<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 September 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>
September 30, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 37,000 $ 35,182
Equity in commodity futures trading accounts:
Cash and option premiums 10,112,596 9,669,947
Net unrealized profit on open contracts 1,706 537,505
----------------- -----------------
TOTAL $10,151,302 $10,242,634
================= =================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit shares payable $ 225,845 $ 206,262
Brokerage commissions payable 80,261 99,580
Redemptions payable 24,577 39,043
Administrative fees payable 2,112 2,133
----------------- -----------------
Total liabilities 332,795 347,018
----------------- -----------------
PARTNERS' CAPITAL:
General Partners (518 and 518 Units) 141,454 134,829
Limited Partners (35437 and 37500 Units) 9,677,053 9,760,787
----------------- -----------------
Total partners' capital 9,818,507 9,895,616
----------------- -----------------
TOTAL $10,151,302 $10,242,634
================= =================
NET ASSET VALUE PER UNIT
(Based on 35955 and 38018 Units outstanding) $273.08 $260.29
================= =================
See notes to financial statements.
</TABLE>
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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 14,868 $106,538 $1,717,212 $ 158,488
Change in unrealized (24,152) 173,126 (535,799) 26,331
------------------ ------------------ ------------------ ------------------
Total trading results (9,284) 279,664 1,181,413 184,819
------------------ ------------------ ------------------ ------------------
Interest income 117,311 92,987 351,712 284,096
------------------ ------------------ ------------------ ------------------
Total revenues 108,027 372,651 1,533,125 468,915
------------------ ------------------ ------------------ ------------------
EXPENSES:
Profit shares (4,858) - 225,845 -
Brokerage commissions 251,391 264,883 786,984 824,186
Administrative fees 6,616 5,674 20,195 17,657
------------------ ------------------ ------------------ ------------------
Total expenses 253,149 270,557 1,033,024 841,843
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS) $(145,122) $102,094 $ 500,101 $(372,928)
================== ================== ================== ==================
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 36,561 39,364 37,244 40,447
================== ================== ================== ==================
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $(3.97) $2.59 $13.43 $(9.22)
================== ================== ================== ==================
</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 nine months ended September 30, 1997 and 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1995 41,393 $9,767,324 $123,779 $9,891,103
Redemptions (2,430) (548,453) - (548,453)
Net loss - (368,398) (4,530) (372,928)
---------------- ----------------- ----------------- ----------------
PARTNERS' CAPITAL,
September 30, 1996 38,963 $8,850,473 $119,249 $8,969,722
================ ================= ================= ================
PARTNERS' CAPITAL,
December 31, 1996 38,018 $9,760,787 $134,829 $9,895,616
Redemptions (2,063) (577,210) - (577,210)
Net income - 493,476 6,625 500,101
---------------- ----------------- ----------------- ----------------
PARTNERS' CAPITAL,
September 30, 1997 35,955 $9,677,053 $141,454 $9,818,507
================ ================= ================= ================
</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 September 30, 1997 and the results of its
operations for the nine months ended September 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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock indices $ 309,556 $ 348,103 $ 531,963 $(137,040)
Commodities (311,788) (205,493) 22,500 (523,874)
Currencies 222,916 (307,745) 1,373,666 323,214
Energy 49,222 375,887 (169,563) 721,929
Metals (279,190) 68,912 (577,153) (199,410)
------------------- ------------------- ------------------- -------------------
$ (9,284) $ 279,664 $1,181,413 $ 184,819
=================== =================== =================== ===================
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of September 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 $ 63,631,339 $13,737,785 $44,152,280 $ 7,715,055
Commodities 1,383,479 1,864,250 2,035,313 1,506,581
Currencies 27,562,561 24,849,214 32,144,464 54,783,905
Energy 4,005,009 - 1,991,507 -
Metals 7,614,454 6,685,844 1,725,155 3,277,971
------------------ ------------------ ------------------ ------------------
$104,196,842 $47,137,093 $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 September 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 $ 69,092,577 $16,714,295 $49,419,307 $10,883,476
Non-Exchange
traded 35,104,265 30,422,798 32,629,412 56,400,036
------------------ ------------------ ------------------ ------------------
$104,196,842 $47,137,093 $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 nine months
ended September 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 $ 41,857,045 $28,331,282 $34,097,774 $25,837,354
Commodities 1,932,717 1,853,384 1,770,860 1,475,802
Currencies 52,218,457 58,834,121 56,150,940 64,659,715
Energy 2,268,739 1,395,863 2,288,126 621,942
Metals 4,863,773 4,384,526 4,654,430 5,759,826
------------------ ------------------ ------------------ ------------------
$103,140,731 $94,799,176 $98,962,130 $98,354,639
================== ================== ================== ==================
</TABLE>
As of September 30, 1997 and December 31, 1996, $ 7,638,682 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 September 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 $ 596,776 $ 444,299 $ 458,316 $325,910
Non-Exchange
traded 515,602 (442,593) 791,431 211,595
------------------- -------------------- ------------------- -------------------
$1,112,378 $ 1,706 $1,249,747 $537,505
=================== ==================== =================== ===================
</TABLE>
3. RELATED PARTY TRANSACTIONS
MLIP is currently reviewing certain aspects of the interest
arrangements between the Partnership and certain affiliates of MLIP. The purpose
of the review is to confirm that the Partnership received interest credits as
described in its Prospectus. The results of this review have not been
determined.
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 first nine months of 1996, the Fund's average month-end Net
Assets equaled $9,298,561, and the Fund recognized gross trading gains of
$184,819 or 1.99% of such average month-end Net Assets. Brokerage commissions of
$824,186 or 8.86% and Administrative expense of $17,657 or .19%, of average
month-end Net Assets were paid. Interest income of $284,096 or 3.06% of average
month-end Net Assets resulted in a net loss of $372,928 or 4.01% of average
month-end Net Assets, which resulted in a 3.66% decrease in the Net Asset Value
per Unit since December 31, 1995.
During the first nine months of 1997, the Fund's average month-end Net
Assets equaled $10,377,411, and the Fund recognized gross trading gains of
$1,181,413 or 11.38% of average month-end Net Assets. Brokerage commissions of
$786,984 or 7.58%, Administrative fees of $20,195 or 0.19% and Profit shares of
$225,845 or 2.18% of average month-end Net Assets were paid. Interest income of
$351,712 or 3.39% of average month-end Net Assets resulted in net gain of
$500,101 or 4.82% of average month end Net Assets which resulted in a 4.91%
increase in the Net Asset Value per Unit since December 31, 1996.
During the first nine months of 1997 and 1996, the Fund experienced 11
profitable months and 7 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
Jan. Feb. Mar. Apr May Jun Jul Aug Sep
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $252.05 $224.51 $225.51 $236.49 $219.53 $227.57 $230.17 $224.71 $230.21
- --------------------------------------------------------------------------------------------------
1997 $277.32 $292.65 $283.51 $274.35 $277.52 $277.13 $295.54 $270.69 $273.08
- --------------------------------------------------------------------------------------------------
</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.
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
None.
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 nine 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: November 14, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 14, 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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 0 0
<RECEIVABLES> 10151302 9071338
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 10151302 9071338
<SHORT-TERM> 0 0
<PAYABLES> 332795 101616
<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> 9818507 8969722
<TOTAL-LIABILITY-AND-EQUITY> 10151302 9071338
<TRADING-REVENUE> 1181413 184819
<INTEREST-DIVIDENDS> 351712 284096
<COMMISSIONS> 1033024 841843
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 500101 (372928)
<INCOME-PRE-EXTRAORDINARY> 500101 (372928)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 500101 372928
<EPS-PRIMARY> 13.43 (9.22)
<EPS-DILUTED> 13.43 (9.22)
</TABLE>
