<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
For the fiscal year ended: December 31, 1996
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-15298
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3365950
- ------------------------------- -------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTER
WORLD FINANCIAL CENTER
SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106
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(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-4167
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Limited
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Partnership Units
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(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) 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
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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 "1996 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1996,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
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THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
ANNUAL REPORT FOR 1996 ON FORM 10-K
Table of Contents
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<TABLE>
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PART I PAGE
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<S> <C> <C>
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 8
Item 3. Legal Proceedings.................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................................. 8
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 9
Item 6. Selected Financial Data.............................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data.......................................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 14
PART III
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Item 10. Directors and Executive Officers of the Registrant.................................. 15
Item 11. Executive Compensation.............................................................. 16
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 17
Item 13. Certain Relationships and Related Transactions...................................... 17
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 18
</TABLE>
-i-
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PART I
ITEM 1: BUSINESS
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(a) General Development of Business:
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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"). 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, energy and
agricultural products.
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") acts as the general partner of the Partnership. Merrill Lynch Futures
Inc. (the "Commodity Broker" or "MLF") is the Partnership's commodity broker.
The General Partner is a wholly-owned subsidiary of Merrill Lynch Group Inc.,
which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. The
Commodity Broker is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. (ML&Co. and its affiliates are herein sometimes referred to as "Merrill
Lynch.")
When the Fund began trading in January 1987, it had an initial
capitalization of $56,741,035. Units were sold only as of a single closing,
January 2, 1987. Through December 31, 1996, Units with an aggregate Net Asset
Value of $63,310,819 had been redeemed (including December 31, 1996 redemptions
which were not actually paid out until January 1997). As of December 31, 1996,
the capitalization of the Fund was $9,895,616, and the Net Asset Value per Unit,
originally $100 as of January 2, 1987, had risen to $260.29. As of December 31,
1996, the Fund had 426 Limited Partners.
Through December 31, 1996, the net gain in the Net Asset Value per
Unit was 160.29%. The highest month-end Net Asset Value per Unit through
December 31, 1996 was $260.29 (December 31, 1996) and the lowest $100.05
(September 30, 1987).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Fund trades in the international futures, options on futures and
forward markets with the objective of achieving significant profits over time.
One of the objectives of the Fund is to provide diversification to a
limited portion of the risk segment of the Limited Partners' portfolios into an
investment field that has historically often demonstrated a low degree of
performance correlation with traditional stock and bond holdings. Since it
began trading, the Fund's returns have, in fact, frequently been significantly
non-correlated (not, however, negatively correlated) with the United States
stock and bond markets.
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, 1997 unless
further renewed (which MLIP currently intends to do). Millburn Ridgefield has
been the sole Trading Advisor of the Fund since inception.
1
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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 Joint Venture 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.
MILLBURN RIDGEFIELD
Millburn Ridgefield is one of the longest operating of all active
managed futures advisors. Principals of Millburn Ridgefield have been managing
client assets in the futures and forward markets since 1972, and as of January
1, 1997 Millburn Ridgefield was managing approximately $569 million of client
and proprietary capital in these markets. As of such date, Millburn Ridgefield
and its affiliates were also managing over $152 million in other disciplines.
Millburn Ridgefield uses a highly systematic trend-following approach
which relies primarily on technical, market-related information. Millburn
Ridgefield regards its strategies as long-term in nature, and gives substantial
emphasis to risk management - through, for example, analysis of leverage,
implementation of "stop-loss" liquidation points on all open positions and
ongoing rebalancing of portfolio commitments based on volatility risk
assessments of the different markets traded.
Millburn Ridgefield implements multiple systems (generally, at least
three) in analyzing each market which it trades. Only if all systems
implemented in a market generate a positive trading signal will a "full
position" be taken. A "full position" represents the maximum exposure that the
risk control overlay in the trading system will allow in a given market based on
account equity, market volatility and other factors. Because Millburn
Ridgefield utilizes multiple trading systems, a negative signal in one system
may be offset by positive signals in the other systems. Partial positions may
be taken if one or more trading systems generate a neutral or negative trading
signal while the other system(s) generate positive signal(s). This multi-system
approach is intended to help to filter out the "whipsaw" effect which short-term
"noise" price fluctuations and reversals can otherwise have on trend-following
systems - resulting in the dissipation of account equity through the frequent
acquisition and liquidation of positions. The use of multiple evaluative models
gives Millburn Ridgefield's strategy a degree of internal diversification which
has the potential to increase its risk control capabilities.
As is the case with most trend-following systems, Millburn Ridgefield
seeks to achieve cumulative profitability through capturing sustained price
trends of significant duration and magnitude. Such trends tend to be relatively
infrequent (often occurring only 2 to 3 times or less during a year in any given
market). The early determination of the beginning and end of such major trends
is an important feature of successful trading. Millburn Ridgefield's technical
trading systems are designed with the objective that they will generate a
trading signal when market conditions indicate a trend is likely to occur. If
the trend is not subsequently confirmed or quickly reverses itself, positions
are closed out in an attempt to limit capital losses. Positions which are
profitable are maintained until the trading systems indicate that the trend has
ended.
MILLBURN RIDGEFIELD TRADING STRATEGY
Multiple Trading Systems, The objective of Millburn Ridgefield's
------------------------
trading method is to participate in all major sustained price moves in the
markets traded. Millburn Ridgefield regards its approach as long-term in
nature. Millburn Ridgefield makes trading decisions pursuant to its trading
method, which includes technical trend analysis (and certain non-trend-following
technical systems) and the money management principles described below, 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 is engaged in a substantial ongoing research
effort to improve its trading methods and to apply its quantitative analytic
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.
2
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The first step in the trading methodology is developing intermediate-
to long-term trading systems which generate long or short (buy or sell)
decisions in a particular market based on the direction of the price trend in
the market. Millburn Ridgefield has developed hundreds of trading systems using
classes of quantitative models and classes of data such as price, volume and
interest rates. The full range of systems are tested in each market against
five, ten or fifteen years of historical data to simulate the results the system
would have achieved in the markets had the system been used to make trading
decisions during the simulation period. Profits are calculated plus a number of
statistics designed to identify high quality profits such as trade reliability
(percentage of profitable trades), drawdowns (worst losses experienced), average
giveback of maximum profits on profitable trades and Sharpe ratio (risk adjusted
returns).
The performance of all systems in the market are ranked, and three or
four systems are selected which make decisions in different ways at different
times. This multi-system approach ensures that the total risk intended to be
taken in a market is spread over several different strategies. If four systems
are used to trade crude oil, the maximum position would be traded if all four
were long or short. If two were long and two short, they would cancel each
other out and a flat position in crude oil would be signaled. The effect of the
multi-system approach is that in periods during which the technical picture is
unclear, the systems disagree and positions will be light or flat, but when all
systems agree on the trend, maximum positions will be traded. In certain
markets, Millburn Ridgefield also uses short-term systems based on intraday tick
data. Minute-by-minute prices are used to identify "quiet" as opposed to "noisy"
periods, and trades may be implemented with or counter to the short-term trend
depending on conditions.
In certain markets, Millburn Ridgefield uses a strategy which focuses
on calculating options volatility. When volatility is low, the probability of
directional signals being profitable increases, and trades are implemented by
buying at-the-money or slightly out-of-the-money options. The nature of options
results in an increase in leverage as a position becomes profitable and a
decrease in leverage as a position becomes unprofitable.
Risk Management. Risk is a function of both price level and price
---------------
volatility. For example, a 100,000 barrel crude oil position is worth more and
is, therefore, more risky with oil at $30 per barrel than with oil at $10 per
barrel. Similarly, if prices are moving in a 5% daily range, oil is more risky
than if prices are moving in a 1% daily range. In attempting to assess market
volatility as a means of monitoring and evaluating risk, Millburn Ridgefield
utilizes its volatility overlay which is also a part of individual market risk
management. This system measures the risk in the portfolio's position in a
market and signals a decrease in position size when risk increases and an
increase in position size when risk decreases. Millburn Ridgefield's volatility
overlay maintains overall portfolio risk and distribution of risk across markets
within designated ranges. It is applied to all three systematic strategies
described above. A secondary benefit of the volatility overlay can be the
timely taking of profits since markets tend to become more volatile after a
profitable trend has been long underway, and the volatility overlay often
signals position reductions before trend reversals.
In addition to the volatility overlay, 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 attempts further to improve the quality of profits by
reducing volatility. In establishing a futures portfolio, Millburn Ridgefield
will select markets and assign them relevant weightings with the objective of
achieving broad diversification. Factors considered include profitability,
liquidity, market depth, correlation of losing periods and Millburn Ridgefield's
trading experience. Millburn Ridgefield seeks a portfolio in which returns from
trading in different markets 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 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. 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 worst case is
measured from a daily high in
3
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portfolio assets to the subsequent daily low whether that occurs days, weeks or
months after the daily high (a peak-to-trough drawdown). If the drawdown is
considered too severe, the leverage or portfolio size is reduced.
Decisions whether to trade a particular market are based upon various
factors, including the liquidity of the market, its significance in terms of the
desired degrees of concentration and diversification, and its profit potential
(both historically and at a given time). These decisions will require the
exercise of judgment. The decision not to trade certain markets for certain
periods, or to reduce the size of a position in a particular market, may result
at times in missing significant profit opportunities.
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 movements, 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.
With respect to the execution of trades, Millburn Ridgefield may rely
to an extent upon the judgment of others, including dealers, bank traders and
floor brokers. No assurance is given that it will be possible to execute trades
regularly at or near the desired buy or sell point.
The trading method, systems and money management principles utilized
by Millburn Ridgefield are proprietary and confidential. The foregoing
description is general and is not intended to be complete.
USE OF PROCEEDS AND INTEREST INCOME
General. The Fund's assets are not used to purchase or acquire any
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asset but rather held as security for and to pay the Partnership's speculative
trading losses as well as any expenses and redemptions. The primary use of the
Fund's capital is to permit the Advisor to trade on a speculative basis in a
wide range of different futures, forwards and options on futures markets on
behalf of the Partnership. While being used for this purpose, the Partnership's
assets are also generally available to earn interest, as more fully described
below under "- Available Assets."
Market Sectors. The Partnership trades in a diversified group of
--------------
markets under the direction of the Trading Advisor. The Trading Advisor can,
and does, from time to time materially alter the allocation of its overall
trading commitments among different market sectors. There is essentially no
restriction on the commodity interests which may be traded by Millburn
Ridgefield or the rapidity with which Millburn Ridgefield may alter its market
sector allocations.
The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.
Market Types. The Fund trades on a variety of United States and
------------
foreign futures exchanges. Applicable exchange rules differ significantly among
different countries and exchanges. Substantially all of the Fund's off-exchange
trading takes place in the highly liquid, institutionally based currency forward
markets. The forward markets are generally unregulated, and in its forward
trading the Fund does not deposit margin with respect to its positions. The
Partnership's forward currency trading is executed exclusively through the
Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of
its affiliates, with MLF as the back-to-back intermediary to the ultimate
counterparties, which include Merrill Lynch Investment Bank ("MLIB") with which
the Advisor trades on behalf of the Fund.
As in the case of its market sector allocations, the Fund's
commitments to different types of markets - U.S. and non-U.S., regulated and
unregulated - differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitment to any of these different
types of markets.
4
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The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.
Custody of Assets. All of the Fund's assets are currently held in
-----------------
CFTC-regulated customer accounts at MLF.
Available Assets. The Fund earns interest, as described below, on its
----------------
"Available Assets," which can be generally described as the cash actually held
by the Fund or invested in short-term Treasury bills. Available Assets are held
primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are
comprised of the following: (a) the Fund's cash balance in the offset accounts
(as described below) - which includes "open trade equity" (unrealized gains and
losses on open positions) on United States futures contracts, which is paid into
or out of the Fund's account on a daily basis; (b) short-term Treasury bills
purchased by the Fund; and (c) the Fund's cash balance in foreign currencies
derived from its trading in non-U.S. dollar denominated futures and options
contracts, which includes open trade equity on those exchanges which settle
gains and losses on open positions in such contracts prior to the closing out of
such positions. Available Assets do not include, and the Fund does not earn
interest on, the Fund's gains or losses on its open forward, commodity option
and certain foreign futures positions since such gains or losses are not
collected or paid until such positions are closed out.
The Partnership's Available Assets may be greater than, less than or
equal to the Fund's Net Asset Value (on which the redemption value of the Units
is based) primarily because Net Asset Value reflects all gains and losses on
open positions as well as accrued but unpaid expenses.
The interest income arrangements for the Partnership's U.S. dollar
Available Assets differ from those applicable to its non-U.S. dollar Available
Assets. Interest income, once accrued by the Fund, is subject to the risk of
trading losses.
Interest Earned on the Fund's U.S. Dollar Available Assets. The
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Fund's U.S. dollar Available Assets are held in cash in offset accounts and in
short-term Treasury bills purchased from dealers unaffiliated with Merrill
Lynch. Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month. The
Fund receives all the interest paid on the short-term Treasury bills in which it
invests.
The use of the offset account arrangements for the Partnership's U.S.
dollar Available Assets may be discontinued by Merrill Lynch whether or not
Merrill Lynch otherwise continues to maintain its offset arrangements. The
offset arrangements are dependent on the banks' continued willingness to make
overnight credits available to Merrill Lynch, which, in turn, is dependent on
the credit standing of ML&Co. If Merrill Lynch were to determine that the
offset arrangements had ceased to be practicable (either because ML&Co. credit
lines at participating banks were exhausted or for any other reason), Merrill
Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available
Assets to the maximum practicable extent in short-term Treasury bills. All
interest earned on the U.S. dollar Available Assets so invested would be paid to
the Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements. The remaining U.S.
dollar Available Assets of the Fund would be kept in cash to meet variation
margin payments and pay expenses, but would not earn interest for the Fund.
The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of the Fund's U.S. dollar Available Assets held in the offset accounts,
charging Merrill Lynch a small fee for this service. The economic benefits
derived by Merrill Lynch - net of the interest credits paid to the Fund and the
fee paid to the offset banks - from the offset accounts have not exceeded 3/4
of 1% per annum of the Fund's average daily U.S. dollar Available Assets held in
the offset accounts. These revenues to Merrill Lynch are in addition to the
Brokerage Commissions and Administrative Fees paid by the Fund to MLF and MLIP,
respectively.
Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available
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Assets. Under the single currency margining system implemented for the
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Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options. MLF
provides the necessary margin, permitting the
5
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Fund to retain the monies which would otherwise be required for such margin as
part of the Fund's U.S. dollar Available Assets. Consequently, the Fund does not
earn interest on foreign margin deposits. The Fund does, however, earn interest
on its non-U.S. dollar Available Assets. Specifically, the Fund is credited by
Merrill Lynch with interest at the local short-term rate on realized and
unrealized gains on non-U.S. dollar denominated positions for such gains
actually held in cash by the Fund. Merrill Lynch charges the Fund Merrill
Lynch's cost of financing realized and unrealized losses on such positions.
In order to avoid the expense of daily currency conversions, the Fund
holds foreign currency gains and finances foreign currency losses on an interim
basis until converted into U.S. dollars and either paid into or out of the
Fund's U.S. dollar Available Assets. Foreign currency gains or losses on open
positions are not converted into U.S. dollars until the positions are closed.
Assets of the Fund while held in foreign currencies are subject to exchange rate
risk.
Forward Transactions. Spot and forward currency contracts are the
--------------------
only non-exchange traded instruments held by the Fund.
To date, approximately 20% to 30% of the Fund's trades by volume have
been in forward currency contracts, but from time to time the percentage of the
Fund's trading represented by forward currency trades may fall substantially
outside this range. In using the F/X Desk, the Fund trades through MLF.
Because the Fund need not deposit any margin with MLF in respect of the Fund's
forward trading, the Fund's additional risk in trading in such unregulated
markets should be limited to a possible loss of unrealized profits on open
forward positions which a counterparty accessed through MLF would not, in the
event of its bankruptcy, be able to pay to MLF for the account of the Fund (MLF
not itself being obligated to pay such unrealized profits to the Fund unless MLF
is paid by MLF's counterparty).
Having the Fund (and the other MLF clients using the F/X Desk) trade
through the F/X Desk on the basis of MLF's credit lines permits the F/X Desk to
access a wide range of counterparties without the need of such counterparties
evaluating the individual credit of the Fund (or any other MLF client).
CHARGES
The following table summarizes the charges incurred by the Fund
during 1994, 1995 and 1996.
<TABLE>
<CAPTION>
1994 1995 1996
------------------------- ---------------------- ----------------------
% OF AVERAGE % OF AVERAGE % OF AVERAGE
DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END
COST AMOUNT NET ASSETS AMOUNT NET ASSETS AMOUNT NET ASSETS
---- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions** $1,034,279 12.48% $1,183,321 12.01% $1,120,320 11.94%
Administrative
Fees** 22,157 0.27 25,350 0.26 24,001 0.26
Profit Shares 119,420 1.44 471,976 4.79 206,261 2.20
---------- ----- --------- ----- --------- -----
Total $ 1,175,856 14.19% $ 1,680,647 17.06% $1,350,582 14.40%
=========== ====== =========== ====== ========== ======
____________
</TABLE>
** A portion of the Brokerage Commissions in prior periods have been
reclassified to conform to the current period presentation of the Administrative
Fees.
____________________________
The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the benefits which may be derived by Merrill
Lynch from the deposit of certain of the Fund's U.S. dollar Available Assets in
offset accounts. See Item 1(c), "Narrative Description of Business - Use of
Proceeds and Interest Income."
6
<PAGE>
The Fund's average month-end Net Assets during 1994, 1995 and 1996
equaled $8,284,849, $9,852,663 and $9,384,974, respectively.
During 1994, 1995 and 1996, the Fund earned $290,482, $468,023 and
$382,717 in interest income, or approximately 3.51%, 4.75% and 4.08% of the
Fund's average month-end Net Assets.
As of January 1, 1996, the 11.92% per annum Brokerage Commissions paid
by the Fund to MLF were recharacterized as 11.67% per annum Brokerage
Commissions and a 0.25% per annum Administrative Fee paid by the Fund to MLIP.
This recharacterization had no economic effect on the Fund.
Effective February 1, 1997, the Brokerage Commissions paid by the Fund
were reduced from 11.67% to 9.50% per annum.
______________________________
<TABLE>
<CAPTION>
DESCRIPTION OF CURRENT CHARGES
<S> <C> <C>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
MLF Brokerage Commissions A flat-rate monthly commission of 0.9725 of
1% of the Fund's month-end assets (a 11.67%
annual rate).
During 1994, 1995 and 1996, the round-turn
(each purchase and sale or sale and purchase
of a single futures contract) equivalent
rate of the Fund's flat-rate Brokerage
Commissions was approximately $33, $120 and
$102, respectively.
As of February 1, 1997, the Fund's Brokerage
Commissions were reduced from 11.67% to
9.50% per annum (0.7917 of 1% per month).
MLF Use of Fund assets Merrill Lynch may derive an economic benefit
from the deposit of certain of the Fund's
U.S. dollar Available Assets in offset
accounts; such benefit to date has not
exceeded 3/4 of 1% of such average daily
U.S. dollar Available Assets.
MLIP Administrative Fees As of January 1, 1996, the Brokerage
Commissions payable by the Fund were reduced
from 11.92% to 11.67% annually, and the Fund
began to pay MLIP a monthly Administrative
Fee equal to 0.020833 of 1% of the Fund's
month-end assets (0.25% annually). This
change had no economic effect on the Fund.
MLIP pays all of the Fund's routine
administrative costs.
MLIB Bid--ask spreads Under MLIP's F/X Desk arrangements, MLIB
receives bid--ask spreads on the forward
trades it executes with the Fund.
Other
Counterparties Bid--ask spreads The counterparties other than MLIB with
which the F/X Desk deals also each receive
bid-ask spreads on the forward trades
executed with the Fund.
MLIP F/X Desk service fees
</TABLE>
7
<PAGE>
Under the F/X Desk arrangements, MLIP or
another Merrill Lynch entity receives a
service fee equal, at current exchange
rates, to approximately $5.00 to $12.50 on
each purchase or sale of each futures
contract-equivalent forward contract
executed with counterparties other than
MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential
spread for exchanging the Fund's spot
currency positions (which are acquired
through the F/X Desk, as described above)
for equivalent futures positions.
Millburn
Ridgefield Profit Share 20% of any New Trading Profit as of the end
of each calendar year and upon redemption of
Units.
MLF;
Others Extraordinary
expenses Actual costs incurred; none paid to date,
and expected to be negligible.
______________________
REGULATION
The General Partner, Millburn Ridgefield and the Commodity Broker are
each subject to regulation by the Commodity Futures Trading Commission and the
National Futures Association. Other than in respect of its periodic reporting
requirements, the Partnership itself is generally not subject to regulation by
the Securities and Exchange Commission. However, MLIP itself is registered as
an "investment adviser" under the Investment Advisers Act of 1940.
(i) through (xii) - not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales:
- -----
The Partnership does not engage in material operations in foreign
countries, nor is a material portion of the Partnership's revenues derived from
customers in foreign countries. The Partnership does, however, trade, from the
United States, on a number of foreign commodity exchanges.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of
its business.
The Partnership's only place of business is the place of business of
the General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
ITEM 3: LEGAL PROCEEDINGS
-----------------
There are no pending legal proceedings to which the Partnership or the
General Partner 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.
8
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(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, 1996, there were 427 holders of Units,
including the General Partner and the Trading Advisor.
(c) Dividends:
---------
The Partnership has made no distributions since trading
commenced, nor does the General Partner presently intend to make any
distributions in the future.
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the
audited financial statements of the Partnership.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA 1996 1995 1994 1993 1992
- --------------------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain $1,800,104 $2,689,922 $2,206,016 $ 369,871 $ 3,222,430
Change in Unrealized (Loss) Gain (39,401) 405,757 (891,323) 1,010,906 (1,250,488)
---------- ---------- ---------- ---------- -----------
Total Trading Results 1,760,703 3,095,679 1,314,693 1,380,777 1,971,942
Interest Income 382,717 468,023 290,482 216,417 266,889
---------- ---------- ---------- ---------- -----------
Total Revenues 2,143,420 3,563,702 1,605,175 1,597,194 2,238,831
---------- ---------- ---------- ---------- -----------
Expenses:
Brokerage Commissions 1,120,320 1,208,671 1,056,436 1,196,550 1,239,484
Administrative Fees 24,001 0 0 0 0
Profit Shares 206,261 471,976 119,420 83,410 187,260
---------- ---------- ---------- ---------- -----------
Total Expenses 1,350,582 1,680,647 1,175,856 1,279,960 1,426,744
---------- ---------- ---------- ---------- -----------
Net Income $ 792,838 $1,883,055 $ 429,319 $ 317,234 $ 812,087
========== ========== ========== ========== ===========
BALANCE SHEET DATA 1996 1995 1994 1993 1992
- ------------------ ---------- ---------- ---------- ---------- -----------
Fund Net Asset Value $9,895,616 $9,891,103 $8,863,340 $9,610,371 $10,291,312
Net Asset Value per Unit $260.29 $238.96 $195.94 $185.64 $179.60
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER UNIT
- ----------------------------------------------------------------------------------------------------
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>
1992 $149.14 $146.21 $144.49 $142.98 $143.59 $163.17 $176.42 $187.64 $185.97 $178.53 $181.98 $179.60
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
1996 $252.05 $224.51 $225.51 $236.49 $219.53 $227.57 $230.17 $224.71 $230.21 $251.56 $258.55 $260.29
- ----------------------------------------------------------------------------------------------------
Pursuant to CFTC policy, monthly performance is presented from January
1, 1992, even though the Units were outstanding prior to such date.
</TABLE>
10
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
DECEMBER 31, 1996
Type of Pool: Single Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
Inception of Trading: January 2, 1987
Aggregate Subscriptions: $56,741,035
Current Capitalization: $9,895,616
Worst Monthly Drawdown/(2)/: (10.92)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (17.32)% (1/91 - 11/91)
_____________
Net Asset Value per Unit, December 31, 1996: $260.29
- --------------------------------------------------------------------------------
Monthly Rates of Return/(4)/
- --------------------------------------------------------------------------------
Month 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
January 5.48% (3.30)% (7.91)% (3.10)% (9.29)%
February (10.92) 6.09 (1.56) 5.14 (1.96)
March 0.44 15.22 6.67 (0.87) (1.17)
April 4.87 3.81 (2.70) 5.23 (1.05)
May (7.17) (1.88) 4.53 (2.32) 0.43
June 3.66 0.68 5.06 (3.17) 13.62
July 1.14 (3.10) (3.03) 4.29 8.12
August (2.37) 0.57 (6.21) (8.23) 6.36
September 2.45 (2.29) 3.12 0.33 (0.89)
October 9.27 (0.60) 2.41 (1.77) (4.00)
November 2.78 (0.20) 4.39 1.24 1.93
December 0.67 6.50 1.89 7.69 (1.30)
Compound Annual
Rate of Return 8.93% 21.95% 5.55% 3.36% 9.23%
- --------------------------------------------------------------------------------
(1) Certain funds, including funds sponsored by MLIP, are structured
so as to guarantee to investors that their investment will be worth no less than
a specified amount (typically, the initial purchase price) as of a date certain
after the date of investment. The CFTC refers to such funds as "principal
protected." The Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1992 by the Fund; a drawdown is
measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1992 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during
the month of determination (including interest income and after all expenses
have been accrued or paid) divided by the total equity of the Fund as of the
beginning of such month.
11
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATION
------------------------
OPERATIONAL OVERVIEW
The Fund's success depends on Millburn Ridgefield's ability to
recognize and capitalize on trends and other profit opportunities in different
sectors of the world economy. Millburn Ridgefield's trading methods are
confidential, so that substantially the only information that can be furnished
regarding the Fund's results of operations is its performance record, as set
forth above. Unlike most operating businesses, general economic or seasonal
conditions have no direct effect on the profit potential of the Fund, while, at
the same time, 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. Millburn Ridgefield
believes, however, that there are certain market conditions - for example,
markets with strong price trends - in which the Fund has a better opportunity of
being profitable than in others.
RESULTS OF OPERATIONS
General. MLIP believes that futures funds should be regarded as
-------
medium- to long-term (i.e., three to five year) investments, but it is difficult
to identify trends in the Fund's operations and virtually impossible to make any
predictions regarding future results based on the results to date. An investment
in the Fund may be less successful over a longer than a shorter period.
Markets with sustained price trends 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 price trends will occur
and (iii) Millburn Ridgefield's systems are affected differently by trending
markets as well as by particular types of trends.
MLIP attempts to control credit risk in the Fund's futures, forward
and options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF. MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.
MLIP relies primarily on Millburn Ridgefield's risk management
policies and strategies to control the market risk inherent in the Fund's
trading. MLIP reviews the positions acquired by Millburn Ridgefield on a daily
basis in an effort to determine whether such policies and strategies are being
followed and whether the overall positions of the Fund may have become what MLIP
analyzes as being excessively concentrated in a limited number of markets - in
which case MLIP may discuss the possibility of rebalancing or deleveraging the
Fund's portfolio with Millburn Ridgefield. To date, however, MLIP has not
intervened so as to require any rebalancing or deleveraging of Millburn
Ridgefield's trading.
MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized); however,
MLIP has not done so to date and does not presently intend to do so.
PERFORMANCE SUMMARY
1994
1994 was characterized by relatively quiet markets without many major
price trends. United States interest rates generally declined during the period,
and as they did, so did the U.S. dollar as compared to the Deutschemark and
certain other major currencies.
1995
In 1995, prevailing price trends in several key markets enabled
Millburn Ridgefield 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 conditions. After months
characterized by very difficult trading environments, solid price trends across
many markets (including U.S. Treasury and non-dollar bond markets) began to
emerge during the first quarter of 1995. In the second quarter, market
volatility once again began to affect trading, as many previously strong price
trends began to weaken and, in some cases, reverse. The U.S. dollar hit new lows
versus the Japanese yen and Deutschemark
12
<PAGE>
before rebounding sharply. In addition, there were strong indications that the
U.S. economy was slowing which, when coupled with a failure of the German
Central Bank to lower interest rates, stalled a rally in the German bond market.
During the third quarter, there was a correction in U.S. bond prices after
several months of a strong uptrend. Throughout August and into September, the
U.S. dollar rallied sharply against the Japanese yen and the Deutschemark as a
result of the coordinated intervention by major central banks and widespread
recognition of the growing banking crisis in Japan. Despite continued price
volatility during the final quarter of 1995, the Trading Advisors were able to
identify several trends in key markets. U.S. Treasury bond prices continued
their strong move upward throughout November, due both to weak economic data and
optimism on federal budget talks. As the year ended, the yield on the 30-year
Treasury bond was pushed to its lowest level in more than two years.
1996
January 1996 began with major gains continuing in the energy sector,
but the upward price trends in these markets reversed sharply later in the month
and resulted in a small loss. February saw the Trust incur its worst monthly
drawdown as all six sectors traded by World Resource Portfolio sustained losses-
an unusual result. In the next two months, the Trust managed comparatively minor
gains and then in May a loss of (7.88)% was sustained, as all sectors except
energy were unprofitable. In June, a soaring energy market produced gains which
almost offset May's losses. In July, the Trust incurred slight losses as energy
trading was unprofitable. The following five months, August through December,
produced profits in each month as major trends occurred in the interest rate and
currency markets.
The performance of the Fund to date has demonstrated significant
volatility as well as the dependence of the Fund for its profitability on
general market conditions over which Millburn Ridgefield has no control.
PERFORMANCE OVERVIEW
The principal variables which determine the net performance of the
Partnership are gross profitability and interest income. During all periods set
forth under "Selected Financial Data," the interest rates in many countries were
at unusually low levels. This negatively impacted revenues because interest
income is typically a major component of commodity pool profitability. In
addition, low interest rates are frequently associated with reduced fixed-income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished. On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the
Partnership may be reduced as compared to high yielding and much lower risk
fixed-income investments.
The Partnership's Brokerage Commissions and the Fund's Administrative
Fees are a constant percentage of assets charge. The only Fund costs (other than
the insignificant F/X Desk service fees and EFP differentials as well as bid-ask
spreads on forward contracts) which are not based on a percentage of the Fund's
assets are the Profit Shares payable to the Trading Advisor.
The events that primarily determine the Fund's profitability are those
that produce sustained and major price movements. The Trading Advisor is
generally more likely to be able to profit from sustained trends, irrespective
of their direction, than from static markets. During the course of the
Partnership's performance to date, such events have ranged from Federal Reserve
Board reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful distinction in
the operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time. Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of variation margin.
Except in unusual circumstances, factors - regulatory approvals, cost
of goods sold, employee relations and the like - which often materially affect
an operating business have virtually no impact on the Fund.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Fund's costs are generally proportional to its asset base, and,
within broad ranges of capitalization, the Trading Advisor's trading positions
(and the resulting gains and losses) should increase or decrease in approximate
proportion to the size of the Fund account managed by each of them,
respectively.
Inflation per se is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of major
price movements that can have a materially favorable or adverse impact on the
Fund's performance.
In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
received or paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies). In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains. However, in general, there is no meaningful difference between
the Fund's realized and unrealized gains.
In terms of cash flow, it makes little difference whether a market
position remains open (so that the profit or loss on such positions remains
unrealized), as cash settlement of unrealized gains and losses occurs
periodically whether or not positions are closed out. The only meaningful
difference between realized and unrealized gains or losses in the case of the
Fund is that unrealized items reflect gains or losses on positions which
Millburn Ridgefield has determined not to close out (presumably, in the hope of
future profits), whereas realized gains or losses reflect amounts received or
paid in respect of positions no longer being maintained.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in
Exhibit 13.01.
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.
14
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
Millburn Ridgefield on behalf of the Partnership.
The principal officers of MLIP and their business backgrounds are as
follows.
John R. Frawley, Jr. Chief Executive Officer, President
and Director
James M. Bernard Chief Financial Officer,
Senior Vice President and Treasurer
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and Director
Allen N. Jones Chairman and Director
Steven B. Olgin Vice President, Secretary and Director
of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP as well as Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith ("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. Mr. Frawley served on the CFTC's Regulatory Coordination
Advisory Committee from its inception in 1990 through its dissolution in 1994.
Mr. Frawley is currently a member of the CFTC's Financial Products Advisory
Committee. In January 1996, he 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 a Director of the Futures Industry Institute. Mr. Frawley
also currently serves on a panel created by the Chicago Mercantile Exchange and
The Board of Trade of the City of Chicago to study cooperative efforts related
to electronic trading, common clearing and the issues regarding a potential
merger.
James M. Bernard was born in 1950. Mr. Bernard is Chief Financial Officer,
Senior Vice President and Treasurer of MLIP. He joined MLF in 1983. Before
that he was the Commodity Controller for Nabisco Brands Inc. from November 1976
to 1982 and a Supervisor at Ernst & Whinney from 1972 to November 1976. Mr.
Bernard is a member of 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 1942. Mr. Chandor is Senior Vice President,
the Director of Sales, Marketing and Research and a Director of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of Equity, Derivative
Products 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.
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 June 1992, he held the position of
First Vice
15
<PAGE>
President of MLPF&S. From January 1990 to June 1992, he held the position of
District Director of MLPF&S. Before January 1990, he held the position of Senior
Regional Vice President of MLPF&S.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary
and the Director of Administration of MLIP. He joined MLIP in July 1994 and
became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was
an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated
from The American University with a Bachelor of Science degree in Business
Administration and a Bachelor of Arts degree in Economics. In 1986, he received
his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a
member of the Managed Futures Association's Government Relations Committee and
has served as an arbitrator for the NFA.
At its December 1996 Board of Directors meeting, MLIP formed a Finance
Committee composed of representatives of several different operating and
administrative units at Merrill Lynch to oversee the financial controls and
accounting procedures implemented by MLIP. The Finance Committee will meet
periodically to review MLIP's financial reporting, monitoring and record
keeping, as well as all proposed changes - other than the selection of Advisors
- - affecting the operations of the Fund.
As of December 31, 1996, the principals of MLIP had no investment in the
Fund, and MLIP's general partner interest in the Fund was valued at $134,829.
MLIP acts as general partner to thirteen public futures funds whose units
of limited partnership interest are registered under the Securities Exchange Act
of 1934: The Growth and Guarantee Fund L.P., ML Futures Investments L.P., ML
Futures Investments II L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R.
Strategy Fund(SM) L.P., The SECTOR Strategy Fund(SM) II L.P., The SECTOR
Strategy Fund(SM) IV L.P., The SECTOR Strategy Fund(SM) V L.P., The SECTOR
Strategy Fund(SM) VI L.P., ML Global Horizons L.P., ML Principal Protection L.P.
(formerly, ML Principal Protection Plus L.P.), ML JWH Strategic Allocation Fund
L.P. and the Fund. Because MLIP serves as the sole general partner of each of
these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(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 and Administrative Fees to the General Partner. The General
Partner or its affiliates may also receive certain economic benefits from
holding the Fund's dollar Available Assets in offset accounts, as described in
Item 1(c) above. The
16
<PAGE>
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, 1996, 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, 1996, the Trading Advisor owned 1,026 Units and the
General Partner owned 518 Units (unit-equivalent general partnership interests),
which was less than 5% of the total Units outstanding.
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager of the
Fund. The General Partner provides all normal ongoing administrative functions
of the Partnership, such as accounting, legal and printing services. The General
Partner, which receives the Administrative Fees, pays all expenses relating to
such services.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1996 the Partnership paid: (i) Brokerage Commissions of $1,120,320
to the Commodity Broker, which included $383,975 in consulting fees paid by the
Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of
$24,001 to MLIP. In addition, MLIP and its affiliates may have derived certain
economic benefits from maintaining a portion of the Fund's assets in "offset
accounts," as described under Item 1(c), "Narrative Description of Business -Use
of Proceeds and Interest Income - Interest Earned on the Fund's U.S. Dollar
Available Assets" and Item 11, "Executive Compensation" herein.
See Item 1(c), "Narrative Description of Business - Charges" and "-
Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to management or
otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
17
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)1. Financial Statements (found in Exhibit 13.01): Page
-------------------- ----
Independent Auditors' Report 1
Statements of Financial Condition as of
December 31, 1996 and 1995 2
For the years ended December 31, 1996,
1995 and 1994:
Statements of Income 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-11
(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
- ----------- -----------
3.01 Amended and Restated Limited Partnership Agreement of the
Partnership.
Exhibit 3.01: Is incorporated herein by reference from Exhibit 3.01
- ------------
contained in Amendment No. 1 to the Registration Statement (File
No. 33-8377) filed on October 21, 1986, on Form S-1 under the
Securities Act of 1933 (the "Registrant's Registration
Statement").
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.
3.04 Amended and Restated Certificate of Limited Partnership of
the Registrant, dated July 27, 1995.
Exhibit 3.04: Is incorporated herein by reference from Exhibit 3.04
- ------------
contained in the Partnership's Report on Form 10-Q for the
Quarter ended September 30, 1995.
10.01 Joint Venture Agreement between the Partnership, Merrill
Lynch Investment Partners Inc. and Millburn Ridgefield
Corporation.
Exhibit 10.01: Is incorporated herein by reference from Exhibit
- -------------
10.01 contained in the Registrant's Registration Statement.
18
<PAGE>
10.03 Customer Agreement between the Joint Venture and Merrill
Lynch Futures Inc.
Exhibit 10.03: Is incorporated hereby by reference from Exhibit
- -------------
10.03 contained in the Registrant's Registration Statement.
10.05 Form of Consulting Agreement between Millburn Ridgefield
Corporation and the Partnership.
Exhibit 10.05: Is incorporated herein by reference from Exhibit
- -------------
10.05(a) contained in the Partnership's Report on Form 10-K of
December 31, 1987, filed on March 28, 1988.
10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993
among Merrill Lynch Investment Bank, Merrill Lynch Investment
Partners Inc., Merrill Lynch Futures Inc. and the Fund.
Exhibit 10.06: Is filed herewith.
- -------------
10.07(a) Form of Advisory and Consulting Agreement Amendment
among Merrill Lynch Investment Partners Inc., Millburn
Ridgefield Corporation, the Fund and Merrill Lynch Futures.
Exhibit 10.07(a): Is filed herewith.
- ----------------
10.07(b) Form of Amendment to the Customer Agreement among the
Partnership and MLF.
Exhibit 10.07(b): Is filed herewith.
- ----------------
13.01 1996 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
28.01 Prospectus of the Partnership dated October 27, 1986.
Exhibit 28.01: Is incorporated by reference as filed with the Securities and
- -------------
Exchange Commission pursuant to Rule 424 under the Securities
Act of 1933, Registration Statement (File No. 33-8377) on Form
S-1, on October 31, 1986.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of 1996.
19
<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 14, 1997 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 and Director March 14, 1997
- -------------------------
John R. Frawley, Jr.
/s/James M. Bernard Chief Financial Officer, Treasurer (Principal Financial March 14, 1997
- -------------------------
James M. Bernard and Accounting Officer) and Senior Vice President
/s/Jeffrey F. Chandor Senior Vice President and Director of Sales, March 14, 1997
- -------------------------
Jeffrey F. Chandor Marketing and Research, and Director
/s/Allen N. Jones Director March 14, 1997
- -------------------------
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.)
<TABLE>
<CAPTION>
<S> <C> <C>
MERRILL LYNCH INVESTMENT General Partner of Registrant March 14, 1997
PARTNERS INC.
By: /s/John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
</TABLE>
20
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
1996 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 10.06 Foreign Exchange Desk Service Agreement, dated July 1,
1993 among Merrill Lynch Investment Bank, Merrill
Lynch Investment Partners Inc., Merrill Lynch Futures
Inc. and the Fund
Exhibit 10.07(a) Form of Advisory and Consulting Agreement Amendment by
and among Merrill Lynch Investment Partners Inc., each
Advisor, the Fund and Merrill Lynch Futures Inc.
Exhibit 10.07(b) Form of Amendment to the Customer Agreement among the
Partnership and MLF
Exhibit 13.01 1996 Annual Report and Independent Auditors' Report
21
<PAGE>
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
Merrill Lynch Investment Partners Inc.
General Partner of
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
22
<PAGE>
EXHIBIT 10.06
<PAGE>
EXHIBIT 10.6
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
BY AND AMONG
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
DATED AS OF JULY 1, 1993
<PAGE>
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
TABLE OF CONTENTS
-----------------
PAGE
----
1. MLF Customer Agreement.................................................. 2
2. MLIB and MLF............................................................ 2
3. Equal Terms............................................................. 3
4. "Chinese Wall" Procedures............................................... 3
5. Access.................................................................. 3
6. Trading Procedures...................................................... 3
7. Service Fee............................................................. 4
8. Expenses................................................................ 4
9. Errors.................................................................. 4
10. Choice of Counterparties; MLFIP Review.................................. 5
11. Currencies Traded....................................................... 5
12. Additional Credit Lines................................................. 5
13. CTA Option not to Trade Through the F/X Desk............................ 5
14. Confidentiality......................................................... 5
15. Form of Confirmations................................................... 6
16. Separate Accounting..................................................... 6
17. Records of Service Fees................................................. 6
18. Net Asset Valuations.................................................... 6
-i-
<PAGE>
19. Supervision......................................... 6
20. No ERISA Funds...................................... 6
21. Response to Inquiries............................... 7
22. Disclosure.......................................... 7
23. Audit of F/X Desk................................... 7
24. Governing Law....................................... 7
Schedule A: Funds Party to the F/X Desk
Service Agreement as of July 1, 1993....... A-1
Appendix I: Trading Procedures to be
Monitored by MLFIP...................... APPI-1
Appendix II: "Chinese Wall" Procedures.............. APPII-1
-ii-
<PAGE>
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
This Agreement dated as of July 1, 1993 by and among Merrill Lynch
International Bank ("MLIB"), Merrill Lynch Futures Inc. ("MLF"), ML Futures
Investment Partners Inc. ("MLFIP") and each of the funds (collectively, the
"Funds") identified on Schedule A hereto, as the same may be amended from time
to time by agreement among MLIB, MLF and MLFIP, of which MLFIP is the Sponsor,
General Partner or Trading Manager, as the case may be.
WHEREAS, MLIB, MLF and MLFIP have agreed to establish and operate a service
desk (the "F/X Desk") to assist the Funds and other clients introduced by
Merrill Lynch affiliates (the Funds and such other clients being hereinafter
collectively referred to as "Clients") in effecting off-exchange currency trades
("F/X trades") (i) through both MLF and MLIB with third-party counterparties
and/or (ii) through MLF with MLIB, in each case in the over-the-counter, inter-
dealer, inter-bank market;
WHEREAS, only Clients qualified under Part 35 of the regulations of the
Commodity Futures Trading Commission (the "CFTC") will be permitted to utilize
the F/X Desk;
WHEREAS, Clients other than the Funds will execute other documentation in
connection with their use of the F/X Desk, subject to the provisions of Section
3 hereof;
WHEREAS, all trades executed through the F/X Desk will be executed as
principal trades either: (i) between MLIB and MLF at a competitive "bid-asked"
spread, with MLF entering into a back-to-back transaction, without mark-up or
spread, with the appropriate Clients; or (ii) between MLIB and a third-party
counterparty with a back-to-back transaction executed between MLIB and MLF and,
in turn, between MLF and the appropriate Clients, without mark-up or spread
other than the Service Fee described herein, in each case as determined pursuant
to the Trading Procedures to be monitored by MLFIP referred to in Section 6
hereof;
WHEREAS, no proprietary Merrill Lynch trading shall be permitted to take
place through the F/X Desk; and
<PAGE>
WHEREAS, MLFIP as General Partner or Trading Manager of the Funds or the
Board of Directors of each of the Funds for which MLFIP serves as Sponsor, as
the case may be, has determined that it is in the best interests of the Funds to
enter into this Service Agreement in order to provide access to the increasingly
diverse and international currency markets in which certain managed futures
advisors concentrate a significant percentage of their trading and because MLFIP
is confident that doing so will reduce the overall cost of the Funds' currency
trading;
NOW THEREFORE, in consideration of the premises and for other valuable
consideration the receipt and sufficiency of which are hereby acknowledged, each
of the Funds, respectively, MLFIP, MLIB and MLF hereby agree as follows:
1. MLF Customer Agreement
----------------------
Other than in respect of the terms set forth herein, the terms of the MLF
Customer Agreement previously executed and delivered between each of the Funds
and MLFIP shall govern the Funds' F/X trading through the F/X Desk as
contemplated hereby, and such Customer Agreement is hereby restated and
incorporated herein by reference in its entirety to the extent not inconsistent
herewith.
2. MLIB and MLF
------------
In F/X Desk trading with F/X Desk counterparties other than MLIB, MLIB
shall act as principal with such counterparties and then enter into a back-to-
back trade with MLF (MLIB adding the Service Fee to the contract pricing but no
mark-up or spread) which will, in turn, enter into a back-to-back trade (without
mark-up, spread or fee) with the appropriate Clients.
In F/X Desk trading with MLIB, MLIB shall act as principal with MLF
(charging a competitive "bid-asked" spread), which will, in turn, enter into a
back-to-back trade (without mark-up, spread or fee) with the appropriate
Clients.
MLF, not MLIB, shall be responsible for allocating positions acquired
through or with MLIB among the appropriate Clients; provided that MLFIP shall
assist in allocating positions among the appropriate Funds.
MLF shall in all cases enter into back-to-back principal transactions with
the appropriate Clients, effectively transferring to their respective accounts
the positions taken by MLF with MLIB; provided that MLF shall remain financially
liable
-2-
<PAGE>
to MLIB on all such trades. MLF shall not charge any Fund any spread or
mark-ups on any such back-to-back transactions.
The Trading Procedures to be monitored by MLFIP to be implemented by the
F/X Desk are set forth in Appendix I hereto.
3. Equal Terms
-----------
All Funds will utilize the F/X Desk on substantially identical terms, and
no Client will utilize the F/X Desk on any terms more favorable than those of
the Funds.
4. "Chinese Wall" Procedures
-------------------------
The procedures attached hereto as Appendix II have been adopted to prevent
misuse or misappropriation of information relating to the Funds' order flow
through the F/X Desk.
In no event shall any Merrill Lynch proprietary trading take place through
the F/X Desk (other than trading of ML Institutional Partners L.P. which may be
deemed "proprietary" to Merrill Lynch & Co., Inc. within the meaning of CFTC
Reg. 1.3 (y)).
5. Access
------
MLIB, MLF and MLFIP shall provide and maintain direct access, through
dedicated telephone lines, between the F/X Desk and the advisors ("CTAs")
trading for the Funds through the F/X Desk, at no additional cost to the Funds.
In conjunction therewith, MLIB, MLF and MLFIP shall establish mutually
satisfactory procedures to assure the validity of all orders transmitted by the
CTAs.
6. Trading Procedures
------------------
As set forth in Appendix I hereto, upon receipt of an F/X trade order, the
F/X Desk shall obtain a price from MLIB and at least two (2) other
counterparties. The order shall be executed with MLIB if the price quoted by
MLIB (which will not include a Service Fee) is as good as or better than the
best price quoted by the other counterparties contacted (including the Service
Fee). If MLIB is not making a market in a currency in which a CTA wishes to
acquire a position, the F/X Desk shall contact three (3) other counterparties
for price quotes and shall execute the trade order with the counterparty
offering the best price quote.
-3-
<PAGE>
MLFIP shall cause to be documented the counterparties contacted for each
F/X trade executed through the F/X Desk and the price offered by each such
counterparty. Such documentation shall be retained by the F/X Desk pursuant to
MLFIP's standard recordkeeping procedures.
7. Service Fee
-----------
For the F/X Desk's services hereunder, MLFIP will receive a Service Fee, on
trades for which MLIB does not act as the ultimate counterparty, equal to one
"pip" per futures-equivalent trade on each purchase and one "pip" per futures-
equivalent trade on each sale transaction - each "pip" to be calculated in
accordance with standard industry practice. Such Service Fee will be added as a
mark-up by MLIB on all trades executed by the F/X Desk with counterparties other
than MLIB, and promptly paid by MLIB to MLFIP. No Service Fee will be charged
or paid on F/X trades executed with MLIB as principal rather than MLIB as back-
to-back principal with a third-party counterparty.
MLFIP represents and warrants that, to the best of MLFIP's knowledge after
due inquiry, the Service Fee is competitive with that charged by third parties
for comparable services. Furthermore, if, as a result of MLFIP's annual review
of the competitiveness of the operations of the F/X Desk, MLFIP determines that
the Service Fee is not competitive, MLFIP will promptly adjust such Fee so that
it becomes so.
8. Expenses
--------
The only cost to the Funds of utilizing the F/X Desk shall be the Service
Fees paid on trades executed through MLIB with counterparties other than MLIB
and the "bid-asked" spreads on trades executed with such counterparties and with
MLIB. None of the Funds shall in any event pay any expenses, overhead or other
costs relating to the operation of the F/X Desk.
9. Errors
------
In addition to any liability which MLIB or MLF may have in respect thereof,
MLFIP shall indemnify and hold each Fund harmless for all losses incurred or
quantifiable profits foregone as a result of any errors on the part of F/X Desk
personnel in executing trades on behalf of such Fund. Such indemnity shall not,
however, apply to losses incurred or profits foregone as a result of technical
or telecommunication failures, counterparty errors or defaults, CTA errors or
any other cause not within the reasonable control of MLFIP.
-4-
<PAGE>
10. Choice of Counterparties; MLFIP Review
--------------------------------------
MLFIP and MLF shall each have the right to approve any counterparty
proposed by MLIB, as well as to request MLIB to include a particular
counterparty in the F/X Desk group of counterparties, which request MLIB will
not unreasonably refuse; provided that MLIB need not include more than twelve
(12) counterparties in such group at any one time. In no event shall any
counterparty other than MLIB be directly or indirectly controlled by, or under
common control with, MLFIP, MLF or MLIB.
MLFIP will conduct, no less frequently than annually, a review of the
counterparties used by, and the general operations of, the F/X Desk in order to
evaluate their competitiveness, credit standing, service and reputation. Each
of MLIB and MLF undertake to cooperate fully with MLFIP in such review.
11. Currencies Traded
-----------------
MLIB, MLFIP and MLF agree to use best efforts, upon CTA request, to include
additional currencies in the portfolio of currencies which can be traded through
the F/X Desk.
12. Additional Credit Lines
-----------------------
MLIB agrees to use best efforts to obtain all such additional credit lines
as may be necessary to ensure that the CTAs are able to trade currencies on
behalf of the Funds to the full extent they may deem appropriate and, if such
credit lines cannot be obtained, to make alternative arrangements so as to
permit the CTAs to do so, at no additional cost to the Funds.
13. CTA Option not to Trade Through the F/X Desk
--------------------------------------------
MLFIP, MLF and MLIB each agree that in the event any CTA wishes not to use
the F/X Desk to effect trades for a Fund, MLFIP, MLF and MLIB will arrange for
such CTA to trade for such Fund exclusively with MLIB through MLF without
Service Fees or margin requirements. MLFIP will inform each CTA of the
availability of this option. CTAs may designate specific F/X trade orders as
ones which are to be executed exclusively with MLIB on a trade by trade basis.
14. Confidentiality
---------------
MLIB, MLF and MLFIP agree to keep all orders executed through the F/X Desk
strictly confidential, in accordance with industry custom, except as otherwise
required by law. MLIB, MLF and MLFIP agree to execute such agreements or
documents as any
-5-
<PAGE>
CTA may reasonably require to evidence the foregoing undertaking of
confidentiality.
MLIB, MLF and MLFIP shall observe the "Chinese Wall" procedures set forth
in Appendix II hereto in order to ensure that information relating to Clients'
F/X trades will not be misused or misappropriated.
15. Form of Confirmations
---------------------
All trades executed through the F/X Desk will be confirmed by MLIB to MLF
as principal transactions, and MLF shall, in turn, confirm back-to-back
transactions with the appropriate Clients as principal trades between MLF and
such Clients carried in an "unregulated" MLF account.
16. Separate Accounting
-------------------
MLFIP and MLF shall account separately for all trades and all assets of
each Client, and such trades and assets shall in no event be commingled with
those of any other Client.
17. Records of Service Fees
-----------------------
MLIB and MLFIP shall maintain full and accurate records of all Service Fees
paid to MLIB, and all Service Fees remitted by MLIB to MLFIP, respectively.
MLFIP shall be responsible for allocating Service Fees among the Funds, and MLF
for allocating Service Fees among other Clients.
18. Net Asset Valuations
--------------------
MLIB will cooperate fully with MLFIP and MLF in obtaining, to the extent
reasonably practicable, valuations of the open F/X positions held by Clients,
and will attempt to provide data feeds compatible with MLFIP's existing systems.
19. Supervision
-----------
There shall at all times be an appropriately qualified supervising employee
assigned to the F/X Desk.
20. No ERISA Funds
--------------
MLFIP shall ensure that no Fund, the assets of which constitute "plan
assets" under the Employee Retirement Income Security Act of 1974 ("ERISA"),
trades through the F/X Desk.
-6-
<PAGE>
21. Response to Inquiries
---------------------
MLFIP shall use best efforts to respond to any inquiries concerning the
operation of the F/X Desk which they may receive from investors in the Funds.
22. Disclosure
----------
MLFIP agrees to disclose the F/X Desk operation to all existing and
prospective Funds to the full extent that it is advised by counsel may be
necessary or appropriate.
23. Audit of F/X Desk
-----------------
MLIB, MLF and MLFIP agree to obtain an annual auditors' review of the F/X
Desk (which need not result in a formal audit report) so as to verify and
document compliance with the operation of the F/X Desk as contemplated hereby.
The expense of such review shall be paid by MLFIP.
24. Governing Law
-------------
This Service Agreement shall be governed by and construed in accordance
with the laws of the State of New York, United States of America, without regard
to principles of conflicts of law.
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement by their
representatives thereunto duly authorized.
EACH OF THE FUNDS
LISTED ON SCHEDULE A HERETO
By: ML FUTURES INVESTMENT PARTNERS INC.
General Partner/Trading Manager
By: ___________________________________
Title:
ML FUTURES INVESTMENT PARTNERS INC.
By: _______________________________
Title:
MERRILL LYNCH FUTURES INC.
By: _______________________________
Title:
MERRILL LYNCH INTERNATIONAL BANK
By: _______________________________
Title:
WORLD CURRENCIES LIMITED
INTERRATE(TM) LIMITED
ML FUTURES INVESTMENTS LTD.
CURRENCY INVESTMENT PARTNERS LTD.
SECTOR(SM) INTERNATIONAL LTD.
ML JAPAN INVESTMENT PARTNERS LTD.
ML MOUNTAIN PARTNERS LTD.
ML HYMAN BECK LTD.
ML CHESAPEAKE LTD.
By: _______________________________
John R. Frawley, Jr., as a
Director of each of the above
listed companies
-8-
<PAGE>
SCHEDULE A
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP General Partner
- ---------------------
The Futures Expansion Fund Limited Partnership
The Growth and Guarantee Fund L.P.
ML Futures Investments II L.P.
ML Futures Investments L.P.
John W. Henry & Co./Millburn L.P.
The S.E.C.T.O.R. Strategy Fund(SM) L.P.
The SECTOR Strategy Fund(SM) II L.P.
The SECTOR Strategy Fund(SM) IV L.P.
The SECTOR Strategy Fund(SM) V L.P.
The SECTOR Strategy Fund(SM) VI L.P.
The JWH Global Asset Fund L.P.
The Leyden Investment Fund L.P.
ML Institutional Partners L.P.
ML Global Horizons L.P.
MLFIP Sponsor
- -------------
World Currencies Limited
InterRate(TM) Limited
ML Futures Investments Ltd.
Currency Investment Partners Ltd.
SECTOR(SM) International Ltd.
ML Japan Investment Partners Ltd.
ML Mountain Partners Ltd.
ML Hyman Beck Ltd.
ML Chesapeake Ltd.
A-1
<PAGE>
SCHEDULE A (CONT.)
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP Trading Manager
- ---------------------
Commodity Trading Company, Ltd. Consent: NCB Investment
Services Company
Limited
By: _________________________
Title: ______________________
A-2
<PAGE>
SCHEDULE A (CONT.)
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP Trading Manager
- ---------------------
Permal Commodities Ltd. Consent: Worms Asset
Management, Inc.
By: _______________________
Title: _____________________
Consent: F.M.C. Limited
Managing Director
By: _______________________
Title: _____________________
Consent: S.C.S. Limited
Managing Director
By: _______________________
Title: _____________________
A-3
<PAGE>
APPENDIX I
TRADING PROCEDURES
TO BE MONITORED BY MLFIP
A) F/X Desk Trading Procedures
---------------------------
(i) prior to effecting any trade, the F/X Desk will ensure that there
exist sufficient credit limits with approved counterparties;
(ii) the F/X Desk will provide dedicated telephone lines to facilitate
trading;
(iii) upon receipt of an F/X trade order, F/X Desk personnel shall
inquire of MLIB and two (2) counterparties unaffiliated with
Merrill Lynch;
(iv) in the event that MLIB is not quoting a "bid" and "asked" price
for a particular currency, F/X Desk personnel shall inquire of
three (3) counterparties unaffiliated with Merrill Lynch;
(v) no less than six (6) counterparties other than MLIB shall be
included in the group of counterparties contacted by the F/X
Desk;
(vi) the F/X Desk need not rotate the counterparties contacted for
price quotes provided that MLFIP reasonably believes that not
doing so is in, or not opposed to, the best interests of the
Clients;
(vii) the order of inquiry as among MLIB and the two (2) other
counterparties contacted shall be as near to simultaneous as
practicable;
(viii) trades which the F/X Desk executes with MLIB shall be executed by
MLIB in the same manner as MLIB executes other customer trades;
(ix) trades shall be executed with that counterparty whose price
quote, plus Service Fee, is the best obtained upon inquiry;
provided that trades shall be executed with MLIB if its price
quote, without Service Fee, is as good as or better than the best
price quote, plus Service Fee, obtained from any other
counterparty;
APPI-1
<PAGE>
(x) in the event an F/X trade is executed with a counterparty other
than MLIB, the Service Fee shall be added to the price quoted by
such counterparty. MLIB will promptly remit such Service Fee to
MLFIP.
(xi) each F/X trade order, counterparties inquired of, price quotes
received, execution price, and trade time shall be recorded and
preserved; and
(xii) the F/X Desk will make its trading records available upon
request to internal and external auditors as well as authorized
MLFIP, MLIB and MLF personnel.
B) CTA Direct Trading with MLIB
----------------------------
(i) MLFIP will offer each CTA the opportunity to trade on behalf of
the Funds directly with MLIB rather than through the F/X Desk;
(ii) the F/X Desk will provide dedicated phone lines to facilitate
trading (which may be the same lines used for a CTA's trading
through the F/X Desk);
(iii) CTAs may designate particular trades as trades which the CTA
wishes to be executed directly with MLIB, on a trade by trade
basis;
(iv) the person or persons on the F/X Desk (the "CTA Order Handler")
handling trades designated by CTAs to be executed directly with
MLIB shall have no trading operations at MLFIP, MLIB or MLF other
than receiving CTAs' orders through the F/X Desk, communicating
these orders to the MLIB trading desk, and managing MLIB's
position and market exposure in acting as counterparty to such
orders;
(v) trades which the CTA Order Handler executes will be executed with
MLIB's trading desk, not with MLIB's proprietary traders;
(vi) each F/X trade order, execution price, and trade time shall be
recorded and preserved by the CTA Order Handler; and
(vii) the CTA Order Handler will make its trading records (which may be
kept together with those of the other F/X operations) available
upon request
APPI-2
<PAGE>
to internal and external auditors as well as
authorized MLFIP, MLIB and MLF personnel.
C) Monitoring
----------
MLFIP will monitor the F/X Desk and be responsible for the general
oversight thereof, confirming:
(i) that MLIB's prices quoted to the F/X Desk are consistent with
prices quoted by MLIB to the CTA Order Handler;
(ii) that the F/X Desk is quoting prices in a fair and
nondiscriminatory manner (i.e., does not always source MLIB's bid
first or last, rotates the order in which it solicits external
bids, and solicits such bids from competitive counterparties that
make markets in the currency being requested);
(iii) that the F/X Desk records, documents and retains the bids for
each trade, the counterparties contacted, to which counterparty
the trade was ultimately awarded and, if effected with an
external counterparty, the amount of the "pip" added to such
trade;
(iv) that each counterparty is providing service and pricing which are
consistently competitive;
(v) that the confidentiality requirements of this Service Agreement
are being satisfied;
(vi) that no MLIB personnel trading for MLIB's proprietary account
will have access to or knowledge of the transactions effected by
the F/X Desk and that the "Chinese Wall" procedures set forth in
Appendix II are being implemented;
(vii) that F/X Desk personnel effect only such trades as are
envisioned by this Service Agreement and are not effecting other
trades on behalf of MLIB;
(viii) that, on an annual basis, an audit (which need not be by
independent public accountants as opposed to Merrill Lynch audit
staff and which need not result in a formal audit report) is
conducted to insure the F/X Desk's compliance with the provisions
of this Service Agreement;
APPI-3
<PAGE>
(ix) that MLIB and MLFIP has each maintained full and accurate records
of all Service Fees paid; and
(x) that a netting agreement is and remains in effect between MLIB
and MLF (and/or the Funds).
APPI-4
<PAGE>
APPENDIX II
"CHINESE WALL" PROCEDURES
1. The F/X Desk and its personnel (including the CTA Order Handler):
(i) must be physically segregated from any persons trading on behalf
of MLIB's proprietary account (as opposed to the MLIB trading
desk which will be contacted by the F/X Desk and its personnel);
(ii) will effect trades solely as necessitated by the stated purposes
of the F/X Desk as set forth in the Foreign Exchange Desk Service
Agreement and will not effect any other trades on behalf of
MLIB's proprietary account (as opposed to the MLIB trading desk
which will be contacted by the F/X Desk and its personnel).
2. All personnel on the F/X Desk must be Merrill Lynch employees.
3. The F/X Desk will trade only with such external counterparties and in such
currencies and such products as shall have been agreed upon among MLF, MLIB
and MLFIP.
4. The F/X Desk and its personnel will keep all orders executed by it strictly
confidential in accordance with industry custom (except as disclosure
thereof may be required in the course of trading or as required by law).
5. The F/X Desk (including the CTA Order Handler) will not disclose
information relating to any F/X Desk trades to any Merrill Lynch employee
trading for the proprietary account of Merrill Lynch (as opposed to the
MLIB trading desk which will be contacted by the F/X Desk and its
personnel).
APPII-1
<PAGE>
EXHIBIT 10.07(a)
<PAGE>
FORM OF ADVISORY AND CONSULTING AGREEMENT AMENDMENT
This ADVISORY AND CONSULTING AGREEMENT AMENDMENT dated as of January 1,
1997 by and among the funds listed on Schedule I hereto (THE "FUNDS"),
________________ (THE "ADVISOR"), MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP") and MERRILL LYNCH FUTURES INC. ("MLF")
W I T N E S S E T H
WHEREAS, the Advisor is acting as a commodity trading advisor for the Funds
pursuant to the Advisory Agreements, and in certain cases the Consulting
Agreements, among the parties hereto (as the case may be) set forth on Schedule
II hereto (collectively. the "Advisory Agreements");
WHEREAS, the parties hereto have agreed to reduce the Consulting Fees paid
by MLF, the commodity broker of the Fund, to the Advisor;
WHEREAS, the parties hereto have agreed to adjust the Profit Share paid by
the Fund to the Advisor, including, without limitation, by providing that the
Profit Share shall be calculated on an annual rather than a quarterly basis; and
WHEREAS, this Agreement shall be deemed to renew each of the Advisory
Agreements (on the terms set forth herein and therein) until December 31, 1997.
NOW THEREFORE, the parties hereto agree as follows:
1. REDUCTION OF CONSULTING FEE
---------------------------
Beginning January 1, 1997, the Consulting Fee paid by MLF to the Advisor
will be reduced to ___% per annum (0.___% of the month-end assets each month).
2. ADJUSTMENT OF PROFIT SHARE
--------------------------
From and after January 1, 1997, the Profit Share payable by the Funds to
the Advisor will be calculated at the rate of ___% of any New Trading Profit in
excess of the highest level of cumulative Trading Profit (the "high water mark")
achieved by the Advisor for each of the Funds, respectively, as of any previous
calendar quarter-end (including December 31, 1996); or $0 if the Advisor has
traded unprofitably for a Fund. Trading Profit shall be calculated pursuant to
Schedule C to the Advisory Agreements, after reduction for combined Brokerage
and Administrative Fees of ___% of average month-end assets per annum (0.__% of
the month-end assets each month). Further more, beginning January 1, 1997,
Profit Shares shall be calculated not as of the end of each calendar quarter,
but rather as of the end of each calendar year and the "high water mark" for
purposes of determining whether Trading Profit recognized after January 1, 1997
constitutes New Trading Profit
<PAGE>
will equal the highest level of cumulative Trading Profit as of any calendar
year-end (at such point, if any, that cumulative Trading Profit as of a calendar
year-end exceeds the "high water mark" in effect with respect to each Fund as of
the effective date of this Agreement).
3. TERM
----
The current term of the Advisory Agreements will expire December 31,
1997, at which time each such Advisory Agreement will be automatically renewed,
unless (i) MLIP or one or more of the Funds gives 30 days' notice to the Advisor
of the termination of such Advisory Agreement, or (ii) from and after the end of
the period during which such Advisory Agreement may be renewed at the option of
either MLIP or the affected Fund (treating the term ending December 31, 1997 as
the current twelve month term of each such Advisory Agreement) the Advisor gives
30 days' termination notice.
Any renewal rights exercisable by one or more Funds or MLIP under the
Advisory Agreements shall remain in full force and effect as if December 31,
1997 were the end of the current twelve-month term of each such Advisory
Agreement.
4. ENTIRE AGREEMENT
----------------
This Agreement, together with the Advisory Agreements, constitutes the
entire agreement among the parties hereto with respect to the matters referred
to herein, and no other agreement, verbal or otherwise, shall be binding as
between the parties unless it shall be in writing and signed by the part against
whom enforcement is sought.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereto duly set forth their hand
as of the 1st day of January 1997.
THE FUNDS LISTED ON SCHEDULE I
WHICH ARE U.S. LIMITED PARTNERSHIPS
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By: ______________________________
Name:
Title:
THE FUNDS LISTED ON SCHEDULE I,
OTHER THAN ML PRINCIPAL PROTECTION
PLUS LTD., WHICH ARE CAYMAN ISLANDS
INVESTMENT COMPANIES
By: ______________________________
Name:
Title:
ML PRINCIPAL PROTECTION PLUS LTD.
By: ______________________________
Name:
Title:
MERRILL LYNCH FUTURES INC.
By: ______________________________
Name:
Title:
THE ADVISOR MERRILL LYNCH INVESTMENT PARTNERS,
INC.
By: ___________________________ By: ________________________________
Name: Name:
Title: Title:
-3-
<PAGE>
SCHEDULE I
THE FUNDS
U.S. Funds Cayman Islands Funds
---------- --------------------
1. 1.
--------------------------- ---------------------------
2. 2.
--------------------------- ---------------------------
3. 3.
--------------------------- ---------------------------
4. 4.
--------------------------- ---------------------------
-4-
<PAGE>
SCHEDULE II
ADVISORY AGREEMENTS
Advisory Agreements with the U.S. Funds dated:
U.S. Fund No.
(See Schedule I)
----------------
1. ________________
2. ________________
3. ________________
4. ________________
Advisory Agreements with the Cayman Islands Funds dated:
Cayman Islands
Fund No.
(See Schedule I)
----------------
1. ________________
2. ________________
3. ________________
4. ________________
<PAGE>
EXHIBIT 10.07(b)
<PAGE>
FORM OF
AMENDMENT
TO THE
CUSTOMER AGREEMENT
This Customer Agreement Amendment ("Amendment") is made as of this 1st day
of [MONTH, YEAR] by and between [THE FUND] (the "Fund") and Merrill Lynch
Futures Inc.
W I T N E S S E T H:
WHEREAS, the parties hereto entered into a Customer Agreement relating to
the purchase and sale of commodity futures and forward contracts and commodity
options (the "Customer Agreement");
WHEREAS, the parties hereto have agreed to reduce the brokerage commissions
paid by the Fund to Merrill Lynch Futures Inc., the Fund's commodity broker,
pursuant to the Customer Agreement and wish to amend the Customer Agreement
accordingly;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained in the Customer Agreement and herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree to amend the Customer
Agreement as follows:
1. Brokerage Commissions. Beginning [DATE, YEAR] the brokerage commissions
---------------------
payable by the Fund to Merrill Lynch Futures Inc. will be reduced to ______ of
1% of month-end Net Assets, before reduction for such monthly brokerage
commissions and any New Profits Account allocation but after the crediting of
interest income received during the month (a ____% annual rate). Such brokerage
commissions shall not include any administrative fee paid directly to Merrill
Lynch Investment Partners Inc.
2. Amendment. This Amendment may not be amended except by the written
---------
consent of each of the parties hereto.
3. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall, however, together constitute one and the same
documents.
-1-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the day and year first above written.
[THE FUND]
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
BY: ________________________________
Name:
Title:
MERRILL LYNCH FUTURES INC.
BY: ________________________________
Name:
Title:
-2-
<PAGE>
THE FUTURES EXPANSION FUND
LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
AND JOINT VENTURE
Consolidated Financial Statements for the
years ended December 31, 1996, 1995 and
1994 and Independent Auditors' Report
<PAGE>
To: The Limited Partners of The Futures Expansion Fund Limited Partnership
The Futures Expansion Fund Limited Partnership (the "Fund" or the "Partnership")
ended its ninth fiscal year of trading on December 31, 1996 with a Net Asset
Value ("NAV") per Unit of $260.29, representing an increase of 8.93% from the
December 31, 1995 NAV per Unit of $238.96.
1996 proved to be a profitable year for the Fund. We continue to work diligently
with the Trading Advisor to meet the Fund's objective and look forward to 1997
and the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President and Chief Executive Officer
Merrill Lynch Investment Partners Inc.
(General Partner)
Report of the Trading Advisor
During 1996, the Fund's currency, interest rate and energy trading was
profitable; metals trading was narrowly unprofitable and agricultural commodity
trading was unprofitable.
The most profitable sector of the Fund's portfolio in 1996 was currencies, and
the principal feature of the currency markets was the strength of the U.S.
dollar. The major part of the Fund's currency trading profits resulted from
short positions in the Japanese yen, Swiss franc and British pound.
The interest rate futures sector of the portfolio was also quite profitable in
1996. The Fund was able to exploit declining European, Japanese and Australian
interest rates with long positions in French, German, Italian, Japanese and
Australian 10-year government bonds futures. Short-term interest-rate futures
and U.S. 10-year note and 30-year bond futures were unprofitable in 1996.
Energy trading was also quite profitable for the Fund in 1996. Although the Fund
held both long and short positions during the year, the bulk of the energy
profits resulted from long positions in natural gas, crude oil, heating oil,
London gasoil and unleaded gasoline.
The metals sector resulted in a small loss in 1996 with a loss from nickel
trading outweighing small gains from copper, aluminum, gold and silver trading.
In the agricultural commodity sector of the portfolio, corn and cocoa profits
were substantially outweighed by losses in cotton, coffee, orange juice and
sugar.
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, 1996, 1995 AND 1994:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-11
<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, 1996
and 1995, and the related consolidated statements of income and changes in
partners' capital for each of the three years in the period ended December 31,
1996. 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, 1996 and 1995 and the results of their operations for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 3, 1997
New York, New York
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
- --------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Accrued interest (Note 3) $ 35,182 $ 39,699
Equity in commodity futures trading accounts:
Cash and options premiums 9,669,947 9,860,595
Net unrealized profit on open contracts 537,505 576,906
----------- -----------
TOTAL $10,242,634 $10,477,200
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 39,043 $ 7,169
Brokerage commissions payable (Note 3) 99,580 103,775
Administrative fees payable (Note 3) 2,133 -
Profit shares payable (Note 2) 206,262 475,153
----------- -----------
Total liabilities 347,018 586,097
----------- -----------
PARTNERS' CAPITAL:
General Partner (518 and 518 units) 134,829 123,779
Limited Partners (37,500 and 40,875 units) 9,760,787 9,767,324
----------- -----------
Total partners' capital 9,895,616 9,891,103
----------- -----------
TOTAL $10,242,634 $10,477,200
=========== ===========
NET ASSET VALUE PER UNIT $260.29 $238.96
======= =======
</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, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Trading profit (loss):
Realized $1,800,104 $2,689,922 $2,206,016
Change in unrealized (39,401) 405,757 (891,323)
-------------- --------------- ---------------
Total trading results 1,760,703 3,095,679 1,314,693
Interest income (Note 3) 382,717 468,023 290,482
-------------- --------------- ---------------
Total revenues 2,143,420 3,563,702 1,605,175
-------------- --------------- ---------------
EXPENSES:
Profit shares (Note 2) 206,261 471,976 119,420
Brokerage commissions (Note 3) 1,120,320 1,208,671 1,056,436
Administrative fees (Note 3) 24,001 - -
-------------- --------------- ---------------
Total expenses 1,350,582 1,680,647 1,175,856
-------------- --------------- ---------------
NET INCOME $ 792,838 $1,883,055 $ 429,319
============== =============== ===============
NET INCOME PER UNIT
Weighted average number of Units
outstanding (Note 4) 38,474 43,021 48,226
====== ====== ======
Net income per weighted average
General Partner and Limited
Partner Unit $20.61 $43.77 $8.90
====== ====== =====
</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, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partner General Partner Total
---------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
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
Redemptions (3,375) (788,325) - (788,325)
Net Income - 781,788 11,050 792,838
---------------- --------------------- ------------------- -----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 38,018 $9,760,787 $134,829 $9,895,616
================ ===================== =================== =================
</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, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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 activities on January 2, 1987 on futures.
The Partnership, through its joint venture, engages in the speculative
trading of futures, options on futures 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. which in turn is a wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch"), 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 on futures and forward contract transactions
are recorded on the trade date and open contracts are reflected in net
unrealized gain (loss) on open contracts in the Consolidated Statements of
Financial Condition at the difference between the original contract amount
and the fair value. The change in net unrealized profit (loss) on open
contracts from one period to the next is reflected in change in unrealized
in the Consolidated Statements of Income. Fair value is based on quoted
market prices on the exchange or market on which the contract is traded.
Operating Expenses
------------------
The General Partner pays for all routine operating costs (including legal,
printing, postage and similar administrative expenses of the Partnership,
including the Partnership's share of any such costs incurred
-5-
<PAGE>
by the Joint Venture (Note 2). The General Partner receives an
administrative fee as well as a portion of the brokerage commission paid
to MLF by the Partnership as reimbursement for the foregoing expenses.
Income Taxes
------------
No provision for income taxes has been made in the accompanying
consolidated 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
had been made as of December 31, 1996.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of
such Partner's Units at the Net Asset Value as of the close of business on
the last 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
assigned its rights and obligations under the Joint Venture Agreement to
the Trading Manager. The Joint Venture Agreement was renewed for the year
ended December 31, 1997. The General Partner is the manager of the Joint
Venture, while the Trading Manager has sole discretion in determining the
commodity futures, options on futures 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
The Joint Venture's U.S. dollar-denominated assets are held at MLF in cash
or short-term Treasury bills. The Joint Venture receives all interest paid
on such Treasury bills. On the cash held at MLF, the Joint Venture
receives interest from Merrill Lynch at rates ranging from .50 of 1% per
annum below the prevailing 91-day Treasury bill rate up to the full
prevailing 91-day Treasury bill rate. Merrill Lynch may derive certain
economic benefits, in excess of the interest which Merrill Lynch pays to
the Joint Venture, from possession of such cash.
-6-
<PAGE>
Merrill Lynch credits the Joint Venture with interest on the Joint
Venture's non-U.S. dollar-denominated available assets based on local
short-term rates. Merrill Lynch charges the Joint Venture Merrill Lynch's
cost of financing realized and unrealized losses on the Joint Venture's
non-U.S. dollar-denominated positions.
The Joint Venture paid brokerage commissions to MLF at a flat rate of .993
of 1% (an 11.92% annual rate) of the monthly Joint Venture's month-end
assets. Effective January 1, 1996, the percentage was reduced to .973 of
1% (an 11.67% annual rate) of the Joint Venture's month-end assets and the
Joint Venture began to pay MLIP a monthly administrative fee of .021 of 1%
(a .25% annual rate) of the Joint Venture's month-end assets (this
recharacterization had no economic effect on the Joint Venture). Month-end
assets are not reduced, for purposes of calculating brokerage commissions
and administrative fees, by any accrued commissions, administrative fees,
profit shares or other fees or charges.
MLIP estimates the round-turn equivalent commission rate charged to the
Joint Venture during the years ended December 31, 1996, 1995 and 1994, was
approximately $102, $120 and $33, respectively (not including, in
calculating round-turn equivalents, forward contracts on a
futures-equivalent basis).
MLF pays the Advisor annual consulting fees of .333 of 1% (a 4% annual
rate) of the Joint Venture's month-end assets after reduction for a
portion of the brokerage commissions.
The Joint Venture trades forward contracts through a Foreign Exchange
Service Desk (the "F/X Desk") established by MLIP, that contacts at least
two counterparties along with Merrill Lunch 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 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 charge)
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 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's 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 .25 of 1% per annum of the Joint Venture's
average month-end Net Assets.
-7-
<PAGE>
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
Units outstanding at December 31, 1996, 1995 and 1994 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.
5. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Joint Venture trades futures, options on futures and forward
contracts in interest rates, stock indices, commodities, currencies,
energy and metals. The Joint Venture's trading results revenues by
reporting category were as follows:
<TABLE>
<CAPTION>
Total Trading Results
--------------------------------------
1996 1995
---------------- ------------------
<S> <C> <C>
Interest Rates and Stock Indices $ 640,339 $1,596,343
Commodities (465,306) (115,263)
Currencies 846,362 1,292,619
Energy 845,777 509,756
Metals (106,469) (187,776)
---------------- ------------------
$1,760,703 $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 market values of the underlying
financial instruments or commodities underlying such derivative
instruments frequently result in changes in the Partnership's unrealized
profit (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 in the markets in which
the financial 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. The procedures focus primarily on monitoring the trading of
the Trading Manger, calculating the Net Asset Value of the Joint Venture
as of the close of business on each day and reviewing outstanding
positions for over-concentrations. 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 and 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.
-8-
<PAGE>
Fair Value
----------
The derivative instruments used in the Joint Venture's trading activities
are marked to market daily with the resulting unrealized profit (loss)
recorded in the Consolidated Statements of Financial Condition and the
related profit (loss) reflected in trading revenues in the Consolidated
Statements of Income. The contract/notional values of open contracts as
of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- ----------------------------------------------
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 Rates
and Stock
Indices $44,152,280 $ 7,715,055 $20,375,908 $17,124,189
Commodities 2,035,313 1,506,581 987,392 1,770,746
Currencies 32,144,464 54,783,905 19,188,424 33,984,223
Energy 1,991,507 - 4,266,468 -
Metals 1,725,155 3,277,971 1,106,950 4,593,110
---------------- ----------------- ----------------- -----------------
$82,048,719 $67,283,512 $45,925,142 $57,472,268
================ ================= ================= =================
</TABLE>
Substantially all of the Joint Venture's derivative financial instruments
outstanding as of December 31, 1996, 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, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- -------------------------------------------
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 $49,419,307 $10,883,476 $26,004,588 $21,373,095
Non-
Exchange
Traded 32,629,412 56,400,036 19,920,554 36,099,173
------------------ ------------------ ------------------ ------------------
$82,048,719 $67,283,512 $45,925,142 $57,472,268
================== ================== ================== ==================
</TABLE>
-9-
<PAGE>
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, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------- ---------------------------------------------
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 Rates
and Stock
Indices $34,097,774 $25,837,354 $30,015,746 $ 9,014,518
Commodities 1,770,860 1,475,802 1,548,022 1,302,572
Currencies 56,150,940 64,659,715 42,383,672 40,767,472
Energy 2,288,126 621,942 2,368,843 1,331,304
Metals 4,654,430 5,759,826 2,456,274 3,268,684
------------------ ------------------ ----------------- -----------------
$98,962,130 $98,354,639 $78,772,557 $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.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically
perceived to be less than those associated with over-the-counter
transactions (non-exchange-traded), 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 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
on 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.
At December 31, 1996 and 1995, $7,515,623 and $7,759,078 of the Joint
Venture's assets, respectively, were held in segregated accounts at MLF
in accordance with Commodity Futures Trading Commission regulations.
-10-
<PAGE>
The gross unrealized profit and the net unrealized profit (loss) on the
Joint Venture's open derivative instrument positions as of December 31,
1996 and 1995 were are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ----------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit (Loss) Profit Profit (Loss)
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Exchange-Traded $ 458,316 $325,910 $ 892,375 $674,608
Non-Exchange-Traded 791,431 211,595 205,307 (97,702)
---------------- -------------- ---------------- --------------
$1,249,747 $537,505 $1,097,682 $576,906
================ ============== ================ ==============
</TABLE>
The Partnership, through its normal course of business, enters into
various contracts with MLF acting as its commodity broker. Pursuant to
the brokerage arrangement with MLF, to the extent that such trading
results in receivables from and payables to MLF, these receivables and
payables are offset and reported as a net receivable or payable.
6. SUBSEQUENT EVENT
Effective February 1, 1997, the Joint Venture's brokerage commission
percentage was reduced to .792 of 1% (a 9.5% annual rate) of the Joint
Venture's month-end assets.
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
Merrill Lynch Investment Partners Inc.
General Partner of
The Futures Expansion Fund Limited Partnership
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000799824
<NAME> The Futures Expansion Fund Limited Partnership
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 0 0
<RECEIVABLES> 10,242,634 10,477,200
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 10,242,634 10,477,200
<SHORT-TERM> 0 0
<PAYABLES> 347,018 586,097
<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> 9,895,616 9,891,103
<TOTAL-LIABILITY-AND-EQUITY> 10,242,634 10,477,200
<TRADING-REVENUE> 1,760,703 3,095,679
<INTEREST-DIVIDENDS> 382,717 468,023
<COMMISSIONS> 1,120,320 1,208,671
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 792,838 1,883,055
<INCOME-PRE-EXTRAORDINARY> 792,838 1,883,055
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 792,838 1,883,055
<EPS-PRIMARY> 20.61 43.77
<EPS-DILUTED> 20.61 43.77
</TABLE>
