Item 1. Business.
(a) General Development of Business.
Commodity Trend Timing Fund II (the "Partnership") is a limited partnership which was organized under the laws of the State of New York on May 14, 1982. The Partnership engages in the speculative trading of commodity futures and option contracts, including futures contracts on U.S. Treasury bills and other financial instruments, foreign currencies and stock indices (collectively, "futures"). The Partnership commenced trading operations on December 22, 1982. Redemptions for the years ended December 31, 1996, 1995 and 1994 are reported in the Statements of Partners' Equity on page under "Item 8. Financial Statements and Supplementary Data."
The Partnership trades futures primarily on United States futures exchanges and may, to a lesser extent, trade futures on some foreign futures exchanges. It engages in such trading through a futures brokerage account maintained with its futures broker, Smith Barney Inc. ("SB").
Under the terms of the Limited Partnership Agreement of the Partnership (the "Partnership Agreement"), the general partner of the Partnership (the "General Partner") has sole responsibility for the management of the business and affairs of the Partnership, but may delegate futures trading discretion to one or more commodity trading advisors.
Chang-Crowell Investment Management Inc. ("CCIM") acts as the Partnership's trading manager subject to the terms and conditions of the Trading Manager Agreement made June 21, 1995, between the Partnership and CCIM (the "Trading Manager Agreement"). As trading manager, CCIM appoints and supervises the Partnership's futures trading advisors ("Advisors"). CCIM has selected Marathon Capital Growth Partners L.L.C. ("Marathon"), a registered commodity trading advisor, to manage a portion of the Partnership's assets. Marathon was formed in March 1995 by two principals of CCIM and Chang-Crowell Management Corporation ("CCMC"), an affiliate of CCIM, Robert Ecke and Bruce Terry. CCIM has selected CCMC to manage the other portion of the Partnership's assets. Currently, Marathon manages approximately 78% of the Partnership's assets, and CCMC manages approximately 22% of the Partnership's assets. Marathon and CCMC manage the Partnership's assets subject to the terms and conditions of the Management Agreement made June 21, 1995, among CCIM, CCMC and Marathon (the "Management Agreement"). The Trading Manager Agreement and the Management Agreement each expire on June 30, 1997.
The Partnership may, in its sole discretion, renew the Trading Manager Agreement for additional one-year periods. The Partnership may terminate the Trading Manager Agreement as to CCIM upon 60 days' notice if (i) limited partners of the Partnership ("Limited Partners") owning more than 50% of the outstanding Units shall vote to require the Partnership to terminate the Trading Manager Agreement or (ii) CCIM fails to comply with the terms of the Trading Manager Agreement. The Partnership may immediately terminate the Trading Manager Agreement as to CCIM if (i) CCIM dissolves or is otherwise not serving as trading manager of the Partnership or (ii) CCIM's registration as a commodity pool operator with the Commodity Futures Trading Commission (the "CFTC"), or any other regulatory authority, is terminated or suspended. CCIM may terminate the Trading Manager Agreement by giving not less than 30 days' notice to the Partnership.
CCIM may, in its sole discretion, renew the Management Agreement for additional one-year periods. CCIM may terminate the Management Agreement as to an Advisor upon 60 days' notice if (i) the Advisor fails to conform to the Partnership's trading policies which are described under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Trading Operations," (ii) the per Unit Net Asset Value (as defined in the Partnership Agreement) of the assets allocated to the Advisor shall decline at any time to 75% or less of their Net Asset Value on June 30, 1995, (iii) Limited Partners owning more than 50% of the outstanding Units shall vote to require the Partnership to terminate the Management Agreement, (iv) the Advisor fails to comply with the terms of the Management Agreement or (v) CCIM reasonably believes that the application of speculative position limits resulting from the aggregation of the Partnership's commodity futures positions with those of accounts managed or advised by the Advisor will substantially affect the performance of the Partnership's futures trading. CCIM may immediately terminate the Management Agreement as to an Advisor if (i) the Advisor dissolves or is otherwise not managing the trading programs of the Partnership or (ii) the Advisor's registration as a commodity trading advisor with the Commodity Futures Trading Commission (the "CFTC"), or any other regulatory authority, is terminated or suspended. Any Advisor may terminate the Management Agreement by giving not less than 30 days' notice to CCIM.
The Advisors' investment decisions have been and will continue to be based primarily on diversified technical analysis and trend-following futures trading strategies which seek to identify price changes and trends.
Under the terms of a customer agreement ("Customer Agreement") entered into with SB, the Partnership is obligated to pay futures brokerage commissions at 80% of the standard rates SB charges its public customers. As of January 1, 1986, and until further notice, the Partnership will charged brokerage commissions at 50% of SB's standard public customer rates in effect from time to time. SB is obligated to reimburse the Partnership in any fiscal year for any brokerage commissions paid to it by the Partnership which exceed 25% of the average of the month-end Net Assets (as defined in the Partnership Agreement) of the Partnership during such year. Nonetheless, SB has agreed that until further notice it will reimburse the Partnership for any commissions (excluding exchange, floor brokerage and clearing fees) which exceed 20% of such average month-end Net Assets during a fiscal year. In addition, SB will pay the Partnership interest on 98% of the average daily equity in its account during each month at the rate of the average non-competitive yield of 13-week U.S. Treasury bills as determined at the weekly auctions thereof during the month.
(b) Financial Information About Industry Segments.
The Partnership's business consists of only one segment: speculative trading of futures. The Partnership does not engage in sales of goods or services. The Partnership's net income (loss) from operations for the years ended December 31, 1996, 1995 and 1994 are set forth under "Item 6. Select Financial Data." Partnership capital at December 31, 1996, was $2,462,173.
(c) Narrative Description of Business.
See paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic Operations and Export Sales.
The Partnership does not engage in sales of goods or services.
Item 2.

Item 2. Properties.
The Partnership does not own or lease any properties. CCIM operates out of its rented offices in Greenwich, Connecticut.
Item 3.

Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Partnership is a party or to which any of its assets are subject. No material legal proceedings affecting the Partnership were terminated during the fiscal year ended December 31, 1996.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
The Partnership has issued no stock. There is no public market for the Units.
(b) Holders.
The number of holders of Units as of December 31, 1996, was 515. CCIM is the sole holder of units of general partnership interest.
(c) Distribution.
The Partnership did not declare a distribution in 1996 or 1995.
Item 6.

Item 6. Selected Financial Data.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only assets are its equity in its futures trading account, consisting of cash and cash equivalents, and net unrealized appreciation (depreciation) on open futures contracts and interest receivable. Because of the low margin deposits typically required in futures trading, relatively small price movements may result in substantial losses to the Partnership. Such substantial losses could lead to a material decrease in liquidity. To minimize this risk, the Partnership follows certain trading policies, including:
(i) Partnership funds will be invested only in futures contracts which are traded in sufficient volume to permit, in the opinion of the Advisors, ease of taking and liquidating positions.
(ii) The Partnership will diversify its positions among various commodities. The Partnership will not initiate additional positions in a commodity if such additional positions would result in a net long or short position in such commodity requiring as margin more than 15% of the Partnership's Net Assets. For purposes of this limitation, gold coins, bullion and futures will be considered as one commodity and silver coins, bullion and futures will be considered as one commodity.
(iii) The Partnership will not initiate additional positions in any commodity if such additional positions would result in aggregate positions for all commodities requiring as margin more than 66-2/3% of the Partnership's Net Assets.
(iv) The Partnership may occasionally accept delivery of a commodity. Unless any such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearing house, the physical commodity position will be fully hedged.
(v) The Partnership will not employ the trading technique commonly known as "pyramiding," in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities.
(vi) The Partnership will not purchase, sell or trade in securities (other than securities in which "customers' funds" may be invested under the Commodity Exchange Act, as amended), nor will it write, purchase, sell or trade in options on securities. However, the Partnership may, within its discretion, trade in options on commodity futures contracts or physical commodities.
(vii) The Partnership will not utilize borrowings except short-term borrowings if the Partnership takes delivery of any cash commodities.
(viii) The Advisors from time to time may employ trading strategies such as spreads or straddles on behalf of the Partnership. The term "spread" or "straddle" describes a commodity futures trading strategy involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets and in which the trader expects to earn a profit from a widening or narrowing of the difference between the prices of the two contracts.
(ix) The Partnership will not trade on a regular basis in forward contracts on foreign currencies. Such transactions may be effected only in an attempt to hedge currency risks resulting from trading on foreign exchanges or to limit losses or protect profits on existing positions in futures contracts on foreign currencies in situations in which such positions cannot be closed out due to particular market conditions. Such transactions will only be effected with banks having a minimum combined capital and surplus of $100,000,000.
(x) The Partnership will not permit the churning of its commodity trading account.
Trading policies (ii), (iii), (iv), (v), (vi), (vii), (ix) and (x) described above may not be changed without the approval of the holders of a majority of the Units. The remaining trading policies may be altered by the General Partner without approval by the Limited Partners if it is determined that such change is in the best interests of the Partnership. The Limited Partners will be notified of any material changes in trading policies. The Limited Partners will not be notified of changes in the futures traded.
Trading policies (i) through (v) described above are designed to limit market risk. Trading policy (ix) is designed to limit credit risk. Further, CCIM is aware at all times of all positions taken by the Advisors and understands the operations of each Advisor's trading program. CCIM continuously monitors the Advisors' trading to ensure compliance with the trading policies. Marathon's computer-based trading program has a proprietary portfolio risk filter which operates independent of the program's trading signal generator and incorporates a number of market risk management systems.
The Partnership did not trade in forward contracts on foreign currencies or any other off-exchange contracts during the fiscal year ended December 31, 1995. Currently, the Partnership trades primarily on U.S. futures exchanges. The Partnership also trades on LIFFE (The London International Financial Futures and Options Exchange), MATIF (Marche a Terme Internationale de France), SFE (the Sydney Futures Exchange) and SIMEX (the Singapore International Mercantile Exchange). CCIM's restriction of trading to such markets limits credit risk. In a further effort to limit credit risk, all trades are effected through SB, a highly capitalized broker-dealer.
Other than the risks inherent in futures trading, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. The Partnership Agreement requires dissolution of the Partnership under certain circumstances as defined in the Partnership Agreement including, but not limited to, a decrease in the Net Asset Value of a Unit to less than $350 as of the close of business on any business day, or a decrease in the aggregate Net Assets of the Partnership to less than $1,750,000.
(b) Capital Resources.
The Partnership has made no material commitments for capital expenditures as of December 31,1996.
The Partnership's capital consists of the capital contributions of the General Partner and the Limited Partners as increased or decreased by gains or losses on its trading of futures, expenses, interest income, redemptions of Units and distributions of profits, if any. Gains or losses on futures trading cannot be predicted. Market moves in commodities are dependent upon fundamental and technical factors which the Advisors may or may not be able to identify. Partnership expenses consist of, among other things, brokerage commissions, management fees and incentive fees. The level of such expenses is dependent upon the level of futures trading and the ability of the Advisors to identify and take advantage of price movements in the futures markets, in addition to the level of Net Assets maintained. Interest income is dependent upon interest rates over which the Partnership has no control. No forecast can be made as to the level of redemptions of Units in any given period. In 1996, 824.8852 Units were redeemed for an aggregate redemption value of $788,041. In 1995, 1,449.57 Units were redeemed for an aggregate redemption value of $1,287,854. In 1994, 1,014.3443 Units were redeemed for an aggregate redemption value of $1,279,127.
(c) Results of Operations.
For the year ended December 31, 1996, the Net Asset Value per Unit decreased .003% from $870.56 to $870.26. For the year ended December 31, 1995, the Net Asset Value per Unit decreased 6.5% from $931.07 to $870.56. For the year ended December 31, 1994, the Net Asset Value per Unit decreased 50.4% from $1,878.55 to $931.07.
For the year ended December 31, 1996, the Partnership experienced net trading gains of $329,426 before commissions and expenses. Realized net trading gains of $429,582 for the year ended December 31, 1996, were primarily attributable to the trading of foreign bonds currencies and grain futures. For the year ended December 31,1995, the Partnership experienced net trading losses of $187,724 before commissions and expenses. Realized net trading losses of $316,392 for the year ended December 31, 1995, were primarily attributable to the trading of interest rate and metals futures. Such losses were partially offset by realized trading gains experienced in the trading of currency and stock index futures. Realized net trading losses of $4,143,824 for the year ended December 31,1994, were primarily attributable to the trading of interest rate, stock index and currency futures. Such losses were partially offset by realized trading gains experienced in the trading of metals, energy and agricultural commodity futures.
Futures markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in futures trading, but also increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisors to correctly identify such trends. Such trends are influenced by, among other factors, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. The Advisors' technical trading methods do not generally take into account such fundamental factors.
Item 8.

Item 8. Financial Statements and Supplementary Data.
COMMODITY TREND TIMING FUND II
Page Number ------
Independent Auditor's Report
Financial Statements: Statement of Financial Condition December 31, 1996 and 1995
Statement of Operations For the years ended December 31, 1996, 1995 and 1994
Statement of Partners' Equity For the years ended December 31, 1996 and 1995
Notes to Financial Statements
[LETTERHEAD OF JEFFREY VORISEK, CPA, CFP]
INDEPENDENT AUDITOR'S REPORT
To the Partners of Commodity Trend Timing Fund II (A New York Limited Partnership)
We have audited the accompanying statement of financial condition of Commodity Trend Timing Fund II, L.P. as of December 31, 1996 and 1995, and the related statements of operations, and partners' equity for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commodity Trend Timing Fund II, L.P. at December 31, 1996 and 1995 and the results of its operations for the years then ended in conformity with generally accepted accounting principles.
/S/ Jeffrey Vorisek
Jeffrey Vorisek Certified Public Accountant McHenry, IL March 12, 1997
COMMODITY TREND TIMING FUND II, L.P. STATEMENT OF FINANCIAL CONDITION December 31, 1996 and 1995
ASSETS 1996 1995 ----------- -----------
Trading account equity Cash and cash equivalents -- $ 326,100 Net unrealized trading gains $ 84,584 184,740 Owed to broker (120) -- Securities on deposit 2,377,590 2,676,723 ----------- ----------- 2,462,054 3,187,563 Interest receivable 119 335 ----------- -----------
Total Assets $ 2,462,173 $ 3,187,898 =========== =========== LIABILITIES AND PARTNERSHIP EQUITY
Accrued expenses: Commissions $ 9,048 $ 15,600 Management fees 8,141 10,545 Other 10,940 8,760 ----------- ----------- Total Liabilities 28,129 34,905 ----------- -----------
General Partner equity, 56 and 56 units outstanding in 1996 and 1995, respectively 49,057 49,074
Limited Partners' equity, 2,741 and 3,566 units outstanding in 1996 and 1995, respectively; a change of (825) units 2,384,987 3,103,919 ----------- ----------- Total Equity 2,434,044 3,152,993 ----------- ----------- Total Liabilities and Partnership Equity $ 2,462,173 $ 3,187,898 =========== ===========
See Notes to Financial Statements
COMMODITY TREND TIMING FUND II, L.P. STATEMENT OF OPERATIONS For the years ended December 31, 1996, 1995 and 1994
See Notes to Financial Statements
COMMODITY TREND TIMING FUND II, L.P. STATEMENT OF PARTNERS' EQUITY For the years ended December 31, 1996 and 1995
See Notes to Financial Statements
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 1996
Note 1. Significant Accounting Policies
The valuation of net assets includes unliquidated commodity futures contracts owned by the Partnership, if any, at the end of the period. The unrealized gain or loss on these contracts, if any, has been calculated based on closing prices on the last business day of the year of 1996 and 1995. Foreign currency is translated into US dollars at the exchange rates prevailing on the last business day of the year.
Income taxes - No provision for income taxes has been made since the Partnership is not subject to taxes on income. Each partner is individually liable for the tax on its share of income and expenses. The Partnership prepares a calendar year information tax return.
Securities on Deposit - US. Treasury securities are presented at cost plus accrued interest, which approximates market.
Net Asset Value Per Unit - Net asset value per unit equals Partnership equity divided by the number of units outstanding at period end.
Revenue Recognition - Commodity futures and options are recorded on the trade date, and open futures positions are reflected in the accompanying statement of financial condition as the difference between the original contract value and the market value on the last business day of the reporting period. The market value of the commodity futures and options contracts is based upon the most recent available settlement price on the appropriate commodity exchanges.
Changes in unrealized gains or losses represent the total increases or (decreases) in unrealized gains or (increases) decreases in unrealized losses on open positions during the period.
Statement of Cash Flows - The Partnership has elected not to provide a statement of cash flows as permitted by Statement of Accounting Standards 102 "Statement of Cash Flows".
Offsetting exchange contracts - FASB Interpretation #39 allows the offset of assets and liabilities for exchange traded contracts as long as certain conditions are met. These financial statements present the fair value loss positions offset with the fair value gain positions. The Partnership uses the offset method to account for all open contracts.
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS
Note 2. Nature Of Business And Partnership Organization.
The Partnership was organized as a Limited Partnership under the laws of the State of New York on May 14, 1982. The Partnership is engaged in the speculative trading of commodity futures contracts and any other commodity interests, including futures contracts on US Treasury Bills, foreign currency, stock indices and other derivative financial instruments.
As of May 1, 1995 Chang-Crowell Investment Management, Inc. ("CCIM"). replaced Smith Barney Futures Management, Inc. as the General Partner of the Partnership. The Agreement of Limited Partnership vests all responsibility and powers for the management of the business and affairs of the Partnership with CCIM, the General Partner. CCIM is registered with the Commodity Futures Trading Commission as a Commodity Pool Operator and Commodity Trading Advisor and is also a member of the National Futures Association.
The General Partner and each limited partner will share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of his initial capital contribution and profits, if any, net of redemption.
The Partnership will be liquidated upon the first to occur of the following: December 31, 2002; the net asset value of a Unit decreases to less than $350 as of the close of any business day; the aggregate net assets decline to less than $1,750,000; or under certain other circumstances as defined in the Limited Partnership Agreement.
Note 3. Contracts And Agreements:
The General Partner, CCIM will act as a Trading Manager to the Partnership. CCIM has discretion to utilize the services of one or more professional commodity trading advisors. As of December 31, 1996 the Partnership had agreements with two Trading Advisors. Asset management is split between Chang-Crowell Management Corporation and Marathon Capital Growth Partners L.L.C. Both of the Trading Advisors are registered with the Commodity Futures Trading Commission as Commodity Trading Advisors and both are also members of the National Futures Association.
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS
(Note 3. continued)
The Partnership pays a monthly management fee equal to 1/3 of 1% (4% per annum) of the Partnership's month end net asset value, as defined, and a quarterly incentive fee equal to 15% of Partnership trading profits, as defined, to the Trading Advisors.
Smith Barney is a registered commodity broker and clears futures transactions for the Partnership. The Partnership pays commissions to Smith Barney at 50% of the standard rate which Smith Barney charges to public customers. The Partnership's funds are deposited in a segregated account at Smith Barney and the Partnership receives interest on these funds.
Note 4. Partner Equity And Redemption Of Partnership Interest.
Each Partner may redeem part or all its units at the net asset value as of the end of any quarter ended January 31, April 30, July 31 or October 31.
At the time CCIM replaced Smith Barney Futures Management Inc. ("SBFM") as General Partner of the Partnership, SBFM redeemed its remaining interest in the Partnership equal to $71,976. CCIM initially contributed $49,120 to Partnership equity. The statement of partners' equity reports this transaction as a General Partner net redemption of $22,856.
Note 5. Financial Instruments With Off-Balance Sheet Credit And Market Risk.
Included in the definition of financial instruments are futures, options on futures and forward contracts. The Partnership invests in various futures contracts for speculative purposes. These contracts are marked to market daily, with variations in the value of the futures contracts settled on a daily basis with the exchange upon which they are traded. For these contracts the unrealized gain or loss rather than the notional amounts, represents the approximate future cash requirements. At December 31, 1996 the Partnership owned open exchange traded futures contracts that would have provided approximately $138,812 if settled and also would have used $(54,228) if settled. Offsetting these assets and liabilities at December 31, 1996 results in an unrealized net trading gain of $84,584.
Theoretically, the Partnership is exposed to a market risk (loss) equal to the notional value of contracts purchased and unlimited liability on contracts sold short. Generally, financial futures and options on futures contracts can be closed out at the discretion of
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS
(Note 5. continued)
the trading advisor. However, if the market is not liquid, it could prevent the timely close-out of any unfavorable positions or require the Partnership to hold those positions until maturity, regardless of the changes in their value or the trading advisor's investment strategies. At December 31, 1996 the Partnership owned long and short exchange traded futures positions with an aggregate notional value of approximately $21,670,000. At December 31, 1996 the Partnership owned contracts with a fair value of $83,052 and notional value of $15,738,000 which mature within 90 days; and 6 contracts with a fair value of $1,511 and notional value of $941,000 which mature within 180 days; and 24 contracts with a fair value of $21 and notional value of $5,081,000 which mature within 270 days. Futures contracts have little credit risk because futures exchanges are the counterparties.
Note 6. Derivative Financial Instruments and Fair Value Of Financial Instruments.
A derivative financial instrument is a financial agreement whose value is linked to, or derived from, the performance of an underlying asset. The underlying asset can be currencies, commodities, interest rates, stocks, or any combination. Changes in the underlying asset indirectly affect the value of the derivative. All trading instruments are subject to market risk, the risk that future changes in market conditions may make an instrument less valuable or more onerous. As the instruments are recognized at fair market value, those changes directly affect reported income. Financial instruments (including derivatives) used for trading purposes are recorded in the statement of financial condition at fair value at the reporting date. Realized and unrealized changes in fair values are recognized in net trading revenue in the period in which the changes occur. Interest income arising from trading instruments is included in the statement of operations as part of interest income.
Notional amounts are equivalent to the aggregate face value of the derivative financial instruments. Notional amounts do not represent the amounts exchanged by the parties to derivatives and do not measure the Partnership's exposure to credit or market risks. The amounts exchanged are based on the notional amounts and other terms of the derivatives.
The Partnership engages in the speculative trading of derivative financial instruments which includes futures contracts. Futures contracts are commitments to either purchase or sell designated financial instruments at a future date for a specified price and may be settled in cash or through delivery. Initial margin requirements are met in cash or other instruments, and changes in the contract values are settled daily.
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS
(Note 6. continued)
The Partnership has funds at the Commodity broker in regulated and non-regulated accounts which are used to meet minimum margin requirements for all of the Partnership's open positions, as set by the exchange upon which each futures contract is traded. At December 31, 1996 the Partnership had assets in segregated (regulated) accounts at the Commodity broker of $2,462,054. These requirements are adjusted, as needed, due to daily fluctuations in the values of the underlying assets. The Partnership had realized net trading gains/(losses) from futures trading for the year ended 1996 and 1995 of $429,582 and $(316,392) respectively, as reported in the statement of operations. The Partnership had revenue from the change in unrealized net trading gains/(losses) of $(100,156) and $128,668 for the same period, as reported in the statement of operations.
Foreign currency gains or losses are the result of the conversion of the foreign currency denomination to US dollars. Non-regulated futures contracts have foreign exchange risk since the contracts are traded in currency denominations other than US dollars.
COMMODITY TREND TIMING FUND II, L.P. NOTES TO FINANCIAL STATEMENTS
Note 7. Selected Financial Data
Net realized and unrealized trading gains (losses), interest income, net income (loss) and increases (decreases) in net asset value per unit for the years ended December 31, 1996, 1995, 1994, 1993 and 1992; and total assets as of December 31, of those years respectively:
Brokerage commissions and clearing fees for the years reported were $244,105, $147,995, $938,050, $1,215,575 and $1,153,173, respectively.
Item 9.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Mr. Jeffrey Vorisek, a Certified Public Accountant, audited the Partnership's financial statements for the fiscal years ended December 31, 1995 and 1996. Coopers & Lybrand L.L.P. ("Coopers") audited the Partnership's financial statements for the fiscal year ended December 31, 1994.
(i) Coopers did not resign or decline to stand for reappointment. CCIM engaged the services of Mr. Vorisek on January 29, 1996 rather than Coopers as a cost-effectiveness measure.
(ii) Neither the reports of Mr. Vorisek on the financial statements for the fiscal years ended December 31, 1996 and 1995 nor the reports of Coopers on the financial statements for the fiscal years ended December 31, 1994 and 1993 contained an adverse opinion or a disclaimer of opinion, and none of such reports were qualified or modified as to uncertainty, audit scope or accounting principles.
(iii) The decision to change accountants was made by the Managing Directors on behalf of CCIM, the General Partner at the time of such change. Under Section 8 of the Partnership Agreement, the General Partner generally has exclusive authority to conduct and manage the business of the Partnership.
(iv) CCIM is not aware of any disagreements with Coopers during the fiscal years ended December 31, 1995 and 1994 on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement or disagreements, if not resolved to the satisfaction of Coopers, would have caused Coopers to make reference to the subject matter of the disagreement or disagreements in connection with its report on the Partnership's financial statements.
(v) Not applicable.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no directors or officers. Its affairs are managed by CCIM, as General Partner. Investment decisions are made by CCIM, as trading manager, and by Marathon and CCMC, as Advisors.
Each of Messrs. R. Parker Crowell, Bruce N. Terry and Robert Ecke, as an executive officer of CCIM, was required, pursuant to Securities and Exchange Commission Rule 16a-3(e) and the instructions to Form 3, to file a Form 3 within ten days after May 1, 1995, the effective date of the election of CCIM as General Partner. None of such Forms have been filed. Messrs. Terry and Ecke did not hold any Units on May 1, 1995, and have not acquired any Units since such date. Mr. Crowell assigned to CCIM 19.86 Units effective as of May 1, 1995. Mr. Crowell did not file a Form 4 disclosing such assignment. Since such assignment, Mr. Crowell has had beneficial ownership of 15 Units.
Item 11.

Item 11. Executive Compensation.
Under the terms of Paragraph 6 of the Partnership Agreement, a General Partner must maintain a 1% interest in the profits and losses of the Partnership. To the extent the Partnership engages in profitable activities, CCIM derives benefit from its interest.
The Partnership pays to CCIM (i) a monthly management fee equal to 1/3 of 1% of the Partnership's Net Assets allocated to the Advisors as of the end of each calendar month and (ii) a quarterly incentive fee equal to 15% of the Partnership's Trading Profits (as defined below) earned on the assets of the Partnership allocated to each Advisor, calculated without regard to the performance of the other Advisor.
CCIM pays to each Advisor (i) a monthly management fee equal to 1/12 of 1% of the Partnership's Net Assets allocated to the Advisor as of the end of each calendar month and (ii) a quarterly incentive fee equal to 15% of the Partnership's Trading Profits (as defined below) earned on the assets of the Partnership allocated to the Advisor.
Consequently, CCIM receives 100% of the aggregate compensation paid as a management fee pursuant to the Trading Manager Agreement, but retains only 50% of such compensation and pays 25% of such compensation to each Advisor. No incentive fees were paid in 1996. CCIM would receive 100% of the aggregate compensation paid by the Partnership as an incentive fee but would pay all of such compensation to each Advisor pursuant to the Management Agreement.
During the year ended December 31, 1996, the Advisors and CCIM, as trading manager, were paid management fees as follows:
Advisor Amount
CCMC $28,170 Marathon $31,765 CCIM $59,935
"Trading Profits" is determined by adding the net of any profits and losses realized on all trades closed out during a fiscal quarter to the net of any unrealized profits and losses on open positions as of the end of such quarter (after deduction for accrued round-turn brokerage commissions) and subtracting from such sum the following: (i) the net of any unrealized profits or losses on open positions as of the end of the preceding fiscal quarter (after deduction for accrued round-turn brokerage commissions); (ii) all expenses (except incentive fees for the current quarter) incurred or accrued during such quarter; and (iii) cumulative net realized trading losses, if any, carried forward from all preceding quarters since the last quarter for which an incentive fee was payable. Interest income is not taken into account in computing Trading Profits.
The terms of the Management Agreement are not the result of arms-length negotiations and may not represent the best terms that could be obtained from a trading advisor that is not a related party.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
The Partnership knows of no person who beneficially owns more than 5% of the Units outstanding as of December 31, 1996. Mr. Crowell, a Director of CCIM, has beneficial ownership of 15 Units.
(b) Security Ownership of Management.
Under the terms of the Partnership Agreement, the Partnership's affairs are managed by the General Partner. CCIM owns units of general partnership interest equivalent to 56.37 Units (2.015% of the Units outstanding as of December 31, 1996). Mr. Crowell has beneficial ownership of Units.
(c) Changes in Control.
The Partnership knows of no arrangement the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.

Item 13. Certain Relationships and Related Transactions.
(a) through (d) - Not applicable.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits.
1-1 Letter Amending Selling Agreement between the Partnership and Lehman Brothers Capital Management Corp. (filed as Exhibit 1.1 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
1-2 Letter Amending Soliciting Dealer Agreements (filed as Exhibit 1.2 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-1 Certificate of Limited Partnership of the Partnership as filed in the office of the County Clerk of New York County on May 14, 1982 (filed as Exhibit 3.2 to the Registration Statement No. 2-77668 and incorporated herein by reference).
3-2 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on December 21, 1982 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended January 31, 1983, and incorporated herein by reference).
3-3 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on March 23, 1983 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended April 30, 1993, and incorporated herein by reference).
3-4 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on July 8, 1983 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended July 31, 1983, and incorporated herein by reference).
3-5 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on November 2, 1983. (filed as Exhibit 3.5 to Form 10-K for the fiscal year ended October 31, 1983, and incorporated herein by reference).
3-6 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on February 8, 1984 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended January 31, 1984, and incorporated herein by reference).
3-7 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on April 18, 1984 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended April 30, 1984, and incorporated herein by reference).
3-8 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on August 21, 1984 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended July 31, 1984, and incorporated herein by reference).
3-9 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on January 31, 1985 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended January 31, 1985, and incorporated herein by reference).
3-10 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on February 4, 1985 (filed as Exhibit 19.2 to Form 10-Q for the quarter ended April 30, 1985, and incorporated herein by reference).
3-11 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on May 2, 1985 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended April 30, 1985, and incorporated herein by reference).
3-12 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on May 15, 1985 (filed as Exhibit 19.2 to Form 10-Q for the quarter ended April 30, 1985, and incorporated herein by reference).
3-13 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on August 2, 1985 (filed as Exhibit 3.15 to Amendment No. 2 to Registration Statement No. 2-93885 and incorporated herein by reference).
3-14 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on October 9, 1985 (filed as Exhibit 3.14 to Form 10-K for the fiscal year ended October 31, 1985, and incorporated herein by reference).
3-15 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on November 4, 1985 (filed as Exhibit 3.15 to Form 10-K for the fiscal year ended October 31, 1985, and incorporated herein by reference).
3-16 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on February 5, 1985 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended January 31, 1986, and incorporated herein by reference).
3-17 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on May 13, 1986 (filed as Exhibit 19.1 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-18 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on June 6, 1986 (filed as Exhibit 19.2 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-19 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on July 13, 1986 (filed as Exhibit 19.3 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-20 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on July 21, 1986 (filed as Exhibit 19.4 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-21 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on August 6, 1986 (filed as Exhibit 19.5 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-22 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on September 5, 1986 (filed as Exhibit 19.6 to Form 10-Q for the quarter ended July 31, 1986, and incorporated herein by reference).
3-23 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on October 6, 1986 (previously filed).
3-24 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on November 7, 1986 (previously filed).
3-25 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on December 4, 1986 (previously filed).
3-26 Certificate Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on January 12, 1987 (filed as Exhibit 19.4 to Form 10-Q for the quarter ended January 31, 1987, and incorporated herein by reference).
3-27 Certificates Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on February 5, 1987, March 4, 1987, March 9, 1987, April 8, 1987, and May 8, 1987 (filed as Exhibits 19.1 through 19.5 to Form 10-Q for the quarter ended April 30, 1987, and incorporated herein by reference).
3-28 Certificates Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on June 4, 1987, July 8, 1987, and August 10, 1987 (filed as Exhibits 19.1 through 19.3 to Form 10-Q for the quarter ended July 31, 1987, and incorporated herein by reference).
3-29 Certificates Amending Certificate of Limited Partnership as filed in the office of the County Clerk of New York County on September 10, 1987, October 15, 1987, November 5, 1987, and November 16, 1987 (filed as Exhibits 19.1 through 19.4 to Form 10-Q for the quarter ended October 31, 1987, and incorporated herein by reference).
3-30 Certificate of Amendment of the Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York on October 2, 1995 (filed as Exhibit 3-30 to Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference).
10-1 Customer Agreement between the Partnership and Lehman Brothers Capital Management Corp. dated as of August 31, 1982 (filed as Exhibit 10.1 to Form 10-K for the fiscal year ended October 31, 1983, and incorporated herein by reference).
10-2 Management Agreement among the Partnership, Hayden Commodities Corp. and Richard D. Donchian dated as of August 31, 1982 (filed as Exhibit 10.2 to Form 10-K for the fiscal year ended October 31, 1983, and incorporated herein by reference).
10-3 Letter extending Management Agreement among the Partnership, Hayden Commodities Corp. and Richard D. Donchian dated as of December 15, 1983 (filed as Exhibit 10.3 to Form 10-K for the fiscal year ended October 31, 1983, and incorporated herein by reference).
10-4 Letter Amending Management Agreement among the Partnership, Hayden Commodities Corp. and Richard D. Donchian dated as of January 23, 1984 (filed as Exhibit 10.1 to Form 10-Q for the quarter ended January 31, 1984, and incorporated herein by reference).
10-5 Letters dated December 31, 1985, and December 26, 1986, amending and extending the Management Agreement (filed as Exhibits 10.2 and 10.3 to Form 10-Q for the quarter ended April 30, 1987, and incorporated herein by reference).
10-6 Letter dated December 2, 1987, amending and extending the Management Agreement (previously filed).
10-7 Letter dated December 1, 1988, extending the Management Agreement (filed as Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).
10-8 Letter dated December 14, 1989, extending the Management Agreement (previously filed).
10-9 Letter dated December 6, 1990, from Hayden Commodities Corp., as General Partner, to R. Parker Crowell extending Management Agreement (filed as Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).
10-10 Letter dated December 9, 1991, from Lehman Brothers Capital Management Corp. ("LBCMC"), as General Partner, to R. Parker Crowell extending Management Agreement (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).
10-11 Letter dated November 30, 1992, from LBCMC, as General Partner, to R. Parker Crowell extending Management Agreement (filed as Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).
10-12 Letter dated December 20, 1993, from Smith Barney Shearson Futures Management Inc., as General Partner, to R. Parker Crowell extending Management Agreement (filed as Exhibit 10.12 to Form 10-K for fiscal year ended December 31, 1993, and incorporated herein by reference).
10-13 Letter dated February 16, 1995, from Smith Barney Futures Management, Inc, as General Partner, to R. Parker Crowell extending Management Agreement (filed as Exhibit 10.13 to Form 10-K for fiscal year ended December 31, 1994, and incorporated herein by reference).
10-14 Letter dated May 1, 1995, from the Partnership to R. Parker Crowell and CCMC regarding the assignment of R. Parker Crowell's rights, duties and obligations under the Management Agreement to CCMC, and CCMC's assumption thereof (filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference).
10-15 Letter dated June 21, 1995, from the Partnership to CCMC terminating the Management Agreement effective June 30, 1995 (filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference).
10-16 Trading Manager Agreement made June 21, 1995, to become effective June 30, 1995, between the Partnership and CCIM (filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference).
10-17 Management Agreement made June 21, 1995, to become effective June 30, 1995, among CCIM, CCMC and Marathon (filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference).
10-18 Letter dated September 10,1996, from Coopers & Lybrand LLP ("Coopers") to the Securities and Exchange Commission regarding the concurrance of Coopers with the statements made by the Partnership in the Form 10-K/A1 for the fiscal year ended December 31, 1995, concerning the change in the Partnership's independent accountant (filed as Exhibit 16-1 to Form 10-K/A2 for the fiscal year ended December 31, 1996, and incorporated herein by reference).
27-1 Financial Data Schedule for the Fiscal Year Ended December 31, 1996 (filed herein).
(b) Report on Form 8-K: None filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMODITY TREND TIMING FUND II
By: CHANG-CROWELL INVESTMENT MANAGEMENT INC. Its: General Partner
By: /s/ Robert Ecke /s/ Robert Ecke, President
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 31, 1997.
By: /s/ Robert Ecke Robert Ecke, President and Director of Chang-Crowell Investment Management Inc.
Date: March 31, 1997
By: /s/ Bruce N. Terry Bruce N. Terry, Treasurer and Director of Chang-Crowell Investment Management Inc.
Date: March 31, 1997


Item 1. Business
(a) General
(a) The business of the Company is life insurance. The Company was incorporated under the laws of Kentucky on August 31, 1960, and commenced business in April, 1961. Its principal office is located at 200 Capital Avenue, Frankfort, Kentucky 40601, telephone number (502) 223-2361. The Company also owns 96% of Investors Underwriters, Inc., an investment holding company. Kentucky Investors, Inc., a Kentucky corporation ("KII"), owns 74% of the Company's stock. In addition, KII wholly owns Investors Heritage Printing, Inc. ("IHP") and Investors Heritage Financial Services Group, Inc. ("FSG"). The business segments of the Company are identified and discussed on pages 44 and 45 of the Annual Report to Stockholders for the year ended December 31, 1996 and are incorporated herein by reference. A portfolio of the standard forms of participating, non-participating, whole life, limited pay, endowment, split-funding, interest-sensitive whole life, guaranteed issue whole life, universal life, term and group life is offered by the Company. In addition, the Company has historically written credit life and credit accident and health insurance (respectively, "Credit Life" and "Credit A&H", and collectively "Credit Insurance") on a group basis. During 1995, the Company exited the Credit Insurance market as a direct writer and experienced insignificant production (less than $500,000) from the Credit Insurance product lines in 1995. During 1996 sales operations were conducted through the Ordinary Life sales division of the Company and through FSG which marketed the Company's Ordinary and Credit Insurance products and other products for unaffiliated companies identified below. See "Material Changes and Developments-Credit Insurance". As anticipated more than 10% of FSG's revenues for 1996 were derived from the sale of the Company's Credit Insurance products. Ordinary Life. Ordinary Life sales are under the direct supervision of the home office using a regionally supervised agency system. The method of field operation involves independent contractual agents working with district and regional managers. These managers contract with and train agents who work under them. The regional managers may have several district managers under their supervision. As a result of our growth in the preneed area, agency relationships have been entered into directly with the funeral home owner. Management anticipates this trend to continue and, depending on the size of the funeral home and state law, preneed counselors will also become part of our agency force. The Company also sells business through general agents or brokers who may represent one or more companies. Approximately 37% of total insurance in force is Ordinary Life. The Ordinary Life sales are built around a standard portfolio of life insurance products with some of the major contributions to in-force business being a participating ordinary life insurance policy, a guaranteed issue whole life policy and non-participating life policies. Some of the participating policies provide for payment of guaranteed annual endowments of fixed amounts beginning at the end of the second policy year and continuing through the premium paying period. These policies also have an annual guaranteed benefit. As of December 31, 1996, 11% of the total ordinary insurance in force was comprised of participating policies and of the 11%, approximately 6% was comprised of participating policies with some guaranteed benefit. Another block of participating policies provides for payment of a dividend which will purchase additional insurance equal to 5% of the previous year's total death benefit, including any additional insurance purchased in prior years. The dividend is not guaranteed. As of December 31, 1996, 5% of the total ordinary insurance in force was comprised of participating policies with non-guaranteed benefits. Non-participating life insurance policies represented 89% of the total ordinary insurance in force. Four different guaranteed issue whole life policies were sold through 1993. Each has a policy limit of $10,000 face amount, with graded death benefits during the first two policy years. Two of the policies are non- participating with non-guaranteed increases in the death benefit and two of the policies are participating. The Company also issues two non-participating interest-sensitive single premium whole life policies based on simplified underwriting. These policies provide for payment of the full face amount at the death of the insured and for increasing death benefits on a non-guaranteed basis. During 1994, the Company introduced new products designed for the pre- arranged funeral market. These products are single premium and modal premium non-participating whole life policies. Single premium policies are sold on a guaranteed issue basis and modal premium policies are fully underwritten. Both single and modal premium policies provide for non-guaranteed increasing death benefits and have a maximum face amount of $25,000. The Company also sells a mortgage protection product which is being marketed by FSG. It is anticipated that during 1997 the Company will introduce group products designed for the prearranged funeral market. These products are in the process of being approved in various states and will be implemented after approvals are received. Credit Insurance. Credit Insurance is generally sold through banks, finance companies and automobile dealerships and is offered in connection with the extension of credit by these institutions. The amount of the insurance is designed to cover the amount of the loan, with the financial institutions being the beneficiary of the insurance policy to the extent of the unpaid balance of the loan. Credit Insurance production is generally dependent on consumer debt. In times of low unemployment, reasonable interest rates and a steadily improving economy, consumer debt increases; therefore, Credit Insurance sales increase. When the economy slows, consumer debt slows and therefore Credit Insurance sales decrease. During the fourth quarter of 1994, the Company began phasing out of the Credit Insurance market as a direct writer and premium production from Credit Insurance during 1995 was less than $500,000, as anticipated. The Company continued to provide the administration and claims processing services for the Credit Insurance operations. FSG entered into a marketing agreement with Franklin Life Insurance Company ("Franklin") to market Franklin's Credit Insurance products during 1995. During the fourth quarter of 1995, the Company and FSG were advised that Franklin was exiting the Commonwealth of Kentucky as a direct writer of Credit Insurance products. FSG immediately began negotiations with several unaffiliated insurance companies to market Credit Insurance for them. Simultaneously, FSG initiated discussions with unaffiliated insurance companies regarding a transaction where the Credit Insurance business would be written by the Company and all of the risk would be immediately reinsured to the unaffiliated insurance company. A reinsurance transaction was viewed favorably because the Company would be able to generate an alternate source of income through fees from administration and claim processing services provided. In addition, FSG would be able to maintain its revenues in the form of commissions from the sale of the Company's Credit Insurance products. In December, 1995, the Company entered into a reinsurance agreement with The Connecticut General Life Insurance Company, Bloomfield, Connecticut ("Connecticut General") under the terms of which the Company cedes to Connecticut General all of the risk on all Credit Insurance policies sold by the Company. In addition to receiving a retention fee, the Company also receives a fee for administration and claims processing services. It has not been necessary for the Company to add any employees to assist in the administration of this business. No additional amounts were required to be expended in order to utilize the Company's administrative and claims processing capabilities. Employees will be added only when warranted. It was and continues to be management's belief that the number of Credit Insurance providers in the Commonwealth of Kentucky is contracting as a result of two Kentucky domestic insurers exiting the Credit Insurance market. Management believed there would be opportunities to administer Credit Insurance business in Kentucky for non-domestic insurers that are expected to replace exiting insurers. This belief has come to fruition in an alternate way through the reinsurance agreement with Connecticut General. The Company has continued to seek contracts to operate as an administrator for other companies which sell Credit Insurance, and has recently entered into a reinsurance agreement with another unaffiliated company, Life Investors, whereby the Company's Credit Insurance products sold by Life Investors' agents will be reinsured to Life Investors. The Company and FSG will be paid a retention fee and a marketing fee for services provided. FSG will continue to call on banks, finance companies and selected automobile dealerships to market the Credit Insurance products. Credit Insurance gross written premiums during 1996 were $8,746,000, as anticipated and are expected to exceed $10,000,000 during 1997. As described above, that business was and will continue to be ceded to Connecticut General and Life Investors. Approximately 9% of the total life insurance in force is Credit Insurance, all of which was written directly by the Company. In addition to selling Credit Insurance, some of the Company's bank agents obtain an ordinary life license enabling them to sell mortgage insurance that might be required in excess of the statutory Credit Life limitation enacted by each state where our Credit Insurance products are sold. During 1996 premium production in this area was up 108%. Premiums produced in 1995 were $597,000 as compared to $1,239,000 in 1996. The Company anticipates continued growth in this area of approximately 20% during 1997. The Company's mortgage insurance products will continue to be marketed through FSG. Group Life. Group life accounts for the remaining 54% of in-force business. Since 1990, the Company has participated in the Federal Employee Group Life Insurance (FEGLI) Program, which is administered by Metropolitan Life Insurance Company. As a result of the termination of the Commonwealth of Kentucky group life contract, on November 30, 1992, the Company's participation in the FEGLI Program has substantially decreased since 1993. The reduction of in-force business since 1993 has been $132,510,000. As stated above, the Company is in the process of converting to group insurance products in the preneed market. As the group preneed products are introduced, group life premiums and in-force business will increase significantly while individual premiums and in-force business will decrease commensurately. Principal Markets. The principal markets for the Company's products are in the Commonwealths of Kentucky and Virginia, and the States of North Carolina, South Carolina, Georgia, Ohio, Indiana, Florida, Tennessee, Illinois, Kansas, West Virginia and Texas. The Company has licensed ordinary agents and regional managers throughout these states. The Company also has licensed credit life agents in over 75 banks and automobile dealerships throughout the Commonwealth of Kentucky. The Company is also licensed in sixteen other states: Alabama, Arkansas, Mississippi, and Louisiana in the South and Southeast; Colorado, Missouri, New Mexico, North Dakota, South Dakota, Oklahoma, Montana, Nebraska, Arizona and Utah in the West; and Michigan in the North. The business in these states is written mostly through general agents. Risk. The Company in many cases requires evidence of insurability before issuing individual life policies including, in some cases, a medical examination or a statement by an attending physician. Home office underwriters review the evidence of insurability required and approve the issuance of the policy in accordance with the application if the risk is acceptable. Some applicants who are substandard risks are rejected, but many are offered policies with higher premiums, restricted coverages or reduced benefits during the first two policy years. The majority of the single premium business is written through the prearranged funeral market without evidence of insurability, relying on safeguards such as product design, limits on the amount of coverage, and premiums which recognize the resultant higher level of claims. Risk is integral to insurance but, as is customary in the insurance business, the Company obtains reinsurance with respect to amounts in excess of its retention limits. The maximum limit of retention by the Company on its standard contract for any one life is $100,000 plus the amount of the return of premium benefits, if any. The maximum is reduced for sub-standard classes of risk. The maximum retention on Credit Life was $100,000 per life. Excess coverages are reinsured externally. As of December 31, 1996; approximately $316,499,000, or 12% of total life insurance in force was reinsured with non- affiliated well established insurance companies.The Company would become liable for the reinsured risks if the reinsurers could not meet their obligations. The Company is party to a number of reinsurance and coinsurance agreements with non-affiliated companies. Approximately $316,499,000 of insurance in force for the Company was reinsured with eighteen companies. The reinsurers for the Company and amounts of insurance in force that are reinsured are as follows:
COMPANY REINSURANCE AMOUNT PERCENT OF TOTAL
Connecticut General Life Insurance Co. $187,567,000 59.3% Crown Life Insurance Co. 11,350,000 3.6% The Lincoln National Life Ins. Co. 83,510,000 26.4% J.M. Limited 9,162,000 2.9% Banc One Kentucky Ins. Co. 508,000 .2% AEtna Life Insurance Co. 1,099,000 .4% Indiana-Kentucky Ins. Co. Ltd. 2,063,000 .6% Riverside Reinsurance Ltd. 2,981,000 .9% Pirtle Ltd. 1,146,000 .4% Lancaster Life Insurance Co. 3,595,000 1.1% Business Men's Assurance Co. 6,234,000 2.0% Swiss Re America 2,675,000 .8% Groves Reinsurance Ltd. 1,037,000 .3% Munich American Reinsurance Co. 2,792,000 .9% Other Companies (4) 780,000 .2% TOTAL $316,499,000 100.0%
AEtna and Crown Life reinsured Credit Life and Credit A&H policies sold between July 1, 1988 and June 30, 1992. These reinsurance agreements were terminated with respect to new issues by the Company during 1991 and 1992, respectively. Neither reinsurer accepted the risk on any new policies issued after the termination date of each agreement; however, both AEtna and Crown Life continue to provide reinsurance on all Credit Insurance policies sold prior to March 16, 1991 (AEtna) and June 30, 1992 (Crown Life). During 1996, the Company reinsured all of the risk on the Credit Insurance policies sold by its agents to Connecticut General, and will continue to do so in 1997. As explained above, some of these risks will also be reinsured to Life Investors. The Company has not experienced a reinsurer default under any of the reinsurance agreements to which the Company is a party. Further, the Company has no knowledge of and does not anticipate any material default in any existing reinsurance obligations. Regulation of Insurance. The business of the Company is subject to regulation and supervision by the insurance regulatory authority of each state in which the Company is licensed to do business. Such regulators grant licenses to transact business; regulate trade practices; approve policy forms; license agents; establish minimum reserve and loss ratio requirements; review form and content of required financial statements; prescribe types and amounts of investments permitted; and assure that capital, surplus and solvency requirements are met. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (the "NAIC"), a self- regulatory organization of state insurance commissioners, insurance companies are examined periodically by one or more of the regulatory authorities. Domiciled in the Commonwealth of Kentucky, the Company is licensed by the Kentucky Department of Insurance and is subject to its examination and regulations. The most recent examination was completed during 1996 for the five years ending December 31, 1994. The Company received an excellent report. Kentucky law now requires an examination every three years; therefore, it is anticipated that the Company's next examination will commence during 1998 for the three years ending December 31, 1997. In December of 1992, the NAIC adopted a "Risk Based Capital for Life and/or Health Insurers Model Act" (the "Model Act") which was designed to identify inadequately capitalized life and health insurers. The Model Act defines two key measures: (i) adjusted capital, which equals an insurer's statutory capital and surplus plus its asset valuation reserve, plus one-half its liability for policyholder dividends ("Adjusted Capital") and (ii) authorized control level risk based capital ("RBC"). RBC is determined by a complex formula which is intended to take into account the various risks assumed by an insurer. Should an insurer's Adjusted Capital fall below certain prescribed levels (defined in terms of its RBC), the Model Act provides for the following four different levels of regulatory attention: "Company Action Level:" This level of review is triggered if an insurer's Adjusted Capital is less than 200 percent of its RBC.The insurer is required to submit a plan to the appropriate regulatory authority that discusses proposed corrective action. The Company's Adjusted Capital is more than 3 times the required amount. "Regulatory Action Level": This level of review is triggered if an insurer's Adjusted Capital is less than 150% of its RBC. The regulatory authority formally requires the insurer to submit an RBC plan, and performs a special examination of the insurer and issues an order specifying corrective actions. The Company's Adjusted Capital is more than 4.1 times the required amount. "Authorized Control Level": This level of review is triggered if an insurer's Adjusted Capital is less than 100% of its RBC. The regulatory authority is authorized to take whatever action it deems necessary. The Company's Adjusted Capital is more than 6.1 times the required amount. "Mandatory Control Level": This level of review is triggered if an insurer's Adjusted Capital falls below 70% of its RBC. The regulatory authority is required to place the insurer under its control. The Company's Adjusted Capital is more than 8.8 times the amount required. Since the Adjusted Capital levels of the Company currently exceed all of the regulatory action levels as defined by the NAIC's Model Act, the Model Act currently has no impact on the Company's operations or financial condition. Competition. The life insurance business is highly competitive. With the introduction of universal life and other interest sensitive products in recent years, competition with other financial institutions has increased. The industry includes both stock and mutual companies, including some of the largest financial institutions in the United States. While the business is responsive to the current economic environment, changes are not quite so volatile, and there are indications that, except for Credit Life, the life insurance market is stable, even in times of stress for other companies. The Company differentiates itself through its marketing techniques, product features, customer service and reputation. The Company maintains its competitive position by its focus on areas which have historically proven profitable. Those areas include single premium pre-need products, modal premium final expense products, traditional whole life products, mortgage protection products and level term products. The Company's competitive position is maintained by its ability to provide quality customer service throughout the distribution system. Other competitive strengths include the Company's asset/liability management system, a quality investment portfolio which provides liquidity and the Company's non-leveraged financial position. The business of the Company is not seasonal. (b) Material Changes and Developments While changes in the life insurance business are not as dramatic as in other forms of business, new product development and innovative sales methods must be ongoing to meet the current economic times. The Company believes that growth from increased sales is directly related to the constant attention paid to revising and selling the products developed by the Company. Ordinary Production. The Company is working diligently to increase ordinary product sales. The largest increase in this area has been the final expense and prearranged funeral sales. Final expense sales include the sale of lower face amount ordinary life insurance products, the purpose of which is to pay the insured's final expenses. Prearranged funeral sales include the sale of modal premium and single premium ordinary life policies which are sold to fund a specific prearranged funeral contract. The Company expanded its marketing capability for this market through the 1993 acquisition of marketing assets and agents from Legacy One, Inc., a former independent marketing agent for the Company. As a result, the Company steadily increased sales during 1993 and 1994. The actual increase in 1994 over 1993 in overall ordinary premium production was approximately 21%, significantly higher than the 10-12% increase anticipated by management, and the increase in 1995 over 1994 was approximately 11%, as anticipated.During 1996 the Company continued to increase its marketing operations and to expand into new states, including but not limited to, Tennessee, Indiana, Illinois, Kansas, South Carolina and Georgia, and experienced growth in premium production of approximately 28 percent in the prearranged funeral market during 1996 over 1995, $16,681,000 compared to $13,072,000. The Company anticipates continued growth in this segment of approximately 12-15% during 1997. Credit Insurance. From 1988 to 1991, the Company substantially increased sales of Credit Insurance to $37 million and reinsured substantial portions of the Credit Life and Credit A&H business with AEtna and Crown Life. However, during 1992 the Company decreased Credit Insurance production to the pre-1988 annual premium levels of $8-10 million. As a result of the anticipated decreased in production, the reinsurance agreement with Crown Life was terminated effective for policies written after June 30, 1992. See "Business- Risk". Desired levels of Credit Insurance production were reached in 1993 and 1994. Throughout 1994 the Company continued to closely monitor Credit Life and Credit A&H claims and make adjustments in the claims administration process. Claim ratios on Credit A&H have stabilized. The Company continues to closely monitor the claims paying process to make certain that proper payments are being made in accordance with the policy. The Company's Credit Insurance operation continued to be strong throughout 1994 in financial institutions and with a selected number of automobile dealers participating in either a reinsurance program or the Company's commission structure. However, during 1994 the Company decided to exit the Credit Insurance market as a direct writer. The driving factor behind this decision was the desire of the Company's Board of Directors and management to improve and strengthen the Company's surplus and profitability. Historically, the Credit A&H line has not been a profitable segment of the Company's business; however, when balanced with the Credit Life line, acceptable profit margins were achieved. Since 1991, the profitability of the lines diminished due to increased losses on the Credit A&H line and shrinking profit margins on the Credit Life line. Therefore, since other lines of business have been and continue to show strong growth and profits, and the continued sale of Credit A&H inhibited growth of the Company's surplus and the full realization of profits from other lines of business, management and the Board of Directors determined that it was in the best interest of the Company and its stockholders to discontinue as a direct writer of Credit Life and Credit A&H. Realizing the significant contribution of our financial marketing group, which was successful in increasing the Company's Credit Insurance production to record levels during the late 1980's and early 1990's, and realizing the significant relationship our employees have developed with the financial institutions in the Commonwealth of Kentucky, KII formed FSG as a wholly-owned subsidiary. During 1996, FSG marketed the Company's Credit Insurance products and will continue to do so in 1997. In addition, FSG was responsible for marketing products for unaffiliated companies to financial institutions including Individual Disability (Illinois Mutual Life and Casualty Company), Involuntary Unemployment Insurance (Vesta Fire Insurance Corp.), and GAP, which covers the excess of the loan amount over the value of the collateral if the collateral is a total loss (General Electric Capital Assurance Company). The Company was not a direct writer of any of these products during 1996. FSG will continue to market the Company's mortgage protection products. Management anticipated growth of approximately 3-5 percent in this segment of the Company's business during 1996 due to the marketing efforts of FSG. Actual growth during 1996 was 108% due to the fact that several of FSG's agents who also had agency relationships with other companies began sending more of the business to the Company. During the fourth quarter of 1995, FSG and the Company were advised that Franklin was exiting the Commonwealth of Kentucky as a direct writer of Credit Insurance products. FSG immediately began negotiating with a number of unaffiliated insurance companies to market Credit insurance products for them. In addition, FSG began negotiating a potential transaction with unaffiliated companies where the Credit Insurance policies would be written by the Company and all of the risk would be immediately reinsured to the unaffiliated company. Under a reinsurance arrangement, the Company would generate alternative revenues from retention fees and fees for administration and claims processing. Additionally, FSG will continue to generate revenues in the form of commissions. Therefore, in December 1995 the Company entered into a reinsurance agreement with Connecticut General under the terms of which all of the risk on all Credit Insurance policies sold by the Company would be reinsured with Connecticut General. The decision to reenter the Credit Insurance market as a direct writer required careful consideration of the decision to exit the market during 1995. The driving factors behind the decision to reenter were the ability to structure the reinsurance transaction with a highly rated insurance company, the ability to protect, improve and strengthen the Company's surplus and profitability, the ability to utilize our Credit Insurance administration and claims processing capabilities and the ability to generate alternative sources of revenue for the Company. The structure of the reinsurance agreement with Connecticut General accomplishes each of these goals. Further, FSG has been successful in retaining the majority of the Credit Insurance agency accounts and has successfully recruited another unaffiliated agency which is anticipated to more than double overall gross written Credit Insurance premiums and will therefore further enhance FSG's revenues. Employees. The number of persons employed by the Company is 111. The number of active independent contractual agents of the Company is 2,250. Management of the Company considers its relationship with the employees and agents to be satisfactory. Item 2.

Item 2. Properties The physical property of the Registrant consists of the home office building and grounds, owned in fee, at 200 Capital Avenue, Frankfort, Kentucky. Adjacent to the home office, the Company owns additional property on Second Street and on Shelby Street in Frankfort, Kentucky. One building is used for Agency and Company meetings; one building is a print shop used by IHP, one building is used for supplies and additional storage; and one building is leased to a commercial tenant. The Company also leases office space at One Harbison Way, Suite 106, Columbia, South Carolina 29212. Item 3.

Item 3. Legal Proceedings There are no legal proceedings to which the Registrant is a party which are material to the overall financial condition or the results of operations of the Company. Item 4.

Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security Matters (a) The information relative to the market value of the Company's stock appears on the inside back cover in the Annual Report to the Stockholders for the year ended December 31, 1996, and is incorporated herein by reference. (b) Approximate Number of Equity Security Holders (A) (B) Title of Class Number of Holders Common Stock of Record 12-31-96 2,834
(c) Dividends Cash dividends paid in 1996 amounted to $684,442 or $.76 per share. The 1996 cash dividend, to be paid April 11, 1997, is $.76 per share, payable to stockholders of record March 27, 1997. Item 6.

Item 6. Selected Financial Data Selected financial data for the past five years appears on page 29 in the Annual Report to the Stockholders for the year ended December 31, 1996, and is incorporated herein by reference. Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of financial condition and results of operations appears on pages 9-21 in the Annual Report to the Stockholders for the year ended December 31, 1996, and is incorporated herein by reference. Item 8.

Item 8. Financial Statements and Supplementary Data The consolidated financial statements and notes appear on page 29 through 46 in the Annual Report to Stockholders for the year ended December 31, 1996, and are incorporated herein by reference. See Part IV, Item 14. Item 9.

Item 9. Disagreements on Accounting and Financial Disclosure None.
Part III Item 10.

Item 10. Directors and Executive Officers of the Registrant (a) The Executive officers and directors of the Company are:
Name, Position & Year Family Became Officer/Director Age Relationship
Harry Lee Waterfield II 53 Chairman of the Board, President/1963
Jimmy R. McIver 45 Treasurer/1988
Wilma Yeary 65 Secretary/1989
Jane S. Jackson 42 Assistant Secretary/1989
Howard L. Graham 62 Vice President, Corporate Services/1969
Loretta Jane Wise 50 Vice President, Policy Service/1988
Nancy W. Walton 57 Sister of Vice President, Harry Lee Underwriting/1975 Waterfield II
N. Douglas Hippe 58 Vice President, Accounting/1974
Raymond L. Carr 48 Vice President, Administration Operations/1977
John E. Simmons 44 Vice President, Credit Life/Office Services/1986
Donald R. Philpot 59 Vice President, Agency/1981
Margaret J. Kays 65 Vice President, Human Resources/1993 Helen S. Wagner 60 Director/1986
Jerry F. Howell 83 Director/1964
Jerry F. Howell, Jr. 55 Son of Jerry Director/1987 F. Howell
Robert M. Hardy, Jr. 39 Nephew of Vice President & General Counsel, Harry Lee Director/1986 Waterfield II
Michael F. Dudgeon 35 Nephew of Director/1988 Harry Lee Waterfield II
Adron Doran 87 Director/1972
H. Glenn Doran 71 Director/1992
Clair S. Manson 69 Vice President, Chief Actuary/1987
Gordon C. Duke 51 Director/1996
(b) The principal occupation of each of the Officers listed above for the past five years has been that as indicated, except for Margaret J. Kays. Ms. Kays was elected Vice President, Human Resources in 1993. Prior to that time, Ms. Kays served as the Company's Assistant Vice President, Credit Life Accounting. Each of the Directors has occupied the position indicated for a period of more than five years with the exception of H. Glenn Doran and Gordon Duke. Mr. Doran was elected to the Board in July of 1992 and Mr. Duke was elected to the Board in 1996. Each filled vacancies caused by the untimely death of another Board member. Information regarding the business experience of the Directors who are not officers of the Company is shown on pages 2, 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 1997, and is incorporated herein by reference. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any Director or Executive Officer during the past five years. Officers are appointed annually by the Board of Directors at the Board meeting immediately following the Annual Meeting of Shareholders. There are no arrangements or any understandings between any officer and any other person pursuant to which the office was selected. Item 11.

Item 11. Executive Compensation and Transactions Information regarding compensation of executive officers and transactions with executive officers and directors is not restated in this Annual Report because the response to this item is shown on page 5 & 6 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 8, 1997 and is incorporated herein by reference. Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management Security ownership by Officers, Directors, and management, is not restated in this Annual Report because the response to this item is shown on pages 2, 3 & 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 1997, and is incorporated herein by reference. Item 13.

Item 13. Certain Relationships and Related Transactions Certain relationships and related transactions are shown on page 7 of the Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 1997, and are incorporated herein by reference. PART IV Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. Financial Statements incorporated herein by reference in Item 8 to the Company's Annual Report to Stockholders for the year ended December 31, 1996 (pages 30-46) filed as Exhibit 1: Consolidated Balance Sheets -- December 31, 1996 and 1995 For the years ended December 31, 1996, 1995 and 1994: Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements (a)2. Financial Statement Schedule Schedule I -- Summary of Investments -- Other than Investments in Related Parties Schedule III -- Supplementary Insurance Information Schedule IV -- Reinsurance The financial statements and schedules of Investors Heritage Life Insurance Company, as incorporated by reference in its Annual Report on Form 10-K filed with the Securities & Exchange Commission for the year ended December 31, 1996, are incorporated herein by reference. All other schedules have been omitted as not applicable, not required, or the required information has been included in the financial statements, notes thereto, or are incorporated herein by reference to the Annual Report on Form 10-K of Investors Heritage Life Insurance Company for the year ended December 31, 1996. (a)3. Listing of Exhibits Exhibit 1 - Annual Report to the Stockholders for the year ended December 31, 1996.* Exhibit 3.1-- Articles of Incorporation of the Company, as amended. Exhibit 3.2-- By-Laws of the Company, as amended. Exhibit 11-- Statements re Computation of Per Share Earnings.** Exhibit 23 - Consent of Independent Auditors. *The material included in this Report shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that this registrant specifically incorporates it in its Annual Report on this Form 10-K by reference. **The information required is contained in Note A to the Consolidated Financial Statements, "Common Stock and Earnings per Share", on page 37 of the Annual Report to the Stockholders for the year ended December 31, 1996 and is incorporated herein by reference. (b) Reports on Form 8-K No filing of Form 8-K was made in the fourth quarter, 1996. (c) See Item 14(a)(3) above. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Investors Heritage Life Insurance Company
March 27, 1997 /s/ DATE BY: Harry Lee Waterfield II ITS: Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Harry Lee Waterfield II Chairman of the Board, President and Chief Executive Officer March 27, 1997
/s/ Jimmy R. McIver Treasurer March 27, 1997
/s/ Howard L. Graham Vice President, Corporate Services March 27, 1997
/s/ Jerry F. Howell Director March 27, 1997
/s/ H. Glenn Doran Director March 27, 1997
/s/ Helen S. Wagner Director March 27, 1997
/s/ Adron Doran Director March 27, 1997
/s/ Robert M. Hardy, Jr. Vice President, General Counsel and Director March 27, 1997
/s/ Jerry F. Howell, Jr. Director March 27, 1997
/s/ Michael F. Dudgeon, Jr. Director March 27, 1997
/s/ Gordon C. Duke Director March 27, 1997
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Investors Heritage Life Insurance Company
We have audited the consolidated financial statements of Investors Heritage Life Insurance Company and subsidiary listed in the accompanying Index to financial statements (Item 14(a)). Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Heritage Life Insurance Company and subsidiary at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt securities in 1994.
/s/ Ernst & Young LLP Louisville, Kentucky March 25, 1997
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-46722-01) pertaining to the Kentucky Investors, Inc. and Affiliated Companies 401(k) Savings Plan and Trust Agreement and in the related prospectus of our report dated March 25, 1997, with respect to the consolidated financial statements and schedules of Investors Heritage Life Insurance Company included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP Louisville, Kentucky March 25, 1997
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996
AMOUNT AT WHICH MARKET SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET Fixed maturity securities available-for-sale:
Bonds: United States and government agencies and authorities $ 20,134,443 $ 20,916,574 $ 20,916,574
States and political 1,988,971 2,005,110 2,005,110 subdivisions
Foreign 7,573,874 7,675,600 7,675,600
Mortgage-backed securities 34,116,401 33,999,689 33,999,689
Corporate 81,814,543 82,942,752 82,942,752
Redeemable preferred stock 21,000 44,326 44,326 ----------- ----------- ----------- Total $145,649,232 $147,584,051 $147,584,051 ============ ============ ============ Equity securities, available for sale:
Common stocks: Banks, trusts & insurance companies $ 392,280 $ 1,991,292 $ 1,991,292
Industrial, misc. and all other 331,004 292,664 292,664
Nonredeemable preferred stocks 311,049 323,862 323,862 ------------ ------------ -------------- Total $ 1,034,333 $ 2,607,818 $ 2,607,818 ============ ============ ==============
Total securities available for sale: $146,683,565 $150,191,869 $150,191,869 ============ ============= ============ Mortgage loans on real estate 13,881,835 XXXXXXXX 13,881,835
Policy loans 6,894,715 XXXXXXXX 6,894,715
Other long term investments 217,681 XXXXXXXX 217,681
Short-term investments 968,899 XXXXXXXX 968,899 ------------ --------- ------------
Total investments $168,646,695 XXXXXXXX $172,154,999 ============ ============ ==============
INVESTORS HERITAGE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
SEGMENT
Life Credit Accident Corporate Total and (Life & Health Annuities and A&H)
$ $ $ $ $
Deferred Policy Acquisi- tion Costs 26,867,679 669,447 384,048 -0- 27,921,174
Future Policy Benefits, Lossess, Claims & Loss Expenses 170,672,825 290,776 130,769 -0- 171,094,370
Unearned Premium 4,413 8,578,377 699,452 -0- 9,282,242
Other Policy Claims & Benefits Payable 3,042,248 433,913 67,063 -0- 3,543,224
Premiums Revenue 36,329,602 (506,630) 31,053 -0- 36,354,025
Net Invest- ment Income (1) and (3) 8,894,825 82,614 48,005 2,048,603 11,164,047
Benefits claims, Losses & Settle- ment Expenses 19,419,843 757,693 471,502 -0- 20,649,038
Amorti- zation Deferred Acquisi- tion Costs 4,379,445 1,215,569 299,514 -0- 5,894,528
Other Operating Expenses (2) 5,125,814 904,319 144,268 918,304 7,092,705
(1) Net investment income is allocated in proportion to policy liabilities and stockholders' equity. (2) Other operating expenses are assigned directly to the applicable segment. (3) Includes realized investment gains or losses.
FOR THE YEAR ENDED DECEMBER 31, 1995
SEGMENT
Life Credit Accident Corporate Total and (Life & Health Annuities and A&H)
$ $ $ $ $
Deferred Policy Acquisi- tion Costs 25,845,535 1,885,016 529,562 -0- 28,260,113
Future Policy Benefits, Lossess, Claims & Loss Expenses 154,363,644 608,600 209,901 -0- 155,182,145
Unearned Premium 7,473 5,539,142 965,747 -0- 6,512,362 Other Policy Claims & Benefits Payable 3,415,505 262,739 88,068 -0- 3,766,312
Premiums Revenue 33,185,006 (1,167,524)1,043,894 -0- 33,061,376
Net Invest- ment Income (1) and (3) 9,251,927 365,529 82,783 1,171,857 10,872,096
Benefits claims, Losses & Settle- ment Expenses 33,529,515 (3,593,030) 187,439 -0- 30,123,924
Amorti- zation Deferred Acquisi- tion Costs 2,809,459 2,673,578 602,920 -0- 6,085,957
Other Operating Expenses (2) 5,147,730 992,599 234,049 607,562 6,981,940
(1) Net investment income is allocated in proportion to policy liabilities and stockholders' equity. (2) Other operating expenses are assigned directly to the applicable segment. (3) Includes realized investment gains or losses.
FOR THE YEAR ENDED DECEMBER 31, 1994
SEGMENT
Life Credit Accident Corporate Total and (Life & Health Annuities and A&H)
$ $ $ $ $
Deferred Policy Acquisi- tion Costs 25,124,359 4,747,594 627,482 -0- 30,499,435
Future Policy Benefits, Lossess, Claims & Loss Expenses 137,272,524 2,608,173 191,654 -0- 140,072,351
Unearned Premium 10,717 13,917,874 1,178,085 -0- 15,106,676
Other Policy Claims & Benefits Payable 4,684,333 313,573 73,578 -0- 5,071,484
Premiums Revenue 30,529,592 4,876,595 1,037,575 -0- 36,443,762
Net Invest- ment Income (1) and (3) 7,940,980 520,975 83,895 1,811,501 10,357,351
Benefits claims, Losses & Settle- ment Expenses 27,282,303 720,440 (379,281) -0- 27,623,462
Amorti- zation Deferred Acquisi- tion Costs 4,226,129 4,961,903 904,838 -0- 10,092,870
Other Operating Expenses (2) 4,208,623 874,651 180,311 768,624 6,032,209
(1) Net investment income is allocated in proportion to policy liabilities and stockholders' equity. (2) Other operating expenses are assigned directly to the applicable segment. (3) Includes realized investment gains or losses.
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE IV - REINSURANCE
FOR THE YEAR ENDED DECEMBER 31, 1996
Accident Life Premium, and Insurance Life Health TOTAL In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,388,230,107 39,614,360 3,244,892 42,859,252
Ceded to other Companies 316,499,131 6,619,435 3,358,570 9,978,005
Assumed from other Companies 1,216,370,893 3,379,319 354,983 3,734,302
Net Amount 2,288,101,869 36,374,244 241,305 36,615,549
Percentage of Amount Assumed to Net 53% 9% 147% 10%
FOR THE YEAR ENDED DECEMBER 31, 1995
Accident Life Premium, and Insurance Life Health TOTAL In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,301,580,403 30,088,838 (97,463) 29,991,375
Ceded to other Companies 180,264,855 807,810 327,654 1,135,464
Assumed from other Companies 1,235,769,597 3,477,443 870,956 4,348,399
Net Amount 2,357,085,145 32,758,471 445,839 33,204,310
Percentage of Amount Assumed to Net 52% 11% 195% 13%
FOR THE YEAR ENDED DECEMBER 31, 1994
Accident Life Premium, and Insurance Life Health TOTAL In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,533,680,499 30,789,709 2,539,118 33,328,827
Ceded to other Companies 280,015,000 919,336 501,149 1,420,485
Assumed from other Companies 1,284,986,501 3,930,203 608,295 4,538,498
Net Amount 2,538,652,000 33,800,576 2,646,264 36,446,840
Percentage of Amount Assumed to Net 51% 12% 23% 12%