<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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 (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-5662
----------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
This document contains 10 pages.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------------- --------------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $40,593 $35,182
Equity in commodity futures trading accounts:
Cash and option premiums 10,552,425 9,669,947
Net unrealized profit on open contracts 25,858 537,505
-------------------- --------------------
TOTAL $10,618,876 $10,242,634
==================== ====================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit shares payable $230,702 $206,262
Brokerage commissions payable 84,021 99,580
Redemptions payable 60,969 39,043
Administrative fees payable 2,211 2,133
-------------------- --------------------
Total liabilities 377,903 347,018
-------------------- --------------------
PARTNERS' CAPITAL:
General Partners (518 and 518 Units) 143,552 134,829
Limited Partners (36436 and 37500 Units) 10,097,421 9,760,787
-------------------- --------------------
Total partners' capital 10,240,973 9,895,616
-------------------- --------------------
TOTAL $10,618,876 $10,242,634
==================== ====================
NET ASSET VALUE PER UNIT
(Based on 36954 and 38018 Units outstanding $277.13 $260.29
==================== ====================
</TABLE>
See notes to financial statements.
2
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $(238,618) $(141,080) $1,702,344 $51,950
Change in unrealized 102,942 406,999 (511,647) (146,795)
-------------- -------------- ------------- -------------
Total trading results (135,676) 265,919 1,190,697 (94,845)
-------------- -------------- ------------- -------------
Interest income 126,782 94,393 234,401 191,109
-------------- -------------- ------------- -------------
Total revenues (8,894) 360,312 1,425,098 96,264
-------------- -------------- ------------- -------------
EXPENSES:
Profit shares (28,311) - 230,703 -
Brokerage commissions 252,070 272,688 535,593 559,303
Administrative fees 6,633 5,842 13,579 11,983
-------------- -------------- ------------- -------------
Total expenses 230,392 278,530 779,875 571,286
-------------- -------------- ------------- -------------
NET INCOME (LOSS) $(239,286) $81,782 $645,223 $(475,022)
============== ============== ============= =============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 37,344 40,610 37,585 40,991
============== ============== ============= =============
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $(6.41) $2.01 $17.17 $(11.59)
============== ============== ============= =============
</TABLE>
See notes to 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 six months ended June 30, 1997 and 1996
-----------------------------------------------
<TABLE>
<CAPTION>
Units Limited General Total
Partners Partner
------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1995 41,393 $9,767,324 $123,779 $9,891,103
Redemptions (1,790) (403,681) - (403,681)
Net loss - (469,123) (5,899) (475,022)
------------- --------------- ------------ ------------
PARTNERS' CAPITAL,
June 30, 1996 39,603 $8,894,520 $117,880 $9,012,400
============= =============== ============ ============
PARTNERS' CAPITAL,
December 31, 1996 38,018 $9,760,787 $134,829 $9,895,616
Redemptions (1,064) (299,866) - (299,866)
Net income - 636,500 8,723 645,223
------------- --------------- ------------ ------------
PARTNERS' CAPITAL,
June 30, 1997 36,954 $10,097,421 $143,552 $10,240,973
============= =============== ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of The Futures Expansion Fund Limited
Partnership (the "Partnership" or the "Fund") as of June 30, 1997 and the
results of its operations for the six months ended June 30, 1997 and
1996. However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1996 (the "Annual
Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respective
periods are as follows:
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest rate &
Stock indices $126,438 $(346,426) $222,407 $(485,145)
Commodities 207,637 (86,915) 334,288 (318,380)
Currencies (45,486) 427,542 1,150,750 630,959
Energy (247,472) 299,064 (218,785) 346,042
Metals (176,793) (27,346) (297,963) (268,321)
------------- ------------- ------------- -------------
$(135,676) $265,919 $1,190,697 $(94,845)
============= ============= ============= =============
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of June 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock Indices $82,185,222 $482,611 $44,152,280 $7,715,055
Commodities 3,380,323 746,145 2,035,313 1,506,581
Currencies 28,535,336 32,477,010 32,144,464 54,783,905
Energy - 2,117,154 1,991,507 -
Metals 4,283,504 6,526,321 1,725,155 3,277,971
------------------- ---------------------- ------------------- ----------------------
$118,384,385 $42,349,241 $82,048,719 $67,283,512
=================== ====================== =================== ======================
</TABLE>
5
<PAGE>
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of June 30, 1997 and
December 31, 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Exchange
traded $85,761,807 $4,780,061 $49,419,307 $10,883,476
Non-Exchange
traded 32,622,578 37,569,180 32,629,412 56,400,036
------------------- ---------------------- ------------------- ----------------------
$118,384,385 $42,349,241 $82,048,719 $67,283,512
=================== ====================== =================== ======================
</TABLE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the six months ended
June 30, 1997 and the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock Indices $32,994,532 $34,755,910 $34,097,774 $25,837,354
Commodities 2,106,309 1,775,533 1,770,860 1,475,802
Currencies 55,225,226 62,048,958 56,150,940 64,659,715
Energy 2,061,391 1,424,996 2,288,126 621,942
Metals 4,446,895 3,800,721 4,654,430 5,759,826
------------------- ---------------------- ------------------- ----------------------
$96,834,353 $103,806,118 $98,962,130 $98,354,639
=================== ====================== =================== ======================
</TABLE>
As of June 30, 1997 and December 31, 1996, $ 7,227,232 and $7,515,623 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 profit and the net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of June 30, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit (Loss)
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Exchange
traded $408,527 $298,584 $458,316 $325,910
Non-Exchange
traded 577,352 (272,726) 791,431 211,595
---------------- ------------------ ----------------- ------------------
$985,879 $25,858 $1,249,747 $537,505
================ ================== ================= ==================
</TABLE>
6
<PAGE>
Item 2: 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. Merrill Lynch Investment Partners Inc. (MLIP) believes,
however, that there are 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. 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 the six months of 1996, the Fund's average month-end Net
Assets equaled $9,473,799, and the Fund recognized gross trading losses of
$94,845 or 1.00% of average month-end Net Assets. Brokerage commissions of
$559,303 or 5.90% and Administrative expense of $11,983 or .13%, of average
month-end Net Assets were paid. Interest income of $191,109 or 2.02% of average
month-end Net Assets resulted in a net loss of $475,022 or 5.01% of average
month-end Net Assets, which resulted in a 4.77% decrease in the Net Asset Value
per Unit since December 31, 1995.
During the six months of 1997, the Fund's average month-end Net
Assets equaled $10,461,400, and the Fund recognized gross trading gains of
$1,190,697 or 11.38% of average month-end Net Assets. Brokerage commissions of
$535,593 or 5.12% and Administrative fees of $13,579 or .13% of average month-
end Net Assets were paid. Interest income of $ 234,401 or 2.24% of average
month-end Net Assets resulted in net gain of $645,223 or 6.17% of average month
end Net Assets which resulted in a 6.47% increase in the Net Asset Value per
Unit since December 31, 1996.
During the six months of 1997 and 1996, the Fund experienced 7
profitable months and 5 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
- -------------------------------------------------------------------------------
Jan. Feb. Mar. Apr May Jun
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 $252.05 $224.51 $225.51 236.49 219.53 227.57
- -------------------------------------------------------------------------------
1997 $277.32 $292.65 $283.51 274.35 277.52 277.13
- -------------------------------------------------------------------------------
</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
7
<PAGE>
major price movements, and market corrections can result in rapid and material
losses (sometimes as much as 5% 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 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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
On June 24, 1997, the Commodity Futures Trading Commission ("CFTC")
accepted an Offer of Settlement from Merrill Lynch Futures Inc. ("MLF") and
others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.", CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the CFTC that MLF had violated Section 4c(a)(A) of the Commodity
Exchange Act (the "Act"), relating to wash sales, and CFTC Regulation 1.37(a),
relating to recordkeeping requirements. MLF agreed to cease and desist from
violating Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil
monetary penalty of $175,000.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
James M. Bernard, formerly a Senior Vice President of MLIP, is no
longer with the firm.
Michael A. Karmelin has been appointed Chief Financial Officer, Vice
President and Treasurer of MLIP. Mr. Karmelin assumed these positions on April
14, 1997, when he completed his tenure as Chief Financial Officer of Merrill
Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited
partnerships. Mr. Karmelin was born in 1947. Mr. Karmelin joined ML Hubbard in
January 1994 as a Vice President. From May 1994 until he joined MLIP, Mr.
Karmelin was the Chief Financial Officer of ML Hubbard, responsible for its
accounting, treasury and tax functions. Prior to joining ML Hubbard, Mr.
Karmelin held several senior financial positions with Merrill Lynch & Co., Inc.
("ML&Co.") and Merrill Lynch, Pierce, Fenner & Smith Incorporated from December
1985 to December 1993, including Vice President/Senior Financial Officer
Corporate Real Estate and Purchasing, Manager Commitment Control/Capital
Budgeting, and Senior Project Manager/Project Analysis. Prior to joining ML&Co.,
Mr. Karmelin was employed at Avco Corporation for 17 years, where he held a
variety of financial positions. Mr. Karmelin holds a B.B.A. degree in Accounting
from Baruch College, C.U.N.Y. and a Master of Business Administration degree in
Corporate Strategy and Finance from New York University. Mr. Karmelin passed the
Certified Public Accountant examination in 1974 and is a member of the Treasury
Management Association, the Institute of Management Accountants and The
Strategic Leadership Forum.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
There are no exhibits required to be filed as part of this
document.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the six months of
fiscal 1997.
9
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
Date: August 12, 1997 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: August 12, 1997 By /s/ MICHAEL A. KARMELIN
-----------------------
Michael A. Karmelin
Chief Financial Officer, Vice President
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 0 0
<RECEIVABLES> 10,618,876 9,220,043
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 10,618,876 9,220,043
<SHORT-TERM> 0 0
<PAYABLES> 377,903 207,643
<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> 10,240,973 9,012,400
<TOTAL-LIABILITY-AND-EQUITY> 10,618,876 9,220,043
<TRADING-REVENUE> 1,190,697 (94,845)
<INTEREST-DIVIDENDS> 234,401 191,109
<COMMISSIONS> 779,875 571,286
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 645,223 (475,022)
<INCOME-PRE-EXTRAORDINARY> 645,223 (475,022)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 645,223 (475,022)
<EPS-PRIMARY> 17.17 (11.59)
<EPS-DILUTED> 17.17 (11.59)
</TABLE>
