<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Fee Required)
For the fiscal year ended: December 31, 1995
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
(No Fee Required)
Commission file number: 0-15298
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3365950
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters
World Financial Center
South Tower, 6th Fl., New York, NY 10080-6106
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-4161
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership
-------------------
Units
-----
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates: the
registrant is a limited partnership and, accordingly, has no voting stock held
by non-affiliates or otherwise.
Documents Incorporated By Reference
The registrant's "1995 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1995.
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
Annual Report for 1995 on Form 10-K
Table of Contents
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PART I
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PAGE
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Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II
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Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 3
Item 8. Financial Statements and Supplementary Data 5
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
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Item 10. Directors and Executive Officers of the Registrant 5
Item 11. Executive Compensation 6
Item 12. Security Ownership of Certain Beneficial Owners
and Management 6
Item 13. Certain Relationships and Related Transactions 6
PART IV
-------
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 7
<PAGE>
PART I
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Item 1: Business
--------
(a) General Development of Business:
-------------------------------
The Futures Expansion Fund Limited Partnership (the "Partnership" or
the "Fund") was organized under the Delaware Revised Uniform Limited Partnership
Act on August 13, 1986. Its sole public offering of units of limited
partnership interest ("Units") commenced on October 27, 1986, and the
Partnership began commodity futures, forwards and options trading on January 2,
1987 through a Joint Venture (the "Joint Venture") with and under the direction
of Millburn Ridgefield Corporation ("Millburn Ridgefield" or the "Trading
Advisor"). Millburn Ridgefield is a Delaware corporation registered with the
Commodity Futures Trading Commission ("CFTC") as a commodity trading advisor,
commodity pool operator and futures commission merchant. The Partnership,
through the Joint Venture, engages in the speculative trading of commodity
futures, forward and options contracts on currencies, financial instruments,
stock indices, metals, and energy and agricultural products.
Merrill Lynch Investment Partners Inc. (formerly ML Futures Investment
Partners Inc.) (the "General Partner" or "MLIP") acts as the general partner of
the Partnership, and Merrill Lynch Futures Inc. (the "Commodity Broker" or
"MLF") is the Joint Venture's commodity broker. The Commodity Broker is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The General
Partner is currently a wholly-owned subsidiary of Merrill Lynch Group Inc.,
which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The General Partner maintains a minimum account balance equal to at least
1% of the total capital of the Fund, and must do so as long as it remains
General Partner of the Partnership.
(b) Financial Information about Industry Segments:
---------------------------------------------
The Joint Venture's business constitutes only one segment for
financial reporting purposes, i.e., a speculative "commodity pool."
(c) Narrative Description of Business:
---------------------------------
The Joint Venture Agreement between the Partnership and the Trading
Advisor may be terminated by the General Partner, acting on behalf of the
Partnership, under certain circumstances involving, for example, substantial
losses or changes in control of the Trading Advisor. The termination of the
Joint Venture Agreement would not necessarily terminate the Partnership, but
would require the General Partner to make other advisory arrangements for the
Joint Venture. The Joint Venture Agreement has been continually renewed since
the inception of trading and currently terminates on December 31, 1996 unless
further renewed. Millburn Ridgefield has been the sole Trading Advisor of the
Fund since inception.
The Joint Venture is a speculative commodity pool and, as such, the
success of its operations depends entirely upon the profitability of its trading
as directed by the Trading Advisor (or such other advisor as may be selected for
the Partnership in the future) in charge of managing the Partnership's assets
from time to time. Since the Joint Venture's inception, the Trading Advisor has
served in this capacity.
The objective of Millburn Ridgefield's trading method is to
participate in all major sustained price moves in the markets traded. Millburn
Ridgefield will make trading decisions pursuant to its trading method which
includes technical trend analysis (and certain non-trend-following technical
systems) and money management principles which may be revised from time to time.
Given trends in price of sufficient duration and magnitude, these trading
systems may be profitable even though more than half of all individual trades
are unprofitable. A period of time without such trends, however, may result in
substantial losses. Millburn Ridgefield has a substantial ongoing research
effort to improve its currency and futures trading method and to apply its
quantitative analysis expertise to new financial products.
Trading is limited to markets which Millburn Ridgefield believes are
sufficiently liquid in respect of the amount of trading contemplated.
In addition to the volatility overall, Millburn Ridgefield's risk
management focuses on money management principles applicable to the portfolio as
a whole rather than to individual markets. The first principle is portfolio
diversification which further improves the quality of profits by reducing
volatility. In any currency and futures portfolio, Millburn Ridgefield will
select markets and assign them relevant weightings to achieve broad
diversification. Factors considered include profitability, liquidity, market
depth, correlation of losing periods and Millburn Ridgefield's trading
experience. Millburn Ridgefield seeks a portfolio where returns from trading
are not highly correlated; returns are not all positive or negative at the same
time.
Additional money management principles, applicable to the portfolio as
a whole include: limiting the assets committed as margin, generally within a
range of 15% to 30% of an account's net assets at exchange minimum margins,
(including imputed margins on forward positions) although the amount committed
to margin at any time may be substantially higher; prohibiting pyramiding (that
is, using unrealized profits in a particular market as margin for additional
positions in the same market) and changing the equity utilized for trading by an
account solely on a controlled
1
<PAGE>
periodic basis rather than as an automatic consequence of an increase in equity
resulting from trading profits.
Another important risk management function is the careful control of
leverage or portfolio size. Appropriate leverage levels are determined by
simulating the entire portfolio - all markets, all systems, all risk control
overlays, the exact weightings of the markets in the portfolio and the proposed
level of leverage - over the past five or ten years to determine the worst case
experienced by the portfolio in the simulation period.
The money management principles, computer assisted research into
historical trading data, and experience of the principals of Millburn Ridgefield
are factors upon which decisions concerning the percentage of assets to be used
for each market traded and the size of positions taken or maintained are based.
From time to time decisions to increase or decrease the size of a position, long
or short, may be made. Such decisions also require the exercise of judgment and
may include consideration of the volatility of the particular market; the
pattern of price movement, both inter-day and intra-day; open interest; volume
of trading; changes in spread relationships between various forward contracts;
and overall portfolio balance and risk exposure.
The Trading Manager also engages in trading on commodity exchanges
outside the United States on behalf of the Joint Venture. Trading on such
exchanges is not regulated by any United States government agency and may
involve certain risks not applicable to trading on United States exchanges.
Furthermore, as the Joint Venture determines its Net Asset Value in United
States dollars, with respect to trading on foreign markets the Joint Venture is
subject to the risk of fluctuations in the exchange rate between the local
currency and dollars and to the possibility of exchange controls.
The Joint Venture trades forward contracts through a Foreign Exchange
Desk (the "F/X Desk") that contacts at least two counterparties along with
Merrill Lynch International Bank ("MLIB") for all of the Joint Ventures currency
trades. The F/X Desk contacts at least two counterparties in addition to MLIB
for a price quote on each trade. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee
(at current exchange rates) equal to approximately $5.00 to $12.50 on each
purchase or sale of a futures-contract equivalent face amount of a foreign
currency on each transaction. No service fee is charged on trades awarded to
MLIB (on which MLIB receives a "bid-ask" spread). MLIB is awarded trades only
if its price is (without the service fee) equal to or better than the best price
(including the service charge) offered by any of the other counterparties
contacted.
The F/X Desk trades using credit lines provided by a Merrill Lynch
entity. The Joint Venture is not required to margin or otherwise guarantee its
F/X Desk trading.
Certain of the Joint Venture's currency trades are executed in the
form of "exchange of futures for physical" ("EFP") transactions involving MLIB
and MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary Market
("IMM"). In its EFP trading with Merrill Lynch, the Joint Venture acquires cash
currency positions through the F/X Desk in the same manner and on the same terms
as in the case of the Joint Venture's other F/X Desk trading. When the Joint
Venture exchanges these positions for futures, there is a "differential" between
the prices of these two positions. This "differential" reflects, in part, the
different settlement dates of the cash and the futures contracts as well as
prevailing interest rates, but also includes a pricing spread in favor of MLIB
or another Merrill Lynch entity. The General Partner estimates the Joint
Venture's service fee and EFP differential costs to total no more than 0.25 of
1% of the Joint Venture's average month-end Net Assets on an annual basis.
The Fund, to the extent that it has executed currency EFP transactions
in the past, has both acquired its cash positions and effected the exchange of
positions for futures contracts through brokers other than MLF (to which the
futures positions were ultimately given up to be cleared).
A substantial portion of the Partnership's assets are maintained as
cash in trading accounts with the Commodity Broker. The Commodity Broker credits
the Partnership's accounts with interest on its assets (not all of which are
available for investment) at a rate of 0.5% per annum below the 91-day Treasury
bill rate. Certain of the Partnership's assets are invested in short-term
sovereign debt obligations of foreign countries and used to margin futures
positions on such countries exchanges.
Each Limited Partner may redeem any or all of their Units at month-end
upon notifying the General Partner ten days prior to such month-end. Each Unit
redeemed is paid the current month-end Net Asset Value as calculated by the
General Partner.
The General Partner, the Trading Advisor and Commodity Broker are each
subject to regulation by the Commodity Futures Trading Commission and National
Futures Association. Other than in respect of its periodic reporting
requirements, the Partnership is generally not subject to regulation by the
Securities and Exchange Commission.
(i) through (xii) -- not applicable.
(xiii) The Joint Venture has no employees.
2
<PAGE>
(d) Financial Information about Foreign and Domestic Operations Export
------------------------------------------------------------------
Sales:
-----
The Partnership does not engage in material operations in foreign
countries (although it does trade on certain foreign exchanges), nor is a
material portion of the Partnership's revenues derived from customers in foreign
countries.
Item 2: Properties
----------
The Partnership does not use any physical properties in the conduct of
its business.
The Partnership's principal place of business is the principal place of
business of the General Partner (see Item 10 herein), and the principal place of
business of the Joint Venture, through which the Partnership trades, is in
Ridgefield, Connecticut. The General Partner performs all administrative
services for the Partnership from its offices.
Item 3: Legal Proceedings
-----------------
There are no pending legal proceedings to which the Partnership or the
Joint Venture is a party.
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its
Limited Partners.
PART II
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Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
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(a) Market Information:
------------------
There is no established public trading market for the Units, nor
will one develop. Rather, Limited Partners may redeem Units as of the end of
each month at Net Asset Value.
(b) Holders:
-------
As of December 31, 1995, there were 464 holders of Units, including the
General Partner.
(c) Dividends:
---------
The Partnership has made no distributions since trading commenced, nor
does the General Partner presently intend to make any such distributions in the
future.
Item 6: Selected Financial Data
-----------------------
The following is a summary of selected consolidated financial data of
the Partnership:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Realized gain (loss) $ 2,689,922 $2,206,016 $ 369,871 $ 3,222,430 $ (602,041)
Change in unrealized
gain (loss) 405,757 (891,323) 1,010,906 (1,250,488) 1,042,707
Interest income 468,023 290,482 216,417 266,889 516,060
------------ ------------ ------------ ------------ ------------
Total revenue 3,563,702 1,605,175 1,597,194 2,238,831 956,726
Expenses:
Brokerage commissions 1,208,671 1,056,436 1,196,550 1,239,484 1,383,678
Profit shares 471,976 119,420 83,410 187,260 -0-
------------ ------------ ------------ ------------ ------------
Total Expenses 1,680,647 1,175,856 1,279,960 1,426,744 1,383,678
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,883,055 $ 429,319 $ 317,234 $ 812,087 $ (426,952)
============ ============ ============ ============ ============
Total assets $10,477,200 $9,155,701 $9,936,486 $10,627,856 $11,496,970
Total partners' capital $ 9,891,103 $8,863,340 $9,610,371 $10,291,312 $11,233,427
Net Asset Value per Unit $238.96 $195.94 $185.64 $179.60 $164.41
</TABLE>
Item 7: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Operational Overview; Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations
depend on Trading Advisor's ability to recognize and capitalize on trends and
other profit opportunities in different sectors of the world commodity markets.
The Trading Advisor's trading methods are confidential, so that substantially
the only information that can be furnished regarding the Fund's results of
operations is contained in the performance record of its trading. Unlike
operating businesses, general economic or seasonal conditions do not directly
affect the profit potential of the Fund, and its past performance is not
necessarily indicative of future results. Because of the speculative nature of
its trading, operational or economic trends have little relevance to the Fund's
results. MLIP believes, however, that there are
3
<PAGE>
certain market conditions, for example, markets with strong price trends, in
which the Fund has a better likelihood of being profitable than in others.
Results of Operations - General
- -------------------------------
Unlike an operating business, MLIP believes that it is difficult to
identify "trends" in the Fund's operations and virtually impossible to make any
predictions regarding future results based on results to date (even over the
nine year operational history of the Fund to date). The Trading Advisor regards
its strategy as long-term in nature.
Markets in which sustained price trends occur with some frequency tend
to be more favorable to managed futures investments than "whipsaw," "choppy"
markets, but (i) this is not always the case, (ii) it is impossible to predict
when trending markets will occur and (iii) the Trading Advisor is affected by
trends in general as well as by particular types of trends.
The Fund controls credit risk in its trading in the derivatives markets
by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Trading Advisor attempts to control the market risk inherent
in derivatives trading by applying multiple trading systems in each market as
well as implementing the basic risk management policies described above under
"Item 1: Business - (c) Narrative Description of Business." However, as a
single-advisor fund, the Partnership must be considered a more speculative
investment than the multi-advisor funds which have become popular in the public
commodity pool markets during approximately the last decade. Millburn Ridgefield
trades a diversified portfolio for the Fund, but with an emphasis on the
currency and financial instrument markets.
Performance Summary
- -------------------
During 1993, the Fund's average month-end Net Assets equalled
$9,410,468, and the Fund recognized gross trading gains of $1,380,777 or 14.67%
of such average month-end Net Assets. Brokerage commissions of $1,196,550 or
12.72% and Profit Shares of $83,410 or 0.89% of average month-end Net Assets
were paid. Interest income of $216,417 or 2.30% of average month-end Net Assets
resulted in net income of $317,234 or 3.37% of average month-end Net Assets,
which resulted in a 3.36% increase in the Net Asset Value per Unit.
During 1994, the Fund's average month-end Net Assets equalled
$8,284,849, and the Fund recognized gross trading gains of $1,314,693 or 15.87%
of such average month-end Net Assets. Brokerage commissions of $1,056,436 or
12.75% and Profit Shares of $119,420 or 1.44% of average month-end Net Assets
were paid. Interest income of $290,482 or 3.51% of average month-end Net Assets
resulted in net income of $429,319 or 5.18% of average month-end Net Assets,
which resulted in a 5.55% decrease in the Net Asset Value per Unit.
During 1995, the Fund's average month-end Net Assets equalled
$9,852,663, and the Fund recognized gross trading gains of $3,095,679 or 31.42%
of such average month-end Net Assets. Brokerage commissions of $1,208,671 or
12.27% and Profit Shares of $471,976 or 4.79% of average month-end Net Assets
were paid. Interest income of $468,023 or 4.75% of average month-end Net Assets
resulted in net income of $1,883,055 or 19.11% of average month-end Net Assets
which resulted in a 21.96% increase in the overall Net Asset Value of the Fund.
In its past 36 months of trading, the Fund experienced 19 profitable
months and 17 unprofitable months.
MONTH-END NET ASSET VALUE PER UNIT
----------------------------------
<TABLE>
<CAPTION>
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $174.03 $182.97 $181.37 $190.86 $186.44 $180.53 $188.27 $172.77 $173.34 $170.26 $172.38 $185.64
1994 $170.96 $168.29 $179.52 $174.67 $182.59 $191.83 $186.02 $174.47 $179.91 $184.24 $192.32 $195.94
1995 $189.48 $201.01 $231.61 $240.44 $235.91 $237.51 $230.15 $231.47 $226.17 $224.81 $224.36 $238.96
</TABLE>
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in one fiscal year to that
in a prior year are unlikely to be meaningful, given the uncertainty of price
movements in the markets traded by the Fund. In general, MLIP expects that the
Fund is most likely to trade successfully in markets which exhibit strong and
sustained price trends. Millburn Ridgefield's strategy is based on technical
trend analysis (and certain non-trend following technical systems).
Consequently, one would expect that in trendless, "choppy" markets the Fund
would likely be unprofitable, while in markets in which major price movements
occur, the Fund would have its best profit potential (although there could be no
assurance that the Fund would, in fact, trade profitably). However, the Trading
Advisor will not infrequently miss major price movements, and market corrections
can result in rapid and material losses (sometimes as much as 10% in a single
day).
Liquidity
- ---------
Most of the Joint Venture's assets are held as cash which, in turn, is
used to margin its futures positions and earns interest income and is withdrawn,
as necessary, to pay redemptions and fees.
The futures contracts in which the Joint Venture trades may become
illiquid under certain market conditions. Commodity exchanges limit fluctuations
in futures prices during a single day by regulations referred to as "daily
limits." During a single day no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract for a particular commodity has
increased
4
<PAGE>
or decreased by an amount equal to the daily limit, positions in the
commodity can generally neither be taken nor liquidated unless traders are
willing to effect trades at or within the limit. Futures contracts have
occasionally moved to the daily limit for several consecutive days with little
or no trading. Such market conditions could prevent the Joint Venture from
promptly liquidating its futures (including its options) positions. There are no
limitations on the daily price moves in trading foreign currency forward
contracts through banks, although illiquidity may develop in the forward markets
due to large spreads between "bid" and "ask" prices quoted. (Forward contracts
are the bank version of currency futures contracts and are not traded on
exchanges.)
Capital Resources
- -----------------
The Joint Venture does not have, nor does it expect to have, any
capital assets and has no material commitments for capital expenditures. The
Joint Venture uses its assets to supply the necessary margin or premiums for,
and to pay any losses incurred in connection with, its trading activity and to
pay redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
which can have a materially favorable or adverse impact on the Fund's
performance.
Item 8: Financial Statements and Supplementary Data
-------------------------------------------
The financial statements required by this Item are included on pages
E-1 through E-15.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
Item 9: Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
--------
Item 10: Directors and Executive Officers of the Registrant
--------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
---------------------------------------------------
As a limited partnership, the Joint Venture itself has no officers or
directors and is managed by the General Partner. Trading decisions are made on
behalf of the Joint Venture, through the Joint Venture, by the Trading Advisor.
Merrill Lynch Investment Partners Inc. (formerly ML Futures Investment
Partners Inc.), a Delaware corporation, was organized in 1986 principally in
order to serve as the general partner and commodity pool operator of commodity
pools for which Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as
selling agent. The principal offices of the General Partner are located at
Merrill Lynch World Headquarters, 6th Floor, South Tower, World Financial
Center, New York, New York 10080-6106; telephone (212) 236-4161.
The directors and officers of the General Partner, and titles as of
December 31, 1995 are as follows:
John R. Frawley, Jr. President, Chief Executive Officer and Director
James M. Bernard Chief Financial Officer, Senior Vice President and
Treasurer
Jeffrey F. Chandor Senior Vice President and Director of Sales,
Marketing and Research
William T. Maitland Secretary and Director
Allen N. Jones Chairman and Director
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP and Co-Chairman of Merrill Lynch
Futures. He joined MLPF&S in 1966 and has served in various positions, including
Retail and Institutional Sales, Manager of New York Institutional Sales,
Director of Institutional Marketing, Senior Vice President of Merrill Lynch
Capital Markets and Director of International Institutional Sales. Mr. Frawley
holds a Bachelor of Science degree from Canisius College. From its formation in
1990 through its dissolution in 1994, Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee. Mr. Frawley is currently a member of
the CFTC's Financial Products Advisory Committee. In January 1996, Mr. Frawley
was re-elected to a one-year term as Chairman of the Managed Futures
Association, the national trade association of the United States managed futures
industry. Mr. Frawley is also a Director of that organization and Vice Chairman
of the Futures Industry Institute.
James M. Bernard was born in 1950. Mr. Bernard is Chief Financial
Officer, Senior Vice President and Treasurer of MLIP. He joined Merrill Lynch
Futures in 1983. Prior to such time he was the Commodity Controller for Nabisco
Brands Inc. from November 1976 to 1982 and a Supervisor with Ernst & Whinney
from 1972 to November 1976. Mr. Bernard is a member of
5
<PAGE>
the American Institute of Certified Public Accountants and holds a Bachelor of
Science degree from St. John's University and a Master of Business
Administration degree from Fordham University.
Jeffrey F. Chandor was born in 1945. Mr. Chandor is Senior Vice
President and the Director of Sales, Marketing and Research of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Derivatives and Mortgage-Backed Securities as well as
Managing Director of International Sales in the United States, and Managing
Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from
Trinity College, Hartford, Connecticut.
William T. Maitland was born in 1949. From MLIP's inception in August
1986 through June 1, 1988, Mr. Maitland was the Secretary and a Director of MLIP
and, on August 15, 1992, he once again assumed these positions. Mr. Maitland is
the General Counsel for Futures & Options for MLPF&S, a position he has held
since November 1990, and is a member of the Board of Directors of Merrill Lynch
Futures. In 1971, Mr. Maitland graduated with a Bachelor of Arts degree from
Fordham University where his field of concentration was economics. In 1974, he
received his Juris Doctor degree from Fordham Law School. Mr. Maitland joined
MLPF&S in 1979. Mr. Maitland is presently a member of the Board of Directors of
the NFA and the Futures Industry Association ("FIA") and a past President of the
Executive Committee of the Law & Compliance Division of the FIA. He is a member
of the Committee on Commodities Regulation of the Association of the Bar of the
City of New York.
Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director of
MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of
Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has
held the position of Senior Vice President of MLPF&S. From June 1992 through
February 1994, Mr. Jones was the President and Chief Executive Officer of
Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of
Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones
became the Director of Individual Financial Services of the Merrill Lynch
Private Client Group. From January 1992 to May 1992, he held the position of
First Vice President of MLPF&S. From January 1990 to June 1992, he held the
position of District Director of MLPF&S. Prior to January 1990, he held the
position of Senior Regional Vice President of MLPF&S.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None. The Trading Advisor directs the trading activities of the Joint
Venture through the Joint Venture.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
The General Partner is the sole promoter and controlling person of the
Partnership.
Item 11: Executive Compensation
----------------------
The officers of the General Partner are remunerated in their
respective positions. The Partnership does not itself have any officers,
directors or employees. The Partnership pays brokerage commissions to an
affiliate of the General Partner. The directors and officers receive no "other
compensation" from the Partnership, and the directors receive no compensation
for serving as directors of the General Partner. There are no compensation plans
or arrangements relating to a change in control of either the Partnership or the
General Partner.
Item 12: Security Ownership of Certain Beneficial Owners and Management:
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1995, no person or "group" is known to be or
have been the beneficial owner of more than five percent of the Units. All of
the Partnership's units of general partnership interest are owned by the General
Partner.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1995, the Trading Advisor owned 1,026 Units
and the General Partner owned 518 Unit equivalents. This represents, on a
combined basis, less than 4% of the total Units outstanding.
(c) Changes in Control
------------------
None.
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
6
<PAGE>
The General Partner performs certain services for the Partnership, which
include selecting a Trading Advisor to make trading decisions for the
Partnership through the Joint Venture, managing the Joint Venture and providing
for all normal ongoing administrative functions of the Partnership, such as
accounting, legal and printing services. The General Partner pays all expenses
relating to such services, including all such expenses of the Joint Venture, at
no cost to the Partnership. The monthly brokerage commission rate paid by the
Joint Venture to the Commodity Broker was 1% (12% annually). This rate was
reduced to 11.92% annually during 1993. Effective January 1, 1996, the brokerage
commission the Joint Venture pays to the Commodity Broker will be reduced to
.9725% (a 11.67% annual rate), and the Partnership will pay an administrative
fee of .020833% (a .25% annual rate). The General Partner estimates that the
round-turn equivalent commission rate charged to the Joint Venture during the
year ended December 31, 1995, 1994 and 1993 was approximately $120, $33 and $29,
respectively (not including forward contracts on a futures contract equivalent
basis in calculating the round-turn rate). The consulting fee rate paid by the
commodity broker to the Trading Advisor is 0.33% (4% annually) of the Joint
Venture's month-end Net Assets.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as Commodity Broker
for the Joint Venture at the selection of the General Partner. The General
Partner will not negotiate for lower commissions to be charged to the Joint
Venture and the commissions charged to the Joint Venture have not been
negotiated at arms' length between the General Partner and its affiliate,
Merrill Lynch Futures Inc.
In 1995, the Joint Venture paid $1,208,671 in brokerage fees to
MLF, which, in turn, paid $405,561 in consulting fees to the Trading Advisor.
See Item 1(c) "Narrative Description of Business" for a discussion
of other business dealings between MLIP affiliates and the Joint Venture.
(c) Indebtedness of Management:
--------------------------
The Joint Venture is prohibited from making any loans.
(d) Transactions with Promoters:
---------------------------
Not applicable.
PART IV
-------
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)1. Financial Statements:
--------------------
Page
----
Independent Auditors' Report E-5
Consolidated Statements of Financial Condition
as of December 31, 1995 and 1994 E-6
For the Years Ended December 31, 1995, 1994 and 1993:
Consolidated Statements of Income E-7
Consolidated Statements of Changes in
Partners' Capital E-8
Notes to Consolidated Financial Statements E-9
(a)2. Financial Statement Schedules:
-----------------------------
Financial statement schedules not included in this Form 10-K have been
omitted for the reason that they are not required or are not applicable or that
equivalent information has been included in the financial statements or notes
thereto.
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are filed herewith
to this Annual Report on Form 10-K:
Designation Description
- ----------- -----------
1.01 Form of Selling Agreement among the Partnership, the General
Partner, Merrill Lynch Futures Inc., the Trading Advisor, and
the Selling Agent.
Exhibit 1.01: Is incorporated by reference from Exhibit 1.01 contained in
- ------------
Amendment No. l to the Registration Statement (File No. 33-8377)
filed on October 21, 1986 on Form S-l under the Securities Act
of 1933.
3.01 Amended and Restated Limited Partnership Agreement of the
Partnership.
7
<PAGE>
Exhibit 3.01: Is incorporated by reference from Exhibit 3.0l contained in
- ------------ Amendment No. l to the Registration Statement (File No. 33-8377)
filed on October 21, 1986, on Form S-l under the Securities Act
of 1933.
3.02 Amendment No. 1 to the Amended and Restated Limited Partnership
Agreement dated March 1, 1990.
Exhibit 3.02: Is incorporated by reference from Exhibit 3.02 contained in the
- ------------ Partnership's report on Form 10-K for the fiscal year ended
December 31, 1989.
3.03 Amended and Restated Certificate of Limited Partnership, dated
March 1, 1990.
Exhibit 3.03: Is incorporated by reference from Exhibit 3.03 contained in the
- ------------ Partnership's report on Form 10-K for the fiscal year ended
December 31, 1989.
3.04 Amended and Restated Certificate of Limited Partnership of the
Partnership, dated July 27, 1995.
Exhibit 3.04: Is incorporated by reference from Exhibit 3.04 contained in the
- ------------ Partnership's report on Form 10-Q for the Quarter Ended
September 30 , 1995.
10.03 Consulting Agreement, dated as of April 1, 1987.
Exhibit 10.03: Is incorporated by reference from Exhibit 10.05(a) contained in
- ------------- the Partnership's Form 10-K of December 31, 1987 filed on March
28, 1988.
10.04 Amendment No. 2 to the Joint Venture Agreement, dated as of
December 31, 1987.
Exhibit 10.04: Is incorporated by reference from Exhibit 10.04 contained in the
- ------------- Partnership's report on Form 10-K for the fiscal year ended
December 31, 1989.
10.05 Amendment No. 3 to the Joint Venture Agreement, dated as of
December 31, 1988.
Exhibit 10.05: Is incorporated by reference from Exhibit 10.05 contained in the
- ------------- Partnership's report on Form 10-K for the fiscal year ended
December 31, 1989.
10.06 Amendment No. 4 to the Joint Venture Agreement, dated as of
December 31, 1989.
Exhibit 10.06: Is incorporated by reference from Exhibit 10.06 contained in the
- ------------- Partnership's report on Form 10-K for the fiscal year ended
December 31, 1989.
10.07 Amendment No. 5 to the Joint Venture Agreement, dated as of
January 1, 1990.
Exhibit 10.07: Is incorporated by reference from Exhibit 10.07 contained in the
- ------------- Partnership's Form 10-K of December 31, 1990, filed on March 27,
1991.
10.08 Amendment No. 6 to the Joint Venture Agreement, dated as of
January 1, 1992.
Exhibit 10.08: Is incorporated by reference from Exhibit 10.08 contained in the
- ------------- Partnership's report on Form 10-K for the Fiscal Year Ended
December 31, 1991.
10.09 Amendment No. 7 to the Joint Venture Agreement, dated as of
January 1, 1993.
Exhibit 10.09: Is incorporated by reference from Exhibit 10.09 contained in the
- ------------- Partnership's report on Form 10-K for the Fiscal Year Ended
December 31, 1992.
10.10 Amendment No. 8 to the Joint Venture Agreement, dated as
of January 1, 1994.
Exhibit 10.10: Is incorporated by reference from Exhibit 10.09 contained in the
- ------------- Partnership's report on Form 10-K for the Fiscal Year Ended
December 31, 1994.
10.11 Form of Advisory Agreement between the Partnership, Merrill
Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and
prospective trading advisors.
Exhibit 10.11: Is incorporated by reference from Exhibit 10.11 contained in the
- ------------- Registrant's report on Form 10-Q for the Quarter Ended June 30,
1995.
13.01 1995 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
99.01 Prospectus of the Partnership dated October 27, 1986.
Exhibit 99.01: Is incorporated by reference as filed with the Securities and
- ------------- Exchange Commission pursuant to Rule 424 under the Securities
Act of 1933, as amended, on October 31, 1986.
8
<PAGE>
(b) Reports on Form 8-K:
-------------------
Form 8-K was filed by the Registrant on July 28, 1995 disclosing MLIP's
name change from ML Futures Investment Partners Inc.
9
<PAGE>
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.
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
President, Chief Executive Officer and
Director (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 28, 1996 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ------------------------------------- --------------
<S> <C> <C>
/s/John R. Frawley, Jr. President and Chief Executive Officer March 28, 1996
- -----------------------
John R. Frawley, Jr. and Director
/s/James M. Bernard Chief Financial Officer, Treasurer March 28, 1996
- -------------------
James M. Bernard (Principal Financial and Accounting
Officer) and Senior Vice President
/s/Jeffrey F. Chandor Senior Vice President and Director March 28, 1996
- ---------------------
Jeffrey F. Chandor of Sales, Marketing and Research
/s/William T. Maitland Director March 28, 1996
- ----------------------
William T. Maitland
/s/Allen N. Jones Director March 28, 1996
- -----------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of March 28, 1996
PARTNERS INC. Registrant
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
1995 FORM 10-K
INDEX TO EXHIBITS
-----------------
EXHIBIT PAGE
---------------------
Exhibit 13.01 1995 Annual Report and Independent E-1
Auditors' Report
<PAGE>
THE FUTURES EXPANSION FUND
LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
AND JOINT VENTURE
Financial Statements for the years ended
December 31, 1995, 1994 and 1993 and
Independent Auditors' Report
<PAGE>
To: The Limited Partners of THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
The Futures Expansion Fund Limited Partnership (the "Fund") ended its eighth
fiscal year of trading on December 31, 1995 with a Net Asset Value ("NAV") per
Unit of $238.96, representing an increase of 21.96% from the December 31, 1994
NAV per Unit of $195.94. During the fiscal year, trading profits were generated
in the interest rate, currency, energy and stock index sectors while losses were
incurred in the metals and agriculture sectors.
In 1995, price trends which prevailed in several key markets enabled the Fund's
Trading Advisor to trade profitably for the Fund. Although trading in many of
the traditional commodity markets may have been lackluster, the currency and
financial markets offered exceptional trading opportunities. Soaring stock
prices and falling interest rates, coupled with significant currency moves,
resulted in profitable trading opportunities in these markets throughout the
year.
1995 proved to be a good year for the Fund. As General Partner and Trading
Manager of the Fund, we continue to remain confident that the Fund is well
positioned to benefit from trading opportunities in 1996 and are working
diligently with the Trading Advisor to meet the Fund's objective of substantial
capital appreciation over the long-term. We look forward to the new fiscal year
and the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
REPORT OF THE TRADING ADVISOR
The Fund produced a very attractive return in 1995. Interest rate futures and
currency trading were highly profitable, and energy futures trades also made a
significant positive contribution. Stock index futures positions were marginally
profitable. On the other hand, metals and soft commodities produced slightly
negative results, while grain trading had no appreciable impact on overall
results.
The rally in the long end of the interest rate market pushed bond yields down
worldwide in 1995. Consequently, long futures and call option positions in the
yen bond, U.S. notes and bonds, bunds and the Italian bond were very profitable.
Meanwhile, in France and Australia, social and political unrest interrupted the
rally, and trading of long-term futures produced losses. As short-term rates in
the U.S. and Japan were lead lower by official actions, long positions in Euro-
yen and Eurodollars were profitable. At the same time, a long put position on
French short-term rates benefitted as social unrest forced these rates upward.
Turning to currencies, a dollar decline early in 1995, and a dollar rally toward
year-end produced attractive trading opportunities for Millburn's systematic
approaches. Trading in the yen/U.S. dollar
<PAGE>
exchange rate produced the largest gains, although profits were also made
trading the dollar against a number of European currencies, especially the
German mark. Cross rate trading was very positive in 1995. The mark/lire,
mark/yen and yen/Canadian dollar currency prices contributed to gains.
Meanwhile, trading in the British pound, Spanish peseta and ECU produced
negative results.
In the energy sector, long futures positions in natural gas, crude oil, unleaded
gas, heating oil and gasoil were very profitable as a year-end rally produced
price gains throughout the energy complex.
Stock index futures were moderately profitable. Gains from long futures trades
in the Topix and Nikkei Dow (both Japan) more than offset trading losses in the
All Ordinaries (Australia) and FTSE (UK).
In metals trading, small losses were registered on both sides of the market in
aluminum, nickel, copper and gold. Meanwhile, a loss on a long orange juice
trade dominated developments in the softs portion of the Fund's portfolio.
We believe that the continuing trend toward global growth and globalization of
markets makes this Fund a potentially rewarding investment. No one has a clear
picture of the future, but the flexible nature of Millburn's management and the
diversity of the markets traded within the Fund has the potential to make it a
rewarding long-term investment.
MILLBURN RIDGEFIELD CORPORATION
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
The Futures Expansion Fund Limited Partnership:
We have audited the accompanying consolidated statements of financial condition
of The Futures Expansion Fund Limited Partnership (a Delaware limited
partnership; the "Partnership") and its Joint Venture as of December 31, 1995
and 1994 and the related consolidated statements of income and of changes in
partners' capital for each of the three years in the period ended December 31,
1995. 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. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of The Futures Expansion Fund Limited
Partnership (a Delaware limited partnership) and its Joint Venture as of
December 31, 1995 and 1994 and the results of their operations for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
January 26, 1996
New York, New York
-1-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
- ------
Cash on deposit at brokers $ -- $ 20,000
Accrued interest (Note 3) 39,699 35,340
Equity in commodity futures trading accounts:
Cash and option premiums 9,860,595 8,929,212
Net unrealized gain on open contracts 576,906 171,149
----------- ----------
TOTAL $10,477,200 $9,155,701
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 7,169 $ 78,972
Brokerage commissions payable (Note 3) 103,775 90,793
Profit shares payable 475,153 122,596
----------- ----------
Total liabilities 586,097 292,361
----------- ----------
PARTNERS' CAPITAL:
General Partner (518 and 518 Units) 123,779 101,500
Limited Partners (40,875 and 44,716 Units) 9,767,324 8,761,840
----------- ----------
Total partners' capital 9,891,103 8,863,340
----------- ----------
TOTAL $10,477,200 $9,155,701
=========== ==========
NET ASSET VALUE PER UNIT
(Based on 41,393 and 45,234 Units outstanding) $238.96 $195.94
=========== ==========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REVENUES: 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Trading profits (loss):
Realized $2,689,922 $2,206,016 $ 369,871
Change in unrealized 405,757 (891,323) 1,010,906
---------- ---------- ----------
Total trading results 3,095,679 1,314,693 1,380,777
Interest income (Note 3) 468,023 290,482 216,417
---------- ---------- ----------
Total revenues 3,563,702 1,605,175 1,597,194
---------- ---------- ----------
EXPENSES:
Profit shares 471,976 119,420 83,410
Brokerage commissions (Note 3) 1,208,671 1,056,436 1,196,550
---------- ---------- ----------
Total expenses 1,680,647 1,175,856 1,279,960
---------- ---------- ----------
NET INCOME $1,883,055 $ 429,319 $ 317,234
========== ========== ==========
NET INCOME PER UNIT:
Weighted average number of Units
outstanding (Note 4) 43,021 48,226 54,981
========== ========== ==========
Weighted average net income per Unit $43.77 $8.90 $5.77
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partner General Partner Total
----- --------------- --------------- -----
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL 57,300 $10,153,915 $137,397 $10,291,312
DECEMBER 31, 1992
Redemptions (5,531) (961,819) (36,356) (998,175)
Net income -- 312,460 4,774 317,234
------ ----------- -------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1993 51,769 9,504,556 105,815 9,610,371
Redemptions (6,535) (1,166,161) (10,189) (1,176,350)
Net income -- 423,445 5,874 429,319
------ ----------- -------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1994 45,234 8,761,840 101,500 8,863,340
Redemptions (3,841) (855,292) -- (855,292)
Net income -- 1,860,776 22,279 1,883,055
------ ----------- -------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 41,393 $ 9,767,324 $123,779 $ 9,891,103
====== =========== ======== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Futures Expansion Fund Limited Partnership (the "Partnership") was organized
under the Delaware Revised Uniform Limited Partnership Act on August 13, 1986
and commenced trading activities on January 2, 1987. The Partnership, through
its joint venture, engages in the speculative trading of futures, options and
forward contracts on a wide range of commodities. Millburn Ridgefield
Corporation (the "Trading Manager") is the trading manager for the Partnership.
Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners
Inc.) ("MLIP" or the "General Partner"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc. ("Merrill Lynch"), which in turn is a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., is the general partner of the Partnership, and
Merrill Lynch Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its
commodity broker. MLIP invests for its account the lesser of $100,000 or 3% of
the total contributions to the Partnership, but in no event less than 1% of such
total contributions. MLIP and each Limited Partner share in the profits and
losses of the Partnership in proportion to their respective interests in it.
The consolidated financial statements include the accounts of the Joint Venture
(the "Joint Venture") to which the Partnership has contributed substantially all
of its available capital, representing a current equity interest in the Joint
Venture of approximately 99%. All related transactions between the Partnership
and the Joint Venture are eliminated in consolidation.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Commodity futures, options, and forward contract transactions are recorded on
the trade date and open contracts are reflected in the financial statements at
their fair value on the last business day of the reporting period. The
difference between the original contract amount and fair value is reflected in
income as an unrealized gain or loss. Fair value is based on quoted market
prices. All commodity futures, options and forward contracts are reflected at
fair value in the financial statements.
Operating Expenses
- ------------------
The General Partner pays for all routine operating cost (including legal,
accounting, printing, postage and similar administrative expenses) of the
Partnership, including the Partnership's share of any such costs incurred by the
Joint Venture (Note 2). The General Partner receives a portion of the brokerage
commission paid to MLF by the Partnership as reimbursement for the foregoing
expenses.
-5-
<PAGE>
Income Taxes
- ------------
No provision for income taxes had been made in the accompanying financial
statements as each partner is individually responsible for reporting income or
loss based on such partner's respective share of the Partnership's income and
expenses as reported for income tax purposes.
Distributions
- -------------
The Unitholders are entitled to receive, equally per Unit, any distributions
which may be made by the Partnership. No such distributions have been made as
of December 31, 1995.
Redemptions
- -----------
A Limited Partner may require the Partnership to redeem some or all of their
Units at the Net Asset Value as of the close of business on the last business
day of any month upon ten calendar days' notice.
Dissolution of the Partnership
- ------------------------------
The Partnership will terminate on December 31, 2006 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as
defined in the Limited Partnership Agreement.
2. JOINT VENTURE AGREEMENT
The Partnership and Millburn Partners entered into a Joint Venture Agreement
whereby Millburn Partners contributed $100,000 to the Joint Venture and the
Partnership contributed all of its available capital (except for an
administrative reserve). Subsequently, Millburn Partners entered into an
assignment with the Trading Manager, assigning its rights and obligations under
the Joint Venture Agreement. The Joint Venture Agreement was renewed for the
year ended December 31, 1996. The General Partner is the manager of the Joint
Venture, while the Trading Manager has sole discretion in determining the
commodity futures, options and forward trades to be made on its behalf, subject
to the trading limitations outlined in the Joint Venture Agreement.
Pursuant to the Joint Venture Agreement, the Trading Manager and the Partnership
share in the profits of the Joint Venture based on equity ownership after 20%
of annual New Trading Profits, as defined, are allocated to the Trading Manager.
Losses are allocated to the Trading Manager and the Partnership based on equity
ownership.
3. RELATED PARTY TRANSACTIONS
All of the Joint Venture's assets are deposited with MLF. As a means of
approximating the interest rate which would be earned by the Joint Venture had
100% of its Net Assets on deposits with MLF been invested in 91-day Treasury
bills, MLF pays the Joint Venture interest on its account equity on deposit with
MLF at a rate of 0.5 of 1% per annum below the prevailing 91-day Treasury bill
rate. In the case of its trading in certain foreign futures contracts, the
Joint Venture deposits margin in foreign currency denominated instruments or
cash and earns interest generally at a rate of 0.5 of 1% per annum below the
London Clearing Broker Rate. Any additional economic benefit derived from
possession of the Joint Venture's assets accrues to MLF or its affiliates.
The Joint Venture pays brokerage commissions to MLF at a flat rate of .9933 of
1% (an 11.92% annual rate) of the Joint Venture's month-end assets. Monthly-end
assets are not reduced for purposes of calculating brokerage commissions by any
accrued but unpaid brokerage commissions, profit shares or other fees or
charges. MLIP estimates that the round-turn equivalent commission rate charged
to the Joint Venture during the years ended December 31, 1995, 1994 and 1993,
was approximately $120, $33
-6-
<PAGE>
and $29, respectively (not including, in calculating round-turn equivalents,
forward contracts on a futures-equivalent basis).
MLF pays the Trading Manager annual Consulting Fees of 4% of the Joint Venture's
average month-end assets, after reduction for a portion of the brokerage
commissions.
The Joint Venture trades forward contracts through a Foreign Exchange Desk (the
"F/X Desk") established by MLIP, that contacts at least two counterparties along
with Merrill Lynch International Bank ("MLIB"), for all of the Partnership's
currency trades. All counterparties other than MLIB are unaffiliated with any
Merrill Lynch entity. The F/X Desk charges a service fee equal (at current
exchange rates) to approximately $5.00 to $12.50 on each purchase or sale of a
futures contract equivalent face amount of a foreign currency. No service fees
are charged on any trades awarded to MLIB (which receives a "bid-ask" spread on
such trades). MLIB is awarded trades only if its price (which includes no
service fee) is equal to or better than the best price (including the service
fee) offered by any of the other counterparties contacted.
The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch
entity. The Joint Venture is not required to margin or otherwise guarantee its
F/X Desk trading.
Certain of the Joint Venture's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and MLF.
In these transactions, a spot or forward (collectively referred to as "cash")
currency position is acquired and exchanged for an equivalent futures position
on the Chicago Mercantile Exchange's International Monetary Market. In its EFP
trading, the Joint Venture acquires cash currency positions through the F/X Desk
in the same manner and on the same terms as in the case of the Joint Venture's
other F/X Desk trading. When the Joint Venture exchanges these positions for
futures, there is a "differential" between the prices of these two positions.
This "differential" reflects, in part, the different settlement dates of the
cash and the futures contracts as well as prevailing interest rates, but also
includes a pricing spread in favor of MLIB or another Merrill Lynch entity.
The Joint Venture's F/X Desk service fee and EFP differential costs have, to
date, totaled no more than 0.25 of 1% per annum of the Joint Venture's average
month-end Net Assets.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit. The weighted average number of
Units outstanding at December 31, 1995, 1994 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed based
on the respective length of time each was outstanding during the preceding
period.
-7-
<PAGE>
5. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Joint Venture trades futures, options and forward contracts in interest
rates, stock indices, commodities, currencies, energy and metals. The Joint
Venture's revenues by reporting category were as follows:
<TABLE>
<CAPTION>
1995
Total Trading Results
-----------------------
<S> <C>
Interest rates and stock indices $1,596,343
Commodities (115,263)
Currencies 1,292,619
Energy 509,756
Metals (187,776)
----------
$3,095,679
==========
</TABLE>
Market Risk
- -----------
Derivative instruments involve varying degrees of off-balance sheet market risk,
and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the financial instruments or commodities
underlying such derivative instruments frequently result in changes in the
Partnership's unrealized gain or loss on such derivative instruments as
reflected in the Consolidated Statements of Financial Condition. The Joint
Venture's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the Joint
Venture as well as the volatility and liquidity of the markets in which the
derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing so.
These procedures focus primarily on monitoring the trading of the Trading
Manager, calculating the Net Asset Value of the Joint Venture as of the close of
business on each day and reviewing outstanding positions for over-concentration.
While the General Partner will not itself intervene in the markets to hedge or
diversify the Joint Venture's market exposure, the General Partner may urge the
Trading Manager to reallocate positions in an attempt to avoid over-
concentrations. However, such interventions are unusual. Except in cases in
which it appears that the Advisor has begun to deviate from past practice or
trading policies or to be trading erratically, the General Partner's basic risk
control procedures consist simply of the ongoing process of Trading Manager
monitoring, with the market risk controls being applied by the Trading Manager.
Fair Value
- ----------
The derivative instruments used in the Joint Venture's trading activities are
marked to market daily with the resulting unrealized gains or losses recorded in
the Consolidated Statements of Financial Condition and the related profit or
loss reflected in trading revenues in the Consolidated Statements of Income.
-8-
<PAGE>
The contract/notional values of open contracts as of December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------------------ ------------------------------------------
Commitment to Commitment to Commitment to Commitments to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Interest Rates $20,375,908 $17,124,189 $27,386,268 $23,095,364
and Stock
Indices
Commodities 987,392 1,770,746 2,072,932 579,881
Currencies 19,188,424 33,984,223 20,133,927 33,508,943
Energy 4,266,468 -- -- 1,408,032
Metals 1,106,950 4,593,110 3,336,012 2,369,320
----------- ----------- ----------- -----------
$45,925,142 $57,472,268 $52,929,139 $60,961,540
=========== =========== =========== ===========
</TABLE>
Substantially all of the Joint Venture's derivative instruments outstanding as
of December 31, 1995 expire within one year.
The contract/notional value of the Joint Venture's open exchange-traded and non-
exchange-traded open derivative instrument positions as of December 31, 1995 was
as follows:
<TABLE>
<CAPTION>
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
--------------------- ------------------
<S> <C> <C>
Exchange-Traded $26,004,588 $21,373,095
Non-Exchange-Traded 19,920,554 36,099,173
----------- -----------
$45,925,142 $57,472,268
=========== ===========
</TABLE>
The average fair value of the Joint Venture's derivative instrument positions
which were open as of the end of each calendar month during the year ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
-----------------------------------------
<S> <C> <C>
Interest Rates and
Stock Indices $30,015,746 $ 9,014,518
Commodities 1,548,022 1,302,572
Currencies 42,383,672 40,767,472
Energy 2,368,843 1,331,304
Metals 2,456,274 3,268,684
----------- -----------
$79,772,557 $55,684,550
=========== ===========
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects offsetting
commitments to purchase and sell the same derivative instrument on the same date
in the future. These commitments are economically offsetting but are not, as a
technical matter, offset in the forward market until the settlement date.
-9-
<PAGE>
Credit Risk
- -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may also require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent of the Joint
Venture's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized gain, if any, included in the Consolidated
Statements of Financial Condition. The Joint Venture also has credit risk
because the sole counterparty or broker with respect to most of the Joint
Venture's assets is MLF.
As of December 31, 1995 and 1994, $7,759,078 and $1,695,058 of the Joint
Venture's assets, respectively, were held in segregated accounts at MLF in
accordance with Commodity Futures Trading Commission regulations.
The gross unrealized gain and the net unrealized gain (loss) on the Joint
Venture's open derivative instrument positions as of December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
Gain Gain (Loss)
---------------- --------------
<S> <C> <C>
Exchange-Traded $ 892,375 $674,608
Non-Exchange-Traded 205,307 (97,702)
---------- --------
$1,097,682 $576,906
========== ========
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
James M. Bernard
Chief Financial Officer
The Futures Expansion Fund Limited Partnership
Merrill Lynch Investment Partners Inc.
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<CASH> 0 20,000
<RECEIVABLES> 10,477,200 9,135,701
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 10,477,200 9,155,701
<SHORT-TERM> 0 0
<PAYABLES> 586,097 292,361
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,891,103 8,863,340
<TOTAL-LIABILITY-AND-EQUITY> 10,477,200 9,155,701
<TRADING-REVENUE> 3,095,679 1,314,693
<INTEREST-DIVIDENDS> 468,023 290,482
<COMMISSIONS> 1,680,647 1,175,856
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1,883,055 429,319
<INCOME-PRE-EXTRAORDINARY> 1,883,055 429,319
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,883,055 429,319
<EPS-PRIMARY> 43.77 8.90
<EPS-DILUTED> 43.77 8.90
</TABLE>
