<PAGE>
VARIABLE ANNUITY CONTRACT PROSPECTUS
MULTIOPTION SELECT
FLEXIBLE PAYMENT VARIABLE ANNUITY CONTRACT
OF MINNESOTA MUTUAL'S VARIABLE ANNUITY ACCOUNT
The individual variable annuity contract offered by this Prospectus is
designed for use in connection with personal retirement plans, some of which may
qualify for federal income tax advantages available under sections 401, 403,
408, 408A, or 457 of the Internal Revenue Code. It may also be used apart from a
qualified plan.
The owner of a contract will have contract values accumulated on a completely
variable basis as part of the Variable Annuity Account. The Variable Annuity
Account invests its assets in shares of Advantus Series Fund, Inc. and Class 2
of the Templeton Developing Markets Funds (the "Funds"). The accumulation value
of the contract and the amount of each variable annuity payment will vary in
accordance with the performance of the Portfolio or Portfolios of the Funds
selected by the contract owner. The contract owner bears the entire investment
risk for any amounts allocated to the Portfolios of the Funds.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Variable Annuity Account, and it
should be read and kept 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 and is incorporated
by reference into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (612) 665-3500; after
September 1, 1998, (651) 665-3500, or by writing Minnesota Mutual at its
principal office at Minnesota Mutual Life Center, 400 Robert Street North, St.
Paul, Minnesota 55101-2098. A Table of Contents for the Statement of Additional
Information appears in this Prospectus on page 32.
This Prospectus is not valid unless attached to a current prospectus of Advantus
Series Fund, Inc. and the Templeton Developing Markets Fund.
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.
[LOGO]
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
PH 612/665-3500
http://www.minnesotamutual.com
The date of this document and the Statement of Additional Information is: May 1,
1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms............................................... 3
Questions and Answers About the Variable Annuity Contract... 4
Expense Table............................................... 9
Condensed Financial Information............................. 12
Performance Data............................................ 14
General Descriptions
The Minnesota Mutual Life Insurance Company............. 15
Variable Annuity Account................................ 15
Advantus Series Fund, Inc............................... 15
Templeton Variable Products Series Fund................. 16
Additions, Deletions or Substitutions................... 17
Contract Charges
Deferred Sales Charges.................................. 17
Mortality and Expense Risk Charges...................... 18
Transaction and Contract Charges........................ 18
Voting Rights............................................... 19
Description of the Contract
General Provisions...................................... 19
Annuity Payments and Options............................ 20
Death Benefits.......................................... 24
Purchase Payments, Value of the Contract and
Transfers.............................................. 24
Redemptions............................................. 26
Federal Tax Status.......................................... 27
Year 2000 Computer Problem.................................. 32
Statement of Additional Information......................... 32
Appendix A--Illustration of Variable Annuity Values......... 33
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED 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, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
SPECIAL TERMS
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 your values under a contract in the Variable
Annuity Account.
ANNUITANT: the person who may receive lifetime benefits under the contract.
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 we have designated as an eligible investment for the Variable Annuity
Account, namely, Advantus Series Fund, Inc. and its Portfolios and Class 2 of
the Templeton Developing Markets Fund.
GENERAL ACCOUNT: all of our assets other than those in the Variable Annuity
Account or in our other separate accounts.
PLAN: a tax-qualified employer pension, profit-sharing, or annuity purchase plan
under which benefits are to be provided by the variable annuity contract
described herein.
PURCHASE PAYMENTS: amounts paid to us under a contract.
VALUATION DATE: each date on which a Fund Portfolio is valued.
VARIABLE ANNUITY ACCOUNT: a separate investment account called the Minnesota
Mutual Variable Annuity Account, where the investment experience of its assets
is kept separate from that of our other assets.
VARIABLE ANNUITY: an annuity providing for payments varying in amount in
accordance with the investment experience of the Fund.
VOLUME CREDIT: an additional amount, other than a dividend, which may be
credited by us to your contract.
WE, OUR, US: The Minnesota Mutual Life Insurance Company.
YOU, YOUR: the Contract Owner.
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE VARIABLE ANNUITY CONTRACT
WHAT IS AN ANNUITY?
An annuity is 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. An
annuity with payments which are guaranteed as to amount during the payment
period is a fixed annuity. An annuity with payments which vary during the
payment period in accordance with the investment experience of a separate
account is called a variable annuity.
WHAT IS THE CONTRACT OFFERED BY THIS PROSPECTUS?
The contract is a variable annuity contract issued by us which provides for
monthly annuity payments. These payments may begin immediately or at a future
date elected by you. Purchase payments received by us under a contract are
allocated to the Variable Annuity Account. In the Variable Annuity Account, your
purchase payments are invested in one or more Portfolios of Advantus Series
Fund, Inc. according to your instructions. If your application fails to specify
which Portfolios are desired, or is otherwise incomplete, and you do not consent
to our retention of your initial payment until the application is made complete,
we will return your initial payment within five business days. There are no
interest or principal guarantees on your funds.
WHAT INVESTMENT OPTIONS ARE AVAILABLE FOR THE VARIABLE ANNUITY ACCOUNT?
Purchase payments allocated to the Variable Annuity Account are invested
exclusively in shares of each Fund. Each Fund is a mutual fund of the series
type, which means that it has several different portfolios which it offers for
investment. Shares of each Fund will be made available at net asset value to the
Variable Annuity Account to fund the variable annuity contract. The Fund is also
required to redeem its shares at net asset value at our request. We reserve the
right to add, combine or remove other eligible funds.
The investment objectives and certain policies of the Portfolios of the
Advantus Series Fund are as follows:
The Growth Portfolio seeks the long-term accumulation of capital. Current
income, while a factor in portfolio selection, is a secondary objective. The
Growth Portfolio will invest primarily in common stocks and other equity
securities. Common stocks are more volatile than debt securities and involve
greater investment risk.
The Bond Portfolio seeks as high a level of long-term total rate of return
as is consistent with prudent investment risk. A secondary objective is to
seek preservation of capital. The Bond Portfolio will invest primarily in
long-term, fixed-income, high-quality debt instruments. The value of debt
securities will tend to rise and fall inversely with the rise and fall of
interest rates.
The Money Market Portfolio seeks maximum current income to the extent
consistent with liquidity and the stability of capital. The Money Market
Portfolio will invest in money market instruments and other debt securities
with maturities not exceeding one year. The return produced by these
securities will reflect fluctuation in short-term interest rates.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
The Asset Allocation Portfolio seeks as high a level of long-term total
rate of return as is consistent with prudent investment risk. The Asset
Allocation Portfolio will invest in common stocks and other equity
securities, bonds and money market instruments. The Asset Allocation
Portfolio involves the risks inherent in stocks and debt securities of
varying maturities and the risk that the Portfolio may invest too much or
too little of its assets in each type of security at any particular time.
The Mortgage Securities Portfolio seeks a high level of current income
consistent with prudent investment risk. In pursuit of this objective, the
Mortgage Securities Portfolio will follow a policy of investment primarily
in mortgage-related securities. Prices of mortgage-related securities will
tend to rise and fall inversely with the rise and fall of the general level
of interest rates.
The Index 500 Portfolio seeks investment results that correspond generally
to the price and yield performance of the common stocks included in the
Standard & Poor's Corporation 500 Composite Stock Price Index (the "Index").
It is designed to provide an economical and convenient means of maintaining
a broad position in the equity market as part of an overall
4
<PAGE>
investment strategy. All common stocks, including those in the Index,
involve greater investment risk than debt securities. The fact that a stock
has been included in the Index affords no assurance against declines in the
price or yield performance of that stock.
The Capital Appreciation Portfolio seeks growth of capital. Investments
will be made based upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital growth.
Because of the market risks inherent in any equity investment, the selection
of securities on the basis of their appreciation possibilities cannot ensure
against possible loss in value.
The International Stock Portfolio seeks long-term capital growth. In
pursuit of this objective, the International Stock Portfolio will follow a
policy of investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The Small Company Portfolio seeks long-term accumulation of capital. In
pursuit of this objective, the Small Company Portfolio will follow a policy
of investing primarily in common or preferred stocks issued by small
companies, defined in terms of either market capitalization or gross
revenues. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally.
Small companies will typically have a market capitalization of less than
$1.5 billion or annual gross revenues of less than $1.5 billion.
The Maturing Government Bond Portfolios seek to provide as high an
investment return as is consistent with prudent investment risk for a
specified period of time ending on a specified liquidation date. The
investments in each Portfolio are primarily zero coupon securities, debt
securities which pay no cash income and are sold at a discount from their
par value at maturity, particularly those issued by the U.S. Treasury and
those issued by the U.S. Government and its agencies. There are four
Portfolios of this type and each will mature on a specified target date as
indicated in the name of each Portfolio. The current maturity dates are in
September in the years 1998, 2002, 2006 and 2010.
The Value Stock Portfolio seeks the long-term accumulation of capital. The
production of income through the holdings of dividend-paying stocks will be
a secondary objective of the Portfolio. The Value Stock Portfolio will
invest primarily in equity securities of companies which, in the opinion of
the Portfolio's investment adviser, have market values which appear low
relative to their underlying value or future earnings and growth potential.
The Small Company Value Portfolio seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The Global Bond Portfolio formerly the International Bond Portfolio prior
to May 1, 1998, seeks to maximize current income consistent with protection
of principal. The Portfolio pursues its objective by investing primarily in
a managed portfolio of non-U.S. dollar debt securities issued by foreign
governments, companies and supranational entities.
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 Mid
Cap Index. The Portfolio pursues its investment objective by investing
primarily in the 400 common stocks that comprise the Index, issued by
medium-sized domestic companies with market capitalizations that generally
range from $200 million to $5 billion. It is designed to provide an
economical and convenient means of maintaining a diversified portfolio in
this equity security area as part of an over-all investment strategy. The
inclusion of a stock in the
5
<PAGE>
Index in no way implies an opinion by Standard & Poor's as to its
attractiveness as an investment, nor is it a sponsor or in any way
affiliated with the Portfolio.
The Macro-Cap Value Portfolio seeks to provide high total return. It
pursues this objective by investing in equity securities that the
sub-adviser believes, through the use of dividend discount models, to be
undervalued relative to their long-term earnings power, creating a
diversified portfolio of equity securities which typically will have a
price/earnings ratio and a price to book ratio that reflects a value
orientation. The Portfolio seeks to enhance its total return relative to
that of a universe of large-sized U.S. companies.
The Micro-Cap Growth Portfolio seeks long-term capital appreciation. It
pursues its objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
The Real Estate Securities Portfolio seeks above-average income and long-
term growth of capital. The Portfolio intends to pursue its objective by
investing primarily in equity securities of companies in the real estate
industry. The Portfolio seeks to provide a yield in excess of the yield of
the Standard & Poor's Corporation 500 Composite Stock Price Index.
In addition to the investments in the Advantus Series Fund, the Variable
Annuity Account invests in Class 2 shares of the Templeton Developing Markets
Fund, a diversified portfolio with two classes of shares of the Templeton
Variable Products Series Fund Class 2, a mutual fund of the series type.
The investment objectives and certain policies of the Templeton Developing
Markets Fund available under the contract are as follows:
The Templeton Developing Markets Fund seeks long-term capital
appreciation. It pursues this objective by investing primarily in equity
securities of issuers in countries having developing markets. Countries
generally considered to have developing markets are all countries that are
considered to be developing or emerging countries by the International Bank
for Reconstruction and Development (more commonly referred to as the World
Bank) or the International Finance Corporation, as well as countries that
are classified by the United Nations or otherwise regarded by their
authorities as developing.
There is no assurance that any Fund will meet its objectives. Additional
information concerning the investment objectives and policies of the Funds can
be found in the current prospectus for each Fund, which is attached to this
Prospectus.
A person should carefully read each prospectus before investing in the
contract.
CAN YOU CHANGE THE PORTFOLIO SELECTED?
Yes. You can change your allocation of future purchase payments by giving us
written notice or a telephone call notifying us of the change. And before
annuity payments begin, you may transfer all or a part of your accumulation
value from one Fund to another or among the Portfolios. After annuity payments
begin, amounts held as annuity reserves may be transferred 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. For a more detailed discussion of applicable telephone procedures,
please see page 24 of this Prospectus under the heading "Purchase Payments,
Value of the Contract and Transfers."
WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACT?
We deduct from the net asset value of the Variable Annuity Account an amount,
computed daily, equal to an annual rate of 1.25% for mortality and expense risk
guarantees. This total represents a charge of .80% for our assumption of
mortality risks and .45% for our assumption of expense risks. We reserve the
right to increase the charge for the assumption of expense risks to not more
than .60%. If this charge is increased to this maximum amount, then the total of
the mortality risk and expense risk charge would be 1.40% on an annual rate.
In addition, Advantus Capital Management, Inc., one of our subsidiaries, acts
as the investment adviser to the Series Fund and deducts from the net asset
value of each Portfolio of the Series Fund a fee for its services which are
provided under an investment
6
<PAGE>
advisory agreement. The investment advisory agreements with Advantus Capital
provide that the fee shall be computed at the annual rate of .4% of the Index
400 Mid-Cap and Index 500 Portfolios, .75% of the Capital Appreciation, Value
Stock, Small Company Value, Real Estate Securities and the Small Company
Portfolios, 1.0% of the International Stock Portfolio, .6% of the Global Bond
Portfolio, .7% of the Macro-Cap Value Portfolio, 1.1% of the Micro-Cap Growth
Portfolio, .25% for each Maturing Government Bond Portfolio and .5% of each of
the remaining Portfolio's net assets. For the Templeton Developing Markets Fund,
its investment manager deducts from the net asset value of the Fund a fee for
services provided under an investment advisory agreement which, effective May 1,
1997, will be at an annual rate of 1.25%. Also deducted from the net asset value
on a daily basis is a Rule 12b-1 fee of .25%.
The Funds are subject to certain expenses that may be incurred with respect to
their operations. For more information, see the prospectuses of each Fund which
are attached to this prospectus. The Templeton Developing Markets Fund pays its
investment adviser management fees at an annual rate of 1.25% of the Fund's
average daily net assets and pays other operating expenses which will vary every
year but, for the most recent fiscal year, were 0.33% of its average daily net
assets. In addition, Class 2 of the Templeton Developing Markets Fund has a rule
12b-1 plan and may pay up to 0.25% annually of the average daily net assets for
distribution. For more information, see the fund's prospectus.
In addition, a deferred sales charge may apply. Deductions for any applicable
premium taxes may also be made (currently such taxes range from 0.0% to 3.5%)
depending upon applicable law.
For more information on charges, see the heading "Contract Charges" in this
Prospectus. The deferred sales charge is discussed below.
WHAT IS THE DEFERRED SALES CHARGE?
We deduct a deferred sales charge on contract withdrawals and surrenders during
the first seven contract years following receipt of each purchase payment for
expenses relating to the sale of the contract. The amount of any deferred sales
charge is deducted from the accumulation value.
The amount of deferred sales charge, as a percentage of the amount surrendered
or withdrawn, decreases during the first seven contract years following receipt
of each purchase payment from an initial charge of 7% to 0%. The charge does not
apply to the excess, if any, of the accumulation value over the sum of all
purchase payments made to the contract, less the amount of previous purchase
payment withdrawals. The charge is applied to each purchase payment on a
first-in, first-out basis. The charge will not exceed 7% of the purchase
payments made under the contract.
There is no deferred sales charge on (1) amounts applied to provide an annuity
under the contract, (2) amounts returned pursuant to the contracts' cancellation
right, or (3) amounts paid in the event of the death of the owner.
For more information on this charge, see the heading "Deferred Sales Charges"
in this Prospectus.
ARE THERE ANY OTHER CHARGES IN THE CONTRACT?
Yes. We reserve the right to make a charge, not to exceed $25, for transfers
occurring more frequently than once a month. Currently we do not impose such a
charge. Also, the contract contains a provision of a contract fee of $200 when a
fixed annuity is elected.
CAN YOU MAKE PARTIAL WITHDRAWALS FROM THE CONTRACT?
Yes. You may make withdrawals of the accumulation value of your contract before
an annuity begins. Partial withdrawals must be pursuant to your written request.
Partial withdrawals are generally subject to the deferred sales charge. In
addition, a penalty tax of 10% of the amount of the taxable distribution may be
assessed upon withdrawals from the variable annuity contract in certain
circumstances, including distributions made prior to the owner's attainment of
age 59 1/2. For more information, see the heading "Federal Tax Status" in this
Prospectus.
DO YOU HAVE A RIGHT TO CANCEL THE CONTRACT?
Yes. You may cancel the contract any time within ten days of your receipt of the
contract by returning it to us or your agent. In some states, such as
California, 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 the states.
IS THERE A GUARANTEED DEATH BENEFIT?
Yes. The death benefit shall be equal to the greater of: (1) the amount of the
accumulation
7
<PAGE>
value payable at death; or (2) the amount of the total purchase payments as
consideration for this contract, less all contract withdrawals.
WHAT ANNUITY OPTIONS ARE AVAILABLE?
The contract specifies several annuity options. Each annuity option may be
elected on either a variable annuity or fixed annuity or a combination of the
two. Other annuity options may be available from us on request. The specified
annuity options 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.
WHAT IF THE OWNER DIES?
If you die before payments begin, we will pay the death benefit to the named
beneficiary. In the case of joint owners, this amount would be payable at the
death of the second owner.
If the annuitant dies after annuity payments have begun, we will pay whatever
death benefit may be called for by the terms of the annuity option selected. If
the owner of this contract is other than a natural person, such as a trust or
other similar entity, we will pay a death benefit of the accumulation value to
the named beneficiary on the death of the annuitant, if death occurs prior to
the date for annuity payments to begin.
WHAT VOTING RIGHTS DO YOU HAVE?
Contract owners and annuitants will be able to direct us as to how to vote
shares of the underlying Funds held for their contracts where shareholder
approval is required by law in the affairs of the Funds.
8
<PAGE>
EXPENSE TABLE
The tables shown below are to assist a contract owner in understanding the costs
and expenses that a contract will bear directly or indirectly. For more
information on contract costs and expenses, see the Prospectus heading "Contract
Charges" and the information immediately following. The table does not reflect
deductions for any applicable premium taxes which may be made from each purchase
payment depending upon the applicable law. The tables show the expenses of each
portfolio of the Funds after expense reimbursement.
The following contract expense information is intended to illustrate the
expenses of the MultiOption Select 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.
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACT
MULTIOPTION SELECT
CONTRACT OWNER TRANSACTION EXPENSES
The amount of the deferred sales charge percentage is as shown in the table
below:
<TABLE>
<CAPTION>
CONTRACT YEARS SINCE PAYMENT CHARGE
- -------------------------------- -------------
<S> <C>
0-1 7%
1-2 7%
2-3 6%
3-4 5%
4-5 4%
5-6 3%
6-7 2%
7 and thereafter 0%
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees............... 1.25%
------
Total Separate Account Annual Expenses.... 1.25%
------
------
</TABLE>
Note: We have reserved the right to increase the total of the mortality and
expense risk fees to not more than 1.40% on an annual rate. For more information
on these charges, please see the heading "Mortality and Expense Risk Charges" on
page 18 of this Prospectus.
FUND ANNUAL EXPENSES
(As a percentage of average net assets for the described Advantus Series Fund,
Inc. Portfolios and the Templeton Variable Product Series.)
<TABLE>
<CAPTION>
OTHER TOTAL FUND
INVESTMENT EXPENSES ANNUAL EXPENSES
MANAGEMENT (AFTER EXPENSE DISTRIBUTION (AFTER EXPENSE
FEES REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)
----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Advantus Series Fund, Inc.:
Growth Portfolio.................... 0.50% 0.05% -- 0.55%
Bond Portfolio...................... 0.50% 0.07% -- 0.57%
Money Market Portfolio.............. 0.50% 0.09% -- 0.59%
Asset Allocation Portfolio.......... 0.50% 0.05% -- 0.55%
Mortgage Securities Portfolio....... 0.50% 0.09% -- 0.59%
Index 500 Portfolio................. 0.40% 0.05% -- 0.45%
Capital Appreciation Portfolio...... 0.75% 0.05% -- 0.80%
International Stock Portfolio....... 0.71% 0.26% -- 0.97%
Small Company Portfolio............. 0.75% 0.07% -- 0.82%
Maturing Government Bond 1998
Portfolio (1)..................... 0.25% 0.15% -- 0.40%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OTHER TOTAL FUND
INVESTMENT EXPENSES ANNUAL EXPENSES
MANAGEMENT (AFTER EXPENSE DISTRIBUTION (AFTER EXPENSE
FEES REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)
----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Maturing Government Bond 2002
Portfolio (1)..................... 0.25% 0.15% -- 0.40%
Maturing Government Bond 2006
Portfolio (1)..................... 0.25% 0.15% --% 0.40%
Maturing Government Bond 2010
Portfolio (1)..................... 0.25% 0.15% -- 0.40%
Value Stock Portfolio............... 0.75% 0.05% -- 0.80%
Small Company Value Portfolio (1)... 0.75% 0.15% -- 0.90%
Global Bond Portfolio............... 0.60% 1.00% -- 1.60%
Index 400 Mid-Cap Portfolio (1)..... 0.40% 0.15% -- 0.55%
Macro-Cap Value Portfolio (1)....... 0.70% 0.15% -- 0.85%
Micro-Cap Growth Portfolio (1)...... 1.10% 0.15% -- 1.25%
Real Estate Securities Portfolio
(2)............................... 0.75% 0.15% -- 0.90%
Templeton Variable Products Series:
Developing Markets Fund Class 2..... 1.25% 0.33%(3) 0.25% 1.83%
</TABLE>
(1) Minnesota Mutual voluntarily absorbed certain expenses of the Maturing
Government Bond 1998, Maturing Government Bond 2002, Maturing Government
Bond 2006, Maturing Government Bond 2010, Small Company Value, Index 400
Mid-Cap, Macro-Cap Value and Micro-Cap Growth Portfolios for the period
ended December 31, 1997. If these portfolios had been charged for expenses,
the ratio of expenses to average daily net assets would have been .74%,
1.14%, 1.50%, 1.85%, 1.78%, 1.70%, 3.13% and 2.03%, respectively. It is
Minnesota Mutual's present intention to waive other fund expenses during the
current fiscal year which exceed, as a percentage of average daily net
assets, .15%. Minnesota Mutual also reserves the option to reduce the level
of other expenses which it will voluntarily absorb.
(2) Because the Portfolio will be available on May 1, 1998, the figure for other
expenses has been based on estimated expenses for the current year.
Minnesota Mutual has voluntarily agreed to absorb or waive other expenses
which exceed, as a percentage of daily net assets, .15%. If the Portfolio
was to be charged for these expenses, it is estimated that the ratio of
total expenses to average daily net assets would be 1.78%. Minnesota Mutual
also reserves the option to reduce the level of other expenses which it will
voluntarily absorb.
(3) Developing Markets Fund Class 2 has a distribution plan or "Rule 12b-1 Plan"
which is described in the Fund's prospectus. Because Class 2 shares were not
offered until May 1, 1997, figures (other than "Distribution Expenses") are
estimates for 1998 based on the historical expenses of the Fund's Class 1
shares for the fiscal year ended December 31, 1997.
10
<PAGE>
CONTRACT OWNER EXPENSE EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
IF YOU SURRENDERED YOUR IF YOU ANNUITIZE AT THE END OF THE
CONTRACT AT THE END OF THE APPLICABLE TIME PERIOD OR YOU DO
APPLICABLE TIME PERIOD NOT SURRENDER YOUR CONTRACT*
------------------------------------------ --------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio................... $ 88 $ 117 $ 137 $ 212 $18 $ 57 $ 97 $212
Bond Portfolio..................... $ 88 $ 117 $ 139 $ 214 $18 $ 57 $ 99 $214
Money Market Portfolio............. $ 89 $ 118 $ 140 $ 216 $19 $ 58 $100 $216
Asset Allocation Portfolio......... $ 88 $ 117 $ 137 $ 212 $18 $ 57 $ 97 $212
Mortgage Securities Portfolio...... $ 89 $ 118 $ 140 $ 216 $19 $ 58 $100 $216
Index 500 Portfolio................ $ 87 $ 114 $ 132 $ 201 $17 $ 54 $ 92 $201
Capital Appreciation Portfolio..... $ 91 $ 124 $ 150 $ 238 $21 $ 64 $110 $238
International Stock Portfolio...... $ 93 $ 129 $ 159 $ 255 $23 $ 69 $119 $255
Small Company Portfolio............ $ 91 $ 125 $ 151 $ 240 $21 $ 65 $111 $240
Maturing Government Bond 1998
Portfolio........................ $ 87 $ 112 $ 130 $ 195 $17 $ 52 $ 90 $195
Maturing Government Bond 2002
Portfolio........................ $ 87 $ 112 $ 130 $ 195 $17 $ 52 $ 90 $195
Maturing Government Bond 2006
Portfolio........................ $ 87 $ 112 $ 130 $ 195 $17 $ 52 $ 90 $195
Maturing Government Bond 2010
Portfolio........................ $ 87 $ 112 $ 130 $ 195 $17 $ 52 $ 90 $195
Value Stock Portfolio.............. $ 91 $ 124 $ 150 $ 238 $21 $ 64 $110 $238
Small Company Value Portfolio...... $ 92 $ 127 $ 155 $ 248 $22 $ 67 $115 $248
Global Bond Portfolio.............. $ 99 $ 148 $ 190 $ 318 $29 $ 88 $150 $318
Index 400 Mid-Cap Portfolio........ $ 88 $ 117 $ 137 $ 212 $18 $ 57 $ 97 $212
Macro-Cap Value Portfolio.......... $ 91 $ 126 $ 153 $ 243 $21 $ 66 $113 $243
Micro-Cap Growth Portfolio......... $ 95 $ 138 $ 173 $ 284 $25 $ 78 $133 $284
Real Estate Securities Portfolio... $ 92 $ 127 N/A N/A $22 $ 67 N/A N/A
Templeton Developing Markets Class
2 Portfolio...................... $ 101 $ 155 $ 202 $ 339 $31 $ 95 $162 $339
</TABLE>
*Annuitization for this purpose means the election of an Annuity Option under
which benefits are expected to continue for a period of at least five years.
11
<PAGE>
CONDENSED FINANCIAL INFORMATION
The financial statements of Minnesota Mutual Variable Annuity Account and the
consolidated financial statements of The Minnesota Mutual 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 years ended December 31, 1997, 1996, 1995 and the period
from September 15, 1994, commencement of operations, to December 31, 1994. (For
Small Company Value, Global Bond, Index 400 Mid-Cap, Micro-Cap Growth and
Templeton Developing Markets financial history is for the period from October 1,
1997, commencement of operations to December 31, 1997. For Macro-Cap Value
Portfolio financial history is for the period from October 15, 1997,
commencement of operations, to December 31, 1997.) This information should be
read in conjunction with the financial statements and related notes of Minnesota
Mutual Variable Annuity Account included in this prospectus.
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Growth Sub-Account:
Unit value at beginning of period............... $3.04 $2.63 $2.14 $2.22
Unit value at end of period..................... $4.01 $3.04 $2.63 $2.14
Number of units outstanding at
end of period................................. 44,705,247 38,448,452 35,809,340 33,090,790
Bond Sub-Account:
Unit value at beginning of period............... $2.19 $2.15 $1.82 $1.84
Unit value at end of period..................... $2.37 $2.19 $2.15 $1.82
Number of units outstanding at
end of period................................. 43,266,404 36,732,062 28,069,241 23,798,963
Money Market Sub-Account:
Unit value at beginning of period............... $1.57 $1.52 $1.46 $1.44
Unit value at end of period..................... $1.63 $1.57 $1.52 $1.46
Number of units outstanding at
end of period................................. 19,804,841 22,929,634 14,809,515 11,720,778
Asset Allocation Sub-Account:
Unit value at beginning of period............... $2.76 $2.49 $2.01 $2.05
Unit value at end of period..................... $3.25 $2.76 $2.49 $2.01
Number of units outstanding at
end of period................................. 119,491,402 116,211,650 110,975,477 109,044,286
Mortgage Securities Sub-Account:
Unit value at beginning of period............... $2.01 $1.93 $1.66 $1.68
Unit value at end of period..................... $2.17 $2.01 $1.93 $1.66
Number of units outstanding at
end of period................................. 34,751,197 32,527,955 31,277,934 31,542,405
Index 500 Sub-Account:
Unit value at beginning of period............... $2.91 $2.43 $1.79 $1.85
Unit value at end of period..................... $3.81 $2.91 $2.43 $1.79
Number of units outstanding at
end of period................................. 54,579,265 46,097,553 35,272,024 29,639,298
Capital Appreciation Sub-Account:
Unit value at beginning of period............... $2.93 $2.52 $2.08 $2.10
Unit value at end of period..................... $3.71 $2.93 $2.52 $2.08
Number of units outstanding at
end of period................................. 53,582,481 51,023,999 45,964,468 40,739,415
International Stock Sub-Account:
Unit value at beginning of period............... $1.73 $1.46 $1.30 $1.37
Unit value at end of period..................... $1.91 $1.73 $1.46 $1.30
Number of units outstanding at
end of period................................. 103,600,602 86,521,264 68,725,183 61,474,893
Small Company Sub-Account:
Unit value at beginning of period............... $1.67 $1.59 $1.22 $1.21
Unit value at end of period..................... $1.78 $1.67 $1.59 $1.22
Number of units outstanding at
end of period................................. 68,590,765 59,295,273 43,234,716 29,723,609
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Maturing Government Bond 1998
Sub-Account:
Unit value at beginning of period............... $1.16 $1.12 $0.98 $1.00
Unit value at end of period..................... $1.21 $1.16 $1.12 $0.98
Number of units outstanding at
end of period................................. 3,789,296 3,911,112 3,330,772 2,578,506
Maturing Government Bond 2002
Sub-Account:
Unit value at beginning of period............... $1.21 $1.20 $0.97 $0.99
Unit value at end of period..................... $1.29 $1.21 $1.20 $0.97
Number of units outstanding at
end of period................................. 2,938,848 2,935,860 2,417,823 2,528,509
Maturing Government Bond 2006
Sub-Account:
Unit value at beginning of period............... $1.25 $1.28 $0.96 $0.96
Unit value at end of period..................... $1.39 $1.25 $1.28 $0.96
Number of units outstanding at
end of period................................. 2,665,421 2,334,109 1,878,731 1,808,705
Maturing Government Bond 2010
Sub-Account:
Unit value at beginning of period............... $1.27 $1.33 $0.95 $0.94
Unit value at end of period..................... $1.47 $1.27 $1.33 $0.95
Number of units outstanding at
end of period................................. 2,017,743 2,077,124 924,681 913,358
Value Stock Sub-Account:
Unit value at beginning of period............... $1.78 $1.38 $1.05 $1.09
Unit value at end of period..................... $2.13 $1.78 $1.38 $1.05
Number of units outstanding at
end of period................................. 68,251,135 43,796,523 18,744,902 7,178,675
Small Company Value Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $1.03
Number of units outstanding at
end of period................................. 4,822,504
Global Bond Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $1.00
Number of units outstanding at
end of period................................. 25,083,345
Index 400 Mid-Cap Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $1.00
Number of units outstanding at
end of period................................. 5,020,041
Macro-Cap Value Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $0.98
Number of units outstanding at
end of period................................. 5,003,390
Micro-Cap Growth Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $0.91
Number of units outstanding at
end of period................................. 5,019,879
Templeton Developing Markets Class 2
Sub-Account:
Unit value at beginning of period............... $1.00
Unit value at end of period..................... $0.69
Number of units outstanding at
end of period................................. 724,374
</TABLE>
13
<PAGE>
PERFORMANCE DATA
From time to time the Variable Annuity Account may publish advertisements
containing performance data relating to its sub-accounts. In the case of the
Money Market Sub-Account, the Variable Annuity Account 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 one year, five year and ten year periods and for the
period since the inception of the underlying Portfolios. Such performance data
may be accompanied by cumulative total return quotations for the comparable
periods. For periods prior to the date of this Prospectus the quotations will be
based on the assumption that the contracts described herein were issued when the
underlying Portfolios first became available to the Variable Annuity Account
under other contracts issued by us. The Money Market Sub-Account may also quote
such average annual and cumulative total return figures. Performance figures
used by the Variable Annuity Account are based on historical information of the
sub-accounts for specified periods, and the figures are not intended to suggest
that such performance will continue in the future. Performance figures of the
Variable Annuity Account will reflect charges made pursuant to the terms of the
contracts offered by this Prospectus and charges of underlying funds. The
various performance figures used in Variable Annuity Account advertisements
relating to the contract described in this Prospectus are summarized below. More
detailed information on the computations is set forth in the Statement of
Additional Information.
MONEY MARKET SUB-ACCOUNT YIELD. Yield quotations for the Money Market
Sub-Account are based on the income generated by an investment in the
sub-account over a specified period, usually seven days. The figures are
"annualized," that is, the amount of income generated by the investment during
the period is assumed to be generated over a 52-week period and is shown as a
percentage of the investment. Effective yield quotations are calculated
similarly, but when annualized the income earned by an investment in the sub-
account is assumed to be reinvested. Effective yield quotations will be slightly
higher than yield quotations because of the compounding effect of this assumed
reinvestment. Yield and effective yield figures quoted by the Sub-Account will
not reflect the deduction of any applicable deferred sales charges.
TOTAL RETURN FIGURES. Cumulative total return figures may also be quoted for
all sub-accounts. Cumulative total return is based on a hypothetical $1,000
investment in the sub-account at the beginning of the advertised period, and is
equal to the percentage change between the $1,000 net asset value of that
investment at the beginning of the period and the net asset value of that
investment at the end of the period. Cumulative total return figures quoted by
the sub-account will not reflect the deduction of any applicable deferred sales
charges.
Prior to May 1, 1998, the Global Bond Portfolio was known as the International
Bond Portfolio.
All cumulative total return figures published for sub-accounts will be
accompanied by average annual total return figures for a one-year period and for
the period since the sub-account became available pursuant to the Variable
Annuity Account's registration statement. Average annual total return figures
will show for the specified period the average annual rate of return required
for an initial investment of $1,000 to equal the surrender value of that
investment at the end of the period. The surrender value will reflect the
deduction of the deferred sales charge applicable to the contract and to the
length of the period advertised. Such average annual total return figures may
also be accompanied by average annual total return figures, for the same or
other periods, which do not reflect the deduction of any applicable deferred
sales charges.
PREDICTABILITY OF RETURN. For each of the Maturing Government Bond
Sub-Accounts, Minnesota Mutual will calculate an anticipated growth rate (AGR)
on each day that the underlying Portfolio of the Fund is valued. Minnesota
Mutual may also calculate an anticipated value at maturity (AVM) on any such
day. Daily calculations for each are necessary because (i) the AGR and AVM
calculations assume, among other things, an expense ratio and portfolio
composition that remains unchanged for the life of each such sub-account to the
target date at maturity, and (ii) such calculations are therefore meaningful as
a measure of predictable return only if such units are held to the applicable
target maturity date and only with respect to units purchased on the date of
such calculations (the AGR and AVM applicable to units purchased on any other
date may be materially different). Those assumptions can only be hypothetical
given that owners of contracts have the option to
14
<PAGE>
purchase or redeem units on any business day through contract activity, and will
receive dividend and capital gain distributions through the receipt of
additional shares to their unit values. A number of factors in addition to
contract owner activity can cause a Maturing Government Bond Sub-Account's AGR
and AVM to change from day to day. These include the adviser's efforts to
improve total return through market opportunities, transaction costs, interest
rate changes and other events that affect the market value of the investments
held in each Maturing Government Bond Portfolio in the Fund. Despite these
factors, it is anticipated that if specific units of a Maturing Government Bond
Sub-Account are held to the applicable target maturity date, then the AGR and
AVM applicable to such units (i.e., calculated as of the date of purchase of
such units) will vary from the actual return experienced by such units within a
narrow range.
- ------------------------------------------------------------------------
GENERAL DESCRIPTIONS
A. THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
We are a mutual life insurance company organized in 1880 under the laws of
Minnesota. Our home office is at 400 Robert Street North, St. Paul, Minnesota
55101-2098, telephone: (612) 665-3500; after September 1, 1998, (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 ANNUITY ACCOUNT
A separate account called the Minnesota Mutual Variable Annuity Account was
established on September 10, 1984, by our Board of Trustees in accordance with
certain provisions of the Minnesota insurance law. The separate account is
registered as a "unit investment trust" with the Securities and Exchange
Commission under the Investment Company Act of 1940, but such registration does
not signify that the Securities and Exchange Commission supervises the
management, or the investment practices or policies, of the Variable Annuity
Account. The separate account meets the definition of a "separate account" under
the federal securities laws.
The Minnesota law under which the Variable Annuity Account was established
provides that the assets of the Variable Annuity Account shall not be chargeable
with liabilities arising out of any other business which we may conduct, but
shall be held and applied exclusively to the benefit of the holders of those
variable annuity contracts for which the separate account was established. The
investment performance of the Variable Annuity Account is entirely independent
of both the investment performance of our General Account and of any other
separate account which we may have established or may later establish. All
obligations under the contracts are general corporate obligations of Minnesota
Mutual.
The Variable Annuity Account currently has twenty-one sub-accounts to which
contract owners may allocate purchase payments. Each sub-account invests in
shares of a corresponding Portfolio of the Fund. Additional sub-accounts may be
added at our discretion.
C. ADVANTUS SERIES FUND, INC.
The Variable Annuity Account currently invests exclusively in Advantus Series
Fund, Inc. (the "Series Fund"), a mutual fund of the series type which is
advised by Advantus Capital Management, Inc. Prior to May 1, 1997, the name of
the Series Fund was "MIMLIC Series Fund, Inc." The Series Fund is registered
with the Securities and Exchange Commission as a diversified (except for the
Global Bond Portfolio), open-end management investment company, but such
registration does not signify that the Commission supervises the management, or
the investment practices or policies, of the Series Fund. The Series Fund issues
its shares, continually and without sales charge, only to us and our separate
accounts, which currently include the Variable Annuity Account, the Group
Variable Annuity Account, Variable Fund D, the Variable Life Account and the
Variable Universal Life Account. The Series Fund may be made available to other
separate accounts as new products are developed and may be used as the
underlying investment medium for separate accounts of the Northstar Life
Insurance Company, a wholly-owned life insurance subsidiary of ours domiciled in
the State of New York. Shares are sold and redeemed at net asset value. In the
case of a newly issued contract, purchases of shares of the Portfolios of the
Series Fund in connection with the first purchase payment will be based on the
values next determined after issuance of the contract by us. Redemptions of
shares of the Portfolios of the Series Fund are made at the net
15
<PAGE>
asset value next determined from the day we receive a request for transfer,
partial withdrawal or surrender at our home office. In the case of outstanding
contracts, purchases of shares of the Portfolios of the Series Fund for the
Variable Annuity Account are made at the net asset value of such shares next
determined after receipt by us of contract purchase payments.
The Series Fund's investment adviser is Advantus Capital Management, Inc.
("Advantus Capital"). Advantus Capital is a wholly-owned subsidiary of MIMLIC
Asset Management Company ("MIMLIC Management") which, prior to May 1, 1997,
served as investment adviser to the Fund. MIMLIC Management is a wholly-owned
subsidiary of Minnesota Mutual. It acts as an investment adviser to the Fund
pursuant to an advisory agreement.
Advantus Capital acts as investment adviser for the Fund and its Portfolios.
Winslow Capital Management, Inc., a Minnesota corporation with principal offices
at 4720 IDS Tower, 80 South Eighth Street, Minneapolis, Minnesota 55402, has
been retained under an investment sub-advisory agreement with Advantus Capital
to provide investment advice and, in general, conduct the management and
investment program of the Capital Appreciation Portfolio. Similarly, Templeton
Investment Counsel, Inc., a Florida corporation with principal offices in Fort
Lauderdale, Florida, has been retained under an investment sub-advisory
agreement to provide investment advice to the International Stock Portfolio of
the Fund.
J.P. Morgan Investment Management Inc., a Delaware corporation with principal
offices in New York, New York, has been retained under an investment
sub-advisory agreement to provide investment advice for the Macro-Cap Value
Portfolio of the Fund. Wall Street Associates, a California corporation with
principal offices in La Jolla, California, has been retained under an investment
sub-advisory agreement to provide investment advice for the Micro-Cap Growth
Portfolio of the Fund. Julius Baer Investment Management, Inc., a Delaware
corporation with principal offices in New York, New York, has been retained
under an investment sub-advisory agreement to provide investment advice for the
Global Bond Portfolio of the Fund.
A prospectus for the Fund is attached to this Prospectus. A person should
carefully read the Fund's prospectus before investing in the contract.
D. TEMPLETON VARIABLE PRODUCTS SERIES FUND
In addition to the investments in the Fund, the Variable Annuity Account invests
in Class 2 shares of the Templeton Developing Markets Fund, a diversified
portfolio of the Templeton Variable Products Series Fund, a mutual fund of the
series type.
The investment objectives and certain policies of the Templeton Developing
Markets Fund available under the contract are as follows:
The Templeton Developing Markets Fund seeks long-term capital
appreciation. It pursues this objective by investing primarily in equity
securities of issuers in countries having developing markets. Countries
generally considered to have developing markets are all countries that are
considered to be developing or emerging countries by the International Bank
for Reconstruction and Development (more commonly referred to as the World
Bank) or the International Finance Corporation, as well as countries that
are classified by the United Nations or otherwise regarded by their
authorities as developing.
Class 2 of the Templeton Developing Markets Fund pays 0.25% of the average
daily net assets annually under a distribution plan adopted under Rule 12b-1 of
the Investment Company Act of 1940. Amounts paid under the 12b-1 plan to
Minnesota Mutual may be used for certain contract owner services or distribution
activities.
The investment adviser of Templeton Developing Markets Fund is Templeton Asset
Management Ltd., a Singapore corporation. It is an indirect wholly-owned
subsidiary of Franklin Resources, Inc. ("Franklin"). Through its subsidiaries,
Franklin is engaged in the financial services industry. The Templeton
organization has been investing globally since 1940 and, with its affiliates,
provides investment management and advisory services to a worldwide client base.
The investment adviser and its affiliates have offices worldwide. A prospectus
for the Fund is attached to this Prospectus. A person should carefully read the
Fund's prospectus before investing in the contract.
16
<PAGE>
E. 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 the Variable Annuity Account.
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 the Variable Annuity Account
and we reserve the right to add, combine or remove any sub-accounts of the
Variable Annuity Account. Each additional sub-account will purchase shares in a
new portfolio or mutual fund. Such sub-accounts may be established when, in our
sole discretion, marketing, tax, investment or other conditions warrant such
action. Similar considerations will be used by us should there be a
determination to eliminate one or more of the sub-accounts of the Variable
Annuity Account. 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 the Variable
Annuity Account under the Investment Company Act of 1940, to restrict or
eliminate any voting rights of the contract owners, and to combine the Variable
Annuity Contract with one or more of our other separate accounts.
Shares of the Funds are also sold to other of our 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 two Funds simultaneously. Although neither Minnesota Mutual nor the
Funds currently foresees any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the Funds' Board
of Directors intends to monitor events in order to identify any material
conflicts between such policy owners and contract owners and to determine what
action, if any, should be taken in response thereto. Such action 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,
(1) changes in state insurance laws, (2) changes in Federal income tax laws, (3)
changes in the investment management of any of the Portfolios of the Fund, or
(4) differences in voting instructions between those given by policy owners and
those given by contract owners.
- ------------------------------------------------------------------------
CONTRACT CHARGES
The contract has several types of charges, all of which are discussed below.
They include a deferred sales charge, mortality and expense risk charges and a
transaction charge.
A. DEFERRED SALES CHARGES
No deferred sales charge is deducted from the purchase payment made for this
contract. However, when a contract's accumulation value is reduced by a
withdrawal or a surrender, a deferred sales charge may be deducted for expenses
relating to the sale of the contracts. There is no deferred sales charge on (1)
amounts applied to provide an annuity under the contract, (2) amounts returned
pursuant to the contract's cancellation right, or (3) amounts paid in the event
of the death of the owner.
The deferred sales charge is the charge made on contract withdrawals or
surrenders. It is made during the seven year period following the receipt of
each purchase payment. The amount withdrawn plus any deferred sales charge is
deducted from the accumulation value. Accumulation units will be cancelled of a
value equal to the applicable charge and the amount of the withdrawal.
The amount of the deferred sales charge is determined from the percentages
shown in the table below. All purchase payments will be allocated to a
withdrawal or a surrender for this purpose on a first-in, first-out basis for
the purpose of determining the amount of the deferred sales charge. It applies
only to withdrawal or surrender of purchase payments received by us within seven
years of the date of the withdrawal or surrender. However, you may receive the
excess, if any, of the accumulation value of the contract over the sum of all of
the purchase payments made to the contract, reduced by the amount of previous
purchase payment withdrawals, without a deferred sales charge. In addition, we
will waive the sales charge on that portion of a contract's purchase payments
which are applied to the purchase of an Adjustable Income Annuity, which is an
immediate variable annuity product issued by us. We will also waive the sales
charge on
17
<PAGE>
amounts withdrawn because of an excess contribution to a tax-qualified contract.
The amount of the deferred sales charge percentage is as shown in the table
below:
<TABLE>
<CAPTION>
CONTRACT YEARS SINCE PAYMENT CHARGE
- -------------------------------- -------------
<S> <C>
0-1 7%
1-2 7%
2-3 6%
3-4 5%
4-5 4%
5-6 3%
6-7 2%
7 and thereafter 0%
</TABLE>
The amount of the deferred sales charge is determined by: (a) calculating the
number of years each purchase payment being withdrawn has been in the contract;
(b) multiplying each purchase payment withdrawn by the appropriate sales charge
percentage in the table; and (c) adding the deferred sales charge from all
purchase payments as calculated in (b).
As a percentage of purchase payments paid to the contract, Ascend Financial
Services, Inc. ("Ascend Financial"), the principal underwriter, may pay up to
4.5% of the amount of the purchase payments to the contract. In addition, Ascend
Financial or Minnesota Mutual will pay, based uniformly on the sale of variable
annuity contracts by such broker-dealers, credits which allow registered
representatives who are responsible for sales of variable annuity contracts to
attend conventions and other meetings sponsored by Minnesota Mutual or its
affiliates for the purpose of promoting the sale of the insurance and/or
investment products offered by Minnesota Mutual and its affiliates. Such credits
may cover the registered representatives' transportation, hotel accommodations,
meals, registration fees and the like. Minnesota Mutual may also pay those
registered representatives amounts based upon their production and the
persistency of life insurance and annuity business placed with Minnesota Mutual.
B. MORTALITY AND EXPENSE RISK CHARGES
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 contract, to each annuitant
regardless of how long that annuitant lives or all annuitants as a group live.
This assures an annuitant that neither the annuitant's own longevity nor an
improvement in life expectancy generally will have an adverse effect on the
monthly annuity payments received under the contract.
We assume an expense risk by assuming the risk that deductions provided for in
the contract for the mortality and other expenses will be adequate to cover the
expenses incurred.
For assuming these risks, we currently make a deduction from the Variable
Annuity Account at the annual rate of .80% for the mortality risk and .45% for
the expense risk. We reserve the right to increase the charge for the assumption
of expense risks to not more than .60%. If this charge is increased to this
maximum amount, then the total of the mortality risk and expense risk charge
would be 1.40% on an annual basis.
For a discussion of how these charges are applied in the calculation of the
accumulation unit value, please see the discussion entitled "Purchase Payments,
Value of the Contract and Transfers" on page 24.
If these deductions prove to be insufficient to cover the actual cost of the
expense and mortality risks assumed by us, then we will absorb the resulting
losses and make sufficient transfers to the Variable Annuity Account from our
General Account, where appropriate. Conversely, if these deductions prove to be
more than sufficient after the establishment of any contingency reserves deemed
prudent or required by law, any excess will be profit (or "surplus") to us. Some
or all of such profit may be used to cover any distribution costs not recovered
through the deferred sales charge.
C. TRANSACTION AND CONTRACT CHARGES
We reserve the right to make a charge, not to exceed $25, for each transfer
among the sub-accounts of the separate account when the frequency of such
transfer requests exceeds one every calendar month. No charge is currently
imposed on transfer requests exceeding this frequency.
A $200 contract fee is imposed when a fixed annuity is elected under the
contract and the guaranteed rates are applied to provide an annuity.
18
<PAGE>
VOTING RIGHTS
The Fund shares held in the Variable Annuity Account will be voted by us at the
regular and special meetings of the Fund. Shares attributable to contracts will
be voted by us in accordance with instructions received from contract owners
with voting interests in each sub-account of the Variable Annuity Account. In
the event no instructions are received from a contract owner with respect to
shares of a Portfolio held by a sub-account, we will vote such shares of the
Portfolio and shares not attributable to contracts in the same proportion as
shares of the Portfolio held by such sub-account for which instructions have
been received. The number of votes which are available to a contract owner will
be calculated separately for each sub-account of the Variable Annuity Account.
If, however, the Investment Company Act of 1940 or any regulation under that Act
should change so that we may be allowed to vote shares in our own right, then we
may elect to do so.
During the accumulation period of each contract, the contract owner holds the
voting interest in each 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 underlying Fund shares held by that sub-
account.
During the annuity period of each contract, the annuitant holds the voting
interest in each 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 underlying Fund shares held 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 Fund shareholders'
meeting if the shares held for the contract owner's contract may be voted at
such meeting. We will also send proxy materials and a form of instruction so
that you can instruct us with respect to voting.
- ------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACT
A. GENERAL PROVISIONS
1. FLEXIBLE PAYMENT VARIABLE ANNUITY CONTRACT
This is a contract which may be used in connection with all types of
tax-qualified plans, state deferred compensation plans or individual retirement
annuities adopted by or on behalf of individuals. It may also be purchased by
individuals not as a part of any plan. The contract provides for a variable
annuity or a fixed annuity to begin at some future date with the purchase
payments for the contract to be paid prior to the annuity commencement date in a
series of payments flexible with respect to the date and amount of payment. The
contract is also appropriate for situations where only a single purchase payment
is anticipated.
2. ISSUANCE OF CONTRACT
The contracts are issued to you, the contract owner named in the application.
The owner of the contract may be the annuitant or someone else.
3. MODIFICATION OF THE CONTRACT
A contract may be modified at any time by written agreement between you and us.
However, no such modification will adversely affect the rights of an annuitant
under the contract unless the modification is made to comply with a law or
government regulation. You will have the right to accept or reject the
modification. This right of acceptance or rejection is limited for contracts
used as individual retirement annuities.
4. ASSIGNMENT
If the contract is sold in connection with a tax-qualified program, (including
employer sponsored employee pension benefit plans, tax-sheltered annuities and
individual retirement annuities) your or the annuitant's interest 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, and
to the maximum extent permitted by law, benefits payable under the contract
shall be exempt from the claims of creditors.
If the contract is not issued in connection with a tax-qualified program, the
interest of any person in the contract may be assigned during the lifetime of
the annuitant. We will not be bound by any assignment until we have recorded
written notice of it at our home office. We are not responsible for the validity
of any assignment. An assignment will not apply to any payment or action made by
us before it was recorded. Any proceeds which become payable to an assignee will
be payable in a single sum. Any claim made by an assignee will be subject to
proof of the assignee's interest and the extent of the assignment.
19
<PAGE>
5. LIMITATIONS ON PURCHASE PAYMENTS
You choose when to make purchase payments under the contract. There is no
minimum purchase payment amount and there is no minimum amount which must be
allocated to any sub-account of the Variable Annuity Account. In the Variable
Annuity Account, your purchase payments are invested in the Funds according to
your instructions. If your application fails to specify which Portfolios are
desired, or is otherwise incomplete, and you do not consent to our retention of
your initial payment until the application is made complete, we will return your
initial payment within five business days.
Total purchase payments under the contract may not exceed $5,000,000, except
with our consent.
We may cancel the contract, in our discretion, if no purchase payments are
made for a period of two or more full contract years and both (a) the total
purchase payments made, less any withdrawals and associated charges, and (b) the
accumulation value of the entire contract, are less than $2,000. If such a
cancellation takes place, we will pay you the accumulation value of your
contract and we will notify you, in advance, of our intent to exercise this
right in our annual report which advises contract owners of the status of their
contracts. We will act to cancel the contract ninety days after the contract
anniversary unless an additional purchase payment is received before the end of
that ninety day period. Contracts issued in some states, for example, New
Jersey, do not permit such a cancellation and contracts issued there do not
contain this provision.
There may be limits on the maximum contributions to retirement plans that
qualify for special tax treatment.
6. DEFERMENT OF PAYMENT
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 to postponement for:
(a) 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;
(b) 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 Fund or to fairly determine the value of
the assets of the Fund; or
(c) such other periods as the Commission may by order permit for the
protection of the contract owners.
7. PARTICIPATION IN DIVISIBLE SURPLUS
The contracts participate in our divisible surplus, according to the annual
determination of our Board of Trustees as to the portion, if any, of our
divisible surplus which has accrued on the contracts.
No assurance can be given as to the amount of divisible surplus, if any, that
will be distributable under these contracts in the future. Such amount may arise
if mortality and expense experience is more favorable than assumed. When any
distribution of divisible surplus is made, it may take the form of additional
payments to annuitants or the crediting of additional accumulation units. We do
not anticipate any divisible surplus and do not anticipate making dividend
payments to contract owners under this contract.
B. ANNUITY PAYMENTS AND OPTIONS
1. ANNUITY PAYMENTS
Variable annuity payments are determined on the basis of (a) the mortality table
specified in the contract, which reflects the age of the annuitant, (b) the type
of annuity payment option selected, and (c) the investment performance of the
Fund Portfolios selected by the contract owner. 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 the Funds, and thus the annuity payments will vary with the
investment experience of the assets of the Funds, selected by the contract
owner.
20
<PAGE>
2. ELECTING THE RETIREMENT DATE AND FORM OF ANNUITY
The contract provides for four optional annuity forms, any one of which 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. Other
annuity options may be available from us on request.
While the contracts require that notice of election to begin annuity payments
must be received by us at least 30 days prior to the annuity commencement date,
we are currently waiving that requirement for such variable annuity elections
received at least three valuation days prior to the 15th of the month. We
reserve the right to enforce the 30 day notice requirement at our option at any
time in the future.
Each contract permits an annuity payment to begin on the first day of any
month. Under the contract, if you do not make an election, annuity payments will
begin on the later of: (a) the 85th birthday of the annuitant, or (b) five years
after the date of issue of the contract. Currently, it is our practice to await
instructions from a contract owner before beginning to pay annuity payments. If
you fail to elect an annuity option or form, a variable annuity will be provided
and the annuity option shall be Option 2A, a life annuity with a period of 120
months. The minimum first monthly annuity payment on either a variable or fixed
dollar basis must be at least $20. If such first monthly 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.
In addition, the contract restricts the maximum amount which may be applied to
provide a fixed annuity under the contract. The maximum amount which may be
applied for a fixed annuity is $1,000,000.
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.
3. 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 monthly payment 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. 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 and using the same interest rate which served as a basis for the
annuity 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. If this
option is elected, the contract and payments shall then be the joint property of
the annuitant and the designated joint annuitant. It would be possible under
this option for both annuitants to receive only one annuity payment if they both
died prior to the due date of the second annuity payment, two if they died
before the due date of the third annuity payment, etc.
OPTION 4--PERIOD CERTAIN ANNUITY
This is an annuity payable monthly for a period certain of from 5 to 20 years,
as elected. If the annuitant dies before 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 (1) 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 (2) such commuted amount
21
<PAGE>
shall be applied to effect a life annuity under Option 1 or Option 2.
4. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT
Under the contract described in this Prospectus, the first monthly annuity
payment is determined by the available value of the contract when an annuity
begins. In addition, a number of states do impose a premium tax on the amount
used to purchase an annuity benefit, depending on the type of plan involved.
Where applicable, these taxes currently range from 0.0% 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.
The amount of the first monthly payment depends on the optional annuity form
elected and the adjusted age of the annuitant. A formula for determining the
adjusted age is contained in the contract.
The contract contains tables indicating the dollar amount of the first fixed
monthly payment under each optional annuity form for each $1,000 of value
applied (after deduction of any premium taxes not previously deducted). The
tables are determined from the Progressive Annuity Table with interest at the
rate of 3% per annum, assuming births in the year 1900 and an age setback of six
years. If, when annuity payments are elected, we are using tables of annuity
rates for this contract which result in larger annuity payments, we will use
those tables instead.
The dollar amount of the first monthly variable annuity payment is determined
by applying the available value (after deduction of any premium taxes not
previously deducted) to a rate per $1,000 which is based on the Progressive
Annuity Table with interest at the rate of 4.5% per annum, assuming births in
the year 1900 and with an age setback of six years. The amount of the first
payment depends upon the annuity payment option selected and the adjusted age of
the annuitant and any joint annuitant. A number of annuity units is then
determined by dividing this dollar amount by the then current annuity unit
value. Thereafter, the number of annuity units remains unchanged during the
period of annuity payments. This determination is made separately for each sub-
account of the separate account. The number of annuity units is based upon the
available value in each sub-account as of the date annuity payments are to
begin. If, when annuity payments are elected, we are using tables of annuity
rates for this contract which result in larger annuity payments, we will use
those tables instead.
The dollar amount determined for each sub-account will then be aggregated for
purposes of making payment.
The 4.5% interest rate assumed in the variable annuity determination would
produce level annuity payments if the net investment factor remained constant at
4.5% per year. Subsequent payments will decrease, remain the same or increase
depending upon whether the actual net investment factor is less than, equal to,
or greater than 4.5%. A higher interest rate means a higher initial payment, but
a more slowly rising (or more rapidly falling) series of subsequent payments. A
lower assumption has the opposite effect.
Annuity payments are always made as of the first day of a month. The contracts
require that notice of election to begin annuity payments must be received by us
at least thirty days prior to the annuity commencement date. However, Minnesota
Mutual currently waives this requirement, and at the same time reserves the
right to enforce the thirty day notice at its option in the future.
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, on the valuation date coincident with the first valuation date
following the fourteenth day of the month preceding the date on which the
annuity is to begin.
If a request for a fixed annuity is received between the first valuation date
following the fourteenth day of the month and the second to last valuation date
of the month prior to commencement, the transfer will occur on the valuation
date coincident with or next following the date on which the request is
received. If a fixed annuity request is received after the third to the last
valuation day of the month prior to commencement, it will be treated as a
request received the following month, and the commencement date will be changed
to the first of the month following the requested commencement date. The account
value used to determine fixed annuity payments will be the value as of the last
valuation date of the month preceding the date the fixed annuity is to begin.
If a variable annuity request is received after the third valuation date
preceding the first valuation date following the fourteenth day of the month
prior to the commencement date, it
22
<PAGE>
will be treated as a request received the following month, and the commencement
date will be changed to the first of the month following the requested
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 variable annuity begin date.
5. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS
The dollar amount of the second and later variable annuity payments is equal to
the number of annuity units determined for each sub-account times the annuity
unit value for that sub-account as of the due date of the payment. This amount
may increase or decrease from month to month.
6. VALUE OF THE ANNUITY UNIT
The value of an annuity unit for a sub-account is determined monthly as of the
first day of each month by multiplying the value on the first day of the
preceding month by the product of (a) .996338, and (b) the ratio of the value of
the accumulation unit for that sub-account 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 (.996338 is a factor to neutralize the assumed net investment factor, as
discussed above, of 4.5% per annum built into the first payment calculation
which is not applicable because the actual net investment rate is credited
instead). The value of an annuity unit for a sub-account 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.
7. TRANSFER OF ANNUITY RESERVES
Amounts held as annuity reserves may be transferred among the variable annuity
sub-accounts during the annuity period. Annuity reserves may also be transferred
from a variable annuity to a fixed annuity during this time. The change must be
made by a written request. The annuitant and joint annuitant, if any, must make
such an election.
There are restrictions to such a transfer. The transfer of an annuity reserve
amount from any sub-account must be at least equal to $5,000 or the entire
amount of the reserve remaining in that sub-account. In addition, annuity
payments must have been in effect for a period of 12 months before a change may
be made. Such transfers can be made only once every 12 months. The written
request for an annuity transfer must be received by us more than 30 days in
advance of the due date of the annuity payment subject to the transfer. Upon
request, we will make available to you annuity reserve amount sub-account
information.
A transfer will be made on the basis of annuity unit values. The number of
annuity units from the sub-account being transferred will be converted to a
number of annuity units in the new sub-account. The annuity payment option will
remain the same and cannot be changed. After this conversion, a number of
annuity units in the new sub-account will be payable under the elected option.
The first payment after conversion will be of the same amount as it would have
been without the transfer. The number of annuity units will be set at that
number of units which are needed to pay that same amount on the transfer date.
When we receive a request for the transfer of variable annuity reserves, it
will be effective for future annuity payments. The transfer will be effective
and funds actually transferred in the middle of the month prior to the next
annuity payment affected by your request. We will use the same valuation
procedures to determine your variable annuity payment that we used initially.
Amounts held as reserves to pay a variable annuity may also be transferred to
a fixed annuity during the annuity period. However, the restrictions which apply
to annuity sub-account transfers will apply in this case as well. The amount
transferred will then be applied to provide a fixed annuity amount. This amount
will be based upon the adjusted age of the annuitant and any joint annuitant at
the time of the transfer and a $200 contract fee will be imposed. The annuity
payment option will remain the same. Amounts paid as a fixed annuity may not be
transferred to a variable annuity.
When we receive a request to make such a transfer to a fixed annuity, it will
be effective for future annuity payments. The transfer will be effective and
funds actually transferred in the middle of the month prior to the next annuity
payment. We will use the same fixed annuity pricing at the time of transfer that
we use to determine an initial fixed annuity payment. However, if your annuity
is based upon annuity units in a sub-account which matures on a date other than
the stated annuity valuation date, then your annuity units will be adjusted to
reflect sub-account performance in the maturing sub-account to which reserves
are transferred for the period between annuity valuation dates.
23
<PAGE>
C. DEATH BENEFITS
The contract provides that in the event of the death of the owner before annuity
payments begin, the amount payable at death will be the contract accumulation
value determined as of the valuation date coincident with or next following the
date due proof of death is received by us at our home office. Death proceeds
will be paid in a single sum to the beneficiary designated unless an annuity
option is elected. Payment will be made within seven days after we receive due
proof of death. Except as noted below, the entire interest in the contract must
be distributed within five years of the owner's death.
The contract has a guaranteed death benefit if you die before annuity payments
have started. The death benefit shall be equal to the greater of: (1) the amount
of the accumulation value payable at death; or (2) the amount of the total
purchase payments paid to us as consideration for this contract, less all
contract withdrawals.
If the owner dies on or before the date on which annuity payments begin and if
the designated beneficiary is a person other than the owner's spouse, that
beneficiary may elect an annuity option measured by a period not longer than
that beneficiary's life expectancy only so long as annuity payments begin not
later than one year after the owner's death. If there is no designated
beneficiary, then the entire interest in a contract must be distributed within
five years after the owner's death. If the annuitant dies after annuity payments
have begun, any payments received by a non-spouse beneficiary must be
distributed at least as rapidly as under the method elected by the annuitant as
of the date of death.
If there are joint owners of this contract, the death benefit described will
not be payable until the death of the surviving joint owner.
If any portion of the contract interest is payable to the owner's designated
beneficiary who is also the surviving spouse of the owner, that spouse shall be
treated as the contract owner for purposes of: (1) when payments must begin, and
(2) the time of distribution in the event of that spouse's death. Payments must
be made in substantially equal installments.
If the owner of this contract is other than a natural person, such as a trust
or other entity, we will pay a death benefit of the accumulation value to the
named beneficiary on the death of the annuitant, if death occurs prior to the
date for annuity payments to begin.
D. PURCHASE PAYMENTS, VALUE OF THE CONTRACT AND TRANSFERS
1. CREDITING ACCUMULATION UNITS
During the accumulation period--the period before annuity payments begin--each
purchase payment is credited on the valuation date coincident with or next
following the date such purchase payment is received by us 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
submitted to us for compliance with our issue criteria and, if it is accepted, a
contract will be issued.
If the initial purchase payment is accompanied by an incomplete application,
that purchase payment will not be credited until the valuation date coincident
with or next following the date a completed application is received. We are
required to return the initial purchase payment accompanying an incomplete
application immediately and in full if it appears that the application cannot be
completed within five business days, unless the prospective owner specifically
consents to our retention of the purchase payment until the application is made
complete.
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 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 Fund.
We will determine the value of accumulation units on each day on which each
Fund is valued. The net asset value of the 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), but this time may be changed) on each day, Monday through
Friday, except (i) days on which changes in the value of such Fund's portfolio
securities will not materially affect the current net asset value of such Fund's
shares,
24
<PAGE>
(ii) days during which no such Fund's shares are tendered for redemption and no
order to purchase or sell such Fund's shares is received by such Fund and (iii)
customary national business holidays on which the New York Stock Exchange is
closed for trading (as of the date hereof, New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day). Accordingly, the value of accumulation
units so determined will be applicable to all purchase payments received by us
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.
Applications received without instructions as to allocation of purchase
payment amounts among the sub-accounts of the Variable Annuity Account will be
treated as incomplete.
Upon your written request, values under the contract may be transferred among
the sub-accounts of the Variable Annuity Account. We will make the transfer on
the basis of accumulation unit values on the valuation date coincident with or
next following the day we receive the request at our home office. No deferred
sales charge will be imposed on such transfers. There is no dollar amount
limitation which is applied to transfers.
Systematic transfer arrangements may be established among the sub-accounts of
the Variable Annuity Account. They may begin on the 10th or 20th of any month
and if a transfer cannot be completed 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 sub-account
accumulation value is depleted. Systematic transfer arrangements are limited to
a maximum of twenty sub-accounts.
Also, you may effect transfers, or a change in the allocation of future
purchase payments, by means of a telephone call. Transfers 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 telephone instructions. 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 telephone
transfers, contact us.
We make telephone contract services automatically available to all contract
owners. We will employ reasonable procedures to satisfy ourselves that
instructions received from contract owners are genuine and, to the extent that
we do not, we may be liable for any losses due to unauthorized or fraudulent
instructions. We require contract owners or a person authorized by you to
personally identify themselves in telephone conversations 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.
2. VOLUME CREDIT
Wherever allowed by law, we reserve the right to credit certain additional
amounts ("volume credit") to your contract if you submit large initial or
subsequent purchase payments. Such volume credit is credited by us on your
behalf with funds from our General Account. As of the date of this Prospectus,
we were making such a program available. However, we reserve the right to
modify, suspend or terminate it at any time, or from time to time, without
notice.
The current breakpoints for qualifying for a volume credit are shown below.
Also shown is the value of such volume credit as a percentage of your purchase
payment.
<TABLE>
<CAPTION>
VOLUME CREDIT AS A
PERCENTAGE OF THE
PURCHASE PAYMENT PURCHASE PAYMENT
- -------------------------- -------------------------
<S> <C>
$ 0-- 499,999 0
500,000-- 749,999 .375
750,000-- 999,999 .75
1,000,000--1,499,999 1.125
1,500,000--1,999,999 1.50
2,000,000--2,499,999 1.875
2,500,000--2,999,999 2.25
3,000,000--3,999,999 2.625
4,000,000--5,000,000 3.00
</TABLE>
The volume credit is added the next business day after the purchase payments
are allocated to the contract, and are allocated to the investment options in
the same manner as the purchase payment. Should you exercise your right to
return the contract under the free look provision, the then current value of any
volume credit as of the date your contract is cancelled and will be deducted
from your account value prior to determining the amount to be returned to you.
We do not consider volume credit to be "investment in the contract" for income
tax purposes (see "Federal Tax Status"). Volume credit amounts may be withdrawn
without assessment of the deferred sales charge (see "Deferred Sales Charge").
25
<PAGE>
Each time a new purchase payment is made, a new volume credit will be
calculated. The applicable percentage from the chart will be based on the total
cumulative purchase payments to date, including the new purchase payment, less
all prior purchase payments withdrawn. The new volume credit equals this
percentage times the amount of the new purchase payment.
3. VALUE OF THE CONTRACT
The accumulation 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 for each sub-account of the Variable Annuity Account. There is
no assurance that such value will equal or exceed the purchase payments made.
The contract owner will be advised periodically of the number of accumulation
units credited to the contract for each sub-account of the Variable Annuity
Account, the current value of an accumulation unit, and the total value of the
contract.
4. ACCUMULATION UNIT VALUE
The value of an accumulation unit for each sub-account of the Variable Annuity
Account was set at $1.000000 on the first valuation date of such sub-account.
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 for the applicable sub-account
(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.
5. NET INVESTMENT FACTOR FOR EACH VALUATION PERIOD
The net investment factor is an index used to measure the investment performance
of a sub-account from one valuation period to the next. For any 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 current rate of 1.25% per annum.
The gross investment rate is equal to: (1) the net asset value per share of a
Portfolio share held in a sub-account of the Variable Annuity Account determined
at the end of the current valuation period, plus (2) the per share amount of any
dividend or capital gain distribution by the Portfolio if the "ex-dividend" date
occurs during the current valuation period, divided by (3) the net asset value
per share of that Portfolio share determined at the end of the preceding
valuation period. The gross investment rate may be positive or negative.
E. REDEMPTIONS
1. PARTIAL WITHDRAWALS AND SURRENDER
The contract provides that prior to the date annuity payments begin partial
withdrawals may be made by you from the contract for cash amounts of at least
$250. You must make a written request for any withdrawal. In this event, the
accumulation value will be reduced by the amount of the withdrawal and any
applicable deferred sales charge. In the absence of instructions to the
contrary, withdrawals will be made from the Variable Annuity Account in the same
proportion that the value of your interest in any sub-account bears to your
total accumulation value on a pro rata basis. We will waive the applicable
dollar amount limitation on withdrawals where a systematic withdrawal program is
in place and where such a smaller amount satisfies the minimum distribution
requirements of the Code or where the withdrawal is requested because of an
excess contribution to a tax-qualified contract. Withdrawal values will be
determined as of the valuation date coincident with or next following the date
your written withdrawal request is received at our home office.
In the absence of instructions to the contrary, systematic withdrawals will be
made from the sub-accounts on a pro rata basis if the accumulation values are in
no more than twenty sub-accounts. If more than twenty sub-accounts have
accumulation values, we will need instructions as to those sub-accounts from
which systematic withdrawals are to be made. For systematic withdrawals, the
maximum number of sub-accounts which may be used is twenty.
The contract provides that prior to the commencement of annuity payments, you
may elect to surrender the contract for its surrender value. You will receive in
a single cash sum the accumulation value computed as of the valuation date
coincident with or next following the date of surrender, reduced by any
applicable deferred sales charge or you may elect an annuity.
26
<PAGE>
For more information on the application of the deferred sales charge, see
"Deferred Sales Charges" on page 17.
Once annuity payments have commenced the annuitant cannot surrender his or her
annuity benefit and receive a single sum settlement in lieu thereof. For a
discussion of commutation rights of annuitants and beneficiaries subsequent to
the annuity commencement date, see "Optional Annuity Forms" on page 21.
Contract owners may also submit their signed written withdrawal or surrender
requests to Minnesota Mutual by facsimile (FAX) transmission. Our FAX number is
(612) 665-7942. Transfer instructions or changes as to future allocations of
purchase payments may be communicated to us by the same means. Payment of a
partial withdrawal or surrender will be made to you within 7 days after we
receive your completed request.
2. RIGHT OF CANCELLATION
You should read the contract carefully as soon as it is received. You may cancel
the purchase of a contract within ten days after its delivery, for any reason,
by giving us written notice at 400 Robert Street North, St. Paul, Minnesota
55101-2098, of an intention to cancel. If the contract is cancelled and
returned, we will refund to you the greater of (a) the accumulation value of the
contract, or (b) the amount of purchase payments paid under the contract.
Payment of the requested refund will be made to you within seven days after we
receive notice of cancellation.
In some states, such as California, the free look period may be extended. In
California, the free look period is extended to thirty days' time. Those rights
are subject to change and may vary among the states.
The liability of the Variable Annuity Account under the foregoing is limited
to the accumulation value of the contract at the time it is returned for
cancellation. Any additional amounts necessary to make our refund to you equal
to the purchase payments will be made by 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 competent 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(b), 408A or 457 of the Code ("Qualified Contract").
The ultimate effect of federal income taxes on the 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 the Variable Annuity Account 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 the Variable Annuity Account or on capital
gains arising from the Variable Annuity Account's activities. The Variable
Annuity Account is not taxed as a "regulated investment company" under the Code
and it does not anticipate any change in that tax status.
TAXATION OF ANNUITY CONTRACTS IN GENERAL
Section 72 of the Code governs taxation of nonqualified annuities in general and
some aspects of qualified programs. No taxes are 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. 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 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
27
<PAGE>
the excess of the contract value over the purchase payments made under the
contract. Such taxable portion is taxed at ordinary income tax rates.
In the case of a withdrawal under an annuity that is part of a tax-qualified
retirement plan, 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.
If a taxable distribution is made under the variable annuity contracts, a
penalty tax of 10% of the amount of the taxable distribution may apply. 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 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, where they are 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, the designation of an annuitant or
other payee who is not also the contract owner, or the assignment of the
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, designation or assignment should consult a
competent tax adviser with respect to the potential tax effects of that
transaction.
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 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 the Variable Annuity Account to
be "adequately diversified" in order for the contract to be treated as an
annuity contract for federal tax purposes. The Variable Annuity Account, through
the Fund, intends to comply with the diversification requirements prescribed in
Regulations Section 1.817-5, which affect how the Fund's assets may be invested.
Although the investment adviser is an affiliate of Minnesota Mutual, Minnesota
Mutual does not have control over the Fund or its investments. Nonetheless,
Minnesota Mutual believes that each Portfolio of the Fund in which the Variable
Annuity Account owns shares will be operated in compliance with the requirements
prescribed by the Treasury.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
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. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do 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 owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular sub-accounts without being treated as
owners of the underlying
28
<PAGE>
assets." As of the date of this Prospectus, no such guidance has been issued.
The ownership rights under the contract are similar to, but different in
certain reports 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. These
differences could result in a contract owner being treated as the owner of the
assets of the Variable Annuity Account. In addition, Minnesota Mutual does not
know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. Minnesota Mutual
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 the variable annuity account.
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 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
owner's death; and (b) if an 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 owner's death. These requirements shall be considered satisfied if
any portion of the 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 owner's
"designated beneficiary" is the person designated by such owner as a beneficiary
and to whom ownership of the contract passes by reason of death. It must be a
natural person. However, if the owner's "designated beneficiary" is the
surviving spouse of the owner, the contract may be continued with the surviving
spouse as the new 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.
Minnesota Mutual intends 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.
Other rules may apply to qualified contracts.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of the 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
Legislation has been proposed in 1998 that, if enacted, would adversely modify
the federal taxation of certain insurance and annuity contracts. For example,
one proposal would tax transfers among investment options and tax exchanges
involving variable contracts. A second proposal would reduce the "investment in
the contract" under cash value life insurance and certain annuity contracts by
certain amounts, thereby increasing the amount of income for purposes of
computing gain. 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.
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
29
<PAGE>
specified minimum distribution rules; 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. Owners and participants
under retirement plans as well as annuitants and beneficiaries are cautioned
that the rights of any person to any benefits under annuities 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
our annuity administration procedures. Owners, participants and beneficiaries
are responsible for determining that contributions, distributions and other
transactions with respect to the annuities comply with applicable law.
Purchasers of annuities for use with any retirement plan should consult their
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 the later of April 1 of
the calendar year following the calendar year in which the 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 in the Code), distributions generally must begin no later than April 1
of the calendar year following the calendar year in which the Owner (or plan
participant) reaches age 70 1/2. For IRAs described in Section 408,
distributions generally must commence no later than the later of April 1 of the
calendar year following the calendar year in which the Owner (or plan
participant) reaches age 70 1/2. Roth IRAs under Section 408A do not require
distributions at any time prior to the Owner's death.
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: (1) elective contributions made in years beginning after
December 31, 1988; (2) earnings on those contributions; and (3) 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 7 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 of 100% of the 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.
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
30
<PAGE>
subject to certain Code requirements regarding participation and amounts of
contributions.
SIMPLE IRAS
Beginning January 1, 1997, certain small employers may establish Simple IRAs as
provided by Section 408(p) of the Code, under which employees may elect to defer
up to $6,000 (as increased for cost of living adjustments) as a percentage of
compensation. The sponsoring employer is required to make a matching
contribution on behalf of contributing employees. Distributions from Simple IRAs
are subject to the same restrictions that apply to IRA distributions and are
taxed as ordinary income. Subject to certain exceptions, premature distributions
prior to age 59 1/2 are subject to a 10% penalty tax, which is increased to 25%
if the distribution occurs within the first two years after the commencement of
the employee's participation in the plan.
ROTH IRAS
Effective January 1, 1998, section 408A of the Code permits certain eligible
individuals to contribute to a Roth IRA. Contributions to a Roth IRA, which are
subject to certain limitations, are not deductible and must be made in cash or
as a rollover or transfer from another Roth IRA or other IRA. A rollover from or
conversion of an IRA to a Roth IRA may be subject to tax and other special rules
may apply. You should consult a tax adviser before combining any converted
amounts with any other Roth IRA contributions, including any other conversion
amounts from other tax years. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to the Roth
IRA.
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, 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.
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.
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
31
<PAGE>
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 60 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
It should be understood that the foregoing description of the federal income tax
consequences under these contracts is not exhaustive and that special rules are
provided with respect to situations not discussed herein. It should also be
understood that 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 qualified tax adviser should be consulted.
- ------------------------------------------------------------------------
YEAR 2000 COMPUTER PROBLEM
The services provided by Minnesota Mutual to the Separate Account and its
contract owners depend on the smooth functioning of its computer systems. Many
computer software systems in use today cannot distinguish the year 2000 from the
year 1900 because of the way that dates are encoded, stored and calculated. That
failure could have a negative impact on the ability of Minnesota Mutual to
provide services to contract owners. Minnesota Mutual has been actively working
on necessary changes to its computer systems to deal with the year 2000.
Although there can be no assurance of complete success, Minnesota Mutual
believes that it will be able to resolve these issues on a timely basis and that
there will be no material adverse impact on its ability to provide services to
the Separate Account.
In addition, Minnesota Mutual's operations could be impacted by its service
providers' or suppliers' year 2000 efforts. Minnesota Mutual has undertaken an
initiative to assess the efforts of organizations where there is a significant
business relationship; however there is no assurance that Minnesota Mutual will
not be affected by year 2000 problems of other organizations.
- ------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information, which contains additional information
including financial statements, is available from the offices of Minnesota
Mutual at your request. The Table of Contents for that Statement of Additional
Information is as follows:
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contract
Performance Data
Auditors
Registration Statement
Financial Statements
32
<PAGE>
APPENDIX A--ILLUSTRATION OF VARIABLE ANNUITY VALUES
The illustration included in this Appendix shows the effect of investment
performance on the monthly variable annuity income. The illustration assumes a
gross investment return, after tax, of: 0%, 6.54% and 12.00%.
For illustration purposes, an average annual expense equal to 2.02% of the
average daily net assets is deducted from the gross investment return to
determine the net investment return. The net investment return is then used to
project the monthly variable annuity incomes. The expense charge of 2.02%
includes: 1.25% for Mortality and Expense Risk, and an average of .77% for
investment management and other fund expenses. These expenses are listed for
each portfolio in the table following.
The gross and net investment rates are for illustrative purposes only and are
not a reflection of past or future performance. Actual variable annuity income
will be more or less than shown if the actual returns are different than those
illustrated.
The illustration assumes 100% of the assets are invested in sub-account(s) of
the Variable Annuity Account. For comparison purposes, a current fixed annuity
income, available through the General Account is also provided. The illustration
assumes an initial interest rate, used to determine the first variable payment
of 4.50%. After the first variable annuity payment, future payments will
increase if the annualized net rate of return exceeds the initial interest rate,
and will decrease if the annualized net rate of return is less than the initial
interest rate.
The illustration provided is for a male, age 65, selecting a Life and 10 Year
Certain annuity option with $100,000 of non-qualified funds, residing in the
State of Minnesota. Upon request, we will provide a comparable illustration
based upon the proposed annuitant's date of birth, sex, annuity option, state of
residence, type of funds, value of funds, and selected gross annual rate of
return (not to exceed 12%).
ACTUAL 1997 VARIABLE ANNUITY SEPARATE ACCOUNT CHARGES
AND FUND EXPENSES
<TABLE>
<CAPTION>
FUND OTHER
SEPARATE ACCOUNT MORTALITY & MANAGEMENT FUND DISTRIBUTION
SUB-ACCOUNT NAME EXPENSE RISK FEE EXPENSES EXPENSES TOTAL
- ---------------------------------------- ------------- ---------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Growth.................................. 1.25% .50% .05% -- 1.80%
Bond.................................... 1.25% .50% .07% -- 1.82%
Money Market............................ 1.25% .50% .09% -- 1.84%
Asset Allocation........................ 1.25% .50% .05% -- 1.80%
Mortgage Securities..................... 1.25% .50% .09% -- 1.84%
Index 500............................... 1.25% .40% .05% -- 1.70%
Capital Appreciation.................... 1.25% .75% .05% -- 2.05%
International Stock..................... 1.25% .71% .26% -- 2.22%
Small Company........................... 1.25% .75% .07% -- 2.07%
Maturing Government Bond 1998........... 1.25% .25% .15% -- 1.65%
Maturing Government Bond 2002........... 1.25% .25% .15% -- 1.65%
Maturing Government Bond 2006........... 1.25% .25% .15% -- 1.65%
Maturing Government Bond 2010........... 1.25% .25% .15% -- 1.65%
Value Stock............................. 1.25% .75% .05% -- 2.05%
Small Company Value..................... 1.25% .75% .15% -- 2.15%
Global Bond............................. 1.25% .60% 1.00% -- 2.85%
Index 400 Mid-Cap....................... 1.25% .40% .15% -- 1.80%
Macro-Cap Value......................... 1.25% .70% .15% -- 2.10%
Micro-Cap Growth........................ 1.25% 1.10% .15% -- 2.50%
Real Estate Securities.................. 1.25% .75% .15% -- 2.15%
Templeton Developing Markets Class 2
(1).................................... 1.25% 1.25% .33% .25% 3.08%
--
--- --- --- ------
Average........................... 1.25% .59% .17% .01% 2.02%
</TABLE>
(1) Templeton Developing Markets Fund Class 2 has a distribution plan or "Rule
12b-1" Plan which is described in the Fund's prospectus. Because Class 2
shares were not offered until May 1, 1997, figures (other than "Distribution
Expenses") are estimates for 1998 based on historical experiences of the
Fund's Class 1 shares for the fiscal year ended December 31, 1997.
33
<PAGE>
VARIABLE ANNUITY PAYOUT ILLUSTRATION
PREPARED FOR: Prospect
PREPARED BY: Minnesota Mutual
SEX: Male DATE OF BIRTH: 05/01/1933
STATE: MN
LIFE EXPECTANCY: 20.0 (IRS) 18.1 (MML)
ANNUITIZATION OPTION:10 Year Certain with Life Contingency
QUOTATION DATE: 05/01/1998
COMMENCEMENT DATE: 06/01/1998
SINGLE PAYMENT RECEIVED: $100,000.00
FUNDS: Non-Qualified
INITIAL MONTHLY INCOME: $663
The monthly variable annuity income amount shown below assumes a constant
annual investment return. The initial interest rate of 4.50% is the assumed rate
used to calculate the first monthly payment. Thereafter, monthly payments will
increase or decrease based upon the relationship between the initial interest
rate and the performance of the sub-account(s) selected. The investment returns
shown are hypothetical and not a representation of future results.
<TABLE>
<CAPTION>
ANNUAL RATE OF RETURN
-------------------------------------------
0.00% GROSS 6.52% GROSS 12.00% GROSS
DATE AGE (-2.02% NET) (4.50% NET) (9.98% NET)
- ---------------------------------------- ----- ------------ ------------ -------------
<S> <C> <C> <C> <C>
June 1, 1998............................ 65 $663 $663 $663
June 1, 1999............................ 66 622 663 698
June 1, 2000............................ 67 583 663 735
June 1, 2001............................ 68 547 663 773
June 1, 2002............................ 69 513 663 814
June 1, 2007............................ 74 371 663 1,051
June 1, 2012............................ 79 269 663 1,357
June 1, 2017............................ 84 195 663 1,752
June 1, 2022............................ 89 141 663 2,262
June 1, 2027............................ 94 102 663 2,920
June 1, 2032............................ 99 74 663 3,770
June 1, 2033............................ 100 70 663 3,968
</TABLE>
IF 100% OF YOUR PURCHASE WAS APPLIED TO PROVIDE A FIXED ANNUITY ON THE
QUOTATION DATE OF THIS ILLUSTRATION, THE FIXED ANNUITY INCOME AMOUNT WOULD BE
$720.
Net rates of return reflect expenses totaling 2.02%, which consist of the
1.25% Variable Annuity Account mortality and expense risk charge and .77% for
the Fund management fee and other Fund expenses (this is an average with the
actual varying from .40% to 1.83%).
Minnesota Mutual MultiOption variable annuities are available through
registered representatives of Ascend Financial Services, Inc.
This is an illustration only and not a contract.
34
<PAGE>
Minnesota Mutual Variable Annuity Account
("Variable Annuity Account"), a Separate Account of
The Minnesota Mutual Life Insurance Company
("Minnesota Mutual")
400 Robert Street North
St. Paul, Minnesota 55101-2098
Telephone: (612) 665-3500
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 1998
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 the Fund's current Prospectus, bearing the same
date, which may be obtained by calling The Minnesota Mutual Life Insurance
Company at (612) 665-3500; or after September 1, 1998, (651) 665-3500;
or writing to Minnesota Mutual at Minnesota Mutual Life Center, 400 Robert
Street North, St. Paul, Minnesota 55101-2098.
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contract
Performance Data
Auditors
Registration Statement
Financial Statements
<PAGE>
TRUSTEES AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA MUTUAL
Trustees Principal Occupation
Giulio Agostini Senior Vice President, Finance and Administrative
Services, Minnesota Mining and
Manufacturing Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller Company, St.
Paul, Minnesota, since June 1995, prior thereto for
more than five years President and Chief Executive
Officer, H. B. Fuller Company (Adhesive Products)
Leslie S. Biller President and Chief Operating Officer, Norwest
Corporation, Minneapolis, Minnesota (Banking)
John F. Grundhofer President and Chief Executive Officer, U.S. Bancorp,
Minneapolis, Minnesota (Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for more than
five years Chairman of the Board, President and
Chief Executive Officer, Deluxe Corporation,
Shoreview, Minnesota (Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Prior to March 1996, and for more than five years,
Ph.D. President, Northwest Area Foundation, St. Paul,
Minnesota (Private Regional Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual Life
Insurance Company, since August 1995; prior
thereto for more than five years Vice President and
Actuary, The Minnesota Mutual Life Insurance
Company
Michael E. Shannon Chairman, Chief Financial and Administrative
Officer, Ecolab, Inc., St. Paul, Minnesota
(Develops and Markets Cleaning and Sanitizing
Products)
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)
1
<PAGE>
Principal Officers (other than Trustees)
Name Position
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Frederick P. Feuerherm Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Michael T. Kellett Vice President
Richard D. Lee Vice President
Robert M. Olafson Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Senior Vice President and Chief Financial Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
William N. Westhoff Senior Vice President and Treasurer
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Mutual have been employed by Minnesota Mutual for at
least five years with the exception of Mr. Westhoff. Mr. Westhoff has been
employed by Minnesota Mutual since April 1998. Prior thereto, Mr. Westhoff was
employed by American Express Financial Corporation, Minneapolis, Minnesota,
from August 1994 to October 1997 as Senior Vice President, Global Investments
and from November 1989 to July 1994 as Senior Vice President, Fixed Income
Management.
DISTRIBUTION OF CONTRACT
The contract will be sold in a continuous offering by our life insurance
agents who are also registered representatives of Ascend Financial Services,
Inc. ("Ascend Financial") or other broker-dealers who have entered into
selling agreements with Ascend Financial. Ascend Financial acts as principal
underwriter of the contracts. Ascend Financial is a wholly-owned subsidiary
of MIMLIC Corporation, which in turn is a wholly-owned subsidiary of
Minnesota Mutual Life. MIMLIC Corporation is also the sole owner of the
shares of Advantus Capital Management Company, a registered investment
adviser and the investment adviser to the Advantus Series Fund, Inc. 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 Mutual to the underwriter for 1997, 1996 and
1995 were $15,067,613, $13,034,146 and $7,203,781 respectively, for payment to
associated dealers on the sale of the contracts, which include other
contracts issued through the Variable Annuity Account. Agents of Minnesota
Mutual who are also registered representatives of Ascend Financial are
compensated directly by Minnesota Mutual.
2
<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. The Variable Annuity Account 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, 1997 were 3.78% and 3.85%, respectively. Such
figures reflect the voluntary absorption of certain expenses of Advantus
Series Fund, Inc. (the "Fund") by Minnesota Mutual described below under
"Total Return Figures for All Sub-Accounts." Yield figures quoted by the
Money Market Sub-Account will not reflect the deduction of any applicable
deferred sales charges (the deferred sales charge, as a percentage of the
accumulation value withdrawn, begin as of the contract date at 9% for the
flexible payment contract).
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 the
Variable Annuity Account'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. Such quotations of cumulative
total return will not reflect the deduction of any applicable deferred sales
charges.
The cumulative total return figures published by the Variable Annuity Account
relating to the contract described in the Prospectus will reflect Minnesota
Mutual's voluntary absorption of certain Fund expenses described below.
3
<PAGE>
Cumulative total return quotations for Sub-Accounts will be accompanied by
average annual total return figures for a one-year period and for the period
since the Sub-Account became available pursuant to the Variable Annuity
Account'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 surrender value will reflect the deduction of the
deferred sales charge applicable to the contract and to the length of the
period advertised. The average annual total return figures published by the
Variable Annuity Account will reflect Minnesota Mutual's voluntary absorption
of certain Fund expenses.
<TABLE>
<CAPTION>
From Inception Date of
to 12/31/97 Inception
-------------- ---------
<S> <C> <C>
Growth Sub-Account 283.66% (280.17%) 12/3/85
Bond Sub-Account 134.03% (132.80%) 12/3/85
Money Market Sub-Account 61.78% (59.21%) 12/3/85
Asset Allocation Sub-Account 216.14% (215.45%) 12/3/85
Mortgage Securities Sub-Account 116.57% (116.17%) 6/1/87
Index 500 Sub-Account 281.10% (279.95%) 6/1/87
Capital Appreciation Sub-Account 272.38% (268.38%) 6/1/87
International Stock Sub-Account 91.03% (90.99%) 5/1/92
Small Company Sub-Account 77.96% (77.95%) 5/3/93
Maturing Government Bond
1998 Sub-Account 22.47% (21.96%) 5/2/94
Maturing Government Bond
2002 Sub-Account 32.17% (30.99%) 5/2/94
Maturing Government Bond
2006 Sub-Account 43.37% (41.31%) 5/2/94
Maturing Government Bond
2010 Sub-Account 53.10% (48.46%) 5/2/94
Value Stock Sub-Account 112.79% (112.43%) 5/2/94
Small Company Value Sub-Account 1.97% (1.09%) 10/1/97
Global Bond Sub-Account -.24% (-.24%) 10/1/97
Index 400 Mid-Cap Sub-Account -.25% (-1.40%) 10/1/97
Macro-Cap Value Sub-Account -2.39% (-2.39%) 10/15/97
Micro-Cap Growth Sub-Account -13.48% (-14.26%) 10/1/97
Templeton Developing Markets Class 2 Sub-Account -30.60% -30.60%) 10/1/97
</TABLE>
4
<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 ten-year period or for the period since the Sub-Account became available
pursuant to the Variable Annuity Account's registration statement if less
than ten years. 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 surrender value will reflect the deduction of the deferred sales charge
applicable to the contract (flexible premium/single premium) and to the
length of the period advertised. The average annual total return figures
published by the Variable Annuity Account will reflect Minnesota Mutual's
voluntary absorption of certain Fund expenses. For the period subsequent
to March 9, 1987, Minnesota Mutual 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, .90% of the average daily net assets of the Capital Appreciation
and Small Company Portfolios of the Fund and expenses that exceed 1.00% of the
average daily net assets of the International Stock Portfolio of the Fund
exclusive of the advisory fee. And, for the period subsequent to May 2, 1994,
Minnesota Mutual has voluntarily absorbed fees and expenses that exceed .90%
of the average daily net assets of the Value Stock Portfolio and fees and
expenses that exceed .40% of the average daily net assets of the Maturing
Government Bond Portfolios. It should be noted that for the Maturing
Government Bond Portfolios maturing in 1998 and 2002, Minnesota Mutual
voluntarily absorbed fees and expenses that exceeded .20% of average daily
net assets of those Portfolios until April 30, 1998. For the period subsequent
to April 30, 1998, Minnesota Mutual has voluntarily agreed to absorb fees and
expenses that exceed .40% of the average daily net assets of the Maturing
Government Bond Portfolios maturing in 1998 and 2002. Minnesota Mutual has
voluntarily agreed to absorb fees and expenses that exceed .55% of the average
daily net assets of the Index 400 Mid-Cap Portfolio, .90% of the average daily
net assets of the Small Company Value Portfolio, 1.25% of the average daily net
assets of the Micro-Cap Growth Portfolio, .85% of the average daily net assets
of the Macro-Cap Value Portfolio and expenses that exceed 1.00% of the average
daily net assets of the Global Bond Portfolio of the Fund exclusive of the
advisory fee. For the period subsequent to May 1, 1998, Minnesota Mutual has
voluntarily agreed to absorb fees and expenses the exceed .90% of the average
daily net assets of the Real Estate Securities Portfolio. There is no specified
or minimum period of time during which Minnesota Mutual has agreed to continue
its voluntary absorption of these expenses, and Minnesota Mutual may in its
discretion cease its absorption of expenses at any time. Should Minnesota
Mutual cease absorbing expenses the effect would be to increase substantially
Fund expenses and thereby reduce investment return.
5
<PAGE>
The average annual rates of return for the Sub-Accounts, in connection with
the contract described in the Prospectus, for the specified periods ended
December 31, 1997 are shown in the tables below. The figures in parentheses
show what the average annual rates of return would have been had Minnesota
Mutual not absorbed Fund expenses as described above. These figures also
assume that the contracts described herein were issued when the Underlying
Portfolios first became available to the Variable Annuity Account. This
contract only became available as of the date of September 15, 1994.
<TABLE>
<CAPTION>
Flexible Premium Deferred Variable Annuity
MultiOption Select
------------------------------------------
Year Ended Five Years Ten Years From Inception Date of
12/31/97 Ended 12/31/97 Ended 12/31/97 to 12/31/97 Inception
---------- -------------- -------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Growth Sub-Account 24.76% (24.76%) 13.52% (13.52%) 14.00% (13.96%) N/A (N/A) 12/3/85
Bond Sub-Account 1.06% (1.06%) 5.28% (5.27%) 7.29% (7.23%) N/A (N/A) 12/3/85
Money Market Sub-Account -3.17% (-3.17%) 2.36% (2.17%) 4.02% (3.79%) N/A (N/A) 12/3/85
Asset Allocation
Sub-Account 10.51% (10.51%) 9.99% (9.99%) 11.47% (11.46%) N/A (N/A) 12/3/85
Mortgage Securities
Sub-Account .78% (.78%) 5.46% (5.46%) 7.85% (7.82%) N/A (N/A) 6/1/87
Index 500 Sub-Account 23.72% (23.72%) 17.69% (17.69%) 13.47% (13.44%) N/A (N/A) 6/1/87
Capital Appreciation
Sub-Account 19.67% (19.67%) 13.99% (13.98%) 14.89% (14.79%) N/A (N/A) 6/1/87
6
<PAGE>
International Stock
Sub-Account 3.55% (3.55%) 15.18% (15.18%) N/A (N/A) 11.78% (11.77%) 5/1/92
Small Company Sub-Account -.58% (-.58%) N/A (N/A) N/A (N/A) 12.60% (12.60%) 5/3/93
Maturing Government Bond -2.22% (-2.74%) N/A (N/A) N/A (N/A) 4.49% (3.93%) 5/2/94
1998 Sub-Account
Maturing Government Bond
2002 Sub-Account -.15% (-.80%) N/A (N/A) N/A (N/A) 6.77% (5.85%) 5/2/94
Maturing Government Bond
2006 Sub-Account 4.23% (3.16%) N/A (N/A) N/A (N/A) 9.26% (8.08%) 5/2/94
Maturing Government Bond
2010 Sub-Account 9.40% (7.55%) N/A (N/A) N/A (N/A) 11.30% (9.12%) 5/2/94
Value Stock Sub-Account 12.69% (12.69%) N/A (N/A) N/A (N/A) 21.74% (21.66%) 5/2/94
Small Company Value
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -5.03% (-5.91%) 10/1/97
Global Bond Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -7.24% (-7.24%) 10/1/97
Index 400 Mid-Cap
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -7.25% (-8.40%) 10/1/97
Macro-Cap Value
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -9.39% (-9.39%) 10/15/97
Micro-Cap Growth
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -20.48% (-21.26%) 10/1/97
Templeton Developing Markets
Class 2 Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -37.60% (-37.60%) 10/1/97
</TABLE>
The average annual total return figures described above may be accompanied by
other average annual total return quotations which do not reflect the
deduction of any deferred sales charges. Such other average annual total
return figures will be calculated as described above, except that the initial
$1,000 investment will be equated to that same investment's net asset value,
rather than its surrender value, at the end of the period. 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, 1997 are shown in the table below. Inasmuch as no deferred
sales charges are reflected in these figures, they are the same for both the
flexible premium and the single premium contracts. The figures in
parentheses show what the average annual rates of return, without the
application of applicable deferred sales charges, would have been had
Minnesota Mutual not absorbed Fund expenses as described above.
<TABLE>
<CAPTION>
Year Ended Five Years Ten Years From Inception Date of
12/31/97 Ended 12/31/97 Ended 12/31/97 to 12/31/97 Inception
------------- -------------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Growth Sub-Account 31.76% (31.76%) 14.00% (14.00%) 14.00% (14.00%) N/A (N/A) 12/3/85
Bond Sub-Account 8.06% (8.06%) 5.93% (5.92%) 7.34% (7.28%) N/A (N/A) 12/3/85
7
<PAGE>
Money Market
Sub-Account 3.83% (3.83%) 3.07% (2.88%) 4.02% (3.79%) N/A (N/A) 12/3/85
Asset Allocation
Sub-Account 17.51% (17.51%) 10.53% (10.53%) 11.47% (11.47%) N/A (N/A) 12/3/85
Mortgage Securities
Sub-Account 7.78% (7.78%) 6.09% (6.09%) 7.85% (7.82%) N/A (N/A) 6/1/87
Index 500
Sub-Account 30.72% (30.72%) 18.11% (18.11%) 16.07% (16.04%) N/A (N/A) 6/1/87
Capital Appreciation
Sub-Account 26.67% (26.67%) 14.46% (14.46%) 14.89% (14.79%) N/A (N/A) 6/1/87
International Stock
Sub-Account 10.55% (10.55%) 15.63% (15.63%) N/A (N/A) 12.09% (12.08%) 5/1/92
Small Company
Sub-Account 6.42% (6.42%) N/A (N/A) N/A (N/A) 13.15% (13.15%) 5/3/93
Maturing Government
Bond 1998
Sub-Account 4.78% (4.26%) N/A (N/A) N/A (N/A) 5.68% (5.12%) 5/2/94
Maturing Government
Bond 2002
Sub-Account 7.15% (6.20%) N/A (N/A) N/A (N/A) 7.90% (6.98%) 5/2/94
Maturing Government
Bond 2006
Sub-Account 11.23% (10.16%) N/A (N/A) N/A (N/A) 10.32% (9.14%) 5/2/94
Maturing Government
Bond 2010
Sub-Account 16.40% (14.55%) N/A (N/A) N/A (N/A) 12.31% (10.13%) 5/2/94
Value Stock
Sub-Account 19.69% (19.69%) N/A (N/A) N/A (N/A) 22.54% (22.46%) 5/2/94
Small Company Value
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) 1.97% (1.09%) 10/1/97
Global Bond
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -.24% (-.24%) 10/1/97
Index 400 Mid-Cap
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -.25% (-1.40%) 10/1/97
Macro-Cap Value
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -2.39% (-2.39%) 10/15/97
Micro-Cap Growth
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -13.48% (-14.26%) 10/1/97
Templeton Developing
Markets Class 2
Sub-Account N/A (N/A) N/A (N/A) N/A (N/A) -30.60% (-30.60%) 10/1/97
</TABLE>
8
<PAGE>
PREDICTABILITY OF RETURN
ANTICIPATED VALUE AT MATURITY. The maturity values of zero-coupon bonds are
specified at the time the bonds are issued, and this feature, combined with
the ability to calculate yield to maturity, has made these instruments
popular investment vehicles for investors seeking reliable investments to
meet long-term financial goals.
Each Maturing Government Bond Portfolio of the Fund consists primarily of
zero-coupon bonds but is actively managed to accommodate contract owner
activity and to take advantage of perceived market opportunities. Because of
this active management approach, there is no guarantee that a certain price
per share of a Maturing Government Bond Portfolio, or a certain price per
unit of the corresponding Sub-Account, will be attained by the time a
Portfolio is liquidated. Instead, the Fund attempts to track the price
behavior of a directly held zero-coupon bond by:
(1) Maintaining a weighted average maturity within each Maturing
Government Bond Portfolio's target maturity year;
(2) Investing at least 90% of assets in securities that mature
within one year of that Portfolio's target maturity year;
(3) Investing a substantial portion of assets in Treasury STRIPS
(the most liquid Treasury zero);
(4) Under normal conditions, maintaining a nominal cash balance;
(5) Executing portfolio transactions necessary to accommodate net
contract owner purchases or redemptions on a daily basis; and
(6) Whenever feasible, contacting several U.S. government
securities dealers for each intended transaction in an effort
to obtain the best price on each transaction.
These measures enable the Company to calculate an anticipated value at
maturity (AVM) for each unit of a Maturing Government Bond Sub-Account,
calculated as of the date of purchase of such unit, that approximates the
price per unit that such unit will achieve by the weighted average maturity
date of the underlying Portfolio. The AVM calculation for each Maturing
Government Bond Sub-Account is as follows:
AVM = P(1 + AGR/2)2T
where P = the Sub-Account's current price per unit; T = the Sub-Account's
weighted average term to maturity in years; and AGR = the anticipated growth
rate.
This calculation assumes an expense ratio and a portfolio composition for the
underlying Maturing Government Bond Portfolio that remain constant for the
life of such Portfolio.
9
<PAGE>
Because the Portfolio's expenses and composition do not remain constant,
however, the Company may calculate AVM for each Maturing Government Bond
Sub-Account on any day on which the underlying Maturing Government Bond
Portfolio is valued. Such an AVM is applicable only to units purchased on
that date.
In addition to the measures described above, which the adviser believes are
adequate to assure close correspondence between the price behavior of each
Portfolio and the price behavior of directly held zero-coupon bonds with
comparable maturities, the Fund expects that each Portfolio will invest at
least 90% of its net assets in zero-coupon bonds until it is within four
years of its target maturity year and at least 80% of its net assets in
zero-coupon securities within two to four years of its target maturity year.
This expectation may be altered if the market supply of zero-coupon
securities diminishes unexpectedly.
ANTICIPATED GROWTH RATE. The Company calculates an anticipated growth rate
(AGR) for each Maturing Government Bond Sub-Account on each day on which the
underlying Portfolio is valued. AGR is a calculation of the anticipated
annualized rate of growth for a Sub-Account unit, calculated from the date of
purchase of such unit to the Sub-Account's target maturity date. As is the
case with calculations of AVM, the AGR calculation assumes that each
underlying Maturing Government Bond Portfolio expense ratio and portfolio
composition will remain constant. Each Maturing Government Bond Sub-Account
AGR changes from day to day (i.e., a particular AGR calculation is applicable
only to units purchased on that date), due primarily to changes in interest
rates and, to a lesser extent, to changes in portfolio composition and other
factors that affect the value of the underlying Portfolio.
The Company expects that a contract owner who holds specific units until the
underlying Portfolio's weighted average maturity date will realize an
investment return and maturity value on those units that do not differ
substantially from the AGR and AVM calculated on the day such units were
purchased. The AGR and AVM calculated with respect to units purchased on any
other date, however, may be materially different.
AUDITORS
The consolidated financial statements of Minnesota Mutual and the financial
statements of the Minnesota Mutual Variable Annuity Account included herein
have been audited by KPMG Peat Marwick LLP, 4200 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402, independent auditors, whose
reports thereon appear elsewhere herein, and have been so included in
reliance upon the reports of KPMG Peat Marwick LLP and upon the authority of
said firm as experts in accounting and auditing.
-10-
<PAGE>
REGISTRATION STATEMENT
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended, with respect to the
contract offered hereby. This Prospectus does not contain all the
information set forth in the registration statement and amendments thereto
and the exhibits filed as a part thereof, to all of which reference is hereby
made for further information concerning the Variable Annuity Account,
Minnesota Mutual, and the contract. Statements contained in this Prospectus
as to the contents of contracts and other legal instruments are summaries,
and reference is made to such instruments as filed.
-11-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Contract Owners of Minnesota Mutual Variable Annuity Account:
We have audited the accompanying statements of assets and liabilities of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500,
Capital Appreciation, International Stock, Small Company, Maturing Government
Bond 1998, Maturing Government Bond 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Small Company Value,
International Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth and
Templeton Developing Markets Segregated Sub-Accounts of Minnesota Mutual
Variable Annuity Account (the Account) (class of contracts offered for
combination Fixed and Variable Annuity Contracts for Personal Retirement
Plans) as of December 31, 1997 and the related statements of operations for
the year then ended, (the period from September 29, 1997, commencement of
operations, to December 31, 1997 for Small Company Value and Index 400
Mid-Cap segregated sub-accounts, the period from September 24, 1997,
commencement of operations, to December 31, 1997 for International Bond
segregated sub-account, the period from September 15, 1997, commencement of
operations, to December 31, 1997 for Micro-Cap Growth segregated sub-account,
the period from October 15, 1997, commencement of operations, to December 31,
1997 for Macro-Cap Value segregated sub-account and the period from
October 2, 1997, commencement of operations, to December 31, 1997 for Templeton
Developing Markets segregated sub-account), the statements of changes in net
assets for each of the years in the two-year period then ended (the period
from September 29, 1997, commencement of operations, to December 31, 1997 for
Small Company Value and Index 400 Mid-Cap segregated sub-accounts, the period
from September 24, 1997, commencement of operations, to December 31, 1997 for
International Bond segregated sub-account, the period from September 15,
1997, commencement of operations, to December 31, 1997 for Micro-Cap Growth
segregated sub-account, the period from October 15, 1997, commencement of
operations, to December 31, 1997 for Macro-Cap Value segregated sub-account
and for the period from October 2, 1997, commencement of operations, to
December 31, 1997 for Templeton Developing Markets segregated sub-account)
and the financial highlights for the periods in footnote (6). 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, 1997 were
confirmed to us by the respective Sub-Account mutual fund, or for Advantus
Series Fund, Inc. (formerly MIMLIC Series Funds, Inc.), verified by
examination of the underlying portfolios. 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, Capital Appreciation,
International Stock, Small Company, Maturing Government Bond 1998, Maturing
Government Bond 2002, Maturing Government Bond 2006, Maturing Government Bond
2010, Value Stock, Small Company Value, International Bond, Index 400 Mid-Cap,
Macro-Cap Value, Micro-Cap Growth and Templeton Developing Markets Segregated
Sub-Accounts of Minnesota Mutual Variable Annuity Account at December 31, 1997
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 Peat Marwick LLP
Minneapolis, Minnesota
February 20, 1998
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------
MONEY
ASSETS GROWTH BOND MARKET
------------- ------------ ------------
<S> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Growth Portfolio, 75,052,197 shares at net asset value of $2.40 per share
(cost $148,695,896) ......................................................... $ 180,110,618 - -
Bond Portfolio, 77,690,256 shares at net asset value of $1.33 per share
(cost $96,660,321) .......................................................... - 102,984,322 -
Money Market Portfolio, 32,324,767 shares at net asset value of $1.00 per
share (cost $32,324,767) .................................................... - - 32,324,767
Asset Allocation Portfolio, 192,771,941 shares at net asset value of $2.03 per
share (cost $312,521,866) ................................................... - - -
Mortgage Securities Portfolio, 62,637,402 shares at net asset value of $1.21
per share (cost $72,229,435) ................................................ - - -
Index 500 Portfolio, 67,489,230 shares at net asset value of $3.10 per share
(cost $135,527,207) ......................................................... - - -
Capital Appreciation Portfolio, 70,196,900 shares at net asset value of $2.85
per share (cost $138,929,837) ............................................... - - -
------------- ------------ ------------
180,110,618 102,984,322 32,324,767
------------- ------------ ------------
Receivable for investments sold ................................................. 190,155 66,256 444,339
Receivable from Minnesota Mutual for contract purchase payments ................. 215,326 196,619 84,420
------------- ------------ ------------
Total assets ............................................................ 180,516,099 103,247,197 32,853,526
------------- ------------ ------------
LIABILITIES
Payable for investments purchased ............................................... 215,326 196,619 84,420
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges ............................................................... 190,155 66,256 444,339
------------- ------------ ------------
Total liabilities ....................................................... 405,481 262,875 528,759
------------- ------------ ------------
Net assets applicable to annuity contract owners ........................ $ 180,110,618 102,984,322 32,324,767
------------- ------------ ------------
------------- ------------ ------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of 44,705,247
for Growth; 43,266,404 for Bond; 19,804,841 for Money Market; 119,491,402 for
Asset Allocation; 34,751,197 for Mortgage Securities; 54,579,265 for Index 500
and 53,582,481 for Capital Appreciation........................................ 179,196,196 102,234,395 32,294,387
Contracts in annuity payment period (note 2) .................................... 914,422 749,927 30,380
------------- ------------ ------------
Total contract owners' equity ........................................... $ 180,110,618 102,984,322 32,324,767
------------- ------------ ------------
------------- ------------ ------------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... $ 4.01 2.37 1.63
------------- ------------ ------------
------------- ------------ ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------
ASSET MORTGAGE
ASSETS ALLOCATION SECURITIES
---------------- ---------------
<S> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Growth Portfolio, 75,052,197 shares at net asset value of $2.40 per share
(cost $148,695,896) ......................................................... - -
Bond Portfolio, 77,690,256 shares at net asset value of $1.33 per share
(cost $96,660,321) .......................................................... - -
Money Market Portfolio, 32,324,767 shares at net asset value of $1.00 per
share (cost $32,324,767) .................................................... - -
Asset Allocation Portfolio, 192,771,941 shares at net asset value of $2.03 per
share (cost $312,521,866) ................................................... 391,032,409 -
Mortgage Securities Portfolio, 62,637,402 shares at net asset value of $1.21
per share (cost $72,229,435) ................................................ - 75,862,180
Index 500 Portfolio, 67,489,230 shares at net asset value of $3.10 per share
(cost $135,527,207) ......................................................... - -
Capital Appreciation Portfolio, 70,196,900 shares at net asset value of $2.85
per share (cost $138,929,837) ............................................... - -
------------- -------------
391,032,409 75,862,180
Receivable for investments sold ................................................. 119,342 44,611
Receivable from Minnesota Mutual for contract purchase payments ................. 265,608 113,793
------------- -------------
Total assets ............................................................ 391,417,359 76,020,584
------------- -------------
LIABILITIES
Payable for investments purchased ............................................... 265,608 113,793
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges ............................................................... 119,342 44,611
------------- -------------
Total liabilities ....................................................... 384,950 158,404
------------- -------------
Net assets applicable to annuity contract owners ........................ 391,032,409 75,862,180
------------- -------------
------------- -------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of 44,705,247
for Growth; 43,266,404 for Bond; 19,804,841 for Money Market; 119,491,402 for
Asset Allocation; 34,751,197 for Mortgage Securities; 54,579,265 for Index 500
and 53,582,481 for Capital Appreciation......................................... 387,882,050 75,331,558
Contracts in annuity payment period (note 2) .................................... 3,150,359 530,622
------------- -------------
Total contract owners' equity ........................................... 391,032,409 75,862,180
------------- -------------
------------- -------------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... 3.25 2.17
------------- -------------
------------- -------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------
INDEX CAPITAL
ASSETS 500 APPRECIATION
------------- -------------
<S> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Growth Portfolio, 75,052,197 shares at net asset value of $2.40 per share
(cost $148,695,896) ......................................................... - -
Bond Portfolio, 77,690,256 shares at net asset value of $1.33 per share
(cost $96,660,321) .......................................................... - -
Money Market Portfolio, 32,324,767 shares at net asset value of $1.00 per
share (cost $32,324,767) .................................................... - -
Asset Allocation Portfolio, 192,771,941 shares at net asset value of $2.03 per
share (cost $312,521,866) ................................................... - -
Mortgage Securities Portfolio, 62,637,402 shares at net asset value of $1.21
per share (cost $72,229,435) ................................................ - -
Index 500 Portfolio, 67,489,230 shares at net asset value of $3.10 per share
(cost $135,527,207) ......................................................... 209,465,456 -
Capital Appreciation Portfolio, 70,196,900 shares at net asset value of $2.85
per share (cost $138,929,837) ............................................... - 200,190,828
------------- -------------
209,465,456 200,190,828
Receivable for investments sold ................................................. 167,882 32,677
Receivable from Minnesota Mutual for contract purchase payments ................. 186,022 173,559
------------- -------------
Total assets ............................................................ 209,819,360 200,397,064
------------- -------------
LIABILITIES
Payable for investments purchased ............................................... 186,022 173,559
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges ............................................................... 167,882 32,677
------------- -------------
Total liabilities ....................................................... 353,904 206,236
Net assets applicable to annuity contract owners ........................ 209,465,456 200,190,828
------------- -------------
------------- -------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of 44,705,247
for Growth; 43,266,404 for Bond; 19,804,841 for Money Market; 119,491,402 for
Asset Allocation; 34,751,197 for Mortgage Securities; 54,579,265 for Index 500
and 53,582,481 for Capital Appreciation......................................... 208,069,256 199,012,499
Contracts in annuity payment period (note 2) .................................... 1,396,200 1,178,329
------------- -------------
Total contract owners' equity ........................................... 209,465,456 200,190,828
------------- -------------
------------- -------------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... 3.81 3.71
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------
MATURING
INTERNATIONAL SMALL GOVERNMENT
ASSETS STOCK COMPANY BOND 1998
---------------- ------------- --------------
<S> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
International Stock Portfolio, 116,932,366 shares at net asset value of $1.71
per share (cost $165,400,474) ............................................... $ 199,426,099 - -
Small Company Portfolio, 74,694,833 shares at net asset value of $1.65 per
share (cost $109,015,821) ................................................... - 123,586,129 -
Maturing Government Bond 1998 Portfolio, 4,246,523 shares at net asset value
of $1.08 share (cost $4,371,425) ............................................ - - 4,596,761
Maturing Government Bond 2002 Portfolio, 3,556,331 shares at net asset value
of $1.07 per share (cost $3,692,921) ........................................ - - -
Maturing Government Bond 2006 Portfolio, 3,218,672 shares at net asset value
of $1.16 per share (cost $3,432,949) ........................................ - - -
Maturing Government Bond 2010 Portfolio, 2,282,762 shares at net asset value
of $1.29 per share (cost $2,564,420) ........................................ - - -
Value Stock Portfolio, 84,507,886 shares at net asset value of $1.73 per
share (cost $134,022,650) ................................................... - - -
---------------- ------------- --------------
199,426,099 123,586,129 4,596,761
Receivable for investments sold.................................................. 166,717 71,500 16,479
Receivable from Minnesota Mutual for contract purchase payments ................. 251,106 151,748 211
---------------- ------------- --------------
Total assets ................................................................ 199,843,922 123,809,377 4,613,451
---------------- ------------- --------------
LIABILITIES
Payable for investments purchased ............................................... 251,106 151,748 211
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges................................................................ 166,717 71,500 16,479
---------------- ------------- --------------
Total liabilities............................................................ 417,823 223,248 16,690
---------------- ------------- --------------
Net assets applicable to annuity contract owners ............................ $ 199,426,099 123,586,129 4,596,761
---------------- ------------- --------------
---------------- ------------- --------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding 103,600,602
for International Stock; 68,590,765 for Small Company; 3,789,296 for Maturing
Government Bond 1998; 2,938,848 for Maturing Government Bond 2002;
2,665,421 for Maturing Government Bond 2006; 2,017,743 for Maturing
Government Bond 2010 and 68,251,135 for Value Stock ........................... $ 198,085,598 122,127,222 4,589,253
Contracts in annuity payment period (note 2) .................................... 1,340,501 1,458,907 7,508
---------------- ------------- --------------
Total contract owners' equity ........................................... $ 199,426,099 123,586,129 4,596,761
---------------- ------------- --------------
---------------- ------------- --------------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... $ 1.91 1.78 1.21
---------------- ------------- --------------
---------------- ------------- --------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
BOND 2002 BOND 2006
ASSETS ----------- ------------
<S> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
International Stock Portfolio, 116,932,366 shares at net asset value of $1.71
per share (cost $165,400,474) ............................................... - -
Small Company Portfolio, 74,694,833 shares at net asset value of $1.65 per
share (cost $109,015,821) ................................................... - -
Maturing Government Bond 1998 Portfolio, 4,246,523 shares at net asset value
of $1.08 share (cost $4,371,425) ............................................ - -
Maturing Government Bond 2002 Portfolio, 3,556,331 shares at net asset value
of $1.07 per share (cost $3,692,921) ........................................ 3,818,401 -
Maturing Government Bond 2006 Portfolio, 3,218,672 shares at net asset value
of $1.16 per share (cost $3,432,949) ........................................ - 3,729,549
Maturing Government Bond 2010 Portfolio, 2,282,762 shares at net asset value
of $1.29 per share (cost $2,564,420) ........................................ - -
Value Stock Portfolio, 84,507,886 shares at net asset value of $1.73 per
share (cost $134,022,650) ................................................... - -
----------- ----------
3,818,401 3,729,549
Receivable for investments sold.................................................. 13,030 19,623
Receivable from Minnesota Mutual for contract purchase payments ................. 25,191 69
Total assets ................................................................ 3,856,622 3,749,241
----------- ----------
LIABILITIES
Payable for investments purchased ............................................... 25,191 69
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges................................................................ 13,030 19,623
----------- ----------
Total liabilities............................................................ 38,221 19,692
----------- ----------
Net assets applicable to annuity contract owners ............................ 3,818,401 3,729,549
----------- ----------
----------- ----------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding 103,600,602
for International Stock; 68,590,765 for Small Company; 3,789,296 for Maturing
Government Bond 1998; 2,938,848 for Maturing Government Bond 2002;
2,665,421 for Maturing Government Bond 2006; 2,017,743 for Maturing
Government Bond 2010 and 68,251,135 for Value Stock ........................... 3,796,044 3,705,916
Contracts in annuity payment period (note 2) .................................... 22,357 23,633
----------- ----------
Total contract owners' equity ........................................... 3,818,401 3,729,549
----------- ----------
----------- ----------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... 1.29 1.39
----------- ----------
----------- ----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------
MATURING
GOVERNMENT VALUE
ASSETS BOND 2010 STOCK
----------- ------------
<S> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
International Stock Portfolio, 116,932,366 shares at net asset value of $1.71
per share (cost $165,400,474) ............................................... - -
Small Company Portfolio, 74,694,833 shares at net asset value of $1.65 per
share (cost $109,015,821) ................................................... - -
Maturing Government Bond 1998 Portfolio, 4,246,523 shares at net asset value
of $1.08 share (cost $4,371,425) ............................................ - -
Maturing Government Bond 2002 Portfolio, 3,556,331 shares at net asset value
of $1.07 per share (cost $3,692,921) ........................................ - -
Maturing Government Bond 2006 Portfolio, 3,218,672 shares at net asset value
of $1.16 per share (cost $3,432,949) ........................................ - -
Maturing Government Bond 2010 Portfolio, 2,282,762 shares at net asset value
of $1.29 per share (cost $2,564,420) ........................................ 2,950,172 -
Value Stock Portfolio, 84,507,886 shares at net asset value of $1.73 per
share (cost $134,022,650) ................................................... - 146,326,158
------------ ------------
2,950,172 146,326,158
Receivable for investments sold.................................................. 14,392 141,021
Receivable from Minnesota Mutual for contract purchase payments ................. 51 300,322
------------ ------------
Total assets ................................................................ 2,964,615 146,767,501
------------ ------------
LIABILITIES
Payable for investments purchased ............................................... 51 300,322
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges................................................................ 14,392 141,021
------------ ------------
Total liabilities............................................................ 14,443 441,343
------------ ------------
Net assets applicable to annuity contract owners ............................ 2,950,172 146,326,158
------------ ------------
------------ ------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding 103,600,602
for International Stock; 68,590,765 for Small Company; 3,789,296 for Maturing
Government Bond 1998; 2,938,848 for Maturing Government Bond 2002;
2,665,421 for Maturing Government Bond 2006; 2,017,743 for Maturing
Government Bond 2010 and 68,251,135 for Value Stock ........................... 2,950,172 145,218,768
Contracts in annuity payment period (note 2) .................................... - 1,107,390
------------ ------------
Total contract owners' equity ........................................... 2,950,172 146,326,158
------------ ------------
------------ ------------
NET ASSET VALUE PER ACCUMULATION UNIT ........................................... 1.47 2.13
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------
SMALL
COMPANY INTERNATIONAL INDEX 400
ASSETS VALUE BOND MID-CAP
------------ ----------- -----------
<S> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Small Company Value Portfolio, 4,807,040 shares at net asset value
of $1.03 per share (cost $4,806,939) .......................................... $ 4,959,512 - -
International Bond Portfolio, 25,401,497 shares at net asset value
of $.98 per share (cost $25,405,543) .......................................... - 25,003,659 -
Index 400 Mid-Cap Portfolio, 5,004,350 shares at net asset value of $1.01
per share (cost $4,994,105) ................................................... - - 5,042,153
Macro-Cap Value Portfolio, 5,012,656 shares at net asset value of $.97 per
share (cost $5,000,253) ....................................................... - - -
Micro-Cap Growth Portfolio, 5,156,598 shares at net asset value of $.89
per share (cost $5,126,041) ................................................... - - -
Investment in shares of Templeton Variable Products Series Fund:
Templeton Developing Markets Fund - Class 2, 77,752 shares at net asset
value of $6.62 per share (cost $619,494) ...................................... - - -
----------- ----------- -----------
4,959,512 25,003,659 5,042,153
Receivable for investments sold .................................................. 2,440 3,662 1,740
Receivable from Minnesota Mutual for contract purchase payments .................. 29,161 5,341 19,103
----------- ----------- -----------
Total assets .............................................................. 4,991,113 25,012,662 5,062,996
----------- ----------- -----------
LIABILITIES
Payable for investments purchased ................................................ 29,161 5,341 19,103
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges ................................................................. 2,440 3,662 1,740
----------- ----------- -----------
Total liabilities ......................................................... 31,601 9,003 20,843
----------- ----------- -----------
Net assets applicable to annuity contract owners .......................... $ 4,959,512 25,003,659 5,042,153
----------- ----------- -----------
----------- ----------- -----------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of 4,822,504
for Small Company Value; 25,083,345 for International Bond; 5,020,041 for
Index 400 Mid-Cap; 5,003,390 for Macro-Cap Value; 5,019,478 for Micro-Cap
Growth and 724,374 for Templeton Developing Markets.............................. $ 4,959,512 25,003,659 5,042,153
Contracts in annuity payment period (note 2) ..................................... - - -
----------- ----------- -----------
Total contract owners' equity ............................................. $ 4,959,512 25,003,659 5,042,153
----------- ----------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT ............................................ $ 1.03 1.00 1.00
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------
TEMPLETON
MACRO-CAP MICRO-CAP DEVELOPING
ASSETS VALUE GROWTH MARKETS
------------ ------------ ------------
<S> <C> <C> <C>
Investments in shares of Advantus Series Fund, Inc.:
Small Company Value Portfolio, 4,807,040 shares at net asset value
of $1.03 per share (cost $4,806,939) .......................................... - - -
International Bond Portfolio, 25,401,497 shares at net asset value
of $.98 per share (cost $25,405,543) .......................................... - - -
Index 400 Mid-Cap Portfolio, 5,004,350 shares at net asset value of $1.01
per share (cost $4,994,105) ................................................... - - -
Macro-Cap Value Portfolio, 5,012,656 shares at net asset value of $.97 per
share (cost $5,000,253) ....................................................... 4,883,988 - -
Micro-Cap Growth Portfolio, 5,156,598 shares at net asset value of $.89
per share (cost $5,126,041) ................................................... - 4,575,844 -
Investment in shares of Templeton Variable Products Series Fund:
Templeton Developing Markets Fund - Class 2, 77,752 shares at net asset
value of $6.62 per share (cost $619,494) ...................................... - - 514,721
------------ ------------ ------------
4,883,988 4,575,844 514,721
Receivable for investments sold .................................................. 1,719 1,912 25
Receivable from Minnesota Mutual for contract purchase payments .................. 34,474 29,755 88
------------ ------------ ------------
Total assets .............................................................. 4,920,181 4,607,511 514,834
------------ ------------ ------------
LIABILITIES
Payable for investments purchased ................................................ 34,474 29,755 88
Payable to Minnesota Mutual for contract terminations and mortality and
expense charges ................................................................. 1,719 1,912 25
------------ ------------ ------------
Total liabilities ......................................................... 36,193 31,667 113
------------ ------------ ------------
Net assets applicable to annuity contract owners .......................... 4,883,988 4,575,844 514,721
------------ ------------ ------------
------------ ------------ ------------
CONTRACT OWNERS' EQUITY
Contracts in accumulation period, accumulation units outstanding of 4,822,504
for Small Company Value; 25,083,345 for International Bond; 5,020,041 for
Index 400 Mid-Cap; 5,003,390 for Macro-Cap Value; 5,019,478 for Micro-Cap
Growth and 724,374 for Templeton Developing Markets.............................. 4,883,988 4,575,844 502,694
Contracts in annuity payment period (note 2) ..................................... - - 12,027
------------ ------------ ------------
Total contract owners' equity ............................................. 4,883,988 4,575,844 514,721
------------ ------------ ------------
------------ ------------ ------------
NET ASSET VALUE PER ACCUMULATION UNIT ............................................ 0.98 0.91 0.69
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------
MONEY
GROWTH BOND MARKET
------------- ----------- -----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ....... $ 1,137,742 4,546,234 1,629,587
Mortality and expense charges (note 3) ..................................... (1,845,531) (1,123,144) (406,546)
------------- ----------- -----------
Investment income (loss) - net ........................................... (707,789) 3,423,090 1,223,041
------------- ----------- -----------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ........... 29,398,678 - -
------------- ----------- -----------
Realized gains on sales of investments:
Proceeds from sales ...................................................... 17,612,084 15,691,020 58,505,394
Cost of investments sold ................................................. (15,577,090) (15,242,829) (58,505,394)
------------- ----------- -----------
2,034,994 448,191 -
------------- ----------- -----------
Net realized gains on investments ........................................ 31,433,672 448,191 -
------------- ----------- -----------
Net change in unrealized appreciation or depreciation
of investments ........................................................ 10,155,331 3,109,325 -
------------- ----------- -----------
Net gains on investments ................................................. 41,589,003 3,557,516 -
------------- ----------- -----------
Net increase in net assets resulting from operations ......................... $ 40,881,214 6,980,606 1,223,041
------------- ----------- -----------
------------- ----------- -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------
ASSET MORTGAGE
ALLOCATION SECURITIES
------------ -----------
<S> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ....... 9,142,631 4,258,968
Mortality and expense charges (note 3) ..................................... (4,438,938) (865,603)
------------ -----------
Investment income (loss) - net ........................................... 4,703,693 3,393,365
------------ -----------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ........... 18,980,915 -
------------ -----------
Realized gains on sales of investments:
Proceeds from sales ...................................................... 45,903,963 14,501,168
Cost of investments sold ................................................. (38,736,145) (14,242,736)
------------ -----------
7,167,818 258,432
------------ -----------
Net realized gains on investments ........................................ 26,148,733 258,432
------------ -----------
Net change in unrealized appreciation or depreciation
of investments ........................................................ 26,799,187 1,596,944
------------ -----------
Net gains on investments ................................................. 52,947,920 1,855,376
------------ -----------
Net increase in net assets resulting from operations ......................... 57,651,613 5,248,741
------------ -----------
------------ -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------
INDEX CAPITAL
500 APPRECIATION
------------ -------------
<S> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ....... 1,866,988 -
Mortality and expense charges (note 3) ..................................... (2,207,566) (2,167,763)
------------ -------------
Investment income (loss) - net ........................................... (340,578) (2,167,763)
------------ -------------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ........... 2,358,762 15,018,896
------------ -------------
Realized gains on sales of investments:
Proceeds from sales ...................................................... 25,102,570 21,800,298
Cost of investments sold ................................................. (16,744,425) (16,547,794)
------------ -------------
8,358,145 5,252,504
------------ -------------
Net realized gains on investments ........................................ 10,716,907 20,271,400
------------ -------------
Net change in unrealized appreciation or depreciation
of investments ........................................................ 35,139,477 23,548,588
------------ -------------
Net gains on investments ................................................. 45,856,384 43,819,988
------------ -------------
Net increase in net assets resulting from operations ......................... 45,515,806 41,652,225
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------------
MATURING
GOVERNMENT
INTERNATIONAL SMALL BOND
STOCK COMPANY 1998
------------- ------------ -------------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ..... $ 4,995,517 1,671 242,260
Mortality and expense charges (note 3) ................................... (2,291,602) (1,398,061) (58,522)
------------- ------------ -------------
Investment income (loss) - net ......................................... 2,703,915 (1,396,390) 183,738
------------- ------------ -------------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ......... 2,492,168 - 10,599
------------- ------------ -------------
Realized gains on sales of investments:
Proceeds from sales .................................................... 21,740,953 22,202,110 1,265,260
Cost of investments sold ............................................... (17,494,601) (19,816,010) (1,224,226)
------------- ------------ -------------
4,246,352 2,386,100 41,034
------------- ------------ -------------
Net realized gains on investments ...................................... 6,738,520 2,386,100 51,633
------------- ------------ -------------
Net change in unrealized appreciation or depreciation
of investments ...................................................... 7,074,429 6,377,969 (17,138)
------------- ------------ -------------
Net gains on investments ............................................... 13,812,949 8,764,069 34,495
------------- ------------ -------------
Net increase in net assets resulting from operations ....................... $ 16,516,864 7,367,679 218,233
------------- ------------ -------------
------------- ------------ -------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
BOND BOND
2002 2006
------------ -----------
<S> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ..... 186,750 169,108
Mortality and expense charges (note 3) ................................... (44,406) (40,383)
------------ -----------
Investment income (loss) - net ......................................... 142,344 128,725
------------ -----------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ......... 27,745 45,356
------------ -----------
Realized gains on sales of investments:
Proceeds from sales .................................................... 716,861 359,142
Cost of investments sold ............................................... (700,145) (344,512)
------------ -----------
16,716 14,630
------------ -----------
Net realized gains on investments ...................................... 44,461 59,986
------------ -----------
Net change in unrealized appreciation or depreciation
of investments ...................................................... 55,287 172,717
------------ -----------
Net gains on investments ............................................... 99,748 232,703
------------ -----------
Net increase in net assets resulting from operations ....................... 242,092 361,428
------------ -----------
------------ -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------
MATURING
GOVERNMENT
BOND VALUE
2010 STOCK
------------ -----------
<C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) ..... 109,502 1,590,323
Mortality and expense charges (note 3) ................................... (31,112) (1,526,691)
------------ -----------
Investment income (loss) - net ......................................... 78,390 63,632
------------ -----------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ......... 22,856 12,783,189
------------ -----------
Realized gains on sales of investments:
Proceeds from sales .................................................... 890,311 21,135,199
Cost of investments sold ............................................... (868,673) (17,464,014)
------------ -----------
21,638 3,671,185
------------ -----------
Net realized gains on investments ...................................... 44,494 16,454,374
------------ -----------
Net change in unrealized appreciation or depreciation
of investments ...................................................... 236,051 2,218,967
------------ -----------
Net gains on investments ............................................... 280,545 18,673,341
------------ -----------
Net increase in net assets resulting from operations ....................... 358,935 18,736,973
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
SMALL
COMPANY INTERNATIONAL INDEX 400
VALUE (a) BOND (b) MID-CAP (a)
-------------- -------------- --------------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) .... $ - 369,778 -
Mortality and expense charges (note 3) .................................. (16,022) (85,707) (15,973)
-------------- -------------- --------------
Investment income (loss) - net ........................................ (16,022) 284,071 (15,973)
-------------- -------------- --------------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ........ - 26,587 429
-------------- -------------- --------------
Realized gains (losses) on sales of investments:
Proceeds from sales ................................................... 1,119,365 1,246,996 658,475
Cost of investments sold .............................................. (1,125,078) (1,224,320) (672,453)
-------------- -------------- --------------
(5,713) 22,676 (13,978)
-------------- -------------- --------------
Net realized gains (losses) on investments ............................ (5,713) 49,263 (13,549)
-------------- -------------- --------------
Net change in unrealized appreciation or depreciation
of investments ..................................................... 152,573 (401,884) 48,048
-------------- -------------- --------------
Net gains (losses) on investments ..................................... 146,860 (352,621) 34,499
-------------- -------------- --------------
Net increase (decrease) in net assets resulting from operations .......... $ 130,838 (68,550) 18,526
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
TEMPLETON
MACRO-CAP MICRO-CAP DEVELOPING
VALUE (d) GROWTH (c) MARKETS (e)
-------------- -------------- --------------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) .... 20,040 - -
Mortality and expense charges (note 3) .................................. (12,612) (18,203) (749)
-------------- -------------- --------------
Investment income (loss) - net ........................................ 7,428 (18,203) (749)
-------------- -------------- --------------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying mutual fund (note 4) ........ 1,893 139,073 -
-------------- -------------- --------------
Realized gains (losses) on sales of investments:
Proceeds from sales ................................................... 324,507 454,393 59,770
Cost of investments sold .............................................. (339,640) (478,152) (69,787)
-------------- -------------- --------------
(15,133) (23,759) (10,017)
-------------- -------------- --------------
Net realized gains (losses) on investments ............................ (13,240) 115,314 (10,017)
-------------- -------------- --------------
Net change in unrealized appreciation or depreciation
of investments ..................................................... (116,265) (550,197) (104,773)
-------------- -------------- --------------
Net gains (losses) on investments ..................................... (129,505) (434,883) (114,790)
-------------- -------------- --------------
Net increase (decrease) in net assets resulting from operations .......... (122,077) (453,086) (115,539)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
(a) For the period from September 29, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from September 24, 1997, commencement of operations, to
December 31, 1997.
(c) For the period from September 15, 1997, commencement of operations, to
December 31, 1997.
(d) For the period from October 15, 1997, commencement of operations, to
December 31, 1997.
(e) For the period from October 2, 1997, commencement of operations, to
December 31, 1997.
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------
MONEY ASSET
GROWTH BOND MARKET ALLOCATION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net ................................ $ (707,789) 3,423,090 1,223,041 4,703,693
Net realized gains on investments ............................. 31,433,672 448,191 - 26,148,733
Net change in unrealized appreciation or depreciation
of investments .............................................. 10,155,331 3,109,325 - 26,799,187
-------------- -------------- -------------- --------------
Net increase in net assets resulting from operations ............ 40,881,214 6,980,606 1,223,041 57,651,613
-------------- -------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments .................................... 37,464,249 29,678,709 52,599,130 51,665,342
Contract terminations and withdrawal payments ................. (15,679,425) (14,483,737) (57,536,852) (41,700,448)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................... 5,455 (4,132) (549,389) 550,291
Annuity benefit payments ...................................... (92,583) (80,007) (12,607) (314,868)
-------------- -------------- -------------- --------------
Increase in net assets from contract transactions ............... 21,697,696 15,110,833 (5,499,718) 10,200,317
-------------- -------------- -------------- --------------
Increase in net assets .......................................... 62,578,910 22,091,439 (4,276,677) 67,851,930
Net assets at the beginning of year ............................. 117,531,708 80,892,883 36,601,444 323,180,479
-------------- -------------- -------------- --------------
Net assets at the end of year ................................... $ 180,110,618 102,984,322 32,324,767 391,032,409
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------
MORTGAGE INDEX CAPITAL
SECURITIES 500 APPRECIATION
-------------- -------------- --------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ................................ 3,393,365 (340,578) (2,167,763)
Net realized gains on investments ............................. 258,432 10,716,907 20,271,400
Net change in unrealized appreciation or depreciation
of investments .............................................. 1,596,944 35,139,477 23,548,588
-------------- -------------- --------------
Net increase in net assets resulting from operations ............ 5,248,741 45,515,806 41,652,225
-------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments .................................... 18,403,459 51,509,928 27,739,494
Contract terminations and withdrawal payments ................. (13,595,580) (22,382,897) (19,504,571)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................... 4,705 (359,445) 663
Annuity benefit payments ...................................... (44,690) (152,662) (128,627)
-------------- -------------- --------------
Increase in net assets from contract transactions ............... 4,767,894 28,614,924 8,106,959
-------------- -------------- --------------
Increase in net assets .......................................... 10,016,635 74,130,730 49,759,184
Net assets at the beginning of year ............................. 65,845,545 135,334,726 150,431,644
-------------- -------------- --------------
Net assets at the end of year ................................... 75,862,180 209,465,456 200,190,828
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
INTERNATIONAL SMALL BOND BOND
STOCK COMPANY 1998 2002
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net .................................. $ 2,703,915 (1,396,390) 183,738 142,344
Net realized gains on investments ............................... 6,738,520 2,386,100 51,633 44,461
Net change in unrealized appreciation or depreciation
of investments ................................................ 7,074,429 6,377,969 (17,138) 55,287
-------------- -------------- ------------ -------------
Net increase in net assets resulting from operations .............. 16,516,864 7,367,679 218,233 242,092
-------------- -------------- ------------ -------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ...................................... 51,794,301 36,868,064 1,064,388 684,461
Contract terminations and withdrawal payments ................... (19,345,856) (20,954,051) (1,206,624) (667,868)
Actuarial adjustments for mortality experience on annuities
in payment period ............................................. 50,457 305,163 3 24
Annuity benefit payments ........................................ (153,952) (155,161) (117) (4,611)
-------------- -------------- ------------ -------------
Increase (decrease) in net assets from contract transactions ..... 32,344,950 16,064,015 (142,350) 12,006
-------------- -------------- ------------ -------------
Increase in net assets ............................................ 48,861,814 23,431,694 75,883 254,098
Net assets at the beginning of year................................ 150,564,285 100,154,435 4,520,878 3,564,303
-------------- -------------- ------------ -------------
Net assets at the end of year ..................................... $ 199,426,099 123,586,129 4,596,761 3,818,401
-------------- -------------- ------------ -------------
-------------- -------------- ------------ -------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
BOND BOND VALUE
2006 2010 STOCK
-------------- -------------- ------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net .................................. 128,725 78,390 63,632
Net realized gains on investments ............................... 59,986 44,494 16,454,374
Net change in unrealized appreciation or depreciation
of investments ................................................ 172,717 236,051 2,218,967
-------------- -------------- ------------
Net increase in net assets resulting from operations .............. 361,428 358,935 18,736,973
-------------- -------------- ------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ...................................... 743,477 823,375 68,735,594
Contract terminations and withdrawal payments ................... (314,002) (859,199) (19,539,662)
Actuarial adjustments for mortality experience on annuities
in payment period ............................................. 24 - 25,118
Annuity benefit payments ........................................ (4,781) - (93,964)
-------------- -------------- ------------
Increase (decrease) in net assets from contract transactions ..... 424,718 (35,824) 49,127,086
-------------- -------------- ------------
Increase in net assets ............................................ 786,146 323,111 67,864,059
Net assets at the beginning of year................................ 2,943,403 2,627,061 78,462,099
-------------- -------------- ------------
Net assets at the end of year ..................................... 3,729,549 2,950,172 146,326,158
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------
SMALL
COMPANY INTERNATIONAL INDEX 400
VALUE (a) BOND (b) MID-CAP (a)
------------- ------------- -------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................. $ (16,022) 284,071 (15,973)
Net realized gains (losses) on investments ................................. (5,713) 49,263 (13,549)
Net change in unrealized appreciation or depreciation
of investments ........................................................... 152,573 (401,884) 48,048
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations ............. 130,838 (68,550) 18,526
------------- ------------- -------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ................................................. 5,932,017 26,233,498 5,666,129
Contract terminations and withdrawal payments .............................. (1,103,343) (1,161,289) (642,502)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................................ - - -
Annuity benefit payments ................................................... - - -
------------- ------------- -------------
Increase in net assets from contract transactions ........................... 4,828,674 25,072,209 5,023,627
------------- ------------- -------------
Increase in net assets ...................................................... 4,959,512 25,003,659 5,042,153
Net assets at the beginning of period ....................................... - - -
------------- ------------- -------------
Net assets at the end of period ............................................. $ 4,959,512 25,003,659 5,042,153
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------
TEMPLETON
MACRO-CAP MICRO-CAP DEVELOPING
VALUE (d) GROWTH (c) MARKETS (e)
------------- ------------- -------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................. 7,428 (18,203) (749)
Net realized gains (losses) on investments ................................. (13,240) 115,314 (10,017)
Net change in unrealized appreciation or depreciation
of investments ........................................................... (116,265) (550,197) (104,773)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations ............. (122,077) (453,086) (115,539)
------------- ------------- -------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ................................................. 5,317,960 5,465,120 676,481
Contract terminations and withdrawal payments .............................. (311,895) (436,190) (45,203)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................................ - - (649)
Annuity benefit payments ................................................... - - (369)
------------- ------------- -------------
Increase in net assets from contract transactions ........................... 5,006,065 5,028,930 630,260
------------- ------------- -------------
Increase in net assets ...................................................... 4,883,988 4,575,844 514,721
Net assets at the beginning of period ....................................... - - -
------------- ------------- -------------
Net assets at the end of period ............................................. 4,883,988 4,575,844 514,721
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(a) For the period from September 29, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from September 24, 1997, commencement of operations, to
December 31, 1997.
(c) For the period from September 15, 1997, commencement of operations, to
December 31, 1997.
(d) For the period from October 15, 1997, commencement of operations, to
December 31, 1997.
(e) For the period from October 2, 1997, commencement of operations, to
December 31, 1997.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------
MONEY ASSET
GROWTH BOND MARKET ALLOCATION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net ................................ $ (439,595) 2,620,317 1,086,863 5,404,485
Net realized gains on investments ............................. 10,996,380 850,783 - 22,978,363
Net change in unrealized appreciation or depreciation
of investments .............................................. 4,627,723 (1,797,465) - 3,391,254
-------------- -------------- -------------- --------------
Net increase in net assets resulting from operations ............ 15,184,508 1,673,635 1,086,863 31,774,102
-------------- -------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments .................................... 22,686,286 28,459,419 52,853,330 54,563,388
Contract terminations and withdrawal payments ................. (14,919,406) (10,171,421) (39,767,006) (40,381,655)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................... 5,969 9,564 56,007 24,449
Annuity benefit payments ...................................... (60,957) (54,798) (72,840) (159,662)
-------------- -------------- -------------- --------------
Increase in net assets from contract transactions ............... 7,711,892 18,242,764 13,069,491 14,046,520
-------------- -------------- -------------- --------------
Increase in net assets .......................................... 22,896,400 19,916,399 14,156,354 45,820,622
Net assets at the beginning of year ............................. 94,635,308 60,976,484 22,445,090 277,359,857
-------------- -------------- -------------- --------------
Net assets at the end of year ................................... $ 117,531,708 80,892,883 36,601,444 323,180,479
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------
MORTGAGE INDEX CAPITAL
SECURITIES 500 APPRECIATION
-------------- -------------- --------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ................................ 3,178,143 (13,155) (1,690,612)
Net realized gains on investments ............................. 106,132 4,244,496 8,063,210
Net change in unrealized appreciation or depreciation
of investments .............................................. (863,049) 16,185,492 13,204,750
-------------- -------------- --------------
Net increase in net assets resulting from operations ............ 2,421,226 20,416,833 19,577,348
-------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments .................................... 14,864,436 40,905,486 32,359,143
Contract terminations and withdrawal payments ................. (12,572,781) (12,092,904) (17,945,477)
Actuarial adjustments for mortality experience on annuities
in payment period ........................................... 2,662 32,413 30,374
Annuity benefit payments ...................................... (46,736) (72,750) (72,144)
-------------- -------------- --------------
Increase in net assets from contract transactions ............... 2,247,581 28,772,245 14,371,896
-------------- -------------- --------------
Increase in net assets .......................................... 4,668,807 49,189,078 33,949,244
Net assets at the beginning of year ............................. 61,176,738 86,145,648 116,482,400
-------------- -------------- --------------
Net assets at the end of year ................................... 65,845,545 135,334,726 150,431,644
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
INTERNATIONAL SMALL BOND BOND
STOCK COMPANY 1998 2002
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net ................................. $ 1,433,842 (872,696) (46,153) 156,009
Net realized gains on investments .............................. 5,318,066 11,720,645 31,397 15,246
Net change in unrealized appreciation or depreciation
of investments ............................................... 14,598,427 (7,159,671) 127,703 (135,902)
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets resulting from operations... 21,350,335 3,688,278 112,947 35,353
-------------- -------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ..................................... 42,935,430 38,517,725 1,501,980 864,195
Contract terminations and withdrawal payments .................. (14,587,080) (11,390,236) (837,825) (237,287)
Actuarial adjustments for mortality experience on annuities
in payment period ............................................ 26,969 36,861 - 3,006
Annuity benefit payments ....................................... (69,138) (84,501) - (2,024)
-------------- -------------- -------------- --------------
Increase in net assets from contract transactions ................ 28,306,181 27,079,849 664,155 627,890
-------------- -------------- -------------- --------------
Increase in net assets ........................................... 49,656,516 30,768,127 777,102 663,243
Net assets at the beginning of year............................... 100,907,769 69,386,308 3,743,776 2,901,060
-------------- -------------- -------------- --------------
Net assets at the end of year .................................... $ 150,564,285 100,154,435 4,520,878 3,564,303
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------
MATURING MATURING
GOVERNMENT GOVERNMENT
BOND BOND VALUE
2006 2010 STOCK
-------------- -------------- --------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ................................. 131,513 (20,022) 8,107
Net realized gains on investments .............................. 19,246 4,521 5,716,915
Net change in unrealized appreciation or depreciation
of investments ............................................... (188,675) (7,215) 7,186,237
-------------- -------------- --------------
Net increase (decrease) in net assets resulting from operations... (37,916) (22,716) 12,911,259
-------------- -------------- --------------
Contract transactions (notes 2, 3, 4 and 5):
Contract purchase payments ..................................... 742,285 1,808,688 45,810,561
Contract terminations and withdrawal payments .................. (169,160) (384,991) (6,189,324)
Actuarial adjustments for mortality experience on annuities
in payment period ............................................ 3,303 - 25,380
Annuity benefit payments ....................................... (2,074) - (27,424)
-------------- -------------- --------------
Increase in net assets from contract transactions ................ 574,354 1,423,697 39,619,193
-------------- -------------- --------------
Increase in net assets ........................................... 536,438 1,400,981 52,530,452
Net assets at the beginning of year............................... 2,406,965 1,226,080 25,931,647
-------------- -------------- --------------
Net assets at the end of year .................................... 2,943,403 2,627,061 78,462,099
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Minnesota Mutual Variable Annuity Account (the Account) was established
on September 10, 1984 as a segregated asset account of The Minnesota Mutual
Life Insurance Company (Minnesota Mutual) under Minnesota law and is
registered as a unit investment trust under the Investment Company Act of
1940 (as amended). There are currently four types of contracts each
consisting of one to twenty-one segregated sub-accounts. The financial
statements presented herein include only the segregated sub-accounts
offered in connection with the sale of the Combination Fixed and Variable
Annuity Contracts for Personal Retirement Plans (Multi-option Annuity) and
Multi-Option Select.
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 Mutual. Contract owners allocate their variable annuity
purchase payments to one or more of the twenty segregated sub-accounts.
Such payments are then invested in shares of Advantus Series Fund, Inc.,
formerly MIMLIC Series Fund, Inc., and Templeton Variable Products Series
Fund (Underlying Funds). The Advantus Series Fund, Inc. was organized by
Minnesota Mutual as the investment vehicle for its variable annuity
contracts and variable life policies. Each of the Underlying Funds 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, Capital Appreciation, International Stock,
Small Company, Maturing Government Bond 1998, Maturing Government Bond
2002, Maturing Government Bond 2006, Maturing Government Bond 2010, Value
Stock, Small Company Value, International Bond, Index 400 Mid-Cap,
Macro-Cap Value, Micro-Cap Growth, Micro-Cap Value and Templeton Developing
Markets segregated sub-accounts are invested in shares of the Growth, Bond,
Money Market, Asset Allocation, Mortgage Securities, Index 500, Capital
Appreciation, International Stock, Small Company, Maturing Government Bond
1999, Maturing Government Bond 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Small Company Value,
International Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth
and Micro-Cap Value Portfolios of the Advantus Series Fund, Inc. and
Templeton Developing Markets Fund - Class 2 of the Templeton Variable
Products Series Fund, respectively. As of December 31, 1997, the
Micro-Cap Value segregated sub-account is not available.
Ascend Financial Services, Inc., formerly MIMLIC Sales Corporation acts as
the underwriter for the Account. Advantus Capital Management, Inc. acts as
the investment adviser for the Advantus Series Fund, Inc. Ascend Financial
Services, Inc. and Advantus Capital Management, Inc. are wholly-owned
subsidiaries of MIMLIC Asset Management Company. MIMLIC Asset Management
Company is a wholly-owned subsidiary of Minnesota Mutual.
(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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets resulting from operations during the period. Actual results
could differ from those estimates.
INVESTMENTS IN UNDERLYING FUNDS
Investments in shares of the Underlying Funds are stated at market value
which is the net asset value per share as determined daily by each of the
Underlying Funds. 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 Underlying Funds are reinvested in additional shares of the
Underlying Funds and are recorded by the segregated sub-accounts on the
ex-dividend date.
<PAGE>
2
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Mutual 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 Underlying Funds.
CONTRACTS IN ANNUITY PAYMENT PERIOD
Annuity reserves are computed for currently payable contracts according to
the Progressive Annuity Mortality Table, using an assumed interest rate of
3.5 percent. Charges to annuity reserves for mortality and risk expense
are reimbursed to Minnesota Mutual if the reserves required are less than
originally estimated. If additional reserves are required, Minnesota
Mutual reimburses the Account.
(3) MORTALITY AND EXPENSE AND SALES CHARGES
The mortality and expense charge paid to Minnesota Mutual is computed daily
and is equal, on an annual basis, to 1.25 percent of the average daily net
assets of the Account. Under certain conditions, the charge may be
increased to 1.40 percent of the average daily net assets of the Account.
A contingent deferred sales charge may be imposed on a Multi-Option Annuity
or Multi-Option Select contract owner during the first ten years or first
seven years, respectively, if a contract's accumulation value is reduced by
a withdrawal or surrender. Total sales charges deducted from redemption
proceeds for the years ended December 31, 1997 and 1996 amounted to
$1,743,977 and $1,677,688, respectively.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Underlying Funds shares, including reinvestment
of dividend distributions, were as follows during the year ended December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . $68,000,669
Bond Portfolio. . . . . . . . . . . . . . . . . . . . . . . . 34,224,943
Money Market Portfolio. . . . . . . . . . . . . . . . . . . . 54,228,739
Asset Allocation Portfolio. . . . . . . . . . . . . . . . . . 79,788,888
Mortgage Securities Portfolio . . . . . . . . . . . . . . . . 22,662,427
Index 500 Portfolio . . . . . . . . . . . . . . . . . . . . . 55,735,678
Capital Appreciation Portfolio. . . . . . . . . . . . . . . . 42,758,390
International Stock Portfolio . . . . . . . . . . . . . . . . 59,281,986
Small Company Portfolio . . . . . . . . . . . . . . . . . . . 36,869,735
Maturing Government Bond 1998 Portfolio . . . . . . . . . . . 1,317,247
Maturing Government Bond 2002 Portfolio . . . . . . . . . . . 898,956
Maturing Government Bond 2006 Portfolio . . . . . . . . . . . 957,941
Maturing Government Bond 2010 Portfolio . . . . . . . . . . . 955,733
Value Stock Portfolio . . . . . . . . . . . . . . . . . . . . 83,109,106
Small Company Value Portfolio . . . . . . . . . . . . . . . . 5,932,017
International Bond Portfolio. . . . . . . . . . . . . . . . . 26,629,863
Index 400 Mid-Cap Portfolio . . . . . . . . . . . . . . . . . 5,666,558
Macro-Cap Value . . . . . . . . . . . . . . . . . . . . . . . 5,339,893
Micro-Cap Growth Portfolio. . . . . . . . . . . . . . . . . . 5,604,193
Templeton Developing Markets Fund . . . . . . . . . . . . . . 689,281
</TABLE>
<PAGE>
3
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the years ended
December 31, 1997 and 1996 (periods ended December 31, 1997 for Small
Company Value, International Bond, Index 400 Mid-Cap, Macro-Cap Value,
Micro-Cap Growth and Templeton Developing Markets) were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------------
MONEY ASSET MORTGAGE
GROWTH BOND MARKET ALLOCATION SECURITIES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 . . . . . . . . . 35,809,340 28,069,241 14,809,515 110,975,477 31,277,934
Contract purchase . . . . . . . . . 7,959,321 13,440,580 34,210,814 20,938,882
payments . . . . . . . . . . . . . 7,656,512
Deductions for contract
terminations and
withdrawal payments . . . . . . . (5,320,209) (4,777,759) (26,090,695) (15,702,709) (6,406,491)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1996 . . . . . . . . . 38,448,452 36,732,062 22,929,634 116,211,650 32,527,955
Contract purchase . . . . . . . . . 10,771,702 13,082,596 32,831,960 17,230,670
payments . . . . . . . . . . . . . 8,805,041
Deductions for contract
terminations and
withdrawal payments . . . . . . . (4,514,907) (6,548,254) (35,956,753) (13,950,918) (6,581,799)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1997 . . . . . . . . . 44,705,247 43,266,404 19,804,841 119,491,402 34,751,197
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------------
MATURING
INDEX CAPITAL INTERNATIONAL SMALL GOVERNMENT
500 APPRECIATION STOCK COMPANY BOND 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 . . . . . . . . . 35,272,024 45,964,468 68,725,183 43,234,716 3,330,772
Contract purchase
payments . . . . . . . . . . . . . 15,526,087 11,655,640 27,327,499 23,161,740 1,322,226
Deductions for contract
terminations and
withdrawal payments . . . . . . . (4,700,558) (6,596,109) (9,531,418) (7,101,183) (741,886)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1996 . . . . . . . . . 46,097,553 51,023,999 86,521,264 59,295,273 3,911,112
Contract purchase
payments . . . . . . . . . . . . . 15,045,840 8,635,068 27,399,036 21,317,225 897,511
Deductions for contract
terminations and
withdrawal payments . . . . . . . (6,564,128) (6,076,586) (10,319,698) (12,021,733) (1,019,327)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1997 . . . . . . . . . 54,579,265 53,582,481 103,600,602 68,590,765 3,789,296
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
4
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------------
MATURING MATURING MATURING SMALL
GOVERNMENT GOVERNMENT GOVERNMENT VALUE COMPANY
BOND 2002 BOND 2006 BOND 2010 STOCK VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 . . . . . . . . . 2,417,823 1,878,731 924,681 18,744,902 -
Contract purchase
payments . . . . . . . . . . . . . 736,594 611,384 1,477,104 29,156,933 -
Deductions for contract
terminations and
withdrawal payments . . . . . . . (218,557) (156,006) (324,661) (4,105,312) -
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1996 . . . . . . . . . 2,935,860 2,334,109 2,077,124 43,796,523 -
Contract purchase
payments . . . . . . . . . . . . . 553,116 580,185 624,211 34,081,601 5,910,477
Deductions for contract
terminations and
withdrawal payments . . . . . . . (550,128) (248,873) (683,592) (9,626,989) (1,087,973)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1997 . . . . . . . . . 2,938,848 2,665,421 2,017,743 68,251,135 4,822,504
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------------
TEMPLETON
INTERNATINAL INDEX 400 MACRO-CAP MICRO-CAP DEVELOPING
BOND MID-CAP VALUE GROWTH MARKETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1996 . . . . . . . . . - - - -
Contract purchase
payments . . . . . . . . . . . . . 26,222,899 5,600,260 5,329,567 5,472,331 807,553
Deductions for contract
terminations and
withdrawal payments . . . . . . . (1,139,554) (580,219) (326,177) (452,853) (83,179)
------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1997 . . . . . . . . . 25,083,345 5,020,041 5,003,390 5,019,478 724,374
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
5
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) 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,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 3.04 2.63 2.14 2.15 2.08
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income (loss) . . . (.02) (.01) (.01) (.01) -
Net gains or losses on securities
(both realized and unrealized) . .99 .42 .50 - .07
------------ ------------ ------------ ------------ ------------
Total from investment operations .97 .41 .49 (.01) .07
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 4.01 3.04 2.63 2.14 2.15
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
6
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
BOND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 2.19 2.15 1.82 1.93 1.77
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . .09 .08 .04 .05 .05
Net gains or losses on securities
(both realized and unrealized) . .09 (.04) .29 (.16) .11
Total from investment operations .18 .04 .33 (.11) .16
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 2.37 2.19 2.15 1.82 1.93
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
7
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MONEY MARKET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 1.57 1.52 1.46 1.42 1.40
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income . . . . . . . . .06 .05 .06 .04 .02
------------ ------------ ------------ ------------ ------------
Total from investment operations . . .06 .05 .06 .04 .02
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 1.63 1.57 1.52 1.46 1.42
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
8
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
ASSET ALLOCATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 2.76 2.49 2.01 2.07 1.97
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . . .04 .04 .04 .01 .01
Net gains or losses on securities
(both realized and unrealized) . . . .45 .23 .44 (.07) .09
------------ ------------ ------------ ------------ ------------
Total from investment operations . . .49 .27 .48 (.06) .10
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 3.25 2.76 2.49 2.01 2.07
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
9
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MORTGAGE SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 2.01 1.93 1.66 1.74 1.61
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . . .10 .10 .10 .06 .04
Net gains or losses on securities
(both realized and unrealized) . . . .06 (.02) .17 (.14) .09
------------ ------------ ------------ ------------ ------------
Total from investment operations . . .16 .08 .27 (.08) .13
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 2.17 2.01 1.93 1.66 1.74
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
10
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
INDEX 500
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 2.91 2.43 1.79 1.80 1.66
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . (.01) - .01 - -
Net gains or losses on securities
(both realized and unrealized) . .91 .48 .63 (.01) .14
------------ ------------ ------------ ------------ ------------
Total from investment operations .90 .48 .64 (.01) .14
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 3.81 2.91 2.43 1.79 1.80
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
11
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
CAPITAL APPRECIATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 2.93 2.52 2.08 2.06 1.89
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment loss . . . . . . . (.04) (.03) (.03) (.02) (.02)
Net gains or losses on securities
(both realized and unrealized). .82 .44 .47 .04 .19
------------ ------------ ------------ ------------ ------------
Total from investment operations .78 .41 .44 .02 .17
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 3.71 2.93 2.52 2.08 2.06
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
12
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
INTERNATIONAL STOCK
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year . . . . $ 1.73 1.46 1.30 1.32 .93
------------ ------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income (loss) . . .03 .02 (.02) .01 (.01)
Net gains or losses on securities
(both realized and unrealized) . .15 .25 .18 (.03) .40
------------ ------------ ------------ ------------ ------------
Total from investment operations .18 .27 .16 (.02) .39
------------ ------------ ------------ ------------ ------------
Unit value, end of year . . . . . . . $ 1.91 1.73 1.46 1.30 1.32
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
13
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
SMALL COMPANY
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 3, 1993*
--------------------------------------------------------- TO DECEMBER
1997 1996 1995 1994 31, 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.67 1.59 1.22 1.16 1.00
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment loss . . . . . . . (.02) (.02) (.02) (.01) (.01)
Net gains or losses on securities
(both realized and unrealized) . .13 .10 .39 .07 .17
------------ ------------ ------------ ------------ ------------
Total from investment operations .11 .08 .37 .06 .16
------------ ------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 1.78 1.67 1.59 1.22 1.16
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 3, 1993, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
14
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MATURING GOVERNMENT BOND 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 2, 1994*
------------------------------------------ TO DECEMBER
1997 1996 1995 31, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.16 1.12 .98 1.00
------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income (loss) . . .04 (.01) .05 .03
Net gains or losses on securities
(both realized and unrealized) . .01 .05 .09 (.05)
------------ ------------ ------------ ------------
Total from investment operations .05 .04 .14 (.02)
------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 1.21 1.16 1.12 .98
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 2, 1994, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
15
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MATURING GOVERNMENT BOND 2002
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 2, 1994*
------------------------------------------ TO DECEMBER
1997 1996 1995 31, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.21 1.20 .97 1.00
------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . .05 .06 .06 .04
Net gains or losses on securities
(both realized and unrealized) . .03 (.05) .17 (.07)
------------ ------------ ------------ ------------
Total from investment operations .08 .01 .23 (.03)
------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 1.29 1.21 1.20 .97
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 2, 1994, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
16
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MATURING GOVERNMENT BOND 2006
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 2, 1994*
------------------------------------------ TO DECEMBER
1997 1996 1995 31, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.25 1.28 .96 1.00
------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income . . . . . . .05 .06 .06 .04
Net gains or losses on securities
(both realized and unrealized) . .09 (.09) .26 (.08)
------------ ------------ ------------ ------------
Total from investment operations .14 (.03) .32 (.04)
------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 1.39 1.25 1.28 .96
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 2, 1994, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
17
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MATURING GOVERNMENT BOND 2010
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 2, 1994*
------------------------------------------ TO DECEMBER
1997 1996 1995 31, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.27 1.33 .95 1.00
------------ ------------ ------------ ------------
Income (loss) from
investment operations:
Net investment income (loss) . . .04 (.02) .06 .04
Net gains or losses on securities
(both realized and unrealized) . .16 (.04) .32 (.09)
------------ ------------ ------------ ------------
Total from investment operations .20 (.06) .38 (.05)
------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 1.47 1.27 1.33 .95
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 2, 1994, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
18
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
VALUE STOCK
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, MAY 2, 1994*
------------------------------------------ TO DECEMBER
1997 1996 1995 31, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unit value, beginning of period . . . $ 1.78 1.38 1.05 1.00
------------ ------------ ------------ ------------
Income from investment operations:
Net investment income . . . . . . - - - .01
Net gains or losses on securities
(both realized and unrealized) . .35 .40 .33 .04
------------ ------------ ------------ ------------
Total from investment operations .35 .40 .33 .05
------------ ------------ ------------ ------------
Unit value, end of period . . . . . . $ 2.13 1.78 1.38 1.05
------------ ------------ ------------ ------------
</TABLE>
* Inception of the segregated sub-account was May 2, 1994, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
19
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
SMALL COMPANY VALUE
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income from investment operations:
Net investment income . . . . . . . . . . . . -
Net gains or losses on securities (both
realized and unrealized). . . . . . . . . . . .03
------------
Total from investment operations . . . . . . .03
------------
Unit value, end of period . . . . . . . . . . . . . $ 1.03
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 1, 1997, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
20
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
INTERNATIONAL BOND
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . .01
Net gains or losses on securities (both
realized and unrealized) . . . . . . . . . . (.01)
------------
Total from investment operations . . . . . . -
------------
Unit value, end of period . . . . . . . . . . . . . $ 1.00
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 1, 1997, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
21
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
INDEX 400 MID-CAP
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . -
Net gains or losses on securities (both
realized and unrealized) . . . . . . . . . . -
------------
Total from investment operations . . . . . . -
------------
Unit value, end of period . . . . . . . . . . . . . $ 1.00
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 1, 1997, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
22
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MACRO-CAP VALUE
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, 1997*
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income (loss) from investment operations:
Net investment income . . . . . . . . . . . . . -
Net gains or losses on securities (both
realized and unrealized) . . . . . . . . . . (.02)
------------
Total from investment operations . . . . . . (.02)
------------
Unit value, end of period . . . . . . . . . . . . . $ .98
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 15, 1997, when
the units became effectively registered under the Securities Exchange
Act of 1933.
<PAGE>
23
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
MACRO-CAP GROWTH
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income (loss) from investment operations:
Net investment loss . . . . . . . . . . . . . . (.01)
Net gains or losses on securities (both
realized and unrealized) . . . . . . . . . . (.08)
------------
Total from investment operations . . . . . . (.09)
------------
Unit value, end of period . . . . . . . . . . . . . $ .91
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 1, 1997, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
24
MINNESOTA MUTUAL VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
TEMPLETON DEVELOPING MARKETS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 2, 1997
TO DECEMBER
31, 1997
------------
<S> <C>
Unit value, beginning of period . . . . . . . . . . $ 1.00
------------
Income (loss) from investment operations:
Net investment income . . . . . . . . . . . . . -
Net gains or losses on securities (both
realized and unrealized) . . . . . . . . . . (.31)
------------
Total from investment operations . . . . . . (.31)
------------
Unit value, end of period . . . . . . . . . . . . . $ .69
------------
------------
</TABLE>
* Inception of the segregated sub-account was October 2, 1997, when the
units became effectively registered under the Securities Exchange Act
of 1933.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1997. 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 audits 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 Mutual Life Insurance Company and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ending December 31, 1997 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
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 financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1998
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,518,807 and $4,558,975) $ 4,719,801 $ 4,674,082
Held-to-maturity, at amortized cost (fair value
$1,158,227 and $1,179,112) 1,088,312 1,125,638
Equity securities, at fair value (cost $537,441 and
$429,509) 686,638 549,797
Mortgage loans, net 661,337 608,808
Real estate, net 39,964 43,082
Policy loans 213,488 204,178
Short-term investments 112,352 126,372
Other invested assets 216,838 94,647
----------- -----------
Total investments 7,738,730 7,426,604
Cash 96,179 57,140
Finance receivables, net 211,794 259,192
Deferred policy acquisition costs 576,030 589,517
Accrued investment income 83,439 90,996
Premiums receivable 68,030 77,140
Property and equipment, net 58,123 55,050
Reinsurance recoverables 150,126 126,629
Other assets 52,852 54,798
Separate account assets 5,366,810 3,706,256
----------- -----------
Total assets $14,402,113 $12,443,322
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,275,221 $ 4,310,015
Future policy and contract benefits 1,687,529 1,638,720
Pending policy and contract claims 64,356 70,577
Other policyowner funds 416,752 396,848
Policyowner dividends payable 55,321 49,899
Unearned premiums and fees 202,070 207,111
Federal income tax liability:
Current 45,300 25,643
Deferred 166,057 149,665
Other liabilities 334,305 286,042
Notes payable 298,000 319,000
Separate account liabilities 5,320,517 3,691,374
----------- -----------
Total liabilities $12,865,428 $11,144,894
=========== ===========
Policyowners' surplus:
Unassigned surplus 1,380,012 1,190,116
Net unrealized investment gains 156,673 108,312
----------- -----------
Total policyowners' surplus 1,536,685 1,298,428
----------- -----------
Total liabilities and policyowners' surplus $14,402,113 $12,443,322
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 615,253 $ 612,359 $ 603,770
Policy and contract fees 272,037 245,966 214,203
Net investment income 553,773 530,987 515,047
Net realized investment gains 114,367 55,574 62,292
Finance charge income 43,650 46,932 39,937
Other income 71,707 51,630 40,250
---------- ---------- ----------
Total revenues 1,670,787 1,543,448 1,475,499
---------- ---------- ----------
Benefits and expenses:
Policyowner benefits 515,873 541,520 517,771
Interest credited to policies and con-
tracts 298,033 288,967 297,145
General operating expenses 369,961 302,618 273,425
Commissions 114,404 103,370 93,465
Administrative and sponsorship fees 81,750 79,360 76,223
Dividends to policyowners 26,776 24,804 27,282
Interest on notes payable 24,192 22,798 11,128
Increase in deferred policy acquisi-
tion costs (26,878) (19,284) (34,173)
---------- ---------- ----------
Total benefits and expenses 1,404,111 1,344,153 1,262,266
---------- ---------- ----------
Income from operations before taxes 266,676 199,295 213,233
Federal income tax expense (benefit):
Current 84,612 68,033 71,379
Deferred (7,832) 744 11,995
---------- ---------- ----------
Total federal income tax expense 76,780 68,777 83,374
Net income $ 189,896 $ 130,518 $ 129,859
========== ========== ==========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,298,428 $1,212,850 $ 874,577
Net income 189,896 130,518 129,859
Change in net unrealized investment
gains and losses 48,361 (44,940) 208,414
---------- ---------- ----------
Policyowners' surplus, end of year $1,536,685 $1,298,428 $1,212,850
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 189,896 $ 130,518 $ 129,859
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 276,719 275,968 288,218
Fees deducted from policy and con-
tract balances (214,803) (206,780) (201,575)
Change in future policy benefits 76,358 84,389 100,025
Change in other policyowner liabili-
ties 7,597 16,099 (4,762)
Change in deferred policy acquisition
costs (19,430) (15,312) (29,822)
Change in premiums due and other re-
ceivables (9,280) (26,142) (18,039)
Change in federal income tax liabili-
ties 5,277 (12,055) 18,376
Net realized investment gains (123,016) (59,546) (66,643)
Other, net 8,760 29,987 36,561
----------- ----------- -----------
Net cash provided by operating ac-
tivities 198,078 217,126 252,198
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,099,114 877,682 1,349,348
Equity securities 601,936 352,901 203,493
Mortgage loans -- 15,567 4,315
Real estate 9,279 11,678 15,948
Other invested assets 26,877 12,280 10,775
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 403,829 329,550 253,576
Fixed maturity securities, held-to-
maturity 139,394 114,222 127,617
Mortgage loans 109,246 94,703 104,730
Purchases of:
Fixed maturity securities, available-
for-sale (1,498,048) (1,228,048) (1,975,130)
Fixed maturity securities, held-to-
maturity (82,835) (60,612) (140,763)
Equity securities (585,349) (446,599) (212,142)
Mortgage loans (157,247) (108,691) (209,399)
Real estate (3,908) (3,786) (16,554)
Other invested assets (55,988) (29,271) (20,517)
Finance receivable originations or pur-
chases (115,248) (175,876) (167,298)
Finance receivable principal payments 133,762 142,723 123,515
Other, net (88,626) (40,062) (19,292)
----------- ----------- -----------
Net cash used for investing activi-
ties (63,812) (141,639) (567,778)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insur-
ance contracts 928,696 657,405 710,525
Withdrawals from annuity and insurance
contracts (1,013,588) (702,681) (563,569)
Proceeds from issuance of surplus notes -- -- 124,967
Proceeds from issuance of debt by sub-
sidiary -- 60,000 50,000
Payments on debt by subsidiary (21,000) (21,000) (10,000)
Other, net (3,355) (6,898) (3,801)
----------- ----------- -----------
Net cash provided by (used for) fi-
nancing activities (109,247) (13,174) 308,122
----------- ----------- -----------
Net increase (decrease) in cash and
short-term investments 25,019 62,313 (7,458)
Cash and short-term investments, begin-
ning of year 183,512 121,199 128,657
----------- ----------- -----------
Cash and short-term investments, end of
year $ 208,531 $ 183,512 $ 121,199
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, 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 four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues in 1997 for these business units were $854,192,000,
$284,222,000, $232,619,000 and $114,324,000, respectively. Additional revenues
of $185,430,000, were reported by the Company's subsidiaries.
At December 31, 1997, the Company was one of the 12 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(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), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). 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 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.
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 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
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 acquisition costs amortized were $128,176,000, $125,978,000 and
$104,940,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
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.
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.
Fair values of fixed maturity securities and equity securities 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,
1997 and 1996, was $6,269,000 and $5,968,000, respectively.
Policy loans are carried at the unpaid principal balance.
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 of 1997.
The swaps were carried at fair value, which were based upon dealer quotes.
Changes in fair value were recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses were recognized in income. The Company
realized a loss of approximately $31 million in 1997, upon settlement of these
equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. 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 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. These contracts are generally short-term in nature and there is
no material exposure to the Company at December 31, 1997.
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 and
equity securities are recorded as a separate component of policyowners'
surplus, 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
$90,926,000 and $81,962,000 at December 31, 1997 and 1996, 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,
1997, 1996 and 1995, were $8,965,000, $6,454,000 and $5,941,000, 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 policyowners 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 is included with separate account assets and amounted
to $46,293,000 and $14,882,000 as of December 31, 1997 and 1996, respectively.
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Policyowner 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 policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees 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.
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 1996 and 1995 financial statement balances have been reclassified to
conform with the 1997 presentation.
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $457,391 $433,985 $426,114
Equity securities 16,182 14,275 8,883
Mortgage loans 55,929 63,865 58,943
Real estate (407) (475) 497
Policy loans 15,231 13,828 12,821
Short-term investments 6,995 6,535 6,716
Other invested assets 3,871 4,901 5,168
-------- -------- --------
Gross investment income 555,192 536,914 519,142
Investment expenses (1,419) (5,927) (4,095)
-------- -------- --------
Total $553,773 $530,987 $515,047
======== ======== ========
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $ 3,711 $(6,536) $24,025
Equity securities 92,765 57,770 36,374
Mortgage loans 2,011 (721) (207)
Real estate 1,598 7,088 2,436
Other invested assets 14,282 (2,027) (336)
-------- ------- -------
Total $114,367 $55,574 $62,292
======== ======= =======
</TABLE>
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>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 18,804 $ 19,750 $ 34,898
Gross realized losses (15,093) (26,286) (10,873)
Equity securities:
Gross realized gains 151,200 79,982 52,670
Gross realized losses (27,672) (22,212) (16,296)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $ 472,671 $314,576
Gross unrealized losses (118,863) (77,337)
Adjustment to deferred acquisition costs (100,299) (65,260)
Adjustment to unearned policy and contract fees (13,087) (8,192)
Deferred federal income taxes (83,749) (55,475)
--------- --------
Net unrealized gains $ 156,673 $108,312
========= ========
</TABLE>
68
<PAGE>
THE MINNESOTA MUTUAL 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, 1997
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 239,613 $ 18,627 $ -- $ 258,240
Foreign governments 1,044 -- 29 1,015
Corporate securities 2,273,474 216,056 70,484 2,419,046
International bond securities 150,157 2,565 23,530 129,192
Mortgage-backed securities 1,854,519 66,934 9,145 1,912,308
---------- -------- -------- ----------
Total fixed maturities 4,518,807 304,182 103,188 4,719,801
Equity securities--unaffiliated 421,672 134,558 14,575 541,655
Equity securities--affiliated 115,769 29,214 -- 144,983
---------- -------- -------- ----------
Total equity securities 537,441 163,772 14,575 686,638
---------- -------- -------- ----------
Total available-for-sale 5,056,248 467,954 117,763 5,406,439
Held-to maturity:
Corporate securities 893,407 59,850 752 952,505
Mortgage-backed securities 194,905 10,817 -- 205,722
---------- -------- -------- ----------
Total held-to-maturity 1,088,312 70,667 752 1,158,227
---------- -------- -------- ----------
Total $6,144,560 $538,621 $118,515 $6,564,666
========== ======== ======== ==========
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
State, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- -------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- -------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- -------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- -------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- -------- ----------
Total $6,114,122 $367,312 $ 78,443 $6,402,991
========== ======== ======== ==========
</TABLE>
69
<PAGE>
THE MINNESOTA MUTUAL 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, 1997 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 $ 47,387 $ 44,198 $ 2,982 $ 3,004
Due after one year through five
years 335,383 354,936 120,846 124,461
Due after five years through ten
years 1,355,665 1,416,149 317,689 337,322
Due after ten years 925,853 992,210 451,890 487,718
---------- ---------- ---------- ----------
2,664,288 2,807,493 893,407 952,505
Mortgage-backed securities 1,854,519 1,912,308 194,905 205,722
---------- ---------- ---------- ----------
Total $4,518,807 $4,719,801 $1,088,312 $1,158,227
========== ========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, bonds and certificates of deposit with a
carrying value of $8,000,000 and $12,934,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investment are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,895
Foreclosed real estate -- 535
Investment real estate 2,248 2,529
------- -------
Total $ 3,748 $ 4,959
======= =======
</TABLE>
At December 31, 1997, the recorded investment in mortgage loans that were
considered to be impaired was $18,400 before allowance for credit losses. These
impaired loans, due to adequate fair market value of underlying collateral, do
not have an allowance for credit losses.
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000 and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, 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, 1997 and 1996.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,895 $1,711 $2,449
Provision for credit losses -- 381 127
Charge-offs (395) (197) (865)
------ ------ ------
Balance at end of year $1,500 $1,895 $1,711
====== ====== ======
</TABLE>
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $3,268 $9,375 $15,845
Interest income on impaired mortgage loans--contractual 556 1,796 1,590
Interest income on impaired mortgage loans--collected 554 1,742 1,515
</TABLE>
(4) NOTES RECEIVABLE
In connection with the Company's planned construction of an additional home
office facility in St. Paul, the Company entered into a loan contingency
agreement with the Housing and Redevelopment Authority of the City of Saint
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, 1997 HRA has drawn
$286,775 on this loan contingency agreement and accrued interest of $1,374.
(5) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $183,424 $204,038
Retail installment notes 20,373 30,843
Retail revolving credit 25,426 24,863
Credit card receivables -- 3,541
Accrued interest 3,116 3,404
-------- --------
Gross receivables $232,339 $266,689
Allowance for uncollectible amounts (20,545) (7,497)
-------- --------
Finance receivables, net $211,794 $259,192
======== ========
</TABLE>
Direct installment loans at December 31, 1997 consisted of $83,836,000 of
discount basis loans (net of unearned finance charges) and $99,588,00 of
interest-bearing loans. As of December 31, 1996, discount basis loans amounted
to $93,127,000 and interest-bearing loans amounted to $110,911,000. Direct
installment loans generally have a maximum term of 84 months. 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 $65
million and $69 million of real estate secured loans at December 31, 1997 and
1996, respectively. Revolving credit loans included approximately $24 million
and $23 million of real estate secured loans at December 31, 1997 and 1996,
respectively. Experience has shown that a substantial portion of finance
receivables will be renewed, converted or paid in full prior to maturity.
Principal cash collections of direct installment loans amounted to
$90,940,000, $92,438,000 and $75,865,000 and the percentage of these cash
collections to the average net balances were 47%, 48%, and 47% for the years
ended December 31, 1997, 1996 and 1995, respectively.
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NET FINANCE RECEIVABLES (CONTINUED)
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 7,497 $ 6,377 $ 5,360
Provision for credit losses 28,206 10,086 6,140
Charge-offs (17,869) (11,036) (6,585)
Recoveries 2,711 2,070 1,462
-------- -------- -------
Balance at end of year $ 20,545 $ 7,497 $ 6,377
======== ======== =======
</TABLE>
At December 31, 1997, 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, 1997 and the related allowance for
credit losses was as follows:
<TABLE>
<CAPTION>
INSTALLMENT REVOLVING
LOANS CREDIT TOTAL
----------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at December 31, 1997 $7,723 14,492 22,215
Related allowance for credit losses $4,200 7,772 11,972
</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 1997. The
average balances of impaired loans during the year ended December 31, 1997 was
$7,397,000 and $12,793,000, respectively, for installment basis and revolving
credit direct loans.
There were no material commitments to lend additional funds to customers
whose loans were classified as non-accrual at December 31, 1997.
(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>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $93,337 $69,753 $74,631
Difference between computed and actual tax ex-
pense:
Dividends received deduction (5,573) (2,534) (1,710)
Special tax on mutual life insurance companies 3,341 2,760 10,134
MF&C sale (4,408) -- --
Foundation gain (4,042) (1,260) (540)
Tax credits (3,600) (3,475) (1,840)
Expense adjustments and other (2,275) 3,533 2,699
------- ------- -------
Total tax expense $76,780 $68,777 $83,374
======= ======= =======
</TABLE>
72
<PAGE>
THE MINNESOTA MUTUAL 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>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 14,374 $ 15,854
Unearned fee income 49,274 43,232
Pension and post-retirement benefits 23,434 21,815
Tax deferred policy acquisition costs 73,134 58,732
Net realized capital losses 9,609 8,275
Other 20,524 19,229
-------- --------
Gross deferred tax assets 190,349 167,137
Deferred tax liabilities:
Deferred policy acquisition costs 201,611 206,331
Real estate and property and equipment depreciation 11,165 10,089
Basis difference on investments 11,061 8,605
Net unrealized capital gains 122,876 81,339
Other 9,693 10,438
-------- --------
Gross deferred tax liabilities 356,406 316,802
-------- --------
Net deferred tax liability $166,057 $149,665
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1997 and 1996, 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, 1997, 1996 and 1995, were
$97,721,000, $79,026,000 and $64,390,000, respectively.
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $416,910 $377,302 $349,311
Less: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Net balance at January 1 314,749 296,969 287,687
-------- -------- --------
Incurred related to:
Current year 121,153 134,727 129,896
Prior years 7,809 4,821 (4,014)
-------- -------- --------
Total incurred 128,962 139,548 125,882
-------- -------- --------
Paid related to:
Current year 51,275 51,695 47,620
Prior years 57,475 70,073 68,980
-------- -------- --------
Total paid 108,750 121,768 116,600
-------- -------- --------
Net balance at December 31 334,961 314,749 296,969
Plus: reinsurance recoverable 104,716 102,161 80,333
-------- -------- --------
Balance at December 31 $439,677 $416,910 $377,302
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim 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 and claim adjustment expenses incurred increased
(decreased) by $7,809, $4,821 and ($4,014) in 1997, 1996 and 1995,
respectively. These amounts are the result of normal reserve development
inherent in the uncertainty of establishing the liability for unpaid accident
and health claims and claim adjustment expenses.
(8) EMPLOYEE BENEFIT PLANS
Pension Plans
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.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 6,462 $ 6,019 $ 5,294
Interest accrued on projected benefit obligation 9,640 8,541 7,935
Actual return on plan assets (9,575) (12,619) (18,061)
Net amortization and deferral 656 4,698 11,811
------- -------- --------
Net periodic pension cost $ 7,183 $ 6,639 $ 6,979
======= ======== ========
</TABLE>
74
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLANS
------------------ ----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 70,638 $ 61,328 $ -- $ --
Non-vested benefit obligation 21,252 19,119 8,017 5,912
-------- -------- ------- -------
Accumulated benefit obligation $ 91,890 $ 80,447 $ 8,017 $ 5,912
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $130,144 $117,836 $15,744 $12,576
Plan assets at fair value 128,970 115,107 -- --
-------- -------- ------- -------
Plan assets less then projected bene-
fit obligation 1,174 2,729 15,744 12,576
Unrecognized net gain (loss) 6,061 3,633 (4,229) (2,332)
Unrecognized prior service cost (334) (364) -- --
Unamortized transition asset (obliga-
tion) 2,202 2,422 (7,682) (8,451)
Additional minimum liability -- -- 4,184 4,119
-------- -------- ------- -------
Net pension liability $ 9,103 $ 8,420 $ 8,017 $ 5,912
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.3% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1997 and 1996. The assumed long-term rate of return on plan assets was either
8.5% or 7.5%, depending on the plan.
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 trustees 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
1997, 1996 and 1995 of $7,173,000, $6,092,000 and $6,595,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
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.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $1,008 $1,011 $1,276
Interest accrued on projected benefit obligation 1,826 2,041 2,452
Amortization of prior service cost (526) (513) (513)
Amortization of net gain (480) (177) --
------ ------ ------
Net periodic postretirement benefit cost $1,828 $2,362 $3,215
====== ====== ======
</TABLE>
75
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 9,333 $10,238
Other fully eligible plan participants 4,861 4,594
Other active plan participants 9,738 9,514
------- -------
Total accumulated postretirement benefit obligation 23,932 24,346
Unrecognized prior service cost 3,680 4,107
Unrecognized net gain 11,290 9,880
------- -------
Accrued postretirement benefit liability $38,902 $38,333
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1997 and 1996 was 7.5%. The 1997 net health care cost trend rate
was 8.5%, graded to 5.5% over 6 years, and the 1996 rate was 9.0%, graded to
5.5% over 7 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1997 and 1996. 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 31,1997 by
$4,323,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1997 by $588,000.
(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.
(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 life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
76
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) REINSURANCE (CONTINUED)
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $595,686 $615,098 $600,841
Reinsurance assumed 78,097 64,489 64,792
Reinsurance ceded (58,530) (67,228) (61,863)
-------- -------- --------
Net premiums $615,253 $612,359 $603,770
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $58,072,000,
$72,330,000 and $58,338,000 during 1997, 1996 and 1995 respectively.
(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, 1997 and 1996.
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 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,
1997 and 1996, 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,
1997 and 1996, 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, 1997 and 1996
as those investments 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. 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.
77
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,719,801 $4,719,801 $4,674,082 $4,674,082
Held-to-maturity 1,088,312 1,158,227 1,125,638 1,179,112
Equity securities 686,638 686,638 549,797 549,797
Mortgage loans:
Commercial 506,860 527,994 432,198 445,976
Residential 154,477 158,334 176,610 180,736
Policy loans 213,488 213,488 204,178 204,178
Short-term investments 112,352 112,352 126,372 126,372
Cash 96,179 96,179 57,140 57,140
Finance receivables, net 211,794 211,794 259,192 259,192
Derivatives 1,457 1,457 1,197 1,197
---------- ---------- ---------- ----------
Total financial assets $7,791,358 $7,886,264 $7,606,404 $7,677,782
========== ========== ========== ==========
</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>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,131,806 $2,112,301 $2,178,355 $2,152,636
Annuity certain contracts 55,431 57,017 52,636 53,962
Other fund deposits 754,960 753,905 808,592 805,709
Guaranteed investment contracts 8,188 8,187 18,770 18,866
Supplementary contracts without
life contingencies 46,700 45,223 47,966 47,536
Notes payable 298,000 302,000 319,000 325,974
---------- ---------- ---------- ----------
Total financial liabilities $3,295,085 $3,278,633 $3,425,319 $3,404,683
========== ========== ========== ==========
</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 policyowners' 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 of the State of Minnesota. The
approved accrued interest was $3,008,000 as of December 31, 1997 and 1996. The
issuance costs of $1,357,000 are deferred and amortized over 30 years on
straight-line basis.
78
<PAGE>
THE MINNESOTA MUTUAL 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>
1997 1996
-------- --------
(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 173,000 194,000
-------- --------
Total notes payable $298,000 $319,000
======== ========
</TABLE>
At December 31, 1997, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1998, $31,000,000; 1999 $49,000,000;
2000 $33,000,000; 2001 $26,000,000; 2002 $22,000,000.
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, 1997.
Interest paid on debt for the years ended December 31, 1997, 1996 and 1995,
was $18,197,000, $21,849,000 and $6,504,000, respectively.
(13) 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 $279,978,000 as
of December 31, 1997. 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 venture capital and real estate
investments totaling $139,774,000 as of December 31, 1997. The Company
estimates that $51,300,000 of these commitments will be invested in 1998, with
the remaining $88,474,000 invested over the next four years.
As of December 31, 1997, the Company had committed to purchase bonds and
mortgage loans totaling $109,362,000 but had not completed the purchase
transactions.
At December 31, 1997, the Company had guaranteed the payment of $73,100,000
in policyowner dividends and discretionary amounts payable in 1998. The Company
has pledged bonds, valued at $75,774,000 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. An asset is recorded for the amount of guaranty fund assessments
paid which can be recovered through future premium tax credits.
79
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) 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. Therefore, fundamental differences exist between statutory
and GAAP accounting, and their effects on income and policyowners' surplus are
illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1997 1996 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 870,688 $ 682,886 $167,078 $115,797 $ 88,706
Adjustments:
Deferred policy acquisi-
tion costs 576,030 589,517 19,430 15,312 29,822
Net unrealized invest-
ment gains 199,637 111,575 -- -- --
Statutory asset valua-
tion reserve 242,100 240,474 -- -- --
Statutory interest main-
tenance reserve 24,169 24,707 (538) (8,192) 12,976
Premiums and fees de-
ferred or receivable (74,025) (75,716) 2,175 1,587 497
Change in reserve basis 108,105 98,406 9,699 20,114 12,382
Separate accounts (51,172) (40,755) (6,272) (6,304) (854)
Unearned policy and con-
tract fees (126,477) (121,843) (12,825) (2,530) (4,410)
Surplus notes (125,000) (125,000) -- -- --
Net deferred taxes (166,057) (149,665) 7,832 (744) (11,995)
Nonadmitted assets 32,611 31,531 -- -- --
Policyowner dividends 60,036 57,765 2,708 502 4,660
Other (33,960) (25,454) 609 (5,024) (1,925)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,536,685 $1,298,428 $189,896 $130,518 $129,859
========== ========== ======== ======== ========
</TABLE>
80
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 239,613 $ 258,240 $ 258,240
Foreign governments 1,044 1,015 1,015
Public utilities 385,228 406,920 398,887
Mortgage-backed securities 2,049,424 2,118,030 2,107,213
All other corporate bonds 2,931,810 3,093,823 3,042,758
---------- ---------- ----------
Total bonds 5,607,119 5,878,028 5,808,113
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 7,732 10,090 10,090
Banks, trusts and insurance companies 37,217 47,120 47,120
Industrial, miscellaneous and all
other 354,317 460,170 460,170
Nonredeemable preferred stocks 22,406 24,275 24,275
---------- ---------- ----------
Total equity securities 421,672 541,655 541,655
---------- ---------- ----------
Mortgage loans on real estate 661,337 xxxxxx 661,337
Real estate(2) 39,964 xxxxxx 39,964
Policy loans 213,488 xxxxxx 213,488
Other long-term investments 216,838 xxxxxx 216,838
Short-term investments 112,352 xxxxxx 112,352
---------- ---------- ----------
Total 1,243,979 -- $1,243,979
---------- ---------- ----------
Total investments $7,272,770 $6,419,683 $7,593,747
========== ========== ==========
</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.
81
<PAGE>
THE MINNESOTA MUTUAL 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
- ------- ----------- -------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627
Accident and
health insurance 70,593 466,109 34,250 17,153
Annuity 71,425 3,266,965 -- 4,576
Property and
liability
insurance -- 280 1,116 --
-------- ---------- -------- -------
$576,030 $5,962,750 $202,070 $64,356
======== ========== ======== =======
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772
Accident and
health insurance 62,407 437,118 33,770 18,774
Annuity 70,649 3,360,614 -- 31
Property and
liability
insurance -- 27,855 24,189 --
-------- ---------- -------- -------
$589,517 $5,948,735 $207,111 $70,577
======== ========== ======== =======
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212
Accident and
health insurance 55,888 400,950 34,847 14,567
Annuity 53,015 3,401,760 -- 33
Property and
liability
insurance -- 30,117 23,783 --
-------- ---------- -------- -------
$539,732 $5,841,981 $210,494 $55,812
======== ========== ======== =======
</TABLE>
<TABLE>
<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)
- ------- ---------- ---------- -------------- ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997:
Life insurance $576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insurance 205,869 40,343 87,424 9,451 101,960
Annuity 64,637 261,768 242,738 16,252 129,263
Property and
liability
insurance 40,316 4,395 33,773 -- 13,146 43,376
-------- -------- -------- -------- -------- -------
$887,290 $553,773 $840,682 $128,176 $590,307 $43,376
======== ======== ======== ======== ======== =======
1996:
Life insurance $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 160,097 34,202 96,743 14,017 87,222
Annuity 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance 50,109 5,550 36,933 -- 19,033 50,515
-------- -------- -------- -------- -------- -------
$858,325 $530,987 $855,291 $125,978 $508,146 $50,515
======== ======== ======== ======== ======== =======
1995:
Life insurance $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 153,505 33,358 93,482 11,448 83,345
Annuity 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance 49,216 5,703 33,563 -- 18,090 51,133
-------- -------- -------- -------- -------- -------
$817,973 $515,047 $842,198 $104,940 $454,241 $51,133
======== ======== ======== ======== ======== =======
</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
82
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997:
Life insurance in force $118,345,796 $14,813,351 $29,341,332 $132,873,777 22.1%
============ =========== =========== ============
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%
============ =========== =========== ============
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
</TABLE>
83
