Index 500 Sub-Account and the Small
Company Growth Sub-Account as these sub-accounts first became available as a
result of the Variable Fund D reorganization in October 1990. The column above
entitled "Since Inception Ended 12/31/99" for these specified sub-accounts
illustrates the average annual total return figures since Variable Fund D's
reorganization.
7
<PAGE>
<TABLE>
<CAPTION>
No Sales Load
One Year Five Years Ten Years Since Inception
Ended 12/31/99 Ended 12/31/99* Ended 12/31/99* Ended 12/31/99*
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account (25.00%) 25.00% (26.24%) 26.24% (16.83%) 16.83% -- --
Bond Sub-Account (-3.27%) -3.27% (6.24%) 6.24% -- -- (6.47%) 6.49%
Money Market
Sub-Account (4.12%) 4.12% (4.45%) 4.45% -- -- (3.62%) 3.78%
Asset Allocation
Sub-Account (14.53%) 14.53% (18.30%) 18.30% -- -- (14.30%) 14.30%
Mortgage Securities
Sub-Account (1.42%) 1.42% (7.46%) 7.46% -- -- (6.59%) 6.60%
Index 500
Sub-Account (19.49%) 19.49% (26.83%) 26.83% -- -- (19.62%) 19.63%
Small Company Growth
Sub-Account (45.18%) 45.18% (16.92%) 16.92% -- -- (15.11%) 15.11%
</TABLE>
*Ten year average annual total return figures are not available for the Bond
Sub-Account the Money Market Sub-Account, the Asset Allocation Sub-Account,
the Mortgage Securities Sub-Account, the Index 500 Sub-Account and Small Company
Growth Sub-Account as these sub-accounts first became available as a result of
Variable Fund D's reorganization in October 1990. The column above entitled
"Since Inception Ended 12/31/99" for these specified sub-accounts illustrates
the average annual total return figures since Variable Fund D's reorganization.
8
<PAGE>
ANNUITY PAYMENTS
Please see Appendix A to this Statement of Additional Information for an
illustration of the calculation of annuity unit values and of a variable
annuity payment, showing the method used for the calculation of both the
initial and subsequent payments.
AUDITORS
The financial statements of Variable Fund D and the Consolidated Financial
Statements of Minnesota Life Insurance Company included in this Statement of
Additional Information have been audited by KPMG LLP, 4200 Norwest Center,
90 South Seventh Street, Minneapolis, Minnesota 55402, independent auditors,
as indicated in their reports in this Statement of Additional Information, and
are included herein in reliance upon such reports and upon the authority of such
firm as experts in accounting and auditing.
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of Minnesota Life Insurance Company
and Contract Owners of Variable Fund D:
We have audited the accompanying statements of assets and liabilities of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500 and
Small Company Growth Segregated Sub-Accounts of Variable Fund D (the Account),
as of December 31, 1999 and the related statements of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for periods presented in
note (7) to the financial statements. These financial statements and the
financial highlights are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights 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 and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investments owned at December 31, 1999 were verified by examination
of the underlying portfolios of Advantus Series Fund, Inc. 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 the Growth, Bond, Money Market,
Asset Allocation, Mortgage Securities, Index 500 and Small Company Growth
Segregated Sub-Accounts of Variable Fund D at December 31, 1999 and the results
of their operations, changes in their net assets and the financial highlights
for the periods stated in the first paragraph above, in conformity with
generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
February 4, 2000
<PAGE>
VARIABLE FUND D
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
MONEY ASSET
ASSETS GROWTH BOND MARKET ALLOCATION
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Growth Portfolio, 29,155,887 shares at net asset value
of $3.33 per share (cost $54,057,900)............................. $ 97,169,610 - - -
Bond Portfolio, 44,436 shares at net asset value
of $1.18 per share (cost $52,800)................................. - 52,417 - -
Money Market Portfolio, 611,238 shares at net asset
value of $1.00 per share (cost $611,238).......................... - - 611,238 -
Asset Allocation Portfolio, 1,939,197 shares at
net asset value of $2.39 per share (cost $3,372,671).............. - - - 4,627,816
Mortgage Securities Portfolio, 34,294 shares at net
asset value of $1.17 per share (cost $40,320)..................... - - - -
Index 500 Portfolio, 509,567 shares at net asset
value of $4.56 per share (cost $1,524,437)........................ - - - -
Small Company Growth Portfolio, 138,598 shares at net
asset value of $2.44 per share (cost $234,572).................... - - - -
------------- ---------- ----------- ------------
97,169,610 52,417 611,238 4,627,816
Receivable from Advantus Series Fund, Inc. for investments sold....... 8,219 1 14 102
Receivable from Minnesota Life for contract purchase payments......... 675 - 87 572
------------- ---------- ----------- ------------
Total assets.............................................. 97,178,504 52,418 611,339 4,628,490
------------- ---------- ----------- ------------
LIABILITIES
Payable to Advantus Series Fund, Inc. for investments purchased....... 675 - 87 572
Payable to Minnesota Life for contract terminations
and mortality and expense charges................................. 8,219 1 14 102
------------- ---------- ----------- ------------
Total liabilities......................................... 8,894 1 101 674
------------- ---------- ----------- ------------
Net assets applicable to annuity contract owners.......... $ 97,169,610 52,417 611,238 4,627,816
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of
3,098,116 for Growth; 29,421 for Bond; 434,563 for Money Market;
1,310,008 for Asset Allocation; 22,267 for Mortgage Securities;
421,646 for Index 500 and 111,546 for Small Company Growth........ $ 95,385,611 52,417 611,238 4,471,274
Contracts in annuity payment period (note 2).......................... 1,783,999 - - 156,542
------------- ---------- ----------- ------------
Total contract owners' equity............................. $ 97,169,610 52,417 611,238 4,627,816
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
NET ASSET VALUE PER ACCUMULATION UNIT................................. $ 30.79 1.78 1.41 3.41
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------
SMALL
MORTGAGE INDEX COMPANY
ASSETS SECURITIES 500 GROWTH
------------ ----------- ---------
<S> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Growth Portfolio, 29,155,887 shares at net asset value
of $3.33 per share (cost $54,057,900)............................. - - -
Bond Portfolio, 44,436 shares at net asset value
of $1.18 per share (cost $52,800)................................. - - -
Money Market Portfolio, 611,238 shares at net asset
value of $1.00 per share (cost $611,238).......................... - - -
Asset Allocation Portfolio, 1,939,197 shares at
net asset value of $2.39 per share (cost $3,372,671).............. - - -
Mortgage Securities Portfolio, 34,294 shares at net
asset value of $1.17 per share (cost $40,320)..................... 40,076 - -
Index 500 Portfolio, 509,567 shares at net asset
value of $4.56 per share (cost $1,524,437)........................ - 2,325,574 -
Small Company Growth Portfolio, 138,598 shares at net
asset value of $2.44 per share (cost $234,572).................... - - 338,095
------------ ----------- ---------
40,076 2,325,574 338,095
Receivable from Advantus Series Fund, Inc. for investments sold....... 1 61 4
Receivable from Minnesota Life for contract purchase payments......... - - -
------------ ----------- ---------
Total assets.............................................. 40,077 2,325,635 338,099
------------ ----------- ---------
LIABILITIES
Payable to Advantus Series Fund, Inc. for investments purchased ...... - - -
Payable to Minnesota Life for contract terminations
and mortality and expense charges................................. 1 61 4
------------ ----------- ---------
Total liabilities......................................... 1 61 4
------------ ----------- ---------
Net assets applicable to annuity contract owners.......... 40,076 2,325,574 338,095
------------ ----------- ---------
------------ ----------- ---------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of
3,098,116 for Growth; 29,421 for Bond; 434,563 for Money Market;
1,310,008 for Asset Allocation; 22,267 for Mortgage Securities;
421,646 for Index 500 and 111,546 for Small Company Growth ....... 40,076 2,186,197 284,959
Contracts in annuity payment period (note 2).......................... - 139,377 53,136
------------ ----------- ---------
Total contract owners' equity............................. 40,076 2,325,574 338,095
------------ ----------- ---------
------------ ----------- ---------
NET ASSET VALUE PER ACCUMULATION UNIT................................. 1.80 5.18 2.55
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE FUND D
Statements of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
MONEY ASSET
GROWTH BOND MARKET ALLOCATION
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 5)............................................ $ 411,664 27,810 22,582 244,336
Reimbursement from Minnesota Mutual for excess expense
charges (note 4)................................................ 240,891 722 1,144 13,289
Mortality and expense charges (note 3)............................ (730,045) (2,442) (3,870) (44,957)
------------- ---------- ----------- ------------
Investment income (loss) - net................................ (77,490) 26,090 19,856 212,668
------------- ---------- ----------- ------------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 5).. 2,631,083 11,188 - 361,967
------------- ---------- ----------- ------------
Realized gains (losses) on sales of investments:
Proceeds from sales........................................... 24,094,220 1,118,641 109,985 3,517,874
Cost of investments sold...................................... (15,647,594) (1,163,466) (109,985) (2,745,522)
------------- ---------- ----------- ------------
8,446,626 (44,825) - 772,352
------------- ---------- ----------- ------------
Net realized gains (losses) on investments.................... 11,077,709 (33,637) - 1,134,319
------------- ---------- ----------- ------------
Net change in unrealized appreciation or depreciation
of investments............................................. 9,648,060 (4,603) - (652,983)
------------- ---------- ----------- ------------
Net gains (losses) on investments............................. 20,725,769 (38,240) - 481,335
------------- ---------- ----------- ------------
Net increase in net assets resulting from operations.................. $ 20,648,279 (12,150) 19,856 694,004
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------
SMALL
MORTGAGE INDEX COMPANY
SECURITIES 500 GROWTH
------------ ----------- ---------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 5)............................................ 8,169 56,640 -
Reimbursement from Minnesota Mutual for excess expense
charges (note 4)................................................ 209 4,402 1,193
Mortality and expense charges (note 3)............................ (707) (25,922) (1,956)
------------ ----------- ---------
Investment income (loss) - net................................ 7,671 35,120 (763)
------------ ----------- ---------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 5).. - 62,289 -
------------ ----------- ---------
Realized gains (losses) on sales of investments:
Proceeds from sales........................................... 127,533 3,483,952 391,935
Cost of investments sold...................................... (129,074) (2,265,635) (370,141)
------------ ----------- ---------
(1,541) 1,218,317 21,794
------------ ----------- ---------
Net realized gains (losses) on investments.................... (1,541) 1,280,606 21,794
------------ ----------- ---------
Net change in unrealized appreciation or depreciation
of investments............................................. (4,435) (656,714) 81,224
------------ ----------- ---------
Net gains (losses) on investments............................. (5,976) 623,892 103,018
------------ ----------- ---------
Net increase in net assets resulting from operations.................. 1,695 659,012 102,255
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE FUND D
Statements of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
MONEY ASSET
GROWTH BOND MARKET ALLOCATION
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net ................................... $ (77,490) 26,090 19,856 212,668
Net realized gains (losses) on investments ....................... 11,077,709 (33,637) - 1,134,319
Net change in unrealized appreciation or depreciation of
investments...................................................... 9,648,060 (4,603) - (652,983)
------------- ----------- ----------- ------------
Net increase (decrease) in net assets resulting from operations ...... 20,648,279 (12,150) 19,856 694,004
------------- ----------- ----------- ------------
Contract transactions (notes 2, 3, 5 and 6):
Contract purchase payments ....................................... 2,914,329 771,432 321,074 231,918
Contract terminations and withdrawal payments .................... (23,435,010) (1,116,921) (107,259) (3,469,430)
Actuarial adjustments for mortality experience on annuities in
payment period................................................... 35,319 - - 92
Annuity benefit payments ......................................... (205,373) - - (16,869)
------------- ----------- ----------- ------------
Increase (decrease) in net assets from contract transactions ......... (20,690,735) (345,489) 213,815 (3,254,289)
------------- ----------- ----------- ------------
Increase (decrease) in net assets .................................... (42,456) (357,639) 233,671 (2,560,285)
Net assets at the beginning of year .................................. 97,212,066 410,056 377,567 7,188,101
------------- ----------- ----------- ------------
Net assets at the end of year ........................................ $ 97,169,610 52,417 611,238 4,627,816
------------- ----------- ----------- ------------
------------- ----------- ----------- ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------
SMALL
MORTGAGE INDEX COMPANY
SECURITIES 500 GROWTH
------------ ----------- ---------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ................................... 7,671 35,120 (763)
Net realized gains (losses) on investments ....................... (1,541) 1,280,606 21,794
Net change in unrealized appreciation or depreciation of
investments...................................................... (4,435) (656,714) 81,224
------------ ----------- ---------
Net increase (decrease) in net assets resulting from operations ...... 1,695 659,012 102,255
------------ ----------- ---------
Contract transactions (notes 2, 3, 5 and 6):
Contract purchase payments ....................................... 7,454 901,067 275,794
Contract terminations and withdrawal payments .................... (127,035) (3,451,603) (388,884)
Actuarial adjustments for mortality experience on annuities in
payment period................................................... - 114 40
Annuity benefit payments ......................................... - (10,943) (2,328)
------------ ----------- ---------
Increase (decrease) in net assets from contract transactions ......... (119,581) (2,561,365) (115,378)
------------ ----------- ---------
Increase (decrease) in net assets .................................... (117,886) (1,902,353) (13,123)
Net assets at the beginning of year .................................. 157,962 4,227,927 351,218
------------ ----------- ---------
Net assets at the end of year ........................................ 40,076 2,325,574 338,095
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE FUND D
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
MONEY ASSET
GROWTH BOND MARKET ALLOCATION
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net ................................... $ 345,618 23,375 19,596 130,616
Net realized gains (losses) on investments ....................... 15,172,018 16,596 - 599,913
Net change in unrealized appreciation or depreciation
of investments................................................... 10,064,337 (14,719) - 640,456
------------- ----------- ----------- ------------
Net increase in net assets resulting from operations ................. 25,581,973 25,252 19,596 1,370,985
------------- ----------- ----------- ------------
Contract transactions (notes 2, 3, 5 and 6):
Contract purchase payments ....................................... 2,304,654 776,403 643,001 466,292
Contract terminations and withdrawal payments .................... (9,456,895) (839,050) (685,594) (861,749)
Actuarial adjustments for mortality experience on annuities in
payment period................................................... 7,871 - - (1,265)
Annuity benefit payments.......................................... (189,323) - - (1,875)
------------- ----------- ----------- ------------
Increase (decrease) in net assets from contract transactions.......... (7,333,693) (62,647) (42,593) (398,597)
------------- ----------- ----------- ------------
Increase (decrease) in net assets..................................... 18,248,280 (37,395) (22,997) 972,388
Net assets at the beginning of year .................................. 78,963,786 447,451 400,564 6,215,713
------------- ----------- ----------- ------------
Net assets at the end of year ........................................ $ 97,212,066 410,056 377,567 7,188,101
------------- ----------- ----------- ------------
------------- ----------- ----------- ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------
SMALL
MORTGAGE INDEX COMPANY
SECURITIES 500 GROWTH
------------ ----------- ---------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ................................... 10,966 7,258 (632)
Net realized gains (losses) on investments ....................... 181 637,977 (10,073)
Net change in unrealized appreciation or depreciation
of investments................................................... (242) 256,388 29,117
------------ ----------- ---------
Net increase in net assets resulting from operations ................. 10,905 901,623 18,412
------------ ----------- ---------
Contract transactions (notes 2, 3, 5 and 6):
Contract purchase payments ....................................... 311,440 1,765,982 348,911
Contract terminations and withdrawal payments .................... (382,978) (1,896,668) (206,762)
Actuarial adjustments for mortality experience on annuities in
payment period................................................... - (1,283) (425)
Annuity benefit payments.......................................... - (1,935) (632)
------------ ----------- ---------
Increase (decrease) in net assets from contract transactions.......... (71,538) (133,904) 141,092
------------ ----------- ---------
Increase (decrease) in net assets..................................... (60,633) 767,719 159,504
Net assets at the beginning of year .................................. 218,595 3,460,208 191,714
------------ ----------- ---------
Net assets at the end of year ........................................ 157,962 4,227,927 351,218
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE FUND D
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Variable Fund D (the Account), is organized as a segregated asset account
of Minnesota Life Insurance Company (Minnesota Life) under Minnesota law
and is registered as a unit investment trust under the Investment Company
Act of 1940 (as amended).
The assets of each segregated sub-account are held for the exclusive
benefit of the variable annuity contract owners and are not chargeable with
liabilities arising out of the business conducted by any other account or
by Minnesota Life. Contract owners allocate their variable annuity payments
to one or more of the seven segregated sub-accounts. Such payments are then
invested in shares of Advantus Series Fund, Inc., (the Fund) organized by
Minnesota Life as the investment vehicle for its variable annuity contracts
and variable life policies. The Fund is registered under the Investment
Company Act of 1940 (as amended) as a diversified, open-end management
investment company. Payments allocated to the Growth, Bond, Money Market,
Asset Allocation, Mortgage Securities, Index 500 and Small Company Growth
segregated sub-accounts are invested in shares of the Growth, Bond, Money
Market, Asset Allocation, Mortgage Securities, Index 500 and Small Company
Growth Portfolios of the Fund, respectively.
Ascend Financial Services, Inc. acts as the underwriter for the Account.
Advantus Capital Management, Inc., a wholly owned subsidiary of Minnesota
Life, acts as the investment adviser for the Fund. Ascend Financial
Services, Inc. is a wholly-owned subsidiary of Advantus Capital Management,
Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements.
Actual results could differ from those estimates.
INVESTMENTS IN ADVANTUS SERIES FUND, INC.
Investments in shares of the Fund portfolios are stated at market value
which is the net asset value per share as determined daily by the Fund.
Investment transactions are accounted for on the date the shares are
purchased or sold. The cost of investments sold is determined on the
average cost method. All dividend distributions received from the Fund are
reinvested in additional shares of the Fund and are recorded by the
sub-accounts on the ex-dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Life for federal income tax
purposes. Under current interpretations of existing federal income tax law,
no income taxes are payable on investment income or capital gain
distributions received by the Account from the Fund.
CONTRACTS IN ANNUITY PAYMENT PERIOD
Annuity reserves are computed for contracts currently payable using the
Progressive Annuity Mortality Table and an assumed interest rate of 3.5
percent. Charges to annuity reserves for mortality and risk expense are
reimbursed to Minnesota Life if the reserves required are less than
originally estimated. If additional reserves are required, Minnesota Life
reimburses the Account.
<PAGE>
2
VARIABLE FUND D
(3) MORTALITY AND EXPENSE AND SALES AND ADMINISTRATIVE SERVICE CHARGES
The mortality and expense charge paid to Minnesota Life is computed daily
and is equal, on an annual basis, to .795 percent of the average daily net
assets of the Account.
Sales and administrative service charges, depending upon the type of
contract, may be deducted from the contract owner's contract purchase
payment or contract withdrawal. Total sales and administrative charges
deducted from contract purchase payments or contract withdrawal proceeds
for the years ended December 31, 1999 and 1998 amounted to $2,199 and
$2,249, respectively.
(4) REIMBURSEMENT FROM MINNESOTA LIFE FOR EXCESS EXPENSES
Effective October 26, 1990, the contract owners of the Account voted to
reorganize as a unit investment trust under the Investment Company Act of
1940 (as amended). Prior to the reorganization, the Account invested
directly in a diversified portfolio of equity securities. The Account has
seven segregated sub-accounts to which contract owners may allocate their
payments.
Under the Plan of Reorganization, Minnesota Life agreed to reimburse the
Account for any increase in expenses paid by the Account as a result of the
reorganization. Prior to the reorganization, the Account was charged an
investment advisory fee equal, on an annual basis, to .265 percent of the
average daily net assets. After the reorganization, the Account no longer
pays an investment advisory fee since it no longer invests directly in a
portfolio of securities. However, contract values that are allocated to the
segregated sub-accounts after the reorganization are invested in Fund
portfolios that pay investment advisory fees as well as other operating
expenses. Investment advisory fees are based on the average daily net
assets of the Fund portfolios at the annual rate of .50 percent for the
Growth, Bond, Money Market, Asset Allocation and Mortgage Securities
Portfolios, .40 percent for the Index 500 Portfolio and .75 percent for the
Small Company Growth Portfolio.
In calculating the accumulation unit value for the Growth segregated
sub-account, Minnesota Life has agreed to make an adjustment that will have
the effect of reimbursing the excess of any expenses indirectly incurred as
a result of the investment advisory fee and the operating expenses incurred
by the Growth Portfolio over the .265 percent investment advisory paid
prior to the reorganization. In calculating the accumulation unit value for
the segregated sub-accounts other than Growth, Minnesota Life will make
adjustments that, in effect, reimburse the excess of the investment
advisory fees incurred through indirect investment in the Fund over the
.265 percent investment management fee paid prior to the reorganization. No
adjustment will be made for the additional operating expenses charged to
those portfolios. However, in the past ten years Minnesota Life has
voluntarily absorbed other operating expenses that exceed .15 percent on an
annual basis for each Fund portfolio.
(5) INVESTMENT TRANSACTIONS
The Account's purchases of Fund shares, including reinvestment of dividend
distributions, were as follows during the year ended December 31, 1999:
<TABLE>
<S> <C>
Growth Portfolio ............................................ $ 5,957,078
Bond Portfolio .............................................. 810,430
Money Market Portfolio ...................................... 343,656
Asset Allocation Portfolio .................................. 838,220
Mortgage Securities Portfolio ............................... 15,623
Index 500 Portfolio ......................................... 1,019,996
Small Company Growth Portfolio .............................. 275,794
</TABLE>
<PAGE>
3
VARIABLE FUND D
(6) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the years ended
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------
MONEY
GROWTH BOND MARKET
----------------- ----------------- -----------------
<S> <C> <C> <C>
Units outstanding at December 31, 1997.............................. 4,229,239 256,628 309,546
Contract purchase payments..................................... 102,498 432,492 489,578
Deductions for contract terminations,
withdrawal payments and charges.............................. (450,347) (466,400) (519,627)
----------------- ----------------- -----------------
Units outstanding at December 31, 1998.............................. 3,881,390 222,720 279,497
Contract purchase payments..................................... 110,947 427,206 232,416
Deductions for contract terminations,
withdrawal payments and charges.............................. (894,221) (620,505) (77,350)
----------------- ----------------- -----------------
Units outstanding at December 31, 1999.............................. 3,098,116 29,421 434,563
----------------- ----------------- -----------------
----------------- ----------------- -----------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------
SMALL
ASSET MORTGAGE INDEX COMPANY
ALLOCATION SECURITIES 500 GROWTH
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Units outstanding at December 31, 1997........... 2,564,823 130,573 1,012,408 109,961
Contract purchase payments.................. 179,041 183,321 442,749 199,852
Deductions for contract terminations,
withdrawal payments and charges........... (366,535) (224,849) (505,539) (132,312)
----------------- ----------------- ----------------- -----------------
Units outstanding at December 31, 1998........... 2,377,329 89,045 949,618 177,501
Contract purchase payments.................. 60,523 4,238 189,002 153,925
Deductions for contract terminations,
withdrawal payments and charges........... (1,127,844) (71,016) (716,974) (219,880)
----------------- ----------------- ----------------- -----------------
Units outstanding at December 31, 1999........... 1,310,008 22,267 421,646 111,546
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
<PAGE>
4
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for
an accumulation unit outstanding during the periods indicated:
GROWTH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 24.63 18.38 13.84 11.88 9.60
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss).................. (.02) .08 .05 .05 .05
Net gains or losses on securities
(both realized and unrealized)............. 6.18 6.17 4.49 1.91 2.23
---------- ---------- ---------- ---------- ----------
Total from investment operations........... 6.16 6.25 4.54 1.96 2.28
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 30.79 24.63 18.38 13.84 11.88
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
5
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
BOND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 1.84 1.75 1.60 1.57 1.32
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income......................... .15 .09 .09 .07 .04
Net gains or losses on securities
(both realized and unrealized)............. (.21) - .06 (.04) .21
---------- ---------- ---------- ---------- ----------
Total from investment operations........... (.06) .09 .15 .03 .25
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 1.78 1.84 1.75 1.60 1.57
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
6
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
MONEY MARKET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 1.35 1.29 1.24 1.19 1.13
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income......................... .06 .06 .05 .05 .06
---------- ---------- ---------- ---------- ----------
Total from investment operations........... .06 .06 .05 .05 .06
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 1.41 1.35 1.29 1.24 1.19
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
7
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
ASSET ALLOCATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 2.98 2.42 2.05 1.83 1.47
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income......................... .12 .05 .04 .05 .04
Net gains on securities
(both realized and unrealized)............. .31 .51 .33 .17 .32
---------- ---------- ---------- ---------- ----------
Total from investment operations........... .43 .56 .37 .22 .36
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 3.41 2.98 2.42 2.05 1.83
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
8
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
MORTGAGE SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 1.77 1.67 1.54 1.47 1.26
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income......................... .16 .09 .12 .06 .10
Net gains or losses on securities
(both realized and unrealized)............. (.13) .01 .01 .01 .11
---------- ---------- ---------- ---------- ----------
Total from investment operations........... .03 .10 .13 .07 .21
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 1.80 1.77 1.67 1.54 1.47
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
9
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
INDEX 500
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year.................... $ 4.34 3.41 2.60 2.15 1.58
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income......................... .05 .01 .01 .02 .02
Net gains on securities
(both realized and unrealized)............. .79 .92 .80 .43 .55
---------- ---------- ---------- ---------- ----------
Total from investment operations........... .84 .93 .81 .45 .57
---------- ---------- ---------- ---------- ----------
Unit value, end of year.......................... $ 5.18 4.34 3.41 2.60 2.15
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
10
VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS - CONTINUED
SMALL COMPANY GROWTH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period.................. $ 1.76 1.74 1.62 1.54 1.17
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment loss........................... (.01) (.01) (.01) (.01) (.01)
Net gains on securities (both
realized and unrealized)................... .80 .03 .13 .09 .38
---------- ---------- ---------- ---------- ----------
Total from investment operations........... .79 .02 .12 .08 .37
---------- ---------- ---------- ---------- ----------
Unit value, end of period........................ $ 2.55 1.76 1.74 1.62 1.54
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Minnesota Life Insurance Company:
We have audited the accompanying consolidated balance sheets of the
Minnesota Life Insurance Company and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations and comprehensive
income, changes in stockholder's equity and cash flows for each of the years in
the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Minnesota Life Insurance Company and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in the accompanying schedules is presented for purpose of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
Minneapolis, Minnesota
February 11, 2000
ML-1
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,868,584 and $4,667,688) $ 4,803,568 $ 4,914,012
Held-to-maturity, at amortized cost (fair value
$968,852 and $1,161,784) 974,814 1,086,548
Equity securities, at fair value (cost $587,014 and
$579,546) 770,269 749,800
Mortgage loans, net 696,672 681,219
Real estate, net 36,793 38,530
Finance receivables, net 134,812 163,411
Policy loans 237,335 226,409
Short-term investments 93,993 136,435
Private equities 284,797 160,958
Other invested assets 53,919 100,667
----------- -----------
Total investments 8,086,972 8,257,989
Cash 116,803 175,660
Deferred policy acquisition costs 713,217 564,382
Accrued investment income 93,385 86,974
Premiums receivable, net 94,171 62,609
Property and equipment, net 59,223 67,448
Reinsurance recoverables 194,940 176,683
Other assets 64,256 61,183
Separate account assets 8,931,456 6,994,752
----------- -----------
Total assets $18,354,423 $16,447,680
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Policy and contract account balances $ 4,234,183 $ 4,242,802
Future policy and contract benefits 1,826,953 1,758,375
Pending policy and contract claims 90,762 70,564
Other policyholders funds 451,056 438,595
Policyholders dividends payable 51,749 53,957
Stockholder dividend payable -- 24,700
Unearned premiums and fees 208,013 180,191
Federal income tax liability:
Current 68,320 53,039
Deferred 125,094 173,907
Other liabilities 442,369 514,468
Notes payable 218,000 267,000
Separate account liabilities 8,882,060 6,947,806
----------- -----------
Total liabilities 16,598,559 14,725,404
----------- -----------
Stockholder's equity:
Common stock, $1 par value, 5,000,000 shares autho-
rized, issued and outstanding 5,000 5,000
Additional paid in capital 3,000 --
Retained earnings 1,629,787 1,513,661
Accumulated other comprehensive income 118,077 203,615
----------- -----------
Total stockholder's equity 1,755,864 1,722,276
----------- -----------
Total liabilities and stockholder's equity $18,354,423 $16,447,680
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-2
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 697,799 $ 577,693 $ 615,253
Policy and contract fees 331,110 300,361 272,037
Net investment income 540,056 531,081 553,773
Net realized investment gains 79,615 114,652 114,367
Finance charge income 31,969 35,880 43,650
Other income 81,135 73,498 71,707
---------- ---------- ----------
Total revenues 1,761,684 1,633,165 1,670,787
---------- ---------- ----------
Benefits and expenses:
Policyholders benefits 667,207 519,926 515,873
Interest credited to policies and con-
tracts 282,627 290,870 298,033
General operating expenses 358,387 360,916 369,961
Commissions 110,645 110,211 114,404
Administrative and sponsorship fees 79,787 80,183 81,750
Dividends to policyholders 18,928 25,159 26,776
Interest on notes payable 24,282 22,360 24,192
Amortization of deferred policy acqui-
sition costs 123,455 148,098 128,176
Capitalization of policy acquisition
costs (152,602) (166,140) (155,054)
---------- ---------- ----------
Total benefits and expenses 1,512,716 1,391,583 1,404,111
---------- ---------- ----------
Income from operations before taxes 248,968 241,582 266,676
Federal income tax expense (benefit):
Current 75,172 93,584 84,612
Deferred (1,439) (15,351) (7,832)
---------- ---------- ----------
Total federal income tax expense 73,733 78,233 76,780
---------- ---------- ----------
Net income $ 175,235 $ 163,349 $ 189,896
========== ========== ==========
Other comprehensive income (loss), after
tax:
Foreign currency translation adjust-
ments $ -- $ (947) $ 947
Unrealized gains (losses) on securities (85,538) 47,889 47,414
---------- ---------- ----------
Other comprehensive income (loss), net
of tax (85,538) 46,942 48,361
---------- ---------- ----------
Comprehensive income $ 89,697 $ 210,291 $ 238,257
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-3
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Common stock:
Beginning balance $ 5,000 $ -- $ --
Issued during the year -- 5,000 --
---------- ---------- ----------
Total common stock $ 5,000 $ 5,000 $ --
========== ========== ==========
Additional paid in capital:
Beginning balance $ -- $ -- $ --
Contribution 3,000 -- --
---------- ---------- ----------
Total additional paid in capital $ 3,000 $ -- $ --
========== ========== ==========
Retained earnings:
Beginning balance $1,513,661 $1,380,012 $1,190,116
Net income 175,235 163,349 189,896
Retained earnings transfer for common
stock issued -- (5,000) --
Dividends to stockholder (59,109) (24,700) --
---------- ---------- ----------
Total retained earnings $1,629,787 $1,513,661 $1,380,012
========== ========== ==========
Accumulated other comprehensive income:
Beginning balance $ 203,615 $ 156,673 $ 108,312
Change in unrealized appreciation of
investments (85,538) 47,889 47,414
Change in unrealized gain on foreign
currency translation -- (947) 947
---------- ---------- ----------
Total accumulated other comprehensive
income $ 118,077 $ 203,615 $ 156,673
========== ========== ==========
Total stockholder's equity $1,755,864 $1,722,276 $1,536,685
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-4
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 175,235 $ 163,349 $ 189,896
Adjustments to reconcile net income to
net cash
provided by operating activities:
Interest credited to annuity and in-
surance contracts 282,627 290,870 298,033
Fees deducted from policy and con-
tract balances (217,941) (212,901) (214,803)
Change in future policy benefits 68,578 56,716 76,358
Change in other policyholders lia-
bilities 29,426 11,965 7,597
Amortization of deferred policy ac-
quisition costs 123,455 148,098 128,176
Capitalization of policy acquisition
costs (152,602) (166,140) (155,054)
Change in premiums receivable (31,562) 5,421 (9,280)
Change in federal income tax liabil-
ities 14,598 (7,455) 36,049
Net realized investment gains (79,615) (114,652) (114,367)
Other, net (27,314) 30,524 (44,527)
----------- ----------- -----------
Net cash provided by operating ac-
tivities 184,885 205,795 198,078
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of:
Fixed maturity securities, avail-
able-for-sale 1,856,757 1,835,955 1,099,114
Equity securities 705,050 621,125 601,936
Real estate 7,341 7,800 9,279
Private equities 28,128 20,025 19,817
Other invested assets 5,731 822 7,060
Proceeds from maturities and repay-
ments of:
Fixed maturity securities, avail-
able-for-sale 345,677 414,726 403,829
Fixed maturity securities, held-to-
maturity 122,704 148,848 139,394
Mortgage loans 116,785 126,066 109,246
Purchases of:
Fixed maturity securities, avail-
able-for-sale (2,432,049) (2,384,720) (1,498,048)
Fixed maturity securities, held-to-
maturity (8,446) (99,989) (82,835)
Equity securities (613,596) (610,553) (585,349)
Mortgage loans (130,013) (141,008) (157,247)
Real estate (1,016) (5,612) (3,908)
Private equities (79,584) (64,811) (48,778)
Other invested assets (11,435) (10,871) (7,210)
Finance receivable originations or
purchases (74,989) (77,141) (115,248)
Finance receivable principal payments 88,697 109,277 133,762
Other, net (91,346) 104,519 (88,626)
----------- ----------- -----------
Net cash used for investing activi-
ties (165,604) (5,542) (63,812)
----------- ----------- -----------
Cash Flows from Financing Activities
Deposits credited to annuity and in-
surance contracts 448,012 952,622 928,696
Withdrawals from annuity and insurance
contracts (478,775) (1,053,844) (1,013,588)
Proceeds from issuance of debt 50,000 40,000 --
Payments on debt (49,000) (31,000) (21,000)
Dividends paid to stockholder (83,809) -- --
Other, net (7,008) (4,467) (3,355)
----------- ----------- -----------
Net cash used for financing activi-
ties (120,580) (96,689) (109,247)
----------- ----------- -----------
Net increase (decrease) in cash and
short-term investments (101,299) 103,564 25,019
Cash and short-term investments, be-
ginning of year 312,095 208,531 183,512
----------- ----------- -----------
Cash and short-term investments, end
of year $ 210,796 $ 312,095 $ 208,531
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-5
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Nature of Operations
Description of Business
Minnesota Life Insurance Company, both directly and through its subsidiaries
(collectively, the Company), provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into five strategic business
units, which focus on various markets: Individual Insurance, Financial
Services, Group Insurance, Pension and Asset Management. Revenues in 1999 for
these business units were $703,473,000, $263,418,000, $388,792,000,
$164,774,000, and $66,594,000, respectively. Additional revenues of
$174,633,000 were reported by the Company's subsidiaries and corporate product
line.
The Company serves over six million people through more than 4,000
associates located at its St. Paul, Minnesota headquarters and in sales offices
nationwide.
Conversion to a Mutual Holding Company Structure
Consent was given from the Minnesota Department of Commerce (Department of
Commerce) allowing The Minnesota Mutual Life Insurance Company to implement a
conversion to a mutual holding company. The Minnesota Mutual Life Insurance
Company enacted this privilege effective October 1, 1998. The conversion
created Minnesota Mutual Companies, Inc., a mutual holding company, Securian
Holding Company, and Securian Financial Group, Inc., which are intermediate
stock holding companies. The Minnesota Mutual Life Insurance Company was
converted into a stock life insurance company and renamed Minnesota Life
Insurance Company. Minnesota Mutual Companies, Inc. will at all times, in
accordance with the conversion plan and as required by the Mutual Insurance
Holding Company Act, directly or indirectly control Minnesota Life Insurance
Company through the ownership of at least a majority of the voting power of the
voting shares of the capital stock of Minnesota Life Insurance Company. Annuity
contract and life insurance policyholders of Minnesota Life Insurance Company
have certain membership interests consisting primarily of the right to vote on
certain matters involving Minnesota Mutual Companies, Inc. and the right to
receive distributions of surplus in the event of demutualization, dissolution
or liquidation of Minnesota Mutual Companies, Inc.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The
consolidated financial statements include the accounts of the Minnesota Life
Insurance Company and its subsidiaries. All material intercompany transactions
and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Future events, including
changes in mortality, morbidity, interest rates and asset valuations, could
cause actual results to differ from the estimates used in the consolidated
financial statements.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
ML-6
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include both the portion of claims not covered by and
interest credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to estimated gross profits or margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
policy acquisition costs are amortized over the premium paying period in
proportion to the ratio of annual premium revenues to ultimate anticipated
premium revenues. The ultimate premium revenues are estimated based upon the
same assumptions used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred policy
acquisition costs are amortized over the estimated lives of the contracts in
relation to the present value of estimated gross profits from surrender charges
and investment, mortality and expense margins.
Deferred policy acquisition costs amortized were $123,455,000, $148,098,000
and $128,176,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Software Capitalization
The Accounting Standards Executive Committee issued Statement of Position 98-1,
Accounting for Costs of Computer Software for Internal Use, effective for
fiscal years beginning after December 15, 1998. The Company has adopted the
capitalization of software cost beginning in 1999. At December 1999, the
Company had unamortized cost of $7,459,000 and amortized software expense of
$1,643,000. Costs are amortized over a three-year period.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest on the smaller balance homogeneous finance receivables is suspended
when a loan is contractually delinquent for more than 60 days and is
subsequently recognized when received. Accrual is resumed when the loan is
contractually less than 60 days past due. Finance charges and interest is
suspended when a loan is considered by management to be impaired. Loan
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the observable market price of the loan or the fair value of the collateral
if the loan is collateral dependent. When a loan is identified as impaired,
interest previously accrued in the current year is reversed. Interest payments
received on impaired loans are generally applied to principal unless the
remaining principal balance has been determined to be fully collectible. An
allowance for uncollectible amounts is maintained by direct charges to
operations at an amount which management believes, based upon historical losses
and economic conditions, is adequate to absorb probable losses on existing
receivables that may become uncollectible. The reported receivables are net of
this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities, which may be sold prior to maturity, are classified as available-
for-sale and are carried at fair value.
ML-7
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
On January 1, 1999, the Company converted to the equity method of accounting
for its private equity investments. Prior to 1999 the Company accounted for
these investments using the cost method. The change to this method of
accounting was not material to prior year amounts. Private equity investments
are now carried at our equity in the estimated fair value of the underlying
investments of these limited partnerships. In-kind distributions are recorded
as a return of capital for the cost basis of the stock received. Changes in
fair value are recorded directly in stockholder's equity.
Fair values of fixed maturity securities, equity securities and private
equities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are estimated using values obtained from
independent pricing services which specialize in matrix pricing and modeling
techniques for estimating fair values. Fair values of mortgage loans are based
upon discounted cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an
allowance for estimated losses. Accumulated depreciation on real estate at
December 31, 1999 and 1998, was $7,101,000 and $6,713,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps were used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps were based upon
certain stock indices. If, at the time of settlement for a particular swap, the
designated stock index had fallen below a specified level, the counterparty
would pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index had risen, the Company would pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap. The equity swaps were settled with the
counterparties in August 1997. The swaps were carried at fair value, which were
based upon dealer quotes. Changes in fair value were recorded directly in
stockholder's equity. Upon settlement of the swaps, gains or losses were
recognized in income, and the Company realized a loss of approximately
$31,000,000 in 1997, upon settlement of these equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. Unrealized gains or losses are recorded on foreign
denominated securities due to the fluctuation in foreign currency exchange
rates and/or related payables and receivables and interest on foreign
securities. The Company uses forward foreign exchange currency contracts as
part of its risk management strategy for international investments. The forward
foreign exchange currency contracts are used to reduce market risks from
changes in foreign exchange rates. These forward foreign exchange currency
contracts are agreements to purchase a specified amount of one currency in
exchange for a specified amount of another currency at a future point in time
at a foreign exchange currency rate agreed upon on the contract open date. No
cash is exchanged at the outset of the contract and no payments are made by
either party until the contract close date. On the contract
ML-8
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
close date the contracted amount of the purchased currency is received from the
counterparty and the contracted amount of the sold currency is sent to the
counterparty. Realized and unrealized gains and losses on these forward foreign
exchange contracts are recorded in income as incurred. Notional amounts for the
years ended December 31, 1999 and 1998, were $98,606,000 and $115,194,000,
respectively.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale,
equity securities and private equity investments in limited partnerships are
recorded as a separate component of stockholder's equity, net of taxes and
related adjustments to deferred policy acquisition costs and unearned policy
and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$113,441,000 and $101,692,000 at December 31, 1999 and 1998, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expenses for the years ended December 31,
1999, 1998 and 1997, were $11,749,000, $10,765,000 and $8,965,000,
respectively.
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension, variable
annuity and variable life insurance policyholders and contractholders. Assets
consist principally of marketable securities and both assets and liabilities
are reported at fair value, based upon the market value of the investments held
in the segregated funds. The Company receives administrative and investment
advisory fees for services rendered on behalf of these accounts.
The Company periodically invests money in its separate accounts. The market
value of such investments, included with separate account assets, amounted to
$49,396,000 and $46,946,000 at December 31, 1999 and 1998, respectively.
Policyholders Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for
traditional life, group life, and accident and health products. The reserves
were calculated using the net level premium method based upon assumptions
regarding investment yield, mortality, morbidity, and withdrawal rates
determined at the date of issue, commensurate with the Company's experience.
Provision has been made in certain cases for adverse deviations from these
assumptions.
Other policyholders funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Dividends on participating policies and other discretionary payments are
declared by the Board of Directors based upon actuarial determinations, which
take into consideration current mortality, interest earnings, expense factors
and federal income taxes. Dividends are recognized as expenses consistent with
the recognition of premiums. At December 31, 1999 and 1998, the total
participating business in force was $50,305,164,000 and $55,683,649,000,
respectively.
ML-9
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
Reclassifications
Certain 1998 and 1997 consolidated financial statement balances have been
reclassified to conform to the 1999 presentation.
(3) Investments
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $428,286 $445,220 $457,391
Equity securities 29,282 12,183 16,182
Mortgage loans 54,596 54,785 55,929
Real estate 11 (236) (407)
Policy loans 16,016 15,502 15,231
Short-term investments 5,829 6,147 6,995
Private equities 4,114 1,908 2,081
Other invested assets 6,278 1,918 1,790
-------- -------- --------
Gross investment income 544,412 537,427 555,192
Investment expenses (4,356) (6,346) (1,419)
-------- -------- --------
Total $540,056 $531,081 $553,773
======== ======== ========
Net realized investment gains (losses) for the years ended December 31 were
as follows:
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $(31,404) $ 43,244 $ 3,711
Equity securities 91,591 47,526 92,765
Mortgage loans 1,344 3,399 2,011
Real estate 4,806 7,809 1,598
Private equities 13,983 6,336 8,431
Other invested assets (705) 6,338 5,851
-------- -------- --------
Total $ 79,615 $114,652 $114,367
======== ======== ========
</TABLE>
ML-10
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 28,619 $ 56,428 $ 18,804
Gross realized losses (60,023) (13,184) (15,093)
Equity securities:
Gross realized gains 143,180 107,342 120,437
Gross realized losses (51,589) (59,816) (27,672)
Private equities:
Gross realized gains 14,558 13,563 10,515
Gross realized losses (575) (7,227) (2,084)
</TABLE>
Net unrealized gains (losses) included in stockholder's equity at December
31 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 361,895 $ 487,479
Gross unrealized losses (184,268) (73,440)
Adjustment to deferred acquisition costs (414) (119,542)
Adjustment to unearned policy and contract fees (473) 15,912
Deferred federal income taxes (58,663) (106,794)
--------- ---------
Net unrealized gains $ 118,077 $ 203,615
========= =========
</TABLE>
ML-11
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
Gross Unrealized
-----------------
Amortized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1999
Available-for-sale:
United States government and gov-
ernment
agencies and authorities $ 151,864 $ 32 $ 8,299 $ 143,597
Foreign governments 122,505 678 7,913 115,270
Corporate securities 3,088,999 108,203 117,543 3,079,659
International bond securities 28,979 -- 2,633 26,346
Mortgage-backed securities 1,476,237 4,867 42,408 1,438,696
---------- -------- -------- ----------
Total fixed maturities 4,868,584 113,780 178,796 4,803,568
Equity securities-unaffiliated 463,089 142,583 2,745 602,927
Equity securities-affiliated mu-
tual funds 123,925 44,014 597 167,342
---------- -------- -------- ----------
Total equity securities 587,014 186,597 3,342 770,269
---------- -------- -------- ----------
Total available-for-sale 5,455,598 300,377 182,138 5,573,837
Held-to maturity:
Corporate securities 848,689 15,965 21,492 843,162
Mortgage-backed securities 126,125 2,584 3,019 125,690
---------- -------- -------- ----------
Total held-to-maturity 974,814 18,549 24,511 968,852
---------- -------- -------- ----------
Total $6,430,412 $318,926 $206,649 $6,542,689
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Amortized Fair
Cost Gains Losses Value
---------- -------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale:
United States government and gov-
ernment
agencies and authorities $ 195,650 $ 17,389 $ 201 $ 212,838
Foreign governments 784 -- 311 473
Corporate securities 2,357,861 204,277 30,648 2,531,490
International bond securities 188,448 22,636 1,298 209,786
Mortgage-backed securities 1,924,945 52,580 18,100 1,959,425
---------- -------- ------- ----------
Total fixed maturities 4,667,688 296,882 50,558 4,914,012
Equity securities-unaffiliated 463,777 157,585 15,057 606,305
Equity securities-affiliated mu-
tual funds 115,769 27,726 -- 143,495
---------- -------- ------- ----------
Total equity securities 579,546 185,311 15,057 749,800
---------- -------- ------- ----------
Total available-for-sale 5,247,234 482,193 65,615 5,663,812
Held-to maturity:
Corporate securities 894,064 67,496 235 961,325
Mortgage-backed securities 192,484 9,030 1,055 200,459
---------- -------- ------- ----------
Total held-to-maturity 1,086,548 76,526 1,290 1,161,784
---------- -------- ------- ----------
Total $6,333,782 $558,719 $66,905 $6,825,596
========== ======== ======= ==========
</TABLE>
ML-12
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 39,213 $ 39,542 $ 5,628 $ 5,589
Due after one year through five years 1,065,644 1,125,653 175,672 176,672
Due after five years through ten
years 1,305,697 1,271,316 376,752 375,480
Due after ten years 981,793 928,361 290,637 285,421
---------- ---------- -------- --------
3,392,347 3,364,872 848,689 843,162
Mortgage-backed securities 1,476,237 1,438,696 126,125 125,690
---------- ---------- -------- --------
Total $4,868,584 $4,803,568 $974,814 $968,852
========== ========== ======== ========
</TABLE>
At December 31, 1999 and 1998, fixed maturity securities and short-term
investments with a carrying value of $13,945,000 and $6,361,000, respectively,
were on deposit with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the
consolidated balance sheets as a reduction of the related assets and were as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,500
Investment real estate -- 841
------- -------
Total $ 1,500 $ 2,341
======= =======
</TABLE>
At December 31, 1999, no mortgage loans were considered impaired. At
December 31, 1998, the recorded investment in mortgage loans that were
considered to be impaired was $8,798, before the allowance for credit losses.
These impaired loans, due to adequate fair market value of underlying
collateral, do not have an allowance for credit losses.
A general allowance for credit losses was established for potential
impairments in the remainder of the mortgage loan portfolio. The general
allowance was $1,500,000 at December 31, 1999 and 1998.
Changes in the allowance for credit losses on mortgage loans were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,500 $1,500 $1,895
Provision for credit losses -- -- --
Charge-offs -- -- (395)
------ ------ ------
Balance at end of year $1,500 $1,500 $1,500
====== ====== ======
Below is a summary of interest income on impaired mortgage loans.
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Average impaired mortgage loans $ 4 $ 14 $3,268
Interest income on impaired mortgage loans--contractual 4 18 556
Interest income on impaired mortgage loans--collected 4 17 554
</TABLE>
ML-13
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(4) Notes Receivable
In connection with the Company's construction of an additional home office
facility in St. Paul, Minnesota, the Company entered into a loan contingency
agreement with the Housing and Redevelopment Authority of the City of St. Paul,
Minnesota (HRA) in November 1997. A maximum of $15 million in funds is
available under this loan for condemnation and demolition of the Company's
proposed building site. The note bears interest at a rate of 8.625%, with
principal payments commencing February 2004 and a maturity date of August 2025.
Interest payments are accrued and are payable February and August of each year
commencing February 2001. All principal and interest payments are due only to
the extent of available tax increments. As of December 31, 1999 and 1998, HRA
has drawn $13,574,000 and $9,669,000 on this loan contingency agreement and
accrued interest of $1,795,000 and $673,000, respectively.
(5) Net Finance Receivables
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Direct installment loans $127,379 $147,425
Retail installment notes 9,199 12,209
Retail revolving credit 3,457 17,170
Accrued interest 2,505 2,683
-------- --------
Gross receivables 142,540 179,487
Allowance for uncollectible amounts (7,728) (16,076)
-------- --------
Finance receivables, net $134,812 $163,411
======== ========
</TABLE>
The direct installment loans, at December 31, 1999 and 1998, consisted of
$83,376,000 and $81,066,000, respectively, of discount basis loans (net of
unearned finance charges) and $44,003,000 and $66,359,000, respectively, of
interest-bearing loans and generally have a maximum term of 84 months; the
retail installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Direct installment loans included approximately $29
million and $44 million of real estate secured loans at December 31, 1999 and
1998, respectively. Revolving credit loans included approximately $3 million
and $16 million of real estate secured loans at December 31, 1999 and 1998,
respectively. Contractual maturities of the finance receivables by year, as
required by the industry audit guide for finance companies, were not readily
available at December 31, 1999 and 1998, but experience has shown that such
information is not significant in that a substantial portion of receivables
will be renewed, converted, or paid in full prior to maturity.
During the years ended December 31, 1999 and 1998, principal cash
collections of direct installment loans were $57,665,000 and $75,011,000,
respectively, and the percentages of these cash collections to average net
balances were 43% and 47%, respectively. Retail installment notes' principal
cash collections to average net balances were $12,180,000 and $15,990,000,
respectively, and the percentages of these cash collections to average net
balances were 121% and 101%, respectively.
ML-14
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(5) Net Finance Receivables (continued)
The ratio for the allowance for losses to net outstanding receivables
balances at December 31, 1999 and 1998 was 5.4% and 9.0%, respectively. Changes
in the allowance for losses for the periods ended December 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 16,076 $ 20,545 $ 7,497
Provision for credit losses 5,434 10,712 28,206
Allowance applicable to bulk purchase 125 -- --
Charge-offs (16,712) (18,440) (17,869)
Recoveries 2,805 3,259 2,711
-------- -------- --------
Balance at end of year $ 7,728 $ 16,076 $ 20,545
======== ======== ========
</TABLE>
At December 31, 1999, the recorded investment in certain direct installment
loans and direct revolving credit loans were considered to be impaired. The
balances of such loans at December 31, 1999 and the related allowance for
credit losses were as follows:
<TABLE>
<CAPTION>
Installment Revolving
Loans Credit Total
----------- --------- ------
(In thousands)
<S> <C> <C> <C>
Balances at December 31, 1999 $5,539 692 $6,231
Related allowance for credit losses $1,478 330 $1,808
</TABLE>
All loans deemed to be impaired are placed on a non-accrual status. No
accrued or unpaid interest was recognized on impaired loans during 1999. The
average quarterly balance of impaired loans during the year ended December 31,
1999 and 1998, was $5,758,000 and $6,354,000 for installment basis loans and
$6,214,000 and $12,471,000 for revolving credit loans, respectively.
There were no material commitments to lend additional funds to customers
whose loans were classified as impaired at December 31, 1999.
(6) Income Taxes
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed tax expense $87,139 $84,553 $93,337
Difference between computed and actual tax ex-
pense:
Dividends received deduction (3,127) (1,730) (5,573)
Special tax on mutual life insurance companies (9,568) (3,455) 3,341
Sale of subsidiary -- -- (4,408)
Foundation gain (538) -- (4,042)
Tax credits (4,500) (4,416) (3,600)
Expense adjustments and other 4,327 3,281 (2,275)
------- ------- -------
Total tax expense $73,733 $78,233 $76,780
======= ======= =======
</TABLE>
ML-15
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(6) Income Taxes (continued)
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders liabilities $ 17,461 $ 16,999
Pension and post retirement benefits 30,151 27,003
Tax deferred policy acquisition costs 91,976 82,940
Net realized capital losses 6,709 8,221
Other 16,612 18,487
-------- --------
Gross deferred tax assets 162,909 153,650
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $198,501 $155,655
Real estate and property and equipment depreciation 14,642 10,275
Basis difference on investments 8,092 10,798
Net unrealized capital gains 59,411 143,354
Other 7,357 7,475
-------- --------
Gross deferred tax liabilities 288,003 327,557
-------- --------
Net deferred tax liability $125,094 $173,907
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary
as of December 31, 1999 and 1998 because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1999, 1998 and 1997, were
$59,905,000, $91,259,000 and $71,108,000, respectively.
The Company's tax returns for 1995, 1996, and 1997 are under examination by
the Internal Revenue Service. The Company believes additional taxes, if any,
assessed as a result of these examinations, will not have a material effect on
its financial position.
ML-16
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Liability for Unpaid Accident and Health Claims, Reserve for Losses, and
Claim and Loss Adjustment Expenses
Activity in the liability for unpaid accident and health claims, reserve for
losses and claim and loss adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $435,079 $409,249 $416,910
Less: reinsurance recoverable 108,918 104,741 102,161
-------- -------- --------
Net balance at January 1 326,161 304,508 314,749
-------- -------- --------
Incurred related to:
Current year 92,421 92,793 121,153
Prior years 19,435 14,644 7,809
-------- -------- --------
Total incurred 111,856 107,437 128,962
-------- -------- --------
Paid related to:
Current year 25,084 27,660 51,275
Prior years 63,827 58,124 57,475
-------- -------- --------
Total paid 88,911 85,784 108,750
-------- -------- --------
Decrease in liabilities due to sale of subsidiary -- -- 30,453
-------- -------- --------
Net balance at December 31 349,106 326,161 304,508
Plus: reinsurance recoverable 121,395 108,918 104,741
-------- -------- --------
Balance at December 31 $470,501 $435,079 $409,249
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims, reserve for losses and
claim and loss adjustment expenses is included in future policy and contract
benefits and pending policy and contract claims on the consolidated balance
sheets.
As a result of changes in estimates of claims incurred in prior years, the
accident and health claims, reserve for losses and claim and loss adjustment
expenses incurred increased by $19,435,000, $14,644,000 and $7,809,000 in 1999,
1998 and 1997, respectively which includes the amortization of discount on
individual accident and health claim reserves of $13,918,000, $14,256,000,
$11,522,000 in 1999, 1998 and 1997, respectively. The remaining changes in
amounts are the result of normal reserve development inherent in the
uncertainty of establishing the liability for unpaid accident and health
claims, reserve for losses and claim and loss adjustment expenses.
(8) Employee Benefit Plans
Pension Plans and Post Retirement Plans Other than Pensions
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds, which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan, which provides certain employees with benefits
in excess of limits for qualified retirement plans.
The Company also has unfunded postretirement plans that provide certain
health care and life insurance benefits to substantially all retired employees
and agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
ML-17
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
The change in the benefit obligation and plan assets for the Company's plans
as of December 31 was calculated as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $181,439 $151,509 $ 31,236 $ 24,467
Service cost 8,272 8,402 1,419 1,375
Interest cost 13,132 10,436 2,340 1,713
Amendments 4,385 6 -- --
Actuarial gain (4,143) 16,298 (33) 4,542
Benefits paid (6,060) (5,212) (1,242) (861)
-------- -------- -------- --------
Benefit obligation at end of year $197,025 $181,439 $ 33,720 $ 31,236
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at the
beginning of the year $146,710 $133,505 $ -- $ --
Actual return on plan assets 12,948 13,068 -- --
Employer contribution 6,096 5,349 1,242 861
Benefits paid (6,060) (5,212) (1,242) (861)
-------- -------- -------- --------
Fair value of plan assets at the
end of year $159,694 $146,710 $ -- $ --
======== ======== ======== ========
Funded status $(37,330) $(34,729) $(33,720) $(31,236)
Unrecognized net actuarial loss
(gain) 6,812 12,283 (6,089) (6,251)
Unrecognized prior service cost
(benefit) 8,723 5,293 (2,472) (2,986)
-------- -------- -------- --------
Net amount recognized $(21,795) $(17,153) $(42,281) $(40,473)
======== ======== ======== ========
Amounts recognized in the balance
sheet statement consist of:
Accrued benefit cost $(27,980) $(23,242) $(42,395) $(40,473)
Intangible asset 6,185 6,089 114 --
-------- -------- -------- --------
Net amount recognized $(21,795) $(17,153) $(42,281) $(40,473)
======== ======== ======== ========
Weighted average assumptions as of
December 31
Discount rate 7.50% 7.00% 7.50% 7.00%
Expected return on plan assets 8.27% 8.27% -- --
Rate of compensation increase 5.32% 5.32% -- --
</TABLE>
ML-18
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 5.5 percent for 2005 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------- ----------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $ 8,272 $ 8,402 $ 6,847 $1,419 $1,375 $1,047
Interest cost 13,132 10,436 9,956 2,340 1,713 1,872
Expected return on plan
assets (12,080) (10,978) (9,859) -- -- --
Amortization of prior
service cost (benefits) 954 578 578 (513) (513) (510)
Recognized net actuarial
loss (gain) 459 190 77 (195) (559) (480)
-------- -------- ------- ------ ------ ------
Net periodic benefit
cost $ 10,737 $ 8,628 $ 7,599 $3,051 $2,016 $1,929
======== ======== ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $45,610,000, $36,376,000 and $18,500,000,
respectively, as of December 31, 1999, and $39,470,000, $31,546,000 and
$17,334,000, respectively, as of December 31, 1998.
The assumptions presented herein are based on pertinent information
available to management as of December 31, 1999 and 1998. Actual results could
differ from those estimates and assumptions. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31, 1999 by
$6,164,000 and the estimated eligibility cost and interest cost components of
net periodic benefit costs for 1999 by $831,000. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
postretirement benefit obligation as of December 31, 1999 by $4,879,000 and the
estimated eligibility cost and interest cost components of net periodic
postretirement benefit costs for 1999 by $637,000.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the directors of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1999, 1998 and 1997 of $6,003,000, $7,145,000 and $7,173,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
(9) Sale of Subsidiary
On October 1, 1997, the Company sold Minnesota Fire and Casualty Company (MFC),
a wholly owned subsidiary, to Harleysville Group, Inc. The Company received net
cash proceeds of approximately $33.5 million from the sale, and realized a gain
of approximately $14.5 million. HomePlus Insurance Company (HomePlus), a
previously wholly owned subsidiary of MFC, was excluded from the sale of
assets. In accordance with the agreement, prior to September 30, 1997, MFC made
a distribution of private placement bonds to the Company with an amortized cost
of approximately $4.3 million and transferred all issued and outstanding shares
of HomePlus to the Company. The carrying value of the transferred shares was
approximately $5.8 million. Under an administrative services agreement with
MFC, the Company has retained MFC to provide financial and other services for
HomePlus.
ML-19
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(10) 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 by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligation under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed to be uncollectible.
Reinsurance is accounted for over the lives of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct premiums $662,775 $553,408 $595,686
Reinsurance assumed 102,154 91,548 78,097
Reinsurance ceded (67,130) (67,263) (58,530)
-------- -------- --------
Net premiums $697,799 $577,693 $615,253
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $71,922,000,
$64,174,000 and $58,072,000 during 1999, 1998 and 1997, respectively.
On January 1, 1999, the Company entered into an agreement to sell its
assumed individual life reinsurance business representing $1,982,509,000 of in
force to RGA Reinsurance Company. The Company received cash of $1,284,000 from
the sale and recognized miscellaneous income of approximately $4,139,000,
representing the gain on the sale.
On October 1, 1999, the Company entered into an assumption reinsurance
agreement with Fort Dearborn Life Insurance Company. The agreement transfers
401(k) accounts with associated fixed and variable assets of approximately
$260,000,000.
(11) Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1999 and 1998.
Although management is not aware of any factors that would significantly affect
the estimated fair value, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgement is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning
fixed maturity securities, equity securities, mortgages, private equities and
derivatives. The carrying amounts for policy loans, cash, short-term
investments and finance receivables approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1999 and 1998, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1999 and 1998, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts and other
fund deposits, which have guaranteed interest rates and surrender charges are
estimated to be the amount payable on demand as of December 31, 1999 and 1998
as those investment contracts have no defined maturity and are similar to a
deposit liability. The amount payable on demand equates to the account balance
less applicable surrender charges. Contracts without guaranteed interest rates
and surrender charges have fair values equal to their accumulation values plus
applicable market value adjustments.
ML-20
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(11) Fair Value of Financial Instruments (continued)
The fair values of guaranteed investment contracts and supplementary
contracts without life contingencies are calculated using discounted cash
flows, based on interest rates currently offered for similar products with
maturities consistent with those remaining for the contracts being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
The carrying amounts and fair values of the Company's financial instruments,
which were classified as assets as of December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,803,568 $4,803,568 $4,914,012 $4,914,012
Held-to-maturity 974,814 968,852 1,086,548 1,161,784
Equity securities 770,269 770,269 749,800 749,800
Mortgage loans:
Commercial 625,196 605,112 579,890 603,173
Residential 71,476 73,293 101,329 104,315
Policy loans 237,335 237,335 226,409 226,409
Short-term investments 93,993 93,993 136,435 136,435
Cash 116,803 116,803 175,660 175,660
Finance receivables, net 134,812 134,812 163,411 163,411
Private equities 284,797 284,797 160,958 164,332
Foreign currency exchange con-
tract 655 655 1,594 1,594
---------- ---------- ---------- ----------
Total financial assets $8,113,718 $8,089,489 $8,296,046 $8,400,925
========== ========== ========== ==========
</TABLE>
The carrying amounts and fair values of the Company's financial instruments,
which were classified as liabilities as of December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Deferred annuities $1,822,302 $1,810,820 $2,085,408 $2,075,738
Annuity certain contracts 39,513 39,421 57,528 60,766
Other fund deposits 945,575 936,590 722,321 731,122
Guaranteed investment contracts 116 116 862 862
Supplementary contracts without
life contingencies 43,050 43,126 44,696 44,251
Notes payable 218,000 221,233 267,000 272,834
---------- ---------- ---------- ----------
Total financial liabilities $3,068,556 $3,051,306 $3,177,815 $3,185,573
========== ========== ========== ==========
</TABLE>
(12) Notes Payable
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyholders interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1999 and 1998. The issuance costs of
$1,421,000 are deferred and amortized over 30 years on straight-line basis.
ML-21
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Notes Payable (continued)
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Corporate-surplus notes, 8.25%, 2025 $125,000 $125,000
Consumer finance subsidiary-senior, 6.53%-8.77%, through
2003 93,000 142,000
-------- --------
Total notes payable $218,000 $267,000
======== ========
</TABLE>
At December 31, 1999, the aggregate minimum annual notes payable maturities
for the next four years were as follows: 2000, $33,000,000; 2001, $26,000,000;
2002, $22,000,000; 2003, $12,000,000; thereafter $125,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth
of $41,354,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1999.
The Company maintains a line of credit, which is drawn down periodically
throughout the year. As of December 1999 and 1998, the outstanding balance of
this line of credit was $90,000,000 and $40,000,000, respectively.
Interest paid on debt for the years ended December 31, 1999, 1998 and 1997,
was $24,120,000, $25,008,000 and $18,197,000, respectively.
(13) Other Comprehensive Income
Comprehensive income is defined as any change in stockholder's equity
originating from non-owner transactions. The Company had identified those
changes as being comprised of net income, unrealized appreciation
(depreciation) on securities, and unrealized foreign currency translation
adjustments.
The components of comprehensive income (loss), other than net income are
illustrated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment $ -- $ -- $ 1,457
Less: reclassification adjustment for gains
included in net income -- (1,457) --
---------- -------- --------
-- (1,457) 1,457
Unrealized gains (loss) on securities (59,499) 162,214 171,654
Less: reclassification adjustment for gains
included in net income (74,170) (90,770) (96,476)
---------- -------- --------
(133,669) 71,444 75,178
Income tax expense related to items of other
comprehensive income 48,131 (23,045) (28,274)
---------- -------- --------
Other comprehensive income (loss), net of tax $ (85,538) $ 46,942 $ 48,361
========== ======== ========
</TABLE>
(14) Stock Dividends
During 1999, the Company declared and paid dividends to Securian Financial
Group, Inc. totaling $59,109,000. These dividends were in the form of cash,
common stock and the affiliated stock of Capitol City Property Management and
HomePlus Insurance Agency, Inc. On December 14, 1998, the Company declared and
accrued a dividend to Securian Financial Group, Inc. in the amount of
$24,700,000, which was paid in 1999.
ML-22
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(14) Stock Dividends (continued)
Dividend payments by Minnesota Life Insurance Company to its parent cannot
exceed the greater of 10% of statutory capital and surplus as of the preceding
year-end or the statutory net gain from operations for the current calendar
year, without prior approval from the Department of Commerce. Based on this
limitation and 1998 statutory results, Minnesota Life Insurance Company could
have paid $168,076,000 in dividends in 1999 without prior approval.
(15) Commitments and Contingencies
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
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 by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed uncollectible.
The Company has issued certain participating group annuity and group life
insurance contracts jointly with another life insurance company. The joint
contract issuer has liabilities related to these contracts of $183,200,000 as
of December 31, 1999. To the extent the joint contract issuer is unable to meet
its obligation under the agreement, the Company remains liable.
The Company has long-term commitments to fund private equities and real
estate investments totaling $147,652,000 as of December 31, 1999. The Company
estimates that $60,000,000 of these commitments will be invested in 2000, with
the remaining $87,652,000 invested over the next four years.
As of December 31, 1999, the Company had committed to purchase bonds and
mortgage loans totaling $54,130,000 but had not completed the purchase
transactions.
The Company has a long-term lease agreement for rental space in downtown St.
Paul and other locations. Minimum rental commitments under such leases are as
follows: 2000, $2,400,000; 2001, $2,227,000; 2002, $2,092,000; 2003,
$2,108,000; 2004, $1,261,000; 2005, $22,000.
At December 31, 1999, the Company had guaranteed the payment of $76,600,000
in policyholders dividends and discretionary amounts payable in 2000. The
Company has pledged bonds, valued at $79,333,000 to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Association. At December 31, 1999 and 1998 the liability was ($352,000) and
$1,105,000, respectively. An asset is recorded for the amount of guaranty fund
assessments paid, which can be recovered through future premium tax credits.
This asset was $5,485,000 and $7,282,000 for the periods ending December 31,
1999 and 1998, respectively. These assets are being amortized over a five-year
period.
At December 1999, the Company has guaranteed the payment of approximately
$125,000,000 of senior notes issued by Capitol City Properties Management,
Inc., an affiliated company through the expiration date of the notes June 1,
2021 or by mutual agreement of the parties. These notes were issued in
conjunction with the financing of the Company's additional home office space.
ML-23
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(16) Statutory Financial Data
The Company also prepares financial statements according to statutory
accounting practices prescribed or permitted by the Department of Commerce for
purposes of filing with the Department of Commerce, the National Association of
Insurance Commissioners and states in which the Company is licensed to do
business. Statutory accounting practices focus primarily on solvency and
surplus adequacy. The significant differences that exist between statutory and
GAAP accounting, and their effects are illustrated below:
<TABLE>
<CAPTION>
Year ended December
----------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Statutory capital and surplus $1,089,474 $ 947,885
Adjustments:
Deferred policy acquisition costs 712,532 564,382
Net unrealized investment gains (losses) (49,572) 279,885
Statutory asset valuation reserve 310,626 239,455
Statutory interest maintenance reserve 30,984 49,915
Premiums and fees deferred or receivable (69,618) (73,312)
Change in reserve basis 115,718 113,648
Separate accounts (64,860) (56,816)
Unearned policy and contract fees (144,157) (118,459)
Surplus notes (125,000) (125,000)
Net deferred income taxes (125,094) (173,907)
Non-admitted assets 36,205 39,525
Policyholders dividends 62,268 60,648
Other (23,642) (25,573)
---------- ----------
Stockholder's equity as reported in the accompanying
consolidated financial statements $1,755,864 $1,722,276
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31
--------------------------------
1999 1998 1997
-------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Statutory net income $167,957 $ 104,609 $ 167,078
Adjustments:
Deferred policy acquisition costs 29,164 18,042 26,878
Statutory interest maintenance reserve (18,931) 25,746 (538)
Premiums and fees deferred or receivable 3,686 708 2,175
Change in reserve basis 2,555 3,011 9,699
Separate accounts (8,044) (5,644) (6,272)
Unearned policy and contract fees (8,696) (7,896) (12,825)
Net deferred income taxes 1,439 15,351 7,832
Policyholders dividends 1,620 1,194 2,708
Other 4,485 8,228 (6,839)
-------- ---------- ----------
Net income as reported in the accompanying
consolidated financial statements $175,235 $ 163,349 $ 189,896
======== ========== ==========
</TABLE>
ML-24
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments--Other than Investments in Related Parties
December 31, 1999
<TABLE>
<CAPTION>
As Shown
on the
Market consolidated
Type of investment Cost(3) Value balance sheet(1)
- ------------------ ---------- ---------- ----------------
(In thousands)
<S> <C> <C> <C>
Bonds:
United States government and
government agencies and authorities $ 151,864 $ 143,597 $ 143,597
Foreign governments 122,505 115,270 115,270
Public utilities 287,970 276,558 276,558
Mortgage-backed securities 1,602,362 1,564,386 1,564,386
All other corporate bonds 3,678,697 3,672,609 3,678,571
---------- ---------- ----------
Total bonds 5,843,398 5,772,420 5,778,382
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 7,475 9,072 9,072
Banks, trusts and insurance compa-
nies 25,959 25,399 25,399
Industrial, miscellaneous and all
other 525,152 708,848 708,848
Nonredeemable preferred stocks 28,428 26,950 26,950
---------- ---------- ----------
Total equity securities 587,014 770,269 770,269
---------- ---------- ----------
Mortgage loans on real estate 696,672 XXXXXX 696,672
Real estate (2) 36,793 XXXXXX 36,793
Policy loans 237,335 XXXXXX 237,335
Other long-term investments 473,528 XXXXXX 473,528
Short-term investments 93,993 XXXXXX 93,993
---------- ---------- ----------
Total 1,538,321 -- 1,538,321
---------- ---------- ----------
Total investments $7,968,733 $6,542,689 $8,086,972
========== ========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $ -0-
(3) Original cost for equity securities and original cost reduced by
repayments and adjusted for amortization of premiums or accrual of
discounts for bonds and other investments
See independent auditors' report.
ML-25
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(In thousands)
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
Future policy
Deferred benefits Other policy
policy losses, claims claims and
acquisition and settlement Unearned benefits
Segment costs expenses(1) premiums(2) payable
- ------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
1999:
Life insurance $535,709 $2,388,867 $172,430 $73,670
Accident and
health insur-
ance 80,371 552,833 35,558 16,858
Annuity 97,137 3,118,995 25 234
Property and li-
ability insur-
ance -- 441
-------- ---------- -------- -------
$713,217 $6,061,136 $208,013 $90,762
======== ========== ======== =======
1998:
Life insurance $421,057 $2,303,580 $146,042 $51,798
Accident and
health insur-
ance 74,606 510,969 33,568 18,342
Annuity 68,719 3,186,148 25 424
Property and li-
ability insur-
ance -- 480 556 --
-------- ---------- -------- -------
$564,382 $6,001,177 $180,191 $70,564
======== ========== ======== =======
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627
Accident and
health insur-
ance 70,593 466,109 34,250 17,153
Annuity 71,425 3,266,965 -- 4,576
Property and li-
ability insur-
ance -- 280 1,116 --
-------- ---------- -------- -------
$576,030 $5,962,750 $202,070 $64,356
======== ========== ======== =======
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------------
Amortization
Benefits, of deferred
Net claims, losses policy Other
Premium investment and settlement acquisition operating Premiums
Segment revenue(3) income expenses costs expenses written(4)
- ------- ----------- ---------- -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999:
Life insurance $ 762,745 $258,483 $645,695 $ 88,731 $391,454
Accident and
health insur-
ance 170,988 37,922 108,283 11,779 101,021
Annuity 95,190 243,160 214,461 22,945 79,883
Property and li-
ability insur-
ance (14) 491 323 743 (570)
----------- ---------- -------------- ------------ --------- ----------
$1,028,909 $540,056 $968,762 $123,455 $573,101 $ (570)
=========== ========== ============== ============ ========= ==========
1998:
Life insurance $ 615,856 $246,303 $502,767 $114,589 $342,080
Accident and
health insur-
ance 167,544 35,822 105,336 12,261 93,876
Annuity 93,992 247,970 225,004 21,248 136,527
Property and li-
ability insur-
ance 662 986 2,848 -- 1,187 103
----------- ---------- -------------- ------------ --------- ----------
$ 878,054 $531,081 $835,955 $148,098 $573,670 $ 103
=========== ========== ============== ============ ========= ==========
1997:
Life insurance $ 576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insur-
ance 205,869 40,343 87,424 9,451 101,960
Annuity 64,637 261,768 242,738 16,252 129,263
Property and li-
ability insur-
ance 40,316 4,395 33,773 -- 13,146 43,376
----------- ---------- -------------- ------------ --------- ----------
$ 887,290 $553,773 $840,682 $128,176 $590,307 $43,376
=========== ========== ============== ============ ========= ==========
</TABLE>
- ------
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
See independent auditors' report.
ML-26
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
------------ ----------- ----------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1999:
Life insurance in force $175,297,217 $21,279,606 $37,337,340 $191,354,951 19.5%
============ =========== =========== ============
Premiums:
Life insurance $ 455,857 $ 30,557 $ 83,681 $ 508,981 16.4%
Accident and health
insurance 183,765 18,776 1,281 166,270 0.8%
Annuity 22,562 -- -- 22,562 --
Property and liability
insurance 591 17,797 17,192 (14) n/a
------------ ----------- ----------- ------------
Total premiums $ 662,775 $ 67,130 $ 102,154 $ 697,799 14.6%
============ =========== =========== ============
1998:
Life insurance in force $158,229,143 $18,656,917 $28,559,482 $168,131,708 17.0%
============ =========== =========== ============
Premiums:
Life insurance $ 338,909 $ 30,532 $ 71,198 $ 379,575 18.8%
Accident and health
insurance 180,081 17,894 1,432 163,619 0.9%
Annuity 33,837 -- -- 33,837 --
Property and liability
insurance 581 18,837 18,918 662 2857.7%
------------ ----------- ----------- ------------
Total premiums $ 553,408 $ 67,263 $ 91,548 $ 577,693 15.8%
============ =========== =========== ============
1997:
Life insurance in force $122,120,394 $14,813,351 $25,566,734 $132,873,777 19.2%
============ =========== =========== ============
Premiums:
Life insurance $ 340,984 $ 30,547 $ 63,815 $ 374,252 17.1%
Accident and health
insurance 175,647 16,332 1,310 160,625 0.8%
Annuity 40,060 -- -- 40,060 --
Property and liability
insurance 38,995 11,651 12,972 40,316 32.2%
------------ ----------- ----------- ------------
Total premiums $ 595,686 $ 58,530 $ 78,097 $ 615,253 12.7%
============ =========== =========== ============
</TABLE>
See independent auditors' report.
ML-27
<PAGE>
APPENDIX A
CALCULATION OF ACCUMULATION UNIT VALUES
Calculation of the net investment factor and the accumulation unit value may be
illustrated by the following hypothetical example. Assume the accumulation unit
value of the Variable Fund D Growth Sub-Account on the immediately preceding
valuation period was $6.499041. Assume the following about the Series Fund
Growth Portfolio: (a) the net asset value per share of the Growth Portfolio was
$1.394438 at the end of the current valuation period; (2) the Growth Portfolio
declared a per share dividend and capital gain distribution in the amount of
$.037162 during the current valuation period; and (3) the net asset value per
share of the Growth Portfolio was $1.426879 at the end of the preceding
valuation period.
The gross investment rate for the valuation period would be equal to 1.0033086
(1.394438 plus .037162 divided by 1.426879). The net investment rate for the
valuation period is determined by deducting the total Growth Sub-Account
expenses from the gross investment rate. Total Growth Sub-Account expenses of
.0000162 is equal to .0000315 for mortality and risk expense (the daily
equivalent of .795% assuming 252 valuation dates per year) less .0000093 for the
investment management fee reimbursement (the daily equivalent of .235% assuming
252 valuation dates per year) less .0000060 for the other expense reimbursement
(the daily equivalent of .150% assuming 252 valuation dates per year). The net
investment rate equals 1.0032924 (1.0033086 minus .0000162).
The accumulation unit value at the end of the valuation period would be equal to
the value on the immediately preceding valuation date ($6.499041) multiplied by
the net investment factor for the current valuation period (1.003294), which
produces $6.520438.
CALCULATION OF ANNUITY UNIT VALUES AND VARIABLE ANNUITY PAYMENT
The determination of the annuity unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume that the contract has
been in force for more than ten years so that no deferred sales charge will
apply and that there is no deduction for annuity premium taxes. Assume further
that at the date of his or her retirement, the annuitant has credited to his or
her account 30,000 accumulation units, and that the value of an accumulation
unit on the valuation date next following the fourteenth day of the preceding
month was $1.150000, producing a total value of $34,500. Assume also that the
annuitant elects an option for which the table in the contract indicates the
first monthly payment is $6.57 per $1,000 of value applied; the annuitant's
first monthly payment would thus be 34.500 multiplied by $6.57, or $226.67.
Assume that the annuity unit value on the due date of the first payment was
$1.100000. When this is divided into the first monthly payment, the number of
annuity units represented by that payment is determined to be 206.064. The
value of this same number of annuity units will be paid in each subsequent
month.
Assume further that the accumulation unit value on the valuation date next
following the fourteenth day of the succeeding month is $1.160000. This is
divided by the accumulation unit value on the preceding monthly valuation date
($1.150000) to produce a ratio of 1.008696.
<PAGE>
Multiplying this ratio by .997137 to neutralize the assumed investment rate of
3.5% per annum already taken into account in determining annuity units as
described above, produces a result of 1.005808. This is then multiplied by the
preceding annuity unit value ($1.100000) to produce a current annuity value of
$1.106390.
The second monthly payment is then determined by multiplying the fixed number of
annuity units (206.064) by the current annuity unit value ($1.106390), which
produces a second monthly annuity payment of $227.99.
