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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION--SUBJECT TO CHANGE.
SECURITIES ACT OF 1933 REGISTRATION NO. 2-25483
INVESTMENT COMPANY ACT OF 1940 REGISTRATION NO. 811-1402
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form N-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 46 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 [X]
(Check appropriate box or boxes.)
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CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
(Exact name of Registrant)
CONTINENTAL ASSURANCE COMPANY
(Name of Insurance Company)
CNA PLAZA, CHICAGO, ILLINOIS 60685
(Address of Insurance Company's Principal Executive Offices) (Zip
Code)
Insurance Company's Telephone Number, including Area Code:
(800) 351-3001
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Lynne Gugenheim, Esq.
Continental Assurance Company
CNA Plaza
Chicago, Illinois 60685
(Name and Address of Agent for Service)
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Please send copies of all correspondence to:
Mitchell L. Hollins, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[X] on April 30, 1999 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Group Variable Annuity Contracts
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CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
CROSS REFERENCE SHEET
DATA IN POST-EFFECTIVE AMENDMENT NO. 46 REGISTRATION STATEMENT TO
FORM N-3 (FILE NO. 2-25483)
<TABLE>
<CAPTION>
ITEMS REQUIRED IN PART A OF FORM N-3 LOCATION IN PROSPECTUS
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<S> <C>
1. Cover Page................................. Cover Page
2. Definitions................................ Glossary
3. Synopsis or Highlights..................... Summary
4. Condensed Financial Information............ Condensed Financial Information
5. General Description of Registrant and
Insurance Company....................... Description of CAC and Separate Account (B);
Description of Group Variable Annuity
Contracts
6. Management................................. Management; Summary
7. Deductions and Expenses.................... Deductions and Expenses
8. General Description of Variable Annuity
Contracts............................... Description of Group Variable Annuity
Contracts
9. Annuity Period............................. Annuities; Annuity Payments; Benefits on
Death or Withdrawal
10. Death Benefit.............................. Benefits on Death or Withdrawal
11. Purchases and Contract Value............... Description of Group Variable Annuity
Contracts; Deductions and Expenses
12. Redemptions................................ Benefits on Death or Withdrawal
13. Taxes...................................... Federal Taxes
14. Legal Proceedings.......................... Legal Matters
15. Table of Contents of the Statement of
Additional Information.................. Table of Contents of the Statement of
Additional Information
</TABLE>
<TABLE>
<CAPTION>
ITEMS REQUIRED IN PART B OF FORM N-3 LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
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<S> <C>
16. Cover Page................................. Cover Page
17. Table of Contents.......................... Table of Contents
18. General Information and History............ Description of CAC and Separate Account (B)*;
Investment Advisory Services; Securities
Custodian Description of CAC and Separate
Account (B)-
19. Investment Objectives and Policies......... Investment Policies and Restrictions*
20. Management................................. Management of Separate Account (B)
Management--Investment Advisory
21. Investment Advisory and Other Services..... Agreement*; Investment Advisory Services
22. Brokerage Allocation....................... Brokerage Allocations
23. Purchase and Pricing of Securities Being
Offered................................. Underwriting; Deductions and Expenses*
24. Underwriters............................... Underwriting
25. Calculation of Performance Data............ Calculation of Performance Data
26. Annuity Payments........................... Annuity Payments*
27. Financial Statements....................... Financial Statements; Financial Statements of
CAC
</TABLE>
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* Indicates a location in the Prospectus rather than in the Statement of
Additional Information.
<PAGE> 3
PROSPECTUS
GROUP
VARIABLE
ANNUITY
CONTRACTS B LOGO
The group variable annuity contracts described in this prospectus provide:
- tax deferred annuities for employees of public schools and certain
tax-exempt organizations; and
- retirement plans for self-employed individuals and their eligible
employees.
You may participate in these contracts by investing in Continental
Assurance Company Separate Account (B), a separate account created by
Continental Assurance Company. We will place all purchase payments that you make
under a contract, after the deduction of initial charges, in Separate
Account (B).
Separate Account (B) invests its assets primarily in common stocks and
securities convertible into common stocks. The primary investment objective of
the separate account is the growth of capital in relation to the growth of the
economy and the changing value of the dollar. Current investment income is only
a secondary objective. Continental Assurance Company acts as investment adviser
to, and as principal underwriter for, Separate Account (B).
Group variable annuity contracts involve risks, including possible loss of
principal, and are not a deposit or obligation of, or guaranteed or endorsed by,
any bank or depository institution. The contracts are not federally insured by
the Federal Deposit Insurance Corporation, The Federal Reserve Board, or any
other agency.
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the separate account
and the group variable annuity contracts that you need before purchasing a
contract.
To learn more about Separate Account (B) and the contracts offered by this
prospectus, you can obtain a copy of the Statement of Additional Information
dated April 30, 1999. The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this prospectus. The table of contents of the Statement of Additional
Information appears on page 42 of this prospectus. For a free copy of the
Statement of Additional Information, please call or write us at:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the Statement of Additional Information and other information about
Separate Account (B).
The SEC has not approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: APRIL 30, 1999
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS AND IN
THE STATEMENT OF ADDITIONAL INFORMATION. NEITHER CONTINENTAL ASSURANCE COMPANY
NOR SEPARATE ACCOUNT (B) HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT THAN THAT WHICH IS SET FORTH IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 4
Group Variable Annuity Contracts.......................... 4
Fee and Expense Tables with Examples...................... 4
403(b) Plan Contract for Joint Retirement Board Fees
and Expenses.......................................... 4
Level Deduction Contract for 403(b) Plans Fees and
Expenses.............................................. 5
Graded Deduction Contract for 403(b) Plans Fees and
Expenses.............................................. 6
Contract for HR-10 Plans Fees and Expenses............. 7
The Investment Adviser and Investment Advisory Fee........ 8
403(b) Plan Sales and Administrative Charges.............. 8
HR-10 Plan Sales and Administrative Charges............... 9
Purchase Limits........................................... 10
Investment Objectives..................................... 10
Transfers................................................. 10
Annuity Selection......................................... 10
Withdrawals............................................... 10
Penalty Taxes............................................. 11
Condensed Financial Information............................. 12
Description of CAC and Separate Account (B)................. 14
General................................................... 14
Investment Policies and Restrictions...................... 15
Management.................................................. 19
The Committee............................................. 19
Investment Advisory Agreement............................. 19
Deductions and Expenses..................................... 19
Sales and Administrative Charges--General................. 19
Sales and Administrative Charges--403(b) Plans............ 20
Sales and Administrative Charges--HR-10 Plans............. 21
Investment Advisory Charges............................... 22
</TABLE>
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<TABLE>
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PAGE
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Description of Group Variable Annuity Contracts............. 22
General................................................... 22
Sales of Contracts........................................ 23
Voting Rights............................................. 23
Assignment................................................ 23
Modification or Termination of the Contract............... 24
Contractholder Inquiries.................................. 24
Purchase Payments and Accumulations....................... 24
Allocations of Purchase Payments--HR-10 Plans............. 24
Accumulation Period....................................... 25
Value of an Accumulation Unit............................. 25
Withdrawals............................................... 26
Annuities................................................... 27
Electing the Retirement Date and Form of Annuity--403(b)
Plans.................................................. 27
Annuity Options--403(b) Plans............................. 27
Retirement of Participant--HR-10 Plans.................... 28
Annuity Options--HR-10 Plans.............................. 28
Annuity Payments............................................ 30
Determination of Amount of the First Monthly Variable
Annuity Payment........................................ 30
Determination of the Value of an Annuity Unit and Amount
of Second and Subsequent Monthly Variable Annuity
Payments............................................... 30
Examples.................................................. 31
Assumed Investment Rate................................... 32
Benefits on Death or Withdrawal............................. 32
403(b) Plans.............................................. 32
HR-10 Plans............................................... 33
Federal Taxes............................................... 35
Federal Tax Treatment of Participants..................... 35
Federal Tax Status of Separate Account (B)................ 38
Employee Retirement Income Security Act................... 38
Legal Matters............................................... 39
Reports to Participants..................................... 39
Financial Statements........................................ 40
Independent Auditors' Report................................ 41
Table of Contents of the Statement of Additional
Information............................................... 42
Glossary.................................................... 43
</TABLE>
3
<PAGE> 6
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus before
deciding to invest in a Contract. Some of the technical terms used in this
prospectus are defined in the Glossary beginning on page 43.
GROUP VARIABLE ANNUITY CONTRACTS
The Contracts offered by this prospectus are designed to provide annuity
payments under two types of plans: 403(b) Plans and HR-10 Plans.
- Contracts for 403(b) Plans are issued to annuity purchase plans adopted
by public school systems and certain tax-exempt organizations under
Section 403(b) of the Internal Revenue Code.
- Contracts for HR-10 Plans are issued to self-employed individuals for
themselves and their employees, or to a trustee for the benefit of such
persons and to associations of self-employed persons for the benefit of
participating members.
We currently offer three types of Contracts for 403(b) Plans: (a) the
403(b) Plan Contract for the Joint Retirement Board. This contract is available
only to employees or retired employees of The Joint Retirement Board of the
Rabbinical Assembly of America, The United Synagogue of America, and The Jewish
Theological Seminary of America (the "Joint Retirement Board"); (b) the level
deduction Contract; and (c) the graded deduction Contract. We currently offer
one type of Contract for HR-10 Plans. Each Contract may be modified or amended.
FEE AND EXPENSE TABLES WITH EXAMPLES
403(B) PLAN CONTRACT FOR JOINT RETIREMENT BOARD FEES AND EXPENSES
<TABLE>
<S> <C>
Your Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of
Purchase Payments).................................... 0.00%
Administrative Expenses (as a percentage of Purchase
Payments)............................................. 0.00%
Deferred Sales Load (as a percentage of Purchase
Payments or amount surrendered)....................... None
Surrender Fee (as a percentage of amount
surrendered).......................................... None
Exchange Fee........................................... 0.00%
Fixed Rate Annuity Purchase Fee........................ $ 250
Your Annual Contract Fee.................................... None
Your Annual Expenses
(as a percentage of average net assets)
Management Fee......................................... 0.50%
Mortality and Expense Risk Fees........................ None
Other Expenses
Service Fee.................................... 0.33%
Administration Fee (paid to the Joint Retirement Board
of the
Rabbinical Assembly of America, et al)..........0.35%
------
Total Other Expenses................................. 0.68%
Total Annual Expenses.................................. 1.18%
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
If you surrender your Contract at the end of the
applicable time period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $0 $0 $0 $0
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $250 $250 $250 $250
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $0 $0 $0 $0
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. Contractholders
currently pay an annual fee of .83% of average net assets. Under the
administrative service agreement with the Joint Retirement Board, we deduct
an additional fee of .35% from each Contractholder's net asset value as of
August 1 of each year and pay this fee to the Joint Retirement Board. In
addition to the expenses described above, premium taxes may be applicable.
The information presented in the example listed above should not be
considered a representation of past or future expenses. Actual expenses may
be greater or lesser than those shown in the example. The participant has
several different annuity options from which to choose. There is a $250
annuity purchase fee only if the participant chooses a fixed rate annuity.
LEVEL DEDUCTION CONTRACT FOR 403(B) PLANS FEES AND EXPENSES
<TABLE>
<S> <C> <C>
Your Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of Purchase
Payments)...................................................... 5.00%
Administrative Expenses (as a percentage of Purchase
Payments)...................................................... 1.00%
Deferred Sales Load (as a percentage of Purchase Payments or
amount surrendered)............................................ None
Surrender Fee (as a percentage of amount surrendered)........... None
Exchange Fee.................................................... 0.01%
Fixed Rate Annuity Purchase Fee................................. $250
Your Annual Contract Fee............................................. None
Your Annual Expenses
(as a percentage of average net assets)
Management Fee.................................................. 0.50%
Mortality and Expense Risk Fees................................. None
Other Expenses
Service Fee.......................................... 0.33%
-----
Total Other Expenses.......................................... 0.33%
Total Annual Expenses........................................... 0.83%
</TABLE>
5
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<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
If you surrender your Contract at the end of the
applicable time period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $60 $60 $60 $60
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $310 $310 $310 $310
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $60 $60 $60 $60
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. In addition to the
expenses described above, premium taxes may be applicable. The information
presented in the example listed above should not be considered a
representation of past or future expenses. Actual expenses may be greater
or lesser than those shown in the example. The participant has several
different annuity options from which to choose. We charge a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. We
charge a $10 exchange fee for the second and succeeding transfers in most
of the 403(b) Contracts.
GRADED DEDUCTION CONTRACT FOR 403(B) PLANS FEES AND EXPENSES
<TABLE>
<S> <C> <C>
Your Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of Purchase
Payments)...................................................... 5.00%
Deferred Sales Load (as a percentage of Purchase Payments or
amount surrendered)............................................ None
Surrender Fee (as a percentage of amount surrendered)........... None
Exchange Fee.................................................... .01%
Fixed Rate Annuity Purchase Fee................................. $250
Your Annual Contract Fee............................................. $30
Your Annual Expenses
(as a percentage of average net assets)
Management Fee.................................................. 0.50%
Mortality and Expense Risk Fees................................. None
Other Expenses
Service Fee.......................................... 0.33%
-----
Total Other Expenses.......................................... 0.33%
Total Annual Expenses........................................... 0.83%
</TABLE>
6
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
If you surrender your Contract at the end of the
applicable time period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $80 $140 $200 $350
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $330 $390 $450 $600
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $80 $140 $200 $350
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. In addition to the
expenses described above, premium taxes may be applicable. The information
presented in the example listed above should not be considered a
representation of past or future expenses. Actual expenses may be greater
or lesser than those shown in the example. We deduct a 5% sales load for
the first $10,000 of Purchase Payments for each participant; 4% for the
next $10,000 of Purchase Payments for each participant; and 2.5% on all
Purchase Payments in excess of $20,000. CAC also deducts an administrative
charge based upon the previous year's cost of administration. There is no
maximum dollar limit on this charge. In 1999, CAC will assess this charge
at an annual rate of $30 per participant. The participant has several
different annuity options from which to choose. We charge a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. We
charge a $10 exchange fee for the second and succeeding transfers in most
of the 403(b) Plan Contracts.
CONTRACT FOR HR-10 PLANS FEES AND EXPENSES
<TABLE>
<S> <C>
Your Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of
Purchase Payments).................................... 7.00%
Administrative Expenses (as a percentage of Purchase
Payments)............................................. 1.50%
Deferred Sales Load (as a percentage of Purchase
Payments or amount surrendered)....................... None
Surrender Fee (as a percentage of Purchase Payments
received prior to withdrawal)......................... 2.00%
Exchange Fee........................................... 0.01%
Fixed Rate Annuity Purchase Fee........................ $250
Individual Accounting Fee.............................. $20
Accounting Withdrawal Fee.............................. $10
Your Annual Contract Fee.................................... None
Your Annual Expenses
(as a percentage of average net assets)
Management Fee......................................... 0.50%
Mortality and Expense Risk Fees........................ None
Other Expenses
Service Fee.....................................0.33%
------
Total Other Expenses................................. 0.33%
Total Annual Expenses.................................. 0.83%
</TABLE>
7
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<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
If you surrender your Contract at the end of the
applicable time period:
You would pay the following expenses on a $1,000
invest ment, assuming 5% annual return on
assets: $135 $155 $175 $225
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $445 $355 $395 $445
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $105 $125 $145 $195
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. In addition to the
expenses described above, premium taxes may be applicable. The information
presented in the example listed above should not be considered a
representation of past or future expenses. Actual expenses may be greater
or lesser than those shown in the example. We deduct a sales load under
these Contracts that vary from 0% to 7% depending on the Contract. The
administrative expense under these Contracts varies from 0% to 1.5%
depending on the contract. The participant has several different annuity
options from which to choose. We charge a $250 annuity purchase fee only if
the participant chooses a fixed rate annuity. CAC may deduct an additional
charge for the maintenance of individual accounting records, not to exceed
$20 for each new entrant and $10 per year per participant thereafter and
$10 at each withdrawal. CAC did not deduct this charge in 1996, 1997 or
1998. We deduct a $10 exchange fee for the second and succeeding transfer
in most of the HR-10 Plan Contracts. We deduct a surrender fee (termination
charge) of 2% of the Purchase Payments received prior to withdrawal when
your Account is terminated and the entire interest in the Contract is
withdrawn. We deduct a termination charge of 2% of the pro rata amount of
Purchase Payments received when you withdraw part of your interest in the
Contract.
THE INVESTMENT ADVISER AND
INVESTMENT ADVISORY
FEE...................... CAC acts as the investment adviser to Separate
Account (B). CAC is a stock life insurance company
that was organized under the Illinois Insurance
Code in 1911. CAC maintains its principal office at
CNA Plaza, Chicago, Illinois 60685. Separate
Account (B) is registered as an open-end
diversified management investment company under the
1940 Act.
CAC receives an investment advisory fee at the
annual rate of 0.5% of the average daily net asset
value of Separate Account (B) and a service fee at
the annual rate of 0.33% of the average daily net
asset value of Separate Account (B) for investment
management and other services.
403(B) PLAN SALES AND
ADMINISTRATIVE CHARGES... Joint Retirement Board Contract. Under the current
403(b) Plan Contract with the Joint Retirement
Board, CAC does not deduct any charge for sales and
administrative expenses from Purchase Payments.
8
<PAGE> 11
Under the administrative service agreement with the
Joint Retirement Board effective January 1, 1997,
each Participant under the Joint Retirement Board
Plan is charged a fee of .35% of the Participant's
net asset value as of each August 1. That fee is
remitted to the Joint Retirement Board for
administrative services performed by it on behalf
of Joint Retirement Board Plan Participants.
Level Deduction Contract. Under the level
deduction Contract, we deduct 6% (6.38% of the net
amount invested) from each Purchase Payment for
sales and administrative expenses. Of such 6%
deduction, 5% is for sales expenses and 1% is for
administrative expenses. CAC reserves the right to
increase the rate of deductions for administrative
expenses in the future. Although CAC no longer
offers new level deduction Contracts to employers,
it continues to honor and to service existing level
deduction Contracts with current Contractholders
and to accept Purchase Payments under such
Contracts.
Graded Deduction Contract. Under the graded
deduction Contract, we deduct up to 5% (5.26% of
the net amount invested) from each Purchase Payment
for sales expenses. We reduce the deduction on a
graduated scale based upon the aggregate Purchase
Payments made under both fixed and variable
annuities. The minimum deduction before allowance
for experience rating credits is 2.5% (2.57% of the
net amount invested). CAC also deducts an
administrative charge based upon the previous
year's cost of administration. There is no maximum
dollar limit on this charge. In 1999, CAC will
assess this charge at an annual rate of $30 per
participant.
HR-10 PLAN SALES AND
ADMINISTRATIVE CHARGES... We deduct a charge of 0 to 8.5% of Purchase
Payments (0 to 9.29% of the net amount invested)
from each Purchase Payment. This charge is the sum
of the following expenses:
- sales expenses amounting to a deduction of 0 to
7.0% of Purchase Payments (0 to 7.65% of the net
amount invested); and
- administrative expenses amounting to a deduction
of 0 to 1.5% of Purchase Payments (0 to 1.64% of
the net amount invested).
We credit the balance of the Purchase Payment,
after we deduct sales and administrative charges,
to the participant's account in the form of
Accumulation Units. The exact level of such charges
will vary from Contract to Contract, depending on
volume of Purchase Payments expected, services to
be performed by CAC and the applicable commission
expenses. Accordingly, we will not reduce sales
charges on individual Contracts upon attainment of
any given level of Purchase Payments. Certain
Contracts may also provide for additional annual
fixed dollar charges imposed on a per participant
basis for the maintenance of individual accounting
records. CAC reserves the right
9
<PAGE> 12
to increase the rate of deductions for
administrative expenses in the future.
PURCHASE LIMITS............ The minimum Purchase Payment on Contracts for
403(b) Plans which can be made at any time on
behalf of any participant is $10. There is no
minimum Purchase Payment on Contracts for HR-10
Plans.
INVESTMENT OBJECTIVES...... Separate Account (B) invests its assets primarily
in common stocks and securities convertible into
common stocks. The primary investment objective of
Separate Account (B) is the growth of capital in
relation to the growth of the economy and the
changing value of the dollar. Current investment
income is only a secondary objective. Separate
Account (B)'s investment policies require CAC, in
making investments for Separate Account (B), to
maintain Separate Account (B)'s status as a
diversified investment company. The dollar amount
of investment accumulation before retirement and
the dollar amount of subsequent retirement benefits
will vary to reflect the dividends, interest and
fluctuations in the market value of the securities
held in Separate Account (B) and will be subject to
the same risks to which any owner of common stocks
is subject.
TRANSFERS.................. Prior to beginning annuity payments, a participant
may transfer funds between fixed and variable
annuity contracts. Some of the 403(b) Plan
Contracts and HR-10 Plan Contracts that we offer
provide that any such transfer will be made without
charge. Others provide that CAC may charge a $10
exchange fee for the second and each succeeding
transfer in any calendar year. A participant may
change the percentage allocation of future Purchase
Payments between fixed and variable annuity
contracts at any time without charge.
ANNUITY SELECTION.......... The participant has several different annuity
options from which to choose. We charge a $250
annuity purchase fee if the participant chooses a
fixed rate annuity. For the other annuity options,
there is no fee. CAC reserves the right to change
these charges at any time.
WITHDRAWALS................ 403(b) Plans. A participant may withdraw, without
charge, all or a portion of his individual account
(except for certain amounts attributable to a
salary reduction agreement) before beginning
annuity payments by providing CAC with written
notice. However, effective January 1, 1997, under
the Joint Retirement Board Contract, a participant
must receive written consent from the Joint
Retirement Board prior to providing written notice
to CAC. A withdrawal may be subject to penalty
taxes, in addition to applicable federal income
taxes.
HR-10 Plans. Subject to limitations, you may
withdraw part or all of your interest in the
Contract in one lump sum on any Valuation Date,
except for funds held for terminated or retired
participants. If you elect to make such a
withdrawal, CAC will deduct a termination
10
<PAGE> 13
charge of 2% of the pro rata amount of the Purchase
Payments received under the Contract relating to
the withdrawal.
PENALTY TAXES.............. Distributions made prior to age 59 1/2 generally
are subject to a penalty tax of 10%, in addition to
otherwise applicable federal income taxes. We will
not assess this penalty tax under the following
circumstances:
- if the distribution is made in connection with
death or disability;
- if the distribution is made after separation
from service where the separation occurred after
the participant attains age 55;
- if the distribution is part of a series of
annual or more frequent annuity payments made
after separation from service and at least over
the life of the participant;
- if the distribution is made for certain medical
expenses within the deductible limitation under
the Internal Revenue Code; or
- if the distribution is made to an alternate
payee pursuant to a qualified domestic relations
order ("QDRO").
11
<PAGE> 14
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CONDENSED FINANCIAL INFORMATION
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income(a)............ $ .196 $ .238 $ .194 $ .187 $ .189 $ .155 $ .164 $ .185 $ .243 $ .299
Expenses(b)..................... .160 .134 .107 .085 .073 .068 .060 .052 .044 .042
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Net investment income........... .036 .104 .087 .102 .116 .087 .104 .133 .199 .257
Capital changes
Net realized and unrealized
gain (loss) on
investments................. 3.826 3.450 2.314 2.788 (.181) 1.124 .307 1.707 (.055) .491
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
asset value................. 3.862 3.554 2.401 2.890 (.065) 1.211 .411 1.840 .144 .748
Accumulation unit value at the
beginning of the period....... 17.692 14.138 11.737 8.847 8.912 7.701 7.290 5.450 5.306 4.558
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Accumulation unit value at end
of period..................... $21.554 $17.692 $14.138 $11.737 $8.847 $8.912 $7.701 $7.290 $5.450 $5.306
======= ======= ======= ======= ====== ====== ====== ====== ====== ======
Ratio of fees and expenses to
average net assets(b)(c)...... .83% .83% .83% .83% .83% .83% .83% .83% .83% .83%
Ratio of net investment income
to average net assets(c)...... .19% .64% .67% 1.00% 1.31% 1.05% 1.44% 2.11% 3.74% 5.08%
Portfolio turnover rate......... 41% 45% 53% 46% 52% 69% 71% 13% 55% 47%
Number of accumulation units
outstanding at end of period
(000 omitted)................. 8,321 8,613 8,502 8,763 9,299 9,385 9,935 10,486 11,086 11,983
</TABLE>
- ---------------
(a) No declaration of dividends or distribution of gains is made, and such
amounts are applied to increase Accumulation Unit values.
(b) Pursuant to the terms of the Investment Advisory Agreement, CAC makes
quarterly withdrawals for investment advisory services to Separate Account (B)
at an annual rate of .5% of the average net asset value and quarterly
withdrawals of a service fee at an annual rate of .33% of the average net asset
value.
(c) Participants' equity appearing in the financial statements incorporated
by reference herein is the equivalent of net assets.
Separate Account (B) may from time to time measure performance in terms of
total return, which is calculated for any specified period of time by assuming
the purchase of units at Separate Account (B)'s unit value at the beginning of
the period. Such units are then valued at Separate Account (B)'s unit value at
the end of the period. The percentage increase is determined by subtracting the
initial value of the investment from its value at the end of the period and
dividing that amount by the initial value. The total return on this hypothetical
investment in Separate Account (B) shows its overall dollar or percentage change
in value, exclusive of fees based on the initial amount of the contribution and
recurring annual fees. If these fees were included, the amount or return that a
Participant would realize for an investment during the specified period would be
lower.
12
<PAGE> 15
A cumulative total return reflects Separate Account (B)'s performance over
a stated period of time. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if Separate Account (B)'s performance had been constant over
the entire period. Because average annual returns for more than one year tend to
smooth out variation's in Separate Account (B)'s annual returns, participants
should recognize that such figures are not the same as actual year-by-year
results. Separate Account (B) performance figures are based on historical
results and are not intended to indicate future performance. The investment
return and unit value of Separate Account (B) will vary and may be worth more or
less at redemption than their original cost.
From time to time, Separate Account (B) may produce advertising or sales
materials which disclose its performance over various periods of time. Separate
Account (B) may also compare its performance to that of selected other funds,
fund averages or recognized stock market indices. Such performance ratings or
comparisons may be made with funds that may have different investment
restrictions, objectives, policies or techniques than Separate Account (B) and
the portfolios of such other funds or market indices may be comprised of
securities that differ significantly from Separate Account (B)'s investments.
13
<PAGE> 16
DESCRIPTION OF CAC AND SEPARATE ACCOUNT (B)
GENERAL
CAC is a stock life insurance company which was organized under the
Illinois Insurance Code in 1911, and has been an investment adviser registered
under the Investment Advisers Act of 1940 since 1966. Its life insurance
business involves the writing of group and individual life insurance, accident
and health insurance, and annuity policies. CAC's principal office is located at
CNA Plaza, Chicago, Illinois 60685.
All of the voting securities of CAC are owned by Casualty, a stock casualty
insurance company organized under the Illinois Insurance Code, located at CNA
Plaza, Chicago, Illinois 60685. All of the voting securities of Casualty are
owned by CNA Financial, a Delaware corporation, located at CNA Plaza, Chicago,
Illinois 60685. Loews Corporation, a Delaware corporation, located at 667
Madison Avenue, New York, New York 10021-8087, with interests in insurance,
hotels, watches and other timing devices, drilling rigs and tobacco, owned
approximately 85% of the outstanding voting securities of CNA Financial as of
December 31, 1998. Laurence A. Tisch, the Chairman of the Board, Co-Chief
Executive Officer and a director of Loews Corporation and Chief Executive
Officer and a director of CNA Financial, and his brother, Preston R. Tisch,
President, Co-Chief Executive Officer and a director of CNA Financial and Loews
Corporation, owned, in the aggregate, approximately 31% of the outstanding
common stock of Loews Corporation as of December 31, 1998. Therefore, they may
be deemed to be parents of Loews Corporation, and thus of CNA Financial and CAC,
within the meaning of the federal securities laws.
Separate Account (B) was established by CAC on June 1, 1966, under the
provisions of the Illinois Insurance Code, in order to fund variable annuity
contracts. In addition to serving as investment adviser to Separate Account (B),
CAC also serves as investment adviser to CNA Income Shares, Inc., a closed-end
diversified management investment company.
Variable annuity contracts are securities within the meaning of the
Securities Act of 1933, and are not exempt from registration under the
provisions of that Act. The issuer of such contracts is subject to regulation
under the 1940 Act. Separate Account (B) has been registered as an open-end
diversified management investment company under the 1940 Act, but such
registration does not involve supervision of the management or the investment
practices or policies of Separate Account (B) or CAC by the SEC. Separate
Account (B) has no sub-accounts. Net Purchase Payments made in accordance with
the provisions of the Contracts described herein are added to Separate Account
(B) and invested as described herein. Net Purchase Payments made prior to April
29, 1977 under HR-10 Plan Contracts were added to Continental Assurance Company
Separate Account (A) and invested therein.
CAC owns Separate Account (B)'s assets and, under existing law, is not
considered to be a Trustee with respect to those assets. Nevertheless, the
assets of Separate Account (B) are held for the benefit of the participants and
persons entitled to payments under the Contracts described in this prospectus.
Moreover, investment income and gains and losses from assets allocated to
Separate Account (B) (whether realized or not) are credited to or charged
against Separate Account (B) without regard to other income, gains or losses of
CAC (in accordance with the Contracts' provisions). Thus, the dollar amount of
payments or values which vary reflect the investment results of just Separate
Account (B). Additionally, the Illinois Insurance Code and the Contracts
themselves prohibit CAC from charging any liabilities arising out of other
business of CAC against Separate Account (B)'s assets (equal to the reserves and
other contract liabilities of Separate Account (B)).
14
<PAGE> 17
INVESTMENT POLICIES AND RESTRICTIONS
The objectives and policies in making investments for Separate Account (B)
are set forth below.
1. The primary objective of CAC in making investments for Separate Account
(B) will be the growth of capital in relation to the growth of the
economy and the changing value of the dollar. Current investment income
is only a secondary objective. Accordingly, the assets of Separate
Account (B) will be invested primarily in common stocks and in other
securities convertible into common stocks.
2. When CAC believes that economic and market conditions indicate a
likelihood that investing a majority of the assets of Separate Account
(B) in common stocks or securities convertible into common stocks might
result in a material decrease in the unit value of Separate Account (B),
less than a majority of the assets of Separate Account (B) may be
invested in common stocks or securities convertible into common stocks.
In these situations, any assets not invested in common stocks or
securities convertible into common stocks will be invested primarily in
investment grade debt instruments with a maturity of one year or less,
such as U.S. Treasury bills, bank certificates of deposit, bank
repurchase agreements or commercial paper.
3. When CAC deems that economic and market conditions so indicate, a
portion of the assets of Separate Account (B) may be invested in
preferred stocks and publicly distributed debt instruments such as
corporate bonds, debentures, equipment trust certificates, U.S.
Government securities or U.S. Government Agency securities.
4. Temporary investments for Separate Account (B) may be made in short-term
instruments such as U.S. Treasury Bills, bank certificates of deposit,
bank repurchase agreements or commercial paper.
5. To the extent of 75% of the assets of Separate Account (B), CAC may not
purchase for Separate Account (B) the securities of any issuer if such
purchase would cause more than 5% of the market value of Separate
Account (B)'s assets to be invested in the securities of such issuer
(other than obligations of the United States and its instrumentalities)
or would cause more than 10% of any class of securities of such issuer
to be held in Separate Account (B)'s portfolio. The balance of 25% of
the assets of Separate Account (B) may be invested without regard to
such 5% or 10% limitations.
6. CAC, in acting for Separate Account (B), will not underwrite securities
of others or invest in restricted securities.
7. CAC, in acting for Separate Account (B), will not concentrate more than
25% of Separate Account (B)'s investments in any one industry.
8. The assets of Separate Account (B) will not be invested in commodity
contracts.
9. The assets of Separate Account (B) will not be invested in securities
contracts of investment companies.
10. CAC, in acting for Separate Account (B), will not make loans to other
persons except through the acquisition of securities issued or
guaranteed by banks, bonds, debentures, other debt securities which are
publicly distributed and the lending of portfolio securities
("Portfolio Loans"). Portfolio Loans will be continually secured by
cash, letters of credit, U.S. Government
15
<PAGE> 18
securities or U.S. Government Agency securities having a market value of
not less than the market value of the portfolio securities loaned. The
aggregate value of Portfolio Loans will not exceed 25% of Separate
Account (B)'s net assets at any time.
11. CAC, in acting for Separate Account (B), will not engage in the
purchase and sale of interests in real estate, except that CAC may
engage in the purchase and sale of marketable securities of real estate
companies and real estate trusts which may represent indirect interests
in real estate.
12. CAC, in acting for Separate Account (B), will not purchase securities
for the purpose of control or management of the issuer thereof.
13. CAC will not make short sales for Separate Account (B).
14. CAC will not borrow money for Separate Account (B).
15. CAC will keep Separate Account (B)'s assets substantially fully
invested in assets described in paragraphs 1, 2, 3 and 4 above, as
described therein, and will limit Separate Account (B)'s cash position,
to the extent feasible, to such amounts as may be required to permit
CAC to make normal contract payments from Separate Account (B).
16. CAC, in acting for Separate Account (B), will not issue any senior
securities (as defined in the 1940 Act) except for the lending of
portfolio securities permitted by paragraph 10 above.
The investment policies enumerated above may not be changed without
approval of a majority (as defined in the 1940 Act) in interest of the
participants.
There is no investment policy limitation as to the timing of sales and
purchase of securities. Although it will not be the general policy of CAC, in
acting for Separate Account (B), to engage in short term trading, securities may
be sold without regard to the length of time held whenever investment judgment
makes such action advisable. Since Separate Account (B) is not subject to
federal income taxes on capital gains, it is in a relatively advantageous
position in realizing capital gains even though an increased portfolio turnover
results in correspondingly greater brokerage expenses. The following table sets
forth Separate Account (B)'s rate of total portfolio turnover for the periods
indicated:
<TABLE>
<CAPTION>
RATE OF TOTAL PORTFOLIO TURNOVER PERCENT
- -------------------------------- -------
<S> <C>
1998........................................................ 41%
1997........................................................ 45%
1996........................................................ 53%
</TABLE>
Changes in the rate of portfolio turnover from year to year are
attributable to changes in CAC's assessment of prevailing market conditions. All
investment income and realized capital gains will be reinvested. CAC, in acting
for Separate Account (B), will limit portfolio transactions to those which CAC,
in the exercise of prudent business judgment, deems advisable in order for
Separate Account (B) to carry out its investment policies and to make payments
to participants. The dollar amount of investment accumulation before retirement
and the dollar amount of subsequent retirement benefits will vary to reflect the
dividend, interest and fluctuations in the market value of the securities held
in Separate Account (B) and will be subject to the same risks as are inherent in
the ownership of common stocks.
CAC, in acting for Separate Account (B), will not participate in any
trading account in securities on a joint or joint and several basis; provided,
however, that the bunching of orders for the sale or purchase of
16
<PAGE> 19
marketable portfolio securities with those of other accounts under the
management of CAC or its affiliates and the averaging of prices among Separate
Account (B) and such other accounts will not be deemed to result in a trading
accounting securities. CAC, in acting for Separate Account (B), will not
mortgage or pledge the investments of Separate Account (B), purchase securities
on margin or, except as described below, invest in puts or calls. Unlike the
investment policies and restrictions stated in the preceding paragraphs, the
policies and restrictions described in this paragraph are subject to change
without vote of the participants.
CAC, in acting for Separate Account (B), may write covered call options.
The "writing" of call options by Separate Account (B) means that Separate
Account (B) will be selling the right, but not the obligation, to acquire a
specified number of securities held in Separate Account (B)'s portfolio at a
price set in the option contract (the "exercise price"). The optionholder
generally may exercise this right to purchase the underlying securities at any
time prior to the expiration of the option by notifying Separate Account (B) of
its intention to exercise and delivering to Separate Account (B) funds equal to
the aggregate exercise price of the securities covered by the contract (the
"exercise payment"). Generally, a holder of a call option will exercise its
rights under the call option only if the market price of the underlying stock
exceeds the exercise price of the option. If the market price of the underlying
securities is greater than the option exercise price on the date of exercise,
the holder is, by virtue of the option contract, entitled to purchase the
underlying securities at the below-market exercise price. If the option is
exercised and the market value of the underlying securities exceeds the sum of
the exercise payment and the payment received by Separate Account (B) on the
sale of the option (the "premium"), Separate Account (B) would be left in a less
favorable position than if such call option had not been written (because of the
lost opportunity to realize the economic value represented by such excess).
To close out a position when writing covered call options, Separate Account
(B) may make a "closing purchase transaction," which involves purchasing a call
option on the same security with the same or similar exercise price and
expiration date as the option which it has previously written. Separate Account
(B) will realize a profit or loss from a closing purchase transaction depending
upon the difference between the amount paid to purchase an option and the amount
received from the sale thereof.
CAC, in acting for Separate Account (B), may also purchase covered put
options for hedging purposes. A put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying securities at the
exercise price at any time during the term of the option. Generally, a holder of
a put option will exercise its rights under the put option, only if the market
price of the underlying securities is less than the exercise price of the
option. If the put option is not exercised or the amount by which the exercise
price exceeds the market price of the underlying securities is less than the
premium paid, Separate Account (B) would be left in a less favorable position
than if such put option had not been purchased. If market conditions are
appropriate for Separate Account (B) to exercise the purchased put option,
Separate Account (B) also may sell a put option to close out a purchased put
option rather than exercising the purchased put option.
Separate Account (B) will write call options and purchase put options only
if the related stock is held in its portfolio. The put and call options
described above will generally have a contract term of nine months or less. The
market value of the securities subject to such option obligations at the time
such options are written or purchased will not, in the aggregate, exceed 20% of
Separate Account (B)'s total assets.
The use of options exposes Separate Account (B) to certain additional
investment risks and transaction costs. The risks that may be associated with
the use of option contracts include, but are not
17
<PAGE> 20
limited to, the risk that securities prices will not move in the direction
anticipated by Separate Account (B) and the risk that the skills needed to
successfully use option strategies may be different from those needed to select
portfolio securities. In addition, assets segregated or set aside to cover the
writing of a call option generally may not be disposed of during the term of
such option. Segregating assets could diminish Separate Account (B)'s return due
to the opportunity losses of foregoing other potential investments with the
segregated assets.
CAC is permitted to enter into repurchase agreements and reverse repurchase
agreements on behalf of Separate Account (B). A repurchase agreement is an
instrument under which the purchaser (i.e., Separate Account (B)) acquires
ownership of the obligation (debt security) and the seller agrees, at the time
of the transfer, to repurchase the obligation at a mutually agreed upon time and
price, thereby determining the yield during the purchaser's holding period. This
results in a fixed rate of return insulated from market fluctuations during such
period. Repurchase agreements usually are for short periods, normally ranging
from one day to one month. Repurchase agreements will be entered into only with
respect to obligations in which Separate Account (B) may otherwise invest.
A reverse repurchase agreement is an agreement under which the lender
(i.e., Separate Account (B)) loans a security, usually a U.S. Government
security, to a borrower, usually a bank or a stockbroker, against cash
collateral. The transaction is normally characterized as a loan by the lender of
the security and a simultaneous agreement by the lender to repurchase such
security at an agreed price at a specified later date. The transaction is
normally structured to permit the lender to receive a yield in excess of the
yield of the underlying security. Reverse repurchase agreements are usually made
for short periods, normally ranging from one week to one month. A reverse
repurchase agreement will be a Portfolio Loan permitted by paragraph 10 above.
Sufficient funds will be maintained in the form of cash and short-term
investments, and segregated on an accounting basis, to satisfy such repurchase
commitments.
The Federal Bankruptcy Code provides that a repurchase participant may
enforce a clause requiring the liquidation of a repurchase agreement because of
the insolvency or financial condition of the other party to the repurchase
agreement or because of the commencement of the bankruptcy case by the other
party to the repurchase agreement. The Federal Bankruptcy Code also provides
that the automatic stay does not apply to the set-off by a repurchase
participant of a mutual debt or claim in connection with repurchase agreements
where the set-off is for a margin payment or a settlement payment. Repurchase
agreements are narrowly defined by Section 101(47) of the Bankruptcy Code to
mean only agreements involving the transfer of certificates of deposit, eligible
banker's agreements or securities that are direct obligations of or fully
guaranteed by the United States government. Repurchase agreements not falling
within this definition may not be covered by the protection of Sections 559 and
362(b)(7) of the Bankruptcy Code. It is possible that repurchase agreements not
covered by those sections may be considered by a bankruptcy court to be loans by
the purchaser to the seller. In such event, the purchaser might not be able to
sell the obligation in the event of bankruptcy of seller without leave of the
appropriate court. The purchaser would then be at risk due to a decline of the
value of the obligation, and in the event of bankruptcy would face delays in the
sale of the obligation and would incur legal, disposition and other expenses.
CAC will limit investments by Separate Account (B) which may not be sold
and settlement received therefor within three business days (or such shorter
settlement period as the Commission designates for investment companies as
defined under the 1940 Act) to 10 percent of the net assets of Separate Account
(B).
18
<PAGE> 21
MANAGEMENT
THE COMMITTEE
The supervision of Separate Account (B) is vested by CAC in a Committee.
The Committee has the following specific duties:
1. To review periodically the portfolio of Separate Account (B) to
ascertain that such portfolio is managed in the long-term interest
of the participants and to take such corrective action as may be
necessary.
2. To approve, annually, agreements providing for sales, investment
and administrative services.
3. To recommend from time to time any changes deemed appropriate in
the fundamental investment policies of Separate Account (B), to be
submitted to the participants at their next meeting.
4. To select independent auditors, whose engagement shall be approved
annually by the participants.
The Committee is also authorized to amend the Regulations for Government of
Separate Account (B), except as otherwise provided by law.
INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement, CAC acts as the investment adviser
to Separate Account (B). In rendering its services as investment adviser, CAC is
responsible to the Committee. CAC, as Separate Account (B)'s investment adviser,
provides Separate Account (B) with an investment program complying with the
investment objectives, policies and restrictions of Separate Account (B) (see
"Description of CAC and Separate Account (B)--Investment Policies and
Restrictions"). In carrying out Separate Account (B)'s investment program, CAC
makes the investment decisions and is responsible for the investment and
reinvestment of the Separate Account's assets by the purchase and sale of
securities on behalf of the Separate Account. CAC performs research, statistical
analysis, and continuous supervision of Separate Account (B)'s investment
portfolio, and also furnishes office space for Separate Account (B) and pays the
salaries and fees of Separate Account (B)'s officers and Committee Members. The
Investment Advisory Agreement does not require employees of CAC to devote their
exclusive efforts to Separate Account (B)'s business, and it is expected that
they will provide investment advisory services for CAC's other customers and for
CNA Financial and its affiliates.
DEDUCTIONS AND EXPENSES
SALES AND ADMINISTRATIVE CHARGES--GENERAL
CAC may be deemed to be the principal underwriter for Separate Account (B)
and performs all sales and administrative functions relative to the Contracts
and Separate Account (B). CAC does not act as principal underwriter for any
other investment company.
19
<PAGE> 22
CAC received the following sales and administrative fees in connection with
the operations of Separate Account (B):
<TABLE>
<CAPTION>
SALES AND ADMINISTRATIVE FEES AMOUNT
- ----------------------------- -------
<S> <C>
1998........................................................ $10,428
1997........................................................ 11,417
1996........................................................ 12,704
</TABLE>
CAC, in its sole discretion, may grant an experience rating credit to
participants covered by a 403(b) Plan Contract based upon its profitability.
Experience rating credits of 1% to 5% of Purchase Payments have been granted in
certain cases where substantial individual solicitation has not been necessary.
SALES AND ADMINISTRATIVE CHARGES--403(B) PLANS
The following is an overview of the sales and administrative charges
applicable to the different types of 403(b) Plans offered by Separate Account
(B):
JOINT RETIREMENT BOARD CONTRACT. Under the administrative service
agreement with the Joint Retirement Board, effective January 1, 1997, each
Participant under the Joint Retirement Board Plan is charged a fee of .35% of
the Participant's net asset value as of each August 1. That fee is remitted to
the Joint Retirement Board for administrative services performed by it on behalf
of its 403(b) Plan Participants.
LEVEL DEDUCTION CONTRACTS. Pursuant to the Administrative Service
Agreement, and as provided in the Contracts, CAC currently deducts 6% (6.38% of
the net amount invested) from each Purchase Payment as received for sales
expenses and administrative expenses. Of such 6% deduction, 5% is for sales
expenses and 1% is for administrative expenses. These charges do not cover the
expenses covered by the service fee charged under the Investment Advisory
Agreement. CAC guarantees that during the first five years of a participant's
participation under the Contract no further deductions will be made to cover
such expenses, but any part of the 6% aggregate charge not needed to cover such
expenses accrues as a profit to CAC. Following the end of the fifth year of
participation under the Contract, the 1% deduction by CAC from Purchase Payments
to cover administrative expenses may be increased by CAC upon prior written
notice to the participant.
GRADED DEDUCTION CONTRACTS. Pursuant to the Administrative Service
Agreement, and as provided in the Contracts, to cover sales expenses CAC makes
deductions from Purchase Payments as follows:
- 5% (5.26% of the net amount invested) on the first $10,000 of
Purchase Payments for each participant;
- 4% (4.17% of the net amount invested) on the next $10,000 of
Purchase Payments for each participant; and
- 2.5% (2.57% of the net amount invested) on all Purchase Payments
for each participant in excess of $20,000.
Total Purchase Payments for each participant under both fixed and variable
annuity contracts are included in determining the charge. Any part of such
charge which is not needed to cover such expenses accrues as a profit to CAC.
20
<PAGE> 23
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, CAC makes an administrative charge based upon its cost of
administration. There is no maximum dollar limit on this charge, except that
this charge (for any given year) will not exceed the previous year's cost of
administration. This charge is made on December 31st of each year against the
account of each participant who is not receiving an annuity. In 1999, CAC will
assess this charge at an annual rate of $30 per participant.
Neither the sales charge nor the administrative charge covers the expenses
covered by the service fee charged under the Investment Advisory Agreement.
In the event Purchase Payments are made on behalf of a participant who is
in the accumulation period for a partial year, the administrative charge is
prorated on a monthly basis. For example, if the annual charge for a calendar
year is $30 and the participant is covered under the Contract prior to the
beginning of annuity payments for only eight months of that year, his
administrative charge would be $20.
If no Purchase Payments are received on behalf of a participant during a
calendar year, the deduction from the participant's account for that year will
be 50% of the administrative charge which would otherwise be made. For example,
if the annual charge for a calendar year is $30 and the participant is in the
accumulation period during the entire calendar year but no Purchase Payments are
received on behalf of the participant during the year, his administrative charge
would be 50% of $30 or $15.
SALES AND ADMINISTRATIVE CHARGES--HR-10 PLANS
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, each Purchase Payment received by CAC under an HR-10 Plan Contract
is, after deduction of a percentage charge, credited to Separate Account (B).
The charge ranges from 0 to 8.5% of Purchase Payments (0 to 9.29% of the net
amount invested) comprised of 0 to 7% of Purchase Payments (0 to 7.65% of the
net amount invested) to cover sales expenses and 0 to 1.5% of Purchase Payments
(0 to 1.64% of the net amount invested) to cover certain administrative
expenses. This charge does not cover the expenses covered by the service fee
charged under the Investment Advisory Agreement. CAC guarantees that, except for
this charge and the charges described below, no further deductions will be made
for sales and administrative expenses. While CAC intends that this charge merely
cover such expenses, if any part of this charge is not needed to cover such
expenses, such part accrues as a profit to CAC. Conversely, if such expenses
exceed this charge, a loss to CAC results. The exact level of this charge will
vary from Contract to Contract, depending on the volume of Purchase Payments
expected, the extent of administrative services to be performed by CAC and the
applicable commission expenses. The Contractholder, before entering into a
Contract, and each self-employed or other person subject to the Contract, before
agreeing to make Purchase Payments thereunder, will be given a separate written
statement showing the percentage amount of such charge.
If the Contract so provides, CAC may make additional fixed dollar charges
per participant for the maintenance of individual accounting records. These
charges will not exceed $20 for each entry into the plan relating to such
Contract, $10 per year per participant thereafter, and $10 at each withdrawal.
The initial charge levels anticipated by CAC will be furnished at the time that
application for the Contract is under consideration, and the charges provided
for will be based upon CAC's good faith estimate of the cost to it for the
maintenance of individual accounting records. At the present time, there are no
Contracts in force under which fixed dollar charges per participant are made.
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No increase in the percentage charge for sales and administrative expense,
or in any charge per participant, may be made during the first five Contract
years. After the first five Contract years, the portion of such charges intended
to cover administrative expenses may be changed on the basis of CAC's expenses.
INVESTMENT ADVISORY CHARGES
CAC makes quarterly withdrawals from Separate Account (B) as follows:
- at an annual rate of 0.5% of the average daily net asset value of
Separate Account (B) for providing investment advisory services, and
- at an additional annual rate of 0.33% of the average daily net
asset value of Separate Account (B) as a service fee for bearing
certain expenses of Separate Account (B). Such expenses are
different from those covered by the Administrative Service
Agreement.
DESCRIPTION OF GROUP VARIABLE ANNUITY CONTRACTS
GENERAL
The Contracts provide one method of investing retirement funds in equity
and other securities. The primary purpose of the Contracts is to provide
lifetime payments which will tend to reflect changes in the cost of living
during both the years prior to retirement and the years following retirement.
CAC seeks to accomplish this objective by providing a medium for investment,
generally in equity securities, accompanied by an assumption of the mortality
risk. However, there can be no assurance that this objective will be attained.
The Contracts involve investment risk, including possible loss of
principal. The value of the investments fluctuates continuously and is subject
to the risks of changing economic conditions as well as the risks inherent in
the ability of CAC to anticipate changes in such investments necessary to meet
changes in economic conditions. There can be no assurance that the value of a
participant's individual account during the years prior to retirement, or the
aggregate amount of the variable annuity payments received during the years
following retirement, will equal or exceed the Purchase Payments made on his
behalf. The Contracts are not a deposit or obligation of, or guaranteed or
endorsed by, any bank or depository institution, and the Contracts are not
federally insured by the Federal Deposit Insurance Corporation, The Federal
Reserve Board, or any other governmental agency.
The variable annuity payments are determined on the basis of (1) the
mortality table specified in the Contract, and (2) the investment performance of
Separate Account (B). The dollar amount of the variable annuity payments will
not be affected by adverse mortality experience or by an increase in CAC's
expenses in excess of the expense deductions provided for in the Contract. The
dollar amounts of the payments will, however, reflect the investment losses or
gains and investment income, and thus will vary.
The significant difference between a regular or fixed annuity and a
variable annuity is that under a fixed annuity, the insurance company assumes
the risk of investment gain or loss and guarantees a specified interest rate and
a specified monthly annuity payment. Under a variable annuity, the participant
assumes the risk of investment gain or loss in that the value of his individual
account varies with the investment income and gains or losses of a specified
portfolio of securities. In both cases, the insurance company assumes the
mortality and expense risk under the Contract.
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In assuming the mortality risk, CAC is taking the chance that the actuarial
estimate of mortality rates among annuitants may prove erroneous; in assuming
the expense risk, CAC is taking the chance that the expense margins deducted by
CAC may not prove sufficient to cover the actual sales and administrative costs
and contingency requirements. In either case, if an error in estimation is
against CAC, CAC's earnings will be reduced; if an error in estimation favors
CAC, CAC's earnings will be increased.
SALES OF CONTRACTS
The Contracts are offered by employees and licensed agents and brokers of
CAC.
VOTING RIGHTS
Participants have the right to vote at any annual meeting of participants
upon the following matters:
1. To elect Members of the Committee for Separate Account (B)
(see "Management--The Committee").
2. To approve or disapprove any new or amended agreement providing for
investment services.
3. To approve or disapprove any changes in the fundamental
investment policies of Separate Account (B).
4. To ratify or reject the Committee's selection of independent
auditors for Separate Account (B).
The Committee currently intends to hold annual meetings of participants for
these purposes. However, there is no requirement under applicable law that
Separate Account (B) hold regular annual meetings of participants and the
Committee, in its discretion, may continue holding regular annual meetings of
participants in the future. Meetings of participants are required by the 1940
Act in certain circumstances, including to approve any change in fundamental
investment policies.
The number of votes which a participant who is not retired may cast is
equal to the number of Accumulation Units held by such participant under the
particular Contract concerned, which represent interests in Separate Account
(B). The number of votes which a retired participant may cast is equal to the
monetary value of the actuarial reserve maintained by CAC in Separate Account
(B) for the annuity of that participant divided by the monetary value of an
Accumulation Unit. As payments are made to a retired participant, the monetary
value of that actuarial reserve is reduced; accordingly, the number of votes
which that retired participant may cast will decrease.
The determination of the number of votes to be cast will be made as of a
date within 60 days prior to the annual meeting of the participants. The
participants will receive at least 20 days' prior written notice of such meeting
and of the number of votes to which they are entitled. A participant will be
entitled to vote only if he is a participant on the foregoing record date and on
the date of the meeting.
ASSIGNMENT
The interest of any participant or beneficiary in or under a Contract is
not subject to assignment or transfer. Transfer or surrender of such interest
may be made only to CAC.
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MODIFICATION OR TERMINATION OF THE CONTRACT
Each Contract provides that it may be modified or amended in any respect by
agreement between CAC and the Contractholder, without the consent of any
participant. However, no such modification or amendment may affect retired
participants in any manner, nor may any guarantees previously extended to active
participants be impaired. CAC may also modify or amend any Contract, without
your consent or the consent of any participant, in order to conform to
applicable law or to changes in the operation of Separate Account (B) which have
been approved by vote of the participants or by the Committee.
A Contractholder may elect to terminate a Contract at any time by due
notice to CAC. An HR-10 Plan Contractholder has an option to transfer funds to a
new funding medium (for example to a fixed annuity contract). If an HR-10 Plan
Contract is terminated without transfer of funds to a new funding medium or if a
403(b) Plan Contract is terminated, the rights of the participants are the same
as on termination of employment or other withdrawal. When a participant begins
to receive annuity payments, his rights are fixed and are not affected by any
Contract termination.
CONTRACTHOLDER INQUIRIES
All inquiries by Contractholders, Employers or participants should be made
in writing or by telephone to:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
PURCHASE PAYMENTS AND ACCUMULATIONS
The minimum Purchase Payment on Contracts for 403(b) Plans is $10, which
may be made at any time on behalf of any participant.
There is no minimum Purchase Payment on Contracts for HR-10 Plans. The
HR-10 Plan Contracts permit a variety of payment schedules. A retirement plan
for the self-employed may provide for a fixed percentage of compensation to be
paid by all Employers who are participating, and additional payments to be made
by them on behalf of any of their employees who may also be eligible. If the
plan incorporates a provision for employee payments, these would normally be
deducted regularly from their compensation during the year, and remitted
directly to CAC as collected.
ALLOCATION OF PURCHASE PAYMENTS--HR-10 PLANS
HR-10 Plans adopted by an Employer may provide for other investments in
addition to the Contracts. For example, these plans may also provide for
purchase of life insurance or fixed annuities. The terms of the plan adopted
will set forth the method of allocation of Purchase Payments between the
Contracts and other applications. There may be different allocations among the
participants under a plan. Reallocation of prior Purchase Payments between the
Contracts and insurance or fixed annuity contracts will be permitted prior to
retirement only with the consent of CAC. If the plan so provides, a participant
may upon retirement change the proportion of annuity to be paid on a fixed or
variable basis.
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ACCUMULATION PERIOD
During the period before of annuity payments begin, when a Purchase Payment
is received on behalf of a participant, a sales and administrative charge is
deducted. The balance of the Purchase Payment is credited to the participant's
account in the form of Accumulation Units. The number of Accumulation Units
credited for a participant is determined by dividing the amount credited to his
account by the value of an Accumulation Unit next computed after receipt of the
Purchase Payment at the principal office of CAC, CNA Plaza, Chicago, Illinois
60685. The credit to the participant's account occurs concurrently with such
determination.
VALUE OF AN ACCUMULATION UNIT
During the accumulation period, the value of a participant's account varies
with the performance of the investments of Separate Account (B), and there is no
assurance that such value will equal or exceed Purchase Payments made on behalf
of the participant.
Accumulation Units are valued as of 3:00 P.M., Central Time, on each day on
which the New York Stock Exchange is open and on each other day in which there
is a sufficient degree of trading in the portfolio securities of Separate
Account (B) that the current net asset value of Accumulation Units might be
materially affected by changes in the value of such portfolio securities, with
each day of valuation being referred to as a Valuation Date.
The value of an Accumulation Unit on a Valuation Date is determined by
dividing the net asset value of Separate Account (B) at the close of business on
that day by the number of Accumulation Units outstanding. Receipt of investment
income or realization of capital gains by Separate Account (B) will not change
the number of Accumulation Units outstanding. This number ordinarily may be
increased only through receipt of additional Purchase Payments, and decreased
only through withdrawals. The value of an Accumulation Unit on any day not a
Valuation Date will be the same as the value on the next Valuation Date.
The net asset value of Separate Account (B) is the market value of all
securities and other assets, less liabilities of Separate Account (B), including
accrued investment advisory fees and other service fees. We determine the net
asset value of Separate Account (B) by valuing:
- portfolio securities which are traded on a national securities
exchange at the last sale price, or, in the absence of a sale, at
the closing bid price on the exchange where the security is
primarily traded;
- other securities the prices of which are quoted in the Nasdaq
National Market at the last sale price or, in the absence of a
sale, at the closing bid price;
- other over-the-counter market securities not quoted in the Nasdaq
National Market on the basis of the bid price of over-the-counter
market quotations, if available; and
- all other securities and other assets at a fair value determined in
good faith by the Committee.
Under current federal laws, no federal income tax is payable on income or
capital gains of Separate Account (B). In the event any income taxes are
imposed, they will be deducted in determining the net asset value of Separate
Account (B). Deductions are also made by CAC for investment advisory services
and other services at such prorated percentages as are equivalent to an
aggregate of 0.83% per annum of
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the average daily net asset value of Separate Account (B), under CAC's
Investment Advisory Agreement with Separate Account (B).
The value of an Accumulation Unit was established as $1.00000 ($1) on June
30, 1966, and the initial deposits were applied at that initial unit value on
February 28, 1967. The value as of any later date is found as described above.
The value of a participant's account at any date can be determined by
multiplying the total number of Accumulation Units credited to his account by
the value of an Accumulation Unit on that date.
WITHDRAWALS
Subject to the limitations described in "Benefits on Death or
Withdrawal--HR-10 Plans", an HR-10 Plan Contractholder may withdraw from CAC, in
one lump sum on any Valuation Date, part or all of his or her interest in the
Contract, except for funds held for terminated or retired participants. If you
elect to make such a withdrawal, CAC will deduct a termination charge of 2% of
the pro rata amount of the Purchase Payments received under the Contract before
your withdrawal. In general, any withdrawal made prior to age 59 1/2 (other than
on account of death, disability, separation from service during or after the
employee attains age 55, or a withdrawal which is part of a series of annual or
more frequent annuity payments made after separation from service and at least
over the participant's life, or if the withdrawal is made for certain medical
expenses within the deductible limits under the Internal Revenue Code or if it
is made to an alternate payee pursuant to a QDRO) is subject to an additional
10% tax, under the Internal Revenue Code.
A participant may elect, by written notice to CAC, to withdraw all or a
portion of his individual account other than certain amounts attributable to a
salary reduction agreement prior to beginning annuity payments. However,
effective January 1, 1997, under the Joint Retirement Board Contract, a
participant must receive written consent from the Joint Retirement Board prior
to providing written direction to CAC. CAC will redeem Accumulation Units from
participants, without any charge, at the net asset value per Accumulation Unit
next to be determined after receipt of a signed written request to the office of
CAC. However, withdrawals prior to age 59 1/2 (except for the exceptions stated
in the above paragraph) are generally subject to an additional 10% tax.
Distributions from a 403(b) Plan of amounts contributed on or after January 1,
1989 pursuant to a salary reduction agreement and of earnings on those
contributions (and amounts earned on or after January 1, 1989 on contributions
made before January 1, 1989) may be made only upon the attainment of age 59 1/2,
separation from service, death, disability or hardship. Hardship distributions
are limited to amounts contributed pursuant to a salary reduction agreement,
excluding earnings on those amounts. Payment for Accumulation Units redeemed
will be made by CAC within seven days after receipt of a written redemption
request by CAC at the address set forth above under "Description of Group
Variable Annuity Contracts--Contractholder Inquiries". Payments upon redemption
may be more or less than the original costs of the Accumulation Units. For a
discussion of federal income tax consequences of the receipt of such lump sum
payments, see "Federal Taxes--Federal Tax Treatment of Participants".
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ANNUITIES
ELECTING THE RETIREMENT DATE AND FORM OF ANNUITY--403(B) PLANS
A participant selects, in accordance with the Contract, a retirement date
and annuity option. CAC currently charges a $250 fee for the purchase of a fixed
rate annuity. CAC reserves the right to change this charge at any time. Prior to
beginning annuity payments, a participant may transfer funds between fixed and
variable annuity contracts. Some of the 403(b) Plan Contracts offered hereby
provide that any such transfer will be made without charge. Others provide that
CAC may make a charge of $10 for the second and each succeeding transfer in any
calendar year. A participant may change the percentage allocation of future
Purchase Payments between fixed and variable annuity contracts at anytime
without charge. Subsequent changes in either the retirement date or annuity
option can be made up to 30 days prior to the date annuity payments are to
begin. Distributions must generally begin by April 1 of the year following the
year of attainment of age 70 1/2 or, if later and the participant was not a sole
proprietor or Five Percent Owner with respect to the year in which he or she
reached age 70 1/2 and such participant so elects, by April 1 of the year
following the year in which the participant retires (a different rule may apply
with respect to distributions made in plan years beginning before January 1,
1997--consult your tax advisor). The 403(b) Plan Contracts provide for the
various annuity forms described below. Level deduction Contract participants
have three annuity forms; graded deduction Contract participants have four.
There is an additional annuity form, which is not one of the four options
described below, which is applicable only to plans providing for a qualified
joint and survivor annuity as defined in ERISA. That annuity form is described
following the descriptions of the four options. The annuity payments may be
either fixed or variable at the option of the participant.
ANNUITY OPTIONS--403(B) PLANS
The following annuity options are available under 403(b) Plans offered by
Separate Account (B):
- OPTION 1--LIFE WITHOUT REFUND. Monthly payments for the life of the
participant only.
- OPTION 2--LIFE TEN YEARS CERTAIN. Monthly payments for life, with the
provision that if, at the death of the annuitant, payments have been
made for less than 120 months, annuity payments may, at the option of
the beneficiary designated by the participant, be discounted and paid in
a single sum, or be continued during the remainder of said period to the
beneficiary. If the beneficiary dies while receiving annuity payments,
the value on the date of death of the remaining number of annuity
payments will be paid in a lump sum to the estate of the beneficiary.
This option is considered by CAC to be the "normal form". Unless the
Plan adopted by the Contractholder and communicated to CAC provides for
a qualified joint and survivor annuity as defined in ERISA, this option
will be applied automatically if no other option is elected.
- OPTION 3--JOINT AND SURVIVOR. Monthly payments to the participant for
his life, continuing on the basis of the same number of Annuity Units
after the participant's death to his spouse, for the balance of his
spouse's life.
- OPTION 4--LIFE FIVE YEARS CERTAIN. Monthly payments for life, with a
provision similar to that under the Life Ten Years Certain form, but
extending only five years from retirement. This option may only be
selected by participants under the graded deduction Contract.
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Ordinarily, no option may be elected if the first payment under such option
would be less than $25. If the amount of such first payment would be less than
$25, it will be paid in a lump sum.
No option may be elected which has a period certain longer than the life
expectancy of the participant or the joint and last survivor life expectancies
of the participant and the participant's contingent annuitant, calculated, based
on such persons' attained ages in the year in which payments are required to
begin, using the mortality table provided for such purpose by the Secretary of
the Treasury. Further, with respect to benefits accrued after December 31, 1986,
the distribution cannot exceed a maximum period of years determined under tables
provided by the Secretary of the Treasury, and additional rules apply in
determining the minimum amount which must be distributed each year.
If a plan adopted by the Contractholder and communicated to CAC provides
for a qualified joint and survivor annuity as defined in ERISA as the automatic
form of payment, then unless the participant waives such form and his spouse
consents, the automatic annuity form under the Contract for each participant to
whom such provision is applicable will be an annuity for the life of the
participant which provides a survivor annuity for the life of the participant's
surviving spouse which is not less than one-half, nor greater than the full
amount, of the annuity payable during the life of the participant, and which is
the actuarial equivalent of a single life annuity with ten years certain for the
life of the participant. Any participant who affirmatively waives the automatic
annuity form with the consent of his spouse may select any of the options
described above if he is covered by a graded deduction Contract or any of
Options 1, 2 or 3 if he is covered by a level deduction Contract.
If Option 1 is elected, subsequent to the death of the participant no
payments are made to any person, and if Option 3 is elected, subsequent to the
death of the last to die of the participant and the participant's spouse no
payments are made to any person.
Other options are available with the consent of CAC. Information on such
options will be furnished upon written request to CAC.
RETIREMENT OF PARTICIPANT--HR-10 PLANS
Distributions must generally begin by April 1 of the year following the
year of attainment of age 70 1/2, or, if later and the participant so elects, by
April 1 of the year following the year in which the participant retires (a
different rule may apply with respect to 5% Owners and distributions made in
plan years beginning before January 1, 1997. Consult your tax advisor).
The HR-10 Plan Contract is flexible in allowing retirement on the first day
of any month as elected by the participant and specified in the plan. The only
requirements are that the initial monthly annuity payment must be at least equal
to a minimum amount established by CAC from time to time, and that the
participant must submit certain information to establish proof of his date of
birth. If the annuity would be less than the minimum, it may be paid as a
fixed-value income, or in a lump sum.
ANNUITY OPTIONS--HR-10 PLANS
The form of annuity payable to retired participants of a particular
organization depends on the terms and provisions of the plan adopted by that
organization. Annuity options normally available under the Contract, if the plan
so provides, will include the following listed below, provided that the option
selected must produce an initial monthly annuity payment in the amount of at
least $25. CAC currently charges $250 for the purchase of a fixed rate annuity.
CAC reserves the right to change this charge. Prior to
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beginning annuity payments, a participant may transfer funds between fixed and
variable annuity contracts. Some of the HR-10 Plan Contracts offered hereby
provide that any such transfer will be made without charge. Others provide that
CAC may make a charge of $10 for the second and each succeeding transfer in any
calendar year. A participant may change the percentage allocation of future
Purchase Payments between fixed and variable annuity contracts at any time
without charge.
The following annuity options are available under HR-10 Plans offered by
Separate Account (B):
- OPTION 1--LIFE TEN YEARS CERTAIN. Monthly payments for life, with
the provision that if, at the death of the annuitant, payments have
been made for less than 120 months, annuity payments will be
discounted at the reserve interest rate, and paid to the
beneficiary in a single sum. This option is considered by CAC to be
the "normal form." Unless the plan adopted by the Contractholder
and communicated to CAC provides for a qualified joint and survivor
annuity as defined in ERISA, this option will be applied
automatically if no other option is elected.
- OPTION 2--LIFE FIVE YEARS CERTAIN. Monthly payments for life, with
a provision similar to that under the Life Ten Years Certain form,
but only extending for five years from retirement.
- OPTION 3--LIFE WITHOUT REFUND. Monthly payments for the life of
the participant only.
- OPTION 4--JOINT AND SURVIVOR. Monthly payments to the participant
for his life, continuing on the basis of the same number of Annuity
Units after the participant's death to his spouse, for the balance
of his spouse's life.
- OPTION 5--FIXED INSTALLMENTS. Level monthly payments of a
stipulated dollar amount, payable until the sum applied is
exhausted. The period for which payments are made will vary
depending upon the investment results of the Account.
- OPTION 6--FIXED PERIOD. Variable monthly payments payable over a
predesignated period of years, from one to twenty.
In the case of options with a fixed period, the beneficiary may, in lieu of
a lump sum settlement, elect to have the remaining installments continued on a
monthly basis. This election is available only if the beneficiary is a natural
person.
No option may be elected which has a certain period longer than the life
expectancy of the participant or the joint and last survivor life expectancies
of the participant and the participant's beneficiary calculated based on such
persons' attained ages in the years in which payments are required to begin,
using the mortality table prescribed for such purpose by the Secretary of the
Treasury. Additional special rules apply in determining the minimum amount which
is required to be distributed each year. Life expectancies of the participant
and the participant's spouse will be redetermined annually unless the plan
provides otherwise.
If a plan adopted by the Contractholder and communicated to CAC provides
for a qualified joint and survivor annuity as defined in ERISA then, unless the
participant waives such automatic form of payment with the consent of the
participant's spouse, the automatic annuity form under the Contract for each
participant to whom such provision is applicable will be an annuity for the life
of the participant which provides a survivor annuity for the life of the
participant's spouse which is not less than one-half, nor greater than the full
amount, of the annuity payable during the life of the participant, with respect
to a
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defined benefit plan, which is the actuarial equivalent of a single life annuity
with ten years certain for the life of the participant and, with respect to a
defined contribution plan, is the annuity which can be purchased with the
participant's individual account balance. Any participant who affirmatively
waives the automatic annuity form with the consent of his spouse may select any
of the options described above.
If Option 3 is elected, subsequent to the death of the participant no
payments are made to any person, and if Option 4 is elected, subsequent to the
death of the last to die of the participant and the participant's spouse no
payments are made to any person.
ANNUITY PAYMENTS
DETERMINATION OF AMOUNT OF THE FIRST MONTHLY VARIABLE ANNUITY PAYMENT
As of the date annuity payments are to begin, the value of a participant's
account is computed by multiplying the value of an Accumulation Unit on the
fifteenth day of the preceding calendar month (or the next working day if the
15th falls on a Saturday, Sunday or holiday) by the number of Accumulation Units
credited to the participant's account, and subtracting from the resulting figure
any premium tax that is applicable under state law to the purchase of the
participant's annuity. Such premium taxes range from 0 to 3%. Regardless of the
date on which premium taxes are deducted from the accounts of participants, such
taxes are remitted by CAC to applicable state taxing authorities once per
calendar year. Certain states provide for credits against premium tax
liabilities based upon CAC's ownership of properties or investments located
therein (none of which are assets of Separate Account (B)). In the event that
CAC is able to avail itself of such credits, the resulting saving is not passed
on to participants from whose accounts premium taxes have been deducted.
Each Contract contains tables setting forth the dollar amount of the first
monthly annuity payment which can be purchased by each $1,000. These tables vary
according to the type of Contract, the form of annuity selected by the
participant and the sex and age on the nearest birthday of the participant. The
tables are based on the 1951 Group Annuity Table projected 14 years with
projection scale C and with interest at the assumed investment rate of 3 1/2%.
Participants under the graded deduction Contract--403(b) Plan may also elect an
optional rate of 3%, 4%, 4 1/2% or 5%. The first monthly annuity payment for a
particular annuity form may be found by dividing the value of the participant's
individual account by $1,000 and multiplying this number by the annuity rate
from the applicable table.
DETERMINATION OF THE VALUE OF AN ANNUITY UNIT AND AMOUNT OF SECOND AND
SUBSEQUENT MONTHLY VARIABLE ANNUITY PAYMENTS
The dollar amount of the first monthly variable annuity payment, determined
as above, is divided by the monetary value of an Annuity Unit as of the date of
retirement to fix the number of Annuity Units represented by the annuity
benefit. The number of Annuity Units, so determined, remains fixed thereafter
throughout the payment period. The dollar amount of the second monthly variable
annuity payment, due as of the first day of the month following retirement, is
determined by multiplying the fixed number of Annuity Units by the monetary
value of an Annuity Unit as of the due date of the second payment. This same
procedure is then followed to determine the monetary value of each succeeding
monthly variable annuity payment.
On each Valuation Date, a net investment factor is determined from the
investment performance of the assets of Separate Account (B) during the period
since the last Valuation Date. Such factor is equal
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to the value of an Accumulation Unit at the end of the period, divided by the
value on the preceding Valuation Date, carried to the nearest one hundred
thousandth. The net investment factor is determined after the deduction for any
taxes and for investment advisory fees and services as described above.
The value of an Annuity Unit was established at $1.00000 ($1) on June 30,
1966. The monetary value of an Annuity Unit is redetermined for the entire month
as of the first day of each calendar month by multiplying the value of an
Annuity Unit on the first day of the preceding month by the ratio of the
Accumulation Unit value for the 15th day of the preceding month to the
Accumulation Unit value for the 15th day of the second preceding month, and
dividing the result by a monthly interest factor equivalent to the assumed net
investment rate (or the next working day if the 15th falls on a Saturday, Sunday
or holiday).
The dollar amount of each monthly payment under a variable annuity will
fluctuate with the changing value of an Annuity Unit. The Annuity Unit value
will go up or down each month, depending on whether the actual effective
investment return for that month is at an annual rate which is greater than or
less than the assumed investment rate.
EXAMPLES
The computation of the amounts payable under a variable annuity may be
illustrated by the following two examples, using unisex annuity tables. In each
case, assume a participant retired on January 1, 1999 at age 65. The participant
had on the date of retirement 15,000 Accumulation Units. The monetary value of
an Accumulation Unit as of December 15, 1998 was $20.010614. The total value of
the participant's account was therefore $300,159.21.
- 403(B) PLAN CONTRACT. Assume the participant selected Option
2--Life Ten Years Certain. See "Annuities--Annuity Options--403(b)
Plans". Both graded deduction and level deduction 403(b) Plan
Contracts provide an annuity rate of $6.34 for a participant age 65,
where Option 2 has been selected. The total value of the account
$300,159.21, was therefore divided by $1,000 and multiplied by the
annuity rate of $6.34 to obtain the initial monthly payment,
$1,903.01. (It is assumed that no premium tax was applicable in this
instance). Continuing this example, the monetary value of an Annuity
Unit on the date of retirement was $6.692787. This was divided into
$1,903.01 to obtain the quantity 284.337361 the number of Annuity
Units represented by this benefit. This number of Annuity Units will
remain fixed for the duration of the annuity payments. The second
monthly payment, to be made on February 1, 1999, would be found by
multiplying the number of Annuity Units by the monetary value of an
Annuity Unit on that date. This was $7.348846. The dollar amount of
the second payment would have been times 284.337361 or $2,089.55.
Each succeeding monthly payment for this annuity would be determined
in the same manner, being related in turn to the monetary value of
an Annuity Unit on the date the payment is due. Again, the value of
an Annuity Unit on that date will be found from the value on the
first day of the preceding month, adjusted for investment experience
and assumed interest for the period from the 15th day of the second
preceding month to the 15th day of the preceding month (or the next
working day if the 15th falls on a Saturday, Sunday or holiday).
- HR-10 PLAN CONTRACT. Assume the participant selected Option 1--Life
Ten Years Certain. The HR-10 Plan Contract provides an annuity rate
of $6.34 for a participant age 65, where Option 1 has been selected.
The total value of the account, $300,159.21, was therefore divided
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by $1,000 and multiplied by the annuity rate of to obtain the initial
monthly payment, $1,903.01. (It is assumed that no premium tax was
applicable in this instance). Continuing this example, the monetary
value of an Annuity Unit on the date of retirement was $6.692787. This
was divided into $1,903.01 to obtain the quantity 284.337361, the
number of Annuity Units represented by this benefit. This number of
Annuity Units will remain fixed for the duration of the annuity
payments. The second monthly payment, to be made on February 1, 1999,
would be found by multiplying the number of Annuity Units by the
monetary value of an Annuity Unit on that date. This was $7.348846. The
dollar amount of the second payment would have been 284.337361 times
$7.348846 or $2,089.55 . Each succeeding monthly payment for this
annuity would be determined in the same manner, being related in turn
to the monetary value of an Annuity Unit on the date the payment is
due. Again, the value of an Annuity Unit on that date will be found
from the value on the first day of the preceding month, adjusted for
investment experience and assumed interest for the period from the 15th
day of the second preceding month to the 15th day of the preceding
month (or the next working day if the 15th falls on a Saturday, Sunday
or holiday).
ASSUMED INVESTMENT RATE
The examples are based upon a assumed investment rate of 3 1/2%. Under the
03(b) Plan graded deduction Contract, the participant has the option to choose
an assumed investment rate of 3%, 3 1/2%, 4%, 4 1/2% or 5%. This option must be
selected at least 30 days prior to the date annuity payments are to begin. If an
assumed investment rate is not selected, then a 3 1/2% rate will be applied.
CAC, in special cases, may stipulate variable annuity premiums and reserves on
assumed investment rates other than 3 1/2% for HR-10 Plan Contracts. Each
special Contract of this character would have different monetary values for
Annuity Units.
A higher assumed investment rate will tend to result in a higher initial
payment but a more slowly rising series of subsequent payments (or a more
rapidly falling series of subsequent payments when Accumulation Unit values are
declining). A lower assumed investment rate would have the opposite effect. If
the actual net investment rate is equal to the assumed investment rate, the
annuity payments will be level. The assumed investment rate is an actuarial
technique rather than a guarantee of a rate of return, and no assurances can be
given that the actual net investment rate will equal or exceed the assumed
investment rate.
BENEFITS ON DEATH OR WITHDRAWAL
403(B) PLANS
Upon termination of Purchase Payments on his behalf, a participant under a
403(b) Plan will have the following options, subject to the conditions in the
Contract:
- The participant may elect to have his individual account applied to
provide annuity payments beginning immediately under the selected
annuity option.
- The participant may surrender his individual account and receive
the value of the account. The value of the account will be computed
from the value of an Accumulation Unit next to be determined after a
written request for surrender is received at the principal office of
CAC, CNA Plaza, Chicago, Illinois 60685. Payment will be made within
seven days thereafter,
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without termination charge. Payments upon redemption may be more or less
than the original cost of the Accumulation Units.
- The participant may leave his individual account in force under the
Contract until his required beginning date (generally the April 1
following the later of the year in which he reaches age 70 1/2 or,
if he is not a Five Percent Owner with respect to the year he or she
reaches age 70 1/2, the year in which he retires) and the account
will continue to participate in the investment results of Separate
Account (B). At his required beginning date, the participant must
take an annuity or surrender his account and receive its value.
- If the individual participant moves to another employer which has
similar group annuity contract in force with CAC, his individual
account may be transferred to the other group annuity contract.
Federal income taxes may be withheld from the taxable portion of any amount
distributed.
On the death of a participant prior to retirement, the value of his
individual account will be paid to his beneficiary in a single sum; or, if the
beneficiary is the participant's surviving spouse, it may be left in Separate
Account (B) until the date the participant would have attained age 70 1/2; or it
may be applied under one of the annuity options under the Contract to provide a
lifetime annuity on a variable basis, providing the initial monthly annuity
payment is at least $25 in amount. The participant's entire interest must,
however, be distributed within five years after his death unless the beneficiary
is his spouse or if the beneficiary takes the benefit in the form of a lifetime
annuity that begins by the end of the year that contains the first anniversary
of the participant's death. In general, all death benefits are taxable as
ordinary income when received by the designated beneficiary or by the estate;
however, the participant's spouse may be eligible to elect to defer taxation on
such death benefit to the extent the spouse directs a rollover to an individual
retirement plan or makes a "tax-free" rollover contribution of such death
benefit (including the amount of taxes withheld on such benefit) within sixty
days after receipt thereof to an individual retirement plan.
HR-10 PLANS
Under all plans except certain profit sharing plans, death benefits in the
form of a survivor annuity will generally be paid to the surviving spouse of a
vested or partially vested participant if the participant was married for at
least one year as of the date of his death (or less if the HR-10 Plan so
provides), unless the participant waives such a spousal annuity and his spouse
consents. The monthly amount of the spousal annuity will be the amount the
surviving spouse would have received under a qualified joint and survivor
annuity as defined in ERISA if the participant had retired on the day before his
death (or, in the case of a participant who dies before he became eligible to
retire, the amount the surviving spouse would have received under such an
annuity if the participant had survived to the earliest retirement age under the
plan, retired, and died the day after such retirement). Under certain defined
contribution plans, the monthly amount of the spousal annuity is the amount that
would be provided under an annuity purchased with 50% of the participant's
individual account under the Contract. Under certain profit sharing plans, the
surviving spouse to whom a participant was married for at least one year on the
date of his death (or less if the HR-10 Plan so provides) will receive the
entire value of the participant's individual account under the Contract unless
the surviving spouse consents to another named beneficiary.
For participants who are unmarried or who were married less than a year (or
other applicable period under the HR-10 Plan) when they died, and for other
participants whose spouses consent to an alternative
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<PAGE> 36
form of distribution or to another named beneficiary, in the event of the death
of a participant prior to retirement, the beneficiary currently designated by
the participant will be entitled to the entire value of his individual account
under the Contract. The monetary value of his account will be determined at the
Valuation Date next following the date the notice of death is received at the
principal office of CAC, CNA Plaza, Chicago, Illinois 60685. Payments upon death
or withdrawal may be more or less than the total of the original purchase
payments.
If permitted by the plan, the beneficiary may elect to have the value
applied to provide a variable income to the beneficiary under rates set forth in
the Contract.
On the withdrawal of a participant from the plan prior to retirement due to
a termination of employment or to a termination of the plan itself, the
following options are available:
(a) A participant may, regardless of age, have his individual account
applied to provide a variable annuity option under the Contract,
subject to the minimums set forth therein and to the requirement
that the participant's spouse, if any, must consent in writing to
the distribution.
(b) A participant may, regardless of age, surrender his individual
account and receive the value of the account computed as of the
Valuation Date next after the date the request for surrender is
received by CAC, subject to spousal consent as described in
subparagraph (a) above if required under the Plan.
(c) A participant may, if his interest in Separate Account (B) on the
date of withdrawal is at least $2,000, allow his individual account
to remain in force under the Contract, and his individual account
will continue to participate in the investment results of Separate
Account (B).
On subsequent retirement, such participant may, regardless of age, begin to
receive annuity payments under the option selected. At any time in the interim,
such participant may instead surrender his individual account in accordance with
(b) above.
In lieu of the above options, and if permitted under the plan, any
participant may elect to have his individual account transferred to a fixed
annuity contract, whereupon options similar to those above will apply. There may
be a termination charge of 2% of the pro rata amount of the Purchase Payments
received under the Contract relating to the withdrawal before withdrawal with
respect to a lump sum withdrawal of part or all of the interest of a
Contractholder in a Contract.
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FEDERAL TAXES
FEDERAL TAX TREATMENT OF PARTICIPANTS
403(B) PLANS. Amounts representing contractually permitted Purchase
Payments under 403(b) Plans made on behalf of participants are not recognizable
as taxable income to participants at the time they are made. However, Purchase
Payments made pursuant to salary reduction agreements will be subject to Social
Security ("FICA") taxes and Federal Unemployment Compensation ("FUTA") taxes.
Increases in the value of a participant's individual account are not taxable to
the participant until annuity payments are received by him. Any Purchase
Payments in excess of applicable limitations under the Internal Revenue Code are
includable in income.
All annuity payments received after retirement will be based on realized
and unrealized capital gains as well as amounts representing purchase payments
on behalf of a participant and the participant's pro rata share of investment
income. All such annuity payments will be taxed under Section 72 of the Internal
Revenue Code as ordinary income in the year of receipt to the extent that they
exceed the participant's Investment in the Contract. The Investment in the
Contract is the amount of Purchase Payments made by or on behalf of such
participant which are a part of his or her taxable income in the year in which
such payments are made; i.e., those which are not deductible. In general, the
participant's Investment in the Contract is divided by the expected number of
payments to be made under the Contract. The amount so computed constitutes the
Excludable Amount, which is the amount of each annuity payment considered a
return of capital in each year and therefore not taxable. The participant may
not recover tax-free more than his Investment in the Contract. Thus, if a
participant's payments continue to be made longer than expected, all amounts
received are taxable after the Investment in the Contract is recovered.
Similarly, if a participant dies before recovering his Investment in the
Contract, his estate is entitled to a deduction in the participant's last
taxable year for the unrecovered amount.
The rules for determining the Excludable Amount are contained in Section 72
of the Internal Revenue Code, and require adjustment for payments required under
the Contract to be made, regardless of the participant's death, for a term of
years, and in the case of a joint and survivor annuity payable to a named
beneficiary following the death of the participant.
Should the participant elect to receive his termination value in a lump sum
in lieu of annuity payments, the amount received in excess of his Investment in
the Contract will be taxed as ordinary income in the year received. If any
portion of the balance to the credit of a participant is payable to the
participant in an Eligible Rollover Distribution, the participant or his
surviving spouse will defer taxation to the extent he or she (1) has such
distribution paid directly to an individual retirement plan or another tax-
sheltered annuity which accepts such rollovers or (2) makes a "tax-free"
rollover contribution equal to the amount of such distribution received plus the
amount of taxes withheld on such distribution within sixty days after receipt of
the distribution to an individual retirement plan or another tax sheltered
annuity. (No direct or indirect rollover is permitted to a qualified pension or
profit sharing plan and a direct rollover may not be permitted if the amount of
the distribution is less than $200). All taxable distributions are generally
Eligible Rollover Distributions except annuities paid over life or life
expectancy, installments for a period of ten years or more and required minimum
distributions under Section 401(a)(9) of the Internal Revenue Code.
LIMITS ON CONTRIBUTIONS. The maximum deduction for Employer contributions
made to a qualified defined contribution plan is limited to 25% of compensation
(15% of compensation in the case of a stock bonus or profit sharing plan).
Nondeductible contributions are 10% excise-taxable to the Employer subject
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to certain limitations. This excise tax does not apply to tax-exempt Employers
except with respect to unrelated business income tax. However, in general, the
sum of purchase payments by the Employer, forfeitures of other plan
participants, salary reduction contributions or elective deferrals, if any, and
an employee's voluntary nondeductible contributions may not exceed the lesser of
25% of compensation or $30,000 for any year. For certain 403(b) Plans, these
limitations may be modified at the election of the participant in the 403(b)
Plan.
For HR-10 Plans, nondeductible voluntary Purchase Payments are permitted to
be made by participants if the plan so provides, but only where such privilege
is extended to all participants. Nondeductible voluntary Purchase Payments may
be made, but are subject to certain nondiscrimination requirements and plan
limits which vary from plan to plan. Additionally, elective deferrals may be
made, if permitted by the plan, in an annual amount of up to $10,000. For 403(b)
Plans, the annual limit on salary reduction contributions is $9,500. These
contributions are subject to certain non-discrimination rules.
HR-10 PLANS. For a self-employed individual, compensation may generally be
defined as earned income, determined after the plan contribution. Only the first
$160,000 of a person's compensation ($235,840 for certain participants in plans
maintained by state or local governments that are amended to reflect the
compensation limitation applicable to all other participants) may be taken into
account. Plans may specify that purchase payments be made at a rate less than
25%, and profit sharing plans may provide for the rate of contribution to be
established (as described below) each year. If the plan is a top heavy plan (as
described below), generally an annual purchase payment of 3% of compensation
must be made for all non-key employees.
The maximum deduction for Purchase Payments to a defined benefit plan is
determined annually by an actuary, subject to minimum funding standards
established by the Internal Revenue Code. Generally, no purchase payments may be
made to fund a normal retirement benefit in excess of 100% of compensation or,
if less, $130,000 per year for an individual beginning at his Social Security
retirement age. If it is a top heavy defined benefit plan, certain minimum
benefits must be provided for non-key employees. The $130,000 per year limit is
prorated if the individual has less than ten years of participation in the plan
and is reduced actuarially if benefits begin before Social Security retirement
age.
Special rules apply to all plans (corporate or self-employed) which
primarily benefit the Employer's key employees ("top heavy plans"). A plan is a
top heavy plan (1) if it is a defined contribution plan and the value of the
aggregate accounts of key employees is more than 60 percent of all the value of
the aggregate accounts under the plan for all employees, or (2) if it is a
defined benefit plan and the present value of the cumulative accrued benefits
under the plan for key employees is more than 60 percent of the present value of
the cumulative accrued benefits under the plan for all employees. All plans of
an Employer in which a key employee is a participant and all plans required to
be aggregated to satisfy the qualification requirements of Section 401(a) of the
Internal Revenue Code must be aggregated in determining whether a plan is top
heavy. If the aggregation group, taken as a whole, is top heavy, then each plan
in the group is a top heavy plan. Any other tax qualified plans of the Employer
that meet certain rules may, but need not be, so aggregated. In general, an
employee is considered a key employee if he is a 5% Owner or if he is (or was in
any of the 4 preceding years) (1) an officer of the Employer with annual
compensation of more than $65,000, (2) one of the 10 employees with annual
compensation of more than $30,000 who owns the largest interests in the
Employer, or (3) an owner of 1 percent or more of the stock, profits or capital
of the Employer which owner has annual compensation of more than $150,000.
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For limitation years beginning prior to January 1, 2000, if an Employer
maintains a defined contribution plan and a defined benefit plan, there are
aggregate limitations on the benefits and contributions that may be provided
under the combination of plans. The limitations are more restrictive for top
heavy plans and are most restrictive for super top heavy plans (that is, defined
contribution plans where more than 90% of aggregate account balances are for key
employees and defined benefit plans where more than 90% of the cumulative
accrued benefits are for key employees).
DISTRIBUTIONS--HR-10 PLANS. Similar treatment is accorded to self-employed
individuals and common-law employees with respect to distributions from a plan.
A lump sum distribution in a single taxable year after attainment of age 59 1/2,
or on account of death, or because of disability of a self-employed individual
or separation of a common-law employee from the service of the Employer, is
taxable in the following manner: Employee non-deductible contributions are
received tax-free (distributions are deemed to consist proportionally of
tax-free and taxable amounts, unless CAC has a separate record of amounts
attributable to pre-1987 non-deductible employee contributions, in which case
those amounts may be distributed tax free). Either a self-employed individual or
a common-law employee, if such person is over 59 1/2 and has been a participant
for at least five taxable years before the year of distribution, may elect to be
taxed on the distribution (other than accumulated deductible qualified voluntary
contributions) at the rate applicable to a single taxpayer, subject to special
five-year forward income averaging. A person may make such an election only
once. Special five-year averaging ceases to be available for years beginning
after December 31, 1999. For participants who were age 50 by January 1, 1986,
five year forward averaging is not available, but an election may be made to
preserve the federal income tax treatment of the distribution in effect prior to
1987, i.e., ten-year forward income averaging (using 1986 tax rates) may be used
instead of five-year averaging and the portion of the distribution attributable
to pre-1974 participation is taxable as long term capital gain at a 20% rate.
Alternatively, if any portion of the balance to the credit of a participant is
payable to the participant in an Eligible Rollover Distribution, a participant
or his or her surviving spouse may be eligible to defer taxation on such
distribution to the extent he or she (1) has such distribution paid directly to
an individual retirement plan or another qualified plan which accepts such
rollovers or (2) makes a "tax-free" rollover contribution equal to the amount of
such distribution received plus the amount of taxes withheld on such
distribution within sixty days after receipt of such distribution to an
individual retirement arrangement or to another qualified plan. A direct
rollover may not be permitted if the amount of the distribution is less than
$200. All taxable distributions are generally Eligible Rollover Distributions
except annuities paid over life or life expectancy, installments for a period of
ten years or more, required minimum distributions under Section 401(a)(9) of the
Internal Revenue Code, and certain hardship distributions from a 401(k) plan.
DISTRIBUTIONS--403(B) AND HR-10 PLANS. Distributions made to any
participant in an HR-10 Plan or 403(b) Plan prior to attainment of age 59 1/2
(unless the distribution is made on account of death, disability, separation
from service where the separation occurred during or after the calendar year in
which the participant attains age 55, certain medical expenses within the
deductible limits of the Internal Revenue Code, or as part of a series of annual
or more frequent annuity payments made after separation from service and at
least over the participant's life, or if the distribution is made to an
alternate payee pursuant to a QDRO) will generally be subject to a 10% tax in
addition to the otherwise applicable federal income tax. There is also a 50%
excise tax on the amount by which a distribution is less than the required
minimum distribution.
The withholding of federal income taxes depends upon whether a distribution
is an Eligible Rollover Distribution. There is mandatory income tax withholding
of 20% of the amount of any Eligible Rollover
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Distribution that is not paid in a direct rollover to another qualifying plan;
if such distribution is paid in a direct rollover to another qualifying plan,
there is no income tax withholding obligation. Federal income taxes will be
withheld from the taxable portion of any distribution that is not an Eligible
Rollover Distribution. Additional withholding will not be made for the 10%
additional tax on premature distributions; however the recipient may be
responsible for paying estimated taxes.
FEDERAL TAX STATUS OF SEPARATE ACCOUNT (B)
Separate Account (B) is not qualified as a "regulated investment company"
under subchapter M of the Internal Revenue Code, as it is not taxed separately
from CAC. While Separate Account (B) is part of the total operations of CAC,
under existing federal income tax law, no taxes are payable on the investment
income and realized capital gains which are reinvested in Separate Account (B)
and which are taken into account in determining the value of the Accumulation
Unit and the value of the Annuity Unit and which are not distributed to
participants except as part of annuity payments.
Both investment income and realized capital gains are accumulated and
reinvested.
The investment results credited to a participant's account are not taxable
to the participant until benefits are received by him. At that time, there is no
distinction made between investment income and realized and unrealized gains in
determining either the amount of the participant's benefits, or the taxes paid
by the participant on these benefits. All payments generally are taxable to the
recipient as ordinary income as received. A participant may wish to consult a
tax adviser for more complete information.
EMPLOYEE RETIREMENT INCOME SECURITY ACT
ERISA contains many provisions which may apply to certain annuity plans
described under Sections 403(b) and 401 of the Internal Revenue Code, including
those offered hereunder. Employers and Contractholders may be subject to many
requirements and duties, including reporting and disclosure requirements,
requirements regarding the form and timing of benefit payments, fiduciary
responsibilities (including investment responsibilities) and prohibitions on
certain transactions involving or affecting the assets of the plan. Failure to
comply with ERISA may result in exposure of the Contractholder or Employer to
civil and criminal sanctions.
Certain modifications in the Contracts described in this prospectus may be
required from time to time by ERISA or other laws. Such modifications may be
made by CAC in accordance with provisions in the Contracts which permit CAC to
amend the Contracts to conform to applicable law. Contractholders and, in the
case of HR-10 Plans, Employers will be informed of any such modifications.
As set forth in this prospectus, the HR-10 Plan Contracts described herein
are offered solely in connection with certain retirement plans which are
qualified under Section 401 of the Internal Revenue Code. These plans include
not only individually designed plans of various employers or associations of
employers but also certain plans which are generally described as master or
prototype plans. In general, master or prototype plans are plans sponsored by an
organization such as an insurance company or trade association. The sponsoring
organization obtains a master or prototype plan opinion letter from the Internal
Revenue Service which indicates that the form of the plan meets the requirements
of Section 401 of the Internal Revenue Code. Once the sponsoring organization
has obtained a master or prototype plan opinion letter, Employers may, in
certain cases, adopt the master or prototype plan form as their own
tax-qualified plan with the benefit of a prior Internal Revenue Service approval
of the master or prototype plan form. Prototype plans sponsored by CAC have been
adopted by some Employers.
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This prospectus does not furnish detailed information concerning the
requirements of ERISA or the Internal Revenue Code, and those requirements may
vary depending upon the particular circumstances regarding each Employer and
each Contractholder. Also, the foregoing descriptions under "Federal Tax
Treatment of Participants" apply under federal income tax laws in effect on
April 30, 1999, and the federal tax treatment of Participants may change. It is
therefore recommended that Employers, Contractholders and potential Purchasers
consult with counsel or other competent advisers regarding the impact of ERISA
and The Internal Revenue Code.
LEGAL MATTERS
Separate Account (B) is not involved in any pending legal proceedings. CAC
is involved in litigation arising in the ordinary course of its business.
Because of the nature of litigation, it is not possible to predict the outcome
of these actions; however, in the opinion of the management of CAC, such
litigation will not materially adversely affect the business or financial
position of CAC or Separate Account (B) or the ability of CAC to perform its
obligations under the Investment Advisory Agreement.
Legal matters in connection with the offering made hereby have been passed
upon by Lynne Gugenheim, Vice President and Associate General Counsel of CAC.
REPORTS TO PARTICIPANTS
Semi-annually, CAC will provide a financial report to each participant
covering the most recent six months or calendar year, as applicable. These
reports will include general information on Separate Account (B), including a
schedule of its investments in securities as of the close of the applicable
period. Also provided will be a statement of the participants' equity in
Separate Account (B), showing the changes therein for the period reported on
Reports issued as of the close of a calendar year will contain financial
statements which have been audited by Separate Account (B)'s independent
auditors.
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FINANCIAL STATEMENTS
The following financial statements of Separate Account (B), the notes
thereto and the Independent Auditors' Report with respect thereto are
incorporated into the Statement of Additional Information by this reference from
Separate Account (B)'s 1998 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1998 Annual Report to Participants may be
obtained, at no charge, by contacting in writing or by telephone:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the 1998 Annual Report to Participants and other information about
Separate Account (B).
Financial statements of CAC, the notes thereto and the Independent
Auditors' Report with respect thereto will be filed supplementally. Such
financial statements are included therein solely for the purpose of informing
investors as to the financial position and operations of CAC and are not
financial statements of Separate Account (B).
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INDEPENDENT AUDITORS' REPORT
[TO BE FILED BY AMENDMENT]
41
<PAGE> 44
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Glossary.................................................... 2
Management of Separate Account (B).......................... 3
Investment Advisory Services................................ 4
Impact of Year 2000 on Separate Account (B)................. 6
Securities Custodian........................................ 7
Independent Auditors........................................ 7
Brokerage Allocations....................................... 7
Calculation of Performance Data............................. 7
Underwriting................................................ 8
Financial Statements........................................ 8
</TABLE>
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GLOSSARY
We have capitalized some of the terms used in this prospectus. To help you
understand these terms, we have defined them in this glossary.
Accumulation Unit: an accounting unit used to measure the value of a
Participant's account before annuity payments begin. The term "equity unit",
which is used in some outstanding Contracts, is synonymous with "accumulation
unit".
Administrative Service Agreement: an agreement between CAC and Separate Account
(B) under which CAC provides certain administrative services for Separate
Account (B).
Annuitant: the person on whose life annuity payments are based.
Annuity: a series of payments for life; with either a minimum number of
payments or a determinable sum guaranteed; or for the joint lifetime of the
person receiving payments and another person and thereafter during the lifetime
of the survivor.
Annuity Unit: an accounting unit used to calculate the amount of annuity
payments.
CAC: Continental Assurance Company.
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five member board in which the supervision of Separate Account (B)
is vested.
Contract: a group variable annuity contract described by this prospectus.
Contractholder: the entity to which the Contract is issued, usually the
employer for 403(b) Plans, and either (a) the Trustee of a trust for the benefit
of self-employed individuals and their employees, or (b) an association of
self-employed individuals for HR-10 Plans. References in this prospectus to
"you" or "your" refer to Contractholders.
Eligible Rollover Distribution: distribution as described in Section 402(c)(2)
and Section 402(c)(4) of the Internal Revenue Code from a 403(b) Plan or a HR-10
Plan.
Employer: as used in HR-10 Plan Contracts, a sole proprietor or a partnership
which has adopted or joined, or which proposes to adopt or join, a plan, master
plan, or master plan and trust which includes Participants who are self-employed
persons and which qualifies under Section 401 of the Internal Revenue Code.
ERISA: the Employee Retirement Income Security Act of 1974, as amended.
Excludable Amount: as used in HR-10 Plan Contracts, an amount excludable from
gross income under the provisions of the Internal Revenue Code.
Five Percent Owner or 5% Owner: a person who, at any time during a plan year or
any of the four preceding plan years owns or has owned (or is considered as
owning or as having owned through the application of certain attribution rules)
(a) more than 5% of the outstanding stock of an Employer which is a corporation
or stock possessing more than 5% of the total combined voting power of such
corporation, or (b) if the Employer is not a corporation, more than 5% of the
capital or more than a 5% interest in the profits of the Employer.
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Fixed Annuity: an annuity providing for payments which remain fixed throughout
the payment period and which do not vary with the investment experience of
Separate Account (B).
403(b) Plan: a plan that provides for deferred income tax treatment for annuity
purchase plans adopted by public school systems and certain tax-exempt
organizations under Section 403(b) of the Internal Revenue Code.
HR-10 Plan: a plan offered for use by certain self-employed individuals and
their employees which qualifies under Section 401 of the Internal Revenue Code.
Internal Revenue Code: the Internal Revenue Code of 1986, as amended.
Investment Advisory Agreement: an agreement between CAC and Separate Account
(B) under which CAC acts as the investment adviser to Separate Account (B).
Investment in the Contract: as used in HR-10 Plan Contracts, the investment in
the Contract, as defined in Section 72 of the Internal Revenue Code.
Net Purchase Payment: the amount applied to the purchase of Accumulation Units,
which is equal to the Purchase Payment less the deduction for sales and
administrative charges.
1940 Act: the Investment Company Act of 1940, as amended.
Participant: a person who has an interest in Separate Account (B) because such
person makes Purchase Payments or they are made for such person.
Purchase Payments: amounts paid to CAC by or for a Participant.
Separate Account (B): Continental Assurance Company Separate Account (B), which
consists of assets set aside by CAC in an account which does not contain the
investment experience of other assets or liabilities of CAC.
Valuation Date: a date on which CAC determines the value of Separate Account
(B).
Variable Annuity: an annuity providing for payments varying in amount according
to the investment experience of Separate Account (B).
44
<PAGE> 47
B logo
Group
Variable
Annuity
Contracts
PROSPECTUS
Dated: April 30, 1999
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
Y57-835LL
<PAGE> 48
STATEMENT OF
ADDITIONAL
INFORMATION
GROUP
VARIABLE B LOGO
ANNUITY
CONTRACTS
This Statement of Additional Information provides certain information about
Continental Assurance Company Separate Account (B) ("Separate Account (B)"),
which is a separate account created by Continental Assurance Company ("CAC"),
and certain Group Variable Annuity Contracts sold by CAC. This Statement of
Additional Information is not a Prospectus and should be read in conjunction
with the Prospectus of Separate Account (B), dated April 30, 1999.
For a free copy of the Prospectus, please call or write us at:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the Prospectus and other information about
Separate Account (B).
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: APRIL 30, 1999
<PAGE> 49
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS STATEMENT OF
ADDITIONAL INFORMATION AND IN THE PROSPECTUS. NEITHER CONTINENTAL ASSURANCE
COMPANY OR SEPARATE ACCOUNT (B) HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT THAN THAT WHICH IS SET FORTH IN THIS STATEMENT OF
ADDITIONAL INFORMATION AND THE PROSPECTUS. THIS STATEMENT OF ADDITIONAL
INFORMATION DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE TO PURCHASE
ANY SECURITIES. SUCH OFFERS MAY BE MADE ONLY BY THE PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Glossary.................................................... 2
Management of Separate Account (B).......................... 3
Investment Advisory Services................................ 4
Impact of Year 2000 on Separate Account (B)................. 6
Securities Custodian........................................ 7
Independent Auditors........................................ 7
Brokerage Allocations....................................... 7
Calculation of Performance Data............................. 7
Underwriting................................................ 8
Financial Statements........................................ 8
</TABLE>
GLOSSARY
The following terms have the indicated meanings when used in this Statement
of Additional Information:
Accumulation Unit: an accounting unit used to measure the value of a
participant's account before annuity payments begin. The term "equity unit",
which is used in some outstanding Contracts, is synonymous with "accumulation
unit".
CAC: Continental Assurance Company.
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five member board in which the supervision of Separate Account (B)
is vested.
Contract: a group variable annuity contract described in this Statement of
Additional Information.
Investment Advisory Agreement: an agreement between CAC and Separate Account
(B) under which CAC acts as the investment adviser to Separate Account (B).
1940 Act: the Investment Company Act of 1940, as amended.
Separate Account (B): Continental Assurance Company Separate Account (B), which
consists of assets set aside by CAC, the investment experience of which is kept
separate from that of other assets of CAC.
Variable Annuity: an annuity providing for payments varying in amount in
accordance with the investment experience of Separate Account (B).
2
<PAGE> 50
MANAGEMENT OF SEPARATE ACCOUNT (B)
OFFICERS AND MEMBERS OF THE COMMITTEE
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH SEPARATE PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE ACCOUNT (B) DURING PAST FIVE YEARS
---------------- --- ------------------ -----------------------
<S> <C> <C> <C>
Richard W. Dubberke*........ 61 Vice President, Vice President and Manager of Corporate Bond
CNA Plaza Treasurer and Investments of CAC and Casualty(1); Vice President,
Chicago, Illinois 60685 Member of Committee Treasurer and Director of CNA Income Shares, Inc.
(closed-end investment company) ("CIS").
Richard T. Fox.............. 61 Member of Committee Independent Financial Consultant since October 1995;
661 Sheridan Road Chief Executive Officer of 21st Century Environmental
Winnetka, Illinois 60093 Management, Inc. (environmental recycling company)
("21EMI") from August 1994 to September 1995(2);
President of 21EMI from 1993 to August 1994.
Marilou R. McGirr*.......... 46 Chairman of Committee Vice President of CAC and Casualty since January
CNA Plaza and Member of 1997(1); Assistant Vice President of CAC and Casualty
Chicago, Illinois 60685 Committee from January 1995 to January 1997; Director, Money
Desk, of CAC and Casualty from January 1995 to
January 1997. Vice President and Assistant Treasurer
of CIS since April 1992.
William W. Tongue........... 83 Member of Committee Professor Emeritus of Economics and Finance,
212 Shoreline Drive University of Illinois at Chicago.
Park Ridge, Illinois 60068
Peter J. Wrenn.............. 63 Member of Committee President of Hudson Technology, Inc. (tooling and
915 Columbian Avenue Manufacturing).
Oak Park, Illinois 60302
Lynne Gugenheim*............ 39 Secretary of Manager of Investment Company Administration for CAC;
CNA Plaza Committee Vice President and Associate General Counsel of CAC
Chicago, Illinois 60685 and Casualty since January 1996(1). Secretary of CAC
and CIS since April 1995. From November 1994 to
December 1995, Assistant Vice President and Assistant
General Counsel of CAC and Casualty. From January
1991 to November 1994, Counsel of CAC and Casualty.
</TABLE>
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act), by
virtue of his or her employment with CAC.
(1) CNA Financial, CNA Plaza, Chicago, Illinois 60685, owns all of the
outstanding stock of Casualty, CNA Plaza, Chicago, Illinois 60685, which,
in turns, owns all of the outstanding stock of CAC.
(2) Prior to December 27, 1996 CLE, Inc., a wholly owned indirect subsidiary
of Casualty, owned 63% of the non-voting preferred stock of 21EMI. On
December 27, 1996, CLE, Inc. sold all of the 21EMI stock that it owned to
a third party unaffiliated with Casualty. Since December 27, 1996, CLE,
Inc. has had no interest in 21EMI.
No Committee Member or officer receives any remuneration from Separate
Account (B). CAC pays Committee Members a fee for their service. The Committee
Member's fee is currently $10,000 per annum. CAC also reimburses Committee
Members for expenses incurred in attending meetings of the Committee. However,
no payments of fees or expenses are made to any Committee Member who is an
officer or employee of or special consultant to CAC, CNA Financial or any of
their affiliated companies. Therefore, neither Mr. Dubberke nor Ms. McGirr has
received or will receive any such payments. During 1998, there was no
reimbursement payable for expenses incurred by Committee Members.
3
<PAGE> 51
The payment of fees to Committee Members is one of the items of expense for
which CAC receives a monthly investment advisory fee (at the annual rate of 0.5%
of the average daily net asset value of Separate Account (B)) from Separate
Account (B) pursuant to CAC's Investment Advisory Agreement with Separate
Account (B).
The following table sets forth information regarding the compensation of
all Committee Members of Separate Account (B) for services rendered in 1998 to
Separate Account (B) and to funds deemed to be included in the same fund complex
as Separate Account (B). A "fund complex" for this purpose means any two or more
funds that hold themselves out to investors as related companies or that have a
common or related investment adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM FUND AND FUND
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS COMPLEX
NAME OF PERSON, POSITION FROM FUND FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
------------------------ ------------ ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Richard W. Dubberke,
Committee Member*............ None None None None
Richard T. Fox,
Committee Member............. $10,000 None None 10,$000
Marilou R. McGirr,
Committee Member*............ None None None None
William W. Tongue,
Committee Member............. $10,000 None None 10,$000
Peter J. Wrenn,
Committee Member............. $10,000 None None 10,$000
</TABLE>
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act).
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 26, 1999, no person was deemed to be in control of Separate
Account (B) or was known by either CAC or Separate Account (B) to own of record
or beneficially 5% or more of the Accumulation Units of the Separate Account.
None of the officers or Members of the Committee of Separate Account (B) own any
Accumulation Units of Separate Account (B).
INVESTMENT ADVISORY SERVICES
All of the voting securities of CAC are owned by Casualty, a stock casualty
insurance company organized under the Illinois Insurance Code, the home office
of which is located at CNA Plaza, Chicago, Illinois 60685. All of the voting
securities of Casualty are owned by CNA Financial, a Delaware corporation, CNA
Plaza, Chicago, Illinois 60685. Loews Corporation, a Delaware corporation, 667
Madison Avenue, New York, New York 10021-8087, with interests in insurance,
hotels, watches and other timing devices, drilling rigs and tobacco, owned
approximately 85% of the outstanding voting securities of CNA Financial as of
December 31, 1998. Laurence A. Tisch, the Chairman of the Board, Co-Chief
Executive Officer and a director of Loews Corporation and Chief Executive
Officer and a director of CNA Financial and his brother, Preston R. Tisch,
President, Co-Chief Executive Officer and a director of CNA Financial and Loews
Corporation, owned, in the aggregate, approximately 31% of the outstanding
common stock of Loews Corporation as of December 31, 1998. Therefore, they may
be deemed to be parents of
4
<PAGE> 52
Loews Corporation, and thus of CNA Financial Corporation and CAC, within the
meaning of the federal securities laws.
Pursuant to the Investment Advisory Agreement, CAC makes quarterly
withdrawals from Separate Account (B) at an annual rate of 0.5% of the average
daily net asset value of Separate Account (B) for providing investment advisory
services, and at an additional annual rate of 0.33% of the average daily net
asset value of Separate Account (B) as a service fee for bearing the following
expenses of Separate Account (B): costs and expenses incident to compliance with
federal and state regulations applicable to any public offering of Accumulation
Units in Separate Account (B); expenses related to printing and distributing
prospectuses and statements of additional information to persons who, at the
time of such distribution, are participants in Separate Account (B); SEC
registration; charges and expenses for custodian services (other than charges
and expenses relating to the lending of portfolio securities); charges and
expenses of independent auditors and legal counsel; expenses of meetings of the
participants and of the Committee (including the preparation and distribution of
proxy statements and semi-annual and annual reports); and bookkeeping and
postage expenses (other than postage expenses relating to the mailing of
prospectuses and statements of additional information to persons who, at the
time of such mailing, are not participants in Separate Account (B) or relating
to the mailing of sales literature). In the event that the total amount of the
expenses covered by the service fee is less than the amount of such service fee,
the difference will accrue to CAC as a profit. If such expenses are greater than
the fee, the difference will accrue to CAC as a loss. Under its Investment
Advisory Agreement with Separate Account (B), CAC is permitted to make such
withdrawals on a monthly basis instead of on a quarterly basis, but to date CAC
has nevertheless consented to being paid quarterly. Separate Account (B) has
incurred the following investment advisory and service fees payable to CAC:
1998, $1,365,230; 1997, $1,180,321; and 1996, $933,963. Separate Account (B)
pays all expenses incurred in connection with the lending of portfolio
securities.
The Investment Advisory Agreement may be terminated at any time by either
party, without the payment of any penalty, on sixty days' prior written notice.
The Investment Advisory Agreement continues in effect from year to year so long
as it is approved at least annually by the vote of a majority of the Committee
Members who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting upon such approval.
In the event the Investment Advisory Agreement is terminated and another
investment adviser cannot be found, the assets of Separate Account (B) may be
liquidated. In the event of such liquidation, the interest of any retired
participant in Separate Account (B) will be transferred by CAC to its regular
reserves, and CAC will pay a fixed annuity for the lifetime of the participant
in the same form as the variable annuity held. Participants who are not retired
will be offered an option to receive a lump sum settlement or to receive an
immediate or deferred fixed annuity. Under Section 1035(a)(3) of the Internal
Revenue Code of 1986, no gain or loss will be recognized on the exchange of a
variable annuity for the fixed annuity. Liquidation of Separate Account (B) upon
termination of the Investment Advisory Agreement may have adverse federal income
tax consequences for a participant electing to receive a lump sum settlement
since the full amount of the settlement received will be taxable as ordinary
income realized in the year of receipt.
Under separate agreements with Separate Account (B), CAC acts as principal
underwriter and performs all sales and administrative functions relative to
Separate Account (B) and the variable annuity contracts of Separate Account (B).
The amounts earned by CAC for sales and administrative functions rendered to
Separate Account (B) for each of the years 1998, 1997, and 1996 were $10,428,
$11,417, and
5
<PAGE> 53
$12,704, respectively. The agreement covering sales and administrative services
does not cover the services covered by the Investment Advisory Agreement.
CAC has two affiliates, CNA Investor Services, Inc. ("Investor Services"),
(the successor by merger to CNA Securities Corp.), and Hedge Investor Services,
Inc. ("Hedge Services") which are members of the National Association of
Securities Dealers, Inc. CAC and Separate Account (B) are parties to an
agreement under which Separate Account (B) receives credit from CAC in the form
of a reduction of the investment advisory fee to the extent that services of
Investor Services are utilized in connection with Separate Account (B)'s
portfolio transactions. In 1975, the securities laws were amended to abolish
fixed brokerage commissions on securities transactions. Prior to such changes,
it was mutually advantageous to Separate Account (B) and to CNA Securities Corp.
for the services of CNA Securities Corp. to be utilized in connections with
certain of Separate Account (B)'s portfolio transactions. The advantage of such
arrangement was reduced significantly by the above-mentioned changes in the
securities laws. Separate Account (B) had no transactions with either Investor
Services or Hedge Services during 1998, or with Investor Services during 1997
and 1996.
IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account (B) does not
maintain any systems. Instead, it relies on the systems of its investment
advisor, CAC, and third party vendors. Separate Account (B) has a plan under
which it reviews periodically the progress that these parties are making on this
issue. To date, CNA Financial, on behalf of CAC, has certified internally as
Year 2000 ready all of the systems used by CAC in its duties as investment
advisor and administrative agent for Separate Account (B). Based on its current
assessment, CNA Financial estimates that the total cost to replace and upgrade
its systems to accommodate Year 2000 processing will be approximately $60 to $70
million. As of December 31, 1998, CNA Financial has spent approximately $59
million on Year 2000 readiness matters.
CNA Financial has also received statements of Year 2000 compliance from
certain of key business partners: The Chase Manhattan Bank (Separate Account
(B)'s custodian bank); Bloomberg L.P. (the system used for trade entry); MAXIMIS
(Separate Account (B)'s accounting system) and The Depository Trust Company (the
book-entry depository used to record ownership of securities). Separate Account
(B) believes that the systems on which it relies do not have any remaining
exposure to the Year 2000 problem and, therefore, Separate Account (B) does not
have material exposure to the Year 2000 problem. However, due to the
interdependent nature of computer systems, there may be an adverse impact on
Separate Account (B) if banks, vendors, various governmental agencies and other
business partners fail to successfully address the Year 2000. To mitigate this
impact, CNA Financial is communicating with these various entities to coordinate
Year 2000 conversion.
In addition, CNA Financial has developed business resumption plans to
ensure that it and Separate Account (B) are able to continue critical processes
through other means in the event that it becomes necessary to do so. Formal
strategies have been developed within each business unit and support
organization to include appropriate recovery processes and use of alternative
vendors. More than 200 strategies have been developed by CNA Financial to
address recovery plans for approximately 400 processes. These plans are being
updated quarterly.
6
<PAGE> 54
SECURITIES CUSTODIAN
The custodian of Separate Account (B)'s portfolio securities is The Chase
Manhattan Trust Company of Illinois, 10 South LaSalle Street, Chicago, Illinois
60603.
The custodian does not perform any managerial or policy-making functions
for Separate Account (B).
INDEPENDENT AUDITORS
The Committee has appointed Deloitte & Touche LLP, Two Prudential Plaza,
180 North Stetson Avenue, Chicago, Illinois, as auditors to audit the financial
statements of Separate Account (B). They also audit the Schedule of Investments
and the Financial Highlights of Separate Account (B). In addition, Deloitte &
Touche LLP has been appointed to audit the consolidated financial statements of
CAC.
BROKERAGE ALLOCATIONS
Officers and employees in the Investment Department of CAC are primarily
responsible for making portfolio decisions for Separate Account (B) and for
placing brokerage business of Separate Account (B). Separate Account (B) has
paid the following brokerage fees and commissions in connection with portfolio
transactions: 1998, $538,717; 1997, $464,745; and 1996, $371,335.
In selecting brokers to execute portfolio transactions, CAC's primary
criterion is the expected ability of such brokers to make the best possible
execution on orders. If several brokers are expected to be able to provide
equally good execution, preference is given to those brokers who provide
statistical research, assistance in pricing portfolio securities or other
services. Commissions on all transactions are negotiated, and the primary basis
of the commission agreed to by CAC is the quality of execution. Research
services, to the extent provided to CAC, may be used by CAC in servicing its
other accounts and not all such services are used in connection with Separate
Account (B).
In connection with the purchase and sale of portfolio securities for
Separate Account (B), CAC does not bunch orders for such transactions with
orders for other accounts under the management of Loews, CNA Financial, CAC or
other subsidiaries of CNA Financial unless such other accounts are registered
investment companies and unless such bunching would not have adverse
consequences for Separate Account (B) and such other accounts. Under no
circumstances are orders bunched with orders for CAC's own account or for the
account of Loews Corporation, CNA Financial or other subsidiaries of CNA
Financial. No bunching of orders occurred during 1998.
CALCULATION OF PERFORMANCE DATA
In computing the end-of-period values listed below of a hypothetical
investment in Separate Account (B), average annual total return ("Average
Return") was calculated by dividing the ending unit value by the beginning unit
value raised to the l/nth power and then subtracting one (with "n" equaling the
number of years). Fees based on a percentage of the purchase payment were
subtracted at the beginning of the specified period. Annual account fees, where
applicable, were deducted at the end of each year.
7
<PAGE> 55
LEVEL DEDUCTION CONTRACT FOR 403(B) PLANS
If you invested $1,000 in Separate Account (B) at the beginning of the
applicable time period and surrendered your contract at the end of the
applicable time period, the amount of money you would have received based on the
Average Return indicated is as follows:
<TABLE>
<CAPTION>
14.51% AVERAGE RETURN FOR 17.85% AVERAGE RETURN FOR 16.08% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-98 ENDING ON 12-31-98 ENDING ON 12-31-98
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,145.11 $2,273.51 $4,442.32
</TABLE>
GRADED DEDUCTION CONTRACT FOR 403(B) PLANS
If you invested $1,000 in Separate Account (B) at the beginning of the
applicable time period and surrendered your contract at the end of the
applicable time period, the amount of money you would have received based on the
Average Return indicated is as follows:
<TABLE>
<CAPTION>
12.73% AVERAGE RETURN FOR 16.33% AVERAGE RETURN FOR 14.17% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-98 ENDING ON 12-31-98 ENDING ON 12-31-98
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,127.29 $2,130.36 $3,763.62
</TABLE>
HR-10 PLANS
If you invested $1,000 in Separate Account (B) at the beginning of the
applicable time period and surrendered your contract at the end of the
applicable time period, the amount of money you would have received based on the
Average Return indicated is as follows:
<TABLE>
<CAPTION>
6.47% AVERAGE RETURN FOR 15.76% AVERAGE RETURN FOR 14.90% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-98 ENDING ON 12-31-98 ENDING ON 12-31-98
- ------------------------ ------------------------- -------------------------
<S> <C> <C>
$1,064.66 $2,078.57 $4,011.61
</TABLE>
UNDERWRITING
CAC may be deemed to be the principal underwriter for Separate Account (B),
but receives no compensation from Separate Account (B) other than the fees
pursuant to the Investment Advisory Agreement and the Administrative Service
Agreement. The Contracts are offered by employees and licensed agents and
brokers of CAC, who may be deemed to be "underwriters" under the Securities Act
of 1933. Commissions to such persons on the sale of the Contracts may be
considered "underwriting commissions".
FINANCIAL STATEMENTS
The financial statements of Separate Account (B), the notes thereto and the
Independent Auditors' Report with respect thereto are incorporated into this
Statement of Additional Information by this reference to Separate Account (B)'s
1998 Annual Report to Participants: Balance Sheet; Statement of Operations;
Statement of Changes in Participants' Equity; and Schedule of Investments.
Copies of the
8
<PAGE> 56
1998 Annual Report to Participants may be obtained, at no charge, upon request
by contacting in writing or by telephone:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the Annual Report to Participants and other information about Separate
Account (B).
Financial statements of CAC, the notes thereto and the Independent
Auditors' Report with respect thereto are set forth on pages 10 to 32 of this
Statement of Additional Information. Such financial statements are included
herein solely for the purpose of informing investors as to the financial
position and operations of CAC and are not financial statements of Separate
Account (B).
9
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
[TO BE FILED BY AMENDMENT]
10
<PAGE> 58
The following consolidated financial statements are those of Continental
Assurance Company and not those of the Separate Account. They are included for
the purpose of informing investors as to the financial position and operations
of the Company.
CONTINENTAL ASSURANCE COMPANY
[TO BE FILED BY AMENDMENT]
11
<PAGE> 59
B logo
Group
Variable
Annuity
Contracts
STATEMENT OF ADDITIONAL INFORMATION
Dated: April 30, 1999
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
Y57-838LL
<PAGE> 60
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBERS
IN 1998
ANNUAL REPORT
TO PARTICIPANTS
---------------
<S> <C>
Financial Statements of Continental Assurance Company
Separate Account (B):
Schedule of Investments................................... 4
Balance Sheet............................................. 9
Statement of Operations................................... 9
Statement of Changes in Participants' Equity.............. 10
Notes to Financial Statements............................. 10
Independent Auditors' Report.............................. 12
</TABLE>
<TABLE>
<CAPTION>
PAGE NUMBERS IN
STATEMENT OF
PAGE NUMBERS ADDITIONAL
IN PROSPECTUS INFORMATION
------------- ---------------
<S> <C> <C>
Condensed Financial Information of Continental
Assurance Company Separate Account (B).................... 12
Independent Auditors' Report on Condensed Financial
Information of Continental Assurance Company Separate
Account (B)............................................... 39
Financial Statements of Continental Assurance Company:
Independent Auditors' Report..............................
Consolidated Balance Sheet................................
Statement of Consolidated Operations......................
Statement of Consolidated Stockholder's Equity............
Statement of Consolidated Cash Flows......................
Notes to Financial Statements.............................
</TABLE>
C-1
<PAGE> 61
(B) EXHIBITS:
<TABLE>
<C> <S> <C>
(1)(a)* Resolutions of the Board of Directors of CAC creating
Separate Account (B).
(2)(a)* Regulations for Government of Separate Account (B).
(b)* Code of Ethics, dated May 1, 1981, adopted by the Committee
for Separate Account (B) for the guidance of its officers
and employees.
(3) Custodian Agreement, dated November 26, 1996, between The
Chase Manhattan Trust Company of Illinois and CAC
(incorporated by reference to Exhibit 3 to Post-Effective
Amendment No. 44 to Separate Account (B)'s Registration
Statement on Form N-3, 1933 Act Registration No. 2-25483,
1940 Act Registration No. 811-1402 (the "N-3 Registration
Statement")).
(4)(a) Restated and Amended Investment Advisory Agreement between
CAC and Separate Account (B), dated May 1, 1981.
(5)(a)* Form of Underwriting Agreement, dated March 24, 1975,
between Separate Account (B) and CAC.
(b) Form of Administrative Service Agreement, dated March 24,
1975, as amended October 31, 1979, between Separate Account
(B) and CAC.
(6)(a)* Form of Sample Contract, as amended to date ("Level
Deduction Contract") offered in connection with annuity
purchase plans qualified under the provisions of Section
403(b) of the Internal Revenue Code of 1986, as amended.
(b)* Form of Sample Contract, as amended to date ("Graded
Deduction Contract") offered in connection with annuity
purchase plans qualified under the provisions of Section
403(b) of the Internal Revenue Code of 1986, as amended.
(c)* Form of Sample Contract, as amended to date, offered in
connection with pension or profit sharing plans qualified
under the provisions of Section 401 of the Internal Revenue
Code of 1986, as amended.
(7)(a)* Form of Application used with 403(b) Plan Contracts, as
amended to date.
(b)* Form of Application used with HR-10 Plan Contracts.
(8)(a) Articles of Incorporation of CAC.
(b) By-laws of CAC.
(9) None.
(10) None.
(11)(a) Agreement, dated February 7, 1985, between Separate Account
(B) and CAC regarding CNA Investor Services, Inc.
(b) Administrative Services Agreement with the Joint Retirement
Board of the Rabbinical Assembly of America, et al.
(incorporated by reference to Exhibit 11 to Post-Effective
Amendment No. 44 to the N-3 Registration Statement).
(12) Opinion of Counsel (incorporated by reference to Exhibit 12
to Post-Effective Amendment No. 44 to the N-3 Registration
Statement).
(13)(a)+ Consent of Independent Auditors.
(b) Consent of Counsel (included in Exhibit (12)).
(14) 1998 Annual Report to Participants of Separate Account (B).
(15) None.
(16) Calculation of Performance Data
(17)+ Financial Data Schedule
</TABLE>
- ---------------
+ To be filed in by amendment.
* Previously filed. To be refiled via EDGAR by amendment.
C-2
<PAGE> 62
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
The following table sets forth certain information regarding:
(a) each director or officer of CAC who is engaged directly or
indirectly in activities relating to Separate Account (B) or the variable
annuity contracts offered by Separate Account (B); and
(b) each executive officer of CAC (including CAC's president,
secretary, treasurer and certain vice presidents).
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITIONS AND OFFICES WITH CAC SEPARATE ACCOUNT (B)
- ----------------------------------- ------------------------------ --------------------
<S> <C> <C>
*Bernard L. Hengesbaugh................ Director, Chairman of the Board None
and Chief Executive Officer
*Philip L. Engel....................... Director and President None
*Jonathan D. Kantor.................... Director and Secretary None
*W. James MacGinnitie.................. Director, Senior Vice President and Chief None
Financial Officer
*William J. Sharkey, Jr................ Director None
*Pamela S. Dempsey..................... Vice President and Treasurer None
</TABLE>
- ---------------
* The principal business address is CNA Plaza, Chicago, Illinois 60685.
**
ITEM 31. NUMBER OF CONTRACTOWNERS.
As of February 1, 1999, Separate Account (B) had 190 qualified
Contractholders.**
**
- ---------------
** Indicates that all or a portion of an item has been omitted because the
omitted information has not changed since it was disclosed in this
Registration Statement or prior Amendments hereto.
C-3
<PAGE> 63
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant has caused this post-effective amendment to its
Registration Statement on Form N-3 to be signed on its behalf, in the city of
Chicago, and state of Illinois, on the 26th day of February, 1999.
CONTINENTAL ASSURANCE COMPANY SEPARATE
ACCOUNT (B)
/s/ MARILOU R. MCGIRR
By:
Marilou R. McGirr, Chairman of
Committee
CONTINENTAL ASSURANCE COMPANY
/s/ BERNARD L. HENGESBAUGH
By:
Bernard L. Hengesbaugh, Chairman
of the Board and Chief Executive
Officer
Each member of the Committee of Continental Assurance Company Separate
Account (B) whose signature appears below and each executive officer and
director of Continental Assurance Company whose signature appears below hereby
constitutes and appoints Jonathan D. Kantor and Lynne Gugenheim, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all post-effective amendments filed
after the date hereof to this Registration Statement and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
As required by the Securities Act of 1933, this post-effective amendment
has been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARILOU R. MCGIRR Chairman of Committee and Member of February 26, 1999
- --------------------------------------------- Committee of Separate Account (B)
Marilou R. McGirr (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
/s/ RICHARD W. DUBBERKE Member of Committee of Separate February 26, 1999
- --------------------------------------------- Account (B)
Richard W. Dubberke
/s/ RICHARD T. FOX Member of Committee of Separate February 26, 1999
- --------------------------------------------- Account (B)
Richard T. Fox
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM W. TONGUE Member of Committee of Separate February 26, 1999
- --------------------------------------------- Account (B)
William W. Tongue
/s/ PETER J. WRENN Member of Committee of Separate February 26, 1999
- --------------------------------------------- Account (B)
Peter J. Wrenn
/s/ BERNARD L. HENGESBAUGH Director, Chairman of the Board and February 26, 1999
- --------------------------------------------- Chief Executive Officer of
Bernard L. Hengesbaugh Continental Assurance Company
(Principal Executive Officer)
/s/ PHILIP L. ENGEL Director and President of February 26, 1999
- --------------------------------------------- Continental Assurance Company
Philip L. Engel
/s/ JONATHAN D. KANTOR Director of Continental Assurance February 26, 1999
- --------------------------------------------- Company
Jonathan D. Kantor
/s/ W. JAMES MACGINNITIE Director, Senior Vice President and February 26, 1999
- --------------------------------------------- Chief Financial Officer of
W. James MacGinnitie Continental Assurance Company
(Principal Financial and Accounting
Officer)
Director of Continental Assurance February 26, 1999
- --------------------------------------------- Company
William H. Sharkey, Jr.
</TABLE>
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<C> <C> <S> <C>
(4)(a) -- Restated and Amended Investment Advisory Agreement between
CAC and Separate Account (B), dated May 1, 1981.
(5)(b) -- Form of Administrative Service Agreement, dated March 24,
1975, as amended October 31, 1979, between Separate Account
(B) and CAC.
(8)(a) -- Articles of Incorporation of CAC.
(b) -- By-laws of CAC.
(11)(a) -- Agreement, dated February 7, 1985, between Separate Account
(B) and CAC regarding CNA Investor Services, Inc.
(14) -- 1998 Annual Report to Participants of Separate Account (B).
(16) -- Calculation of Performance Data
</TABLE>
<PAGE> 1
EXHIBIT 4(a)
RESTATED AND AMENDED INVESTMENT ADVISORY AGREEMENT
RESTATED AND AMENDED AGREEMENT made this 1st day of May, 1981 by and
between CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B) (the "Separate
Account") and CONTINENTAL ASSURANCE COMPANY (the "Company").
1. The Company will furnish the Separate Account with investment advisory
services, statistical services, research facilities and services, will supervise
the composition of the Separate Account's portfolio continuously and will effect
such changes therein as the Company deems advisable, including the nature,
timing and manner of effectuating such changes. The Company, at its own expense,
shall furnish office space to the Separate Account and shall pay the salaries
and fees of Officers and Committee Members of the Separate Account. The
compensation for those services shall be an investment advisory fee payable
monthly, computed at the annual rate of 1/2 of 1% of the average daily net asset
value of the Separate Account.
2. The Company shall bear the following expenses of the Separate Account
and shall be compensated as provided below:
(a) All costs and expenses incident to compliance with federal and
state regulations applicable to any public offering of Investment Units of
the Separate Account, for cash or otherwise, including those relating to
the registration of Investment Units under the Securities Act of 1933, as
amended, the qualification of Investment Units under state securities laws,
the printing or other reproduction and distribution of any registration
statement (and all amendments thereto) under the Securities Act of 1933, as
amended, the preliminary and final prospectuses included therein (to the
extent such prospectuses are distributed to persons who, at the time of the
distribution of such prospectuses, are participants in the Separate
Account) and any other necessary documents required by federal and state
regulations applicable to any such public offering;
(b) All fees involved in registering and maintaining registrations of
the Separate Account and of its Investment Units with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended;
(c) All charges and expenses of any custodian appointed by the
Separate Account for the safekeeping of its cash, portfolio securities and
other property, other than fees and expenses relating to the lending of
portfolio securities;
(d) All charges and expenses of independent auditors;
(e) All expenses of meetings of the participants and of the Committee
and of preparing, printing and mailing proxy statements and quarterly,
semi-annual and annual reports to participants;
(f) All charges and expenses of legal counsel in connection with
matters relating to the Separate Account, including without limitation,
legal services rendered in connection with the Separate Account's
registrations and qualifications of securities under federal, state and
other laws;
(g) All the expenses of keeping the general accounts and records of
the Separate Account; and
(h) All postage expenses of the Separate Account (other than those
relating to the mailing of prospectuses to persons who, at the time of such
mailing, are not participants in the Separate Account and to the mailing of
sales literature).
As compensation for bearing the expenses set forth in this paragraph, the
Company shall be paid a monthly service fee by the Separate Account, computed at
the annual rate of 0.33 of 1% of the average daily net asset value of the
Separate Account.
<PAGE> 2
3. The Company shall bear, without compensation, the following expenses of
the Separate Account:
(a) All costs and expenses relating to the printing or other
reproduction and distribution of preliminary and final prospectuses to
persons who, at the time of the distribution of such prospectuses, are not
participants in the Separate Account;
(b) All costs and expenses relating to the advertising of Investment
Units of the Separate Account, including without limitation, the overhead
allocated to the supervision of brokers and dealers selling Investment
Units and the printing and mailing of sales literature;
(c) All costs and expenses relating to the printing or other
reproduction and distribution of any underwriting documents incident to a
public offering of Investment Units of the Separate Account, and review by
the National Association of Securities Dealers, Inc. of any underwriting
arrangement; and
(d) All other expenses primarily intended to result in the sale of
Investment Units of the Separate Account.
4. Notwithstanding the provisions of Section 1 hereof, the Separate Account
shall pay all fees and expenses attributable to the lending of its portfolio
securities.
5. This Agreement shall not be materially amended without the affirmative
vote or written consent of the holders of a majority of the outstanding
Investment Units of the Separate Account.
6. This Agreement may be terminated at any time by either party, without
the payment of any penalty, on sixty days written notice. Such action may be
taken by the Company or by either the Committee of the Separate Account or the
holders of a majority of its outstanding Investment Units.
7. This Agreement shall terminate automatically in the event of its
assignment.
8. This Agreement shall become effective at the close of business on May 1,
1981 and shall continue in force for one year from such date and indefinitely
thereafter, but only so long as the continuance after such year shall be
specifically approved at least annually by the vote of a majority of the members
of the Committee of the Separate Account who are not parties to the Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
IN WITNESS WHEREOF, the Separate Account and the Company have caused this
Agreement to be duly executed the day and year above written.
<TABLE>
<S> <C>
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By: /s/ DONALD C. RYCROFT
Chairman
ATTEST: /s/ ROBERT E. WETZEL
Secretary
CONTINENTAL ASSURANCE COMPANY
By: /s/ DONALD C. RYCROFT
Vice President
ATTEST: /s/ THOMAS R. IGLESKI
Corporate Secretary
</TABLE>
<PAGE> 1
EXHIBIT 5(b)
ADMINISTRATIVE SERVICE AGREEMENT
THIS AGREEMENT, made this 24th day of March, 1975, by and between
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B) (the "Separate Account") and
CONTINENTAL ASSURANCE COMPANY (the "Company").
1. The Company is contractually obligated under its presently outstanding
Variable Annuity Contracts, which are funded in the Separate Account, to provide
sales and administrative services for a sales and administrative fee of 6% which
is deducted from each contribution as it is received. In the event the 6%
exceeds the Company's cost, any excess will inure to the Company as a profit.
The Company agrees to continue such services to all Participants to whom it is
contractually bound to do so for the same 6% charge.
2. The Company and the Separate Account agree that as to all new Contracts
and all amended Contracts which so provide, the Company will make a charge
against each Participant's Account, payable on December 31st of each year,
determined by the Company's cost of administration of the Separate Account for
the prior year. A Participant who is covered under such a contract for only a
portion of a calendar year will pay an administration charge which is prorated
on a monthly basis.
3. This Agreement shall not affect the rights of any Participant who is
retired on the effective date of this Agreement.
IN WITNESS WHEREOF, the Separate Account and the Company have caused this
Agreement to be duly executed the day and year above written.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By: /s/ R. Gillespie
-----------------------------
Chairman
CONTINENTAL ASSURANCE COMPANY
ATTEST: /s/ Thomas R. Igleski By: /s/ David D. Burch
-------------------------- -----------------------------
Secretary Senior Vice President
<PAGE> 2
FIRST AMENDMENT TO THE ADMINISTRATIVE SERVICE AGREEMENT
This First Amendment, dated as of October 31, 1979, by between and
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B) (the "Separate Account") and
CONTINENTAL ASSURANCE COMPANY (the "Company") to an Administrative Service
Agreement dated March 24, 1975 by and between the Separate Account and the
Company (the "Agreement") witnesseth that:
1. Paragraph 1 of the Agreement is hereby deleted in its entirety and
the following paragraph is inserted in lieu thereof:
"1. The Company is presently offering the following three types
of Variable Annuity Contracts, which are funded by the Separate
Account: level deduction contracts, graded deduction contracts
and contracts by which self-employed individuals may provide
retirement plans for themselves and their eligible employees
("HR-10" plans). The Company is contractually obligated under
said contracts to provide sales and administrative services for
the sales and administrative fees specified in each individual
contract. Said fees are deducted from each purchase payment as
it is received. In the event that said fees exceed the Company's
costs, any excess will inure to the Company as a profit. The
Company agrees to continue such service to all Participants to
whom it is contractually bound for the fees specified in the
contracts."
2. All other provisions of the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the Separate Account and the Company have caused this
Agreement to be fully executed as of the date first written by its duly
authorized officers.
CONTINENTAL ASSURANCE COMPANY CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By /s/Donald C. Rycroft By /s/ Donald C. Rycroft
-------------------------- --------------------------
Vice President Chairman
ATTEST: /s/ Thomas R. Igleski ATTEST: /s/ Robert E. Wetzel
--------------------- ---------------------
Vice President and Secretary
Secretary
<PAGE> 1
EXHIBIT 8(a)
ARTICLES OF AMENDMENT
of
ARTICLES OF INCORPORATION
of
CONTINENTAL ASSURANCE COMPANY
Continental Assurance Company, an Illinois stock insurance corporation does
hereby execute these Articles of Amendment of its Articles of Incorporation
pursuant to the applicable provisions of Section 29 of the Illinois Insurance
Code.
The Articles of Incorporation of the Company, as amended by a resolution
duly adopted by the shareholders of the Company at the annual meeting of the
shareholders of the Company duly called and regularly held on the 7th day of
April, 1971, now read as follows:
"ARTICLES OF INCORPORATION
of
CONTINENTAL ASSURANCE COMPANY
ARTICLE I.
The name of the Company shall be Continental Assurance Company.
ARTICLE II.
The principal office of the Company shall be located in the City of
Chicago, Illinois.
ARTICLE III.
The corporate powers of the Company shall be exercised by a Board of
Directors consisting of not less than three or more than twenty-one persons, as
may be fixed from time to time by by-laws of the Company. Such persons shall be
at least twenty-one years of age. At least three members of the Board of
Directors shall be residents and citizens of the State of Illinois.
<PAGE> 2
ARTICLE IV.
At the first meeting of the stockholders the full Board of Directors shall
be chosen by them and thereafter the full Board of Directors shall be elected
annually by the stockholders at their annual meetings. All directors so elected
by the stockholders shall hold office for one year and until their successors
are elected.
All such elections of directors shall be by ballot, cast either in person
or by proxy by the stockholders, and pursuant to Section 3 of Article XI of the
Constitution of the State of Illinois, each stockholder shall be entitled upon
each share of stock he may hold to as many votes as there are directors to be
elected. All vacancies which may occur in the Board of Directors between annual
meetings of the stockholders may be filled by the stockholders at any special
stockholders' meeting called for that purpose.
ARTICLE V.
The Board of Directors shall from time to time elect such officers as may
be provided by the by-laws. Such officers shall exercise such powers of
corporate control as may be provided by the by-laws or delegated to them by the
directors. Such officers shall be elected annually at the first meeting of the
directors after the annual meeting of the stockholders, and shall hold office
for one year, and until such time as their respective successors may be elected
or the office discontinued by the Board of Directors.
ARTICLE VI.
The authorized capital of the Company shall be $22,500,000; the number of
authorized common shares shall be 4,500,000; the par value of each common share
shall be $5.00; and the number of common shares issued at the effective date of
this Article is 4,366.173.
ARTICLE VII.
The object and purpose of the Company is to make insurance on the lives of
persons and every insurance pertaining thereto or connected therewith, and to
grant and dispose of annuities; all pursuant to the provisions of the Act of the
State of Illinois entitled 'An Act to organize and regulate the business of Life
Insurance,' approved March 26th, 1869, and all Acts amendatory thereof or
supplemental thereto; and also to engage in the business of insuring persons
against bodily injury, disability or death resulting from accident and providing
benefits for disability caused by disease, all pursuant to the provisions of the
Act of the State of Illinois entitled 'An Act relating to insurance and
permitting stock corporations organized under the State of Illinois to engage in
the business of life, accident and health insurance; to regulate and control
such business in this state and to repeal all laws now existing which conflict
with the provisions of this Act' approved May 31, 1911, in force July 1, 1911.
ARTICLE VIII.
The manner of conducting the Company shall be upon the stock plan and the
Board of Directors, pursuant to Section 2B of the said Act, approved March 26th,
1869, shall have the power to make such by-laws as they may deem necessary or
proper for the regulation of its business affairs.
<PAGE> 3
ARTICLE IX.
The charter of this Company shall be perpetual."
IN WITNESS WHEREOF, Continental Assurance Company has caused these Articles
of Amendment of its Articles of Incorporation to be executed in duplicate in its
corporate name and its corporate seal to be affixed hereto by its duly
authorized officers, this 16th day of June, 1971.
CONTINENTAL ASSURANCE COMPANY
ATTEST:
By /s/ HERBERT L. DE PAENGER
--------------------------------
Executive Vice President
/s/ WALTER H. JOHNSTON
- ----------------------------------
Assistant Secretary
By /s/ ARCHER O'REILLY JR.
------------------------------
Secretary
Approved and filed this 23rd day of June, 1971
/s/ JAMES BAYLOR
- ------------------------------------------------
Director of Insurance of the State of Illinois
<PAGE> 1
EXHIBIT 8(b)
BY-LAWS
OF
CONTINENTAL ASSURANCE COMPANY
(As Amended August 7, 1985)
ARTICLE I. SHAREHOLDERS' MEETINGS.
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of the Company
shall be held at its principal office in the City of Chicago, Illinois, on the
first Wednesday in April of each year unless such day be a legal holiday, in
which event it shall be held on the next succeeding day not a legal holiday.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for the
consideration of such matters as may be named in the call for such meetings may
be held at any time upon the call of the Chairman of the Board of Directors, the
President, or the Board of Directors and may also be held upon the call of the
Secretary if at any time the holders of one-fifth or more of the outstanding
shares of the Company shall make written application to the Secretary to issue
such call. Such special meeting shall be held in the City of Chicago, Illinois,
at the place specified in the written notice of such meeting and no business
shall be considered thereat except such as may be specified in the written
notice of such meetings.
SECTION 3. NOTICE. Ten days' prior written notice of all annual or special
meetings of the shareholders stating the place, day and hour of the meeting,
and, if a special meeting, the matters to be acted on thereat, shall be sent by
the Secretary of the Company by mail to each shareholder entitled to vote at
such meeting at his post office address as it appears on the records of the
Company Attendance at any meeting in person or by proxy shall constitute a
waiver of notice of such meeting.
SECTION 4. VOTING. Each shareholder may vote at any meeting of the shareholders
either in person or by proxy filed with the Secretary at or before such meeting.
Each shareholder shall be entitled to vote for Directors of the Company as
hereinafter provided and otherwise shall be entitled to one vote for each share
standing in his name on the records of the Company. All questions, unless
otherwise provided by law, shall be decided by a majority of the votes thus
cast.
SECTION 5. QUORUM. A majority of the outstanding shares entitled to be voted,
represented either in person or by proxy, shall be necessary to constitute a
quorum, but less than a quorum may adjourn from time to time without notice
other than by announcement at the meeting, until the holders of the number of
shares requisite to constitute a quorum shall be present in person or by proxy.
At such adjourned meeting at which a quorum shall be present any business may be
transacted which might have been transacted at the meeting as originally
noticed.
ARTICLE II. DIRECTORS.
SECTION 1. DUTIES. The business of the Company shall be managed and controlled
by a Board of Directors consisting of ten persons who shall be elected annually
by the shareholders of the Company, and at least three of whom shall be
residents and citizens of the State of Illinois.
SECTION 2. MANNER OF ELECTION. All elections of Directors shall be by ballot
cast either in person or by proxy by the shareholders, and pursuant to the
Articles of Incorporation of the Company, each
(12) Previously filed as Exhibit 8(a) to Post Effective Amendment No. 31 to the
N-3 Registration Statement.
<PAGE> 2
shareholder shall be entitled to as many votes as shall equal the number of his
shares multiplied by the number of Directors to be elected, and may cast all of
said votes for a single Director or may distribute them among the number to be
voted for, or any two or more of them as he may see fit.
SECTION 3. TERM. Each Director shall hold office until the annual meeting of the
shareholders next succeeding his election and further until his successor is
elected and has qualified.
ARTICLE III. DIRECTORS' MEETINGS.
SECTION 1. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such time or times as may be set by the Board of Directors at the annual
meeting each year on the first Wednesday of February, May, August and November,
unless such day be a legal holiday, in which event the meeting shall be held on
the next succeeding day not a legal holiday. Such meetings shall be held at the
principal office of the Company in the City of Chicago, Illinois, or at such
other place as may be designated by the Board of Directors. The first meeting of
the Board of Directors shall be its annual meeting at which there shall be
elected the Chairman of the Board of Directors, the President, the Executive
Vice President, the Senior Financial Vice President, the other Vice Presidents,
one or more of whom may be designated Senior Vice President, the Secretary, the
Treasurer, the General Counsel, and the members of the Finance Committee.
SECTION 2. SPECIAL MEETINGS. The Chairman of the Board of Directors may call a
special meeting of the Board of Directors at any time. The Secretary shall call
such a meeting upon the request of five members of the Board of Directors or
upon resolution of the Finance Committee. Due notice of any such meeting shall
be given.
SECTION 3. VOTING. Each Director present shall be entitled to cast one vote on
all questions coming before a meeting of the Board of Directors and all
questions unless otherwise provided herein shall be decided by a majority of the
votes thus cast.
SECTION 4. QUORUM. A majority of the Board of Directors shall constitute a
quorum for the transaction of business; but less than a quorum may adjourn from
time to time, without notice other than by announcement at the meeting until a
quorum shall be present.
ARTICLE IV. FINANCE COMMITTEE.
SECTION 1. MEMBERSHIP. The Finance Committee of the Board of Directors shall
consist of eight members elected by a majority of the Board of Directors from
its membership, and ex-officio, the Chairman of the Board of Directors, the
President, and the Executive Vice President of the Company. The Board of
Directors may also elect from its membership alternate members of the Finance
Committee and state the succession in which the alternates shall act as members
of the Finance Committee in the event of the absence or disability of any
member.
SECTION 2. TERM. Each member of the Finance Committee shall take office
immediately upon election and hold the same for the term for which he is elected
and further until his successor is elected, unless meanwhile he ceases to be a
Director, in which event he shall also cease to be a member of the Finance
Committee.
SECTION 3. POWERS. The Finance Committee shall be the investment committee of
the Company, and subject to the direction and control of the Board of Directors,
it shall be charged with the duty and responsibility of supervising the
Company's investments and loans. As to all other matters it shall act during the
intervals between meetings of the Board of Directors, and subject to the
direction and control of the Board of Directors it shall have the same powers,
rights, and duties as the Board of Directors except that it shall not have the
power: (1) to declare dividends; (2) to elect officers of the Company; (3) to
amend the By-Laws; (4) to change the Articles of Incorporation of the Company;
(5) to negative any action of the
<PAGE> 3
Board of Directors. The delegation of powers, rights, and duties by the Board of
Directors to the Finance Committee shall not act to relieve the Board of
Directors or any member thereof of any responsibility imposed upon it or him by
law. The minutes of each meeting of the Finance Committee shall be read at the
next succeeding meeting of the Board of Directors.
SECTION 4. VACANCIES. If a vacancy shall occur in the membership of the Finance
Committee, the Board of Directors shall elect a successor from its membership
and the person thus elected shall become a committee member for the remainder of
the term of his predecessor.
SECTION 5. QUORUM. Four members of the Finance Committee shall constitute a
quorum to transact business.
SECTION 6. MEETINGS. The Finance Committee shall meet at the principal office of
the Company in the City of Chicago, Illinois, once each month on Wednesday, the
day and time to be set by the Finance Committee at its first meeting, unless the
day established by a legal holiday, in which event the meeting shall be held on
the next day, not a legal holiday. The Finance Committee shall meet at any other
time upon call by the President or by any three members of the Committee.
ARTICLE V. OFFICERS.
SECTION 1. ELECTION AND TERM. The following officers of the Company shall be
elected by the Board of Directors at its annual meeting: the Chairman of the
Board of Directors, the President, the Executive Vice President, the Senior
Financial Vice President, the other Vice Presidents, one or more of whom may be
designated Senior Vice President, the Secretary, the Treasurer, and the General
Counsel. Other officers may be appointed from time to time as may be deemed
necessary or proper for dispatch of the Company's business. The Chairman of the
Board of Directors, the President, and the Executive Vice President shall be
elected from the membership of the Board of Directors. All officers of the
Company shall hold office at the discretion of the Board of Directors. Any
officer elected by the Board of Directors may be removed at any time by the
affirmative vote of two-thirds of the Board of Directors. Vacancies may be filed
at any time at any meeting of the Board of Directors.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors shall be the chief executive officer of the
Company and shall have general and active control of its business and affairs.
He shall preside at all meetings of the shareholders and the Board of Directors,
and may exercise any and all of the powers of the President.
SECTION 3. POWERS AND DUTIES OF PRESIDENT. The President shall have general
supervision and direction of all other officers of the Company, subject to the
direction of the Board of Directors, and shall carry into effect the orders of
the Board of Directors and the Chairman of the Board of Directors. He shall have
power to sign and acknowledge all deeds and instruments for the transfer or
conveyance or assignment of the corporate property, discharge of mortgages and
all other instruments or contracts or evidences of obligations necessary for the
transaction of the corporate business, including all policies of insurance; and
to sign all annual or other statements required by the insurance departments of
the various states, territories, districts, countries or jurisdictions in which
the Company may apply for or be granted permission to transact business. In the
absence or disability for any reason of the Chairman of the Board of Directors,
he shall assume the duties of the Chairman of the Board of Directors for
presiding at meetings.
SECTION 4. POWERS AND DUTIES OF EXECUTIVE VICE PRESIDENT. The Executive Vice
President shall assist the President in the performance of such of his duties as
pertain to the insurance operations of the Company, and he shall perform such
other duties as may be assigned to him by the Board of Directors, the Finance
Committee or the President. In the absence of the President, the Executive Vice
President shall have, and exercise, all the rights and powers and be charged
with all the duties of the President.
<PAGE> 4
SECTION 5. POWERS AND DUTIES OF SENIOR FINANCIAL VICE PRESIDENT. The Senior
Financial Vice President shall, subject to the supervision of the Finance
Committee, be the chief investment officer of the Company and shall administer
the investment of its funds. He shall also perform such other duties as may be
assigned to him by the Board of Directors, the Finance Committee or the
President.
SECTION 6. POWERS AND DUTIES OF SENIOR VICE PRESIDENTS. The Senior Vice
President shall assist the President in the performance of such of his duties as
pertain to the insurance operations of the Company, and shall also perform such
other duties as may be assigned to them by the Board of Directors, the Finance
Committee or the President.
SECTION 7. POWERS AND DUTIES OF OTHER VICE PRESIDENTS. It shall be the duty of
the other Vice Presidents to assist the President in the performance of his
duties and to perform such other duties as may be assigned to them by the Board
of Directors, the Finance Committee, or the President.
SECTION 8. POWERS AND DUTIES OF SECRETARY. The Secretary shall keep, or cause to
be kept, a complete record of the proceedings of all meetings of the
shareholders, the Board of Directors, and the Finance Committee and shall be the
custodian of all corporate books and records. It shall be the duty of the
Secretary to present at each annual meeting of the shareholders an alphabetical
list of the shareholders with the number of shares held by each, and to perform
such other duties as may be assigned to him by the Board of Directors, the
Finance Committee or the President.
SECTION 9. POWERS AND DUTIES OF TREASURER. The Treasurer shall be custodian of
all securities owned or held by the Company and shall assist the Senior
Financial Vice President in the performance of his duties. He shall also perform
such other duties as may be assigned to him by the Board of Directors, the
Finance Committee, or the President.
SECTION 10. POWERS AND DUTIES OF GENERAL COUNSEL. The General Counsel shall have
the general responsibility for all of the legal affairs of the Company and shall
perform such other duties as may be assigned to him by the Board of Directors,
the Finance Committee, or the President.
SECTION 11. OTHER OFFICERS. All other officers elected by the Board of Directors
shall perform such duties as are assigned to them by the President and comply
with such orders and rules as the Board of Directors or the Finance Committee
may require from time to time.
SECTION 12. SUCCESSION. The duties of any of the following designated officers
shall in the event of his absence or disability for any reason be performed by
the officer next succeeding him in rank in accordance with the following order
of succession:
Chairman of the Board of Directors
President
Executive Vice President
Senior Financial Vice President
ARTICLE VI. INDEMNIFICATION OF DIRECTOR AND OFFICERS. (As provided by resolution
adopted by the shareholders of the Company at their annual meeting April 1,
1953).
Each person who is or who shall hereafter become a Director or officer of the
Company shall be indemnified by the Company, to the extent not prohibited by
applicable law, against all judgments, decrees, orders and findings rendered or
entered against him, and all costs and expenses reasonably incurred by or
imposed upon him, in connection with or resulting from any action, suit or
proceeding, or threat thereof, to which he is or may be made a party by reason
of his being or having been a Director or
<PAGE> 5
officer of the Company (whether or not he shall be a Director or officer at the
time), except judgments, decrees, orders, findings, costs and expenses incurred
or imposed in relation to matters as to which a recovery shall be had against
him by reason of his having been finally adjudged in such action, suit or
proceeding to have been derelict in the performance of his duties as such
Director or officer. The foregoing right to indemnify (a) shall include
reimbursement of the amounts and expenses paid in settling any such action, suit
or proceeding, or threat thereof, if settling the same is for the best interest
of the Company, (b) shall not be exclusive of other rights to which such
Director or officer may be entitled as a matter of law, and (c) shall inure to
the benefit of the heirs, executors and administrators of such Director or
officer.
ARTICLE VII. ORDER OF BUSINESS.
The following order shall be maintained at all meetings of the shareholders and
of the Board of Directors: Roll Call; Reading of Minutes of Previous Meeting;
Reports of Committees; Unfinished Business; New Business.
ARTICLE VIII. CORPORATE SEAL.
The Company shall have a corporate seal of such design and wording as may be
determined by the Board of Directors. Until otherwise directed, the seal shall
read: "CONTINENTAL ASSURANCE COMPANY - CHARTERED 1911 - CORPORATE SEAL." Such
seal shall be kept in the custody of the Secretary and shall be affixed by him
to such papers executed by the Company as may be necessary or customary.
ARTICLE IX. EXECUTION OF DOCUMENTS.
SECTION 1. EXECUTION. The Chairman of the Board of Directors, and President or a
Vice President shall have the power to bind the Company upon any and all
policies of insurance, contracts, bonds, undertakings and other obligatory
instruments by his signature and execution thereof attested by the signature of
the Secretary or of an Assistant Secretary and such execution of any such
instrument shall be deemed to be the act of the Company. Such signatures, when
authorized by the Board of Directors, may be engraved or printed facsimiles.
SECTION 2. FACSIMILES. Where engraved or printed facsimile signatures are used
on policy forms, checks, receipts or other instruments issued or delivered by
the Company, such policy forms, checks, receipts or other instruments bearing
the facsimile signature of a deceased, retired, or disabled officer may
nevertheless be issued and delivered after the death, retirement or disablement
of such officer with the same effect as if such officer were not deceased,
retired or disabled.
SECTION 3. APPOINTMENT OF ATTORNEY-IN-FACT. The Chairman of the Board of
Directors, the President or a Vice President may from time to time, appoint by
written certificates attorneys-in-fact to act in behalf of the Company in the
execution of policies of insurance, bonds, undertakings and other obligatory
instruments of like nature. Such attorneys-in-fact, subject to the limitations
set forth in their respective certificates of authority shall have full power to
bind the Company by their signature and execution of any such instruments and to
attach the Director, the President or any Vice President or the Board of
Directors, may, at any time, revoke all power and authority previously given to
any attorney-in-fact.
SECTION 4. SERVICE OF FEDERAL PROCESS. The Chairman of the Board of Directors,
the President, or a Vice President is hereby empowered (1) to appoint agents of
the Company and to give them authority to accept in its behalf the service of
federal process in the several judicial districts of the United States, (2) to
issue in the name of the Company certificates evidencing such appointments and
to affix the corporate seal of the Company thereto, and (3) to take any other
action in behalf of the Company necessary or proper to be taken to effect a full
compliance on its part with any requirements of the United States
<PAGE> 6
Treasury Department relative to the appointment of agents to accept service of
process in behalf of the Company.
ARTICLE X. CERTIFICATES FOR SHARES.
Certificates representing shares of the Company shall be in such form,
consistent with the law and the Articles of Incorporation, as shall be approved
by the Board of Directors. They shall be consecutively numbered in the order of
their issue and shall be signed by the Chairman of the Board of Directors, the
President, or a Vice President and by the Secretary or an Assistant Secretary,
and shall be sealed with the corporate seal of the Company. Such seal and the
signatures of such officers of the Company, or any of them, may be engraved or
printed facsimiles, if such certificates are signed by a transfer agent or
registered by a registrar appointed by the Board of Directors. In case any
officer who shall have signed any such certificate, or whose facsimile signature
shall have been used thereon, shall cease to be such officer before such
certificate shall have been issued by the Company, such certificate may,
nevertheless, be used by the Company with the same effect as if such officer had
not ceased to be such at the date of issuance of such certificate.
The Board of Directors may appoint a transfer agent by whom the shares of the
Company may be transferred and also a registrar, by whom the shares may be
registered and in the event of such appointments, no certificate for shares of
the Company shall be valid unless countersigned by such transfer agent and
registered by such registrar.
ARTICLE XI. TRANSFERS OF SHARES.
SECTION 1. TRANSFERS. Certificates for shares may be transferred only by
assignment endorsed thereon, or an instrument of assignment attached thereto,
and executed by the person named in the certificate or by an attorney lawfully
constituted in writing. Except as provided below, transfer of shares shall be
made on the books of the Company only upon surrender of the certificate properly
assigned and upon such surrender a new certificate shall be issued to the
assignee signed as provided in Article X. The surrendered certificate shall be
canceled and delivered to the Secretary who shall preserve the same. In the
event that a certificate has been lost, mislaid, stolen or destroyed, upon
written request of the owner thereof, a replacement certificate may nevertheless
be issued in lieu thereof, in the exercise of the Company's discretion, which
shall be evidenced by a letter signed by the Chairman of the Board of Directors,
the President, or any Vice President, provided that prior to such issue a surety
bond, in form approved by the General Counsel, be furnished for the protection
of the Company, its transfer agent, if any, and its registrar.
SECTION 2. CLOSE OF TRANSFER BOOKS. The Board of Directors may, in its
discretion, close the transfer books as provided in the Articles of
Incorporation.
SECTION 3. HOLDERS OF RECORD. The Company shall be entitled to treat the holder
of record of any share or shares as the holder in fact thereof and accordingly
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person whether or not it shall
have express or other notice thereof.
ARTICLE XII. STATUTORY AGENTS: POWERS OF ATTORNEY: QUALIFICATION.
The Chairman of the Board of Directors, the President, or a Vice President and
the Secretary or an Assistant Secretary are authorized to appoint statutory
agents of the Company, and to execute powers of attorney in evidence thereof,
authorizing them to accept service of process against the Company; to execute
any and all papers and to comply with all applicable requirements of law in
order to qualify the Company to do business in any state, territory, district,
country or jurisdiction and to take any other action on behalf of the Company
necessary or proper to be taken in compliance with law or with rules or
regulations of the supervisory authorities in order to qualify the Company to do
business.
<PAGE> 7
ARTICLE XIII. AMENDMENTS.
These By-Laws may be altered, amended, rescinded or suspended at any meeting of
the Board of Directors by a majority vote of the entire Board of Directors.
<PAGE> 1
EXHIBIT 11(a)
AGREEMENT
Agreement made this 7th day of February, 1985 by and between Continental
Assurance Company Separate Account (B) (the "Separate Account") and Continental
Assurance Company (the "Company").
1. CNA Investor Services, Inc. ("ISI") is an affiliate of the Company.
Within twenty days after the effective date of this Agreement, the Company will
enter into an agreement with ISI whereunder ISI will report quarterly to the
Company the ISI's net profits as defined in Paragraph 3 hereof in connection
with brokerage services provided by ISI for the Separate Account. ISI will keep
such books and records as are necessary to facilitate such reporting, and such
books and records will be made available to the Company and the Separate Account
for inspection upon reasonable notice to ISI.
2. Subject to its primary obligation to obtain the best execution and price
possible for each brokerage transaction, and its unqualified discretion in the
case of any brokerage transaction to choose any exchange or no exchange for the
execution of the transaction, and recognizing that in many situations, secrecy,
speed and other facts have a bearing on the circumstances of a transaction, the
Company agrees that it will endeavor to make use of the brokerage facilities of
ISI for portfolio brokerage transactions of the Separate Account when such use
is in the best interest of the Separate Account. The Company agrees that an
amount equal to the "net profits" as defined in Paragraph 3 hereof derived by
ISI quarter shall be credited by the Company against the investment advisory fee
payable to the Company by the Separate Account as soon as the amount of such
fees are ascertainable.
3. "Net profits" as used in Paragraphs 1 and 2 hereof shall mean the amount
if any, by which the following credits exceed the following debits:
(a) Gross revenues of ISI derived from its execution of portfolio
brokerage transactions on behalf of the Separate Account will be credited.
(b) Direct expenses, as defined in subparagraph (c) (1) herein, of
transactions described in paragraph (a) herein, will be debited.
(c) As used herein, the following phrases shall have the following
meanings:
(1) "Direct expenses" includes all expense items characterized as
"direct" in accordance with good accounting practice and specifically
includes, but is not limited to, applicable floor brokerage fees,
clearing brokers' fees, commissions on forwarded orders, transfer
taxes, exchange fees, interest charges directly applicable to a
transaction, and other fees and charges relating to brokerage
transactions.
4. This Agreement shall be effective with respect to "net profits" derived
by ISI as defined in Paragraph 3 from Separate Account portfolio brokerage
transactions made after February 7, 1985. Such "net profits" shall be credited
against the investment advisory fee payable to the Company by the Separate
Account as soon as the amount of such fees are ascertainable.
1
<PAGE> 2
IN WITNESS WHEREOF, the Separate Account and the Company have caused this
Agreement to be duly executed the day and year above written.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By: /s/ Donald C. Ryroft
-----------------------------
ATTEST: /s/ Robert S. Wetzel Chairman
---------------------------
Secretary
CONTINENTAL ASSURANCE COMPANY
By: /s/ Donald C. Ryroft
----------------------------
ATTEST: /s/ Thomas R. Igleski Vice President
---------------------------
Secretary
2
<PAGE> 1
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
Continental Assurance Company Separate Account (B) ended the year with an
Accumulated Unit Value increase of 21.82% while the dividend-adjusted Standard &
Poor's Composite Index of 500 stocks (S&P 500) increased by 28.58%. The average
stock fund, as reported in the Wall Street Journal, gained 14.52% and the
average growth fund returned 19.37% during 1998.
The market advance was quite narrow in 1998 with the average stock in the S&P
500 gaining just 10.80%. The difference in growth rates between the index and
the average is a result of the index being capitalization weighted. The largest
stocks with the strongest growth rates have continued to trade at higher
multiples to their earnings and growth rates. According to data going back to
1958, compiled by the Leuthold Group and reported in the Wall Street Journal,
the differential between the S&P 500 and the average stock in the index has
never been as large. Other indexes bear out this conclusion as well. The Dow
Jones Industrial Average, still more reflective of slower growth, large
industrial companies, returned 18.13% and the Russell 2000, a small company
index, actually had a negative return of 2.24%.
1998 experienced a record fourth consecutive year of the S&P 500 gaining in
excess of 20%. This strong bull market was originally driven by a cyclical
improvement in earnings and moderating interest rates. Following a sharp but
short summer correction of about 20% the Federal Reserve eased short term
interest rates three times which placed the market back on an upside trajectory.
With earnings gains slowing and long-term interest rates above their summer
lows, the driving force in the fourth quarter was market liquidity.
Separate Account (B) has concentrated its investments generally in large
capitalization companies. At December 31, 1998, the investment portfolio had a
median capitalization of approximately $25 billion. The fund owns stocks of
three companies with capitalizations in excess of $200 billion, Microsoft,
General Electric and Intel, and another six companies with capitalizations
exceeding $100 billion. Only three of the fund's holdings could be considered
small capitalization companies with less than $1 billion in market value, Emmis
Broadcasting, Intermedia Communications and Robert Mondavi. Separate Account (B)
has favored investments in technology and health care companies as well as a
blend of multinational companies. Management believes that the U.S. does
technology better than anyone else and that health care companies, particularly
pharmaceuticals, will continue to benefit as the population in industrial
countries continues to age. The large multinational companies will ultimately
benefit from the faster economic growth in emerging markets.
Separate Account (B) has taken advantage of the market's volatility by
employing a disciplined program of writing call options on stocks held in the
portfolio. During 1998 we generated $1.387 million in call premiums compared to
$986 thousand in 1997. We intend to judiciously use this strategy to enhance
income generation in 1999.
1999 could be a challenging year. Historically, the average return for the
stock market has been about 12.5%, well below the average of the last four
years. The S&P 500 price/ earnings multiple of approximately 25 times 1999
projected earnings is high historically and leaves little room for earnings
disappointments. Earnings are expected to be up, but only moderately in the 3%
to 7% range. If inflation continues to be subdued, the Federal Reserve will
probably not tighten monetary policy. In this economic environment, we currently
expect a positive, but more moderate stock market return than we have had over
the past four years. Because of the high market valuation, continued volatility
can be anticipated. Although we do not expect corrections to exceed 10%, any
move by the Federal Reserve to reduce liquidity would probably result in a
larger market adjustment.
Management will continue to closely monitor market conditions and make
portfolio changes that we believe will enhance relative returns. Thank you for
your continued support and participation.
Cordially,
Marilou R. McGirr
Marilou R. McGirr
Chairman of the Committee
- --------------------------------------------------------------------------------
1
<PAGE> 2
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value at beginning of period $17.69 $14.14 $11.74 $ 8.85 $8.91
----- ----- ----- ----- ---
Investment income .20 .23 .19 .19 .19
Fees .16 .13 .10 .09 .07
----- ----- ----- ----- ---
NET INVESTMENT INCOME .04 .10 .09 .10 .12
Net gain (loss) on investments 3.82 3.45 2.31 2.79 (.18)
----- ----- ----- ----- ---
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 3.86 3.55 2.40 2.89 (.06)
----- ----- ----- ----- ---
VALUE AT END OF PERIOD $21.55 $17.69 $14.14 $11.74 $8.85
----- ----- ----- ----- ---
----- ----- ----- ----- ---
Ratio of investment income--
net to average participants' equity 0.20% 0.60% 0.70% 1.00% 1.30%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 41% 45% 53% 46% 52%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of accumulation units outstanding
at end of period 8,320,912 8,612,630 8,502,140 8,763,186 9,298,777
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
Marilou R. McGirr, Chairman
Vice President
Continental Assurance Company
Richard W. Dubberke
Vice President and
Portfolio Manager
Continental Assurance Company
Richard T. Fox
Financial Consultant
William W. Tongue
Professor of Economics
and Finance, Emeritus
University of Illinois at Chicago
Peter J. Wrenn
President
Hudson Technology, Inc.
- --------------------------------------------------------------------------------
SECRETARY
Lynne Gugenheim
Vice President and
Associate General Counsel
Continental Assurance Company
AUDITORS
Deloitte & Touche LLP
Chicago, Illinois
CUSTODIAN
Chase Manhattan Trust Company
of Illinois
Chicago, Illinois
- --------------------------------------------------------------------------------
This report has been prepared for the information of participants in
Continental Assurance Company Separate Account (B) and is not authorized
for distribution to prospective investors unless preceded or accompanied by an
effective prospectus that includes information regarding Separate Account (B)'s
objectives, policies, management, records, sales commissions and other
information.
- --------------------------------------------------------------------------------
2
<PAGE> 3
- --------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- -------------------------
<S> <C> <C>
1998 December 31 $21.55
1997 December 31 17.69
1996 December 31 14.14
1995 December 31 11.74
1994 December 31 8.85
1993 December 31 8.91
1992 December 31 7.70
1991 December 31 7.29
1990 December 31 5.45
1989 December 31 5.31
</TABLE>
The Annuity Unit Values shown at
the right are based on the monthly
increases or decreases in the
accumulation unit values in excess of
an assumed annualized rate of 3 1/2%
and rounded to the nearest cent.
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- -----------------------
<S> <C> <C>
1999 January 1 $6.69
1998 January 1 6.05
1997 January 1 4.88
1996 January 1 4.36
1995 January 1 3.35
1994 January 1 3.39
1993 January 1 3.14
1992 January 1 2.71
1991 January 1 2.36
1990 January 1 2.40
</TABLE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
- --------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include
investment income and capital gains. This chart displays the unit value at
December 31 for the past ten years. This period was one of mixed
common stock prices. The values shown should not be considered representations
of values which may be achieved in the future.
Unit Value Bar Graph
- --------------------------------------------------------------------------------
3
<PAGE> 4
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(3.0%)
Raytheon Company 45,000 $ 2,396,250
United Technologies Corporation 28,200 3,066,750
------------
5,463,000
------------
BEVERAGES-(3.3%)
The Robert Mondavi Corporation* 54,000 2,207,250
PepsiCo, Inc. 92,000 3,766,250
------------
5,973,500
------------
BROADCASTING-(4.5%)
Emmis Broadcasting Corporation* 45,000 1,951,875
Tele-comm Liberty Media A* 133,312 6,140,684
------------
8,092,559
------------
BUILDING MATERIALS-(1.4%)
Lowe's Companies, Inc. 50,000 2,559,375
------------
CABLE SERVICE-(3.3%)
Comcast Corporation 55,000 3,227,813
Tele-Communications Inc.* 50,000 2,765,625
------------
5,993,438
------------
CHEMICAL-(1.7%)
Monsanto Company 65,000 3,087,500
------------
COMPUTER SOFTWARE-(1.4%)
Microsoft Corporation* 18,000 2,496,375
------------
COMPUTER SYSTEMS-(9.8%)
Cisco Systems, Inc.* 67,500 6,264,844
EMC Corporation* 70,000 5,950,000
First Data Corp. 75,000 2,376,562
International Business Machines Corporation 15,000 2,771,250
------------
17,362,656
------------
COSMETICS-(2.3%)
The Gillette Company 84,000 4,058,250
------------
DIVERSIFIED-(4.5%)
General Electric Company 45,000 4,592,813
Tyco International Ltd. 46,000 3,470,125
------------
8,062,938
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE> 5
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
ELECTRONIC EQUIPMENT-(7.2%)
AMP Incorporated 20,000 $ 1,041,250
Honeywell, Inc. 35,000 2,635,937
Molex Incorporated/Class A 125,995 4,016,091
Motorola, Inc. 44,000 2,686,750
Texas Instruments Incorporated 30,000 2,566,875
------------
12,946,903
------------
ENERGY-(2.5%)
Enron Corp. 80,000 4,565,000
------------
FINANCIAL SERVICES-(2.0%)
American Express Company 35,000 3,578,750
------------
FINANCIAL-BANKS -(6.2%)
Bank United Corp. 70,000 2,747,500
Citigroup Inc. 48,750 2,413,125
First Union Corporation 40,000 2,432,500
Wells Fargo & Company 90,000 3,594,375
------------
11,187,500
------------
FOODS-(1.0%)
Bestfoods 30,600 1,629,450
------------
HEALTH CARE-(5.6%)
Cardinal Health, Inc. 74,625 5,662,172
Medtronic, Inc. 60,000 4,455,000
------------
10,117,172
------------
HOUSEHOLD PRODUCTS-(2.0%)
Procter & Gamble Co. 38,800 3,542,925
------------
MACHINERY-(1.8%)
Illinois Tool Works, Inc. 56,800 3,294,400
------------
MERCHANDISING-DRUGS-(1.9%)
Rite Aid Corporation 70,000 3,469,375
------------
MERCHANDISING-FOODS-(4.4%)
The Kroger Co.* 50,000 3,025,000
Safeway Inc.* 80,000 4,875,000
------------
7,900,000
------------
OIL FIELD SERVICES & EQUIPMENT-(2.4%)
Santa Fe International 95,000 1,389,375
Schlumberger Limited 64,600 2,979,675
------------
4,369,050
------------
PHARMACEUTICAL-(9.8%)
American Home Products Corporation 54,000 3,040,875
Pfizer Inc. 61,000 7,651,687
Schering-Plough Corporation 120,000 6,630,000
------------
17,322,562
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES,
CONTRACTS OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) $ PAR VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLISHING-(1.5%)
Tribune Company 40,000 $ 2,640,000
------------
SEMICONDUCTOR-(3.4%)
Applied Materials, Inc.* 88,000 3,756,500
Intel Corp. 19,800 2,347,537
------------
6,104,037
------------
TELECOMMUNICATIONS-(3.2%)
Loral Space & Communications* 161,500 2,876,719
Tellabs, Inc.* 43,000 2,948,188
------------
5,824,907
------------
UTILITIES-COMMUNICATIONS-(5.6%)
Intermedia Communications Inc.* 80,000 1,380,000
MCI Worldcom, Inc.* 80,000 5,740,000
Sprint Corporation 35,000 2,944,375
------------
10,064,375
------------
TOTAL COMMON STOCKS-(95.7%) 171,705,997
------------
OPTIONS:
EMC Corporation 100 7,625
American Express Company 100 (9,875)
Bestfoods 200 (375)
Intel Corp. 100 4,811
Intermedia Communications Inc. 200 499
------------
TOTAL OPTIONS-(0.0%) 2,685
------------
SHORT-TERM NOTES:
COMPUTER ELECTRONICS-(2.8%)
Tandy Corporation, 5.82%, due 1/11/99 5,000,000 4,991,917
------------
FINANCIAL SERVICES-BANK-(1.5%)
The First National Bank of Chicago Eurodollar Time
Deposit, 5.0%, due 1/4/99 2,725,000 2,725,378
------------
TOTAL SHORT-TERM NOTES-(4.3%) 7,717,295
------------
TOTAL INVESTMENTS-(100.0%) $179,425,977
------------
------------
=================================================================================================
</TABLE>
*Non-income producing security in 1998.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE> 7
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Advanced Communications Group, Inc. 110,000 110,000 -
American Express Company 10,000 10,000 35,000
American Home Products Corporation 64,000 10,000 54,000
American Standard Companies, Inc. 10,000 65,000 -
Amgen, Inc. - 45,000 -
AMP Incorporated 20,000 - 20,000
Banc One Corporation 5,450 59,950 -
Bankamerica Corporation - 52,200 -
Bestfoods 28,800 27,000 30,600
The Boeing Company 35,000 35,000 -
Burlington Northern Santa Fe - 25,212 -
Camco International, Inc. - 50,000 -
Cardinal Health, Inc. 44,875 20,000 74,625
Cisco Systems, Inc. 22,500 - 67,500
Citicorp - 35,500 -
Citigroup Inc. 73,750 25,000 48,750
Comcast Corporation 55,000 - 55,000
Corn Products International Inc. 7,200 7,200 -
Corning Inc. - 52,700 -
Crown Cork & Seal Company, Inc. 10,000 60,000 -
EMC Corporation - 10,000 70,000
Eastman Kodak Company 10,000 10,000 -
Emmis Broadcasting Corporation 45,000 - 45,000
Ericsson (LM) Tel-SP ADR 60,000 60,000 -
First Data Corp. 15,000 20,000 75,000
First Union Corporation 40,000 - 40,000
The Gillette Company 42,000 - 84,000
Healthsouth Corp. 10,000 138,000 -
Heller Financial, Inc. 75,700 75,700 -
Hewlett-Packard Company 5,000 64,000 -
Intel Corp. 25,000 45,200 19,800
Intermedia Communications Inc. 80,000 - 80,000
International Business Machines Corporation 15,000 - 15,000
The Kroger Co. 50,000 - 50,000
Eli Lilly and Company 10,000 50,000 -
Lowe's Companies, Inc. 50,000 - 50,000
Loral Space & Communications 20,000 - 161,500
Mettler-Toledo Holdings Inc. - 116,200 -
Microsoft Corporation 23,000 5,000 18,000
Molex Incorporated/Class A - 20,000 125,995
The Robert Mondavi Corporation 5,000 - 54,000
Motorola, Inc. 30,000 30,000 44,000
PepsiCo, Inc. 25,000 - 92,000
Pfizer Inc. - 20,000 61,000
Rite Aid Corporation 35,000 - 70,000
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Safeway Inc. 40,000 - 80,000
Santa Fe International 25,000 - 95,000
Schering-Plough Corporation 60,000 - 120,000
Schlumberger Limited 23,600 - 64,600
The Sports Authority, Inc. - 124,750 -
Sprint Corporation 35,000 - 35,000
Sprint PCS 17,500 17,500 -
Tele-comm Liberty Media A 44,438 1 133,312
Tele-communications, Inc. 50,000 - 50,000
Teleport Communications Inc. 10,000 45,000 -
Tellabs, Inc. 53,000 10,000 43,000
Texas Instruments Incorporated 30,000 - 30,000
Tribune Company 5,000 10,000 40,000
Tyco International Ltd. 46,000 - 46,000
Union Pacific Corp. 20,000 20,000 -
United States Filter Corporation 40,000 70,000 -
United Technologies Corporation - 10,000 28,200
Ziff Davis Inc. 4,000 4,000 -
===============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF NET
DECEMBER 31, 1998 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $ 7,651,687 4.3%
Schering-Plough Corporation 6,630,000 3.7
Cisco Systems, Inc. 6,264,844 3.5
Tele-comm Liberty Media A 6,140,684 3.4
EMC Corporation 5,950,000 3.3
MCI Worldcom, Inc. 5,740,000 3.2
Cardinal Health, Inc. 5,662,172 3.2
Safeway Inc. 4,875,000 2.7
General Electric Company 4,592,813 2.6
Enron Corp. 4,565,000 2.5
- ----------------------------------------------------------------------------------------
$58,072,200 32.4%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Technological 29.2% 23.0%
Consumer Staples 27.4 23.9
Consumer Servicers 15.6 11.3
Financial Services 8.6 14.2
Capital Goods 6.6 8.8
Utilities 5.9 3.6
Energy 5.2 8.7
Consumer Cyclicals 1.5 1.3
Basic Industries - 3.6
Transportation - 1.6
- -----------------------------------------------------------------------------
100% 100%
=============================================================================
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 10
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note 1
Common stocks, at market (cost $99,881,837 and
$92,262,123) $171,705,997 $145,406,403
Call options written, at market--Note 5 2,685 -
Short-term notes, at amortized cost (approximates
market) 7,717,295 7,333,814
------------ ------------
TOTAL INVESTMENTS 179,425,977 152,740,217
Cash 23,876 13,730
Dividends receivable--Note 1 79,613 102,376
Receivable from Continental Assurance Company for fund
deposits - 58,304
------------ ------------
TOTAL ASSETS 179,529,466 152,914,627
------------ ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 52,131 40,585
Deferred income on call options written 87,060 -
Payable to Continental Assurance Company for fund
withdrawals 44,449 495,148
------------ ------------
TOTAL LIABILITIES 183,640 535,733
- -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,320,912 and 8,612,630
units issued
and outstanding at $21.55 and $17.69 per unit)--Note 2 $179,345,826 $152,378,894
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Dividends $ 1,265,882 $ 1,316,494
Interest and other 398,095 755,828
----------- -----------
1,663,977 2,072,322
----------- -----------
Fees (to Continental Assurance Company)--Note 4
Investment advisory fees 816,238 704,159
Service fees 538,717 464,745
----------- -----------
1,354,955 1,168,904
----------- -----------
NET INVESTMENT INCOME 309,022 903,418
----------- -----------
Investments--Note 3
Net realized gain 13,986,986 16,194,879
Net unrealized gain 18,682,566 14,151,723
----------- -----------
NET GAIN ON INVESTMENTS 32,669,552 30,346,602
- ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $32,978,574 $31,250,020
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
10
<PAGE> 11
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Net investment income $ 309,022 $ 903,418
Net realized gain on investments 13,986,986 16,194,879
Net unrealized gain on investments 18,682,566 14,151,723
------------ ------------
Net increase in participants' equity resulting from
operations 32,978,574 31,250,020
------------ ------------
From unit transactions:
Sales 3,226,883 11,909,643
Withdrawals (9,238,525) (10,972,411)
------------ ------------
Net increase (decrease) in participants' equity
resulting from unit transactions (6,011,642) 937,232
------------ ------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 26,966,932 32,187,252
Participants' equity, January 1 152,378,894 120,191,642
- --------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $179,345,826 $152,378,894
- --------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ORGANIZATION
Continental Assurance Company Separate Account (B) is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company. Separate Account (B) is part of Continental
Assurance Company (CAC), an Illinois life insurance company which is a wholly-
owned subsidiary of Continental Casualty Company (Casualty). Casualty is
wholly-owned by CNA Financial Corporation (CNA). Loews Corporation owns
approximately 85% of the outstanding common stock of CNA.
The operations of CAC include the sale of certain variable annuity contracts,
the proceeds of which are invested in Separate Account (B). CAC also provides
investment advisory and administrative services to Separate Account (B) for a
fee.
The assets and liabilities of Separate Account (B) are segregated from those
of CAC.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price. Securities not traded on a national exchange
are valued at the bid price of over-the-counter market quotations. Short-term
notes are valued at cost plus accrued discount or interest (amortized cost)
which approximates market.
Net realized gains and losses on sales of securities are determined as the
difference between proceeds and cost, using the specific identification method.
There are no differences in cost for financial statement and Federal income tax
purposes.
Security transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date.
Separate Account (B) may loan securities, up to a maximum of 25% of its net
assets, to brokers under loan agreements which are fully secured by cash or
government securities. Loaned securities are not reported herein as purchases or
sales since Separate Account (B) remains the owner of loaned securities. During
the years ended December 31, 1998 and 1997 no investment securities owned by
Separate Account (B) were loaned to brokers under loan agreements.
FEDERAL INCOME TAXES
Under existing Federal income tax law, no taxes are payable by Separate
Account (B) on net investment income and net realized capital gains, which are
reinvested in Separate Account (B) and taken into account in determining unit
values.
OTHER
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
11
<PAGE> 12
- --------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From operations:
Accumulated net investment income $ 52,494,186 $ 52,185,165
Accumulated net realized gain on investment transactions 110,061,935 96,074,948
Accumulated unrealized gain 74,723,866 55,477,008
Accumulated unrealized loss (2,897,021) (2,332,729)
------------ ------------ ---
Accumulated income 234,382,966 201,404,392
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (55,037,140) (49,025,498)
- ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $179,345,826 $152,378,894
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate proceeds $1,070,942,016 $820,595,354
Aggregate cost 1,056,955,030 804,400,475
- -----------------------------------------------------------------------------------------------
Net realized gain $ 13,986,986 $ 16,194,879
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, December 31 $ 71,826,845 $ 53,144,279
Less balance, January 1 53,144,279 38,992,556
- -----------------------------------------------------------------------------------------------
Change in net unrealized gain $ 18,682,566 $ 14,151,723
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------------
Common stocks $ 64,427,142 $ 60,343,096
Short-term notes 1,000,521,759 761,856,229
- -----------------------------------------------------------------------------------------------
Total purchases $1,064,948,901 $822,199,325
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 13
- --------------------------------------------------------------------------------
NOTE 4. MANAGEMENT FEES:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account (B) pays fees to CAC for investment advisory and
management services which are set by contract at one-half of one percent per
annum of the average daily net assets of Separate Account (B).
The Investment Advisory Agreement additionally provides for the
reimbursement to CAC for certain legal, accounting and other expenses. Such
reimbursement of services fees is computed at the rate of .33 of one percent per
annum of the average daily net assets of Separate Account (B).
Participants pay fees directly to CAC for sales and administrative
services. Sales fees represent costs paid by participants upon purchase of
additional accumulation units; administrative fees are deducted annually from
certain participants' accounts.
- --------------------------------------------------------------------------------
FEES AND EXPENSES PAID TO CAC
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $ 816,238 $ 704,159
Service fees 538,717 464,745
---------- ----------
Total fees charged to fund income 1,354,955 1,168,904
Sales and administrative fees paid by participants 10,428 11,417
- ---------------------------------------------------------------------------------------------
Total $1,365,383 $1,180,321
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account (B) invests from time to time in certain derivative
financial instruments, namely put and call options, to increase investments
returns.
Derivatives are carried at fair value which generally reflects the
estimated amounts that Separate Account (B) would receive or pay upon
termination of the contracts at the reporting date. Dealer quotes are available
for all of Separate Account (B)'s derivatives.
The fair values associated with these instruments are generally affected by
changes in the stock market. The credit risk associated with these instruments
is minimal as all transactions are cleared through security exchanges.
A summary of the aggregate notional amounts and estimated market values of
call options at December 31, 1998, as well as the monthly average market values
and the recognized gain, are presented below.
CALL OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTIONAL VALUE MARKET VALUE MONTHLY AVERAGE NET REALIZED GAIN
- -------------------------------------------------------------------
<S> <C> <C> <C>
$4,725,000 $2,685 $4,502 $1,300,540
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
As December 31, 1998 these options were collateralized by stock with a
market value of $4,468,130.
- --------------------------------------------------------------------------------
13
<PAGE> 14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments as of December 31, 1998, of Continental
Assurance Company Separate Account (B) (a separate account of Continental
Assurance Company [the Company], which is an affiliate of CNA Financial
Corporation, an affiliate of Loews Corporation) as of December 31, 1998 and
1997, and the related statements of operations and changes in participants'
equity for the years then ended, and the financial highlights (shown on page
two) for each of the five years in the period ended December 31, 1998. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the custodian and brokers. 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of
Continental Assurance Company Separate Account (B) as of December 31, 1998 and
1997, the results of its operations and changes in its participants' equity for
the years then ended and the information included in the financial highlights
for each of the five years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1999
- --------------------------------------------------------------------------------
14
<PAGE> 15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account (B) does not
maintain any systems. Instead, it relies on the systems of its investment
advisor Continental Assurance Company (CAC) and third party vendors. Separate
Account (B) has a plan under which it reviews periodically the progress that
these parties are making on this issue. To date, CNA Financial Corporation (CNA)
on behalf of CAC has certified internally as Year 2000-ready all of the systems
used by CAC in its duties as investment advisor and administrative agent for
Separate Account (B). While there is no client charge to Separate Account (B),
CNA estimates that the total cost to replace and upgrade its systems to
accommodate Year 2000 processing will be approximately $60 to $70 million. As of
December 31, 1998, CNA has spent approximately $59 million on Year 2000
readiness matters.
CNA has also received statements of Year 2000 compliance from certain of
key business partners: The Chase Manhattan Bank (Separate Account (B)'s
custodian bank); Bloomberg L.P. (the system used for trade entry); MAXIMIS
(Separate Account (B)'s accounting system) and The Depository Trust Company (the
book-entry depository used to record ownership of securities). Separate Account
(B) management believes that the systems on which it relies do not have any
significant remaining exposure to the Year 2000 issue and, therefore, Separate
Account (B) does not have material exposure to the Year 2000 issue. However, due
to the interdependent nature of computer systems, there may be an adverse impact
on Separate Account (B) if banks, independent agents, vendors, insurance agents,
third party administrators, various governmental agencies and other business
partners fail to successfully address the Year 2000. To mitigate this impact,
CNA is communicating with these various entities to coordinate Year 2000
conversion.
In addition, CNA has developed business resumption plans to ensure that it
and Separate Account (B) are able to continue critical processes through other
means in the event that it becomes necessary to do so. Formal strategies have
been developed within each business unit and support organization to include
appropriate recovery processes and use of alternative vendors.
- --------------------------------------------------------------------------------
15
<PAGE> 16
[B LOGO]
Participants Inquiries To: CONTINENTAL ASSURANCE COMPANY
Continental Assurance Company
Separate Account (B) SEPARATE ACCOUNT (B)
Attn: Individual Pension Accounts-35S
P.O. Box 803572 REPORT TO PARTICIPANTS
Chicago, Illinois 60680-3572
800-351-3001 DECEMBER 31, 1998
[CNA LOGO]
[CA LOGO]
L 554-921 (12/98) 2/99
<PAGE> 1
EXHIBIT 16
Continental Assurance Company
Separate Account (B)
The Average Annual Total Return on an investment of $1,000 for one year, five
year and ten year periods ending December 31, 1998.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
1-1-98 to 12-31-98 1-1 -94 to 12-31-93 11-1-80 to 12-31-98
LEVEL DEDUCTION CONTRACT
FOR 403(b) PLANS
<S> <C> <C> <C>
Investment $1,000 $1,000 $1,000
Less Sales Load (5%) (50) (50) (50)
Less Adm Exp (1%) (10) (10) (10)
--- -- ---
Net Investment $940 $940 $940
ERV $1,145.11 $2,273.51 $4,442.32
AVERAGE ANNUAL TOTAL RETURN 14.51% 17.85% 16.08%
GRADED DEDUCTION CONTRACT
FOR 403(B) PLANS
Investment $1, 000 $1,000 $1,000
Less Sales Load (5%) (50) (50) (50)
-- --- --- ---
Net Investment $950 $950 $950
Contract fee @ $30/yr
ERV $1,127.29 $2,130.36 $3,763.62
AVERAGE ANNUAL TOTAL RETURN 12.73% 16.33% 14.17%
HR-10 Plans
Investment $1,000 $1,000 $1,000
Less Sales Load (7%) (70) (70) (70)
Less Adm Exp (1.5%) (15) (15) (15)
Net Investment $915 $915 $915
Acctg fee: $20 1st yr; $10 ea add'l yr
Accounting withdrawal fee $10
Surrender fee $20 (2%)
ERV $1,064.66 $2,078.57 $4,011.61
Average Annual Total Return 6.47% 15.76% 14.90%
</TABLE>
P(1=T)n=ERV
P = a hypothetical initial payment of $1000
T = Average annual total return
n = numbers of years
ERV = ending redeembable value of a hypothetical $1000 payment made at the
beginning of the one, five, and 10-year period, at the end of the one, five,
or 10-year period.
<PAGE> 2
<TABLE>
<CAPTION>
Ten Year Example
Yearly Int
Time Unit Val Return Beg Sal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 1.0000 1,000.00 6 0 154.61 1,094,61 9.46
12/31/89 5.31 0.1645 1,094.61 0 0 28.86 1,123.46 2.64
12/31/90 5.45 0.0264 1,123,46 0 0 379.30 1,502.76 33.76
12/31/91 7.29 0.3376 1.502.76 0 0 84.52 1,587.28 5.62
12/31/92 7.70 0.0562 1,587.28 0 0 249.43 1,836.71 15.71
12/31/93 8.91 0.1571 1,836.71 0 0 -12.37 1,824.34 -0.67
12/31/94 8.85 -0.0067 1,824.34 0 0 595.75 2,420.09 32.66
12/31/95 11.74 0.3266 2,420.09 0 0 494.74 2,914,82 20.44
12/31/96 14.14 0.2044 2,914.82 0 0 731.80 3,646-62 25.11
12/31/97 17.69 0.2511 3,646.62 0 0 795.70 4,442.32 21.82
12/31/98 21.55 0.2182 4,442.32
end 4,442.32
begin 1.000.00
time 10.00
IRR 16.08%
<CAPTION>
Five Year Example
Yearly Int
Time -Unit Val Return Beg Bal % fees $fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0.1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/93 8.91 0.1571 1,000.00 6 0 -6.33 933.67 -6.53
12/31/94 8.85 -0.0067 933.67 0 0 304.89 1,238.66 32.66
12/31/95 11.74 0.3266 1,238.56 0 0 253.20 1,491.76 20.44
12/31/96 14.14 0.2044 1,491.76 0 0 374.52 1,866.29 25.11
12/31/97 17.69 0,2511 1,866.29 0 0 407.23 2,273.51 21.82
12/31/98 21.55 0.2182 2,273.51
end 2,273.51
begin 1,000.00
time 5.00
IRR 17.85%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return Beg Sal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0.1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REP!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REF! #REP!
12/31/93 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/94 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/95 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/96 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/97 17.59 0.2511 1,000.00 6 0 205.11 1,145.11 14.51
12/31/98 21.55 0.2182 1,145.11
end 1,145.11
begin 1,000.00
Pros_97 time 1.00
IRR 14.51%
</TABLE>
<PAGE> 3
Ten Year Example
<TABLE>
<CAPTION>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.66 1.0000 1.000.00 5 30 156.26 1,076,25 7.62
12/31/89 5.31 0.1645 1,076.25 0 30 28.38 1,074.63 -0.15
12/31/90 5.45 0.0264 1,074.63 0 30 362.81 1,407.44 30.97
12/31/91 7.29 0.3376 1,407.44 0 30 79.16 1,456.59 3.49
12/31/92 7.70 0.0562 1,456.59 0 30 228.89 1,655.48 13.65
12/31/93 8.91 0.1571 1,655.48 0 30 -11.15 1,614.34 -2.49
12/31/94 8.85 -0.0067 1,614.34 0 30 527.17 2,111.50 30.80
12/31/96 11.74 0.3266 2,111.50 0 30 431.65 2,513.16 19.02
12/31/96 14.14 0.2044 2,513.16 0 30 630.96 3,114.11 23.91
12/31/97 17.69 0.2511 3,114.11 0 30 679.51 3,763.62 20.86
12/31/98 21.55 0.2182 3,763.62
end 3,763.62
begin 1.000.00
time 10.00
IRR 14.17%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0.1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REFI #REF!
12/31/93 8.91 0.1571 1,000.00 0 0 -6.73 993.27 -0.67
12/31/94 8.85 -0.0067 993.27 5 30 308.14 1,221.74 23.00
12/31/95 11.74 0.3266 1,221.74 0 30 249.76 1.441.50 17.99
12/31/96 14.14 0.2044 1,441.50 0 30 361.90 1,773.40 23.02
12/31/97 17.69 0.2511 1,773.40 0 30 386.96 2,130.36 20.13
12/31/98 21.55 0.2182 2,130.36 0 30 0.00 2,100.36 -1.41
end 2,130.36
begin 1,000.00
time 5-00
IRR 16.33%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return BEG BAL % fees $ fees earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/68 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0,1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/93 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/94 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/95 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/96 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/97 17.69 0.2511 1,000.00 5 30 207.29 1,127.29 12.73
12/31/98 21.55 0.2182 1,127.29
end 1,127.29
Pros_97 begin 1,000.00
time 1.00
IRR 12.73%
</TABLE>
<PAGE> 4
Ten Year Example
<TABLE>
<CAPTION>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 1.0000 1,000.00 8.5 20 150.49 1,045,49 4.55
12/31189 5.31 0.1645 1,045.49 0 10 27.56 1,063.06 1.68
12/31/90 5.45 0.0264 1,063.06 0 10 358.90 1,411.96 32.82
12/31/91 7.29 0.3376 1,411.96 0 10 79.41 1,48l.37 4.92
12/31/92 7.70 0.0562 1,481.37 0 10 232.79 1,704.16 15.04
12/31/93 8.91 0.1571 1,704.16 0 10 -11.48 1,682.68 -1.26
12/31/94 8.85 -0.0067 1,682.68 0 10 549.49 2,222.17 32.06
12/31/95 11.74 0.3266 2,222.17 0 10 454.28 2,666.45 19.99
12/31/96 14.14 0.2044 2,666.45 0 10 669.44 3,325.89 24.73
12/31/97 17.69 0.2511 3,325.89 0 10 725.72 4,041.61 21.52
12/31/98 21.55 0.2182 4,041.61 0 30 4,011.61
end 4,011.61
begin 1,000.00
time 10.00
IRR 14.90%
Five Year Example
Yearly Int
Time Unit Val Return Beg Sol % fees $ fees Earned End Sal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0.1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.46 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/93 8.91 0.1571 1,000.00 8.5 20 -6.16 888.84 -11.12
12/31/94 8.85 -0.0067 888.84 0 10 290.25 1,169.09 31.53
12/31/95 11.74 0.3286 1,169.09 0 10 239.00 1,398.09 19.59
12/31/96 14.14 0.2044 1,398.09 0 10 351.01 1,739.09 24.39
12/31/97 17.69 0.2511 1,739.09 0 10 379.47 2,108.57 21.25
12/31/98 21.55 0.2182 2,108.57 0 30 2,078.57
end 2,078.57
begin 1,000.00
time 5.00
IRR 15.76%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 4.56 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/89 5.31 0.1645 #REF! 0 0 #REF! #REF! #REF!
12/31/90 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/91 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/92 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/93 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/94 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/95 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/96 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/97 17.69 0.2511 1,000.00 8.5 20 199.66 1,094.66 9.47
12/31/98 21.56 0.2182 1,094.66 30 1,064.66
end 1,064.66
Pros_97 begin 1,000.00
time 1.00
IRR 6.47%
</TABLE>
