<PAGE>
GROUP VARIABLE ANNUITY PROSPECTUS
MINNESOTA MUTUAL
GROUP VARIABLE ANNUITY PROSPECTUS
The group deferred variable annuity contracts (hereinafter "Contracts"),
which are more fully described in this Prospectus, are designed to provide
benefits under certain retirement programs or plans which qualify for special
federal income tax treatment. The Contracts are specifically designed for
deferred compensation plans of state and local governments and other tax-exempt
organizations as provided in Sections 457 and 403 of the Internal Revenue Code
(hereinafter "Code").
The contract may also be used in other situations where a group annuity
contract is desired but where the benefit structure does not require a contract
which is recognized as an "annuity" for federal income tax purposes.
The owner of a Contract or a Participant under a Contract may elect to have
contract values accumulated on a completely variable basis, on a completely
fixed basis (as part of Minnesota Mutual's General Account and in which the
safety of principal and interest are guaranteed) or on a combination fixed and
variable basis. To the extent that contract values are accumulated on a variable
basis, they will be a part of the Group Variable Annuity Account. The Group
Variable Annuity Account invests its assets in shares of the Portfolios of
Advantus Series Fund, Inc. (the "Series Fund") or in shares of other registered
investment companies or portfolios of such companies (hereinafter "Underlying
Funds"). The Underlying Funds which are available under the Contract include the
Long-Term Corporate Portfolio of Vanguard Fixed Income Securities Fund, Inc.;
the Vanguard/Wellington Fund, Inc.; the Fidelity Contrafund (This Underlying
Fund is available only to contracts purchased prior to May 1, 1998); the Scudder
International Fund, a series of Scudder International Fund, Inc.; and the Janus
Twenty Fund, a series of the Janus Investment Fund. The variable accumulation
value of the Contract and the amount of each variable annuity payment will vary
in accordance with the performance of the Portfolio or Portfolios of the Series
Fund or such other Underlying Funds selected by the Contract Owner or
Participant. The Contract Owner or Participant bears the entire investment risk
for any amounts allocated to the Group Variable Annuity Account. The Contract
and all interests under it are usually subject to the general interests of
creditors of the owner of the Contract (usually the employer).
The amount of annuity payments may also be variable based upon the experience
of the Group Variable Annuity Account or the payments may be fixed. They may
also be a combination of both.
This Prospectus sets forth information that a prospective investor should know
before investing in the Group Variable Annuity Account, and it should be read
and kept for future reference. A Statement of Additional Information, bearing
the same date, which contains further Contract and Group Variable Annuity
Account information, has been filed with the Securities and Exchange Commission
and is incorporated by reference into this Prospectus. A copy of the Statement
of Additional Information may be obtained without charge by calling (612)
665-3500, after September 1, 1998, (651) 665-3500, or by writing the Group
Variable Annuity Account at its principal office at Minnesota Mutual Life
Center, 400 Robert Street North, St. Paul, Minnesota 55101-2098. A Table of
Contents for the Statement of Additional Information appears at the end of this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
[LOGO]
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
PH 612/665-3500
http://www.minnesotamutual.com
The date of this document and the Statement of Additional Information is: May 1,
1998.
F.47496 Rev. 5-1998
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Definitions................................................. 3
Synopsis.................................................... 4
Expense Table............................................... 6
Condensed Financial Information............................. 9
Financial Statements........................................ 10
Performance Data............................................ 10
General Descriptions........................................ 11
Contract Charges............................................ 16
Sales Charges........................................... 16
Mortality and Expense Risk Charges...................... 16
Contract Administrative Charge.......................... 17
Premium Taxes........................................... 17
Contract Fee............................................ 17
Series Fund and Underlying Fund Expenses.................... 17
Description of the Contracts................................ 18
Voting Rights............................................... 21
Annuity Period.............................................. 22
Death Benefit............................................... 24
Crediting Accumulation Units................................ 25
Withdrawals and Surrender................................... 27
Distribution................................................ 28
Federal Tax Status.......................................... 28
Legal Proceedings........................................... 33
Year 2000 Computer Problem.................................. 33
Registration Statement...................................... 33
Statement of Additional Information......................... 33
</TABLE>
2
<PAGE>
DEFINITIONS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: an accounting device used to determine the value of a
Contract before annuity payments begin.
ACCUMULATION VALUE: the sum of the values under a Contract in the General
Account and in the Group Variable Annuity Account. Accumulation values may also
be determined with respect to each Participant's interest in the Contract.
ANNUITY: a series of payments for life; for life with a minimum number of
payments guaranteed; for the joint lifetime of the annuitant and another person
and thereafter during the lifetime of the survivor; or for a period certain.
ANNUITY UNIT: an accounting device used to determine the amount of annuity
payments.
CERTIFICATE: a Participant's evidence of Contract rights and privileges or of
the amount and terms of annuity payments.
CODE: the Internal Revenue Code of 1986, as amended.
CONTRACT OWNER: the owner of the Contract, which could be a state, a local
government or other tax-exempt employer eligible to contract for a
tax-advantaged plan or any other suitable group owner.
CONTRACT YEAR: a period of one year beginning with the Contract date or a
Contract anniversary.
FIXED ANNUITY: an annuity providing for payments of guaranteed amounts
throughout the payment period.
FUND: the mutual fund or separate investment portfolio within a series mutual
fund which has been designated as an eligible investment for the Group Variable
Annuity Account, which shall be in addition to the Advantus Series Fund, Inc.
and its Portfolios.
GENERAL ACCOUNT: all of our assets other than those in the Group Variable
Annuity Account or in other separate accounts established by us.
GROUP VARIABLE ANNUITY ACCOUNT: a separate investment account called the
Minnesota Mutual Group Variable Annuity Account, where the investment experience
of its assets is kept separate from our other assets. This Group Variable
Annuity Account has several sub-accounts.
PARTICIPANT: a person for whom an interest is maintained under a group variable
annuity Contract, prior to the time that annuity payments begin.
PLAN: a tax-qualified plan of state and local governments and other tax-exempt
organizations, or a plan sponsored by any other suitable group owner, under
which benefits are to be provided by the group variable annuity Contracts
described herein.
PURCHASE PAYMENTS: amounts paid to us under a Contract.
SERIES FUND: the Advantus Series Fund, Inc., a mutual fund of the series type
which is an investment alternative for the Group Variable Annuity Account.
UNDERLYING FUND: one of a number of named mutual funds which are investment
alternatives for the Group Variable Annuity Account.
UNDERLYING FUND PORTFOLIO: a securities portfolio of an Underlying Fund where it
is a mutual fund of the series type.
VALUATION DATE: each date on which a Fund Portfolio is valued.
VARIABLE ANNUITY: an annuity providing for payments varying in amount in
accordance with the investment experience of the Group Variable Annuity Account.
WE, US, OUR: The Minnesota Mutual Life Insurance Company.
YOU, YOUR: a Participant under the Contract.
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE VARIABLE ANNUITY CONTRACTS
THIS SYNOPSIS CONTAINS A BRIEF SUMMARY OF SOME OF THE IMPORTANT FEATURES OF THE
VARIABLE ANNUITY CONTRACTS DESCRIBED IN THIS PROSPECTUS. YOU MAY FIND IT HELPFUL
TO RE-READ THIS SUMMARY AFTER READING THE PROSPECTUS, WHICH SHOULD BE RETAINED
FOR FUTURE REFERENCE. A GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS MAY BE
FOUND UNDER THE HEADING "DEFINITIONS" IN THIS PROSPECTUS.
WHAT IS AN ANNUITY?
An annuity is a series of payments for life; for life with a minimum number of
payments guaranteed; for the joint lifetime of the annuitant and another person
and thereafter during the lifetime of the survivor; or for a period certain. An
annuity with payments which are guaranteed as to amount during the payment
period is a fixed annuity. An annuity with payments which vary during the
payment or accumulation period in accordance with the investment experience of a
separate account is called a variable annuity.
WHAT ARE THE CONTRACTS OFFERED BY THIS PROSPECTUS?
The Contracts are combination fixed and variable annuity contracts issued by us
which provide for monthly annuity payments. These payments may begin immediately
or at a future date elected by you. Purchase payments received by us under a
Contract are allocated either to our General Account or Group Variable Annuity
Account, as specified by you. Purchase payments and other values allocated to
the General Account will be guaranteed and will accumulate at a rate of interest
guaranteed to be no less than 3%. Purchase payments and other values allocated
to the Group Variable Annuity Account are invested according to your
instructions in one or more Underlying Fund Portfolios and there is no guarantee
of investment return or even against investment loss on such allocations.
This Prospectus describes only the variable aspects of the Contracts, except
where fixed aspects are specifically mentioned. Please look to the language of
the Contracts for a description of the fixed portion of the Contracts. For more
information on the Contracts, see the heading "Description of the Contracts" in
this Prospectus.
WHAT TYPES OF VARIABLE ANNUITY CONTRACTS ARE AVAILABLE?
This Prospectus offers only one type of Contract, a group deferred variable
annuity contract (herein "Contract"), designed primarily to be used in
tax-advantaged plans of state and local governments and other tax-exempt
organizations. These governments or organizations are the owners of the
Contracts. The Contract and all interests under it are subject to the general
interests of creditors of the owner of the Contract (usually the employer).
HOW DOES A PERSON OBTAIN COVERAGE UNDER THE CONTRACT?
After purchasing a Contract, the Contract Owner will submit an application to us
for any employee who desires coverage under the Contract, is eligible to
participate in the underlying retirement program and who completes an
application. Such a person is then covered by the Contract and its terms, herein
a "Participant." A person's employer or the Contract Owner should be consulted
for additional information regarding the plan.
HOW IS THE AMOUNT OF PURCHASE PAYMENTS DETERMINED?
As a general matter, the Contract Owner, normally an employer, will report to us
the amount of purchase payments by or on behalf of each Participant. There are
no minimum amounts or number of purchase payments that are required under the
Contract. For deferred compensation programs, the employer or Contract Owner
will make purchase payments by or on behalf of a Participant pursuant to the
provisions of the underlying deferred compensation plan.
WHAT INVESTMENT OPTIONS ARE AVAILABLE FOR THE GROUP VARIABLE ANNUITY ACCOUNT?
Currently purchase payments may be allocated to one or more of the sub-accounts
of the Group Variable Annuity Account that invest respectively in the following
Series Fund or Underlying Fund Portfolios:
Growth Portfolio of Advantus Series Fund, Inc.,
Bond Portfolio of Advantus Series Fund, Inc.,
Money Market Portfolio of Advantus Series Fund, Inc.,
Asset Allocation Portfolio of Advantus Series Fund, Inc.,
4
<PAGE>
Mortgage Securities Portfolio of Advantus Series Fund, Inc.,
Index 500 Portfolio of Advantus Series Fund, Inc.,
Capital Appreciation Portfolio of Advantus Series Fund, Inc.,
International Stock Portfolio of Advantus Series Fund, Inc.,
Small Company Portfolio of Advantus Series Fund, Inc.,
Maturing Government Bond Portfolios of Advantus Series Fund, Inc. (of which
four are available),
Value Stock Portfolio of Advantus Series Fund, Inc.,
Small Company Value Portfolio of Advantus Series Fund, Inc.,
Global Bond Portfolio of Advantus Series Fund, Inc.,
Index 400 Mid-Cap Portfolio of Advantus Series Fund, Inc.,
Macro-Cap Value Portfolio of Advantus Series Fund, Inc.,
Micro-Cap Growth Portfolio of Advantus Series Fund, Inc.,
Real Estate Securities Portfolio of Advantus Series Fund, Inc.,
Long-Term Corporate Portfolio of Vanguard Fixed Income Securities Fund,
Inc.,
Vanguard/Wellington Fund, Inc.,
Fidelity Contrafund, (available only to Contracts purchased before May 1,
1998)
Scudder International Fund, a series of Scudder International Fund, Inc.,
and
Janus Twenty Fund, a series of the Janus Investment Fund
Additional information concerning the investment objectives, policies and
related expenses of the Series Fund Portfolios can be found in the current
prospectus for the Advantus Series Fund, Inc., which is attached to this
Prospectus. Additional information concerning the investment objectives and
policies of these Underlying Funds is contained in the prospectuses for each
such option. Some of these fund alternatives may also be part of a series fund
arrangement where not all of an existing fund's investment options are available
to the Contract.
There is no assurance that any Series Fund Portfolio or Underlying Fund will
meet its objectives.
CAN YOU CHANGE THE PORTFOLIO SELECTED?
Yes, provided that the Contract Owner and the underlying plan permit it. A
Participant may change the allocation of future purchase payments by giving us
written notice or a telephone call notifying us of the change. Before annuity
payments begin, a Participant may transfer all or a part of the accumulation
value from one Portfolio to another or among the Portfolios. After variable
annuity payments begin, transfers of annuity reserves may be made among the
sub-accounts of the Group Variable Annuity Account and from those sub-accounts
to the General Account. However, once fixed annuity payments begin, no annuity
reserves may be transferred out of the General Account.
WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACTS?
The following Contract expense information is intended to illustrate the
expenses of the Contract as applied to the Participant interests thereunder. All
expenses are rounded to the nearest dollar. The information contained in the
tables must be considered with the narrative information which immediately
follows them.
5
<PAGE>
EXPENSE TABLE
The tables shown below are to assist a Contract Owner or Participant in
understanding the costs and expenses that a Participant's interest in the
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. We reserve the right to increase the
mortality and expense risk charge to 1.25%. We also reserve the right to
increase the administrative charge to .40%. However, no such increases are
anticipated. The table does not reflect deductions for any applicable premium
taxes which may be made from each purchase payment depending upon the applicable
law. Surrender amounts in years shown reflect the Participant's ability to
withdraw an amount equal to ten percent of the accumulation value at the end of
the previous calendar year without the imposition of the deferred sales charge.
PARTICIPANT TRANSACTION EXPENSES
<TABLE>
<S> <C>
Deferred Sales Load (as a percentage of amount
surrendered).............................................. 6.0%
decreasing uniformly
by .0833% for each of
the first 72 months
from the contract
date
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value) Mortality and
Expense Risk Charges........................................ 0.85%
Contract Administrative Charge.............................. 0.15%
------
Total Separate Account Annual Expenses.................. 1.00%
------
------
</TABLE>
UNDERLYING MUTUAL FUND ANNUAL EXPENSES
(As a percentage of average net assets for the described underlying mutual
funds.)
<TABLE>
<CAPTION>
TOTAL FUND ANNUAL
MANAGEMENT & OTHER EXPENSES EXPENSES (AFTER
INVESTMENT ADMINISTRATIVE (AFTER EXPENSE EXPENSE
MANAGEMENT FEES EXPENSES REIMBURSEMENTS) REIMBURSEMENTS)
--------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Advantus Series Fund, Inc.:
Growth Portfolio.............. 0.50% -- 0.05% 0.55%
Bond Portfolio................ 0.50% -- 0.07% 0.57%
Money Market Portfolio........ 0.50% -- 0.09% 0.59%
Asset Allocation Portfolio.... 0.50% -- 0.05% 0.55%
Mortgage Securities
Portfolio................... 0.50% -- 0.09% 0.59%
Index 500 Portfolio........... 0.40% -- 0.05% 0.45%
Capital Appreciation
Portfolio................... 0.75% -- 0.05% 0.80%
International Stock
Portfolio................... 0.71% -- 0.26% 0.97%
Small Company Portfolio....... 0.75% -- 0.07% 0.82%
Maturing Government Bond 1998
Portfolio(1)................ 0.25% -- 0.15% 0.40%
Maturing Government Bond 2002
Portfolio(1)................ 0.25% -- 0.15% 0.40%
Maturing Government Bond 2006
Portfolio(1)................ 0.25% -- 0.15% 0.40%
Maturing Government Bond 2010
Portfolio(1)................ 0.25% -- 0.15% 0.40%
Value Stock Portfolio......... 0.75% -- 0.05% 0.80%
Small Company Value
Portfolio(1)................ 0.75% -- 0.15% 0.90%
Global Bond Portfolio......... 0.60% -- 1.00% 1.60%
Index 400 Mid-Cap
Portfolio(1)................ 0.40% -- 0.15% 0.55%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TOTAL FUND ANNUAL
MANAGEMENT & OTHER EXPENSES EXPENSES (AFTER
INVESTMENT ADMINISTRATIVE (AFTER EXPENSE EXPENSE
MANAGEMENT FEES EXPENSES REIMBURSEMENTS) REIMBURSEMENTS)
--------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Macro-Cap Value
Portfolio(1)................ 0.70% -- 0.15% 0.85%
Micro-Cap Growth
Portfolio(1)................ 1.10% -- 0.15% 1.25%
Real Estate Securities
Portfolio(2)................ 0.75% -- 0.15% 0.90%
Vanguard Fixed Income Securities
Fund, Inc.-- Long-Term
Corporate Portfolio............ 0.03% 0.21% 0.04% 0.28%
Vanguard/Wellington Fund,
Inc............................ 0.04% 0.23% 0.04% 0.31%
Fidelity Contrafund............. 0.48% -- 0.22% 0.70%
Scudder International Fund...... 0.82% -- 0.33% 1.15%
Janus Twenty Fund............... 0.66% -- 0.27% 0.93%
</TABLE>
(1) Minnesota Mutual voluntarily absorbed certain expenses of the Maturing
Government Bond 1998, Maturing Government Bond 2002, Maturing Government
Bond 2006, Maturing Government Bond 2010, Small Company Value, Index 400
Mid-Cap, Macro-Cap Value and Micro-Cap Growth Portfolios for the period
ended December 31, 1997. If these portfolios had been charged for expenses,
the ratio of expenses to average daily net assets would have been .74%,
1.14%, 1.50%, 1.85%, 1.78%, 1.70%, 3.13% and 2.03%, respectively. It is
Minnesota Mutual's present intention to waive other fund expenses during the
current fiscal year which exceed, as a percentage of average daily net
assets, .15%. Minnesota Mutual also reserves the option to reduce the level
of other expenses which it will voluntarily absorb.
(2) Because the Portfolio will first become available on May 1, 1998, the figure
for other expenses has been based on estimated expenses for the current
year. Minnesota Mutual has voluntarily agreed to absorb or waive other
expenses which exceed, as a percentage of daily net assets, .15%. If the
Portfolio was to be charged for these expenses, it is estimated that the
ratio of total expenses to average daily net assets would be 1.78%.
Minnesota Mutual also reserves the option to reduce the level of other
expenses which it will voluntarily absorb.
CONTRACT OWNER EXPENSE EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
IF YOU SURENDERED YOUR
CONTRACT AT THE END OF THE IF YOU ANNUITIZE AT THE END OF
APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
------------------------------------- -------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advantus Series Fund, Inc.:
Growth Portfolio...................... $62 $79 $ 95 $185 $16 $49 $ 84 $185
Bond Portfolio........................ $63 $79 $ 96 $187 $16 $50 $ 86 $187
Money Market Portfolio................ $63 $80 $ 97 $189 $16 $50 $ 87 $189
Asset Allocation Portfolio............ $62 $79 $ 95 $185 $16 $49 $ 84 $185
Mortgage Securities Portfolio......... $63 $80 $ 97 $189 $16 $50 $ 87 $189
Index 500 Portfolio................... $61 $76 $ 90 $174 $15 $46 $ 79 $174
Capital Appreciation Portfolio........ $65 $86 $108 $212 $18 $57 $ 97 $212
International Stock Portfolio......... $66 $91 $117 $230 $20 $62 $106 $230
Small Company Portfolio............... $65 $87 $109 $214 $18 $57 $ 99 $214
Maturing Government Bond 1998
Portfolio........................... $61 $74 $ 87 $168 $14 $44 $ 77 $168
Maturing Government Bond 2002
Portfolio........................... $61 $74 $ 87 $168 $14 $44 $ 77 $168
Maturing Government Bond 2006
Portfolio........................... $61 $74 $ 87 $168 $14 $44 $ 77 $168
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
IF YOU SURENDERED YOUR
CONTRACT AT THE END OF THE IF YOU ANNUITIZE AT THE END OF
APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
------------------------------------- -------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing Government Bond 2010
Portfolio........................... $61 $74 $ 87 $168 $14 $44 $ 77 $168
Value Stock Portfolio................. $65 $86 $108 $212 $18 $57 $ 97 $212
Small Company Value Portfolio......... $66 $89 $113 $222 $19 $60 $103 $222
Global Bond Portfolio................. $72 $110 $148 $293 $26 $81 $138 $293
Index 400 Mid-Cap Portfolio........... $62 $79 $ 95 $185 $16 $49 $ 84 $185
Macro-Cap Value Portfolio............. $65 $88 $111 $217 $19 $58 $100 $217
Micro-Cap Growth Portfolio............ $69 $100 $131 $258 $23 $70 $120 $258
Real Estate Securities Portfolio...... $66 $89 $113 $222 $19 $60 $103 $222
Vanguard Fixed Income Securities Fund,
Inc.--Long-Term Corporate Portfolio.... $60 $71 $ 81 $155 $13 $41 $ 70 $155
Vanguard/Wellington Fund, Inc........... $60 $72 $ 83 $158 $13 $42 $ 72 $158
Fidelity Contrafund..................... $64 $83 $103 $201 $17 $54 $ 92 $201
Scudder International Fund.............. $68 $97 $126 $248 $22 $67 $115 $248
Janus Twenty Fund....................... $66 $90 $115 $225 $20 $61 $104 $225
</TABLE>
IS THERE A GUARANTEED DEATH BENEFIT?
Yes. The Contract has a guaranteed death benefit if a Participant dies before
annuity payments have started. The death benefit shall be equal to the greater
of: (1) the amount of the Participant's accumulation value payable at death; or
(2) the amount of the total purchase payments paid to us by or on behalf of a
Participant, less all prior Participant Contract withdrawals or transfers. A
transfer for this purpose is the application of an amount from this Contract to
another investment alternative available in the Contract Owner's underlying
plan.
WHAT ANNUITY OPTIONS ARE AVAILABLE?
The Contracts specify several annuity options. Each annuity option may be
elected on either a variable annuity or fixed annuity basis or a combination of
the two. Other annuity options may be available from us on request. The
specified annuity options are a life annuity; a life annuity with a period
certain of either 120 months, 180 months or 240 months; a joint and last
survivor annuity and a period certain annuity.
WHAT IF A CONTRACT PARTICIPANT DIES?
If a Participant dies before payments begin, we will pay the Participant's
guaranteed death benefit of the Contract as a death benefit to the named
beneficiary. If the annuitant dies after annuity payments have begun, we will
pay whatever death benefit may be called for by the terms of the annuity option
selected.
WHAT VOTING RIGHTS DO YOU HAVE?
Participants and annuitants will be able to direct us as to how to vote shares
of the Series Fund and Underlying Funds held for their Certificates.
8
<PAGE>
CONDENSED FINANCIAL INFORMATION
The financial statements of the Minnesota Mutual Group Variable Annuity and The
Minnesota Mutual Life Insurance Company Account may be found in the Statement of
Additional Information.
The table below gives per unit information about each sub-account for the
years ended December 31, 1997, 1996 and 1995 and the period from September 2,
1994, commencement of operations, to December 31, 1994. This information should
be read in conjunction with the financial statements and related notes of
Minnesota Mutual Group Variable Annuity Account included in the Statement of
Additional Information. As of December 31, 1997, no contract owners have elected
to allocate payments to the Advantus Bond, Advantus Mortgage Securities,
Advantus Capital Appreciation, Advantus International Stock, Advantus Small
Company, Advantus Maturing Government Bond 1998, Advantus Maturing Government
Bond 2002, Advantus Maturing Government Bond 2006, Advantus Maturing Government
Bond 2010 and Advantus Value Stock sub-accounts. Accordingly, no condensed
financial information is presented for these sub-accounts.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2,
YEAR ENDED YEAR ENDED YEAR ENDED 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Advantus Growth Sub-Account:
Unit value at beginning of period............... $1.08 $1.00 -- --
Unit value at end of period..................... $1.42 $1.08 -- --
Number of units outstanding at end of period.... 351,033 136,198 -- --
Advantus Money Market
Sub-Account:
Unit value at beginning of period............... $1.10 $1.06 $1.01 $1.00
Unit value at end of period..................... $1.14 $1.10 $1.06 $1.01
Number of units outstanding at end of period.... 2,345,197 1,676,436 812,075 318,636
Advantus Asset Allocation
Sub-Account:
Unit value at beginning of period............... $1.06 $1.00 -- --
Unit value at end of period..................... $1.25 $1.06 -- --
Number of unit outstanding at end of period..... 368,919 69,684 -- --
Advantus Index 500 Sub-Account:
Unit value at beginning of period............... $1.60 $1.33 $0.98 $1.00
Unit value at end of period..................... $2.09 $1.60 $1.33 $0.98
Number of units outstanding at end of period.... 7,737,757 3,811,296 1,252,482 261,150
Vanguard Long-Term Corporate Sub-Account:
Unit value at beginning of period............... $1.24 $1.23 $0.99 $1.00
Unit value at end of period..................... $1.41 $1.24 $1.23 $0.99
Number of units outstanding at end of period.... 3,145,416 2,199,884 1,202,743 275,796
Vanguard Wellington Sub-Account
Unit value at beginning of period............... $1.48 $1.28 $0.98 $1.00
Unit value at end of period..................... $1.80 $1.48 $1.28 $0.98
Number of units outstanding at end of period.... 16,168,553 9,571,917 4,097,086 1,363,274
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2,
YEAR ENDED YEAR ENDED YEAR ENDED 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fidelity Contrafund Sub-Account:
Unit value at beginning of period............... $1.60 $1.32 $0.98 $1.00
Unit value at end of period..................... $1.95 $1.60 $1.32 $0.98
Number of units outstanding at end of period.... 26,429,507 18,638,007 11,232,337 4,870,232
Scudder International Sub-Account:
Unit value at beginning of period............... $1.18 $1.04 $0.93 $1.00
Unit value at end of period..................... $1.26 $1.18 $1.04 $0.93
Number of units outstanding at end of period.... 5,979,571 4,774,006 3,011,428 1,807,445
Janus Twenty Sub-Account:
Unit value at beginning of period............... $1.63 $1.29 $0.96 $1.00
Unit value at end of period..................... $2.09 $1.63 $1.29 $0.96
Number of units outstanding at end of period.... 6,171,080 2,891,975 990,111 444,821
</TABLE>
- ------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of Minnesota Mutual Group Variable Annuity Account and
The Minnesota Mutual Life Insurance Company's consolidated financial statements
are included in the Statement of Additional Information.
- ------------------------------------------------------------------------
PERFORMANCE DATA
From time to time the Group Variable Annuity Account may publish advertisements
containing performance data relating to its sub-accounts. In the case of the
Money Market sub-account, the Group Variable Annuity Account will publish yield
or effective yield quotations for a seven-day or other specified period. In the
case of the other sub-accounts, performance data will consist of average annual
total return quotations for a one-year period and for the period since the
sub-account became available pursuant to the Group Variable Annuity Account's
registration statement, and may also include cumulative total return quotations
for the period since the sub-account became available pursuant to such
registration statement. The Money Market sub-account may also quote such average
annual and cumulative total return figures. Performance figures used by the
Group Variable Annuity Account are based on historical information of the sub-
accounts for specified periods, and the figures are not intended to suggest that
such performance will continue in the future. Performance figures of the Group
Variable Annuity Account will reflect charges made pursuant to the terms of the
Contracts offered by this Prospectus and charges of the Series Fund or
Underlying Funds. The various performance figures used in Group Variable Annuity
Account advertisements relating to the contracts described in this Prospectus
are summarized below. More detailed information on the computations is set forth
in the Statement of Additional Information.
MONEY MARKET SUB-ACCOUNT YIELD. Yield quotations for the Money Market
sub-account are based on the income generated by an investment in the
sub-account over a specified period, usually seven days. The figures are
"annualized," that is, the amount of income generated by the investment during
the period is assumed to be generated over a 52-week period and is shown as a
percentage of the investment. Effective yield quotations are calculated
similarly, but when annualized the income earned by an investment in the sub-
account is assumed to be reinvested. Effective yield quotations will be slightly
higher than yield quotations because of the compounding effect of this assumed
reinvestment. Yield and effective yield figures quoted by the sub-account will
not reflect the deduction of any applicable deferred sales charges.
TOTAL RETURN FIGURES. Cumulative total return figures may also be quoted for
all sub-accounts. Cumulative total return is based on a hypothetical $1,000
investment in the sub-account at the beginning of the advertised period, and is
equal to the percentage change between the $1,000 net asset value of that
investment at the beginning of the period and the net asset value of that
investment at the end
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<PAGE>
of the period. Cumulative total return figures quoted by the sub-account will
not reflect the deduction of any applicable deferred sales charges.
All cumulative total return figures published for sub-accounts will be
accompanied by average annual total return figures for a one-year period,
three-year period and for the period since the sub-account became available
pursuant to the Group Variable Annuity Account's registration statement. Average
annual total return figures will show for the specified period the average
annual rate of return required for an initial investment of $1,000 to equal the
surrender value of that investment at the end of the period. The surrender value
will reflect the deduction of the deferred sales charge applicable to the
contract and to the length of the period advertised. Such average annual total
return figures may also be accompanied by average annual total return figures,
for the same or other periods, which do not reflect the deduction of any
applicable deferred sales charges.
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GENERAL DESCRIPTIONS
A. THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
The Minnesota Mutual Life Insurance Company is a mutual life insurance company
organized in 1880 under the laws of Minnesota. Its home office is at 400 Robert
Street North, St. Paul, Minnesota 55101-2098 (612) 665-3500, after September 1,
1998, (651) 665-3500. It is licensed to do a life insurance business in all
states of the United States (except New York, where it is an authorized
reinsurer), the District of Columbia, Canada, Puerto Rico, and Guam.
B. MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
On June 14, 1993, the Board of Trustees of Minnesota Mutual established the
Minnesota Mutual Group Variable Annuity Account (the "Group Variable Annuity
Account") in accordance with Minnesota Insurance Law. The Group Variable Annuity
Account is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the "1940 Act") and meets the definition of a "separate
account" under the federal securities laws.
The Minnesota law under which the Group Variable Annuity Account was
established provides that the assets of the Group Variable Annuity Account shall
not be chargeable with liabilities arising out of any other business which
Minnesota Mutual may conduct, but shall be held and applied exclusively for the
benefit of the holders of those variable annuity Contracts for which the
separate account was established. The investment performance of the Group
Variable Annuity Account is entirely independent of both the investment
performance of our General Account and of any other separate accounts which we
may have established or may later establish. All obligations under the Contracts
are general corporate obligations of Minnesota Mutual.
The Group Variable Annuity Account currently has sub-accounts to which
Contract Owners and Participants may allocate purchase payments. Each
sub-account invests in shares of a corresponding Portfolio of the Fund or an
underlying Fund. Additional sub-accounts may be added at our discretion.
C. ADVANTUS SERIES FUND, INC.
The Group Variable Annuity Account may invest in Advantus Series Fund, Inc. (the
"Series Fund"), a mutual fund of the series type. Prior to May 1, 1997, the name
of the Series Fund was "MIMLIC Series Fund, Inc." The Series Fund is registered
with the Securities and Exchange Commission as a diversified, open-end
management investment company, (except for Global Bond Portfolio which is
operated as a non-diversified open-end management investment company) but such
registration does not signify that the Commission supervises the management, or
the investment practices or policies, of the Series Fund. The Series Fund issues
its shares, continually and without sales charge, only to our separate accounts,
which currently include the Variable Annuity Account, the Group Variable Annuity
Account, Variable Fund D, the Variable Life Account, and the Variable Universal
Life Account. The Series Fund may be made available to other separate accounts
as new products are developed, and may be used as the underlying investment
medium for separate accounts of the Northstar Life Insurance Company, a wholly-
owned subsidiary of ours domiciled in the State of New York. Shares are sold and
redeemed at net asset value. In the case of a newly issued Contract or interest
under it, purchases of shares of the Portfolios of the Series Fund in connection
with the first purchase payment will be based on the values next determined
after issuance of the Contract by us. Redemptions of shares of the Portfolios of
the Series Fund are made at the net asset value next determined from the day we
receive a request for transfer, partial withdrawal or
11
<PAGE>
surrender at our home office. In the case of outstanding Contracts, purchases of
shares of the Portfolio of the Series Fund for the Group Variable Annuity
Account are made at the net asset value of such shares next determined after
receipt by us of Contract purchase payments.
The Series Fund's investment adviser is Advantus Capital Management, Inc.
("Advantus Capital"). Advantus Capital is a wholly-owned subsidiary of MIMLIC
Asset Management Company ("MIMLIC Management") which, prior to May 1, 1997,
served as investment adviser to the Series Fund. MIMLIC Management is a
wholly-owned subsidiary of Minnesota Mutual. Advantus Capital acts as an
investment adviser to the Series Fund pursuant to an advisory agreement.
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 Series Fund simultaneously. Although Minnesota Mutual does not
currently foresee any such disadvantages either to variable life insurance
policy owners or to variable annuity contract owners, the Series 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 taken in response thereto. Such action could include the sale of
Series Fund shares by one or more of the separate accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance law, (2) changes in federal income tax laws, (3)
changes in the investment management of any of the Portfolios of the Series
Fund, or (4) differences in voting instructions between those given by policy
owners and those given by contract owners.
The investment objectives and certain policies of the Portfolios of the Series
Fund available in the Contract are as follows:
The Growth Portfolio seeks the long-term accumulation of capital. Current
income, while a factor in portfolio selection, is a secondary objective. The
Growth Portfolio will invest primarily in common stocks and other equity
securities. Common stocks are more volatile than debt securities and involve
greater investment risk.
The Bond Portfolio seeks as high a level of long-term total rate of return
as is consistent with prudent investment risk. A secondary objective is to
seek preservation of capital. The Bond Portfolio will invest primarily in
long-term, fixed-income, high-quality debt instruments. The value of debt
securities will tend to rise and fall inversely with the rise and fall of
interest rates.
The Money Market Portfolio seeks maximum current income to the extent
consistent with liquidity and the stability of capital. The Money Market
Portfolio will invest in money market instruments and other debt securities
with maturities not exceeding one year. The return produced by these
securities will reflect fluctuation in short-term interest rates.
The Asset Allocation Portfolio seeks as high a level of long-term total rate
of return as is consistent with prudent investment risk. The Asset
Allocation Portfolio will invest in common stocks and other equity
securities, bonds and money market instruments. The Asset Allocation
Portfolio involves the risks inherent in stocks and debt securities of
varying maturities and the risk that the Portfolio may invest too much or
too little of its assets in each type of security at any particular time.
The Mortgage Securities Portfolio seeks a high level of current income
consistent with prudent investment risk. In pursuit of this objective the
Mortgage Securities Portfolio will follow a policy of investment primarily
in mortgage-related securities. Prices of mortgage-related securities will
tend to rise and fall inversely with the rise and fall of the general level
of interest rates.
The Index 500 Portfolio seeks investment results that correspond generally
to the price and yield performance of the common stocks included in the
Standard & Poor's Corporation 500 Composite Stock Price Index (the "Index").
It is designed to provide an economical and convenient means of maintaining
a broad position in the equity market as part of an overall investment
strategy. All common stocks, including those in the Index, involve greater
investment risk than debt securities. The fact that a stock has been
included in the Index affords no assurance against declines in the price or
yield performance of that stock.
The Capital Appreciation Portfolio seeks growth of capital. Investments will
be made based upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital
12
<PAGE>
growth. Because of the market risks inherent in any equity investment, the
selection of securities on the basis of their appreciation possibilities
cannot ensure against possible loss in value.
The International Stock Portfolio seeks long-term capital growth. In pursuit
of this objective the International Stock Portfolio will follow a policy of
investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The Small Company Portfolio seeks long-term accumulation of capital. In
pursuit of this objective, the Small Company Portfolio will follow a policy
of investing primarily in common or preferred stocks issued by small
companies, defined in terms of either market capitalization or gross
revenues. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally.
Small companies will typically have a market capitalization of less than
$1.5 billion or annual gross revenues of less than $1.5 billion.
The Maturing Government Bond Portfolios seek to provide as high an
investment return as is consistent with prudent investment risk for a
specified period of time ending on a specified liquidation date. In pursuit
of this objective each of the four Maturing Government Bond Portfolios seek
to return a reasonably assured targeted dollar amount, predictable at the
time of investment, on a specific target date in the future through
investment in a portfolio composed primarily of zero coupon securities.
These are securities that pay no cash income and are sold at a discount from
their par value at maturity. The current target dates for the maturities of
these Portfolios are 1998, 2002, 2006 and 2010, respectively. On maturity
the Portfolio will be converted to cash and reinvested at the direction of
the Contract Owner. In the absence of instructions, liquidation proceeds
will be allocated to the Money Market Portfolio.
The Value Stock Portfolio seeks the long-term accumulation of capital. In
pursuit of this objective, the Value Stock Portfolio will follow a policy of
investing primarily in the equity securities of companies which, in the
opinion of the adviser, have market values which appear low relative to
their underlying value or future earnings and growth potential. As it is
anticipated that the Portfolio will consist in large part of dividend-paying
common stocks, the production of income will be a secondary objective of the
Portfolio.
The Small Company Value Portfolio seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The Global Bond Portfolio seeks, as its investment objective, to maximize
current income, consistent with the protection of principal. The Portfolio
pursues its investment objective by investing primarily in debt securities
issued by issuers located anywhere in the world. Prior to May 1, 1998, the
Global Bond Portfolio was known as the International Bond Portfolio and
pursued its objective by investing primarily in a managed portfolio of
non-U.S. dollar debt securities issued by foreign governments, companies and
supranational entities. Effective after that date, pursuant to a change in
the investment practices of the Portfolio approved by the Board of
Directors, the Portfolio will seek, to achieve its investment objective by
investing primarily in debt securities issued anywhere in the world. The
investment objective of the Portfolio remains unchanged.
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 Mid
Cap Index. The Portfolio pursues its investment objective by investing
primarily in the 400 common
13
<PAGE>
stocks that comprise the Index, issued by medium-sized domestic companies
with market capitalizations that generally range from $200 million to $5
billion. It is designed to provide an economical and convenient means of
maintaining a diversified portfolio in this equity security area as part of
an over-all investment strategy. The inclusion of a stock in the Index in no
way implies an opinion by Standard & Poor's as to its attractiveness as an
investment, nor is it a sponsor or in any way affiliated with the Portfolio.
The Macro-Cap Value Portfolio seeks to provide high total return. It pursues
this objective by investing in equity securities that the sub-adviser
believes, through the use of dividend discount models, to be undervalued
relative to their long-term earnings power, creating a diversified portfolio
of equity securities which typically will have a price/earnings ratio and a
price to book ratio that reflects a value orientation. The Portfolio seeks
to enhance its total return relative to that of a universe of large-sized
U.S. companies.
The Micro-Cap Growth Portfolio seeks long-term capital appreciation. It
pursues its objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
The Real Estate Securities Portfolio seeks as its investment objective
above-average income and long-term growth of capital. The Portfolio intends
to pursue its objective by investing primarily in equity securities of
companies in the real estate industry. The Portfolio seeks to provide a
yield in excess of the yield of the Standard and Poor's 500 Composite Index.
The Portfolio will pursue its objective by investing primarily in equity
securities of companies operating in the real estate industry. Under normal
circumstances, therefore, at least 65% of the Portfolio's assets will be
invested in "real estate securities" or "real estate related securities."
The Portfolio will generally invest in real estate securities of companies
listed on a securities exchange or traded over-the-counter. Investments are
considered to be "real estate securities" if construction, ownership,
management, financing and sale of residential, commercial or industrial real
estate account for not less than 50% of gross revenues or net profits.
A prospectus for the Series Fund is attached to this Prospectus and
prospectuses for the other Underlying Funds are distributed with this Prospectus
or are available upon request. A person should carefully read this Prospectus
and the prospectus for any Underlying Fund Portfolio to which payments are to be
allocated before investing in the Contracts.
D. UNDERLYING FUNDS
In addition to the investment made by the Group Variable Annuity Account in
shares of the Series Fund, the Contracts also provide for sub-accounts of the
Group Variable Annuity Account which invest in shares of other registered
investment companies. These Underlying Fund options may not be available in all
Contracts issued by us and Participants should consult with their employer and
plan sponsor to determine the availability of these options under the Contract
available to them. As of the date of this Prospectus, sub-accounts have been
established which allow for investment in shares of the following:
Long-Term Corporate Portfolio of Vanguard Fixed Income Securities Fund,
Inc., (a corporate and government bond fund); Vanguard/Wellington Fund,
Inc., a balanced equity fund; Fidelity Contrafund, a growth equity fund;
Scudder International Fund, an international stock fund; and Janus Twenty
Fund, a growth equity fund.
The Vanguard Fixed Income Securities Fund, Inc. employs the Wellington
Management Company as the investment adviser for the Long-Term Corporate
Portfolio. The Vanguard/Wellington Fund, Inc., employs as its adviser the
Wellington Management Company. The Fidelity Contrafund has as its adviser
Fidelity Management & Research Company ("FMR"), a subsidiary of FMR
Corporation. The Scudder International Fund has as its adviser Scudder,
Stevens & Clark, Inc. The Janus Twenty Fund has as its adviser Janus Capital
Corporation.
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<PAGE>
The investment objectives and certain policies of the Underlying Funds
available under the Contract are as follows:
The Vanguard Long-Term Corporate Portfolio, part of the Vanguard Fixed
Income Securities Fund, Inc., seeks to provide investors with a high level
of income consistent with the maintenance of principal and liquidity. This
Portfolio invests in a diversified portfolio of investment grade corporate
and government bonds. This Portfolio is exposed to substantial interest rate
risk because of the length of its average maturity and it may exhibit high
to very high price fluctuations due to changing interest rates. The
possibility that corporate bonds held by the Portfolio will be repaid prior
to maturity is an additional risk associated with this Portfolio.
The Vanguard/Wellington Fund, Inc. seeks to provide conservation of
principal, a reasonable income return, and profits without undue risk. This
Fund invests in a diversified portfolio of common stocks and bonds, with
common stocks expected to represent 60% to 70% of the Fund's total assets.
Fidelity Contrafund seeks long-term growth by investing in stocks. This Fund
invests in companies that are currently "out of favor" with the public but
show potential for capital appreciation. The Fund invests in both well-known
and lesser-known companies believed to be undervalued due to overly
pessimistic appraisals by the market. The Fund invests primarily in common
stock and convertible securities, with a bias toward medium- and smaller-
capitalization companies. This Fund is available only to Contracts purchased
prior to May 1, 1998.
The Scudder International Fund, a series of Scudder International Fund,
Inc., seeks long-term growth of capital primarily through a diversified
portfolio of marketable foreign equity securities. It generally invests in
equity securities of established companies that are listed on foreign
exchanges which the Adviser believes have favorable characteristics, but may
also invest up to 20% of its total assets in debt securities of foreign
governments, supranational organizations and private issuers. The Fund seeks
to diversify investments among several countries and to have represented in
the portfolio, in substantial proportions, business activities in not less
than three different countries. The Fund does not intend to concentrate
investments in any particular industry. Foreign investing involves exposure
to special risks, including economic or political instability and currency
fluctuation.
The Janus Twenty Fund, a series of the Janus Investment Fund, seeks
long-term growth of capital. This nondiversified Fund seeks to invest in
companies that the portfolio manager believes offer rapid growth potential.
Under normal circumstances, this Fund will concentrate its investments in a
core position of 20 to 30 common stocks. The risk of loss may be greater
than would exist with a more diversified account.
Some of these shares are available not only to insurance company separate
accounts, but may also be available to the public generally, which may have a
bearing on the question of whether the Contracts may be considered annuity
contracts for tax purposes. For more information, please see the heading
"Federal Tax Status" in this Prospectus. Persons considering sub-account
investments in these Funds should obtain a current prospectus for those Funds
from the Funds or the Contract Owners before investing in those sub-accounts.
E. ADDITIONS, DELETIONS OR SUBSTITUTIONS
We retain the right, subject to any applicable law, to make substitutions with
respect to the investments of the sub-accounts of the Group Variable Annuity
Account. If investment in a fund should no longer be possible or if we determine
it becomes inappropriate for Contracts of this class, we may substitute another
fund for a sub-account. Substitution may be with respect to existing
accumulation values, future purchase payments and future annuity payments.
Investment in all Series Fund or Underlying Fund options may not be available,
and may be restricted by the Contract Owner. For example, the Contracts held by
the Church of the Nazarene Tax-Sheltered Annuity Plan make available the
Underlying Fund options and the Money Market, Growth, Asset Allocation, and
Index 500 Portfolios of the Series Fund. The Contract held by the Minnesota
State Deferred Compensation Plan makes available the Underlying Fund options and
the Money Market and Index 500 Portfolios of the Series Fund. The Minnesota
State Colleges and University 403(b)
15
<PAGE>
Program makes available all of the portfolios of the Series Fund.
We may also establish additional sub-accounts in the Group Variable Annuity
Account and we reserve the right to add, combine or remove any sub-accounts of
the Group Variable Annuity Account. Each additional sub-account will purchase
shares in a new portfolio or mutual fund. Such sub-accounts may be established
when, in our sole discretion, marketing, tax, investment or other conditions
warrant such action. Similar considerations will be used by us should there be a
determination to eliminate one or more of the sub-accounts of the Group Variable
Annuity Account. The basis of offering additional investment options to existing
Contract Owners is subject to our discretion.
We also reserve the right, when permitted by law, to de-register the Group
Variable Annuity Account under the Investment Company Act of 1940, to restrict
or eliminate any voting rights of the Contract Owners, and to combine the Group
Variable Annuity Account with one or more of our other separate accounts.
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CONTRACT CHARGES
A. SALES CHARGES
No sales charge is deducted from the purchase payments for these Contracts.
However, when a Participant's accumulation value is reduced by a withdrawal or
surrender, a deferred sales charge may be deducted for expenses relating to the
sale of the Contracts.
The deferred sales charge is deducted from the Participant's remaining
accumulation value except in the case of a surrender, where it reduces the
amount distributed. We will deduct the deferred sales charge proportionally from
the Participant's fixed and variable accumulation value.
The amount of the deferred sales charge, expressed as a percentage of the
Participant's accumulation value withdrawn, is shown in the following table.
Percentages are shown as of the Participant's date of initial Contract
participation and the end of each of the first six years of participation. The
percentages decrease uniformly each month for 72 months from the initial date.
In no event will the sum of the deferred sales charges exceed 9% of the purchase
payments made by or on behalf of that Participant under a Contract.
<TABLE>
<CAPTION>
END OF DEFERRED
PARTICIPATION YEAR SALES CHARGE
- -------------------- -----------------
<S> <C>
Participation Date 6%
1 5%
2 4%
3 3%
4 2%
5 1%
6 0%
</TABLE>
These sales charges may be waived in certain circumstances where sales expenses
are not paid at the time of sale to registered representatives and
broker-dealers responsible for the sales of the Contracts on the basis of
purchase payments made under the Contract and where the Contract is sold in
anticipation of reduced expenses. Sales charges will also be waived on amounts
withdrawn because of an excess contribution to a tax-qualified contract.
B. MORTALITY AND EXPENSE RISK CHARGES
We assume the mortality risk under the Contracts by our obligation to continue
to make monthly annuity payments, determined in accordance with the annuity rate
tables and other provisions contained in the Contract, to each annuitant
regardless of how long that annuitant lives or all annuitants as a group live.
This assures an annuitant that neither the annuitant's own longevity nor an
improvement in life expectancy generally will have an adverse effect on the
monthly annuity payments received under the Contract. In addition, we assume
mortality risk in the formulation of death benefit provided by the Contract. See
the heading "Death Benefit" herein.
We assume an expense risk by assuming the risk that deductions provided for in
the Contracts for the sales and administrative expenses will be adequate to
cover the expenses incurred.
For assuming these risks, we currently make a deduction from the Group
Variable Annuity Account at the annual rate of .40% for the mortality risk and
.45% for the expense risk. We reserve the right to increase the charge for the
assumption of mortality risks to not more than .60% and the expense risks to not
more than .65%. If this charge is increased to this maximum amount, then the
total of the mortality risk charge and expense risk charge would be 1.25% on an
annual basis.
If these deductions prove to be insufficient to cover the actual cost of the
expense and mortality risks assumed by us, then we will absorb the resulting
losses and make sufficient transfers to the Group Variable Annuity Account from
our general account, where appropriate. Conversely, if these deductions prove to
be more than sufficient after the establishment of
16
<PAGE>
any contingency reserves deemed prudent or required by law, any excess will be
profit (or "surplus") to us. Some or all of such profit may be used to cover any
distribution costs not recovered through the deferred sales charge.
C. CONTRACT ADMINISTRATIVE CHARGE
We perform all administrative services relative to the Contract. These services
may include the review of the applications for compliance with our issue
criteria, the preparation and issue of contracts and certificates, the receipt
of purchase payments, forwarding them to the Series Fund or other fund managers
for investment, 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 Group Variable Annuity Account at the annual rate of .15% for contract
administration. We reserve the right to increase this administrative charge to
not more than .40%. The administrative charge is designed to cover the
administrative expenses incurred by us under the Contract.
D. PREMIUM TAXES
Deduction for any applicable state premium taxes may be made from each purchase
payment or at the commencement of annuity payments. There are currently no
premium taxes which are applicable to the Contracts, but we reserve the right to
make such a deduction should they become applicable to this Contract in the
future.
E. CONTRACT FEE
For Participants who elect a fixed annuity, there is a charge of $200 which is
taken as a contract fee whenever fixed annuity payments are elected and
purchased at rates guaranteed by the Contract. This fee will also be deducted
when amounts are transferred for additional fixed annuity income once fixed
annuity payments have begun.
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SERIES FUND AND UNDERLYING FUND EXPENSES
Advantus Capital, one of our subsidiaries, acts as the investment adviser to the
Series Fund and deducts from the net asset value of each Portfolio of the Series
Fund a fee for its services which are provided under an investment advisory
agreement. The investment advisory agreements provide that the fee shall be
computed at the annual rate which may not exceed .4% for the Index 400 Mid-Cap
and Index 500 Portfolios, .75% of the Capital Appreciation, Value Stock, Small
Company Value, Real Estate Securities and Small Company Portfolios, 1% for the
International Stock Portfolio, .25% for each of the Maturing Government Bond
Portfolios, .6% for the Global Bond Portfolio, .7% for the Macro-Cap Value
Portfolio, 1.1% for the Micro-Cap Growth Portfolio and .5% of each of the
remaining Portfolio's average daily net assets.
The Underlying Funds available to the sub-accounts of the Group Variable
Annuity Account will also have advisory fees and expenses associated with the
management of the assets in those alternatives according to the agreement that
each has with its investment adviser. The adviser for each and a brief summary
of the advisory arrangement for each is as follows:
The Vanguard Fixed Income Securities Fund, Inc. employs the Wellington
Management Company as the investment adviser for the Long-Term Corporate
Portfolio. The Long-Term Corporate Portfolio, along with two other
portfolios in the Fund, pays the adviser an aggregate fee at the end of each
fiscal quarter, calculated by applying a quarterly rate based on an annual
percentage rate to the average month-end assets of each portfolio. The fee
schedule for the Long-Term Corporate Portfolio is as follows: .040% on the
first $1 billion assets, .030% on the next $1 billion assets, .020% on the
next $1 billion assets and .015% on assets over $3 billion. The aggregate
advisory fee is allocated to each Portfolio based on the net assets of each.
For the fiscal year ended January 31, 1997, the Long-Term Corporate
Portfolio paid annual advisory fees equal to .03% of average net assets.
The Vanguard/Wellington Fund, Inc. employs as its adviser the Wellington
Management Company. It pays the adviser a fee calculated at an annual
percentage rate of average daily net assets. The basic fee is subject to
quarterly adjustments based on performance relative to a combined index
comprising the S&P 500 Index and the Lehman Long-Term Corporate AA or Better
Bond Index. For the year ended November 30, 1997, the advisory fee
represented an effective annual basic rate of .04% of the Fund's average net
assets before a decrease of $244,000 based on performance.
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<PAGE>
The Fidelity Contrafund has as its adviser Fidelity Management & Research
Company ("FMR"), a subsidiary of FMR Corp. The management fee paid to FMR is
determined by taking a basic fee and then applying a performance adjustment
which, in turn, depends on how well the Fund has performed relative to the
appropriate index. The basic fee is calculated by adding an aggregated fund
fee rate to an individual fund fee rate and multiplying that amount by the
Fund's average net assets. The annual individual fund fee rate is .30%. For
the year ended December 31, 1997, the management fee was equivalent to an
annual rate of .48% of average net assets after the performance adjustment.
The Scudder International Fund has as its adviser Scudder, Stevens & Clark,
Inc. For the fiscal year ended March 31, 1997, the adviser received an
investment management fee of 0.82% of the Fund's average daily nets assets
on an annual basis. The fee is graduated so that increases in the Fund's net
assets may result in a lower fee and decreases in the Fund's net assets may
result in a higher fee.
The Janus Twenty Fund has as its adviser Janus Capital Corporation. The
advisory fee paid to the adviser for the fiscal period ended on October 31,
1997 amounted to .66%. It pays the adviser a fee at the end of each fiscal
quarter, calculated by applying a rate, based on the following percentages,
to the Fund's average month-end assets for the quarter: .75% of the first
$300 million, .70% of the next $200 million and .65% on amounts over $500
million.
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DESCRIPTION OF THE CONTRACTS
The following material is intended to provide a general description of the terms
of the Contracts. In the event that there are questions concerning the Contracts
which are not discussed or should you desire additional information, then
inquires may be addressed to us at: Minnesota Mutual Life Center, 400 Robert
Street North, St. Paul, Minnesota 55101-2098. Our phone number is: (612)
665-3500 after September 1, 1998, (651) 665-3500.
1. TYPE OF CONTRACT OFFERED
GROUP DEFERRED VARIABLE ANNUITY CONTRACT
The Contract is a group deferred variable annuity contract which is offered to
employers and plan sponsors which are eligible to purchase group contracts which
are to be used in connection with tax-advantaged plans of state and local
governments and other tax-exempt organizations. The type of plans for which the
Contract is suitable are described in Sections 457 and 403 of the Internal
Revenue Code. The Contract provides rights and options to individuals who
participate under such plans; the Contracts may not be purchased directly by
individuals. The contract may also be used in other situations where a group
annuity contract is desired but where the benefit structure does not require a
contract which is recognized as an "annuity" for federal income tax purposes.
2. ISSUANCE OF CONTRACTS
The Contracts are issued by us to sponsors of eligible plans upon their
application. In a typical plan, the sponsor or eligible governmental unit is the
owner of the Contract and will designate individuals eligible to participate in
the Contract as a Participant. The Contract and all interests under it are
usually subject to the general interests of creditors of the owner of the
Contract (usually the employer).
3. MODIFICATION OF CONTRACTS
The Contract may be modified at any time by written agreement between us and the
owner of the Contract. However, no such modification will adversely affect the
rights of a Participant under the Contract unless the modification is made to
comply with a law or government regulation.
4. ANNUITY PAYMENTS
Variable annuity payments are determined on the basis of: (a) the mortality
table specified in the Contract, which reflects the age of the annuitant; (b)
the type of annuity payment option selected; and (c) the investment performance
of the Group Variable Annuity Account and its sub-accounts. The amount of the
variable annuity payments will not be affected by adverse mortality experience
or by an increase in an expense in excess of the expense deduction provided for
in the Contract. The annuitant electing to receive all or a part of
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his or her payments as a variable annuity will receive the value of a fixed
number of annuity units each month. The value of such units and thus the amounts
of the monthly annuity payments will, however, reflect investment gains and
losses and investment income of the Group Variable Annuity Account, and thus the
annuity payments will vary with the investment experience of the assets of the
applicable Group Variable Annuity Account.
5. ASSIGNMENT
A Participant's accumulation value may not be assigned, sold, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose, and to the maximum extent
permitted by law, that value and benefits payable under the Contract shall be
exempt from the claims of creditors. The assets of the plan are, however,
subject to the claims of the general creditors of the Contract Owner (usually
the employer).
6. LIMITATIONS ON PURCHASE PAYMENTS
The amount of purchase payments to be paid by the Contract Owner by or on behalf
of a Participant shall be determined by the Contract Owner in accordance with
the provisions of the underlying plan. All purchase payments are payable at our
Home Office which is located at: 400 Robert Street North, St. Paul, Minnesota
55101-2098.
7. SUSPENSION AND TERMINATION OF PURCHASE PAYMENTS
A Contract Owner may suspend making purchase payments by giving 60 days' written
notice to us. The suspension may be with respect to all Participants or only as
to such class or classes of Participants as may be specified by the Contract
Owner. Purchase payments may be resumed as to those suspended Participants by
written notice to us.
Under some contracts, the Contract Owner may at any time terminate the
Contract should we fail to perform under the Contract and not cure any found
deficiency or should our activities be classified as misfeasance, malfeasance or
fraud. Some Contracts may also be terminated should we have a material change in
our financial condition as measured by the standard insurance company rating
agencies.
We may terminate the Contract at any date by written notice to the Contract
Owner in the event that the Contract is no longer part of a qualified Section
457 or Section 403 plan or if we determine that a Contract amendment is
necessary and the Contract Owner does not assent to such an amendment.
After termination of the Contract, we will accept no further purchase
payments. Termination will have no effect on Participants as to whom annuity
payments have begun. As to Participants with a current accumulation value, those
values will continue to be maintained under the Contract until: (a) withdrawn to
provide plan benefits, (b) applied to provide annuity payments or (c)
transferred to the Contract Owner. So long as Participant Accumulation Values
are maintained under the Contract, the withdrawal and transfer provisions
continue to apply to those values on the same basis as prior to Contract
termination.
If amounts are to be transferred to the Contract Owner on termination of the
Contract, those accumulation values attributable to the Group Variable Annuity
Account, decreased by any applicable deferred sales charge, will be transferred
within seven days after the Contract termination. However, Minnesota Mutual
reserves the right to defer payment for any period during which the New York
Stock Exchange is closed for trading or when the Securities and Exchange
Commission has determined that a state of emergency exists which may make such
determination and payment impractical.
General Account values payable to the Contract Owner on termination are
subject to current valuation procedures and payment of the General Account
accumulation value or market value to the Contract Owner, decreased by any
applicable deferred sales charge, as may be either in a lump sum or in
installments over a five year period as the Contract Owner may elect. However,
in any event we guarantee that on the termination of the Contract, Participant
General Account market values will not be less than the sum of all allocations
made to the General Account by or on behalf of each Participant, accumulated at
3% per annum, less any Participant withdrawal, any applicable deferred sales
charge and less any transfers of General Account accumulation values to the
Group Variable Annuity Account.
8. CONTRACT SETTLEMENT
Whenever any payment of an amount under the Contract attributable to the Group
Variable Annuity Account is to be made in a single sum, payment will be made
within seven days after the date such payment is called for by the terms
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of the Contract, except as payment may be subject for postponement for:
(a) any period during which the New York Stock Exchange is closed other than
customary weekend and holiday closings, or during which trading on the
New York Stock Exchange is restricted, as determined by the Securities
and Exchange Commission;
(b) any period during which an emergency exists as determined by the
Commission as a result of which it is not reasonably practical to
dispose of securities in the Group Variable Annuity Account or to fairly
determine the value of the assets of the Group Variable Annuity Account;
or
(c) such other periods as the Commission may by order permit for the
protection of the Contract Owners.
9. PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is a participating Contract. The portion, if any, of our divisible
surplus accruing on this Contract shall be determined annually by us and shall
be credited to the Contract on such a basis as we may determine. We do not
anticipate any divisible surplus and do not anticipate making dividend payments
to Contract Owners under the Contract.
10. CONTRACT LOANS
A Participant under a Contract which satisfies the requirements of Code Section
403 as a tax-sheltered annuity (a "TSA Contract") and under a plan which
provides for loans may take a loan from us with the Contract as security for the
loan, to the extent that such loans are permitted by applicable state law. The
maximum loan available is the lesser of (a) or (b), where (a) is $50,000 and (b)
is the greater of (i) one-half of the Participant's Accumulation Value less any
applicable deferred sales charge or (ii) the Participant's Accumulation Value up
to the amount of $10,000, less the amount of interest that would be charged
during the first quarter that the loan would be outstanding and less any
applicable deferred sales charge. Such a loan taken from, or secured by, a TSA
Contract may have federal income tax consequences. See "Federal Tax Status". The
maximum loan amount is determined as of the date we receive a Participant's
request for a loan. This minimum loan amount is $1,000.
Upon receiving a written request for a loan, we will send the Participant a
loan application and agreement for his or her signature. We will charge interest
in arrears. Restrictions other than the maximum loan amount which apply to loans
are:
(a) Only one loan may be outstanding at any time;
(b) A period of at least three months is required between the repayment of a
loan and the application for a new loan;
(c) If there is an outstanding loan on the Contract, then any withdrawals
will be limited to the Accumulation Value, less the outstanding loan
principal, less any interest due, and less any applicable deferred sales
charge;
(d) A loan is not available if annuity payments have begun; and
(e) The TSA loan account portion of a Participant's interest in the Contract
may not be transferred to the Group Variable Annuity Account when a loan
is outstanding, provided, however, that a single transfer from the TSA
loan account will be allowed each calendar year in an amount no more
than the TSA loan account value less the outstanding loan principal,
less the outstanding interest, and less any applicable deferred sales
charge.
The loan amount requested, plus the first quarter's interest, plus any
applicable deferred sales charge, will be transferred from the portion of the
Participant's Accumulation Value allocated to the Group Variable Annuity Account
to the General Account on the date the loan application is approved. Unless the
Participant directs us otherwise, amounts will be transferred from sub-accounts
of the Group Variable Annuity Account in the same proportion that the
Participant's allocations to each sub-account bears to his or her total
allocations to the Group Variable Annuity Account prior to the loan.
LOAN INTEREST AND TSA LOAN ACCOUNT INTEREST
The interest rate charged on a loan is variable and will be set on the first
day of each calendar quarter. It will apply to the outstanding loan principal in
that calendar quarter. The loan interest rate will not exceed the greater of the
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"published monthly average" for the calendar month ending two months before the
beginning of the calendar quarter or the "interest rate in effect on the
Contract" plus 1%. The "published monthly average" means the Moody's Composite
Average of Yields on Bonds as published by the Moody's Investors Service. The
"interest rate in effect on the Contract" is the interest rate credited on
portions of Accumulation Value allocated to the General Account, including
amounts held in the TSA loan account.
The interest rate credited to allocations of Accumulation Value to the General
Account will also be credited to the TSA loan account, which will have the
effect of reducing the effective interest rate to be paid on the loan to the
difference between the interest rate paid on the loan and that credited on the
TSA loan account. A loan will have a permanent effect on the Participant's
Accumulation Value. The effect could be either positive or negative, depending
upon whether the investment results of the sub-accounts are greater or lesser
than the interest rate credited on the TSA loan account.
LOAN REPAYMENT
Repayment must be made in substantially equal payments over a period of five
years or less. Early repayment may be made without penalty at any time. When the
loan is repaid, then the TSA loan account terminates, and the amounts remain in
the General Account. A Participant may reallocate these amounts among the
General Account and the sub-accounts of the Separate Account by exercising his
or her Contract's transfer rights.
If a Participant withdraws all of his or her Accumulation Value while a loan
is outstanding, then the loan is due at the time of the withdrawal. If the loan
is not repaid prior to the complete withdrawal, the payment on withdrawal will
be the Participant's Accumulation Value, less the outstanding loan principal,
less any interest due, and less any applicable deferred sales charges. In
addition, depending upon the Participant's circumstances, such a withdrawal may
result in income taxation, tax penalties and disqualification of the
Participant's interest in the Contract as a tax-sheltered annuity.
Failure to meet the requirements of the loan agreement will result in its
termination. Loan amounts will then be treated as distributions under the
contract. Treatment of a loan as a distribution will result in taxable income
under applicable tax rules. In addition, depending upon the Participant's
circumstances, it may result in income taxation, tax penalties, and
disqualification of the Participant's interest in the contract as a
tax-sheltered annuity. If there is a distribution, the Participant's
Accumulation Value will be reduced by the amount of the outstanding loan
principal, reduced by any interest due, and reduced by any applicable deferred
sales charge on that amount.
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VOTING RIGHTS
We will vote in our discretion shares of Underlying Funds other than Portfolios
of the Series Fund held in the Group Variable Annuity Account. We also will vote
the Series Fund Portfolio shares held in the Group Variable Annuity Account, but
will do so in accordance with instructions received from Participants with
values allocated to sub-accounts investing in shares of those Series Fund
Portfolios. We will vote all shares of a Series Fund Portfolio held by the Group
Variable Annuity Account for which no voting instructions are received from
Participants in the same proportion as shares held by the Group Variable Annuity
Account for which such instructions have been received. If, however, the 1940
Act or any regulation thereunder should change so that we may be allowed to vote
such shares in our own right, then we may elect to do so.
Voting instructions for votes of Series Fund Portfolio shares are to be
provided during the accumulation period by Participants with values allocated to
sub-accounts investing in those Portfolios and during the annuity period by
annuitants with annuity reserves allocated to those sub-accounts. In each case,
the value of the amounts so allocated on behalf of a Participant or annuitant
will be divided by net asset value per share of the applicable Series Fund
Portfolio shares to determine the number of shares for which voting instructions
may be provided by the Participant or annuitant. In either case, instructions
for voting fractional shares will be recognized. We shall notify each
Participant or annuitant of a Series Fund shareholders' meeting if the shares
held for the Participant may be voted at such meeting. We shall notify
Participants or annuitants who are entitled to provide such voting instructions
and will provide them with proxy materials and forms necessary for providing
voting instructions.
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During the accumulation period of each Certificate, the Participant holds the
voting interest in each Certificate. The number of votes will be determined by
dividing the accumulation value of the Contract as to the accumulation value of
each Participant attributable to each sub-account by the net asset value per
share of the underlying Series Fund shares held by that sub-account.
During the annuity period of each Certificate, the annuitant holds the voting
interest in each Certificate. The number of votes will be determined by dividing
the reserve for each annuitant allocated to each sub-account by the net asset
value per share of the underlying Series Fund shares held by that sub-account.
After an annuity begins, the votes attributable to any particular annuitant will
decrease as the reserves decrease. In determining any voting interest,
fractional shares will be recognized.
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ANNUITY PERIOD
1. ELECTING THE RETIREMENT DATE AND FORM OF ANNUITY
The Contracts provide for four annuity payment options, any one of which may be
elected if permitted by law. Each annuity payment option may be elected on
either a variable annuity or a fixed annuity basis, or a combination thereof.
Other annuity payment options may be available as agreed to between a
Participant and us and upon request to us.
If an election has not been made otherwise, and the plan does not specify to
the contrary, the Participant's retirement date shall be April 1 of the calendar
year next following the calendar year in which the Participant attains age
70 1/2. The annuity payment option shall be Option 2A, a life annuity with a
period certain of 120 months. Unless notified in writing by the Contract Owner
or Participant at least 30 days prior to the Annuity Commencement Date, a fixed
annuity will be provided by any General Account accumulation value and a
variable annuity will be provided by any Group Variable Annuity Account
accumulation value. The minimum first monthly annuity payment on either a
variable or fixed dollar basis is $20 imposed separately for the portion of the
annuity payments payable as a fixed annuity and the portion payable as a
variable annuity under each of the sub-accounts of the Group Variable Annuity
Account. If such first monthly payment would be less than $20, we may fulfill
our obligation by paying in a single sum the value of a Participant's interest
in the Contract which would otherwise have been applied to provide annuity
payments.
Once annuity payments have commenced, the annuitant cannot surrender his or
her annuity benefit and receive a single sum settlement in lieu thereof. In the
event that a beneficiary elects to receive the commuted value of the remaining
guaranteed payments in a lump sum, that value will be based on the then current
dollar amount of one payment and the same interest rate which served as a basis
for the annuity.
The mortality and expense risks charges continue to be deducted throughout the
annuity period, even under each of the available variable annuity payment
options, including Option 4, under which there is no mortality risk to Minnesota
Mutual.
2. ANNUITY PAYMENT OPTIONS
OPTION 1--LIFE ANNUITY
This is an annuity payable monthly during the lifetime of the annuitant and
terminating with the last monthly payment preceding the death of the annuitant.
This option usually offers the largest monthly payments (of those options
involving life contingencies) since there is no guarantee of a minimum number of
payments or provision for a death benefit for beneficiaries. It would be
possible under this option for the annuitant to receive only one annuity payment
if he or she died prior to the due date of the second annuity payment, two if he
or she died before the due date of the third annuity payment, etc.
OPTION 2--LIFE ANNUITY WITH A PERIOD CERTAIN OF 120 MONTHS (OPTION 2A), 180
MONTHS (OPTION 2B), OR 240 MONTHS (OPTION 2C)
This is an annuity payable monthly during the lifetime of the annuitant, with
the guarantee that if the annuitant dies before payments have been made for the
period certain elected, payments will continue to the beneficiary during the
remainder of the period certain; or if the beneficiary so elects at any time
during the remainder of the period certain, the present value of the remaining
guaranteed number of payments, based on the then current dollar amount of one
such payment shall be paid in a single sum to the beneficiary.
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OPTION 3--JOINT AND LAST SURVIVOR ANNUITY
This is an annuity payable monthly during the joint lifetime of the annuitant
and a designated joint annuitant and continuing thereafter during the remaining
lifetime of the survivor. Under this option there is no guarantee of a minimum
number of payments or provision for a death benefit for beneficiaries.
OPTION 4--PERIOD CERTAIN ANNUITY
This is an annuity payable monthly for a period certain of from 5 to 20 years,
as elected. If the annuitant dies before payments have been made for the period
certain elected, payments will continue to the beneficiary during the remainder
of such period certain.
By written notice to us from the Contract Owner or a Participant at least 30
days prior to a Participant's Annuity Commencement Date, a lump sum settlement
of a Participant's accumulation value may be elected in lieu of the application
of that amount to an Annuity Payment Option. After the payment of such a lump
sum settlement to the Participant, the Participant shall have no further rights
under the Contract.
3. VALUE OF THE ANNUITY UNIT
The value of an annuity unit is determined monthly as of the first day of each
month. The value of the annuity unit on the first day of each month is
determined by multiplying the value on the first day of the preceding month by
the product of (a) .996338, and (b) the ratio of the value of the accumulation
unit for the valuation date next following the fourteenth day of the preceding
month to the value of the accumulation unit for the valuation date next
following the fourteenth day of the second preceding month. (The factor of
.996338 is used to neutralize the assumed net investment rate, discussed in
Section 4 below, of 4.5% per annum built into the first payment calculation and
which is not applicable because the actual net investment rate is credited
instead.) The value of an annuity unit as of any date other than the first day
of a month is equal to its value as of the first day of the next succeeding
month.
4. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT
Under the Contract described in this Prospectus, the first monthly annuity
payment is determined by applying the value of the Participant's individual
accumulation value at retirement. State premium taxes, if applicable and not
previously deducted from purchase payments, may be deducted from the
Participant's accumulation value before the first payment is determined. These
taxes currently range from 0 to 3.5%, depending upon the state of issue and type
of plan involved.
The amount of the first monthly payment depends on the annuity payment option
elected, the form of annuity, and the adjusted age of the annuitant. A table
used to determine the adjusted age of the annuitant and joint annuitant is
contained in the Contract. For both fixed and variable annuity payments, the
adjusted age of the annuitant and joint annuitant, if any, is used to determine
the first payment.
For a fixed annuity, the Contract contains tables indicating the dollar amount
of the monthly payment under each annuity payment option for each $1,000 of
value applied. The tables are determined from the Progressive Annuity Table with
interest at the rate of 3% per annum, assuming births in the year 1900 and an
age setback of six years. A $200 fee may be deducted from the Participant's
General Account accumulation value before applying the rates found in the
tables.
The dollar amount of the first monthly variable annuity payment is determined
by applying the available value (after deduction of any applicable premium taxes
not previously deducted) to a rate which is based on the Progressive Annuity
Table with interest at the rate of 4.5% per annum, assuming births in the year
1900 and with an age setback of six years. A number of units is then determined
by dividing this dollar amount by the then current annuity unit value.
Thereafter, the number of annuity units remains unchanged during the period of
annuity payments. This determination is made separately for each sub-account of
the separate account. The number of annuity units is based upon the available
value in each sub-account as of the date annuity payments are to begin. The
dollar amount determined for each sub-account will then be aggregated for
purposes of making payment.
The 4.5% interest rate assumed in the annuity rate would produce level annuity
payments if the net investment rate remained constant at 4.5% per year.
Subsequent payments will be less than, equal to, or greater than the first
payment depending upon whether the actual net investment rate is less than,
equal to, or greater than 4.5%. A higher interest rate would mean a higher
initial payment, but a more slowly rising (or more rapidly falling) series of
subsequent payments. A lower assumption would have the opposite effect.
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If, when annuity payments are elected, we are using annuity rates for
Contracts of this class which result in larger annuity payments, we will use
those rates instead of those guaranteed in the Contract.
5. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY VARIABLE ANNUITY PAYMENTS
The dollar amount of the second and later variable annuity payments is equal to
the number of annuity units determined for each applicable sub-account of the
Group Variable Annuity Account multiplied by the annuity unit value for that
sub-account as of the due date of the payment. This amount may increase or
decrease from month to month.
The dollar amounts for variable annuity payments determined for each
applicable sub-account of the Group Variable Annuity Account will be aggregated
for purposes of making the monthly variable annuity payment to the Participant.
6. TRANSFER OF ANNUITY RESERVES
Amounts held as annuity reserves may be transferred among the variable annuity
sub-accounts during the annuity period. Annuity reserves may also be transferred
from a variable annuity to a fixed annuity during this time. The change must be
made by a written request. The annuitant and joint annuitant, if any, must make
such an election.
There are restrictions to such a transfer. The transfer of an annuity reserve
amount from any sub-account must be at least equal to $5,000 or the entire
amount of the reserve remaining in that sub-account. In addition, annuity
payments must have been in effect for a period of 12 months before a change may
be made. Such transfers can be made only once every 12 months. The written
request for an annuity transfer must be received by us more than 30 days in
advance of the due date of the annuity payment subject to the transfer. Upon
request, we will make available to you annuity reserve amount sub-account
information.
A transfer will be made on the basis of annuity unit values. The number of
annuity units from the sub-account being transferred will be converted to a
number of annuity units in the new sub-account. The annuity payment option will
remain the same and cannot be changed. After this conversion, a number of
annuity units in the new sub-account will be payable under the elected option.
The first payment after conversion will be of the same amount as it would have
been without the transfer. The number of annuity units will be set at that
number of units which are needed to pay that same amount on the transfer date.
When we receive a request for the transfer of variable annuity reserves, it
will be effective for future annuity payments. The transfer will be effective
and funds actually transferred in the middle of the month prior to the next
annuity payment affected by your request. We will use the same valuation
procedures to determine your variable annuity payment that we used initially.
Amounts held as reserves to pay a variable annuity may also be transferred to
a fixed annuity during the annuity period. However, the restrictions which apply
to annuity sub-account transfers will apply as well. The amount transferred will
then be applied to provide a fixed annuity amount. This amount will be based
upon the adjusted age of the annuitant and any joint annuitant at the time of
the transfer. The annuity payment option will remain the same. Amounts paid as a
fixed annuity may not be transferred to a variable annuity.
When we receive a request to make such a transfer to a fixed annuity, it will
be effective for future annuity payments. The transfer will be effective and
funds actually transferred in the middle of the month prior to the next annuity
payment. We will use the same fixed annuity pricing method at the time of
transfer that we used to determine an initial fixed annuity payment.
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DEATH BENEFIT
Death benefits, if any, payable under Contracts shall be in such amount as is
determined by the provisions of the applicable qualified trust or plan. The
Contracts provide that in the event of the death of the Participant prior to the
commencement of annuity payments, the death proceeds payable to the named
beneficiary will be the greater of: a) the Participant's accumulation value
determined as of the valuation date coincident with or next following the date
due proof of death is received by us, or b) the total of the purchase payments
made by or on behalf of a Participant received by us less any prior Participant
withdrawals or transfers to another investment alternative available in the
Contract Owner's underlying plan. Death proceeds will be paid in a single sum to
the beneficiary designated by the Participant, unless an annuity option is
elected by the beneficiary. Payment will be made within seven
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days after we receive due proof of death of the Participant. Except as noted
below, a Participant's entire interest in the Contract must be distributed
within five years of the Participant's death. If the annuitant dies after
annuity payments have begun, Minnesota Mutual will pay to the beneficiary any
death benefit provided by the annuity option selected. The person selected by
the Participant as the beneficiary of any remaining interest after the death of
the annuitant under the annuity option may be a person different from that
person designated as the beneficiary of the Participant's interest in the
Contract prior to the annuity commencement date.
The beneficiary will be the person or persons named in the Contract
application unless the Participant, or annuitant if annuity payments have
commenced, subsequently changes the beneficiary. In that event, we will pay the
amount payable at death to the beneficiary named in the last change of
beneficiary request. The Participant's or annuitant's written request to change
the beneficiary will not be effective until it is recorded in Minnesota Mutual's
home office records. After it has been recorded, it will take effect as of the
date the Participant or annuitant signed the request. However, if the
Participant or annuitant dies before the request has been recorded, the request
will not be effective as to those death proceeds we have paid before the request
was recorded in our home office records.
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CREDITING ACCUMULATION UNITS
During the accumulation period--the period before the commencement of annuity
payments--the purchase payment (on receipt of a completed application or
subsequently) is credited to a Participant's accumulation value on the valuation
date coincident with or next following the date such purchase payment is
received. If the initial purchase payment is accompanied by an incomplete
application, the purchase payment will not be credited until the valuation date
coincident with or next following the date a completed application is received.
We will offer to return the initial purchase payment accompanying an incomplete
application if it appears that the application cannot be completed within five
business days. Purchase payments will be credited to the Contract in the form of
accumulation units. The number of accumulation units credited with respect to
each purchase payment is determined by dividing the portion of the purchase
payment allocated to each sub-account by the then current accumulation unit
value for that sub-account. The total of these separate account accumulation
values in the sub-accounts will be the separate account accumulation value.
Interests in the sub-accounts will be valued separately.
The number of accumulation units so determined shall not be changed by any
subsequent change in the value of an accumulation unit, but the value of an
accumulation unit will vary from valuation date to valuation date to reflect the
investment experience of the Portfolios of the Series Fund and those other
Underlying Funds which may be held by the sub-accounts of the Group Variable
Annuity Account.
Minnesota Mutual will determine the value of accumulation units on each day on
which the Portfolios of the Series Fund and such other Underlying Funds are
valued. The net asset value of the Series Fund and Underlying Fund shares are
computed once daily, as of the primary closing time for business on the New York
Stock Exchange (as of the date hereof the primary close of trading is 3:00 p.m.
(Central Time), but this time may be changed) on each day, Monday through
Friday, except (i) days on which changes in the value of such Fund's securities
will not materially affect the current net asset value of such Fund's shares,
(ii) days during which no such Series Fund's shares or Underlying Fund's shares
are tendered for redemption and no order to purchase or sell such Fund's shares
is received by such Fund and (iii) customary national business holidays on which
the New York Stock Exchange is closed for trading (as of the date hereof, New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day).
Accordingly, the value of accumulation units will be determined daily, and
such determinations will be applicable to all purchase payments received by
Minnesota Mutual at its home office on that day prior to the close of business
of the Exchange. The value of accumulation units applicable to purchase payments
received subsequent to the close of business of the Exchange on that day will be
the value determined as of the close of business on the next day the Exchange is
open for trading.
In addition to providing for the allocation of purchase payments to the
sub-accounts of the
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separate account, the Contracts also provide for allocation of purchase payments
to Minnesota Mutual's General Account for accumulation at a guaranteed interest
rate.
TRANSFER OF VALUES
Upon a Participant's written or telephone request, values under the Contract may
be transferred between the General Account and the Group Variable Annuity
Account or among the sub-accounts of the Group Variable Annuity Account. We will
make the transfer on the basis of accumulation unit values on the valuation date
coincident with or next following the day we receive the request at our home
office. No deferred sales charge will be imposed on such transfers. Transfers
between the sub-accounts of the Group Variable Annuity Account are unlimited as
to amount and frequency.
The Contracts permit us to limit the frequency and amount of transfers from
the General Account to the sub-accounts of the Group Variable Annuity Account.
The Contracts provide that such transfers from a Participant's Accumulation
Value in our General Account will be on a first-in, first-out (FIFO) basis and
they provide that Participants may transfer the greater of $1,000 or 10% of
their General Account accumulation value annually or in 12 monthly installments.
Currently, we limit such transfers during any calendar year to the greater of
$1,000 or an amount which is no more than 20% of the General Account
accumulation value at the time of the transfer.
Transfer arrangements may be established to begin on the 10th or 20th of any
month and if a transfer cannot be completed it will be made on the next
available transfer date.
Also, in addition to requests for transfer which are by written request, a
Participant or persons authorized by Participants may effect transfers, or a
change in the allocation of future premiums, by means of a telephone call.
Transfers and requests made pursuant to such a call are subject to the same
conditions and procedures as are outlined above for written transfer requests.
During periods of marked economic or market changes, Participants may experience
difficulty in implementing a telephone transfer due to a heavy volume of
telephone calls. In such a circumstance, Participants should consider submitting
a written transfer request while continuing to attempt a telephone transfer. We
reserve the right to restrict the frequency of--or otherwise modify, condition,
terminate or impose charges upon--telephone transfer privileges. For more
information on telephone transfers, contact Minnesota Mutual.
We will employ reasonable procedures to satisfy ourselves that instructions
received from Participants are genuine and, to the extent that we do not, we may
be liable for any losses due to unauthorized or fraudulent instructions. We
require Participants to identify themselves in those telephone conversations
through such information as we may deem to be reasonable. We record telephone
transfer and change of allocation instruction conversations and we provide
Participants with a written confirmation of the telephone transfer.
The interests of Contract Owners and Participants arising from the allocation
of purchase payments or the transfer of contract values to the General Account
of Minnesota Mutual, and thereby to its general assets, are not registered under
the Securities Act of 1933, and Minnesota Mutual is not registered as an
investment company under the Investment Company Act of 1940. Accordingly, such
interests and Minnesota Mutual are not subject to the provisions of those acts
that would apply if registration under such acts were required.
PORTABILITY
In addition to provisions which allow a transfer of Participant accumulation
values under the Contract between the General Account of Minnesota Mutual and
the Group Variable Annuity Account and transfers among the sub-accounts of the
Group Variable Annuity Account, withdrawals are also allowed from the
Participant accumulation values of the Contract to transfer amounts to other
investment alternatives offered by the Contract Owner in its underlying plan.
Withdrawals for this purpose other than those relating to the timing of
payments, are subject to the same limitations and restrictions as described in
the heading "Transfer of Values" immediately above and the same dollar
limitations on such transfers similarly apply.
VALUE OF THE CONTRACT
The value of the Contract at any time prior to the commencement of annuity
payments can be determined by multiplying the total number of accumulation units
credited to the Contract by the current value of an accumulation unit in each
sub-account of the Group Variable Annuity Account and adding to this amount the
sum of General Account values. There is no assurance that such value will equal
or exceed the purchase payments made, except with respect to amounts allocated
to the General Account.
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The Contract Owner and, where applicable, each Participant will be advised
periodically of the number of accumulation units credited to the Contract or to
the Participant's individual account, the current value of each accumulation
unit, and the total value of the Contract or the individual account.
ACCUMULATION UNIT VALUE
The value of an accumulation unit in each sub-account of the Group Variable
Annuity Account was set at $1.000000 on the first valuation date of the Group
Variable Annuity Account. The value of an accumulation unit on any subsequent
valuation date is determined by multiplying the value of an accumulation unit on
the immediately preceding valuation date by the net investment factor (described
below) for the valuation period just ended. The value of an accumulation unit as
of any date other than a valuation date is equal to its value on the next
succeeding valuation date.
NET INVESTMENT FACTOR
The net investment factor is an index used to measure the investment performance
of a sub-account from one valuation period to the next. For any sub-account, the
net investment factor for a valuation period is the gross investment rate for
such sub-account for the valuation period, less a deduction for the mortality
risk, expense risk and administrative charge at the current rate of 1.00% per
annum.
The gross investment rate is equal to: (1) the net asset value per share of a
Series Fund or Underlying Fund share held in a sub-account of the Group Variable
Annuity Account determined at the end of the current valuation period; plus (2)
the per share amount of any dividend or capital gain distribution by that Series
Fund or Underlying Fund if the "ex-dividend" date occurs during the current
valuation period; divided by (3) the net asset value per share of that Series
Fund or Underlying Fund share determined at the end of the preceding valuation
period. The gross investment rate may be positive or negative.
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WITHDRAWALS AND SURRENDER
Under certain circumstances a Participant may have the right to surrender his or
her interest in the Contract in whole or in part, subject to possible adverse
tax consequences. (See discussion under heading "Federal Tax Status").
Withdrawals may be made only for the purpose of providing plan benefits,
making transfers to the Contract Owner, making transfers to plan investment
alternatives available in the Contract Owner's underlying plan other than those
provided for in this Contract, or allowing other withdrawals as allowed in the
plan and mutually agreed upon by Minnesota Mutual and the Contract Owner. The
amount available for withdrawal shall be the Participant accumulation value less
any applicable deferred sales charge. If withdrawals during the first calendar
year of participation are equal to or less than 10% of the total purchase
payments made on behalf of the Participant, the charge will not apply. In
subsequent calendar years there will be no charge for withdrawals equal to or
less than 10% of the prior calendar year Participant accumulation value. If a
Participant's withdrawals in any calendar year exceed this amount, the deferred
sales charge will apply to the excess.
Withdrawal amounts shall be deducted from the Participant's General Account
accumulation value on a first in, first out (FIFO) basis. Unless otherwise
instructed by the Participant or the Contract Owner, withdrawal amounts will be
made from a Participant's interest in the General Account and each sub-account
of the Group Variable Annuity Account in the same proportion that the value of
that Participant's interest in the General Account and any sub-account bears to
that Participant's total accumulation value. The provisions of the applicable
qualified trust, qualified plan or state deferred compensation plan may provide
further limitations on withdrawals.
Withdrawals are made upon written request from the Participant or Contract
Owner to Minnesota Mutual. The withdrawal date will be the valuation date
coincident with or next following the receipt of the request by Minnesota Mutual
at its home office.
We will waive the applicable dollar amount limitation on withdrawals where a
systematic withdrawal program is in place and such a smaller amount satisfies
the minimum distribution requirements of the Code. We will also waive the
applicable dollar amount limitation on withdrawals where a withdrawal is due to
an excess contribution.
Once annuity payments have commenced for a Participant, the Participant cannot
surrender his or her annuity benefit and receive a single sum settlement in lieu
thereof. For a discussion of commutation rights of payees and
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beneficiaries subsequent to the annuity commencement date, see heading "Annuity
Payment Options".
Contract Owners or plan administrators of the Contract Owner's underlying plan
may also submit signed written withdrawal or surrender requests to us by
facsimile (FAX) transmission. Our FAX number is (612) 665-7942, after September
1, 1998, (651) 665-7942. Transfer instructions or changes as to future
allocations of purchase payments may be communicated to us by the same means.
The surrender of a Certificate or a partial withdrawal thereunder may result
in a credit against Minnesota Mutual's premium tax liability. In such event,
Minnesota Mutual will pay in addition to the cash value paid in connection with
the surrender or withdrawal, the lesser of (1) the amount by which Minnesota
Mutual's premium tax liability is reduced, or (2) the amount previously deducted
from purchase payments for premium taxes. No representation can be made that
upon any such surrender or withdrawal any such payment will be made, since
applicable tax laws at the time of surrender or withdrawal would be
determinative.
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DISTRIBUTION
The Contracts will be sold by Minnesota Mutual life insurance agents who are
also registered representatives of Ascend Financial Services, Inc. or other
broker-dealers who have entered into selling agreements with Ascend Financial
Services, Inc. Ascend Financial Services, Inc. ("Ascend Financial") acts as the
principal underwriter of the Contracts. Ascend Financial is a wholly-owned
subsidiary of MIMLIC Asset Management Company, a wholly-owned subsidiary of
Minnesota Mutual. 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.
Commissions to dealers, paid in connection with the sale of the Contracts, may
not exceed an amount which is equal to 6% of the purchase payments received for
the Contracts. Commissions on group cases may vary.
In addition, Ascend Financial or Minnesota Mutual will provide credits which
allow registered representatives (Agents) who are responsible for sales of the
Contracts to attend conventions and other meetings sponsored by Minnesota Mutual
or its affiliates for the purpose of promoting the sale of insurance and/or
investment products offered by Minnesota Mutual and its affiliates. Such credits
may cover the registered representatives' transportation, hotel accommodations,
meals, registration fees and the like. Minnesota Mutual may also pay registered
representatives additional amounts based upon their production and the
persistency of life insurance and annuity business placed with Minnesota Mutual.
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FEDERAL TAX STATUS
INTRODUCTION
The discussion contained herein is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax adviser. No attempt
is made to consider any applicable state or other tax laws. In addition, this
discussion is based on our understanding of federal income tax laws as they are
currently interpreted. No representation is made regarding the likelihood of
continuation of current income tax laws or the current interpretations of the
Internal Revenue Service. The Contract may be purchased on a non-tax qualified
basis ("Non-Qualified Contract") or purchased and used in connection with
certain retirement arrangements entitled to special income tax treatment under
section 401(a), 403(b), 408(k) 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.
Minnesota Mutual is taxed as a "life insurance company" under the Internal
Revenue Code. The operations of the Group Variable Annuity Account form a part
of, and are taxed with, our other business activities. Currently, no federal
income tax is payable by us on income dividends received by the Group Variable
Annuity Account or on capital gains arising from its investment activities. The
Group Variable Annuity Account is not taxed as a "regulated investment company"
under the Internal Revenue Code (the "Code") and it does not anticipate any
change in that tax status. However, if changes in the federal tax laws or
interpretations thereof result in Minnesota Mutual being taxed on income or
gains attributable to the Group Variable Annuity Account, the we may impose a
charge against
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the Group Variable Annuity Account (with respect to some or all Contracts) in
order to set aside provisions to pay such taxes.
TAXATION OF ANNUITY CONTRACTS IN GENERAL
Section 72 of the Code governs taxation of nonqualified annuities in general and
some aspects of tax qualified programs. No taxes are imposed on increases in the
value of a contract until distribution occurs, either in the form of a payment
in a single sum or as annuity payments under the annuity option elected.
As a general rule, deferred annuity contracts held by a corporation, trust or
other similar entity, as opposed to a natural person, are not treated as annuity
contracts for federal tax purposes. The investment income on such contracts is
taxed as ordinary income that is received or accrued by the owner of the
contract during the taxable year.
For payments made in the event of a full surrender of an annuity, the taxable
portion is generally the amount in excess of the cost basis (i.e., purchase
payments) of the contract. Amounts withdrawn from the variable annuity contracts
not part of a qualified program are treated first as taxable income to the
extent of the excess of the contract value over the purchase payments made under
the contract. Such taxable portion is taxed at ordinary income tax rates.
In the case of a withdrawal under an annuity that is part of a qualified
program, a portion of the amount received is taxable based on the ratio of the
"investment in the contract" to the individual's balance in the retirement plan,
generally the value of the annuity. The "investment in the contract" generally
equals the portion of any deposits made by or on behalf of an individual under
an annuity which was not excluded from the gross income of the individual. For
annuities issued in connection with qualified plans, the "investment in the
contract" can be zero.
For annuity payments, the taxable portion is generally determined by a formula
that establishes the ratio that the cost basis of the contract bears to the
expected return under the contract. Such taxable part is taxed at ordinary
income rates.
If a taxable distribution is made under the variable annuity contracts, a
penalty tax of 10% of the amount of the taxable distribution may apply. This
additional tax does not apply where the taxpayer is 59 1/2 or older, where
payment is made on account of the taxpayer's disability, or where payment is
made by reason of death of the owner, and in certain other circumstances.
The Code also provides an exception to the penalty tax for distributions, in
periodic payments, of substantially equal installments, be made for the life (or
life expectancy) of the taxpayer or the joint lives (or joint life expectancies)
of the taxpayer and beneficiary.
For some types of qualified plans, other tax penalties may apply to certain
distributions.
A transfer of ownership of a contract, the designation of an annuitant or
other payee who is not also the Contract Owner, or the assignment of the
contract may result in certain income or gift tax consequences to the Contract
Owner that are beyond the scope of this discussion. A Contract Owner who is
contemplating any such transfer, designation or assignment should consult a
competent tax adviser with respect to the potential tax effects of that
transaction.
For purposes of determining a Contract Owner's gross income, the Code provides
that all nonqualified deferred annuity contracts issued by the same company (or
its affiliates) to the same Contract Owner during any calendar year shall be
treated as one annuity contract. Additional rules may be promulgated under this
provision to prevent avoidance of its effect through serial contracts or
otherwise. For further information on these rules, see your tax adviser.
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code authorizes the Treasury to set standards, by
regulation or otherwise for the investments of the Group Variable Annuity
Account to be "adequately diversified" in order for the Contract to be treated
as an annuity contract for Federal tax purposes. Group Variable Annuity Account,
through the Series Fund, intends to comply with the diversification requirements
prescribed in Regulations Section 1.817-5, which affect how the Series Fund's
assets may be invested. Although the investment adviser is an affiliate of
Minnesota Mutual, Minnesota Mutual does not have control over the Series Fund or
its investments. Nonetheless, Minnesota Mutual believes that each Portfolio of
the Series Fund in which the Group Variable Annuity Account owns shares will be
operated in compliance with the requirements prescribed by the Treasury.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the
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assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity Contract Owner's gross income. The IRS has
stated in published rulings that a variable contract owner will be considered
the owner of separate account assets if the contract owner possesses incidents
of ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
states that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of the
date of this Prospectus, no such guidance has been issued.
The ownership rights of a Participant under the Contract are similar to, but
different in certain respects from, those described by the IRS in rulings in
which it was determined that contract owners were not owners of separate account
assets. For example, a Participant has the choice of one or more sub-accounts in
which to allocate net purchase payments and contract values, and may be able to
transfer among sub-accounts more frequently than in such rulings. These
differences could result in a Contract Owner and thus the Participant as being
treated as the owner of the assets of the Group Variable Annuity Account. In
addition, Minnesota Mutual does not know what standards will be set forth, if
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. Minnesota Mutual therefore reserves the right to modify the
Contract as necessary to attempt to prevent a Contract Owner or Participant from
being considered the owner of a pro rata share of the assets of the Group
Variable Annuity Account.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of the death of the owner.
Generally, such amounts are includable in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender of the Contract, as described above, or (2) if distributed
under an annuity option, they are taxed in the same manner as annuity payments,
as described above.
POSSIBLE CHANGES IN TAXATION
Legislation has been proposed in 1998 that, if enacted, would adversely modify
the federal taxation of certain insurance and annuity contracts. For example,
one proposal would tax transfers among investment options and tax exchanges
involving variable contracts. A second proposal would reduce the "investment in
the contract" under cash value life insurance and certain annuity contracts by
certain amounts, thereby increasing the amount of income for purposes of
computing gain. Although the likelihood of there being any change is uncertain,
there is always the possibility that the tax treatment of the Contracts could
change by legislation or other means. Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change). You should consult a tax adviser with respect to legislative
developments and their effect on the Contract.
TAX QUALIFIED PROGRAMS
The annuity is designed for use with several types of retirement plans that
qualify for special tax treatment. The tax rules applicable to Participants and
beneficiaries in retirement plans vary according to the type of plan and the
terms and conditions of the plan. Special favorable tax treatment may be
available for certain types of contributions and distributions. Adverse tax
consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions); distributions
that do not conform to specified minimum distribution rules; aggregate
distributions in excess of a specified annual amount; and in other specified
circumstances.
We make no attempt to provide more than general information about use of
annuities with the various types of retirement plans. Owners and participants
under retirement plans as well as annuitants and beneficiaries are cautioned
that the rights of any person to any benefits under annuities purchased in
connection with these plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the annuity issued
in connection with such a plan. Some retirement plans are subject to transfer
restrictions, distribution and other requirements
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that are not incorporated into the annuity or other annuity administration
procedures. Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the annuities comply with applicable law. Purchasers of annuities for
use with any retirement plan should consult their legal counsel and tax adviser
regarding the suitability of the contract. The contract may also be used in
other situations where a group annuity contract is desired for funding but where
the benefit structure does not require a contract which is recognized as an
"annuity" for federal income tax purposes. As with deferred compensation plans,
the availability of public funds within the contract may present additional
considerations as to whether that contract is qualified as an annuity contract
for tax purposes.
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 by 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.
SIMPLIFIED EMPLOYEE PENSION (SEP) IRAS
Employers may establish Simplified Employee Pension (SEP) IRAs under Code
section 408(k) to provide IRA contributions on behalf of their employees. In
addition to all of the general Code rules governing IRAs, such plans are subject
to certain Code requirements regarding participation and amounts of
contributions.
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS
Code Section 401(a) permits employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish
retirement plans for themselves and their employees. These retirement plans may
permit the purchase of the contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the plan, to the participant
or to both may result if this annuity is assigned or transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all legal requirements applicable to such benefits prior to transfer of the
annuity.
DEFERRED COMPENSATION PLANS
Code Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and tax-exempt organizations. The plans may permit participants
to specify the form of investment for their deferred compensation account.
With respect to non-governmental Section 457 plans, all investments are owned
by the sponsoring employer and are subject to the claims of the general
creditors of the employer and, depending on the terms of the particular plan,
the employer may be entitled to draw on deferred amounts for purposes unrelated
to its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Any amount deferred under an eligible deferred compensation plan, and any
income attributable to the amounts so deferred, are currently excluded from the
Participant's income. Generally, the maximum amount of compensation that may be
deferred is the lesser of $7,500 or 33 1/3% of includable compensation (taxable
earnings). This amount shall be adjusted for cost-of-living in accordance with
Section 457(e)(15) of the Code. Different rules may apply for Participants
covered by private deferred compensation plans under this section and those
Participants should consult a competent tax adviser concerning the operation of
such a plan. A Participant who participates in a deferred compensation plan
sponsored by an employer and who also participates in a Section 403(b)
retirement program, Section 401(k) plan or a Simplified Employee Pension (SEP)
amounts excludable from gross income pursuant to that program, plan or pension
reduce the amount of compensation which may be deferred under a Section 457
deferred compensation plan.
The diversification requirements of Section 817(h) of the Code, previously
described in this section, may present additional considerations for purchasers
or Participants of the Contracts. Code Section 817(h) applies to a variable
annuity contract other than a pension plan contract. Section 818 of the Code
defines pension plan
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contracts as contracts issued under a Section 401(a) plan, Section 401(k) plan,
Section 403(b) program, or a Section 457 retirement program as maintained by the
United States government, the government of any state or political subdivision
thereof, or by any agency or instrumentality of the foregoing.
Notwithstanding this exemption, an existing Revenue Ruling, Revenue Ruling
81-225, may provide a legal theory that suggests that contracts which utilize a
public fund, that is to say a fund available not only to separate accounts of
insurance companies but to members of the public generally, may present
additional considerations as to whether that contract is qualified as an annuity
contract for tax purposes because of the existence of the availability of the
public funds in that contract. We believe that if the Service were to make such
a determination providing that result, that the existence of a Section 457
deferred compensation plan would, nevertheless, protect Participants in that
plan from current income taxation.
Additionally, should a contract make a public fund available to its
Participants, it is believed that additional contracts funded by the separate
account could participate in the separate account and, so long as they omitted
the use of non-public funds, that they could continue to obtain tax treatment as
an annuity under existing regulations and revenue rulings.
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.
WITHHOLDING
In general, distributions from annuities are subject to federal income tax
withholding unless the recipient elects not to have tax withheld. Different
rules may apply to payments delivered outside the United States. Some states
have enacted similar rules.
Recent changes to the Code allow the rollover of most distributions from
tax-qualified plans and Section 403(b) annuities directly to other tax-qualified
plans that will accept such distributions and to individual retirement accounts
and individual retirement annuities. Distributions which may not be rolled over
are those which are: (1) one of a series of substantially equal annual (or more
frequent) payments made (a) over the life or life expectancy of the employee,
(b) the joint lives or joint expectancies of the employee and the employee's
designated beneficiary, or (c) for a specified period of ten years or more; (2)
a required minimum distribution; or (3) the non-taxable portion of a
distribution.
Any distribution eligible for rollover, which may include payment to an
employee, an employee's surviving spouse or an ex-spouse who is an alternate
payee, will be subject to federal tax withholding at a 20% rate unless the
distribution is made as a direct rollover to a tax-qualified plan or to an
individual retirement account or annuity. It may be noted that amounts received
by individuals which are 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.
LOANS
Generally, interest paid on any loan under an annuity Contract which is owned by
an individual is not deductible. A Participant should consult a competent tax
adviser before deducting any loan interest.
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
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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 becoming a Participant under the Contract or
exercising elections under such a Contract. For further information a qualified
tax adviser should be consulted.
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LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Group Variable Annuity
Account is a party. There are no material pending legal proceedings, other than
ordinary routine litigation incidental to their business, in which Minnesota
Mutual, Advantus Capital or Ascend Financial is a party.
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YEAR 2000 COMPUTER PROBLEM
The services provided by Minnesota Mutual to the Separate Account and its
contract owners depend on the smooth functioning of its computer systems. Many
computer software systems in use today cannot distinguish the year 2000 from the
year 1900 because of the way that dates are encoded, stored and calculated. That
failure could have a negative impact on the ability of Minnesota Mutual to
provide services to contract owners. Minnesota Mutual has been actively working
on necessary changes to its computer systems to deal with the year 2000.
Although there can be no assurance of complete success, Minnesota Mutual
believes that it will be able to resolve these issues on a timely basis and that
there will be no material adverse impact on its ability to provide services to
the Separate Account.
In addition, Minnesota Mutual's operations could be impacted by its service
providers' or suppliers' year 2000 efforts. Minnesota Mutual has undertaken an
initiative to assess the efforts of organizations where there is a significant
business relationship; however there is no assurance that Minnesota Mutual will
not be affected by year 2000 problems of other organizations.
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REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission, 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 exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Group Variable Annuity Account and the Contracts.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof
reference is made to such instruments as filed.
- ------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information, which contains additional Contract and
Group Variable Annuity Account information, including financial statements, is
available from the offices of the Group Variable Annuity Account at your
request. The Table of Contents for that Statement of Additional Information is
as follows:
Group Variable Annuity Account
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contracts
Annuity Payments
Auditors
Financial Statements
Appendix A--Calculation of Unit Values
33
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 1998
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands
upon subjects discussed in the Prospectus. Therefore, this Statement should
be read in conjunction with the Group Variable Annuity Account's current
Prospectus, bearing the same date, which may be obtained by calling Minnesota
Mutual at (612) 665-3500 after September 1, 1998, (651) 665-3500 or writing the
Group Variable Annuity Account at Minnesota Mutual Life Center, 400 Robert
Street North, St. Paul, Minnesota 55101-2098.
TABLE OF CONTENTS
Separate Account
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contracts
Performance Data
Annuity Payments
Auditors
Financial Statements
Appendix A - Calculation of Unit Values
1
<PAGE>
GROUP VARIABLE ANNUITY ACCOUNT
Minnesota Mutual Group Variable Annuity Account is a separate account of The
Minnesota Mutual Life Insurance Company ("Minnesota Mutual"). The Group
Variable Account is registered as a unit investment trust.
TRUSTEES AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA MUTUAL
TRUSTEES PRINCIPAL OCCUPATION
Giulio Agostini Senior Vice President, Finance and
Administrative Services, Minnesota Mining and
Manufacturing Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller
Company, St. Paul, Minnesota (Adhesive
Products) since June 1995, prior thereto
for more than five years President and
Chief Executive Officer, H. B. Fuller
Company
Leslie S. Biller President and Chief Operating Officer,
Norwest Corporation, Minneapolis,
Minnesota (Banking)
John F. Grundhofer President and Chief Executive Officer,
U.S. Bancorp, Minneapolis, Minnesota
(Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for
more than five years Chairman of the Board,
President and Chief Executive Officer,
Deluxe Corporation, Shoreview, Minnesota
(Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General
Mills Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Ph.D. Prior to March 1996, and for more than five
years, President, Northwest Area Foundation,
St. Paul, Minnesota (Private Regional
Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual
Life Insurance Company, since August 1995;
prior thereto for more than five years Vice
President and Actuary, The Minnesota Mutual
Life Insurance Company
2
<PAGE>
Michael E. Shannon Chairman, Chief Financial and
Administrative Officer, Ecolab, Inc.,
St. Paul, Minnesota (Develops and Markets
Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Chairman, Clearwater Investment Trust since
May 1996, prior thereto for more than five
years, Chairman, Clearwater Management
Company, St. Paul, Minnesota (Financial
Management)
PRINCIPAL OFFICERS (OTHER THAN TRUSTEES)
<TABLE>
<CAPTION>
NAME POSITION
<S> <C>
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Frederick P. Feuerherm Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Michael T. Kellett Vice President
Richard D. Lee Vice President
Robert M. Olafson Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Senior Vice President and Chief Financial Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
William N. Westhoff Senior Vice President and Treasurer
</TABLE>
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Mutual have been employed by Minnesota Mutual for at
least five years with the exception of Mr. Westhoff. Mr. Westhoff has been
employed by Minnesota Mutual since April 1998. Prior thereto, Mr. Westhoff
was employed by American Express Financial Corporation, Minneapolis,
Minnesota, from August 1994 to October 1997 as Senior Vice President, Global
Investments and from November 1989 to July 1994 as Senior Vice President,
Fixed Income Management.
DISTRIBUTION OF CONTRACTS
The Contracts will be continuously sold by Minnesota Mutual life insurance
agents who are also registered representatives of Ascend Financial Services,
Inc. or other broker-dealers who have entered into selling agreements with
Ascend Financial. Ascend Financial acts as the principal underwriter of the
contracts. Ascend Financial Services, Inc. is a wholly-owned subsidiary of
MIMLIC Asset Management Company, which in turn is a wholly-owned subsidiary
of Minnesota Mutual. 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.
3
<PAGE>
PERFORMANCE DATA
CURRENT YIELD FIGURES FOR MONEY MARKET SUB-ACCOUNT
Current annualized yield quotations for the Money Market Sub-Account are based
on the Sub-Account's net investment income for a seven-day or other specified
period and exclude any realized or unrealized gains or losses on sub-account
securities. Current annualized yield is computed by determining the net change
(exclusive of realized gains and losses from the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical account
having a balance of one accumulation unit at the beginning of the specified
period, dividing such net change in account value by the value of the account at
the beginning of the period, and annualizing this quotient on a 365-day basis.
The Group Variable Annuity Account may also quote the effective yield of the
Money Market Sub-Account for a seven-day or other specified period for which the
current annualized yield is computed by expressing the unannualized return on a
compounded, annualized basis. The yield and effective yield of the Money Market
Sub-Account for the seven-day period ended December 31, 1997 were 4.04% and
4.12%, respectively. Such figures reflect the voluntary absorption of certain
expenses of Advantus Series Fund, Inc. (the "Fund") by Minnesota Mutual
described below under "Total Return Figures for All Sub-Accounts." Yield
figures quoted by the Money Market Sub-Account will not reflect the deduction of
any applicable deferred sales charges (the deferred sales charge, as a
percentage of the accumulation value withdrawn, begin as of the contract date
at 6%).
TOTAL RETURN FIGURES FOR ALL SUB-ACCOUNTS
Cumulative total return quotations for Sub-Accounts represent the total return
for the period since the Sub-Account became available pursuant to the Group
Variable Annuity Account's registration statement. Cumulative total return is
equal to the percentage change between the net asset value of a hypothetical
$1,000 investment at the beginning of the period and the net asset value of that
same investment at the end of the period. Such quotations of cumulative total
return will not reflect the deduction of any applicable deferred sales charge.
The cumulative total return figures published by the Group Variable Annuity
Account relating to the contract described in the Prospectus will reflect
Minnesota Mutual's or the Underlying Fund's management voluntary absorption
of certain Series Fund or Underlying Fund expenses described below.
Cumulative total return quotations for Sub-Accounts will be accompanied by
average annual total return figures for a one year period, five year period,
ten year period or since the inception of the Group Variable Annuity
Contract. Average annual total return figures are the average annual
compounded rates of return required for an initial investment of $1,000 to
equal the surrender value of that same investment at the end of the period.
The surrender value will reflect the deduction of the deferred sales charge
applicable to the contract payments and to the length of the period the
payments remain in the contract. The average annual total return figures
published by the Group Variable Annuity Account will reflect Minnesota
Mutual's or the Underlying Fund's management voluntary absorption of certain
Series Fund or Underlying Fund expenses. Prior to January 1, 1986, the
Series Fund incurred no expenses. Total return is quoted for only those
Sub-Accounts that had purchase payments allocated to them as of December 31,
1997 under The Group Variable
4
<PAGE>
Annuity Account. The figures in parenthesis show what the cumulative rates
of return would have been had Minnesota Mutual or the Underlying Fund's
management not absorbed Fund expenses as described below.
<TABLE>
<CAPTION>
From Inception Date of
To 12/31/97 Inception
-------------------- ---------
<S> <C> <C> <C>
Growth Sub-Account 42.22% (42.22%) 01/31/96
Asset Allocation Sub-Account 25.13% (25.13%) 01/31/96
Index 500 Sub-Account 109.44% (109.44%) 09/01/94
Vanguard Long-Term Corporate
Sub-Account 39.96% (39.96%) 09/01/94
Vanguard Wellington Sub-Account 80.10% (80.10%) 09/01/94
Fidelity Contrafund Sub-Account 94.91% (94.91%) 09/01/94
Scudder International Sub-Account 25.96% (25.96%) 09/01/94
Janus Twenty Sub-Account 109.22% (109.22%) 09/01/94
</TABLE>
Cumulative total return quotations for Sub-Accounts will be accompanied by
average annual total return figures for a one-year period, five-year period and
ten-year period or for the period since the Sub-Account became available
pursuant to the Group Variable Annuity Account's registration statement if less
than ten years. Average annual total return figures are the average annual
compounded rates of return required for an initial investment of $1,000 to equal
the surrender value of that same investment at the end of the period. The
surrender value will reflect the deduction of the deferred sales charge
applicable to the contract payments and to the length of the period the payments
remain in the contract. The average annual total return figures published by
the Group Variable Annuity Account will reflect Minnesota Mutual's voluntary
absorption of certain Fund expenses. Prior to January 1, 1986, the Fund
incurred no expenses. During 1986 and from January 1 to March 8, 1987 Minnesota
Mutual voluntarily absorbed all fees and expenses of any Fund portfolio that
exceeded .75% of the average daily net assets of such Fund portfolio. For the
period subsequent to March 9, 1987, Minnesota Mutual is voluntarily absorbing
the fees and expenses that exceed .65% of the average daily net assets of the
Growth, Bond, Money Market, Asset Allocation and Mortgage Securities Portfolios
of the Fund, .55% of the average daily net assets of the Index 500 Portfolio of
the Fund, .90% of the average daily net assets of the Capital Appreciation and
Small Company Portfolios of the Fund and expenses that exceed 1.00% of the
average daily net assets of the International Stock Portfolio of the Fund
exclusive of the advisory fee. And, for the period subsequent to May 2, 1994,
Minnesota Mutual has voluntarily absorbed fees and expenses that exceed .90% of
the average daily net assets of the Value Stock Portfolio and fees and expenses
that exceed .40% of the average daily net assets of the Maturing Government Bond
Portfolios. It should be noted that for the Maturing Government Bond Portfolios
maturing in 1998 and 2002, Minnesota Mutual voluntarily absorbed fees and
5
<PAGE>
expenses that exceeded .20% of average daily net assets of those Portfolios
through April 30, 1998. For the period subsequent to April 30, 1998, Minnesota
Mutual has voluntarily absorbed fees and expenses that exceed .40% of the
average daily net assets of the Maturing Government Bond Portfolios maturing in
1998 and 2002. For the period subsequent to October 1, 1997, Minnesota Mutual
has voluntarily agreed to absorb fees and expenses that exceed .55% of the
average daily net assets of the Index 400 Mid-Cap Portfolio, .90% of the average
daily net assets of the Small Company Value and Real Estate Securities
Portfolios, .85% of the average daily net assets of the Macro-Cap Value
Portfolio and expenses that exceed 1.00% of the average daily net assets of the
Global Bond Portfolio of the Fund exclusive of the advisory fee. There is no
specified or minimum period of time during which Minnesota Mutual has agreed to
continue its voluntary absorption of these expenses, and Minnesota Mutual may in
its discretion cease its absorption of expenses at any time. Should Minnesota
Mutual cease absorbing expenses the effect would be to increase substantially
Fund expenses and thereby reduce investment return.
6
<PAGE>
The average annual rates of return for the Sub-Accounts, in connection with
the contract described in the Prospectus, for the specified periods ended
December 31, 1997 are shown in the tables below. The figures in parentheses
show what the average annual rates of return would have been had Minnesota
Mutual or the Underlying Fund's management not absorbed Series Fund or
Underlying Fund expenses as described above. These figures assume that the
contracts described herein were issued at the inception of the Group Variable
Annuity Contract. Total return is quoted for only those Sub-Accounts that
had purchase payments allocated to them as of December 31, 1997 under the
Group Variable Annuity Account.
<TABLE>
<CAPTION>
Group Deferred Variable Annuity
Year Ended Five Years Ten Years From Inception Date of
12/31/97 Ended 12/31/97 Ended 12/31/97 to 12/31/97 Inception
---------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Growth Sub-Account 25.48% (25.48%) N/A (N/A) N/A (N/A) 17.60% (17.60%) 01/31/96
Asset Allocation
Sub-Account 11.92% (11.92%) N/A (N/A) N/A (N/A) 10.01% (10.01%) 01/31/96
Index 500 Sub-Account 24.49% (24.49%) N/A (N/A) N/A (N/A) 23.79% (23.79%) 09/01/94
Vanguard Long-Term
Corporate Sub-Account 7.04% (7.04%) N/A (N/A) N/A (N/A) 9.71% (9.71%) 09/01/94
Vanguard Wellington
Sub-Account 15.91% (15.91%) N/A (N/A) N/A (N/A) 18.32% (18.32%) 09/01/94
Fidelity Contrafund
Sub-Account 15.69% (15.69%) N/A (N/A) N/A (N/A) 21.15% (21.15%) 09/01/94
Scudder International
Sub-Account 1.56% (1.56%) N/A (N/A) N/A (N/A) 6.29% (6.29%) 09/01/94
Janus Twenty
Sub-Account 21.99% (21.99%) N/A (N/A) N/A (N/A) 23.75% (23.75%) 09/01/94
</TABLE>
7
<PAGE>
The average annual total return figures described above may be accompanied by
other average annual total return quotations which do not reflect the
deduction of any deferred sales charges. Such other average annual total
return figures will be calculated as described above, except that the initial
$1,000 investment will be equated to that same investment's net asset value,
rather than its surrender value, at the end of the period. In addition,
these figures assume that the contracts described herein were issued at the
inception of the corresponding Series Fund Portfolios or Underlying Fund.
Thus the total returns reflect simulated performance under the Sub-Account of
the contract assuming all purchase payments had been allocated to the
Underlying Fund or Series Fund Portfolio, reduced for applicable expenses.
The average annual rates of return, as thus calculated, for the Sub-Accounts
of the contracts described in the Prospectus for the specified periods ended
December 31, 1997, are shown in the table below. The figures in parentheses
show what the average annual rates of return, without the application of
applicable deferred sales charges, would have been had Minnesota Mutual or
the Underlying Fund's management not absorbed Series Fund or the Underlying
Fund expenses as described above. Total return is quoted for only those
Sub-Accounts that had purchase payments allocated to them as of December 31,
1997 under The Group Variable Annuity Account.
<TABLE>
<CAPTION>
Year Ended Five Years Ten Years
12/31/97 Ended 12/31/97 Ended 12/31/97
-------- -------------- --------------
<S> <C> <C> <C>
Growth Sub-Account 32.09% (32.09%) 14.15% (14.15%) 14.09% (14.09%)
Asset Allocation Sub-Account 17.81% (17.81%) 10.71% (10.71%) 11.57% (11.57%)
Index 500 Sub-Account 31.05% (31.05%) 18.24% (18.24%) 16.15% (16.15%)
Vanguard Long-Term Corporate Sub-Account 12.68% (12.68%) 8.47% (8.47%) 9.79% (9.79%)
Vanguard Wellington Sub-Account 22.01% (22.01%) 15.33% (15.33%) 13.53% (13.53%)
Fidelity Contrafund Sub-Account 21.78% (21.78%) 18.47% (18.47%) 21.80% (21.80%)
Scudder International Sub-Account 6.90% (6.90%) 11.83% (11.83%) 9.55% (9.55%)
Janus Twenty Sub-Account 28.41% (28.41%) 15.69% (15.69%) 19.92% (19.92%)
</TABLE>
8
<PAGE>
PREDICTABILITY OF RETURN
ANTICIPATED VALUE AT MATURITY. The maturity values of zero-coupon bonds are
specified at the time the bonds are issued, and this feature, combined with the
ability to calculate yield to maturity, has made these instruments popular
investment vehicles for investors seeking reliable investments to meet long-term
financial goals.
Each Maturing Government Bond Portfolio of the Fund consists primarily of
zero-coupon bonds but is actively managed to accommodate contract owner activity
and to take advantage of perceived market opportunities. Because of this active
management approach, there is no guarantee that a certain price per share of a
Maturing Government Bond Portfolio, or a certain price per unit of the
corresponding Sub-Account, will be attained by the time a Portfolio is
liquidated. Instead, the Fund attempts to track the price behavior of a
directly held zero-coupon bond by:
(1) Maintaining a weighted average maturity within each Maturing
Government Bond Portfolio's target maturity year;
(2) Investing at least 90% of assets in securities that mature within one
year of that Portfolio's target maturity year;
(3) Investing a substantial portion of assets in Treasury STRIPS (the most
liquid Treasury zero);
(4) Under normal conditions, maintaining a nominal cash balance;
(5) Executing portfolio transactions necessary to accommodate net contract
owner purchases or redemptions on a daily basis; and
(6) Whenever feasible, contacting several U.S. government securities
dealers for each intended transaction in an effort to obtain the best
price on each transaction.
These measures enable Minnesota Mutual to calculate an anticipated value at
maturity (AVM) for each unit of a Maturing Government Bond Sub-Account,
calculated as of the date of purchase of such unit, that approximates the price
per unit that such unit will achieve by the weighted average maturity date of
the underlying Portfolio. The AVM calculation for each Maturing Government Bond
Sub-Account is as follows:
2T
AVM = P(1 + AGR/2)
where P = the Sub-Account's current price per unit; T = the Sub-Account's
weighted average term to maturity in years; and AGR = the anticipated growth
rate.
This calculation assumes an expense ratio and a portfolio composition for the
underlying Maturing Government Bond Portfolio that remain constant for the life
of such Portfolio. Because the Portfolio's expenses and composition do not
remain constant, however, Minnesota Mutual
9
<PAGE>
may calculate AVM for each Maturing Government Bond Sub-Account on any day on
which the underlying Maturing Government Bond Portfolio is valued. Such an AVM
is applicable only to units purchased on that date.
In addition to the measures described above, which the adviser believes are
adequate to assure close correspondence between the price behavior of each
Portfolio and the price behavior of directly held zero-coupon bonds with
comparable maturities, the Fund expects that each Portfolio will invest at least
90% of its net assets in zero-coupon bonds until it is within four years of its
target maturity year and at least 80% of its net assets in zero-coupon
securities within two to four years of its target maturity year. This
expectation may be altered if the market supply of zero-coupon securities
diminishes unexpectedly.
ANTICIPATED GROWTH RATE. Minnesota Mutual calculates an anticipated growth rate
(AGR) for each Maturing Government Bond Sub-Account on each day on which the
underlying Portfolio is valued. AGR is a calculation of the anticipated
annualized rate of growth for a Sub-Account unit, calculated from the date of
purchase of such unit to the Sub-Account's target maturity date. As is the case
with calculations of AVM, the AGR calculation assumes that each underlying
Maturing Government Bond Portfolio expense ratio and portfolio composition will
remain constant. Each Maturing Government Bond Sub-Account AGR changes from day
to day (i.e., a particular AGR calculation is applicable only to units purchased
on that date), due primarily to changes in interest rates and, to a lesser
extent, to changes in portfolio composition and other factors that affect the
value of the underlying Portfolio.
Minnesota Mutual expects that a contract owner who holds specific units until
the underlying Portfolio's weighted average maturity date will realize an
investment return and maturity value on those units that do not differ
substantially from the AGR and AVM calculated on the day such units were
purchased. The AGR and AVM calculated with respect to units purchased on any
other date, however, may be materially different.
10
<PAGE>
ANNUITY PAYMENTS
Please see Appendix A to this Statement of Additional Information for an
illustration of the calculation of annuity unit values and of a variable annuity
payment, showing the method used for the calculation of both the initial and
subsequent payments.
AUDITORS
The financial statements of the Group Variable Annuity Account and the
Consolidated Financial Statements of The Minnesota Mutual Life Insurance
Company included in this Statement of Additional Information have been
audited by KPMG Peat Marwick LLP, 4200 Norwest Center, 90 South Seventh
Street, Minneapolis, Minnesota 55402, independent auditors, as indicated in
their reports in this Statement of Additional Information, and are included
herein in reliance upon such reports and upon the authority of such firm as
experts in accounting and auditing.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Contract Owners of Minnesota Mutual Group Variable Annuity Account:
We have audited the accompanying statements of assets and liabilities of the
Advantus Growth, Advantus Money Market, Advantus Asset Allocation, Advantus
Index 500, Vanguard Long-Term Corporate, Vanguard Wellington, Fidelity
Contrafund, Scudder International and Janus Twenty Segregated Sub-Accounts of
Minnesota Mutual Group Variable Annuity Account (the Account) as of December 31,
1997 and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended and the financial highlights for the periods presented in footnote
(6). These financial statements and the financial highlights are the
responsibility of the Account's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements.
Investments owned at December 31, 1997 were confirmed to us by the respective
Sub-Account mutual fund group, or, for Advantus Series Fund, Inc. (formerly
MIMLIC Series Fund, Inc.), verified by examination of the underlying portfolios.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Advantus Growth, Advantus
Money Market, Advantus Asset Allocation, Advantus Index 500, Vanguard Long-Term
Corporate, Vanguard Wellington, Fidelity Contrafund, Scudder International and
Janus Twenty Segregated Sub-Accounts of Minnesota Mutual Group Variable Annuity
Account at December 31, 1997 and the results of their operations, changes in
their net assets and the financial highlights for the periods stated in the
first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 20, 1998
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------
ADVANTUS ADVANTUS
ADVANTUS MONEY ASSET
ASSETS GROWTH MARKET ALLOCATION
-----------------------------------------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
Advantus Series Fund, Inc. - Growth Portfolio, 207,879 shares
at net asset value of $2.40 per share (cost $464,319)................ $ 498,869 - -
Advantus Series Fund, Inc. - Money Market Portfolio, 2,676,998
shares at net asset value of $1.00 per share (cost $2,676,998)....... - 2,676,998 -
Advantus Series Fund, Inc. - Asset Allocation Portfolio, 227,483
shares at net asset value of $2.03 per share (cost $427,145) ........ - - 461,444
Advantus Series Fund, Inc. - Index 500 Portfolio, 5,224,680 shares
at net asset value of $3.10 per share (cost $13,213,003) ............ - - -
Vanguard Long-Term Corporate Portfolio, 475,327 shares
at net asset value of $9.26 per share (cost $4,232,044) ............. - - -
Vanguard/Wellington Fund, Inc., 988,264 shares at net asset
value of $29.45 per share (cost $26,058,746) ........................ - - -
Fidelity Contrafund, 1,104,015 shares at net asset
value of $46.63 per share (cost $44,238,448) ........................ - - -
Scudder International Fund, 164,584 shares at net asset value of
$45.75 per share (cost $7,649,007) .................................. - - -
Janus Twenty Fund, 416,349 shares at net asset
value of $30.99 per share (cost $12,961,697) ........................ - - -
------------ ----------- -----------
498,869 2,676,998 461,444
Receivable for investments sold ......................................... 844 3,158 394
Receivable from Minnesota Mutual for contract purchase payments ......... 2,374 331 1,028
------------ ----------- -----------
Total assets ........................................................ 502,087 2,680,487 462,866
------------ ----------- -----------
LIABILITIES
Payable for investments purchased ....................................... 2,374 331 1,028
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges.......................................... 844 3,158 394
------------ ----------- -----------
Total liabilities...................................................... 3,218 3,489 1,422
------------ ----------- -----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS ................................ $ 498,869 2,676,998 461,444
------------ ----------- -----------
------------ ----------- -----------
ACCUMULATION UNITS OUTSTANDING .......................................... 351,033 2,345,197 368,919
------------ ----------- -----------
------------ ----------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT ................................... $ 1.42 1.14 1.25
------------ ----------- -----------
------------ ----------- -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------
ADVANTUS VANGUARD
INDEX LONG-TERM VANGUARD
ASSETS 500 CORPORATE WELLINGTON
-----------------------------------------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
Advantus Series Fund, Inc. - Growth Portfolio, 207,879 shares
at net asset value of $2.40 per share (cost $464,319)................ - - -
Advantus Series Fund, Inc. - Money Market Portfolio, 2,676,998
shares at net asset value of $1.00 per share (cost $2,676,998)....... - - -
Advantus Series Fund, Inc. - Asset Allocation Portfolio, 227,483
shares at net asset value of $2.03 per share (cost $427,145) ........ - - -
Advantus Series Fund, Inc. - Index 500 Portfolio, 5,224,680 shares
at net asset value of $3.10 per share (cost $13,213,003) ............ 16,215,771 - -
Vanguard Long-Term Corporate Portfolio, 475,327 shares
at net asset value of $9.26 per share (cost $4,232,044) ............. - 4,401,522 -
Vanguard/Wellington Fund, Inc., 988,264 shares at net asset
value of $29.45 per share (cost $26,058,746) ........................ - - 29,104,366
Fidelity Contrafund, 1,104,015 shares at net asset
value of $46.63 per share (cost $44,238,448) ........................ - - -
Scudder International Fund, 164,584 shares at net asset value of
$45.75 per share (cost $7,649,007) .................................. - - -
Janus Twenty Fund, 416,349 shares at net asset
value of $30.99 per share (cost $12,961,697) ........................ - - -
------------ ----------- -----------
16,215,771 4,401,522 29,104,366
Receivable for investments sold ......................................... 681 36,223 19,593
Receivable from Minnesota Mutual for contract purchase payments ......... 31,966 5,571 11,392
------------ ----------- -----------
Total assets ........................................................ 16,248,418 4,443,316 29,135,351
------------ ----------- -----------
LIABILITIES
Payable for investments purchased ....................................... 31,966 5,571 11,392
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges.......................................... 681 36,223 19,593
------------ ----------- -----------
Total liabilities.................................................... 32,647 41,794 30,985
------------ ----------- -----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS ................................ 16,215,771 4,401,522 29,104,366
------------ ----------- -----------
------------ ----------- -----------
ACCUMULATION UNITS OUTSTANDING .......................................... 7,737,757 3,145,416 16,168,553
------------ ----------- -----------
------------ ----------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT ................................... 2.09 1.41 1.80
------------ ----------- -----------
------------ ----------- -----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------
FIDELITY SCUDDER JANUS
ASSETS CONTRAFUND INTERNATIONAL TWENTY
-----------------------------------------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
Advantus Series Fund, Inc. - Growth Portfolio, 207,879 shares
at net asset value of $2.40 per share (cost $464,319)................ - - -
Advantus Series Fund, Inc. - Money Market Portfolio, 2,676,998
shares at net asset value of $1.00 per share (cost $2,676,998)....... - - -
Advantus Series Fund, Inc. - Asset Allocation Portfolio, 227,483
shares at net asset value of $2.03 per share (cost $427,145) ........ - - -
Advantus Series Fund, Inc. - Index 500 Portfolio, 5,224,680 shares
at net asset value of $3.10 per share (cost $13,213,003) ............ - - -
Vanguard Long-Term Corporate Portfolio, 475,327 shares
at net asset value of $9.26 per share (cost $4,232,044) ............. - - -
Vanguard/Wellington Fund, Inc., 988,264 shares at net asset
value of $29.45 per share (cost $26,058,746) ........................ - - -
Fidelity Contrafund, 1,104,015 shares at net asset
value of $46.63 per share (cost $44,238,448) ........................ 51,480,240 - -
Scudder International Fund, 164,584 shares at net asset value of
$45.75 per share (cost $7,649,007) .................................. - 7,529,727 -
Janus Twenty Fund, 416,349 shares at net asset
value of $30.99 per share (cost $12,961,697) ........................ - - 12,902,648
------------ ----------- -----------
51,480,240 7,529,727 12,902,648
Receivable for investments sold ......................................... 12,313 1,777 27,083
Receivable from Minnesota Mutual for contract purchase payments ......... 27,831 3,987 577
------------ ----------- -----------
Total assets ........................................................ 51,520,384 7,535,491 12,930,308
------------ ----------- -----------
Liabilities
Payable for investments purchased ....................................... 27,831 3,987 577
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges.......................................... 12,313 1,777 27,083
------------ ----------- -----------
Total liabilities.................................................... 40,144 5,764 27,660
------------ ----------- -----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS ................................ 51,480,240 7,529,727 12,902,648
------------ ----------- -----------
------------ ----------- -----------
ACCUMULATION UNITS OUTSTANDING .......................................... 26,429,507 5,979,571 6,171,080
------------ ----------- -----------
------------ ----------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT ................................... 1.95 1.26 2.09
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS ADVANTUS
ADVANTUS MONEY ASSET
GROWTH MARKET ALLOCATION
------------ ---------- ----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) .................................................... $ 2,553 116,555 5,651
Mortality and expense risk charges (note 3) ............................... (2,995) (19,690) (2,442)
Administrative charges (note 3) ........................................... (529) (3,475) (431)
------------ ---------- --------
Investment income (loss) - net .......................................... (971) 93,390 2,778
------------ ---------- --------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) .................................................... 65,960 - 11,732
------------ ---------- --------
Realized gains (losses) on sales of investments:
Proceeds from sales ..................................................... 17,028 6,489,490 21,059
Cost of investments sold ................................................ (16,700) (6,489,490) (20,272)
------------ ---------- --------
328 - 787
------------ ---------- --------
Net realized gains on investments ....................................... 66,288 - 12,519
------------ ---------- --------
Net change in unrealized appreciation or depreciation
of investments .......................................................... 30,734 - 31,840
------------ ---------- --------
Net gains on investments ................................................ 97,022 - 44,359
------------ ---------- --------
Net increase in net assets resulting from operations ........................ $ 96,051 93,390 47,137
------------ ---------- --------
------------ ---------- --------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS VANGUARD
INDEX LONG-TERM VANGUARD
500 CORPORATE WELLINGTON
------------ ------------- --------------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) .................................................... 96,183 235,011 910,225
Mortality and expense risk charges (note 3) ............................... (92,140) (30,779) (183,473)
Administrative charges (note 3) ........................................... (16,260) (5,432) (32,378)
----------- --------- ----------
Investment income (loss) - net .......................................... (12,217) 198,800 694,374
----------- --------- ----------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) .................................................... 121,518 34,893 1,427,987
----------- --------- ----------
Realized gains (losses) on sales of investments:
Proceeds from sales ..................................................... 1,911,407 559,108 477,442
Cost of investments sold ................................................ (1,615,098) (547,376) (417,897)
----------- --------- ----------
296,309 11,732 59,545
----------- --------- ----------
Net realized gains on investments ....................................... 417,827 46,625 1,487,532
----------- --------- ----------
Net change in unrealized appreciation or depreciation
of investments .......................................................... 2,238,256 193,386 1,986,809
----------- --------- ----------
Net gains on investments ................................................ 2,656,083 240,011 3,474,341
----------- --------- ----------
Net increase in net assets resulting from operations ........................ 2,643,866 438,811 4,168,715
----------- --------- ----------
----------- --------- ----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
FIDELITY SCUDDER JANUS
CONTRAFUND INTERNATIONAL TWENTY
-------------- ------------- ----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) .................................................... 352,907 36,262 557,930
Mortality and expense risk charges (note 3) ............................... (352,610) (58,853) (77,074)
Administrative charges (note 3) ........................................... (62,225) (10,386) (13,601)
------------- ---------- ----------
Investment income (loss) - net .......................................... (61,928) (32,977) 467,255
------------- ---------- ----------
Realized and unrealized gains (losses) on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) .................................................... 4,410,373 784,666 1,080,855
------------- ---------- ----------
Realized gains (losses) on sales of investments:
Proceeds from sales ..................................................... 1,126,281 1,353,688 1,038,753
Cost of investments sold ................................................ (902,139) (1,205,446) (923,833)
------------- ---------- ----------
224,142 148,242 114,920
------------- ---------- ----------
Net realized gains on investments ....................................... 4,634,515 932,908 1,195,775
------------- ---------- ----------
Net change in unrealized appreciation or depreciation
of investments .......................................................... 3,372,088 (499,292) 199,816
------------- ---------- ----------
Net gains on investments ................................................ 8,006,603 433,616 1,395,591
------------- ---------- ----------
Net increase in net assets resulting from operations ........................ 7,944,675 400,639 1,862,846
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS ADVANTUS
ADVANTUS MONEY ASSET
GROWTH MARKET ALLOCATION
------------- ---------- ------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ $ (971) 93,390 2,778
Net realized gains on investments ......................................... 66,288 - 12,519
Net change in unrealized appreciation or depreciation
of investments .......................................................... 30,734 - 31,840
------------ ---------- ---------
Net increase in net assets resulting from operations ....................... 96,051 93,390 47,137
------------ ---------- ---------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 269,788 7,211,487 358,496
Contract terminations, withdrawals and charges ............................ (13,504) (6,466,325) (18,186)
------------ ---------- ---------
Increase in net assets from contract transactions ........................... 256,284 745,162 340,310
------------ ---------- ---------
Increase in net assets ...................................................... 352,335 838,552 387,447
Net assets at the beginning of year.......................................... 146,534 1,838,446 73,997
------------ ---------- ---------
Net assets at the end of year ............................................... $ 498,869 2,676,998 461,444
------------ ---------- ---------
------------ ---------- ---------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS VANGUARD
INDEX LONG-TERM VANGUARD
500 CORPORATE WELLINGTON
------------- ----------- -------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ (12,217) 198,800 694,374
Net realized gains on investments ......................................... 417,827 46,625 1,487,532
Net change in unrealized appreciation or depreciation
of investments .......................................................... 2,238,256 193,386 1,986,809
----------- --------- ----------
Net increase in net assets resulting from operations ....................... 2,643,866 438,811 4,168,715
----------- --------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 9,287,000 2,153,993 12,508,116
Contract terminations, withdrawals and charges ............................ (1,803,007) (923,357) (1,694,344)
----------- --------- ----------
Increase in net assets from contract transactions ........................... 7,483,993 1,230,636 10,813,772
----------- --------- ----------
Increase in net assets ...................................................... 10,127,859 1,669,447 14,982,487
Net assets at the beginning of year.......................................... 6,087,912 2,732,075 14,121,879
----------- --------- ----------
Net assets at the end of year ............................................... 16,215,771 4,401,522 29,104,366
----------- --------- ----------
----------- --------- ----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
FIDELITY SCUDDER JANUS
CONTRAFUND INTERNATIONAL TWENTY
-------------- --------------- -----------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ (61,928) (32,977) 467,255
Net realized gains on investments ......................................... 4,634,515 932,908 1,195,775
Net change in unrealized appreciation or depreciation
of investments .......................................................... 3,372,088 (499,292) 199,816
----------- ---------- ----------
Net increase in net assets resulting from operations ....................... 7,944,675 400,639 1,862,846
----------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 17,971,991 3,449,836 8,858,797
Contract terminations, withdrawals and charges ............................ (4,248,421) (1,944,093) (2,527,943)
----------- ---------- ----------
Increase in net assets from contract transactions ........................... 13,723,570 1,505,743 6,330,854
----------- ---------- ----------
Increase in net assets ...................................................... 21,668,245 1,906,382 8,193,700
Net assets at the beginning of year.......................................... 29,811,995 5,623,345 4,708,948
----------- ---------- ----------
Net assets at the end of year ............................................... 51,480,240 7,529,727 12,902,648
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS ADVANTUS
ADVANTUS MONEY ASSET
GROWTH MARKET ALLOCATION
-------------- ---------- -------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ $ (315) 42,154 (178)
Net realized gains on investments ......................................... 71 - 16
Net change in unrealized appreciation or depreciation
of investments .......................................................... 3,816 - 2,459
------------ ---------- --------
Net increase in net assets resulting from operations ....................... 3,572 42,154 2,297
------------ ---------- --------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 144,424 4,696,233 72,171
Contract terminations, withdrawals and charges ............................ (1,462) (3,757,202) (471)
------------ ---------- --------
Increase in net assets from contract transactions ........................... 142,962 939,031 71,700
------------ ---------- --------
Increase in net assets ...................................................... 146,534 981,185 73,997
Net assets at the beginning of year.......................................... - 857,261 -
------------ ---------- --------
Net assets at the end of year................................................ $ 146,534 1,838,446 73,997
------------ ---------- --------
------------ ---------- --------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------
ADVANTUS VANGUARD
INDEX LONG-TERM VANGUARD
500 CORPORATE WELLINGTON
---------- ----------- ------------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ 2,168 124,753 344,718
Net realized gains on investments ......................................... 130,890 48,734 587,709
Net change in unrealized appreciation or depreciation
of investments .......................................................... 568,849 (116,339) 482,836
--------- --------- ----------
Net increase in net assets resulting from operations ....................... 701,907 57,148 1,415,263
--------- --------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 4,785,759 1,953,546 8,416,427
Contract terminations, withdrawals and charges ............................ (1,060,885) (762,893) (968,102)
--------- --------- ----------
Increase in net assets from contract transactions ........................... 3,724,874 1,190,653 7,448,325
--------- --------- ----------
Increase in net assets ...................................................... 4,426,781 1,247,801 8,863,588
Net assets at the beginning of year.......................................... 1,661,131 1,484,274 5,258,291
--------- --------- ----------
Net assets at the end of year................................................ 6,087,912 2,732,075 14,121,879
--------- --------- ----------
--------- --------- ----------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
FIDELITY SCUDDER JANUS
CONTRAFUND INTERNATIONAL TWENTY
-------------- ------------- ---------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net ............................................ 32,079 99,850 363,009
Net realized gains on investments ......................................... 1,906,915 173,064 448,252
Net change in unrealized appreciation or depreciation
of investments .......................................................... 2,320,829 290,641 (203,397)
---------- ---------- ----------
Net increase in net assets resulting from operations ....................... 4,259,823 563,555 607,864
---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments ................................................ 13,563,785 2,946,298 4,060,942
Contract terminations, withdrawals and charges ............................ (2,871,293) (1,015,404) (1,236,955)
---------- ---------- ----------
Increase in net assets from contract transactions ........................... 10,692,492 1,930,894 2,823,987
---------- ---------- ----------
Increase in net assets ...................................................... 14,952,315 2,494,449 3,431,851
Net assets at the beginning of year.......................................... 14,859,680 3,128,896 1,277,097
---------- ---------- ----------
Net assets at the end of year................................................ 29,811,995 5,623,345 4,708,948
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Minnesota Mutual Group Variable Annuity Account (the Account) was
established on June 14, 1993 as a segregated asset account of The Minnesota
Mutual Life Insurance Company (Minnesota Mutual) under Minnesota law and is
registered as a unit investment trust under the Investment Company Act of
1940 (as amended). The Account commenced operations September 2, 1994.
The Account currently has nineteen segregated sub-accounts to which
variable annuity contract owners may allocate their purchase payments.
The assets of each segregated sub-account are held for the exclusive
benefit of the variable annuity contract owners and are not chargeable with
liabilities arising out of the business conducted by any other account or
by Minnesota Mutual. Contract owners allocate their variable annuity
purchase payments to one or more of the nineteen segregated sub-accounts.
Such payments are then invested in shares of Advantus Series Fund, Inc.
(formerly MIMLIC Series Fund, Inc.) or in shares of other registered
investment companies or portfolios (Underlying Funds). Payments allocated
to the Advantus Growth, Advantus Bond, Advantus Money Market, Advantus
Asset Allocation, Advantus Mortgage Securities, Advantus Index 500,
Advantus Capital Appreciation, Advantus International Stock, Advantus Small
Company, Advantus Maturing Government Bond 1998, Advantus Maturing
Government Bond 2002, Advantus Maturing Government Bond 2006, Advantus
Maturing Government Bond 2010, Advantus Value Stock, Vanguard Long-Term
Corporate, Vanguard Wellington, Fidelity Contrafund, Scudder International
and Janus Twenty segregated sub-accounts are invested in shares of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index
500, Capital Appreciation, International Stock, Small Company, Maturing
Government Bond 1998, Maturing Government Bond 2002, Maturing Government
Bond 2006, Maturing Government Bond 2010 and Value Stock Portfolios of the
Advantus Series Fund, Inc., Long-Term Corporate Portfolio of the Vanguard
Fixed Income Securities Fund, Inc., Vanguard/Wellington Fund, Inc.,
Fidelity Contrafund, Scudder International Fund and Janus Twenty Fund,
respectively. Each of the Underlying Funds is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. As of December 31, 1997, no contract owners
have elected to allocate payments to the Advantus Bond, Advantus Mortgage
Securities, Advantus Capital Appreciation, Advantus International Stock,
Advantus Small Company, Advantus Maturing Government Bond 1998, Advantus
Maturing Government Bond 2002, Advantus Maturing Government Bond 2006,
Advantus Maturing Government Bond 2010 and Advantus Value Stock segregated
sub-accounts.
Ascend Financial Service, Inc. (formerly MIMLIC Sales Corporation) acts as
the underwriter for the Account. Advantus Capital Management, Inc. acts as
the investment adviser for the Advantus Series Fund, Inc. Ascend Financial
Services, Inc. and Advantus Capital Management, Inc. are wholly-owned
subsidiaries of MIMLIC Asset Management Company. MIMLIC Asset Management
Company is a wholly-owned subsidiary of Minnesota Mutual.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets resulting from operations during the period. Actual results
could differ from those estimates.
<PAGE>
2
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENTS IN UNDERLYING FUNDS
Investments in shares of the Underlying Funds are stated at market value
which is the net asset value per share as determined daily by each of the
Underlying Funds. Investment transactions are accounted for on the date
the shares are purchased or sold. The cost of investments sold is
determined on the average cost method. All dividend distributions received
from the Underlying Funds are reinvested in additional shares of the
Underlying Funds and are recorded by the segregated sub-accounts on the
ex-dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Mutual for federal income tax
purposes. Under current interpretations of existing federal income tax
law, no income taxes are payable on investment income or capital gain
distributions received by the Account from the Underlying Funds.
(3) MORTALITY AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
The mortality and expense risk charge paid to Minnesota Mutual is computed
daily and is equal, on an annual basis, to .85 percent of the average daily
net assets of the Account. Under certain conditions, the mortality and
expense risk charge may be increased to 1.25 percent of the average daily
net assets of the Account.
The contract administrative charge paid to Minnesota Mutual 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 contract
administrative charge may be increased to not more than .40 percent of the
average daily net assets of the Account.
A contingent deferred sales charge may be imposed on a contract owner
during the first six years if a contract's accumulation value is reduced by
withdrawal or surrender. This sales charge is currently being waived by
Minnesota Mutual.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Underlying Fund shares, including reinvestment
of dividend distributions, were as follows for the year ended December 31,
1997:
<TABLE>
<S> <C>
Growth Portfolio of the Advantus Series Fund, Inc. . . . . . . . . . . . . . . . . . . . $ 338,301
Money Market Portfolio of the Advantus Series Fund, Inc. . . . . . . . . . . . . . . . . 7,328,042
Asset Allocation Portfolio of the Advantus Series Fund, Inc. . . . . . . . . . . . . . . 375,879
Index 500 Portfolio of the Advantus Series Fund, Inc. . . . . . . . . . . . . . . . . . . 9,504,701
Long-Term Corporate Portfolio of the Vanguard Fixed Income Securities Fund, Inc. . . . . 2,056,951
Vanguard/Wellington Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,413,576
Fidelity Contrafund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,198,296
Scudder International Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,611,120
Janus Twenty Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,917,717
</TABLE>
<PAGE>
3
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the years ended
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------
ADVANTUS ADVANTUS ADVANTUS
ADVANTUS MONEY ASSET INDEX
GROWTH MARKET ALLOCATION 500
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 ........................ - 812,075 - 1,252,482
Contract purchase payments .............. 137,557 4,346,833 70,145 3,278,878
Deductions for contract terminations
and withdrawal payments ................ (1,359) (3,482,472) (461) (720,064)
---------- ----------- ---------- ----------
Units outstanding at
December 31, 1996 ........................ 136,198 1,676,436 69,684 3,811,296
Contract purchase payments .............. 224,928 6,433,808 314,845 4,916,196
Deductions for contract terminations
and withdrawal payments ................ (10,093) (5,765,047) (15,610) (989,735)
---------- ----------- ---------- ----------
Units outstanding at
December 31, 1997......................... 351,033 2,345,197 368,919 7,737,757
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------
VANGUARD
LONG-TERM VANGUARD FIDELITY SCUDDER JANUS
CORPORATE WELLINGTON CONTRAFUND INTERNATIONAL TWENTY
----------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 ........... 1,202,743 4,097,086 11,232,337 3,011,428 990,111
Contract purchase
payments .................. 1,631,680 6,194,350 9,383,519 2,682,525 2,722,397
Deductions for contract
terminations and
withdrawal payments ....... (634,539) (719,519) (1,977,849) (919,947) (820,533)
---------- ---------- ---------- ---------- ----------
Units outstanding at
December 31, 1996 ........... 2,199,884 9,571,917 18,638,007 4,774,006 2,891,975
Contract purchase
payments .................. 1,653,580 7,626,554 10,165,734 2,747,637 4,576,276
Deductions for contract
terminations and
withdrawal payments ....... (708,048) (1,029,918) (2,374,234) (1,542,072) (1,297,171)
---------- ---------- ---------- ---------- ----------
Units outstanding at
December 31, 1997............ 3,145,416 16,168,553 26,429,507 5,979,571 6,171,080
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
4
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for
an accumulation unit outstanding during the years ended December 31, 1997,
1996 and 1995 and the period from September 2, 1994, commencement of
operations, to December 31, 1994 (years ended December 31, 1997 and 1996
for Advantus Growth and Advantus Asset Allocation):
<TABLE>
<CAPTION>
ADVANTUS GROWTH ADVANTUS MONEY MARKET
----------------------- ---------------------------------------------------
1997 1996 1997 1996 1995 1994
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period ...............$ 1.08 1.00 1.10 1.06 1.01 1.00
--------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss) ................. (.01) - .04 .04 .04 .01
Net gains or losses on securities
(both realized and unrealized) .............. .35 .08 - - .01 -
--------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.................................. .34 .08 .04 .04 .05 .01
--------- ---------- ---------- ---------- ---------- ----------
Unit value, end of period .....................$ 1.42 1.08 1.14 1.10 1.06 1.01
--------- ---------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
ADVANTUS
ASSET ALLOCATION ADVANTUS INDEX 500
----------------------- ---------------------------------------------------
1997 1996 1997 1996 1995 1994
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period ...............$ 1.06 1.00 1.60 1.33 .98 1.00
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss) ................. .01 (.01) (.01) - - -
Net gains or losses on securities
(both realized and unrealized) .............. .18 .07 .50 .27 .35 (.02)
--------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations ................................. .19 .06 .49 .27 .35 (.02)
--------- ---------- ---------- ---------- ---------- ----------
Unit value, end of period .....................$ 1.25 1.06 2.09 1.60 1.33 .98
--------- ---------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
5
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
VANGUARD LONG-TERM CORPORATE VANGUARD WELLINGTON
------------------------------------------- -------------------------------------------
1997 1996 1995 1994 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period .........$ 1.24 1.23 .99 1.00 1.48 1.28 .98 1.00
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss) ........... .08 .07 .06 .02 .05 .05 .05 .02
Net gains or losses on securities
(both realized and unrealized) ........ .09 (.06) .18 (.03) .27 .15 .25 (.04)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations ............................ .17 .01 .24 (.01) .32 .20 .30 (.02)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Unit value, end of period ...............$ 1.41 1.24 1.23 .99 1.80 1.48 1.28 .98
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
FIDELITY CONTRAFUND SCUDDER INTERNATIONAL
------------------------------------------- -------------------------------------------
1997 1996 1995 1994 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period ......... 1.60 1.32 .98 1.00 1.18 1.04 .93 1.00
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss) ........... - - (.01) - (.01) .03 - (.01)
Net gains or losses on securities
(both realized and unrealized) ........ .35 .28 .35 (.02) .09 .11 .11 (.06)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations ............................ .35 .28 .34 (.02) .08 .14 .11 (.07)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Unit value, end of period ............... 1.95 1.60 1.32 .98 1.26 1.18 1.04 .93
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
6
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
JANUS TWENTY
--------------------------------------
1997 1996 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period .......................$ 1.63 1.29 .96 1.00
-------- -------- ------- --------
Income (loss) from investment operations:
Net investment income (loss) ......................... .10 .20 .13 -
Net gains or losses on securities
(both realized and unrealized) ...................... .36 .14 .20 (.04)
-------- -------- ------- --------
Total from investment
operations ......................................... .46 .34 .33 (.04)
-------- -------- ------- --------
Unit value, end of period .............................$ 2.09 1.63 1.29 .96
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
<PAGE>
APPENDIX A
Calculation of Accumulation Unit Values
Calculation of the net investment factor and the accumulation unit value may be
illustrated by the following hypothetical example. Assume the accumulation unit
value of the Index 500 Sub-Account on the immediately preceding valuation period
was $1.000000. Assume the following about the Series Fund Index 500 Portfolio:
(a) the net asset value per share of the Index 500 Portfolio was $1.394438 at
the end of the current valuation period; (2) the Index 500 Portfolio declared a
per share dividend and capital gain distribution in the amount of $.037162
during the current valuation period; and (3) the net asset value per share of
the Index 500 Portfolio was $1.426879 at the end of the preceding valuation
period.
The gross investment rate for the valuation period would be equal to 1.003300
(1.394438 plus .037162 divided by 1.426879). The net investment rate for the
valuation period is determined by deducting the total Index 500 Sub-Account
expenses from the gross investment rate. Total Index 500 Sub-Account expenses
of .000040 is equal to .000034 for mortality and risk expense charge (the daily
equivalent of .85% assuming 252 valuation dates per year) plus .000006 for
contract administrative charge (the daily equivalent of .15% assuming 252
valuation dates per year). The net investment rate equals 1.003269 (1.003309
minus .000040).
The accumulation unit value at the end of the valuation period would be equal to
the value on the immediately preceding valuation date ($1.00000) multiplied by
the net investment factor for the current valuation period (1.003269), which
produces $1.003269.
Calculation of Annuity Unit Values and Variable Annuity Payment
The determination of the annuity unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume that the contract has
been in force for more than six years so that no deferred sales charge will
apply and that there is no deduction for annuity premium taxes. Assume further
that at the date of his or her retirement, the annuitant has credited to his or
her account 30,000 accumulation units, and that the value of an accumulation
unit on the valuation date next following the fourteenth day of the preceding
month was $1.150000, producing a total value of $34,500. Assume also that the
annuitant elects an option for which the table in the contract indicates the
first monthly payment is $6.57 per $1,000 of value applied; the annuitant's
first monthly payment would thus be 34.500 multiplied by $6.57, or $226.67.
Assume that the annuity unit value on the due date of the first payment was
$1.100000. When this is divided into the first monthly payment, the number of
annuity units represented by that payment is determined to be 206.064. The
value of this same number of annuity units will be paid in each subsequent
month.
Assume further that the accumulation unit value on the valuation date next
following the fourteenth day of the succeeding month is $1.160000. This is
divided by the accumulation unit value on the preceding monthly valuation date
($1.150000) to produce a ratio of 1.008696.
<PAGE>
Multiplying this ratio by .996338 to neutralize the assumed investment rate of
4.5% per annum already taken into account in determining annuity units as
described above, produces a result of 1.005002. This is then multiplied by the
preceding annuity unit value ($1.100000) to produce a current annuity value of
$1.105502.
The second monthly payment is then determined by multiplying the fixed number of
annuity units (206.064) by the current annuity unit value ($1.105502), which
produces a second monthly annuity payment of $227.80.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Minnesota Mutual Life Insurance Company and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ending December 31, 1997 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying schedules is presented for purpose of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1998
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,518,807 and $4,558,975) $ 4,719,801 $ 4,674,082
Held-to-maturity, at amortized cost (fair value
$1,158,227 and $1,179,112) 1,088,312 1,125,638
Equity securities, at fair value (cost $537,441 and
$429,509) 686,638 549,797
Mortgage loans, net 661,337 608,808
Real estate, net 39,964 43,082
Policy loans 213,488 204,178
Short-term investments 112,352 126,372
Other invested assets 216,838 94,647
----------- -----------
Total investments 7,738,730 7,426,604
Cash 96,179 57,140
Finance receivables, net 211,794 259,192
Deferred policy acquisition costs 576,030 589,517
Accrued investment income 83,439 90,996
Premiums receivable 68,030 77,140
Property and equipment, net 58,123 55,050
Reinsurance recoverables 150,126 126,629
Other assets 52,852 54,798
Separate account assets 5,366,810 3,706,256
----------- -----------
Total assets $14,402,113 $12,443,322
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,275,221 $ 4,310,015
Future policy and contract benefits 1,687,529 1,638,720
Pending policy and contract claims 64,356 70,577
Other policyowner funds 416,752 396,848
Policyowner dividends payable 55,321 49,899
Unearned premiums and fees 202,070 207,111
Federal income tax liability:
Current 45,300 25,643
Deferred 166,057 149,665
Other liabilities 334,305 286,042
Notes payable 298,000 319,000
Separate account liabilities 5,320,517 3,691,374
----------- -----------
Total liabilities $12,865,428 $11,144,894
=========== ===========
Policyowners' surplus:
Unassigned surplus 1,380,012 1,190,116
Net unrealized investment gains 156,673 108,312
----------- -----------
Total policyowners' surplus 1,536,685 1,298,428
----------- -----------
Total liabilities and policyowners' surplus $14,402,113 $12,443,322
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 615,253 $ 612,359 $ 603,770
Policy and contract fees 272,037 245,966 214,203
Net investment income 553,773 530,987 515,047
Net realized investment gains 114,367 55,574 62,292
Finance charge income 43,650 46,932 39,937
Other income 71,707 51,630 40,250
---------- ---------- ----------
Total revenues 1,670,787 1,543,448 1,475,499
---------- ---------- ----------
Benefits and expenses:
Policyowner benefits 515,873 541,520 517,771
Interest credited to policies and con-
tracts 298,033 288,967 297,145
General operating expenses 369,961 302,618 273,425
Commissions 114,404 103,370 93,465
Administrative and sponsorship fees 81,750 79,360 76,223
Dividends to policyowners 26,776 24,804 27,282
Interest on notes payable 24,192 22,798 11,128
Increase in deferred policy acquisi-
tion costs (26,878) (19,284) (34,173)
---------- ---------- ----------
Total benefits and expenses 1,404,111 1,344,153 1,262,266
---------- ---------- ----------
Income from operations before taxes 266,676 199,295 213,233
Federal income tax expense (benefit):
Current 84,612 68,033 71,379
Deferred (7,832) 744 11,995
---------- ---------- ----------
Total federal income tax expense 76,780 68,777 83,374
Net income $ 189,896 $ 130,518 $ 129,859
========== ========== ==========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,298,428 $1,212,850 $ 874,577
Net income 189,896 130,518 129,859
Change in net unrealized investment
gains and losses 48,361 (44,940) 208,414
---------- ---------- ----------
Policyowners' surplus, end of year $1,536,685 $1,298,428 $1,212,850
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 189,896 $ 130,518 $ 129,859
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 276,719 275,968 288,218
Fees deducted from policy and con-
tract balances (214,803) (206,780) (201,575)
Change in future policy benefits 76,358 84,389 100,025
Change in other policyowner liabili-
ties 7,597 16,099 (4,762)
Change in deferred policy acquisition
costs (19,430) (15,312) (29,822)
Change in premiums due and other re-
ceivables (9,280) (26,142) (18,039)
Change in federal income tax liabili-
ties 5,277 (12,055) 18,376
Net realized investment gains (123,016) (59,546) (66,643)
Other, net 8,760 29,987 36,561
----------- ----------- -----------
Net cash provided by operating ac-
tivities 198,078 217,126 252,198
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,099,114 877,682 1,349,348
Equity securities 601,936 352,901 203,493
Mortgage loans -- 15,567 4,315
Real estate 9,279 11,678 15,948
Other invested assets 26,877 12,280 10,775
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 403,829 329,550 253,576
Fixed maturity securities, held-to-
maturity 139,394 114,222 127,617
Mortgage loans 109,246 94,703 104,730
Purchases of:
Fixed maturity securities, available-
for-sale (1,498,048) (1,228,048) (1,975,130)
Fixed maturity securities, held-to-
maturity (82,835) (60,612) (140,763)
Equity securities (585,349) (446,599) (212,142)
Mortgage loans (157,247) (108,691) (209,399)
Real estate (3,908) (3,786) (16,554)
Other invested assets (55,988) (29,271) (20,517)
Finance receivable originations or pur-
chases (115,248) (175,876) (167,298)
Finance receivable principal payments 133,762 142,723 123,515
Other, net (88,626) (40,062) (19,292)
----------- ----------- -----------
Net cash used for investing activi-
ties (63,812) (141,639) (567,778)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insur-
ance contracts 928,696 657,405 710,525
Withdrawals from annuity and insurance
contracts (1,013,588) (702,681) (563,569)
Proceeds from issuance of surplus notes -- -- 124,967
Proceeds from issuance of debt by sub-
sidiary -- 60,000 50,000
Payments on debt by subsidiary (21,000) (21,000) (10,000)
Other, net (3,355) (6,898) (3,801)
----------- ----------- -----------
Net cash provided by (used for) fi-
nancing activities (109,247) (13,174) 308,122
----------- ----------- -----------
Net increase (decrease) in cash and
short-term investments 25,019 62,313 (7,458)
Cash and short-term investments, begin-
ning of year 183,512 121,199 128,657
----------- ----------- -----------
Cash and short-term investments, end of
year $ 208,531 $ 183,512 $ 121,199
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues in 1997 for these business units were $854,192,000,
$284,222,000, $232,619,000 and $114,324,000, respectively. Additional revenues
of $185,430,000, were reported by the Company's subsidiaries.
At December 31, 1997, the Company was one of the 12 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). All material intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Future events, including
changes in mortality, morbidity, interest rates, and asset valuations, could
cause actual results to differ from the estimates used in the financial
statements.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to estimated gross profits or margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
premium revenues. The ultimate premium revenues are estimated based upon the
same assumptions used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred acquisition
costs are amortized over the estimated lives of the contracts in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins.
Deferred acquisition costs amortized were $128,176,000, $125,978,000 and
$104,940,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest on the smaller balance homogeneous finance receivables is suspended
when a loan is contractually delinquent for more than 60 days and is
subsequently recognized when received. Accrual is resumed when the loan is
contractually less than 60 days past due. Finance charges and interest is
suspended when a loan is considered by management to be impaired. Loan
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the observable market price of the loan or the fair value of the collateral
if the loan is collateral dependent. When a loan is identified as impaired,
interest previously accrued in the current year is reversed. Interest payments
received on impaired loans are generally applied to principal unless the
remaining principal balance has been determined to be fully collectible. An
allowance for uncollectible amounts is maintained by direct charges to
operations at an amount which management believes, based upon historical losses
and economic conditions, is adequate to absorb probable losses on existing
receivables that may become uncollectible. The reported receivables are net of
this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities which may be sold prior to maturity are classified as available-for-
sale and are carried at fair value.
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1997 and 1996, was $6,269,000 and $5,968,000, respectively.
Policy loans are carried at the unpaid principal balance.
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps were used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps were based upon
certain stock indices. If, at the time of settlement for a particular swap, the
designated stock index had fallen below a specified level, the counterparty
would pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index had risen, the Company would pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap. The equity swaps were settled with the
counterparties in August of 1997.
The swaps were carried at fair value, which were based upon dealer quotes.
Changes in fair value were recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses were recognized in income. The Company
realized a loss of approximately $31 million in 1997, upon settlement of these
equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. The Company uses forward foreign exchange currency
contracts as part of its risk management strategy for international
investments. The forward foreign exchange currency contracts are used to reduce
market risks from changes in foreign exchange rates. These forward foreign
exchange currency contracts are agreements to purchase a specified amount of
one currency in exchange for a specified amount of another currency at a future
point in time at a foreign exchange currency rate agreed upon on the contract
open date. No cash is exchanged at the outset of the contract and no payments
are made by either party until the contract close date. On the contract close
date the contracted amount of the purchased currency is received from the
counterparty and the contracted amount of the sold currency is sent to the
counterparty. These contracts are generally short-term in nature and there is
no material exposure to the Company at December 31, 1997.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of policyowners'
surplus, net of taxes and related adjustments to deferred policy acquisition
costs and unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$90,926,000 and $81,962,000 at December 31, 1997 and 1996, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expenses for the years ended December 31,
1997, 1996 and 1995, were $8,965,000, $6,454,000 and $5,941,000, respectively.
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension, variable
annuity and variable life insurance policyowners and contractholders. Assets
consist principally of marketable securities and both assets and liabilities
are reported at fair value, based upon the market value of the investments held
in the segregated funds. The Company receives administrative and investment
advisory fees for services rendered on behalf of these accounts.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $46,293,000 and $14,882,000 as of December 31, 1997 and 1996, respectively.
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Policyowner Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees based upon actuarial determinations, which take into
consideration current mortality, interest earnings, expense factors, and
federal income taxes. Dividends are recognized as expenses consistent with the
recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
Reclassifications
Certain 1996 and 1995 financial statement balances have been reclassified to
conform with the 1997 presentation.
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $457,391 $433,985 $426,114
Equity securities 16,182 14,275 8,883
Mortgage loans 55,929 63,865 58,943
Real estate (407) (475) 497
Policy loans 15,231 13,828 12,821
Short-term investments 6,995 6,535 6,716
Other invested assets 3,871 4,901 5,168
-------- -------- --------
Gross investment income 555,192 536,914 519,142
Investment expenses (1,419) (5,927) (4,095)
-------- -------- --------
Total $553,773 $530,987 $515,047
======== ======== ========
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $ 3,711 $(6,536) $24,025
Equity securities 92,765 57,770 36,374
Mortgage loans 2,011 (721) (207)
Real estate 1,598 7,088 2,436
Other invested assets 14,282 (2,027) (336)
-------- ------- -------
Total $114,367 $55,574 $62,292
======== ======= =======
</TABLE>
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 18,804 $ 19,750 $ 34,898
Gross realized losses (15,093) (26,286) (10,873)
Equity securities:
Gross realized gains 151,200 79,982 52,670
Gross realized losses (27,672) (22,212) (16,296)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $ 472,671 $314,576
Gross unrealized losses (118,863) (77,337)
Adjustment to deferred acquisition costs (100,299) (65,260)
Adjustment to unearned policy and contract fees (13,087) (8,192)
Deferred federal income taxes (83,749) (55,475)
--------- --------
Net unrealized gains $ 156,673 $108,312
========= ========
</TABLE>
68
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 239,613 $ 18,627 $ -- $ 258,240
Foreign governments 1,044 -- 29 1,015
Corporate securities 2,273,474 216,056 70,484 2,419,046
International bond securities 150,157 2,565 23,530 129,192
Mortgage-backed securities 1,854,519 66,934 9,145 1,912,308
---------- -------- -------- ----------
Total fixed maturities 4,518,807 304,182 103,188 4,719,801
Equity securities--unaffiliated 421,672 134,558 14,575 541,655
Equity securities--affiliated 115,769 29,214 -- 144,983
---------- -------- -------- ----------
Total equity securities 537,441 163,772 14,575 686,638
---------- -------- -------- ----------
Total available-for-sale 5,056,248 467,954 117,763 5,406,439
Held-to maturity:
Corporate securities 893,407 59,850 752 952,505
Mortgage-backed securities 194,905 10,817 -- 205,722
---------- -------- -------- ----------
Total held-to-maturity 1,088,312 70,667 752 1,158,227
---------- -------- -------- ----------
Total $6,144,560 $538,621 $118,515 $6,564,666
========== ======== ======== ==========
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
State, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- -------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- -------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- -------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- -------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- -------- ----------
Total $6,114,122 $367,312 $ 78,443 $6,402,991
========== ======== ======== ==========
</TABLE>
69
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1997 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 47,387 $ 44,198 $ 2,982 $ 3,004
Due after one year through five
years 335,383 354,936 120,846 124,461
Due after five years through ten
years 1,355,665 1,416,149 317,689 337,322
Due after ten years 925,853 992,210 451,890 487,718
---------- ---------- ---------- ----------
2,664,288 2,807,493 893,407 952,505
Mortgage-backed securities 1,854,519 1,912,308 194,905 205,722
---------- ---------- ---------- ----------
Total $4,518,807 $4,719,801 $1,088,312 $1,158,227
========== ========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, bonds and certificates of deposit with a
carrying value of $8,000,000 and $12,934,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investment are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,895
Foreclosed real estate -- 535
Investment real estate 2,248 2,529
------- -------
Total $ 3,748 $ 4,959
======= =======
</TABLE>
At December 31, 1997, the recorded investment in mortgage loans that were
considered to be impaired was $18,400 before allowance for credit losses. These
impaired loans, due to adequate fair market value of underlying collateral, do
not have an allowance for credit losses.
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000 and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, a
general allowance for credit losses was established for potential impairments
in the remainder of the mortgage loan portfolio. The general allowance was
$1,500,000 at December 31, 1997 and 1996.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,895 $1,711 $2,449
Provision for credit losses -- 381 127
Charge-offs (395) (197) (865)
------ ------ ------
Balance at end of year $1,500 $1,895 $1,711
====== ====== ======
</TABLE>
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $3,268 $9,375 $15,845
Interest income on impaired mortgage loans--contractual 556 1,796 1,590
Interest income on impaired mortgage loans--collected 554 1,742 1,515
</TABLE>
(4) NOTES RECEIVABLE
In connection with the Company's planned construction of an additional home
office facility in St. Paul, the Company entered into a loan contingency
agreement with the Housing and Redevelopment Authority of the City of Saint
Paul, Minnesota (HRA) in November, 1997. A maximum of $15 million in funds is
available under this loan for condemnation and demolition of the Company's
proposed building site. The note bears interest at a rate of 8.625%, with
principal payments commencing February 2004 and a maturity date of August 2025.
Interest payments are accrued and are payable February and August of each year
commencing February 2001. All principal and interest payments are due only to
the extent of available tax increments. As of December 31, 1997 HRA has drawn
$286,775 on this loan contingency agreement and accrued interest of $1,374.
(5) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $183,424 $204,038
Retail installment notes 20,373 30,843
Retail revolving credit 25,426 24,863
Credit card receivables -- 3,541
Accrued interest 3,116 3,404
-------- --------
Gross receivables $232,339 $266,689
Allowance for uncollectible amounts (20,545) (7,497)
-------- --------
Finance receivables, net $211,794 $259,192
======== ========
</TABLE>
Direct installment loans at December 31, 1997 consisted of $83,836,000 of
discount basis loans (net of unearned finance charges) and $99,588,00 of
interest-bearing loans. As of December 31, 1996, discount basis loans amounted
to $93,127,000 and interest-bearing loans amounted to $110,911,000. Direct
installment loans generally have a maximum term of 84 months. Retail
installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Direct installment loans included approximately $65
million and $69 million of real estate secured loans at December 31, 1997 and
1996, respectively. Revolving credit loans included approximately $24 million
and $23 million of real estate secured loans at December 31, 1997 and 1996,
respectively. Experience has shown that a substantial portion of finance
receivables will be renewed, converted or paid in full prior to maturity.
Principal cash collections of direct installment loans amounted to
$90,940,000, $92,438,000 and $75,865,000 and the percentage of these cash
collections to the average net balances were 47%, 48%, and 47% for the years
ended December 31, 1997, 1996 and 1995, respectively.
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NET FINANCE RECEIVABLES (CONTINUED)
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 7,497 $ 6,377 $ 5,360
Provision for credit losses 28,206 10,086 6,140
Charge-offs (17,869) (11,036) (6,585)
Recoveries 2,711 2,070 1,462
-------- -------- -------
Balance at end of year $ 20,545 $ 7,497 $ 6,377
======== ======== =======
</TABLE>
At December 31, 1997, the recorded investment in certain direct installment
loans and direct revolving credit loans were considered to be impaired. The
balances of such loans at December 31, 1997 and the related allowance for
credit losses was as follows:
<TABLE>
<CAPTION>
INSTALLMENT REVOLVING
LOANS CREDIT TOTAL
----------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at December 31, 1997 $7,723 14,492 22,215
Related allowance for credit losses $4,200 7,772 11,972
</TABLE>
All loans deemed to be impaired are placed on a non-accrual status. No
accrued or unpaid interest was recognized on impaired loans during 1997. The
average balances of impaired loans during the year ended December 31, 1997 was
$7,397,000 and $12,793,000, respectively, for installment basis and revolving
credit direct loans.
There were no material commitments to lend additional funds to customers
whose loans were classified as non-accrual at December 31, 1997.
(6) INCOME TAXES
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $93,337 $69,753 $74,631
Difference between computed and actual tax ex-
pense:
Dividends received deduction (5,573) (2,534) (1,710)
Special tax on mutual life insurance companies 3,341 2,760 10,134
MF&C sale (4,408) -- --
Foundation gain (4,042) (1,260) (540)
Tax credits (3,600) (3,475) (1,840)
Expense adjustments and other (2,275) 3,533 2,699
------- ------- -------
Total tax expense $76,780 $68,777 $83,374
======= ======= =======
</TABLE>
72
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 14,374 $ 15,854
Unearned fee income 49,274 43,232
Pension and post-retirement benefits 23,434 21,815
Tax deferred policy acquisition costs 73,134 58,732
Net realized capital losses 9,609 8,275
Other 20,524 19,229
-------- --------
Gross deferred tax assets 190,349 167,137
Deferred tax liabilities:
Deferred policy acquisition costs 201,611 206,331
Real estate and property and equipment depreciation 11,165 10,089
Basis difference on investments 11,061 8,605
Net unrealized capital gains 122,876 81,339
Other 9,693 10,438
-------- --------
Gross deferred tax liabilities 356,406 316,802
-------- --------
Net deferred tax liability $166,057 $149,665
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1997 and 1996, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1997, 1996 and 1995, were
$97,721,000, $79,026,000 and $64,390,000, respectively.
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $416,910 $377,302 $349,311
Less: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Net balance at January 1 314,749 296,969 287,687
-------- -------- --------
Incurred related to:
Current year 121,153 134,727 129,896
Prior years 7,809 4,821 (4,014)
-------- -------- --------
Total incurred 128,962 139,548 125,882
-------- -------- --------
Paid related to:
Current year 51,275 51,695 47,620
Prior years 57,475 70,073 68,980
-------- -------- --------
Total paid 108,750 121,768 116,600
-------- -------- --------
Net balance at December 31 334,961 314,749 296,969
Plus: reinsurance recoverable 104,716 102,161 80,333
-------- -------- --------
Balance at December 31 $439,677 $416,910 $377,302
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in future policy and contract benefits and pending policy
and contract claims on the consolidated balance sheets.
As a result of changes in estimates of claims incurred in prior years, the
accident and health claims and claim adjustment expenses incurred increased
(decreased) by $7,809, $4,821 and ($4,014) in 1997, 1996 and 1995,
respectively. These amounts are the result of normal reserve development
inherent in the uncertainty of establishing the liability for unpaid accident
and health claims and claim adjustment expenses.
(8) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds, which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan, which provides certain employees with benefits
in excess of limits for qualified retirement plans.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 6,462 $ 6,019 $ 5,294
Interest accrued on projected benefit obligation 9,640 8,541 7,935
Actual return on plan assets (9,575) (12,619) (18,061)
Net amortization and deferral 656 4,698 11,811
------- -------- --------
Net periodic pension cost $ 7,183 $ 6,639 $ 6,979
======= ======== ========
</TABLE>
74
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLANS
------------------ ----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 70,638 $ 61,328 $ -- $ --
Non-vested benefit obligation 21,252 19,119 8,017 5,912
-------- -------- ------- -------
Accumulated benefit obligation $ 91,890 $ 80,447 $ 8,017 $ 5,912
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $130,144 $117,836 $15,744 $12,576
Plan assets at fair value 128,970 115,107 -- --
-------- -------- ------- -------
Plan assets less then projected bene-
fit obligation 1,174 2,729 15,744 12,576
Unrecognized net gain (loss) 6,061 3,633 (4,229) (2,332)
Unrecognized prior service cost (334) (364) -- --
Unamortized transition asset (obliga-
tion) 2,202 2,422 (7,682) (8,451)
Additional minimum liability -- -- 4,184 4,119
-------- -------- ------- -------
Net pension liability $ 9,103 $ 8,420 $ 8,017 $ 5,912
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.3% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1997 and 1996. The assumed long-term rate of return on plan assets was either
8.5% or 7.5%, depending on the plan.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the trustees of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1997, 1996 and 1995 of $7,173,000, $6,092,000 and $6,595,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
The Company also has unfunded postretirement plans that provide certain health
care and life insurance benefits to substantially all retired employees and
agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $1,008 $1,011 $1,276
Interest accrued on projected benefit obligation 1,826 2,041 2,452
Amortization of prior service cost (526) (513) (513)
Amortization of net gain (480) (177) --
------ ------ ------
Net periodic postretirement benefit cost $1,828 $2,362 $3,215
====== ====== ======
</TABLE>
75
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 9,333 $10,238
Other fully eligible plan participants 4,861 4,594
Other active plan participants 9,738 9,514
------- -------
Total accumulated postretirement benefit obligation 23,932 24,346
Unrecognized prior service cost 3,680 4,107
Unrecognized net gain 11,290 9,880
------- -------
Accrued postretirement benefit liability $38,902 $38,333
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1997 and 1996 was 7.5%. The 1997 net health care cost trend rate
was 8.5%, graded to 5.5% over 6 years, and the 1996 rate was 9.0%, graded to
5.5% over 7 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1997 and 1996. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31,1997 by
$4,323,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1997 by $588,000.
(9) SALE OF SUBSIDIARY
On October 1, 1997, the Company sold Minnesota Fire and Casualty Company (MFC),
a wholly owned subsidiary to Harleysville Group, Inc. The Company received net
cash proceeds of approximately $33.5 million from the sale, and realized a gain
of approximately $14.5 million. HomePlus Insurance Company (HomePlus), a
previously wholly owned subsidiary of MFC, was excluded from the sale of
assets. In accordance with the agreement, prior to September 30,1997, MFC made
a distribution of private placement bonds to the Company with an amortized cost
of approximately $4.3 million and transferred all issued and outstanding shares
of HomePlus to the Company. The carrying value of the transferred shares was
approximately $5.8 million. Under an administrative services agreement with
MFC, the Company has retained MFC to provide financial and other services for
HomePlus.
(10) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligation under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed to be uncollectible.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
76
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) REINSURANCE (CONTINUED)
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $595,686 $615,098 $600,841
Reinsurance assumed 78,097 64,489 64,792
Reinsurance ceded (58,530) (67,228) (61,863)
-------- -------- --------
Net premiums $615,253 $612,359 $603,770
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $58,072,000,
$72,330,000 and $58,338,000 during 1997, 1996 and 1995 respectively.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly affect
the estimated fair value, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgement is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short term investments, and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1997 and 1996, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1997 and 1996, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts, and other
fund deposits, which have guaranteed interest rates and surrender charges are
estimated to be the amount payable on demand as of December 31, 1997 and 1996
as those investments contracts have no defined maturity and are similar to a
deposit liability. The amount payable on demand equates to the account balance
less applicable surrender charges. Contracts without guaranteed interest rates
and surrender charges have fair values equal to their accumulation values plus
applicable market value adjustments. The fair values of guaranteed investment
contracts and supplementary contracts without life contingencies are calculated
using discounted cash flows, based on interest rates currently offered for
similar products with maturities consistent with those remaining for the
contracts being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
77
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments,
which were classified as assets as of December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,719,801 $4,719,801 $4,674,082 $4,674,082
Held-to-maturity 1,088,312 1,158,227 1,125,638 1,179,112
Equity securities 686,638 686,638 549,797 549,797
Mortgage loans:
Commercial 506,860 527,994 432,198 445,976
Residential 154,477 158,334 176,610 180,736
Policy loans 213,488 213,488 204,178 204,178
Short-term investments 112,352 112,352 126,372 126,372
Cash 96,179 96,179 57,140 57,140
Finance receivables, net 211,794 211,794 259,192 259,192
Derivatives 1,457 1,457 1,197 1,197
---------- ---------- ---------- ----------
Total financial assets $7,791,358 $7,886,264 $7,606,404 $7,677,782
========== ========== ========== ==========
</TABLE>
The carrying amounts and fair values of the Company's financial instruments,
which were classified as liabilities as of December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,131,806 $2,112,301 $2,178,355 $2,152,636
Annuity certain contracts 55,431 57,017 52,636 53,962
Other fund deposits 754,960 753,905 808,592 805,709
Guaranteed investment contracts 8,188 8,187 18,770 18,866
Supplementary contracts without
life contingencies 46,700 45,223 47,966 47,536
Notes payable 298,000 302,000 319,000 325,974
---------- ---------- ---------- ----------
Total financial liabilities $3,295,085 $3,278,633 $3,425,319 $3,404,683
========== ========== ========== ==========
</TABLE>
(12) NOTES PAYABLE
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyowners' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce of the State of Minnesota. The
approved accrued interest was $3,008,000 as of December 31, 1997 and 1996. The
issuance costs of $1,357,000 are deferred and amortized over 30 years on
straight-line basis.
78
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) NOTES PAYABLE (CONTINUED)
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate-surplus notes, 8.25%, 2025 $125,000 $125,000
Consumer finance subsidiary-senior, 6.53%-8.77%, through
2003 173,000 194,000
-------- --------
Total notes payable $298,000 $319,000
======== ========
</TABLE>
At December 31, 1997, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1998, $31,000,000; 1999 $49,000,000;
2000 $33,000,000; 2001 $26,000,000; 2002 $22,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth
of $41,354,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1997.
Interest paid on debt for the years ended December 31, 1997, 1996 and 1995,
was $18,197,000, $21,849,000 and $6,504,000, respectively.
(13) COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed uncollectible.
The Company has issued certain participating group annuity and group life
insurance contracts jointly with another life insurance company. The joint
contract issuer has liabilities related to these contracts of $279,978,000 as
of December 31, 1997. To the extent the joint contract issuer is unable to meet
its obligation under the agreement, the Company remains liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $139,774,000 as of December 31, 1997. The Company
estimates that $51,300,000 of these commitments will be invested in 1998, with
the remaining $88,474,000 invested over the next four years.
As of December 31, 1997, the Company had committed to purchase bonds and
mortgage loans totaling $109,362,000 but had not completed the purchase
transactions.
At December 31, 1997, the Company had guaranteed the payment of $73,100,000
in policyowner dividends and discretionary amounts payable in 1998. The Company
has pledged bonds, valued at $75,774,000 to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Association. An asset is recorded for the amount of guaranty fund assessments
paid which can be recovered through future premium tax credits.
79
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) STATUTORY FINANCIAL DATA
The Company also prepares financial statements according to statutory
accounting practices prescribed or permitted by the Department of Commerce for
purposes of filing with the Department of Commerce, the National Association of
Insurance Commissioners and states in which the Company is licensed to do
business. Statutory accounting practices focus primarily on solvency and
surplus adequacy. Therefore, fundamental differences exist between statutory
and GAAP accounting, and their effects on income and policyowners' surplus are
illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1997 1996 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 870,688 $ 682,886 $167,078 $115,797 $ 88,706
Adjustments:
Deferred policy acquisi-
tion costs 576,030 589,517 19,430 15,312 29,822
Net unrealized invest-
ment gains 199,637 111,575 -- -- --
Statutory asset valua-
tion reserve 242,100 240,474 -- -- --
Statutory interest main-
tenance reserve 24,169 24,707 (538) (8,192) 12,976
Premiums and fees de-
ferred or receivable (74,025) (75,716) 2,175 1,587 497
Change in reserve basis 108,105 98,406 9,699 20,114 12,382
Separate accounts (51,172) (40,755) (6,272) (6,304) (854)
Unearned policy and con-
tract fees (126,477) (121,843) (12,825) (2,530) (4,410)
Surplus notes (125,000) (125,000) -- -- --
Net deferred taxes (166,057) (149,665) 7,832 (744) (11,995)
Nonadmitted assets 32,611 31,531 -- -- --
Policyowner dividends 60,036 57,765 2,708 502 4,660
Other (33,960) (25,454) 609 (5,024) (1,925)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,536,685 $1,298,428 $189,896 $130,518 $129,859
========== ========== ======== ======== ========
</TABLE>
80
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 239,613 $ 258,240 $ 258,240
Foreign governments 1,044 1,015 1,015
Public utilities 385,228 406,920 398,887
Mortgage-backed securities 2,049,424 2,118,030 2,107,213
All other corporate bonds 2,931,810 3,093,823 3,042,758
---------- ---------- ----------
Total bonds 5,607,119 5,878,028 5,808,113
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 7,732 10,090 10,090
Banks, trusts and insurance companies 37,217 47,120 47,120
Industrial, miscellaneous and all
other 354,317 460,170 460,170
Nonredeemable preferred stocks 22,406 24,275 24,275
---------- ---------- ----------
Total equity securities 421,672 541,655 541,655
---------- ---------- ----------
Mortgage loans on real estate 661,337 xxxxxx 661,337
Real estate(2) 39,964 xxxxxx 39,964
Policy loans 213,488 xxxxxx 213,488
Other long-term investments 216,838 xxxxxx 216,838
Short-term investments 112,352 xxxxxx 112,352
---------- ---------- ----------
Total 1,243,979 -- $1,243,979
---------- ---------- ----------
Total investments $7,272,770 $6,419,683 $7,593,747
========== ========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $-0-.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments.
81
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
FUTURE POLICY
DEFERRED BENEFITS OTHER POLICY
POLICY LOSSES, CLAIMS CLAIMS AND
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE
- ------- ----------- -------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627
Accident and
health insurance 70,593 466,109 34,250 17,153
Annuity 71,425 3,266,965 -- 4,576
Property and
liability
insurance -- 280 1,116 --
-------- ---------- -------- -------
$576,030 $5,962,750 $202,070 $64,356
======== ========== ======== =======
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772
Accident and
health insurance 62,407 437,118 33,770 18,774
Annuity 70,649 3,360,614 -- 31
Property and
liability
insurance -- 27,855 24,189 --
-------- ---------- -------- -------
$589,517 $5,948,735 $207,111 $70,577
======== ========== ======== =======
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212
Accident and
health insurance 55,888 400,950 34,847 14,567
Annuity 53,015 3,401,760 -- 33
Property and
liability
insurance -- 30,117 23,783 --
-------- ---------- -------- -------
$539,732 $5,841,981 $210,494 $55,812
======== ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
AMORTIZATION
BENEFITS, OF DEFERRED
NET CLAIMS, LOSSES POLICY OTHER
PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT REVENUE(3) INCOME EXPENSES COSTS EXPENSES WRITTEN(4)
- ------- ---------- ---------- -------------- ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997:
Life insurance $576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insurance 205,869 40,343 87,424 9,451 101,960
Annuity 64,637 261,768 242,738 16,252 129,263
Property and
liability
insurance 40,316 4,395 33,773 -- 13,146 43,376
-------- -------- -------- -------- -------- -------
$887,290 $553,773 $840,682 $128,176 $590,307 $43,376
======== ======== ======== ======== ======== =======
1996:
Life insurance $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 160,097 34,202 96,743 14,017 87,222
Annuity 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance 50,109 5,550 36,933 -- 19,033 50,515
-------- -------- -------- -------- -------- -------
$858,325 $530,987 $855,291 $125,978 $508,146 $50,515
======== ======== ======== ======== ======== =======
1995:
Life insurance $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 153,505 33,358 93,482 11,448 83,345
Annuity 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance 49,216 5,703 33,563 -- 18,090 51,133
-------- -------- -------- -------- -------- -------
$817,973 $515,047 $842,198 $104,940 $454,241 $51,133
======== ======== ======== ======== ======== =======
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
82
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997:
Life insurance in force $118,345,796 $14,813,351 $29,341,332 $132,873,777 22.1%
============ =========== =========== ============
Premiums:
Life insurance $ 340,984 $ 30,547 $ 63,815 $ 374,252 17.1%
Accident and health
insurance 175,647 16,332 1,310 160,625 0.8%
Annuity 40,060 -- -- 40,060 --
Property and liability
insurance 38,995 11,651 12,972 40,316 32.2%
------------ ----------- ----------- ------------
Total premiums $ 595,686 $ 58,530 $ 78,097 $ 615,253 12.7%
============ =========== =========== ============
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
</TABLE>
83
