<PAGE>
File Number 33-62147
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NUMBER
POST-EFFECTIVE AMENDMENT NUMBER 4
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NUMBER ____
VARIABLE ANNUITY ACCOUNT
(formerly Minnesota Mutual Variable Annuity Account)
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(Exact Name of Registrant)
Minnesota Life Insurance Company
(formerly The Minnesota Mutual Life Insurance Company)
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(Name of Depositor)
400 Robert Street North, St. Paul, Minnesota 55101-2098
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(Address of Depositor's Principal Executive Offices) (Zip Code)
(651) 665-3500
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(Depositor's Telephone Number, Including Area Code)
Dennis E. Prohofsky Copy to:
Senior Vice President, J. Sumner Jones, Esq.
General Counsel and Secretary Jones & Blouch L.L.P.
Minnesota Life Insurance Company 1025 Thomas Jefferson Street, N.W.
400 Robert Street North Suite 405
St. Paul, Minnesota 55101-2098 Washington, D.C. 20007
(Name and Address of Agent for Service)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (check appropriate box)
immediately upon filing pursuant to paragraph (b)
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X on May 3, 1999 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(i)
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on (date) pursuant to paragraph (a)(i)
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75 days after filing pursuant to paragraph (a)(ii)
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on (date) pursuant to paragraph (a)(ii) of Rule 485.
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IF APPROPRIATE, CHECK THE FOLLOWING BOX:
this post-effective amendment designates a new effective date for a
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previously filed post-effective amendment.
Title of Securities being registered: Immediate Variable Annuity Contracts
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
Variable Annuity Account
Cross Reference Sheet to Prospectus
Form N-4
Item Number Caption in Prospectus
1. Cover Page
2. Special Terms
3. Questions and Answers About the Variable Annuity Contracts
4. Condensed Financial Information; Performance Data
5. General Descriptions
6. Contract Charges
7. Description of the Contracts
8. Description of the Contracts; Annuity Payments and Options
9. Description of the Contracts; Death Benefits
10. Description of the Contracts; Purchase Payments and Value of the
Contract
11. Description of the Contracts; Redemptions
12. Federal Tax Status
13. Not Applicable
14. Table of Contents of the Statement of Additional Information
<PAGE>
PROSPECTUS
IMMEDIATE VARIABLE ANNUITY CONTRACT
VARIABLE ANNUITY ACCOUNT
("VARIABLE ANNUITY ACCOUNT"), A SEPARATE ACCOUNT OF
MINNESOTA LIFE INSURANCE COMPANY
("MINNESOTA LIFE")
400 Robert Street North
St. Paul, Minnesota 55101-2098
Telephone: (651) 665-3500
This Prospectus describes an individual, immediate variable annuity contract
(the "contract") offered by Minnesota Life Insurance Company. It may be used in
connection with all types of personal retirement plans.
Your contract values are invested in our Variable Annuity Account. The Variable
Annuity Account invests in shares of the Index 500 Portfolio of the Advantus
Series Fund, Inc. The value of the contract and the amount of each variable
annuity payment will vary in accordance with the performance of the Index 500
Portfolio, except as payments are guaranteed in amount by Minnesota Life. The
contract lets you make additional purchase payments and withdrawals during part
of the time you are receiving annuity payments.
This Prospectus includes information you should know before purchasing a
contract. You should read and keep it for future reference. A Statement of
Additional Information, bearing the same date, which contains further
information, has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus. A copy of the Statement
of Additional Information may be obtained without charge by calling (651)
665-3500, or by writing to us at 400 Robert Street North, St. Paul, Minnesota
55101-2098. Its table of contents may be found at the end of this Prospectus.
THIS PROSPECTUS IS NOT VALID UNLESS ATTACHED TO A CURRENT
PROSPECTUS OF ADVANTUS SERIES FUND, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
The date of this document and the Statement of Additional Information is May 3,
1999.
<PAGE>
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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SPECIAL TERMS 1
QUESTIONS AND ANSWERS ABOUT THE VARIABLE ANNUITY CONTRACT 3
EXPENSE TABLE 6
CONDENSED FINANCIAL INFORMATION 9
GENERAL DESCRIPTIONS 9
Minnesota Life Insurance Company 9
Separate Account 9
Advantus Series Fund, Inc. 10
Additions, Deletions or Substitutions 10
CONTRACT CHARGES 11
Sales Charges 11
Risk Charge 12
Mortality and Expense Risk Charges 12
Administration Charge 13
DESCRIPTION OF THE CONTRACTS 13
General Provisions 13
Annuity Payments and Options 15
Death Benefits 18
Purchase Payments and Value of the Contract 20
Redemptions 22
VOTING RIGHTS 25
FEDERAL TAX STATUS 25
PERFORMANCE DATA 32
YEAR 2000 COMPUTER PROBLEM 32
STATEMENT OF ADDITIONAL INFORMATION 33
APPENDIX A -- TAXATION OF QUALIFIED PLANS A-1
APPENDIX B -- COMPUTATION AND EXAMPLES OF WITHDRAWALS B-1
APPENDIX C -- IMMEDIATE VARIABLE ANNUITY ILLUSTRATION C-1
</TABLE>
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
AGE: the age of a person at nearest birthday.
ANNUITANT: the person named on page one of the contract who may receive
lifetime benefits under the contract. Except in the event of the death of either
annuitant prior to the annuity payment commencement date, joint annuitants will
be considered a single entity.
ANNUITY PAYMENT COMMENCEMENT DATE: the first annuity payment date as specified
on page one of the contract.
ANNUITY PAYMENT DATE: each day indicated by the annuity payment commencement
date and the annuity payment frequency for an annuity payment to be determined.
This is shown on page one of the contract.
ANNUITY PAYMENTS: payments made at regular intervals to the annuitant or any
other payee. The annuity payments will increase or decrease in amount. The
changes will reflect the investment experience of the sub-account of the
separate account.
ANNUITY UNIT: the standard of value for the variable annuity payment amount.
BENEFICIARY: the person, persons or entity designated to receive death benefits
payable in the event of the annuitant's death.
CASH VALUE: the dollar amount available for withdrawal under the contract at
any time. A cash value exists only as long as both the number of cash value
units and the applicable factor from the cash value factor table shown in the
contract are greater than zero.
CASH VALUE PERIOD: the time during which there is a cash value under the
contract. The cash value period begins on the annuity commencement date and ends
on the cash value end date shown on page one of the contract.
CASH VALUE UNIT: the measure of your interest in the Separate Account that is
available for withdrawal during the cash value period.
CODE: the Internal Revenue Code of 1986, as amended.
CONTRACT DATE: the effective date of a contract.
FUND: Advantus Series Fund, Inc. or any mutual fund or separate investment
portfolio within a series mutual fund which is designated as an eligible
investment for the Separate Account.
GENERAL ACCOUNT: all of our assets other than those in the Separate Account or
in other separate accounts established by us.
GUARANTEED MINIMUM ANNUITY PAYMENT AMOUNT: the amount which is guaranteed as
the minimum annuity payment amount. This amount is payable regardless of the
performance of the Sub-Account. Purchase payments and cash value withdrawals
will change the guaranteed minimum annuity payment amount.
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JOINT OWNER: the person designated to share equally in the rights and
privileges provided to the owner of this contract. Only you and your spouse may
be named as a joint owner in those states where we offer joint contracts.
PLAN: a tax-qualified employer pension, profit-sharing, or annuity purchase
plan which provide benefits using these contracts.
PURCHASE PAYMENT DATE: the date we receive a purchase payment in our home
office.
PURCHASE PAYMENTS: amounts paid to us as consideration for the contract.
SEPARATE ACCOUNT: a separate investment account entitled Variable Annuity
Account. The assets of the Separate Account are ours. Those assets are not
subject to claims arising out of any other business which we may conduct.
SURRENDER VALUE: the surrender value of the contract shall be the total annuity
value as of the date of surrender plus the amounts deducted from purchase
payments. These include deductions for sales charges, risk charges and state
premium taxes where applicable.
TOTAL ANNUITY VALUE: the total annuity value represents your total interest in
the Separate Account.
VALUATION DATE: any date on which a Fund is valued.
VALUATION PERIOD: the period between successive valuation dates measured from
the time of one determination to the next.
VARIABLE ANNUITY: an annuity providing for payments varying in amount in
accordance with the investment experience of the Fund.
WE, OUR, US: Minnesota Life Insurance Company.
WRITTEN REQUEST: a request in writing signed by you. In the case of joint
owners, the signatures of both owners will be required to complete a written
request. In some cases, we may provide a form for your use. We may also require
that the contract be sent to us along with your written request.
YOU, YOUR: the owner of this contract. The owner may be the annuitant or
someone else. The owner is named in the application.
1940 ACT: the Investment Company Act of 1940, as amended, or any similar
successor federal legislation.
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QUESTIONS AND ANSWERS ABOUT
THE VARIABLE ANNUITY CONTRACT
WHAT IS AN ANNUITY?
An annuity is a series of payments for the life of a person or for the joint
lifetimes of the annuitant and another person and thereafter during the lifetime
of the survivor. 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 of an insurance company is called a variable annuity.
WHAT IS AN IMMEDIATE ANNUITY?
An immediate annuity provides for annuity payments beginning within a relatively
short period after contract issue. This type of annuity is distinguished from a
deferred annuity where contract values may be left with an insurance company or
separate account for some years before annuity payments begin. In some states
this period is shortened so that the contract may be considered to be an
immediate annuity within that state.
WHAT IS THE CONTRACT OFFERED BY THIS PROSPECTUS?
The contract is an immediate, variable annuity contract with scheduled annuity
payments. Annuity payments may be received on a monthly, quarterly, semi-annual
or annual basis. These payments may begin immediately and must begin on a date
within 12 months after the issue date of the contract. Purchase payments are
allocated to the Separate Account. In the Separate Account, your purchase
payments are put into a Sub-Account which invests only in the Index 500
Portfolio of the Fund.
IS THERE A GUARANTEED MINIMUM ANNUITY PAYMENT AMOUNT?
Yes. You will receive at least the guaranteed minimum annuity payment amount
shown in your contract. Each variable annuity payment will vary upwards or
downwards in accordance with the performance of the Sub-Account, however, unless
it would be less than the guaranteed minimum annuity payment amount. If it is,
you will get the guaranteed amount instead. At each annuity payment date, we
will pay the annuitant or annuitants the greater of:
- the annuity payment amount determined by multiplying the number of
annuity units times the annuity unit value, or
- the guaranteed minimum annuity payment amount currently in force for the
contract.
We guarantee that variable annuity payments will always be at least 85% of the
initial variable annuity payment amount. We determine this amount when we issue
your contract. It is shown on page one of the contract. If an additional
purchase payment is made, we guarantee that variable annuity payments will
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always be at least 85% of the annuity amount attributable to that additional
purchase payment, plus the amount already guaranteed. If you withdraw cash value
amounts, the guaranteed annuity payment amount will be reduced by the same
proportion that the withdrawal reduces the number of annuity units.
IS THE AMOUNT OF THE CASH VALUE OF THE CONTRACT GUARANTEED?
No. The cash value of the contract decreases as annuity payments are made. It
will also increase or decrease based upon the performance of the Sub-Account of
the Separate Account. This is reflected in the annuity unit value. We do not
guarantee the performance of any Sub-Account, nor do we guarantee the annuity
unit value, which may fall to zero. The performance of the Sub-Account will not
affect the duration of the cash value period.
ARE THERE LIMITATIONS ON PURCHASE PAYMENTS?
Yes. A purchase payment in an amount of at least $10,000 is required in order
for us to issue the contract. Contracts will not be issued for less than that
amount.
After we issue the contract, you may make additional purchase payments. This
right extends only until the end cash value period of the contract. This period
is shown on page one of the contract. You may make more purchase payments only
while the annuitant is alive. Additional purchase payments must be in an amount
of at least $5,000. We will waive this contract limitation for amounts which are
received after the contract effective date as part of an integrated rollover or
Section 1035 transaction.
WHEN ADDITIONAL PURCHASE PAYMENTS ARE MADE UNDER AN EXISTING IMMEDIATE VARIABLE
ANNUITY CONTRACT, THOSE PURCHASE PAYMENTS FOR TAX PURPOSES WILL NOT RESULT IN A
RECALCULATION OF THE OWNER'S INVESTMENT IN THE CONTRACT AND A DETERMINATION OF A
NEW EXCLUSION AMOUNT. THE AMOUNT OF THOSE ADDITIONAL PURCHASE PAYMENTS WILL BE
TAXABLE WHEN DISTRIBUTED, AS AN ANNUITY OR OTHERWISE.
WE RESERVE THE RIGHT TO SUSPEND THE SALE OF THESE CONTRACTS AND TO TERMINATE
YOUR ABILITY TO MAKE ADDITIONAL PURCHASE PAYMENTS INTO THE CONTRACT.
Total purchase payments may not exceed $1,000,000 except with our prior consent.
WHAT INVESTMENT OPTIONS ARE AVAILABLE FOR THE SEPARATE ACCOUNT?
Purchase payments are allocated to the Sub-Account and in shares of the Index
500 Portfolio of the Fund.
There is no assurance that the Portfolio will meet its objectives. Additional
information concerning the investment objectives and policies of the Portfolio
can be found in the current prospectus for the Fund, which is attached to this
Prospectus. You should carefully read the Fund prospectus before purchasing the
contract.
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WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACTS?
There are charges which reduce purchase payments and charges made directly to
the assets held in the Separate Account.
A deduction for a sales charge and a risk charge is made from purchase payments.
The sales charge is up to 4.5% of purchase payments.
The risk charge, for guaranteeing the minimum annuity payment amount, may be as
much as 2% of each purchase payment. Currently, this charge is made at the per
annum rate of 1.25% of purchase payments.
We deduct a daily charge of .80% of the net asset value of the Separate Account
on an annual basis for our mortality and expense risk guarantees. We reserve the
right to increase this charge to 1.40% on an annual rate.
The Portfolio pays advisory and other expenses. Total advisory and other
expenses of the Portfolio are .44% of average daily net assets of the Portfolio
on an annual basis.
We deduct an administrative charge from the net asset value of the Separate
Account the amount of .15% computed daily, on an annual basis. We reserve the
right to increase this charge to .40%.
Deductions for any applicable premium taxes may also be made (currently such
taxes range from 0.0% to 3.5%) depending upon applicable law.
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The following expense table will illustrate these expenses to assist you in
understanding the contract's changes.
EXPENSE TABLE
The following contract expense information is intended to illustrate the
expenses of the individual, immediate variable annuity contract. All expenses
shown are rounded to the nearest dollar. The information contained in the tables
must be considered with the narrative information which immediately follows them
in this heading.
INDIVIDUAL, IMMEDIATE VARIABLE ANNUITY CONTRACT
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CUMULATIVE TOTAL SALES CHARGE AS A PERCENTAGE
PURCHASE PAYMENTS OF PURCHASE PAYMENTS
- ----------------------------------- -----------------------------
<S> <C>
$ 0 to 499,999.99 4.500%
500,000 to 749,999.99 4.125
750,000 to 1,000,000.00 3.750
1,000,000.01 to 1,499,999.99 3.375
1,500,000 to 1,999,999.99 3.000
2,000,000 to 2,499,999.99 2.625
2,500,000 to 2,999,999.99 2.250
3,000,000 to 3,999,999.99 1.875
4,000,000 to 5,000,000.00 1.500
</TABLE>
<TABLE>
<S> <C>
Risk Charge 1.25%
------
Total Contract Expenses 5.75%
(assuming maximum sales charge)
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees* 0.80%
Administrative Charge* 0.15%
------
Total Separate Account Annual Expenses 0.95%
</TABLE>
ADVANTUS SERIES FUND, INC. INDEX 500 PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Index 500 Portfolio
Management Fees .40%
Other Expenses .04%
------
Total Index 500 Portfolio Annual Expenses .44%
------
------
</TABLE>
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EXAMPLE:
Whether or not you surrender your contract at the end of the applicable time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $10,000 $ 708 $ 990 $ 1,292 $ 2,148
investment as of the end of the period indicated,
assuming a 5% annual return on assets:
</TABLE>
*Under the terms of the contract, total mortality and expense risk fees may be
increased to as much as 1.40% (provided any necessary regulatory approvals are
obtained) and the administrative charge may be increased to as much as .40%.
These figures are based on the assumption that the contract will accumulate
value prior to the annuity payment commencement date at a 5% annual return on
assets for one, three, five and ten years, respectively. The maximum period
allowable between the issuance of a contract and the commencement of annuity
payments is one year.
The tables shown above 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 applicable law.
The examples contained in this table should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than those
shown.
CAN YOU SURRENDER THE CONTRACT?
Yes. Before annuity payments begin, you can surrender the contract for its
surrender value. The surrender value is its total annuity value plus the amounts
deducted from your purchase payments for sales charges, risk charges and state
premium taxes where applicable.
CAN YOU MAKE WITHDRAWALS FROM THE CONTRACT?
Yes. During the cash value period, you can make withdrawals of the cash value of
the contract, pursuant to your written request. Each withdrawal must be in an
amount of at least $500 or, if the cash value of the contract is less than that
amount, all of the total remaining cash value in the contract must be withdrawn.
Withdrawals are not allowed during the period before annuity payments begin.
A withdrawal of all or a portion of the cash value of the contract, subject to
the dollar limitations described above, may be made during the "cash value
period" of the contract. The amount of the cash value depends upon the number of
cash value units in the contract. The number of cash value units and the cash
value period are shown on page one of each contract. If you make later purchase
payments or withdrawals we will give you a new page one.
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When a withdrawal is made during the cash value period, the amount of the
annuity payment to be received by the annuitant after the withdrawal will be
recalculated. The guaranteed minimum annuity payment amount will be redetermined
as well. Each will be adjusted downward to reflect the withdrawal of cash
values.
WHEN WITHDRAWALS ARE TAKEN FROM THE CASH VALUE, ALL AMOUNTS RECEIVED BY THE
TAXPAYER ARE TAXABLE AS ORDINARY INCOME IN THE YEAR IN WHICH THE WITHDRAWALS ARE
TAKEN. THOSE AMOUNTS ARE TAXABLE TO THE RECIPIENT WITHOUT REGARD TO THE OWNER'S
INVESTMENT IN THE CONTRACT OR ANY INVESTMENT GAIN IN THE CONTRACT.
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.
WHAT ANNUITY OPTIONS ARE AVAILABLE?
You may select one of two variable annuity options. One provides for lifetime
variable annuity payments based on the life of a single annuitant, the other
provides for the lifetime variable annuity payments based upon the combined
lives of joint annuitants.
WHAT HAPPENS IF THE ANNUITANT DIES?
If the annuitant, or one of the named joint annuitants dies before annuity
payments begin, we will pay a death benefit to you or the named beneficiary.
This death benefit will be the sum of the contract's total annuity value plus
the amounts deducted from the contract's purchase payments for sales charges,
risk charges and state premium taxes, where applicable.
If the annuitant dies after annuity payments have begun, or after the second
death in the case of joint annuitants, we will pay a death benefit. It will be
equal to the cash value, if any, of the contract as of the date of the
annuitant's death.
WHAT VOTING RIGHTS DO YOU HAVE?
Contract owners and annuitants will be able to direct us as to how to vote
shares of the Portfolio held for their contracts in the Sub-Account of the
Separate Account.
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(SIDEBAR)
We are a life insurance company.
The Variable Annuity Account is one of our separate accounts.
Contract values are invested in a single Portfolio.
(END SIDEBAR)
CONDENSED FINANCIAL INFORMATION
The financial statements of Variable Annuity Account and the consolidated
financial statements of Minnesota Life Insurance Company may be found in the
Statement of Additional Information. No condensed financial information is
presented as the variable annuity contract described in this Prospectus has no
accumulation units or associated information.
GENERAL DESCRIPTIONS
A. MINNESOTA LIFE INSURANCE COMPANY
We are Minnesota Life Insurance Company ("Minnesota Life"), a life insurance
company organized under the laws of Minnesota. Minnesota Life was formerly known
as The Minnesota Mutual Life Insurance Company ("Minnesota Mutual"), a mutual
life insurance company organized in 1880 under the laws of Minnesota. On October
1, 1998, a plan of reorganization created a mutual insurance holding company
named Minnesota Mutual Companies, Inc. Minnesota Mutual reorganized as a stock
insurance company subsidiary of the new holding company and took the new name
Minnesota Life. Our home office is at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, telephone: (651) 665-3500. We are licensed to do a life
insurance business in all states of the United States (except New York where we
are an authorized reinsurer), the District of Columbia, Canada, Puerto Rico and
Guam.
B. SEPARATE ACCOUNT
We established the Variable Annuity Account on September 10, 1984. The Separate
Account is registered as a "unit investment trust" with the SEC under the 1940
Act, but such registration does not signify that the SEC supervises the
management, or the investment practices or policies, of the Separate Account.
The assets of the Separate Account are not chargeable with liabilities arising
out of any other business we may conduct. The investment performance of the
Separate Account is entirely independent of both the investment performance of
our General Account and of any of our separate accounts. All obligations under
the contracts are general corporate obligations of Minnesota Life.
The Separate Account has one Sub-Account available for your purchase payments to
the contract. That Sub-Account invests in the Index 500 Portfolio.
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(SIDEBAR)
We may change the Portfolios offered under the contract.
(END SIDEBAR)
C. ADVANTUS SERIES FUND, INC.
Advantus Series Fund, Inc. (the "Fund"), is a mutual fund advised by Advantus
Capital Management, Inc. ("Advantus Capital"). Prior to May 1, 1997, the name of
the Fund was "MIMLIC Series Fund, Inc." The Fund issues its shares only to us
and our separate accounts. It may be offered to separate accounts of insurance
companies affiliated with us in the future.
Advantus Capital is a wholly-owned subsidiary of Minnesota Life.
The only Portfolio of the Fund which is available for investment by the contract
is the Index 500 Portfolio.
A prospectus for the Fund is attached to this Prospectus. You should carefully
read the Fund's prospectus before investing in the contract.
D. ADDITIONS, DELETIONS OR SUBSTITUTIONS
We retain the right, subject to any applicable law, to make substitutions with
respect to the investments of the Sub-Accounts of the Separate 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 total annuity values
and cash values, future purchase payments and future annuity payments.
We reserve the right to transfer assets of the separate account to another
separate account.
We may also establish additional Sub-Accounts in the Separate Account and we
reserve the right to add, combine or remove any Sub-Accounts of the Separate
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. We will use similar
considerations in determining to eliminate one or more of the Sub-Accounts of
the Separate Account. The addition of any investment option will be made
available to existing contract owners on whatever basis we determine.
We also reserve the right, when permitted by law, to de-register the Separate
Account under the 1940 Act to restrict or eliminate any voting rights of the
contract owners, and to combine the Separate Account with one or more of our
other separate accounts.
Shares of the Fund are also sold to some of our other separate accounts, which
are used to receive and invest premiums 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
the Fund simultaneously. Although neither we nor the Fund currently foresees any
such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, the Fund's 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
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(SIDEBAR)
A deferred sales charge of up to 4.5% may apply.
(END SIDEBAR)
taken in response. 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,
- changes in state insurance laws,
- changes in federal income tax laws,
- changes in the investment management of any of the Portfolios of the
Fund, or
- differences in voting instructions between those given by policy owners
and those given by contract owners.
CONTRACT CHARGES
Under this contract, there are deductions for charges from purchase payments and
other charges which are made directly to the Separate Account. Deductions from
purchase payments are made for sales charges, risk charges and state premium
taxes, where applicable. Deductions for the mortality risk charge, expense risk
charge and the administrative charge are all deducted on each valuation date
from the Separate Account.
In addition to the charges which are applied under the contract, there are also
charges associated with the Index 500 Portfolio of the Fund. These charges,
which are not guaranteed, cover the advisory and other expenses of the Index 500
Portfolio. Total advisory and other expenses of the Portfolio are .44% of
average daily net assets of the Portfolio on an annual basis. More information
can be obtained in the prospectus for the Fund, which is attached to this
Prospectus.
A. SALES CHARGES
A sales charge is deducted from the purchase payments. The percentage amount of
the deduction is as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL SALES CHARGE AS A PERCENTAGE
PURCHASE PAYMENTS OF PURCHASE PAYMENTS
- ---------------------------- ----------------------------
<S> <C>
$ 0 to 499,999.99 4.500%
500,000 to 749,999.99 4.125
750,000 to 1,000,000.00 3.750
1,000,000.01 to 1,499,999.99 3.375
1,500,000 to 1,999,999.99 3.000
2,000,000 to 2,499,999.99 2.625
2,500,000 to 2,999,999.99 2.250
3,000,000 to 3,999,999.99 1.875
4,000,000 to 5,000,000.00 1.500
</TABLE>
The applicable percentage will be based on the total cumulative purchase
payments to the date of payment, including the new purchase payment. In
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(SIDEBAR)
The risk charge is 1.25%.
The mortality and expense risk charge is .80%, but we may increase it to 1.40%.
(END SIDEBAR)
addition, if you purchase multiple contracts at different times, purchase
payments made under all contracts will be aggregated solely for the purpose of
determining the sales charge applicable to those purchase payments made to later
contracts.
These sales charges may be waived in whole or in part where sales expenses are
not paid at the time of sale to registered representatives and broker-dealers
responsible for the sale of the contracts or where the contract is sold in
anticipation of reduced expenses in group or group-type situations. We will not
eliminate or reduce a sales charge if that would be unfairly discriminatory to
any person or class of persons.
B. RISK CHARGE
A risk charge is deducted from each purchase payment for our guarantee of the
minimum annuity payment amount. The risk charge may be as much as 2% of each
purchase payment. Currently, this charge is made at the per annum rate of 1.25%
of purchase payments made to the contract. This rate is not guaranteed for
future purchase payments made under the contract and may change based upon our
experience.
If this deduction proves to be insufficient to cover our actual costs of the
risk assumed by us in providing a guaranteed minimum payment, then we will
absorb the resulting losses. 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 to us.
C. MORTALITY AND EXPENSE RISK CHARGES
We assume the mortality risk by our obligation to continue to make scheduled
annuity payments, 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 scheduled annuity
payments received under the contract. Our actual mortality results will not
adversely affect any payments or values.
We assume an expense risk by assuming that deductions in the contracts will be
adequate to cover our actual expenses. Our actual expense results incurred by us
will not adversely affect any payments or values.
For assuming these risks, we currently make a deduction from the net asset value
of the Separate Account to an annual rate of .80%. This is 0.55% for the
mortality expense risk charge and 0.25% for the expense risk charge. We have the
right to increase these charges. If these charges are increased to the maximum
amount, then the total for the mortality risk and expense risk charges would be
1.40% on an annual basis.
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(SIDEBAR)
The administrative charge is .15%.
The contract is an immediate payment variable annuity. It may be used with a
variety of retirement plans.
We issue the contract to you and you select the annuitant.
(END SIDEBAR)
If these deductions prove to be insufficient to cover our actual costs, then we
will absorb the resulting losses. 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 to us. Some or all of such profit may
be used to cover any distribution costs not recovered through the sales charge.
D. ADMINISTRATION CHARGE
We perform all administrative services relative to the contract. These services
include the review of applications for compliance with our issue rules, the
preparation and issue of the contract, the receipt of purchase payments,
forwarding amounts to the Fund for investment, the calculation of the guaranteed
minimum annuity payment amount, the preparation and mailing of periodic reports
and the performance of other services.
As consideration for providing these services, we currently make a deduction
from the Separate Account at the annual rate of 0.15%. We reserve the right to
increase this charge. If we do, the amount of this charge will not exceed 0.40%.
DESCRIPTION OF THE CONTRACTS
A. GENERAL PROVISIONS
1. Types of Contracts Offered
(a) Variable Annuity Contract
The contract is an individual, immediate, variable annuity contract
issued by us. It provides for scheduled annuity payments on a monthly,
quarterly, semi-annual or annual basis. These payments may begin
immediately. They must begin on a date within 12 months after the issue
date of the contract. Purchase payments received by us under a contract
are allocated to the Separate Account. In the Separate Account, your
purchase payments are put into a Sub-Account which are then invested in
the Portfolio.
This type of contract may be used in connection with a pension or profit
sharing plan under which plan contributions have been accumulating. It
may be used in connection with a plan which has previously been funded
with insurance or annuity contracts. It may also be purchased by
individuals not as a part of any qualified plan. The contract provides
for a variable annuity which is paid on the basis of a single or joint
life annuity. The annuity option elected may not be changed.
2. Issuance of Contracts
The contracts are issued to you. The owner of the contract may be the annuitant
or someone else. The contract may be owned by two persons jointly. In some
states, we may not offer joint contracts.
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(SIDEBAR)
You cannot pay more than $1 million unless we consent.
(END SIDEBAR)
3. Modification of the Contracts
A written agreement between you and us may modify a contract. However, no
modification will adversely affect the rights of an annuitant under the contract
unless it is made to comply with a law or government regulation. You will have
the right to accept or reject a modification. You cannot reject a modification
where the contract is used in a tax-qualified arrangement, and the change is
required to conform the contract with tax laws or regulations.
4. Assignment
The annuitant, or the joint annuitants, can direct or assign the contract
annuity payments so that they are paid to someone else. We will not be bound by
any assignment until we have recorded a written request 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 before it was recorded. Any claim made
by an assignee will be subject to proof of the assignee's interest and the
extent of the assignment.
If the contract is part of 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. To the maximum
extent permitted by law, benefits payable under the contract shall be exempt
from the claims of creditors.
5. Limitations on Purchase Payments
Purchase payments must be made at our home office. Our home office is at 400
Robert Street North, St. Paul, Minnesota 55101-2098. When we receive a purchase
payment, we will send you a confirmation statement and an updated page one for
the contract.
A purchase payment in an amount of at least $10,000 will be required in order
for us to issue the contract. We will not issue a contract for less than that
amount.
After the contract has been issued, you may make additional purchase payments.
You can do this only during the cash value period of the contract as shown on
page one. Additional purchase payments may be made only while the annuitant is
alive. Additional purchase payments must be in an amount of at least $5,000. We
will waive this contract provision for amounts which are received after contract
issue if it is part of an integrated rollover or Section 1035 transaction. When
you make additional purchase payments, those purchase payments will not result
in a recalculation of your investment in the contract and a determination of a
new exclusion amount. You may also wish to consult with your tax adviser.
WE RESERVE THE RIGHT TO SUSPEND THE SALE OF THESE CONTRACTS AND TO TERMINATE
YOUR ABILITY TO MAKE ADDITIONAL PURCHASE PAYMENTS INTO THE CONTRACT.
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(SIDEBAR)
We normally pay lump sum payments within 7 days, but may delay payments in
certain circumstances.
The contract is non-participating.
(END SIDEBAR)
You may not make total purchase payments which exceed the amount of $1,000,000
unless you have our prior consent. Currently, we are accepting purchase payments
of up to $5,000,000 without requiring specific advance consent.
Some states will limit these contracts to a single purchase payment.
There may be limits on the maximum contributions to retirement plans that
qualify for special tax treatment.
6. Deferment of Payment
Whenever we make any payment in a single sum, we will make it 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:
- 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 Commission,
- any period during which an emergency exists as determined by the
Commission as a result of which it is not reasonably practical to dispose
of securities in the Fund or to fairly determine the value of the assets
of the Fund,
- or such other periods as the Commission may by order permit for the
protection of the contract owners.
7. Participation
The contract is nonparticipating. Contracts issued before October 1, 1998 were
participating.
No assurance can be given as to the amounts, if any, that will be distributable
under participating contracts in the future. If any distribution of divisible
surplus is made, it will take the form of the purchase of additional annuity
units.
B. ANNUITY PAYMENTS AND OPTIONS
1. Annuity Payments
Variable annuity payments are determined on the basis of
- the mortality table specified in the contract, which reflects the age of
the annuitant or the joint annuitants, and
- the investment performance of the Sub-Account.
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 those units (and thus
the amount of each scheduled annuity payment) will reflect investment gains
PAGE 15
<PAGE>
(SIDEBAR)
Two annuity options are available on a fixed. Each is payable only as a variable
annuity.
(END SIDEBAR)
and losses and investment income of the Portfolio. The amount of the annuity
payment will increase or decrease from one annuity payment date to the next
unless affected by the guaranteed minimum annuity payment amount.
2. Electing the Annuity Commencement Date
The contracts are issued as immediate annuities on the contract date. When you
purchase a contract, you must indicate the annuity commencement date. It must be
within 12 months from the contract date. Some jurisdictions may restrict this
time limit to a shorter period.
An annuity payment may begin on any day of the month. Annuity payments may be
received on a monthly, quarterly, semi-annual or annual basis.
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. Annuity Forms
The contracts provide for two lifetime annuity forms, a life annuity or a joint
and last survivor annuity. Each annuity payment option is available only as a
variable annuity. No additional optional annuity forms are provided or allowed
under the contracts.
LIFE ANNUITY
This is a scheduled annuity payable during the lifetime of the annuitant.
Annuity payments terminate with the last scheduled payment preceding the death
of the annuitant if the annuitant's death occurs after the cash value period has
expired. If the annuitant dies during the cash value period, the beneficiary
will be paid a death benefit that permits the beneficiary to elect to continue
receiving payments until the end of the cash value period or to withdraw some or
all of the cash value amount. Annuity payment amounts payable as a death benefit
will be reduced for any cash value withdrawals received by the beneficiary.
JOINT AND LAST SURVIVOR ANNUITY
This is a scheduled annuity payable during the joint lifetime of the annuitant
and a designated joint annuitant. Payments continue during the remaining
lifetime of the survivor. If the last surviving annuitant dies during the cash
value period, the beneficiary will be paid a death benefit. The beneficiary may
elect to continue receiving payments until the end of the cash value period or
to withdraw some or all of the cash value. Annuity payment amounts payable as a
death benefit will be reduced for any cash value withdrawals received by the
beneficiary. If this option is elected, the contract and payments shall then be
the joint property of the annuitant and the designated joint annuitant.
The amount of the first scheduled payment depends on the annuity form elected
and the age of the annuitant and the joint annuitant, if any.
PAGE 16
<PAGE>
(SIDEBAR)
The amount of your first annuity payment depends on the age of the annuitant and
the annuity option you select.
(END SIDEBAR)
4. Determination of Amount of Variable Annuity Payments
Unless annuity payments are based on the guaranteed minimum annuity payment
amount, the dollar amount of each variable annuity payment is equal to:
- the number of annuity units in the contract, multiplied by
- the annuity unit value as of the due date of the payment.
A number of annuity units is credited at issuance of the contract based upon the
initial annuity payment amount attributable to the initial purchase payment
received for the contract. The number of annuity units to be credited is
determined by dividing the initial annuity payment amount by the annuity unit
value as of the contract date. The number of annuity units remains unchanged
except as adjusted for your additional purchase payments, cash value withdrawals
or an annuitant's death.
The initial annuity payment amount is determined by applying the purchase
payment, after deductions, to the appropriate annuity purchase rate per $1,000.
Deductions from purchase payments may include premium taxes. Where applicable,
these taxes currently range from 0% to 3.5%.
The initial annuity payment amount depends on the annuity form you elected and
upon the adjusted age of the annuitant and the joint annuitant, if any. The
initial annuity payment amount is also based upon annuity payment purchase rate
tables which assume an interest rate of 4.5% per annum. The 4.5% interest rate
will produce level annuity payments if the net investment performance remains
constant at 4.5% per year. Subsequent payments will decrease, remain the same or
increase depending upon whether the actual net investment performance is less
than, equal to, or greater than 4.5%.
The amount of the first annuity payment after the initial purchase payment, or
after an addition or withdrawal, may be different than the initial annuity
payment amount used to determine the number of annuity units credited at the
time of that transaction. The actual annuity payment amount on any due date is
the number of annuity units multiplied by the annuity unit value on the due date
of the payment. We will pay the guaranteed minimum annuity payment amount if
that amount is greater. The annuity unit value recognizes the net sub-account
performance between the date of a transaction and the date the annuity payment
is calculated for payment.
5. Amount of Second and Subsequent Scheduled Annuity Payments
Unless annuity payments are the guaranteed minimum annuity payment amount, the
dollar amount of the second and later variable annuity payments is equal to:
- the number of annuity units determined for the Sub-Account, times
- the annuity unit value as of the due date of the payment. This amount
will increase or decrease from payment to payment.
PAGE 17
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(SIDEBAR)
Payments are guaranteed at 85% of your initial variable annuity.
This variable annuity has a death benefit during the cash value period.
(END SIDEBAR)
6. The Guaranteed Minimum Annuity Payment Amount
You will receive at least the guaranteed minimum annuity payment amount
specified in your contract. Each variable annuity payment will vary upwards or
downwards in accordance with investment performance unless it would be less than
the guaranteed minimum annuity payment amount. At each annuity payment date, we
will pay the annuitant or annuitants the greater of:
- the annuity payment amount determined by multiplying the number of
annuity units times the annuity unit value, or
- the guaranteed minimum annuity payment amount currently in force for the
contract.
We guarantee that variable annuity payments will always be at least 85% of the
initial variable annuity payment amount.
The guaranteed amount is determined on the contract issue date and shown on page
one of the contract. If an additional purchase payment is made, we will
guarantee that variable annuity payments will always be at least 85% of the
annuity amount attributable to that additional purchase payment, plus the amount
already guaranteed when you make that purchase payment. If you withdraw cash
value amounts under the contract, it will reduce the guaranteed annuity payment
amount by the same proportion that the withdrawal reduces the number of annuity
units.
C. DEATH BENEFITS
The contracts provide that in the event of the death of the annuitant or a joint
annuitant before the annuity payments begin, a death benefit will be paid to you
or, if applicable, to your beneficiary. The death benefit will be paid when we
receive due proof, satisfactory to us, of the death at our home office. The
death benefit will be the sum of:
- the total annuity value of the contract, plus
- the amounts deducted from your purchase payments for sales charges, risk
charges and state premium taxes where applicable.
Death proceeds will be paid in a single sum to the beneficiary designated to
receive a lump sum benefit. 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 an owner's death.
We will pay the cash value of the contract, if any, as a lump sum death benefit
in the event of the death of the annuitant or the second joint annuitant after
annuity payments have begun. We will pay the death benefit to the beneficiary.
If you are not an annuitant and you die, or if any joint owner who is not an
annuitant dies, a death benefit will be paid. This death benefit will be the
same amount as the amount that would be paid on the death of the annuitant or
joint annuitant. It will be paid out in the same manner, except that if death
occurs
PAGE 18
<PAGE>
before the annuity payments begin, the death benefit will be paid out within
five years of the date of death. When we pay a death benefit on the death of the
owner, no other contract benefits are then payable.
You can file a written request with us to change the beneficiary. It will not be
effective until it is recorded in our home office records. After it has been
recorded, it will take effect as of the date you signed the request. However, if
a death occurs before the request has been recorded, the request will not be
effective as to any death proceeds we have paid before the request was recorded
in our home office. If a beneficiary dies, that beneficiary's interest in a
contract ends with his or her death. Only those beneficiaries who survive will
be eligible to share in the amount payable to the beneficiary at the annuitant's
death. If there is no surviving beneficiary upon the death of the annuitant, any
remaining value of death benefit payable to the beneficiary will be paid to the
annuitant's estate.
If the death benefit is payable after annuity payments have begun, the
beneficiary may elect to receive annuity payments during the remainder of the
cash value period rather than a lump sum benefit. However, the number of annuity
units will be set as a number equal to the number of cash value units as of the
date of the annuitant's death. The annuity payments to the beneficiary will
terminate at the end of the cash value period. Then, the guaranteed minimum
annuity payment amount will be adjusted in proportion to any change in the
number of annuity units. The new guaranteed minimum annuity payment amount will
be equal to:
- the guaranteed minimum annuity payment amount just prior to the
annuitant's death, multiplied by
- the number of annuity units after the annuitant's death,
- divided by the number of annuity units prior to the annuitant's death.
If the beneficiary elects to continue the annuity payments, the cash value will
also continue on the beneficiary's behalf as part of the death benefit. This
allows the beneficiary to withdraw any or all of the cash value available at any
time during the remaining cash value period. As with cash value withdrawals
while the annuitant is alive, cash value withdrawals by the beneficiary after
the annuitant's death will reduce future annuity payments and the guaranteed
minimum annuity payment amount.
Death benefits payable after the annuitant's death must be distributed at least
as rapidly as under the method elected by the annuitant or annuitants.
PAGE 19
<PAGE>
(SIDEBAR)
Initial purchase payments are credited within 2 business days of our receipt of
a complete application.
This immediate annuity allows you to make additional purchase payments.
(END SIDEBAR)
D. PURCHASE PAYMENTS AND VALUE OF THE CONTRACT
1. Crediting Annuity and Cash Value Units
You must complete an application and send it to our home office. We will review
each application form submitted to us for compliance with our issue criteria
and, if it is accepted, we will issue a contract. The initial purchase payment
for the contract must be an amount of at least $10,000.
If we receive money and 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 and accepted. We will offer to return
the initial purchase payment with an incomplete application if it appears that
the application cannot be completed within five business days.
Purchase payments are credited to the contract in the form of annuity units and
cash value units. 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, except for the initial purchase payment. The number of
annuity and cash value units credited with respect to each purchase payment is
determined by:
- dividing the initial annuity payment amount attributable to the purchase
payment by
- the then current annuity unit value for the Sub-Account on the date the
purchase payment is credited.
The net amount of each purchase payment, after deductions, will be applied to
purchase an additional initial annuity payment amount at least as great as that
determined by using the guaranteed annuity payment purchase rate table for new
purchase payments included in the contract. The guaranteed annuity payment
purchase rates used for new purchase payments as shown in the contract. When a
purchase payment is made, we are using a more favorable table of annuity payment
purchase rates for new purchase payments, we will use that table instead.
The number of annuity and cash value units determined shall not be changed by
any subsequent change in the value of a unit, but the value of a unit will vary
from valuation date to valuation date to reflect the investment experience of
the Sub-Account.
We will determine the value of annuity units on each day on which the Portfolio
of the Fund is valued.
Cash value units will be credited for each purchase payment in a number equal to
the number of annuity units credited for each respective purchase payment.
2. Total Annuity Value of the Contract
The total annuity value of the contract at any time is the present value of the
future annuity payments expected to be made under the contract. The total
annuity value represents your total interest in the Separate Account.
PAGE 20
<PAGE>
When the annuitant is alive, the total annuity value is equal to:
- the sum of the number of cash value units, multiplied by the annuity unit
value,
- multiplied by the appropriate factor from the total annuity value factor
table(s) included in the contract,
- plus the number of annuity units in excess of the number of cash value
units,
- multiplied by the annuity unit value,
- multiplied by the appropriate factor from the total annuity value factor
table(s) included in the contract.
After the annuitant's death, if the beneficiary elects to continue annuity
payments for the remainder of the cash value period, the total annuity value
will be equal to the cash value at all times during the cash value period.
3. Value of the Annuity Unit
The value of an annuity unit for the Sub-Account is determined on each valuation
date by using the product of:
- the value of an annuity unit on the preceding valuation date,
- the net investment factor for the Sub-Account for the valuation period
ending on the current valuation date, and
- a daily factor (.999879) which adjusts the value for the effect in the
valuation period of the 4.5% annual assumed interest rate that has
already been built into each contract's total annuity value, cash value
and annuity payment calculations.
4. 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 the Sub-Account, the
net investment factor for a valuation period is the gross investment rate for
the valuation period, less a deduction for the mortality and expense risk
charges and the administrative charge at the current rate of 0.95% per annum.
The gross investment rate is equal to:
- the net asset value of a Portfolio share determined at the end of the
current valuation period, plus
- 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
PAGE 21
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(SIDEBAR)
The contract may be surrendered before annuity payments begin.
This immediate annuity allows cash withdrawals during the cash value period.
(END SIDEBAR)
- the net asset value of a Portfolio share determined at the end of the
preceding valuation period. The gross investment rate may be positive or
negative.
E. REDEMPTIONS
1. Withdrawals and Surrender
Withdrawals are not allowed prior to the "cash value period" which begins when
annuity payments begin. At any time during the cash value period of the
contract, you may request a withdrawal from the cash value of the contract. Each
withdrawal must be in an amount of at least $500. However, if the cash value of
the contract is less than that amount, the total of any remaining cash value in
the contract must be withdrawn. Other restrictions on withdrawals may be present
when the contract is used in conjunction with tax qualified programs. You must
make a written request for any withdrawal or surrender.
You may surrender the contract at any time before the annuity payment
commencement date. The annuity payment commencement date is the day the first
annuity payment is made under the contract and it is the beginning of the cash
value period. If you make a surrender request, you will receive the contract's
surrender value. The surrender value will be determined on the valuation date
coincident with or next following the day your written request is received at
our home office.
Withdrawal or surrender proceeds will be paid in a single sum within seven days
of our receipt of your written request.
(a) Determination of Surrender Value
The surrender value of a contract is the total annuity value of the contract as
of the date of surrender plus the amounts deducted from your purchase payments
for sales charges, risk charges and state premium taxes where applicable. As
this surrender value is available only until the time the first annuity payment
is made under the contract, this provision has the effect of providing a return
of your contract's charges, the net purchase payments, plus or minus investment
gains or losses and less Separate Account charges, up until the time of that
payment. As the maximum period of deferral is 12 months after the Contract Date,
this provision offers a benefit which is limited in time.
(b) Determination of Cash Value
The cash value of the contract is not guaranteed. The cash value decreases as
annuity payments are made, but also increases or decreases based on the
performance of the Sub-Account of the Separate Account given by the relative
change in the annuity unit value.
A withdrawal of all or a portion of the cash value of the contract, subject to
the dollar limitations described above, may be made during the "cash value
period" of the contract. The amount of the cash value available for withdrawal
is equal to: (a) times (b) times (c), where (a) is the number of cash value
units credited to
PAGE 22
<PAGE>
(SIDEBAR)
This is how we calculate your new annuity payment after a withdrawal.
This immediate annuity will always pay an annuity benefit, even if you withdraw
all available amounts.
(END SIDEBAR)
the contract, (b) is the current annuity unit value and (c) is the appropriate
cash value factor set forth in a table in the contract. The cash value period
begins at the annuity payment commencement date of the contract and runs for a
period approximately equal to the annuitant's life expectancy at the time the
contract is issued. The number of cash value units and the cash value period are
shown on page one of your contract. We will send you a new page one if you make
subsequent purchase payments or withdrawals. This will inform you of the number
of cash value units remaining in your contract.
The number of cash value units credited under a contract depends on your
purchase payments cash withdrawals. On the issue date of the contract the number
of cash value units will be equal to the number of annuity units credited to the
contract. Normally, withdrawals will reduce both the number of cash value units
and the number of annuity units but at different rates, so that after a
withdrawal the number of cash value units will no longer equal the number of
annuity units.
(c) Effect of Withdrawals on Cash Value
A withdrawal during the cash value period reduces the number of cash value units
of the contract. The new number of cash value units after a withdrawal is equal
to:
- the number of cash value units just prior to the withdrawal,
- multiplied by the cash value prior to withdrawal,
- less the cash value withdrawn, divided by the cash value prior to
withdrawal.
Cash value units are reduced on a last in, first out basis. Therefore, if you
make additional purchase payments were made to the contract after its issue, the
value of the cash value units attributable to those payments will be valued and
cashed out as withdrawals first, running backwards in time until we reach the
values attributable to the initial purchase payment.
(d) Annuity Payment Determinations after Withdrawals
A cash value withdrawal will affect future annuity payments by reducing the
number of annuity units, the basis for determining the amount of those payments.
The new number of annuity units following a cash value withdrawal will depend on
whether or not the annuitant is alive at the time the cash value withdrawal is
made. If the annuitant is not alive, in other words if the withdrawal is made by
the beneficiary as part of the death benefit, the new number of annuity units
will equal the number of cash value units following the withdrawal. At the death
of the annuitant, the number of annuity units is adjusted, if necessary, to
equal the then number of cash value units, and this equivalency is continued
through any subsequent cash value withdrawals.
If the annuitant is alive at the time of the withdrawal, the adjustment of
subsequent annuity payments that occurs after a withdrawal is designed to
produce a new level of annuity payments -- assuming a rate of return exactly
equal to 4.5% -- over the remaining lifetime of the contract, including the
period after the end of the cash value period. After such a withdrawal, there
will be less cash value to support benefit payments during the cash value
period, so that the same level of annuity payments as before the withdrawal
cannot be maintained
PAGE 23
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(SIDEBAR)
You can cancel your contract within 10 days of receiving it and we will refund
you the greater of your accumulation value or your purchase payments.
(END SIDEBAR)
during the cash value period. In order to levelize payments -- again, based on
the assumption of a 4.5% return -- both before and after the end of the cash
value period, it is necessary to "redistribute" annuity payments, reducing
payments after the end of the cash value period and using the portion of the
excess reserves attributable to the reduction to increase payments during the
cash value period above the level that could be supported by the remaining cash
value alone to the level payable after the cash value period. (As a result, even
if all of a contract's cash value is withdrawn, annuity payments will continue
to be made, although at a considerably reduced level.)
If the annuitant is alive at the time of the withdrawal, annuity payments after
a withdrawal are determined as follows. When a withdrawal occurs, the total
annuity value of the contract is recomputed by adding the sum of the new cash
value immediately after the withdrawal and the contract's excess reserves. The
new total annuity value is then converted into a new "initial annuity payment
amount," based on tables set forth in the contract, and the new initial annuity
payment amount is in turn converted into annuity units by dividing it by the
annuity unit value on the date of the withdrawal. The tables are actuarially
computed to produce a level annuity payment for the remaining lifetime of the
contract based on an interest rate of 4.5% and the mortality rates originally
applied to purchase payments received under the contract using its specified
table. When a cash value withdrawal is made, we will inform you of the new
number of annuity units by sending you a new page one for your contract.
Redistribution of annuity payments after withdrawals do not adjust
redistributions made in connection with prior withdrawals. Despite
redistributions, the original mortality guarantees associated with each purchase
payment are preserved.
While annuity payments will be reduced as a result of cash value withdrawals, so
long as the annuitant is alive, annuity payments will never be eliminated by
cash value withdrawals even if all available cash value is completely withdrawn.
Some level of annuity benefit, under the option elected, will always be payable.
Also, a new guaranteed annuity amount will always be in effect after cash
withdrawals. While a new initial annuity payment amount is determined after a
cash withdrawal, additional cash values are not created.
2. Right of Cancellation
You should read the contract carefully when you receive it. 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 your intention to cancel. If the contract is canceled and
returned, we will refund to you the greater of:
- the total annuity value of the contract attributable to your purchase
payments, plus the amounts deducted from your purchase payments, or
- the amount of purchase payments paid under this contract. Payment of the
requested refund will be made to you within seven days after we receive
notice of cancellation.
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(SIDEBAR)
You can instruct us how to vote Fund shares.
We are not offering tax advice. You should consult your own tax adviser.
(END SIDEBAR)
VOTING RIGHTS
We will vote fund shares held in the Separate Account at the regular and special
meetings of the Fund. We will vote shares attributable to contracts in
accordance with instructions received from the annuitant or annuitants or,
during the surrender period of the contract, from the owner, if different from
the annuitants. In the event no instructions are received from the person or
persons entitled to direct such a vote, we will vote shares attributable to that
contract in the same proportion as shares of the Portfolio held by the
Sub-Account for which instructions have been received. If, however, the 1940
Act, any interpretations of that Act or the regulations under it should change
so that we may be allowed to vote shares in our own right, then we may elect to
do so.
The number of votes will be determined by dividing the total annuity value for
each contract allocated to the Sub-Account by the net asset value per share of
the underlying Fund shares held by that Sub-Account. The votes attributable to
any particular contract will decrease as the reserves decrease. In determining
any voting interest, fractional shares will be recognized.
We will notify each person entitled to vote of a Fund shareholders' meeting if
the shares held for his or her contract may be voted at that meeting. We will
also provide proxy materials and a form of instruction to facilitate provision
of voting instructions.
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 ("Nonqualified Contract") or purchased and used in connection with certain
retirement arrangements entitled to special income tax treatment under Section
401(a), 403(b), 408, 408A or 457 of the Code ("Qualified Contracts"). 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 Separate 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 Separate Account or on capital gains arising
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(SIDEBAR)
Taxes on gains under the contract are normally deferred until there is a
distribution of contract values.
Ordinary income tax rates apply to amounts distributed in excess of purchase
payments. Gains are assumed to be distributed before return of purchase
payments.
(END SIDEBAR)
from the Separate Account's activities. The Separate 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 generally imposed on increases
in the value of a contract until distribution occurs, either in the form of a
payment in a single sum or as annuity payments under the annuity option elected.
As a general rule, 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. There is an exception to this general rule for
immediate annuity contracts. An immediate annuity contract for these purposes is
an annuity (i) purchased with a single premium or annuity consideration, (ii)
the annuity starting date of which commences within one year from the date of
the purchase of the annuity, and (iii) which provides for a series of
substantially equal periodic payments (to be made not less frequently than
annually) during the annuity period. Corporations, trusts and other similar
entities, other than natural persons, seeking to take advantage of this
exception for immediate annuity contracts should consult with a tax adviser.
Under current guidance, the tax consequences of additional premium payments and
partial withdrawals under nonqualified and qualified annuities are unclear,
including the effect on taxation of distributions, required distribution
provisions and penalty taxes. Consult a qualified tax adviser before submitting
additional premium payments or requesting a partial withdrawal.
For payments made in the event of a full surrender of an annuity not part of a
qualified program, the taxable portion is generally the amount in excess of the
cost basis of the contract. Amounts withdrawn upon a partial surrender from the
variable annuity contracts are generally treated first as taxable income to the
extent of the excess of the contract value over the purchase payments made under
the contract. All taxable amounts received under an annuity contract are subject
to tax at ordinary rather than capital gain 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 a specific dollar amount of each payment that is not taxed. In
this
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(SIDEBAR)
A penalty tax may apply to distributions prior to age 59 1/2.
Transfers, assignments and certain designations of annuitants can have tax
consequences.
(END SIDEBAR)
respect, Congress has indicated that the Treasury Department may have authority
to treat the combination purchase of an immediate annuity contract and a
separate deferred annuity contract as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws. A prospective purchaser of more than one annuity contract in a
calendar year should consult a tax adviser. The taxable part of each annuity
payment is taxed at ordinary income rates.
The Code imposes a 10% penalty tax on the taxable portion of certain
distributions from annuity contracts. This additional tax does not apply where
the payment is made under an immediate annuity contract, as defined above, or
where the taxpayer is:
- 59 1/2 or older,
- where payment is made on account of the taxpayer's disability,
- where payment is made by reason of the death of an owner, and
- in certain other circumstances.
The Code also provides an exception to the 10% additional tax for distributions,
in periodic payments, of substantially equal installments, being made for the
life (or life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and beneficiary.
For some types of qualified plans, other tax penalties may apply to certain
distributions.
A transfer of ownership of a contract, a pledge of any interest in a contract as
security for a loan, the designation of an annuitant or other payee who is not
also the contract owner, or the assignment of 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,
pledge, designation or assignment should consult a competent tax adviser with
respect to the potential tax effects of that transaction.
NOTICE -- PLEASE READ CAREFULLY
WE HAVE BEEN ADVISED THAT IT IS THE POSITION OF THE INTERNAL REVENUE SERVICE
THAT WHEN WITHDRAWALS (OTHER THAN ANNUITY PAYMENTS) ARE TAKEN FROM THE CASH
VALUE OF AN IMMEDIATE VARIABLE ANNUITY CONTRACT, SUCH AS THAT OFFERED BY THIS
PROSPECTUS, THEN ALL AMOUNTS RECEIVED BY THE TAXPAYER ARE TAXABLE AT ORDINARY
INCOME RATES AS AMOUNTS "NOT RECEIVED AS AN ANNUITY." IN ADDITION, SUCH AMOUNTS
ARE TAXABLE TO THE RECIPIENT WITHOUT REGARD TO THE OWNER'S INVESTMENT IN THE
CONTRACT OR ANY INVESTMENT GAIN WHICH MIGHT BE PRESENT IN THE CURRENT ANNUITY
VALUE. FOR EXAMPLE, UNDER THIS VIEW, A CONTRACT OWNER WITH A CASH VALUE OF
$100,000, SEEKING TO OBTAIN $20,000 OF THE CASH VALUE IMMEDIATELY AFTER ISSUE,
WOULD PAY INCOME TAXES ON THE ENTIRE $20,000 AMOUNT IN THAT TAX YEAR. FOR SOME
TAXPAYERS, SUCH AS THOSE UNDER AGE 59 1/2, ADDITIONAL TAX PENALTIES MAY ALSO
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<PAGE>
APPLY. THIS ADVERSE TAX RESULT MEANS THAT OWNERS OF NONQUALIFIED CONTRACTS
SHOULD CONSIDER CAREFULLY THE TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND
THEIR NEED FOR CONTRACT FUNDS PRIOR TO THE EXERCISE OF THIS RIGHT. CONTRACT
OWNERS SHOULD ALSO CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
IN ADDITION, WE HAVE BEEN ADVISED THAT IT IS THE POSITION OF THE INTERNAL
REVENUE SERVICE THAT WHEN ADDITIONAL PURCHASE PAYMENTS ARE MADE UNDER AN
EXISTING IMMEDIATE VARIABLE ANNUITY CONTRACT, SUCH AS THAT OFFERED BY THIS
PROSPECTUS, THOSE PURCHASE PAYMENTS WILL NOT RESULT IN A RECALCULATION OF THE
OWNER'S INVESTMENT IN THE CONTRACT AND A DETERMINATION OF A NEW EXCLUSION
AMOUNT. FOR EXAMPLE, A CONTRACT OWNER AGED 60 MIGHT PURCHASE A CONTRACT FOR THE
SUM OF $100,000, WHICH WOULD RESULT IN AN INITIAL LIFETIME ANNUITY PAYMENT OF
$460.00 PER MONTH. EACH YEAR, $4,132.23 WOULD BE RECEIVED AS A RETURN OF
INVESTMENT IN THE CONTRACT AND THE EXCESS WOULD BE TAXED AS ORDINARY INCOME. IF
WE ASSUME THAT THE CONTRACT OWNER MAKES AN ADDITIONAL PURCHASE PAYMENT OF
$20,000, THE EXCLUSION AMOUNT OF $4,123.23 WOULD NOT CHANGE, EVEN THOUGH
ADDITIONAL CASH VALUE WILL RESULT IN A NEW VARIABLE ANNUITY PAYMENT. THIS
POSITION OF THE SERVICE WILL RESULT IN THE OWNER'S INABILITY TO RECOVER HIS OR
HER INVESTMENT OVER THE PERIOD OF THE PAYMENTS. ACCORDINGLY, CONTRACT OWNERS,
ESPECIALLY THOSE INTENDING TO MAKE SUBSTANTIAL AND MATERIAL ADDITIONAL PAYMENTS,
SHOULD CONSIDER PURCHASING AN ADDITIONAL CONTRACT INSTEAD OF MAKING AN
ADDITIONAL PAYMENT. FOR FURTHER INFORMATION YOU SHOULD CONSULT YOUR OWN
QUALIFIED 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 Separate Account to be
"adequately diversified" in order for the contract to be treated as a life
insurance contract for federal tax purposes. The Separate 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 ours, we do not have control
over the Fund or its investments. Nonetheless, we believe that the Portfolio of
the Fund in which the Separate Account owns shares will be operated in
compliance with the requirements prescribed by the Treasury.
Prior to the enactment of Section 817(h), the IRS published several rulings
under which owners of certain variable annuity contracts were treated as the
owners, for federal income tax purposes, of the assets held in a separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includable in the variable
annuity contract owner's gross income. However, the continued effectiveness of
the pre-Section 817(h) published rulings is somewhat uncertain. In connection
with its issuance of proposed regulations under Section 817(h) in 1986, the
Treasury Department announced that those regulations did not "provide guidance
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<PAGE>
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." While the Treasury's 1986 announcement stated that guidance would
be issued on the "extent to which the policyholders may direct their investments
to particular sub-accounts without being treated as owners of the underlying
assets", no such guidance has been forthcoming.
The ownership rights under the contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that contract owners were not owners of separate account assets. We do not
believe that the ownership rights of a contract owner under the contract would
result in any contract owner being treated as the owner of the assets of the
Variable Annuity Account. However, we do not know what standards would be
applied if the Treasury Department should proceed to issue regulations or
rulings on this issue. We reserve 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", who
must be a natural person, is the person designated by such owner as a
beneficiary and to whom ownership of the contract passes by reason of death.
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. We
intend to review such provisions and modify them if necessary to assure that
they comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise.
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(SIDEBAR)
Congress may change the tax laws and reduce or eliminate any tax advantages of
the contract.
(END SIDEBAR)
Other rules may apply to qualified contracts.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of an 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. For these purposes, the investment in the contract is not
affected by the owner's death. That is, the investment in the contract remains
the amount of any purchase payments paid which were not excluded from gross
income.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of there being any change in taxation 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 specified minimum distribution
rules, and
- other specified circumstances.
We make no attempt to provide more than general information about use of
annuities with the various types of retirement plans. Some retirement plans are
subject to distribution and other requirements that are not incorporated in the
annuity. The rights of any person to benefits under annuity contracts purchased
in connection with these plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the annuity issued
in connection with such a plan. Some retirement plans are subject to
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
PAGE 30
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(SIDEBAR)
Distributions are subject to income tax withholding requirements unless you take
steps to prevent it.
(END SIDEBAR)
annuities comply with applicable law. If you intend to purchase a contract for
use with any retirement plan you should consult legal counsel and a 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 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.
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:
- 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,
- a required minimum distribution, or
- the non-taxable portion of a distribution.
Any distribution eligible for rollover, which may include payment to an
employee, an employee's surviving spouse or an ex-spouse who is an alternate
payee, will be subject to federal tax withholding at a 20% rate unless the
distribution is made as a direct rollover to a tax-qualified plan or to an
individual retirement account or annuity. It may be noted that amounts received
by individuals which are eligible for rollover may still be placed in another
tax-qualified plan or individual retirement account or individual retirement
annuity if the transaction is completed within 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.
PAGE 31
<PAGE>
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.
PERFORMANCE DATA
From time to time the Variable Annuity Account may publish advertisements
containing performance data relating to the Sub-Account. Performance data will
consist of average annual total return quotations for recent one-year, five-year
and ten-year periods. Performance data may also include cumulative total return
quotations for the period since June 1, 1987 or average annual total return
quotations for periods other than as described above. Performance figures are
based on historical performance information on the assumption that the contracts
offered by this Prospectus were available for sale on June 1, 1987, when the
Sub-Account began operations, and could accumulate value prior to the
commencement of annuity payments for periods in excess of one year. The figures
are not intended to suggest that such performance will continue in the future.
Average annual total return figures are the average annual compounded rates of
return required for an initial investment to equal its total annuity value at
the end of the period. The total annuity value will reflect the sales and risk
charges deducted from purchase payments as well as all other contract charges.
Cumulative total return figures are the percentage changes between the value of
an initial investment and its total annuity value at the end of the period.
Cumulative total return figures will not reflect the deduction of any amounts
from purchase payments. Cumulative total return figures will always be
accompanied by average annual total return figures. More detailed information on
the computations is set forth in the Statement of Additional Information.
YEAR 2000 COMPUTER PROBLEM
The services provided by Minnesota Life 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 Life to provide
services to contract owners. Minnesota Life has been actively working on
necessary changes to its computer systems to deal with the year 2000. Although
PAGE 32
<PAGE>
there can be no assurance of complete success, Minnesota Life 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 Life's operations could be impacted by its service
providers' or suppliers' year 2000 efforts. Minnesota Life has undertaken an
initiative to assess the efforts of organizations where there is a significant
business relationship; however there is no assurance that Minnesota Life 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 Life
at your request. The Table of Contents for that Statement of Additional
Information is as follows:
Directors and Principal Management Officers of Minnesota Life
Distribution of Contracts
Performance Data
Auditors
Registration Statement
Financial Statements
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APPENDIX A
TAXATION OF QUALIFIED PLANS
PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX EXEMPT ORGANIZATIONS
Under Code Section 403(b), payments made by public school systems and certain
tax exempt organizations to purchase annuity contracts for their employees are
excludable from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social Security)
taxes.
Code Section 403(b)(11) restricts the distribution under Code Section 403(b)
annuity contracts of: (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 Service 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 or 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 subject
to certain Code requirements regarding participation and amounts of
contributions.
PAGE A-1
<PAGE>
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 a Simple
IRA 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. Other special rules
may apply.
Qualified distributions from a Roth IRA, as defined by the Code, generally are
excluded from gross income. Qualified distributions include those distributions
made more than five years after the taxable year of the first contribution to
the Roth IRA, but only if:
- the annuity owner has reached age 59 1/2,
- the distribution is paid to a beneficiary after the owner's death,
- the annuity owner becomes disabled, or
- the distribution will be used for a first time home purchase and does not
exceed $10,000.
Nonqualified distributions are includable in gross income only to the extent
they exceed contributions made to the Roth IRA. The taxable portion of a
nonqualified distribution may be subject to a 10% penalty tax.
In addition, state laws may not completely follow the federal tax treatment of
Roth IRAs. You should consult your tax adviser for further information regarding
Roth IRAs.
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
PAGE A-2
<PAGE>
may result if this annuity is assigned or transferred to any individual as a
means to provide benefit payments, unless the plan complies with all legal
requirements applicable to such benefits prior to transfer of the annuity.
DEFERRED COMPENSATION PLANS
Code Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and tax exempt organizations. The plans may permit participants
to specify the form of investment for their deferred compensation account. With
respect to non-governmental Section 457 plans, all investments are owned by the
sponsoring employer and are subject to the claims of the general creditors of
the employer and depending on the terms of the particular plan, the employer may
be entitled to draw on deferred amounts for purposes unrelated to its Section
457 plan obligations. In general, all amounts received under a Section 457 plan
are taxable and are subject to federal income tax withholding as wages.
PAGE A-3
<PAGE>
APPENDIX B
COMPUTATION AND EXAMPLES OF WITHDRAWALS
A cash value withdrawal will affect future annuity payments by reducing the
number of annuity units, the basis for determining the amount of such payments.
If the annuitant is alive at the time of the withdrawal, the new number of
annuity units is determined by first computing a new initial annuity payment
amount and then dividing that amount by the annuity unit value at the time of
the withdrawal.
IF NO PRIOR WITHDRAWALS
If no prior cash withdrawals have been made, the new initial annuity payment
amount is the sum of:
(i) the product of the number of cash value units after the withdrawal
times the current annuity unit value, and
(ii) the product of ([(a) X (b)]/1000) times (c), where
(a) is the excess of the total annuity value over the cash value
immediately prior to the withdrawal,
(b) is the ratio of the cash value withdrawn over the cash value
prior to the withdrawal, and
(c) is the applicable annuity purchase rate set forth in the contract
in the table captioned "Total Annuity Value Factors and Annuity
Payment Purchase Rates Applicable at a Cash Value Withdrawal
while the Annuitant is Alive" ("Table I").
In the above computation "(i)" reflects the portion of the new initial annuity
payment amount supported by the reserves attributable to the cash value of the
contract, and "(ii)" reflects the portion of the new initial annuity payment
amount supported by the annuity reserves in excess of the cash value. The excess
reserves, "(ii) (a)," are multiplied by the proportionate reduction in the cash
value, "(ii) (b)," to determine the portion of the excess reserves that are to
be redistributed, and the redistribution is effected by dividing the portion so
determined by 1000 and multiplying the result by the appropriate annuity
purchase rate.
An example of the withdrawal calculation may serve as a useful illustration.
Assume a contract issued to a woman in 1995, age 60, for an initial purchase
payment of $100,000, and assume further that the net Sub-Account performance
matches the assumed interest rate of 4.5% so that we need not consider the
variation in annuity payments as a result of fluctuations in investment
performance. Assume also that the annuity unit value is and remains $1.00. At
the time of issue of the contract, the initial annuity payment amount, if paid
as a life annuity, will be $460.99, and the number of annuity units and cash
value units will be 460.9900. The guaranteed minimum annuity payment amount is
$391.84 (85% X $460.99).
PAGE B-1
<PAGE>
Assume that at year five, the contract owner makes a withdrawal of 60% of the
cash value. Immediately prior to the withdrawal, the contract has a total
annuity value of $85,594, which is determined by multiplying the current annuity
payment amount, $460.99, by the appropriate factor set forth in the contract
applicable to cash value units in Table I, 185.6737. The total annuity reserves
amount is $85,594. The cash value of the contract immediately prior to the
withdrawal is $70,890, which is determined by multiplying the current annuity
payment amount, $460.99, by the appropriate factor set forth in the contract in
the table captioned "Cash Value Factors." ("Table II"), 153.7783. $70,890 is the
amount of the annuity reserves attributable to the cash value of the contract.
The cash value after the withdrawal is $28,356 ($70,890 - $42,534 (60% X
$70,890)), and the new number of cash value units is 184.3960 (460.9900 X
($28,356/$70,890)).
The new initial annuity payment amount is $235.19, the sum of:
(i) $184.40, the product of the number of cash value units after the
withdrawal (184.3960) times the annuity unit value ($1.00), and
(ii) $50.79, the product of ([(a) X (b)]/1000) times (c), where
(a) is $14,704, the excess of the total annuity value ($85,594) over
the cash value ($70,890) immediately prior to the withdrawal,
(b) is .6, the ratio of the cash value withdrawn ($42,534) over the
cash value prior to the withdrawal ($70,890), and
(c) is 5.7568, the applicable annuity purchase rate set forth in the
contract in Table I.
The new guaranteed minimum annuity payment amount after the withdrawal is
$199.91 ($391.84 X (235.1900/460.9900)).
IF PRIOR WITHDRAWALS
Where prior withdrawals have been made, the above formula is adjusted in the
manner shown in the following example. Assume that after the withdrawal of 60%
of the cash value in the contract described above the owner withdraws 75% of the
remaining cash value at year 15.
Immediately prior to the transaction the contract has a total annuity value of
$32,003. This is determined by multiplying the two components of the current
annuity payment amount $184.40 -- the portion attributable to the cash value
reserves, and $50.79 -- the portion attributable to the annuity reserves in
excess of the cash value, by the appropriate factors set forth in the contract
applicable to cash value units and annuity units in excess of cash value units,
respectively, in Table I, namely, 137.7353 and 130.0297 ($32,003 = ($184.40 X
137.7353) + ($50.79 X 130.0297)). The cash value of the contract immediately
prior to the withdrawal is $16,289, which is determined by multiplying the
portion of the current annuity payment amount attributable to the cash value,
$184.40, by the appropriate factor set forth in the contract in Table II,
88.3373 ($16,289 =
PAGE B-2
<PAGE>
$184.40 X 88.3373). The cash value after the withdrawal is $4,072 ($16,289 -
$12,217 (75% X $16,289)), and the new number of cash value units is 46.0962
(184.3960 X ($4,072/$16,289)).
The new initial annuity payment amount is $149.44, the sum of:
(i) $46.10, the product of the number of cash value units after the
withdrawal (46.0962) times the current annuity unit value ($1.00),
(ii) $50.79, the product of the number of annuity units (235.19) minus the
number of cash value units (184.40), each prior to the withdrawal,
times the current annuity unit value ($1.00), and
(iii) $52.55, the product of ([(a) X (b)]/1000) times (c), where
(a) is $9110, which is
(A) $15,714, the excess of the total annuity value ($32,003)
over the cash value ($16,289) immediately prior to the
withdrawal, minus
(B) $6,604, the value is (ii) above ($50.79) multiplied by the
appropriate factor as of the withdrawal date applicable to
annuity units in excess of cash value units set forth in the
contract in Table I (130.0297),
(b) is .75, the ratio of the cash value withdrawn ($12,217) over the
cash value prior to the withdrawal ($16,289), and
(c) is 7.6905, the applicable annuity purchase rate set forth in the
contract in Table I.
The new initial annuity payment amount has a new guaranteed minimum annuity
payment amount associated with it of $127.02 ($199.91 X 149.4400/235.1900).
PAGE B-3
<PAGE>
APPENDIX C
ADJUSTABLE INCOME ANNUITY DISCLOSURE "A VARIABLE IMMEDIATE ANNUITY"
<TABLE>
<S> <C>
PREPARED FOR: Jane M. Doe COMMENCEMENT DATE: 10/01/1995
DATE OF BIRTH: 10/01/1935 SEX: Female INCOME FREQUENCY: Monthly
STATE: MN INITIAL PERIODIC INCOME: $460.99
PURCHASE PAYMENT: $100,000.00 GUARANTEED MINIMUM INCOME AT ISSUE:
FUNDS: Non-Qualified $391.84
LIFE EXPECTANCY: 24.2 (IRS) ESTIMATED ANNUAL EXCLUSION AMOUNT AT
PREPARED BY: Minnesota Life ISSUE: $3,471.07
QUOTATION DATE: 10/01/1995
ANNUITIZATION OPTION: Single Life
</TABLE>
AGE Your age at nearest birthday.
GUARANTEED INCOME The guaranteed income column represents the minimum annuity
payment you will receive. This amount will be adjusted for additional purchase
payments made to the contract or cash value withdrawals taken from the contract.
PROJECTED INCOME The variable annuity income amount shown assumes a constant
annual investment return. 4.5% is the assumed interest rate used to calculate
the first payment. Thereafter, payments will increase or decrease based upon the
relationship between the 4.5% interest rate and the net investment performance
of the Index 500* Portfolio of the Advantus Series Fund, Inc. Actual value of
the contract will fluctuate depending on the performance of the underlying
sub-account.
CUMULATIVE INCOME The cumulative income amount shown represents the sum of the
projected income payments on an annual basis.
TOTAL ANNUITY VALUE The total annuity value at issue is the net amount credited
to your account after deduction of all front end charges. Thereafter, the total
annuity value changes based on fund performance, annuity payments made, and
subsequent purchase payments or withdrawals. The total annuity value includes
the cash value plus an amount intended to fund annuity payments for the
remainder of your life after the cash value period has ended.
CASH VALUE The cash value is the dollar amount available for withdrawal under
this contract at a given point in time. Access to the cash value is available
during the cash value period--a time period from the first annuity payment date
to your life expectancy as determined at issue. It is important to note that
withdrawals of cash value will reduce the amount of the minimum guaranteed
payment.
Page 1 of 5
Not valid without all pages.
The investment returns shown are hypothetical and are not
a representation of future results.
This is an illustration only and not a contract.
Prepared by Minnesota Life Insurance Company
PAGE C-1
<PAGE>
ESTIMATED ANNUAL EXCLUSION AMOUNT AT ISSUE The annual variable exclusion amount
is based on a cost basis of $100,000 and represents the amount of variable
payments that are excluded from taxation in each calendar year. This annual
amount is prorated in the first calendar year and may be recalculated in any
year where the total value of the annuity payments is less than the exclusion
amount. Exclusion calculations apply only until the cost basis is returned,
thereafter, all payments are fully taxable. This calculation does not include
future contributions or withdrawals.
SPECIAL TAX RULES APPLY TO NON-QUALIFIED PLANS When withdrawals are taken from
the cash value of the Adjustable Income Annuity contract, all amounts received
by the taxpayer are taxable as ordinary income in the year in which the
withdrawals are taken. Under certain circumstances, you may be able to get an
offsetting deduction. When additional purchase payments are made under an
existing Adjustable Income Annuity contract, those purchase payments will not
result in a recalculation of the owner's investment in the contract and a
determination of a new exclusion amount.
OTHER Deductions from your purchase payments are made for sales charges, risk
charges and state premium taxes where applicable. Sales charges are based on
your total cumulative purchase payments (see prospectus for schedule). A risk
charge is deducted for Minnesota Life's guarantee of a minimum annuity payment
amount. This charge is 1.25% of each purchase payment.
Net rates of return reflect expenses totaling 1.40%, which consist of the .95%
Variable Annuity Account mortality and expense risk charge and administrative
charge, and .45% for the Series Fund management fee and other expenses.
Minnesota Life variable immediate annuities are available through registered
representatives of Ascend Financial Services, Inc., Securities Dealer, Member
NASD/SIPC. This illustration must be accompanied or preceded by a current
prospectus for the Variable Annuity Account and for the Advantus Series Fund,
Inc.
* "Standard & Poor's-Registered Trademark-", "S&P-Registered Trademark-", "S&P
500-Registered Trademark-", "Standard & Poor's 500", and "500" are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed for use by Advantus
Series Fund, Inc. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the Fund."
Page 2 of 5
Not valid without all pages.
The investment returns shown are hypothetical and are not
a representation of future results.
This is an illustration only and not a contract.
Prepared by Minnesota Life Insurance Company
PAGE C-2
<PAGE>
ADJUSTABLE INCOME ANNUITY ILLUSTRATION "A VARIABLE IMMEDIATE ANNUITY"
<TABLE>
<S> <C>
PREPARED FOR: Jane M. Doe ANNUITIZATION OPTION: Single Life
DATE OF BIRTH: 10/01/1935 SEX: Female COMMENCEMENT DATE: 10/01/1995
STATE: MN INCOME FREQUENCY: Monthly
PURCHASE PAYMENT: $100,000.00 INITIAL PERIODIC INCOME: $460.99
FUNDS: Non-Qualified GUARANTEED MINIMUM INCOME AT ISSUE:
LIFE EXPECTANCY: 24.2 (IRS) $391.84
PREPARED BY: Minnesota Life *ESTIMATED ANNUAL EXCLUSION AMOUNT AT
QUOTATION DATE: 10/01/1995 ISSUE: $3,471.07
</TABLE>
<TABLE>
<CAPTION>
0.00% GROSS RATE OF RETURN (-1.40% NET)
---------------------------------------------------------------
BEGINNING GUARANTEED PROJECTED CUMULATIVE TOTAL ANNUITY
DATE OF YEAR AGE INCOME INCOME INCOME VALUE CASH VALUE
- --------------- ---------- --- ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Oct 1, 1995.... 1 60 $392 $461 $461 $93,789 $81,667
Oct 1, 1996.... 2 61 392 435 5,822 87,076 75,197
Oct 1, 1997.... 3 62 392 410 10,881 80,764 69,119
Oct 1, 1998.... 4 63 392 392 15,662 74,829 63,409
Oct 1, 1999.... 5 64 392 392 20,364 69,250 58,048
Oct 1, 2000.... 6 65 392 392 25,066 64,009 53,013
Oct 1, 2001.... 7 66 392 392 29,768 59,087 48,288
Oct 1, 2002.... 8 67 392 392 34,470 54,465 43,854
Oct 1, 2003.... 9 68 392 392 39,172 50,128 39,694
Oct 1, 2004.... 10 69 392 392 43,874 46,059 35,792
Oct 1, 2005.... 11 70 392 392 48,576 42,244 32,134
Oct 1, 2006.... 12 71 392 392 53,278 38,670 28,705
Oct 1, 2007.... 13 72 392 392 57,980 35,325 25,493
Oct 1, 2008.... 14 73 392 392 62,682 32,197 22,484
Oct 1, 2009.... 15 74 392 392 67,384 29,277 19,667
Oct 1, 2010.... 16 75 392 392 72,086 26,555 17,031
Oct 1, 2011.... 17 76 392 392 76,788 24,027 14,565
Oct 1, 2012.... 18 77 392 392 81,490 21,682 12,259
Oct 1, 2013.... 19 78 392 392 86,193 19,513 10,104
Oct 1, 2014.... 20 79 392 392 90,895 17,514 8,092
Oct 1, 2015.... 21 80 392 392 95,597 15,682 6,213
Oct 1, 2016.... 22 81 392 392 100,299 14,013 4,460
Oct 1, 2017.... 23 82 392 392 105,001 12,505 2,826
Oct 1, 2018.... 24 83 392 392 109,703 11,160 1,303
Oct 1, 2019.... 25 84 392 392 114,405 9,980 0
Oct 1, 2020.... 26 85 392 392 119,107 8,932 0
Oct 1, 2021.... 27 86 392 392 123,809 7,983 0
Oct 1, 2022.... 28 87 392 392 128,511 7,124 0
Oct 1, 2023.... 29 88 392 392 133,213 6,350 0
Oct 1, 2024.... 30 89 392 392 137,915 5,654 0
Oct 1, 2025.... 31 90 392 392 142,617 5,030 0
Oct 1, 2026.... 32 91 392 392 147,319 4,485 0
Oct 1, 2027.... 33 92 392 392 152,021 3,999 0
Oct 1, 2028.... 34 93 392 392 156,723 3,563 0
Oct 1, 2029.... 35 94 392 392 161,425 3,173 0
Oct 1, 2030.... 36 95 392 392 166,128 2,821 0
</TABLE>
* The exclusion amount does not assume future contributions or withdrawals.
Page 3 of 5
Not valid without all pages.
The investment returns shown are hypothetical and are not
a representation of future results.
This is an illustration only and not a contract.
Prepared by Minnesota Life Insurance Company
PAGE C-3
<PAGE>
ADJUSTABLE INCOME ANNUITY ILLUSTRATION "A VARIABLE IMMEDIATE ANNUITY"
<TABLE>
<S> <C>
PREPARED FOR: Jane M. Doe ANNUITIZATION OPTION: Single Life
DATE OF BIRTH: 10/01/1935 SEX: Female COMMENCEMENT DATE: 10/01/1995
STATE: MN INCOME FREQUENCY: Monthly
PURCHASE PAYMENT: $100,000.00 INITIAL PERIODIC INCOME: $460.99
FUNDS: Non-Qualified GUARANTEED MINIMUM INCOME AT ISSUE:
LIFE EXPECTANCY: 24.2 (IRS) $391.84
PREPARED BY: Minnesota Life *ESTIMATED ANNUAL EXCLUSION AMOUNT AT
QUOTATION DATE: 10/01/1995 ISSUE: $3,471.07
</TABLE>
<TABLE>
<CAPTION>
5.90% GROSS RATE OF RETURN (4.50% NET)
---------------------------------------------------------------
BEGINNING GUARANTEED PROJECTED CUMULATIVE TOTAL ANNUITY
DATE OF YEAR AGE INCOME INCOME INCOME VALUE CASH VALUE
- --------------- ---------- --- ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Oct 1, 1995.... 1 60 $392 $461 $461 $93,789 $81,667
Oct 1, 1996.... 2 61 392 461 5,993 92,286 79,697
Oct 1, 1997.... 3 62 392 461 11,525 90,718 77,638
Oct 1, 1998.... 4 63 392 461 17,057 89,081 75,487
Oct 1, 1999.... 5 64 392 461 22,589 87,373 73,239
Oct 1, 2000.... 6 65 392 461 28,120 85,593 70,890
Oct 1, 2001.... 7 66 392 461 33,652 83,738 68,435
Oct 1, 2002.... 8 67 392 461 39,184 81,807 65,869
Oct 1, 2003.... 9 68 392 461 44,716 79,798 63,188
Oct 1, 2004.... 10 69 392 461 50,248 77,708 60,387
Oct 1, 2005.... 11 70 392 461 55,780 75,537 57,459
Oct 1, 2006.... 12 71 392 461 61,312 73,284 54,400
Oct 1, 2007.... 13 72 392 461 66,844 70,950 51,203
Oct 1, 2008.... 14 73 392 461 72,375 68,538 47,862
Oct 1, 2009.... 15 74 392 461 77,907 66,050 44,371
Oct 1, 2010.... 16 75 392 461 83,439 63,494 40,722
Oct 1, 2011.... 17 76 392 461 88,971 60,888 36,910
Oct 1, 2012.... 18 77 392 461 94,503 58,233 32,926
Oct 1, 2013.... 19 78 392 461 100,035 55,544 28,762
Oct 1, 2014.... 20 79 392 461 105,567 52,838 24,412
Oct 1, 2015.... 21 80 392 461 111,099 50,141 19,865
Oct 1, 2016.... 22 81 392 461 116,630 47,485 15,114
Oct 1, 2017.... 23 82 392 461 122,162 44,912 10,149
Oct 1, 2018.... 24 83 392 461 127,694 42,480 4,961
Oct 1, 2019.... 25 84 392 461 133,226 40,261 0
Oct 1, 2020.... 26 85 392 461 138,758 38,191 0
Oct 1, 2021.... 27 86 392 461 144,290 36,172 0
Oct 1, 2022.... 28 87 392 461 149,822 34,211 0
Oct 1, 2023.... 29 88 392 461 155,354 32,318 0
Oct 1, 2024.... 30 89 392 461 160,886 30,498 0
Oct 1, 2025.... 31 90 392 461 166,417 28,755 0
Oct 1, 2026.... 32 91 392 461 171,949 27,176 0
Oct 1, 2027.... 33 92 392 461 177,481 25,678 0
Oct 1, 2028.... 34 93 392 461 183,013 24,253 0
Oct 1, 2029.... 35 94 392 461 188,545 22,888 0
Oct 1, 2030.... 36 95 392 461 194,077 21,569 0
</TABLE>
* The exclusion amount does not assume future contributions or withdrawals.
Page 4 of 5
Not valid without all pages.
The investment returns shown are hypothetical and are not
a representation of future results.
This is an illustration only and not a contract.
Prepared by Minnesota Life Insurance Company
PAGE C-4
<PAGE>
ADJUSTABLE INCOME ANNUITY ILLUSTRATION "A VARIABLE IMMEDIATE ANNUITY"
<TABLE>
<S> <C>
PREPARED FOR: Jane M. Doe ANNUITIZATION OPTION: Single Life
DATE OF BIRTH: 10/01/1935 SEX: Female COMMENCEMENT DATE: 10/01/1995
STATE: MN INCOME FREQUENCY: Monthly
PURCHASE PAYMENT: $100,000.00 INITIAL PERIODIC INCOME: $460.99
FUNDS: Non-Qualified GUARANTEED MINIMUM INCOME AT ISSUE:
LIFE EXPECTANCY: 24.2 (IRS) $391.84
PREPARED BY: Minnesota Life *ESTIMATED ANNUAL EXCLUSION AMOUNT AT
QUOTATION DATE: 10/01/1995 ISSUE: $3,471.07
</TABLE>
<TABLE>
<CAPTION>
12.00% GROSS RATE OF RETURN (10.60% NET)
---------------------------------------------------------------
BEGINNING GUARANTEED PROJECTED CUMULATIVE TOTAL ANNUITY
DATE OF YEAR AGE INCOME INCOME INCOME VALUE CASH VALUE
- --------------- ---------- --- ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Oct 1, 1995.... 1 60 $392 $461 $461 $93,789 $81,667
Oct 1, 1996.... 2 61 392 488 6,166 97,673 84,349
Oct 1, 1997.... 3 62 392 516 12,204 101,618 86,967
Oct 1, 1998.... 4 63 392 547 18,595 105,609 89,493
Oct 1, 1999.... 5 64 392 578 25,359 109,631 91,896
Oct 1, 2000.... 6 65 392 612 32,517 113,666 94,141
Oct 1, 2001.... 7 66 392 648 40,094 117,695 96,185
Oct 1, 2002.... 8 67 392 686 48,113 121,692 97,984
Oct 1, 2003.... 9 68 392 726 56,599 125,632 99,483
Oct 1, 2004.... 10 69 392 768 65,582 129,484 100,622
Oct 1, 2005.... 11 70 392 813 75,088 133,214 101,332
Oct 1, 2006.... 12 71 392 860 85,150 136,785 101,537
Oct 1, 2007.... 13 72 392 911 95,798 140,159 101,148
Oct 1, 2008.... 14 73 392 964 107,069 143,296 100,068
Oct 1, 2009.... 15 74 392 1,020 118,997 146,157 98,184
Oct 1, 2010.... 16 75 392 1,080 131,621 148,702 95,371
Oct 1, 2011.... 17 76 392 1,143 144,983 150,922 91,488
Oct 1, 2012.... 18 77 392 1,209 159,124 152,767 86,376
Oct 1, 2013.... 19 78 392 1,280 174,091 154,217 79,859
Oct 1, 2014.... 20 79 392 1,355 189,932 155,269 71,736
Oct 1, 2015.... 21 80 392 1,434 206,697 155,944 61,783
Oct 1, 2016.... 22 81 392 1,517 224,441 156,303 49,750
Oct 1, 2017.... 23 82 392 1,606 243,220 156,466 35,358
Oct 1, 2018.... 24 83 392 1,700 263,096 156,630 18,291
Oct 1, 2019.... 25 84 392 1,799 284,132 157,116 0
Oct 1, 2020.... 26 85 392 1,904 306,396 157,735 0
Oct 1, 2021.... 27 86 392 2,015 329,960 158,116 0
Oct 1, 2022.... 28 87 392 2,133 354,899 158,278 0
Oct 1, 2023.... 29 88 392 2,257 381,294 158,246 0
Oct 1, 2024.... 30 89 392 2,389 409,230 158,052 0
Oct 1, 2025.... 31 90 392 2,528 438,796 157,715 0
Oct 1, 2026.... 32 91 392 2,676 470,088 157,759 0
Oct 1, 2027.... 33 92 392 2,832 503,207 157,764 0
Oct 1, 2028.... 34 93 392 2,998 538,259 157,702 0
Oct 1, 2029.... 35 94 392 3,173 575,357 157,516 0
Oct 1, 2030.... 36 95 392 3,358 614,621 157,103 0
</TABLE>
* The exclusion amount does not assume future contributions or withdrawals.
Page 5 of 5
Not valid without all pages.
The investment returns shown are hypothetical and are not
a representation of future results.
This is an illustration only and not a contract.
Prepared by Minnesota Life Insurance Company
PAGE C-5
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
Variable Annuity Account
Cross Reference Sheet to Statement of Additional Information
Form N-4
Item Number Caption in Statement of Additional Information
15. Cover Page
16. Cover Page
17. Directors and Principal Management Officers of Minnesota Life
18. Not Applicable
19. Not Applicable
20. Distribution of Contracts
21. Performance Data
22. Not Applicable
23. Financial Statements
<PAGE>
Variable Annuity Account
("Variable Annuity Account"), a Separate Account of
Minnesota Life Insurance Company
("Minnesota Life")
400 Robert Street North
St. Paul, Minnesota 55101-2098
Telephone: (651) 665-3500
Statement of Additional Information
The date of this document and the Prospectus is: May 3, 1999
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 Separate Account's current Prospectus, bearing
the same date, which may be obtained by calling Minnesota Life Insurance
Company at (651) 665-3500, or writing to us at: 400 Robert Street North, St.
Paul, Minnesota 55101-2098.
Directors and Principal Management Officers of Minnesota Life
Distribution of Contracts
Performance Data
Auditors
Registration Statement
Financial Statements
-1-
<PAGE>
DIRECTORS AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA LIFE
Directors Principal Occupation
--------- --------------------
Giulio Agostini Senior Vice President, Finance and Administrative
Services, 3M, St. Paul, 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 Vice Chairman and Chief Operating Officer, Wells
Fargo & Company, San Francisco, California
(Banking)
John F. Grundhofer President, Chairman and Chief Executive Officer,
U.S. Bancorp, Minneapolis, Minnesota (Banking)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota, Minneapolis, Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Of Counsel, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, Minnesota Life
Insurance Company, since August 1995; prior
thereto for more than five years Vice President
and Actuary, Minnesota Life Insurance
Company
Michael E. Shannon 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)
-2-
<PAGE>
Principal Officers (other than Directors)
Name Position
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
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 Directors who are not also officers of Minnesota Life have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Life have been employed by Minnesota Life for
at least five years with the exception of Mr. Westhoff. Mr. Westhoff has
been employed by Minnesota Life 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 CONTRACTS
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 Advantus Capital Management, Inc, which in turn is a wholly-owned
subsidiary of Minnesota Life. 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. The amount paid by
Minnesota Life to the underwriter for 1998, 1997 and 1996 was $15,989,724,
$15,067,613 and $13,034,146 for payments to associated dealers on the sale of
variable annuity contracts issued through the Variable Annuity Account.
Agents of Minnesota Life who are also registered representatives of Ascend
Financial are compensated directly by Minnesota Life.
PERFORMANCE DATA
TOTAL RETURN FIGURES FOR THE SUB-ACCOUNT
Average annual total return figures for one-year, five-year and ten-year
periods are presented. Average annual total return figures are the average
annual compounded rates of return required for an initial investment of
$10,000 to equal the total annuity value of that same investment at the end
of the period. The total annuity value will reflect the deduction of the
sales and risk charges applicable to the contract. The average annual total
return figures published by the Variable Annuity Account will reflect
Minnesota Life's voluntary absorption of certain Fund expenses. For the
period subsequent to December 31, 1987, Minnesota Life is voluntarily
absorbing the fees and expenses that exceed .55% of the daily net assets of
the Index 500 Portfolio. There is no specified or minimum period of time
during which Minnesota Life has agreed to continue its voluntary absorption
of these expenses, and Minnesota Life may in its discretion cease its
absorption of expenses at any time. Should Minnesota Life cease absorbing
expenses the effect would be to increase substantially Fund expenses and
thereby reduce investment return.
-3-
<PAGE>
The average annual rates of return for the Sub-Account, in connection with the
contract described in the Prospectus, for the specified periods ended
December 31, 1998 are shown in the table below. The figures in parentheses show
what the average annual rates of return would have been had Minnesota Life not
absorbed Fund expenses as described above. These figures also assume that the
contracts described herein were issued when the underlying Portfolio first
became available to the Variable Annuity Account.
<TABLE>
<CAPTION>
Year Ended Five Years Ten Years
12/31/98 Ended 12/31/98 Ended 12/31/98
---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Index 500 Sub-Account (19.49%) 19.49% (20.63%) 20.63% (16.68%) 16.71%
------ ----- ------ ------ ------ ------
</TABLE>
AUDITORS
The financial statements of the Variable Annuity Account and the consolidated
financial statements of Minnesota Life 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.
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
contracts 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 Life, and the
contracts. Statements contained in this Statement of Additional Information as
to the contents of contracts and other legal instruments are summaries, and
reference is made to such instruments as filed.
-4-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of Minnesota Life Insurance Company and Contract Owners of
Variable Annuity Account:
We have audited the accompanying statement of assets and liabilities of the
Index 500 Segregated Sub-Account of the Variable Annuity Account (the Account),
formerly Minnesota Mutual Variable Annuity Account, (contracts offered for
individual, immediate annuity contracts for personal retirement plans) as of
December 31, 1998, the related statement of operations for the year then ended
and the statements of changes in net assets for the two years then ended. These
financial statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Investments owned at
December 31, 1998 were verified by examination of the underlying portfolio of
Advantus Series Fund, Inc. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Index 500 Segregated
Sub-Account of Variable Annuity Account at December 31, 1998 and the results of
its operations and changes in its net assets for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
<PAGE>
VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in shares of Advantus Series Fund, Inc - Index 500 Portfolio,
4,043,024 shares at net asset value of $3.91 per share (cost $12,374,926) ....................... $ 15,807,923
Receivable from Advantus Series Fund, Inc. for investments sold .. ................................... 597
----------------
Total assets .. ......................................................................... 15,808,520
----------------
LIABILITIES
Payable to Minnesota Life for contract terminations and mortality and
expense charges ................................................................................. 597
----------------
Total liabilities .. .................................................................... 597
----------------
Net assets applicable to annuity contract owners ........................................ $ 15,807,923
----------------
----------------
CONTRACT OWNERS' EQUITY
Contracts in annuity payment period (note 2) . ....................................................... $ 15,807,923
----------------
Total contract owners' equity .. ........................................................ $ 15,807,923
----------------
----------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Investment income (loss):
Investment income distributions from underlying mutual fund (note 4) . .......................... $ 90,530
Mortality and expense charges (note 3) .......................................................... (96,607)
Administrative charges (note 3) .. .............................................................. (18,115)
----------------
Investment loss - net ....................................................................... (24,192)
----------------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying mutual fund (note 4) . .............................. 56,745
----------------
Realized gains on sales of investments:
Proceeds from sales .. ...................................................................... 1,482,598
Cost of investments sold . .................................................................. (1,278,207)
----------------
204,391
----------------
Net realized gains on investments ........................................................... 261,136
----------------
Net change in unrealized appreciation or depreciation of investments .. .............................. 2,470,499
----------------
Net gains on investments . .................................................................. 2,731,635
----------------
Net increase in net assets resulting from operations . ...................................... $ 2,707,443
----------------
----------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Operations:
Investment loss - net .. ................................................. $ (24,192) $ (9,723)
Net realized gains on investments ........................................ 261,136 145,883
Net change in unrealized appreciation or depreciation
of investments . ..................................................... 2,470,499 827,107
---------------- ----------------
Net increase in net assets resulting from operations . ........................ 2,707,443 963,267
---------------- ----------------
Contract transactions (notes 2, 3 and 4):
Contract purchase payments . ............................................. 6,647,680 5,596,884
Contract terminations and withdrawal payments . .......................... (655,211) (441,196)
Actuarial adjustments for mortality experience on annuities
in payment period . .................................................. 81,585 (83,544)
Annuity benefit payments . ............................................... (794,250) (261,894)
---------------- ----------------
Increase in net assets from contract transactions ............................. 5,279,804 4,810,250
---------------- ----------------
Increase in net assets ........................................................ 7,987,247 5,773,517
Net assets at the beginning of year ........................................... 7,820,676 2,047,159
---------------- ----------------
Net assets at the end of year ................................................. $ 15,807,923 $ 7,820,676
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Variable Annuity Account (the Account) was established on September
10, 1984 as a segregated asset account of Minnesota Life Insurance
Company (Minnesota Life); formerly The Minnesota Mutual Life Insurance
Company, 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 nineteen
segregated sub-accounts. The financial statements presented herein
include only the segregated sub-account offered in connection with the
sale of the individual, immediate variable annuity contracts for personal
retirement plans (Adjustable Income Annuity).
The assets of the Account are held for the exclusive benefit of the
immediate variable annuity contract owners and are not chargeable with
liabilities arising out of the business conducted by any other account or
by Minnesota Life. Purchase payments made by contract owners are invested
in shares of the Index 500 Portfolio of the Advantus Series Fund, Inc.
The Advantus Series Fund, Inc. (the Fund) was organized by Minnesota Life
as the investment vehicle for its variable annuity contracts and variable
life policies. The Fund is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment
company.
Ascend Financial Services, Inc. acts as the underwriter for the Account.
Advantus Capital Management, Inc. acts as the investment adviser for the
Fund. Ascend Financial Services, Inc. is a wholly-owned subsidiary of
Advantus Capital Management, Inc. and Advantus Capital Management, Inc.
is a wholly-owned subsidiary of Minnesota Life.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements.
Actual results could differ from those estimates.
<PAGE>
2
VARIABLE ANNUITY ACCOUNT
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENTS IN ADVANTUS SERIES FUND, INC.
Investments in shares of the Fund are stated at market value which is the
net asset value per share as determined daily by the Fund. Investment
transactions are accounted for on the date the shares are purchased or
sold. The cost of investments sold is determined on the average cost
method. All dividend distributions received from the Fund are reinvested
in additional shares of the Fund and are recorded by the segregated
sub-account on the ex-dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Life for federal income tax
purposes. Under current interpretations of existing federal income tax
law, no income taxes are payable on investment income or capital gain
distributions received by the Account from the Fund.
CONTRACTS IN ANNUITY PAYMENT PERIOD
Annuity reserves are computed for currently payable contracts according
to the Individual Annuity 1983 Table A, using an assumed interest rate of
4.5 percent. Charges to annuity reserves for mortality and risk expense
are reimbursed to Minnesota Life if the reserves required are less than
originally estimated. If additional reserves are required, Minnesota Life
reimburses the Account.
(3) CONTRACT CHARGES
The mortality and expense risk charge paid to Minnesota Life is computed
daily and is equal, on an annual basis, to .80 percent of the average
daily net assets of the Account. Under certain conditions, the charge may
be increased to not more than 1.40 percent of the average daily net
assets of the Account.
The administrative charge paid to Minnesota Life is computed daily and is
equal, on an annual basis, to .15 percent of the average daily net assets
of the Account. Under certain conditions, the administrative charge may
be increased to not more than .40 percent of the average daily net assets
of the Account.
<PAGE>
3
VARIABLE ANNUITY ACCOUNT
(3) CONTRACT CHARGES - CONTINUED
Contract purchase payments are reflected net of the following charges
paid to Minnesota Life:
A sales charge ranging from 3.75 to 4.50 percent, depending upon
the total amount of purchase payments, is deducted from each
contract purchase payment. Total sales charges deducted from
contract purchase payments for the years ended December 31, 1998
and 1997 amounted to $111,222 and $131,108, respectively.
A risk charge in the amount of 1.25 percent is deducted from each
contract purchase payment. Under certain conditions, the risk
charge may be as high as 2.00 percent. Total risk charges deducted
from contract purchase payments for the years ended December 31,
1998 and 1997 amounted to $30,895 and $36,963, respectively.
A premium tax charge of up to 3.50 percent is deducted from each
contract purchase payment. Total premium tax charges deducted from
contract purchase payments for the years ended December 31, 1998
and 1997 amounted to $121 and $3,218, respectively.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Index 500 Portfolio shares, including
reinvestment of distributions, amounted to $6,794,955 and $5,666,361 for
the years ended December 31, 1998 and 1997, respectively.
<PAGE>
Independent Auditors' Report
The Board of Directors
Minnesota Life Insurance Company
We have audited the accompanying consolidated balance sheets of the Minnesota
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income,
changes in stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Minnesota Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in the accompanying schedules is presented for purpose of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
Minneapolis, Minnesota
February 8, 1999
66
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,667,688 and $4,518,807) $ 4,914,012 $ 4,719,801
Held-to-maturity, at amortized cost (fair value
$1,161,784 and $1,158,227) 1,086,548 1,088,312
Equity securities, at fair value (cost $579,546 and
$537,441) 749,800 686,638
Mortgage loans, net 681,219 661,337
Real estate, net 38,530 39,964
Policy loans 226,409 213,488
Short-term investments 136,435 112,352
Other invested assets 261,625 216,838
----------- -----------
Total investments 8,094,578 7,738,730
Cash 175,660 96,179
Finance receivables, net 163,411 211,794
Deferred policy acquisition costs 564,382 576,030
Accrued investment income 86,974 83,439
Premiums receivable, net 62,609 68,030
Property and equipment, net 67,448 58,123
Reinsurance recoverables 162,553 150,126
Other assets 61,183 52,852
Separate account assets 6,994,752 5,366,810
----------- -----------
Total assets $16,433,550 $14,402,113
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Policy and contract account balances $ 4,242,802 $ 4,275,221
Future policy and contract benefits 1,744,245 1,687,529
Pending policy and contract claims 70,564 64,356
Other policyholders' funds 438,595 416,752
Policyholders' dividends payable 53,957 55,321
Stockholder dividend payable 24,700 --
Unearned premiums and fees 180,191 202,070
Federal income tax liability:
Current 53,039 45,300
Deferred 173,907 166,057
Other liabilities 514,468 334,305
Notes payable 267,000 298,000
Separate account liabilities 6,947,806 5,320,517
----------- -----------
Total liabilities 14,711,274 12,865,428
----------- -----------
Stockholder's equity:
Common stock, $1 par value, 5,000,000 shares
authorized, issued and outstanding 5,000 --
Retained earnings 1,513,661 1,380,012
Accumulated other comprehensive income 203,615 156,673
----------- -----------
Total stockholder's equity 1,722,276 1,536,685
----------- -----------
Total liabilities and stockholder's equity $16,433,550 $14,402,113
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
Statements of Operations
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 577,693 $ 615,253 $ 612,359
Policy and contract fees 300,361 272,037 245,966
Net investment income 531,081 553,773 530,987
Net realized investment gains 114,652 114,367 55,574
Finance charge income 35,880 43,650 46,932
Other income 73,498 71,707 51,630
---------- ---------- ----------
Total revenues 1,633,165 1,670,787 1,543,448
---------- ---------- ----------
Benefits and expenses:
Policyholders' benefits 519,926 515,873 541,520
Interest credited to policies and con-
tracts 290,870 298,033 288,967
General operating expenses 360,916 369,961 302,618
Commissions 110,211 114,404 103,370
Administrative and sponsorship fees 80,183 81,750 79,360
Dividends to policyholders 25,159 26,776 24,804
Interest on notes payable 22,360 24,192 22,798
Increase in deferred policy acquisition
costs (18,042) (26,878) (19,284)
---------- ---------- ----------
Total benefits and expenses 1,391,583 1,404,111 1,344,153
---------- ---------- ----------
Income from operations before taxes 241,582 266,676 199,295
Federal income tax expense (benefit):
Current 93,584 84,612 68,033
Deferred (15,351) (7,832) 744
---------- ---------- ----------
Total federal income tax expense 78,233 76,780 68,777
---------- ---------- ----------
Net income $ 163,349 $ 189,896 $ 130,518
========== ========== ==========
Other comprehensive income, after tax:
Foreign currency translation adjust-
ments $ (947) $ 947 $ --
Unrealized gains (losses) on securities 47,889 47,414 (44,940)
---------- ---------- ----------
Other comprehensive income, net of tax 46,942 48,361 (44,940)
---------- ---------- ----------
Comprehensive income $ 210,291 $ 238,257 $ 85,578
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Common stock:
Issued during the year $ 5,000 $ -- $ --
---------- ---------- ----------
Total common stock $ 5,000 $ -- $ --
========== ========== ==========
Retained earnings:
Beginning balance $1,380,012 $1,190,116 $1,059,598
Net income 163,349 189,896 130,518
Retained earnings transfer for common
stock issued (5,000) -- --
Dividends to stockholder (24,700) -- --
---------- ---------- ----------
Total retained earnings $1,513,661 $1,380,012 $1,190,116
========== ========== ==========
Accumulated other comprehensive income:
Beginning balance $ 156,673 $ 108,312 $ 153,252
Change in unrealized appreciation (de-
preciation) of investments 47,889 47,414 (44,940)
Change in unrealized gain on foreign
currency translation (947) 947 --
---------- ---------- ----------
Total accumulated other comprehensive
income $ 203,615 $ 156,673 $ 108,312
========== ========== ==========
Total stockholder's equity $1,722,276 $1,536,685 $1,298,428
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 163,349 $ 189,896 $ 130,518
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 265,841 276,719 275,968
Fees deducted from policy and con-
tract balances (212,901) (214,803) (206,780)
Change in future policy benefits 56,716 76,358 84,389
Change in other policyholders' lia-
bilities (20,802) 7,597 16,099
Change in deferred policy acquisition
costs (18,042) (26,878) (19,284)
Change in premiums due and other re-
ceivables 5,421 (9,280) (26,142)
Change in federal income tax liabili-
ties 15,589 36,049 (38,113)
Net realized investment gains (114,652) (114,367) (55,574)
Other, net 32,380 (23,213) 56,045
----------- ----------- -----------
Net cash provided by operating ac-
tivities 172,899 198,078 217,126
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,835,726 1,099,114 877,682
Equity securities 523,617 601,936 352,901
Mortgage loans -- -- 15,567
Real estate 7,800 9,279 11,678
Other invested assets 21,682 26,877 12,280
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 414,726 403,829 329,550
Fixed maturity securities, held-to-
maturity 148,848 139,394 114,222
Mortgage loans 126,066 109,246 94,703
Purchases of:
Fixed maturity securities, available-
for-sale (2,384,720) (1,498,048) (1,228,048)
Fixed maturity securities, held-to-
maturity (99,530) (82,835) (60,612)
Equity securities (516,907) (585,349) (446,599)
Mortgage loans (141,008) (157,247) (108,691)
Real estate (5,612) (3,908) (3,786)
Other invested assets (75,682) (55,988) (29,271)
Finance receivable originations or pur-
chases (77,141) (115,248) (175,876)
Finance receivable principal payments 109,277 133,762 142,723
Other, net 141,768 (88,626) (40,062)
----------- ----------- -----------
Net cash provided by (used for) in-
vesting activities 28,910 (63,812) (141,639)
----------- ----------- -----------
Cash Flows from Financing Activities
Deposits credited to annuity and insur-
ance contracts 952,622 928,696 657,405
Withdrawals from annuity and insurance
contracts (1,053,844) (1,013,588) (702,681)
Proceeds from issuance of debt 40,000 -- 60,000
Payments on debt (31,000) (21,000) (21,000)
Other, net (6,023) (3,355) (6,898)
----------- ----------- -----------
Net cash used for financing activi-
ties (98,245) (109,247) (13,174)
----------- ----------- -----------
Net increase in cash and short-term in-
vestments 103,564 25,019 62,313
Cash and short-term investments, begin-
ning of year 208,531 183,512 121,199
----------- ----------- -----------
Cash and short-term investments, end of
year $ 312,095 $ 208,531 $ 183,512
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
70
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Nature of Operations
Conversion to a Mutual Holding Company Structure
Consent was given from the Minnesota Department of Commerce (Department of
Commerce) allowing The Minnesota Mutual Life Insurance Company to implement a
conversion to a mutual holding company. The Minnesota Mutual Life Insurance
Company enacted this privilege effective October 1, 1998. The conversion
created Minnesota Mutual Companies, Inc., a mutual holding company, Securian
Holding Company and Securian Financial Group, Inc., which are intermediate
stock holding companies. The Minnesota Mutual Life Insurance Company was
converted into a stock life insurance company and renamed Minnesota Life
Insurance Company. Minnesota Mutual Companies, Inc. will at all times, in
accordance with the conversion plan and as required by the Mutual Insurance
Holding Company Act, directly or indirectly control Minnesota Life Insurance
Company through the ownership of at least a majority of the voting power of the
voting shares of the capital stock of Minnesota Life Insurance Company. Annuity
contract and life insurance policyholders of Minnesota Life Insurance Company
have certain membership interests consisting primarily of the right to vote on
certain matters involving Minnesota Mutual Companies, Inc. and the right to
receive distributions of surplus in the event of demutualization, dissolution
or liquidation of Minnesota Mutual Companies, Inc.
Description of Business
Minnesota Life Insurance Company, both directly and through its subsidiaries
(collectively, the Company), provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into five strategic business
units which focus on various markets: Individual Insurance, Financial Services,
Group Insurance, Pension and Asset Management. Revenues in 1998 for these
business units were $862,240,000, $273,511,000, $258,928,000, $102,061,000 and
$20,723,000, respectively. Additional revenues of $115,702,000 were reported by
the Company's subsidiaries.
The Company serves over six million people through more than 4,000 associates
located at its St. Paul, Minnesota headquarters and in 75 general agencies and
45 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 Life Insurance Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Future events, including
changes in mortality, morbidity, interest rates and asset valuations, could
cause actual results to differ from the estimates used in the 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.
71
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to estimated gross profits or margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
policy acquisition costs are amortized over the premium paying period in
proportion to the ratio of annual premium revenues to ultimate anticipated
premium revenues. The ultimate premium revenues are estimated based upon the
same assumptions used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred policy
acquisition costs are amortized over the estimated lives of the contracts in
relation to the present value of estimated gross profits from surrender charges
and investment, mortality and expense margins.
Deferred policy acquisition costs amortized were $148,098,000, $128,176,000
and $125,978,000 for the years ended December 31, 1998, 1997 and 1996,
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
72
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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.
Venture capital limited partnerships are carried at cost, net of write-downs
for other than temporary declines in value and allowances for temporary
declines in value. Cash distributions are recorded as a return of capital
and/or income as appropriate. In-kind distributions are recorded as a return of
capital for the cost basis of the stock received.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1998 and 1997, was $6,713,000 and $6,269,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps were used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps were based upon
certain stock indices. If, at the time of settlement for a particular swap, the
designated stock index had fallen below a specified level, the counterparty
would pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index had risen, the Company would pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap. The equity swaps were settled with the
counterparties in August 1997. The swaps were carried at fair value, which were
based upon dealer quotes. Changes in fair value were recorded directly in
stockholder's equity. Upon settlement of the swaps, gains or losses were
recognized in income, and the Company realized a loss of approximately
$31,000,000 in 1997, upon settlement of these equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. Unrealized gains or losses are recorded on foreign
denominated securities due to the fluctuation in foreign currency exchange
rates and/or related payables and receivables and interest on foreign
securities. The Company uses forward foreign exchange currency contracts as
part of its risk management strategy for international investments. The forward
foreign exchange currency contracts are used to reduce market risks from
changes in foreign exchange rates. These forward foreign exchange currency
contracts are agreements to purchase a specified amount of one currency in
exchange for a specified amount of another currency at a future point in time
at a foreign exchange currency rate agreed upon on the contract open date. No
cash is exchanged at the outset of the contract and no payments are made by
either party until the contract close date. On the contract close date the
contracted amount of the purchased currency is received from the counterparty
and the contracted amount of the sold currency is sent to the counterparty.
Realized and unrealized gains and losses on these forward foreign exchange
contracts are recorded in income as incurred. In addition, these contracts are
generally short-term in nature and there is no material exposure to the Company
at December 31, 1998. Notional amounts for the years ended December 31, 1998
and 1997, were $115,194,000 and $80,997,000, respectively.
73
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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 stockholder's equity,
net of taxes and related adjustments to deferred policy acquisition costs and
unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$101,692,000 and $90,926,000 at December 31, 1998 and 1997, 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,
1998, 1997 and 1996, were $10,765,000, $8,965,000 and $6,454,000, respectively.
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension, variable
annuity and variable life insurance policyholders and contractholders. Assets
consist principally of marketable securities and both assets and liabilities
are reported at fair value, based upon the market value of the investments held
in the segregated funds. The Company receives administrative and investment
advisory fees for services rendered on behalf of these accounts.
The Company periodically invests money in its separate accounts. The market
value of such investments, included with separate account assets, amounted to
$46,945,000 and $46,293,000 at December 31, 1998 and 1997, respectively.
Policyholders' Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyholders' funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Dividends on participating policies and other discretionary payments are
declared by the Board of Directors based upon actuarial determinations, which
take into consideration current mortality, interest earnings, expense factors
and federal income taxes. Dividends are recognized as expenses consistent with
the recognition of premiums.
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.
74
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Account Policies (continued)
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 1997 and 1996 consolidated financial statement balances have been
reclassified to conform to the 1998 presentation.
(3) Investments
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $445,220 $457,391 $433,985
Equity securities 12,183 16,182 14,275
Mortgage loans 54,785 55,929 63,865
Real estate (236) (407) (475)
Policy loans 15,502 15,231 13,828
Short-term investments 6,147 6,995 6,535
Other invested assets 3,826 3,871 4,901
-------- -------- --------
Gross investment income 537,427 555,192 536,914
Investment expenses (6,346) (1,419) (5,927)
-------- -------- --------
Total $531,081 $553,773 $530,987
======== ======== ========
Net realized investment gains (losses) for the years ended December 31 were
as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $ 43,244 $ 3,711 $ (6,536)
Equity securities 47,526 92,765 57,770
Mortgage loans 3,399 2,011 (721)
Real estate 7,809 1,598 7,088
Other invested assets 12,674 14,282 (2,027)
-------- -------- --------
Total $114,652 $114,367 $ 55,574
======== ======== ========
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 56,428 $ 18,804 $ 19,750
Gross realized losses (13,184) (15,093) (26,286)
Equity securities:
Gross realized gains 107,342 120,437 79,982
Gross realized losses (59,816) (27,672) (22,212)
</TABLE>
75
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3)Investments (continued)
Net unrealized gains (losses) included in stockholder's equity at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 487,479 $ 472,671
Gross unrealized losses (73,440) (118,863)
Adjustment to deferred acquisition costs (119,542) (100,299)
Adjustment to unearned policy and contract fees 15,912 (13,087)
Deferred federal income taxes (106,794) (83,749)
--------- ---------
Net unrealized gains $ 203,615 $ 156,673
========= =========
</TABLE>
76
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3)Investments (continued)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
Gross Unrealized
-----------------
Amortized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale:
United States government and
government agencies and
authorities $ 195,650 $ 17,389 $ 201 $ 212,838
Foreign governments 784 -- 311 473
Corporate securities 2,357,861 204,277 30,648 2,531,490
International bond securities 188,448 22,636 1,298 209,786
Mortgage-backed securities 1,924,945 52,580 18,100 1,959,425
---------- -------- -------- ----------
Total fixed maturities 4,667,688 296,882 50,558 4,914,012
Equity securities-unaffiliated 463,777 157,585 15,057 606,305
Equity securities-affiliated
mutual funds 115,769 27,726 -- 143,495
---------- -------- -------- ----------
Total equity securities 579,546 185,311 15,057 749,800
---------- -------- -------- ----------
Total available-for-sale 5,247,234 482,193 65,615 5,663,812
Held-to maturity:
Corporate securities 894,064 67,496 235 961,325
Mortgage-backed securities 192,484 9,030 1,055 200,459
---------- -------- -------- ----------
Total held-to-maturity 1,086,548 76,526 1,290 1,161,784
---------- -------- -------- ----------
Total $6,333,782 $558,719 $ 66,905 $6,825,596
========== ======== ======== ==========
<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
government agencies and authori-
ties $ 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 mu-
tual funds 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
========== ======== ======== ==========
</TABLE>
77
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1998, 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 $ 38,375 $ 35,299 $ 11,109 $ 11,346
Due after one year through five
years 529,019 616,064 128,658 133,657
Due after five years through ten
years 1,251,763 1,316,512 373,294 403,159
Due after ten years 923,586 986,712 381,003 413,163
---------- ---------- ---------- ----------
2,742,743 2,954,587 894,064 961,325
Mortgage-backed securities 1,924,945 1,959,425 192,484 200,459
---------- ---------- ---------- ----------
Total $4,667,688 $4,914,012 $1,086,548 $1,161,784
========== ========== ========== ==========
</TABLE>
At December 31, 1998 and 1997, fixed maturity securities and short-term
investments with a carrying value of $6,361,000 and $8,000,000, respectively,
were on deposit with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,500
Investment real estate 841 2,248
------- -------
Total $ 2,341 $ 3,748
======= =======
</TABLE>
At December 31, 1998, the recorded investment in mortgage loans that were
considered to be impaired was $8,798 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, 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.
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, 1998 and 1997.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,500 $1,895 $1,711
Provision for credit losses -- -- 381
Charge-offs -- (395) (197)
------ ------ ------
Balance at end of year $1,500 $1,500 $1,895
====== ====== ======
</TABLE>
78
<PAGE>
Minnesota 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>
1998 1997 1996
---- ------ ------
(In thousands)
<S> <C> <C> <C>
Average impaired mortgage loans $14 $3,268 $9,375
Interest income on impaired mortgage loans--contractual 18 556 1,796
Interest income on impaired mortgage loans--collected 17 554 1,742
</TABLE>
(4) Notes Receivable
In connection with the Company's planned construction of an additional home
office facility in St. Paul, Minnesota, the Company entered into a loan
contingency agreement with the Housing and Redevelopment Authority of the City
of St. Paul, Minnesota (HRA) in November 1997. A maximum of $15 million in
funds is available under this loan for condemnation and demolition of the
Company's proposed building site. The note bears interest at a rate of 8.625%,
with principal payments commencing February 2004 and a maturity date of August
2025. Interest payments are accrued and are payable February and August of each
year commencing February 2001. All principal and interest payments are due only
to the extent of available tax increments. As of December 31, 1998, HRA has
drawn $9,669,128 on this loan contingency agreement and accrued interest of
$673,435.
(5) Net Finance Receivables
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Direct installment loans $147,425 $183,424
Retail installment notes 12,209 20,373
Retail revolving credit 17,170 25,426
Accrued interest 2,683 3,116
-------- --------
Gross receivables 179,487 232,339
Allowance for uncollectible amounts (16,076) (20,545)
-------- --------
Finance receivables, net $163,411 $211,794
======== ========
</TABLE>
Direct installment loans at December 31, 1998, consisted of $81,066,000 of
discount basis loans (net of unearned finance charges) and $66,359,000 of
interest-bearing loans. Direct installment loans at December 31, 1997,
consisted of $83,836,000 of discount basis loans (net of unearned finance
charges) and $99,588,000 of interest-bearing loans. 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 $44,000,000 and $65,000,000 of
real estate secured loans at December 31, 1998 and 1997, respectively.
Revolving credit loans included approximately $16,000,000 and $24,000,000 of
real estate secured loans at December 31, 1998 and 1997, 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
$75,011,000, $90,940,000 and $92,438,000 and the percentage of these cash
collections to the average net balances were 47%, 47% and 48% for the years
ended December 31, 1998, 1997 and 1996, respectively.
79
<PAGE>
Minnesota 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>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $20,545 $ 7,497 $ 6,377
Provision for credit losses 10,712 28,206 10,086
Charge-offs (18,440) (17,869) (11,036)
Recoveries 3,259 2,711 2,070
------- ------- -------
Balance at end of year $16,076 $20,545 $ 7,497
======= ======= =======
</TABLE>
At December 31, 1998, 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, 1998 and the related allowance for
credit losses were as follows:
<TABLE>
<CAPTION>
Installment Revolving
Loans Credit Total
----------- --------- -------
(In thousands)
<S> <C> <C> <C>
Balances at December 31, 1998 $7,546 11,190 $18,736
Related allowance for credit losses $3,033 5,486 $ 8,519
</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 1998. The
average quarterly balances of impaired loans during the year ended December 31,
1998 and 1997, was $6,354,000 and $7,397,000, respectively, for installment
basis loans and $12,471,000 and $12,793,000, respectively for 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, 1998.
(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>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed tax expense $84,553 $93,337 $69,753
Difference between computed and actual tax ex-
pense:
Dividends received deduction (1,730) (5,573) (2,534)
Special tax on mutual life insurance companies (3,455) 3,341 2,760
Sale of subsidiary -- (4,408) --
Foundation gain -- (4,042) (1,260)
Tax credits (4,416) (3,600) (3,475)
Expense adjustments and other 3,281 (2,275) 3,533
------- ------- -------
Total tax expense $78,233 $76,780 $68,777
======= ======= =======
</TABLE>
80
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(6) Income Taxes (continued)
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders' liabilities $ 16,999 $ 14,374
Pension and post retirement benefits 27,003 23,434
Tax deferred policy acquisition costs 82,940 73,134
Net realized capital losses 8,221 9,609
Other 18,487 20,524
-------- --------
Gross deferred tax assets 153,650 141,075
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs 155,655 152,337
Real estate and property and equipment depreciation 10,275 11,165
Basis difference on investments 10,798 11,061
Net unrealized capital gains 143,354 122,876
Other 7,475 9,693
-------- --------
Gross deferred tax liabilities 327,557 307,132
-------- --------
Net deferred tax liability $173,907 $166,057
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1998 and 1997, 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, 1998, 1997 and 1996, were
$91,259,000, $71,108,000 and $79,026,000, respectively.
The Company's tax returns for 1997, 1996 and 1995 are under examination by
the Internal Revenue Service. The Company believes additional taxes, if any,
assessed as a result of these examinations, will not have a material effect on
its financial position.
81
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Liability for Unpaid Accident and Health Claims, Reserve for Losses, and
Claim and Loss Adjustment Expenses
Activity in the liability for unpaid accident and health claims, reserve for
losses and claim and loss adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $409,249 $416,910 $377,302
Less: reinsurance recoverable 104,741 102,161 80,333
-------- -------- --------
Net balance at January 1 304,508 314,749 296,969
-------- -------- --------
Incurred related to:
Current year 92,793 121,153 134,727
Prior years 14,644 7,809 4,821
-------- -------- --------
Total incurred 107,437 128,962 139,548
-------- -------- --------
Paid related to:
Current year 27,660 51,275 51,695
Prior years 58,124 57,475 70,073
-------- -------- --------
Total paid 85,784 108,750 121,768
-------- -------- --------
Decrease in liabilities due to sale of subsidiary -- 30,453 --
-------- -------- --------
Net balance at December 31 326,161 304,508 314,749
Plus: reinsurance recoverable 108,918 104,741 102,161
-------- -------- --------
Balance at December 31 $435,079 $409,249 $416,910
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims, reserve for losses and
claim and loss adjustment expenses is included in future policy and contract
benefits and pending policy and contract claims on the consolidated balance
sheets.
As a result of changes in estimates of claims incurred in prior years, the
accident and health claims, reserve for losses and claim and loss adjustment
expenses incurred increased by $14,644,000, $7,809,000 and $4,821,000 in 1998,
1997 and 1996, respectively. These amounts are the result of normal reserve
development inherent in the uncertainty of establishing the liability for
unpaid accident and health claims, reserve for losses and claim and loss
adjustment expenses.
(8) Employee Benefit Plans
Pension Plans and Post Retirement Plans Other than Pensions
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds, which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan, which provides certain employees with benefits
in excess of limits for qualified retirement plans.
The Company also has unfunded post retirement 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.
82
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
The change in the benefit obligation and plan assets for the Company's plans
as of December 31 was calculated as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $151,509 $134,959 $ 24,467 $ 24,836
Service cost 8,402 6,847 1,375 1,047
Interest cost 10,436 9,956 1,713 1,872
Amendments 6 -- -- (99)
Actuarial gain 16,298 3,816 4,542 (1,930)
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Benefit obligation at end of year $181,439 $151,509 $ 31,236 $ 24,467
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at the
beginning of the year $133,505 $118,963 $ -- $ --
Actual return on plan assets 13,068 13,670 -- --
Employer contribution 5,349 4,940 861 1,259
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Fair value of plan assets at the
end of year $146,710 $133,504 $ -- $ --
======== ======== ======== ========
Funded status $(34,729) $(18,005) $(31,236) $(24,467)
Unrecognized net actuarial loss
(gain) 12,283 (1,735) (6,251) (11,353)
Unrecognized prior service cost
(benefit) 5,293 5,865 (2,986) (3,499)
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
Amounts recognized in the balance
sheet statement consist of:
Accrued benefit cost $(23,242) $(18,059) $(40,473) $(39,319)
Intangible asset 6,089 4,184 -- --
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
----------- -----------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average assumptions as of December 31
Discount rate 7.00% 7.48% 7.00% 7.50%
Expected return on plan assets 8.27% 8.32% -- --
Rate of compensation increase 5.32% 5.29% -- --
</TABLE>
83
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
For measurement purposes, an 8 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5 percent for 2003 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------- ----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $ 8,402 $6,847 $6,315 $1,375 $1,047 $1,041
Interest cost 10,436 9,956 8,852 1,713 1,872 2,074
Expected return on plan as-
sets (10,978) (9,859) (8,751) -- -- --
Amortization of prior serv-
ice cost (benefits) 578 578 578 (513) (510) (501)
Recognized net actuarial
loss (gain) 190 77 10 (559) (480) (177)
------- ------ ------ ------ ------ ------
Net periodic benefit cost $ 8,628 $7,599 $7,004 $2,016 $1,929 $2,437
======= ====== ====== ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
vale of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $39,470,000, $31,546,000 and $17,334,000 as of
December 31, 1998, respectively, and $32,622,000, $24,894,000 and $16,703,000
respectively, as of December 31, 1997.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1998 and 1997. 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 post retirement benefit obligation as of December 31, 1998 by
$5,875,000 and the estimated eligibility cost and interest cost components of
net periodic benefit costs for 1998 by $788,000. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
post retirement benefit obligation as of December 31, 1998 by $4,618,000 and
the estimated eligibility cost and interest cost components of net periodic
post retirement benefit costs for 1998 by $598,000.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the directors of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1998, 1997 and 1996 of $8,395,000, $7,173,000 and $6,092,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
(9) Sale of Subsidiary
On October 1, 1997, the Company sold Minnesota Fire and Casualty Company (MFC),
a wholly owned subsidiary, to Harleysville Group, Inc. The Company received net
cash proceeds of approximately $33.5 million from the sale, and realized a gain
of approximately $14.5 million. HomePlus Insurance Company (HomePlus), a
previously wholly owned subsidiary of MFC, was excluded from the sale of
assets. In accordance with the agreement, prior to September 30, 1997, MFC made
a distribution of private placement bonds to the Company with an amortized cost
of approximately $4.3 million and transferred all issued and outstanding shares
of HomePlus to the Company. The carrying value of the transferred shares was
approximately $5.8 million. Under an administrative services agreement with
MFC, the Company has retained MFC to provide financial and other services for
HomePlus.
84
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(10) Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligation under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed to be uncollectible.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct premiums $553,408 $595,686 $615,098
Reinsurance assumed 91,548 78,097 64,489
Reinsurance ceded (67,263) (58,530) (67,228)
-------- -------- --------
Net premiums $577,693 $615,253 $612,359
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $54,174,000,
$58,072,000 and $72,330,000 during 1998, 1997 and 1996, 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, 1998 and 1997.
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,
1998 and 1997, 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,
1998 and 1997, 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, 1998 and 1997
as those investment contracts have no defined maturity and are similar to a
deposit liability. The amount payable on demand equates to the account balance
less applicable surrender charges. Contracts without guaranteed interest rates
and surrender charges have fair values equal to their accumulation values plus
applicable market value adjustments. 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.
85
<PAGE>
Minnesota 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>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,914,012 $4,914,012 $4,719,801 $4,719,801
Held-to-maturity 1,086,548 1,161,784 1,088,312 1,158,227
Equity securities 749,800 749,800 686,638 686,638
Mortgage loans:
Commercial 579,890 603,173 506,860 527,994
Residential 101,329 104,315 154,477 158,334
Policy loans 226,409 226,409 213,488 213,488
Short-term investments 136,435 136,435 112,352 112,352
Cash 175,660 175,660 96,179 96,179
Finance receivables, net 163,411 163,411 211,794 211,794
Venture capital 160,958 164,332 115,856 122,742
Foreign currency exchange con-
tract 1,594 1,594 1,457 1,457
---------- ---------- ---------- ----------
Total financial assets $8,296,046 $8,400,925 $7,907,214 $8,009,006
========== ========== ========== ==========
</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>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Deferred annuities $2,085,408 $2,075,738 $2,131,806 $2,112,301
Annuity certain contracts 57,528 60,766 55,431 57,017
Other fund deposits 722,321 731,122 754,960 753,905
Guaranteed investment contracts 862 862 8,188 8,187
Supplementary contracts without
life contingencies 44,696 44,251 46,700 45,223
Notes payable 267,000 272,834 298,000 302,000
---------- ---------- ---------- ----------
Total financial liabilities $3,177,815 $3,185,573 $3,295,085 $3,278,633
========== ========== ========== ==========
</TABLE>
(12) Notes Payable
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyholders' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1998 and 1997. The issuance costs of
$1,421,000 are deferred and amortized over 30 years on straight-line basis.
86
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Notes Payable (continued)
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(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 142,000 173,000
-------- --------
Total notes payable $267,000 $298,000
======== ========
</TABLE>
At December 31, 1998, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1999, $49,000,000; 2000, $33,000,000;
2001, $26,000,000; 2002, $22,000,000; 2003, $12,000,000; thereafter
$125,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth
of $44,070,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1998.
Interest paid on debt for the years ended December 31, 1998, 1997 and 1996,
was $25,008,000, $18,197,000 and $21,849,000, respectively.
(13) Other Comprehensive Income
Effective December 31, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income is defined as any
change in stockholder's equity originating from non-owner transactions. The
Company had identified those changes as being comprised of net income,
unrealized appreciation (depreciation) on securities, and unrealized foreign
currency translation adjustments. The components of comprehensive income, other
than net income are illustrated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Other comprehensive income, before tax:
Foreign currency translation adjustment $ -- $ 1,457 $ --
Less: reclassification adjustment for gains in-
cluded in net income (1,457) -- --
------- ------- --------
(1,457) 1,457 --
Unrealized gains (loss) on securities 162,214 171,654 (18,746)
Less: reclassification adjustment for gains in-
cluded in net income (90,770) (96,476) (51,234)
------- ------- --------
71,444 75,178 (69,980)
Income tax expense related to items of other com-
prehensive income (23,045) (28,274) 25,040
------- ------- --------
Other comprehensive income, net of tax $46,942 $48,361 $(44,940)
======= ======= ========
</TABLE>
(14) Stock Dividends
On December 14, 1998, the Company declared and accrued a dividend to Securian
Financial Group, Inc. in the amount of $24,700,000 to be paid in 1999.
Dividend payments by Minnesota Life Insurance Company to its parent cannot
exceed the greater of 10% of statutory capital and surplus as of the preceding
year end or the statutory net gain from operations for the current calendar
year, without prior approval from the Department of Commerce. Based on this
limitation and 1997 statutory results, Minnesota Life Insurance Company could
have paid $87,069,000 in dividends in 1998 without prior approval.
87
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(15) Year 2000 (Unaudited)
The Company's business units utilize products and systems in the normal course
of business. Some of the Company's products and systems will have been replaced
or modified in order to process dates including the year 2000 and beyond.
The Company began preparing for the new millennium in the early 1980s by
designing systems with the year 2000 in mind. The Company began a comprehensive
Year 2000 project in 1995 to prepare all components of its business to function
properly before, during and after the year 2000.
The Company's goal is to have all computer systems and data prepared for the
year 2000. While the Company has taken extensive steps to renovate, upgrade and
replace applications, it is impossible to guarantee there will be no problems
associated with the year 2000 date change. The Company is currently developing
contingency and continuity plans to help minimize any impact of problems that
do arise.
(16) 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 $41,010,000 as of
December 31, 1998. 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 $165,191,000 as of December 31, 1998. The Company
estimates that $60,000,000 of these commitments will be invested in 1999, with
the remaining $105,191,000 invested over the next four years.
As of December 31, 1998, the Company had committed to purchase bonds and
mortgage loans totaling $198,907,000 but had not completed the purchase
transactions.
At December 31, 1998, the Company had guaranteed the payment of $75,100,000
in policyholders' dividends and discretionary amounts payable in 1999. The
Company has pledged bonds, valued at $76,596,000 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.
88
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(17) Statutory Financial Data
The Company also prepares financial statements according to statutory
accounting practices prescribed or permitted by the Department of Commerce for
purposes of filing with the Department of Commerce, the National Association of
Insurance Commissioners and states in which the Company is licensed to do
business. Statutory accounting practices focus primarily on solvency and
surplus adequacy. The significant differences that exist between statutory and
GAAP accounting, and their effects are illustrated below:
<TABLE>
<CAPTION>
Year ended December
----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Statutory capital and surplus $ 947,885 $ 870,688
Adjustments:
Deferred policy acquisition costs 564,382 576,030
Net unrealized investment gains 281,226 213,026
Statutory asset valuation reserve 239,455 242,100
Statutory interest maintenance reserve 49,915 24,169
Premiums and fees deferred or receivable (73,312) (74,025)
Change in reserve basis 117,806 101,415
Separate accounts (56,816) (51,172)
Unearned policy and contract fees (134,373) (126,477)
Surplus notes (125,000) (125,000)
Net deferred income taxes (173,907) (166,057)
Non-admitted assets 36,764 32,611
Policyholders' dividends 60,648 60,036
Other (12,397) (40,659)
---------- ----------
Stockholder's equity as reported in the accompanying
consolidated financial statements $1,722,276 $1,536,685
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Statutory net income $104,609 $167,078 $115,797
Adjustments:
Deferred policy acquisition costs 18,042 26,878 19,284
Statutory interest maintenance reserve 25,746 (538) (8,192)
Premiums and fees deferred or receivable 708 2,175 1,587
Change in reserve basis 3,011 9,699 20,114
Separate accounts (5,644) (6,272) (6,304)
Unearned policy and contract fees (7,896) (12,825) (2,530)
Net deferred income taxes 15,351 7,832 (744)
Policyholders' dividends 1,194 2,708 502
Other 8,228 (6,839) (8,996)
-------- -------- --------
Net income as reported in the accompanying
consolidated financial statements $163,349 $189,896 $130,518
======== ======== ========
</TABLE>
89
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments--Other than Investments in Related Parties
December 31, 1998
<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 $ 195,650 $ 212,838 $ 212,838
Foreign governments 784 473 473
Public utilities 343,230 368,246 357,795
Mortgage-backed securities 2,117,429 2,159,884 2,151,909
All other corporate bonds 3,097,143 3,334,355 3,277,545
---------- ---------- ----------
Total bonds 5,754,236 6,075,796 6,000,560
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 14,403 18,472 18,472
Banks, trusts and insurance companies 42,538 43,615 43,615
Industrial, miscellaneous and all
other 495,635 659,177 659,177
Nonredeemable preferred stocks 26,970 28,536 28,536
---------- ---------- ----------
Total equity securities 579,546 749,800 749,800
---------- ---------- ----------
Mortgage loans on real estate 681,219 XXXXXX 681,219
Real estate (2) 38,530 XXXXXX 38,530
Policy loans 226,409 XXXXXX 226,409
Other long-term investments 261,625 XXXXXX 261,625
Short-term investments 136,435 XXXXXX 136,435
---------- ---------- ----------
Total 1,344,218 -- 1,344,218
---------- ---------- ----------
Total investments $7,678,000 $6,825,596 $8,094,578
========== ========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $-0-.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments
See independent auditors' report.
90
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(In thousands)
<TABLE>
<CAPTION>
As of December 31 For the years ended December 31
--------------------------------------------------- -----------------------------------------------------------
Future policy Amortization
Deferred benefits Other policy Benefits, of deferred
policy losses, claims claims and Net claims, losses policy Other
acquisition and settlement Unearned benefits Premium investment and settlement acquisition operating
Segment costs expenses(1) premiums(2) payable revenue(3) income expenses costs expenses
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Life insurance $421,057 $2,303,580 $146,042 $51,798 $615,856 $246,303 $502,767 $114,589 $342,080
Accident and
health insurance 74,606 496,839 33,568 18,342 167,544 35,822 105,336 12,261 93,876
Annuity 68,719 3,186,148 25 424 93,992 247,970 225,004 21,248 136,527
Property and li-
ability insur-
ance -- 480 556 -- 662 986 2,848 -- 1,187
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$564,382 $5,987,047 $180,191 $70,564 $878,054 $531,081 $835,955 $148,098 $573,670
======== ========== ======== ======= ======== ======== ======== ======== ========
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627 $576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insurance 70,593 466,109 34,250 17,153 205,869 40,343 87,424 9,451 101,960
Annuity 71,425 3,266,965 -- 4,576 64,637 261,768 242,738 16,252 129,263
Property and li-
ability insur-
ance -- 280 1,116 -- 40,316 4,395 33,773 -- 13,146
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$576,030 $5,962,750 $202,070 $64,356 $887,290 $553,773 $840,682 $128,176 $590,307
======== ========== ======== ======= ======== ======== ======== ======== ========
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and li-
ability insur-
ance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
Premiums
Segment written(4)
- ------- ----------
<S> <C>
1998:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 103
----------
$ 103
==========
1997:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 43,376
----------
$43,376
==========
1996:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 50,515
----------
$50,515
==========
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
See independent auditors' report.
91
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
other from other Net assumed to
Gross amount companies companies amount net
------------ ----------- ----------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1998:
Life insurance in
force $158,229,143 $18,656,917 $28,559,482 $168,131,708 17.0%
============ =========== =========== ============
Premiums:
Life insurance $ 338,909 $ 30,532 $ 71,198 $ 379,575 18.8%
Accident and health
insurance 180,081 17,894 1,432 163,619 0.9%
Annuity 33,837 -- -- 33,837 --
Property and liabil-
ity insurance 581 18,837 18,918 662 2857.7%
------------ ----------- ----------- ------------
Total premiums $ 553,408 $ 67,263 $ 91,548 $ 577,693 15.8%
============ =========== =========== ============
1997:
Life insurance in
force $122,120,394 $14,813,351 $25,566,734 $132,873,777 19.2%
============ =========== =========== ============
Premiums:
Life insurance $ 340,984 $ 30,547 $ 63,815 $ 374,252 17.1%
Accident and health
insurance 175,647 16,332 1,310 160,625 0.8%
Annuity 40,060 -- -- 40,060 --
Property and liabil-
ity 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 liabil-
ity insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
</TABLE>
See independent auditors' report.
92
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
Variable Annuity Account
Cross Reference Sheet to Other Information
Form N-4
Item Number Caption in Other Information
24. Financial Statements and Exhibits
25. Directors and Officers of the Depositor
26. Persons Controlled by or Under Common Control with the Depositor
or Registrant
27. Number of Contract Owners
28. Indemnification
29. Principal Underwriters
30. Location of Accounts and Records
31. Management Services
32. Undertakings
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Audited Financial Statements of Variable Annuity Account for the
fiscal year ended December 31, 1998, are included in Part B of this
filing and consist of the following:
1. Independent Auditors' Report
2. Statement of Assets and Liabilities.
3. Statement of Operations.
4. Statements of Changes in Net Assets.
5. Notes to Financial Statements.
(b) Audited Financial Statements of the Depositor, Minnesota Life
Insurance Company, for the fiscal year ended December 31, 1998, are
included in Part B of this filing and consist of the following:
1. Independent Auditors' Report - Minnesota Life Insurance Company.
2. Consolidated Balance Sheets - Minnesota Life Insurance Company.
3. Consolidated Statements of Operations and Comprehensive Income -
Minnesota Life Insurance Company.
4. Consolidated Statements of Changes in Stockholder's Equity -
Minnesota Life Insurance Company.
5. Consolidated Statements of Cash Flows - Minnesota Life Insurance
Company.
6. Notes to Consolidated Financial Statements - Minnesota Life
Insurance Company.
7. Summary of Investments-Other than Investments in Related
Parties - Minnesota Life Insurance Company.
8. Supplementary Insurance Information - Minnesota Life Insurance
Company.
9. Reinsurance - Minnesota Life Insurance Company.
(c) Exhibits
1. The Resolution of The Minnesota Mutual Life Insurance Company's
Executive Committee of its Board of Trustees establishing the
Variable Annuity Account, previously filed as Exhibit (c)1. to
Registrant's Form N-4, File Number 33-62147, is hereby
incorporated by reference.
2. Not applicable.
3. (a) The Distribution Agreement between The Minnesota Mutual Life
Insurance Company and MIMLIC Sales Corporation, previously
filed as Exhibit (c)3.(a) to Registrant's Form N-4, File
Number 33-62147, is hereby incorporated by reference.
(b) Dealer Selling Agreement, previously filed as Exhibit
(c)3.(b) to Registrant's Form N-4, File Number 33-62147, is
hereby incorporated by reference.
<PAGE>
4. (a) The Immediate Variable Annuity Contract, form MHC-95-9326,
previously filed as Exhibit (c)4.(a) to Registrant's Form
N-4, File Number 33-62147, Post-Effective Amendment Number
3, is hereby incorporated by reference.
(b) The Immediate Variable Annuity Contract (Unisex), form
MHC-95-9327, previously filed as Exhibit (c)4.(b) to
Registrant's Form N-4, File Number 33-62147, Post-Effective
Amendment Number 3, is hereby incorporated by reference.
(c) The Individual Retirement Annuity (IRA) Agreement, SEP,
Traditional IRA and Roth-IRA, form MHC-97-9418, previously
filed as Exhibit (c)4.(c) to Registrant's Form N-4, File
Number 33-62147, Post-Effective Amendment Number 3, is
hereby incorporated by reference.
(d) The Individual Retirement Annuity, SIMPLE - (IRA)
Agreement, form MHC-98-9431, previously filed as Exhibit
(c)4.(d) to Registrant's Form N-4, File Number 33-62147,
Post-Effective Amendment Number 3, is hereby incorporated
by reference.
(e) The Qualified Plan Agreement, form MHC-88-9176, previously
filed as Exhibit (c)4.(3) to Registrant's Form N-4, File
Number 33-62147, Post-Effective Amendment Number 3, is
hereby incorporated by reference.
(f) Tax Sheltered Annuity, form MHC-88-9213, previously filed
as Exhibit (c)4.(f) to Registrant's Form N-4, File Number
33-62147, Post-Effective Amendment Number 3, is hereby
incorporated by reference.
5. (a) Application, form MHC-95-9328, previously filed as Exhibit
(c)5.(a) to Registrant's Form N-4, File Number 33-62147,
Post-Effective Amendment Number 3, is hereby incorporated
by reference.
6. Certificate of Incorporation and Bylaws.
(a) Restated Certificate of Incorporation of Minnesota Life
Insurance Company, previously filed as Exhibit (c)6.(a) to
Registrant's Form N-4, File Number 33-62147, Post-Effective
Amendment Number 3, is hereby incorporated by reference.
(b) The Bylaws of Minnesota Life Insurance Company, previously
filed as Exhibit (c)6.(b) to Registrant's Form N-4, File
Number 33-62147, Post-Effective Amendment Number 3, is
hereby incorporated by reference.
7. Not applicable.
8. Not applicable.
9. Opinion and consent of Donald F. Gruber, Esq.
10. Consent of KPMG Peat Marwick LLP.
11. Not applicable.
12. Not applicable.
13. Not applicable.
14. Minnesota Life Insurance Company Power of Attorney To Sign
Registration Statements.
Item 25. Directors and Officers of the Depositor
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrant
---------------- ---------------------- ---------------
Giulio Agostini Director None
3M
3M Center -
Executive 220-14W-08
St. Paul, MN 55144-1000
Anthony L. Andersen Director None
H. B. Fuller Company
2424 Territorial Road
St. Paul, MN 55114
Leslie S. Biller Director None
Wells Fargo & Company
420 Montgomery Street
MHC 0101-121
San Francisco, CA 94104
John F. Bruder Senior Vice President None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, MN 55101
Keith M. Campbell Senior Vice President None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, MN 55101
John F. Grundhofer Director None
U.S. Bancorp
601 2nd Avenue South
Suite 2900
Minneapolis, MN 55402-4302
<PAGE>
Robert E. Hunstad Executive Vice President None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, MN 55101
James E. Johnson Senior Vice President None
Minnesota Life and Actuary
Insurance Company
400 Robert Street North
St. Paul, MN 55101
David S. Kidwell, Ph.D. Director None
The Curtis L. Carlson
School of Management
University of Minnesota
321 19th Avenue South
Minneapolis, MN 55455
Reatha C. King, Ph.D. Director None
General Mills Foundation
P.O. Box 1113
Minneapolis, MN 55440
Dennis E. Prohofsky Senior Vice President, None
Minnesota Life General Counsel and
Insurance Company Secretary
400 Robert Street North
St. Paul, MN 55101
Thomas E. Rohricht Director None
Doherty, Rumble & Butler
Professional Association
2800 Minnesota World
Trade Center
30 East Seventh Street
St. Paul, MN 55101-4999
Robert L. Senkler Chairman, President and None
Minnesota Life Chief Executive Officer
Insurance Company
400 Robert Street North
St. Paul, MN 55101
Michael E. Shannon Director None
Ecolab, Inc.
370 Wabasha Street
Ecolab Center
St. Paul, MN 55102
Gregory S. Strong Senior Vice President and None
Minnesota Life Chief Financial Officer
Insurance Company
400 Robert Street North
St. Paul, MN 55101
Terrence M. Sullivan Senior Vice President None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, MN 55101
Randy F. Wallake Senior Vice President None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, MN 55101
William N. Westhoff Senior Vice President None
Minnesota Life and Treasurer
Insurance Company
400 Robert Street North
St. Paul, MN 55101
Frederick T. Weyerhaeuser Director None
Clearwater Investment Trust
332 Minnesota Street
Suite W-2090
St. Paul, MN 55101-1308
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Wholly-owned subsidiary of Minnesota Mutual Companies, Inc.:
Securian Holding Company (Delaware)
Wholly-owned subsidiary of Securian Holding Company:
Securian Financial Group, Inc. (Delaware)
Wholly-owned subsidiary of Securian Financial Group, Inc.
Minnesota Life Insurance Company
Wholly-owned subsidiaries of Minnesota Life Insurance Company:
Advantus Capital Management, Inc.
HomePlus Insurance Company
Northstar Life Insurance Company (New York)
The Ministers Life Insurance Company
MIMLIC Life Insurance Company (Arizona)
Robert Street Energy, Inc.
Capitol City Property Management, Inc.
Personal Finance Company (Delaware)
Enterprise Holding Corporation
Wholly-owned subsidiary of Advantus Capital Management, Inc.:
Ascend Financial Services, Inc.
Wholly-owned subsidiaries of Ascend Financial Services, Inc.:
MIMLIC Insurance Agency of Massachusetts, Inc. (Massachusetts)
MIMLIC Insurance Agency of Texas, Inc. (Texas)
Ascend Insurance Agency of Nevada, Inc. (Nevada)
Ascend Insurance Agency of Oklahoma, Inc. (Oklahoma)
Wholly-owned subsidiaries of Enterprise Holding Corporation:
Financial Ink Corporation
Oakleaf Service Corporation
Concepts in Marketing Research Corporation
Concepts in Marketing Services Corporation
Lafayette Litho, Inc.
DataPlan Securities, Inc. (Ohio)
MIMLIC Imperial Corporation
MIMLIC Funding, Inc.
MCM Funding 1997-1, Inc.
MCM Funding 1998-1, Inc.
MIMLIC Venture Corporation
HomePlus Insurance Agency, Inc.
Ministers Life Resources, Inc.
Wedgewood Valley Golf, Inc.
<PAGE>
Wholly-owned subsidiary of HomePlus Insurance Agency, Inc.:
HomePlus Insurance Agency of Texas, Inc. (Texas)
Majority-owned subsidiary of Ascend Financial Services, Inc.:
MIMLIC Insurance Agency of Ohio, Inc. (Ohio)
Open-end registered investment company offering shares solely to separate
accounts of Minnesota Life Insurance Company:
Advantus Series Fund, Inc.
Fifty percent-owned subsidiary of MIMLIC Imperial Corporation:
C.R.I. Securities, Inc.
Majority-owned subsidiaries of Minnesota Life Insurance Company:
Advantus Enterprise Fund, Inc.
Advantus International Balanced Fund, Inc.
Advantus Venture Fund, Inc.
Advantus Real Estate Securities Fund, Inc.
Less than majority owned, but greater than 25% owned, subsidiaries of Minnesota
Life Insurance Company:
Advantus Money Market Fund, Inc.
MIMLIC Cash Fund, Inc.
Advantus Cornerstone Fund, Inc.
Advantus Index 500 Fund, Inc.
Less than 25% owned subsidiaries of Minnesota Life Insurance Company:
Advantus Horizon Fund, Inc.
Advantus Spectrum Fund, Inc.
Advantus Mortgage Securities Fund, Inc.
Advantus Bond Fund, Inc.
Unless indicated otherwise parenthetically, each of the above corporations is a
Minnesota corporation.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 25, 1999, the number of holders of securities of the Registrant
of this class were as follows:
Number of Record
Title of Class Holders
-------------- ----------------
Immediate Variable Annuity Contracts 136
<PAGE>
ITEM 28. INDEMNIFICATION
The State of Minnesota has an indemnification statute (Minnesota Statutes
300.083), as amended, effective January 1, 1984, which requires indemnification
of individuals only under the circumstances described by the statute. Expenses
incurred in the defense of any action, including attorneys' fees, may be
advanced to the individual after written request by the board of directors upon
receiving an undertaking from the individual to repay any amount advanced unless
it is ultimately determined that he or she is entitled to be indemnified by the
corporation as authorized by the statute and after a determination that the
facts then known to those making the determination would not preclude
indemnification.
Indemnification is required for persons made a part to a proceeding by reason of
their official capacity so long as they acted in good faith, received no
improper personal benefit and have not been indemnified by another organization.
In the case of a criminal proceeding, they must also have had no reasonable
cause to believe the conduct was unlawful. In respect to other acts arising out
of official capacity: (1) where the person is acting directly for the
corporation there must be a reasonable belief by the person that his or her
conduct was in the best interests of the corporation or, (2) where the person is
serving another organization or plan at the request of the corporation, the
person must have reasonably believed that his or her conduct was not opposed to
the best interests of the corporation. In the case of persons not directors,
officers or policy-making employees, determination of eligibility for
indemnification may be made by a board-appointed committee of which a director
is a member. For other employees, directors and officers, the determination of
eligibility is made by the Board or a committee of the Board, special legal
counsel, the shareholder of the corporation or pursuant to a judicial
proceeding.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Minnesota Life Insurance Company and Variable Annuity Account pursuant to the
foregoing provisions, or otherwise, Minnesota Life Insurance Company and
Variable Annuity Account have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by Minnesota Life Insurance Company and Variable Annuity Account
of expenses incurred or paid by a director, officer or controlling person of
Minnesota Life Insurance Company and Variable Annuity Account in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities
being registered, Minnesota Life Insurance Company and Variable Annuity
Account will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter is Ascend Financial Services, Inc.
Ascend Financial Services, Inc. is also the principal underwriter
for twelve mutual funds (Advantus Horizon Fund, Inc.; Advantus
Spectrum Fund, Inc.; Advantus Money Market Fund, Inc.; Advantus
Mortgage Securities Fund, Inc.; Advantus Bond Fund, Inc.,;
Advantus Cornerstone Fund, Inc.; Advantus Enterprise Fund, Inc.;
Advantus International Balanced Fund, Inc.; Advantus Venture
Fund, Inc.; Advantus Index 500 Fund, Inc.; Advantus Real
Estate Securities Fund, Inc.; and the MIMLIC Cash
<PAGE>
Fund, Inc.) and for four additional registered separate accounts
of Minnesota Life Insurance Company, all of which offer annuity
contracts and life insurance policies on a variable basis.
(b) Directors and Officers of Underwriter.
DIRECTORS AND OFFICERS OF UNDERWRITER
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Depositor
- ------------------ --------------------- ---------------------
Robert E. Hunstad Director None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, Minnesota 55101
George I. Connolly President, Chief None
Ascend Financial Services, Inc. Executive Officer, Chief
400 Robert Street North Compliance Officer and
St. Paul, Minnesota 55101 Director
Margaret Milosevich Vice President, Chief Assistant
Ascend Financial Services, Inc. Operations Officer, Secretary
400 Robert Street North Treasurer and Secretary
St. Paul, Minnesota 55101
Dennis E. Prohofsky Director None
Minnesota Life
Insurance Company
400 Robert Street North
St. Paul, Minnesota 55101
Thomas L. Clark Assistant Treasurer Assistant
Ascend Financial Services, Inc. and Assistant Secretary Secretary
400 Robert Street North
St. Paul, Minnesota 55101
(c) All commissions and other compensation received by each principal
underwriter, directly or indirectly, from the Registrant during
the Registrant's last fiscal year for this class of securities:
Name of Net Underwriting Compensation on
Principal Discounts and Redemption or Brokerage Other
Underwriter Commissions Annuitization Commissions Compensation
----------- ---------------- --------------- ----------- ------------
Ascend $15,989,724 ___ ___ ___
Financial
Services, Inc,
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules promulgated thereunder are in the physical
possession of Minnesota Life Insurance Company, St. Paul, Minnesota 55101-2098.
ITEM 31. MANAGEMENT SERVICES
None.
<PAGE>
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for so
long as payments under the Contracts may be accepted.
(b) The Registrant hereby undertakes to include as part of any
application to purchase a contract offered by the prospectus a
space that an applicant can check to request a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver any Statement of
Additional Information and any financial statement required to be
made available under this form promptly upon written or oral
request.
(d) Minnesota Life Insurance Company hereby represents that, as to
the variable annuity contract which is the subject of this
Registration Statement, File Number 33-62147, the fees and
charges deducted under the contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses
expected to be incurred and the risks assumed by Minnesota
Life Insurance Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
certifies that it meets the requirements of Securities Act Rule 485(b) for
effectiveness of this Amendment to the Registration Statement and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of St. Paul and the State
of Minnesota on the 29th day of April, 1999.
VARIABLE ANNUITY ACCOUNT
(Registrant)
By: MINNESOTA LIFE INSURANCE COMPANY
(Depositor)
By
-------------------------------------------
Robert L. Senkler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the Depositor,
Minnesota Life Insurance Company, has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Saint Paul, and State
of Minnesota, on the 29th day of April, 1999.
MINNESOTA LIFE INSURANCE COMPANY
By
-------------------------------------------
Robert L. Senkler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in their capacities
with the Depositor and on the date indicated.
Signature Title Date
--------- ----- ----
Chairman, President and April 29, 1999
- ----------------------------- Chief Executive Officer
Robert L. Senkler
* Director
- -----------------------------
Giulio Agostini
* Director
- -----------------------------
Anthony L. Andersen
* Director
- -----------------------------
John F. Grundhofer
<PAGE>
* Director
- -----------------------------
David S. Kidwell, Ph.D.
* Director
- -----------------------------
Reatha C. King, Ph.D.
* Director
- -----------------------------
Thomas E. Rohricht
* Director
- -----------------------------
Michael E. Shannon
Director
- -----------------------------
Frederick T. Weyerhaeuser
Senior Vice President April 29, 1999
- ----------------------------- (chief financial officer)
Gregory S. Strong
Senior Vice President April 29, 1999
- ----------------------------- (chief accounting officer)
Gregory S. Strong
Attorney-in-Fact April 29, 1999
- -----------------------------
*By Dennis E. Prohofsky
* Pursuant to power of attorney dated April 12, 1999, a copy of which is
filed herewith.
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
9 Opinion and consent of Donald F. Gruber, Esq.
10 Consent of KPMG Peat Marwick LLP
14 Minnesota Life Insurance Company Power of Attorney To Sign
Registration Statement
<PAGE>
Minnesota Life Insurance Company
400 Robert Street North
St. Paul, MN 55101-2098
651.665.3500 Tel
MINNESOTA LIFE
A MINNESOTA MUTUAL COMPANY
April 21, 1999
Minnesota Life Insurance Company
Minnesota Mutual Life Center
400 Robert Street North
St. Paul, Minnesota 55101
Re: Variable Annuity Account
Immediate Variable Annuity Contract
Gentlepersons:
In my capacity as counsel for Minnesota Life Insurance Company (the "Company"),
I have reviewed certain legal matters relating to the Company's Separate Account
entitled Variable Annuity Account (the "Account") in connection with
Post-Effective Amendment Number 4 to its Registration Statement on Form N-4.
This Registration Statement is to be filed by the Company and the Account with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, with respect to certain immediate variable annuity contracts.
Based upon that review, I am of the following opinion:
1. The Account is a separate account of the Company duly created and
validly existing pursuant of the laws of the State of Minnesota;
and
2. The issuance and sale of these variable annuity contracts funded
by the Account have been duly authorized by the Company and such
contracts, when issued in accordance with and as described in the
current Prospectus contained in the Registration Statement, and
upon compliance with applicable local and federal laws, will be
legal and binding obligations of the Company in accordance with
their terms.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
Donald F. Gruber
Assistant General Counsel
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Minnesota Life Insurance Company and
Contract Owners of Variable Annuity Account:
We consent to the use of our reports included herein and to the reference to our
Firm under the heading "AUDITORS" in Part B of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 29, 1999
<PAGE>
Minnesota Life Insurance Company
Power of Attorney
To Sign Registration Statements
WHEREAS, Minnesota Life Insurance Company ("Minnesota Life") has
established certain separate accounts to fund certain variable annuity and
variable life insurance contracts, and
WHEREAS, Variable Fund D ("Fund D") is a separate account of Minnesota Life
registered as a unit investment trust under the Investment Company Act of 1940
offering variable annuity contracts registered under the Securities Act of 1933,
and
WHEREAS, Variable Annuity Account ("Variable Annuity Account") is a
separate account of Minnesota Life registered as a unit investment trust under
the Investment Company Act of 1940 offering variable annuity contracts
registered under the Securities Act of 1933, and
WHEREAS, Minnesota Life Variable Life Account ("Variable Life Account") is
a separate account of Minnesota Life registered as a unit investment trust under
the Investment Company Act of 1940 offering variable adjustable life insurance
policies registered under the Securities Act of 1933;
WHEREAS, Group Variable Annuity Account ("Group Variable Annuity Account")
is a separate account of Minnesota Life which has been established for the
purpose of issuing group annuity contracts on a variable basis and which is to
be registered as a unit investment trust under the Investment Company Act of
1940 offering group variable annuity contracts and certificates to be registered
under the Securities Act of 1933;
WHEREAS, Minnesota Life Variable Universal Life Account ("Variable
Universal Life Account") is a separate account of Minnesota Life which has been
established for the purpose of issuing group and individual variable universal
life insurance policies on a variable basis and which is to be registered as a
unit investment trust under the Investment Company Act of 1940 offering group
and individual variable universal life insurance policies to be registered under
the Securities Act of 1933;
NOW THEREFORE, We, the undersigned Directors and Officers of Minnesota Life,
do hereby appoint Dennis E. Prohofsky and Garold M. Felland, and each of them
individually, as attorney in fact for the purpose of signing in their names and
on their behalf as Directors of Minnesota Life and filing with the Securities
and Exchange Commission Registration Statements, or any amendment thereto, for
the purpose of: a) registering contracts and policies of Fund D, the Variable
Annuity Account, the Variable Life Account, the Group Variable Annuity Account
and the Variable Universal Life Account for sale by those entities and Minnesota
Life under the Securities Act of 1933; and b) registering Fund D, the Variable
Annuity Account, the Variable Life Account, the Group Variable Annuity Account
and the Variable Universal Life Account as unit investment trusts under the
Investment Company Act of 1940.
Signature Title Date
--------- ----- ----
/s/Robert L. Senkler Chairman of the Board, April 12, 1999
- ------------------------------ President and Chief
Robert L. Senkler Executive Officer
<PAGE>
Signature Title Date
--------- ----- ----
/s/Giulio Agostini Director April 12, 1999
- ------------------------------
Giulio Agostini
/s/Anthony L. Andersen Director April 12, 1999
- ------------------------------
Anthony L. Andersen
/s/Leslie S. Biller Director April 12, 1999
- ------------------------------
Leslie S. Biller
/s/John F. Grundhofer Director April 12, 1999
- ------------------------------
John F. Grundhofer
/s/David S. Kidwell Director April 12, 1999
- ------------------------------
David S. Kidwell, Ph.D.
/s/Reatha C. King, Ph.D. Director April 12, 1999
- ------------------------------
Reatha C. King, Ph.D.
/s/Thomas E. Rohricht Director April 12, 1999
- ------------------------------
Thomas E. Rohricht
/s/Michael E. Shannon Director April 12, 1999
- ------------------------------
Michael E. Shannon
Director April 12, 1999
- ------------------------------
Frederick T. Weyerhaeuser
