<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ------------------
Commission File Number 0-15298
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3365950
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-5662
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 34,185 $ 44,081
Equity in commodity futures trading accounts:
Cash and options premiums 8,171,998 9,715,506
Net unrealized profit on open contracts 972,077 435,225
----------- ------------
TOTAL $ 9,178,260 $ 10,194,812
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit Shares payable $ 129,533 $ 278,351
Brokerage commissions payable 72,658 80,591
Redemptions payable 128,433 193,011
Administrative fees payable 1,912 2,121
----------- ------------
Total liabilities 332,536 554,074
----------- ------------
PARTNERS' CAPITAL:
- -----------------
General Partner (339 and 518 Units) 95,688 142,826
Limited Partners (30999 and 34447 Units) 8,750,036 9,497,912
----------- ------------
Total partners' capital 8,845,724 9,640,738
----------- ------------
TOTAL $ 9,178,260 $ 10,194,812
=========== ============
NET ASSET VALUE PER UNIT
(Based on 31338 and 34965 Units outstanding) $ 282.27 $ 275.73
=========== ============
</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 OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ (247,935) $ 14,868 $ 130,265 $ 1,717,212
Change in unrealized 942,991 (24,152) 487,826 (535,799)
----------- ----------- ---------- ------------
Total trading results 695,056 (9,284) 618,091 1,181,413
----------- ----------- ---------- ------------
Interest income 108,409 117,311 344,403 351,712
----------- ----------- ---------- ------------
Total revenues 803,465 108,027 962,494 1,533,125
----------- ----------- ---------- ------------
EXPENSES:
Profit Shares 129,226 (4,858) 129,649 225,845
Brokerage commissions 207,590 251,391 653,246 786,984
Administrative fees 5,463 6,616 17,191 20,195
----------- ----------- ---------- ------------
Total expenses 342,279 253,149 800,086 1,033,024
----------- ----------- ---------- ------------
NET INCOME (LOSS) $ 461,186 $ (145,122) $ 162,408 $ 500,101
=========== =========== ========== ============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 32,287 36,561 33,669 37,244
=========== =========== ========== ============
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $ 14.28 $ (3.97) $ 4.82 $ 13.43
=========== =========== ========== ============
</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 nine months ended September 30, 1998 and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
--------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 38,018 $ 9,760,787 $ 134,829 $ 9,895,616
Redemptions (2,063) (577,210) - (577,210)
Net income - 493,476 6,625 500,101
------------- --------------- ----------- ---------------
PARTNERS' CAPITAL,
September 30, 1997 35,955 $ 9,677,053 $ 141,454 $ 9,818,507
============= =============== =========== ===============
PARTNERS' CAPITAL,
December 31, 1997 34,965 $ 9,497,912 $ 142,826 $ 9,640,738
Redemptions (3,627) (909,980) (47,442) (957,422)
Net income - 162,104 304 162,408
------------- --------------- ----------- ---------------
PARTNERS' CAPITAL,
September 30, 1998 31,338 $ 8,750,036 $ 95,688 $ 8,845,724
============= =============== =========== ===============
</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
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the
opinion of management, the consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary
to present fairly the financial position of The Futures Expansion Fund
Limited Partnership (the "Partnership" or the "Fund") as of September
30, 1998 and the results of its operations for the nine months ended
September 30, 1998 and 1997. However, the operating results for the
interim periods may not be indicative of the results expected for the
full year.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997 (the "Annual
Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's total trading results by reporting category for the
respective periods are as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest rate &
Stock indices $ 1,257,799 $ 309,556 $ 942,940 $ 531,963
Commodities (156,094) (311,788) 19,560 22,500
Currencies (121,537) 222,916 (346,984) 1,373,666
Energy (10,904) 49,222 240,435 (169,563)
Metals (274,208) (279,190) (237,860) (577,153)
-------------- ------------- ------------ ------------
$ 695,056 $ (9,284) $ 618,091 $ 1,181,413
============== ============= ============ ============
</TABLE>
5
<PAGE>
The contract/notional values of the Partnership's open derivative instrument
positions as of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock Indices $ 46,671,467 $ 1,722,673 $ 33,617,268 $ 16,297,078
Commodities 807,030 1,364,008 1,853,301 1,608,555
Currencies 30,467,197 21,141,137 16,123,114 24,881,223
Energy 1,622,844 - - 2,919,411
Metals 3,275,362 3,828,281 921,166 3,847,958
---------------- --------------- --------------- ---------------
$ 82,843,900 $ 28,056,099 $ 52,514,849 $ 49,554,225
================ =============== =============== ===============
</TABLE>
The contract/notional values of the Partnership's exchange-traded and
non-exchange traded derivative instrument positions as of September 30, 1998 and
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -----------------------------------------
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 $ 49,709,778 $ 3,961,801 $ 36,346,629 $ 21,506,634
Non-Exchange
traded 33,134,122 24,094,298 16,168,220 28,047,591
---------------- --------------- --------------- ---------------
$ 82,843,900 $ 28,056,099 $ 52,514,849 $ 49,554,225
================ =============== =============== ===============
</TABLE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the nine months ended September 30, 1998 and the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock Indices $ 34,048,634 $ 16,808,489 $ 41,346,354 $ 24,621,142
Commodities 906,840 1,657,416 1,878,924 1,911,620
Currencies 46,840,004 48,158,822 51,748,337 57,472,839
Energy 825,819 1,575,802 2,157,602 1,639,384
Metals 3,321,617 3,797,534 4,407,862 4,749,545
---------------- --------------- ---------------- ---------------
$ 85,942,914 $ 71,998,063 $ 101,539,079 $ 90,394,530
================ =============== ================ ===============
</TABLE>
6
<PAGE>
The gross unrealized profit and the net unrealized profit on the Partnership's
open derivative instrument positions as of September 30, 1998 and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ -------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Exchange
traded $ 844,375 $ 755,958 $ 492,147 $ 398,368
Non-Exchange
traded 1,015,186 216,119 394,483 36,857
-------------- ------------- ------------ -----------
$ 1,859,561 $ 972,077 $ 886,630 $ 435,225
============== ============= ============ ============
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr May Jun Jul Aug Sep
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $277.32 $292.65 $283.51 $274.35 $277.52 $277.13 $295.54 $270.69 $273.08
- -------------------------------------------------------------------------------------
1998 $281.99 $274.64 $277.27 $254.92 $265.04 $267.36 $250.99 $268.54 $282.27
- -------------------------------------------------------------------------------------
</TABLE>
Performance Summary
JANUARY 1, 1997 TO SEPTEMBER 30, 1997 BY QUARTER
January 1, 1997 to March 31, 1997
In the currency markets, the U.S. dollar rallied and started 1997 on a strong
note, rising to a four-year high versus the Japanese yen and two-and-a-half year
highs versus the Deutsche mark and the Swiss franc. Currency trading was
profitable in January and February.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. Gains were apparent in interest
rate trading during February and March.
In the energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Energy trading proved
profitable in February; losses, however, occurred in January and March.
April 1, 1997 to June 30, 1997
In the currency markets, the dollar underwent a significant correction in the
Spring against the Japanese yen due to the G7 finance ministers' determination
that a further dollar advance would be counter-productive to their current
goals. Currency trading was unprofitable for the quarter.
Global interest rate and stock indices trading provided profitable results for
the quarter. During April, U.S. bond prices moved in a directionless pattern, as
investors remained concerned over inflation and its impact on further increases
in interest rates by the U.S. Federal Reserve. World stock markets generally
rose in June, and long positions in Japanese Nikkei and Topix indices, the Hong
Kong Hang Seng index and the Australian All Ordinaries index was profitable.
Energy trading was unprofitable for the quarter. In June crude oil trended
downward during the beginning of the month, before a sudden price reversal
occurred amid speculation that Iraq exports could be delayed until August. Price
movement of heating oil and unleaded gas proved to be trendless.
7
<PAGE>
July 1, 1997 to September 30, 1997
In the currency markets, the U.S. dollar rose dramatically in July, reflecting
the dollar's role as a haven for currency traders skeptical over the "Euro", the
new single European currency that is supposed to start replacing several
European national denominations 1n 1999. Beginning in August, the dollar
corrected against the Eurocurrencies in advance of well-advertised tightening by
the Bundesbank. Currency trading was profitable for the quarter.
Global interest rate trading was profitable for the quarter. Economic data in
key countries was positive indicating lower inflation and igniting a worldwide
rally in the bond markets. Specifically, investor sentiment was particularly
strong in the U.S., where prices on the 30-year Treasury bond and 10-year
Treasury note rose to their highest levels in over two years. This followed a
largely positive economic report delivered by Federal Reserve Chairman Greenspan
in testimony before Congress.
Energy trading was profitable for the quarter. By the middle of the year, the
decline in prices reversed sharply as Saudi Arabia and Iran, together
representing about 45% of OPEC's oil production joined forces to pressure
oil-producing nations to stay within OPEC production quotas.
JANUARY 1, 1998 TO SEPTEMBER 30, 1998 BY QUARTER
January 1, 1998 to March 31, 1998
The principal feature of the currency markets in the first quarter was U.S.
dollar strength. Short positions versus the dollar in the Japanese yen, Swiss
franc, German mark and Spanish peseta were profitable. Swiss franc and German
mark puts were profitable as well.
In the energy markets, short positions in crude oil, heating oil, London gas oil
and unleaded gasoline and a long position in natural gas were profitable.
Stock index futures trading was unprofitable in the first quarter due primarily
to losses on short positions in the Japanese Nikkei and Topix, the Hong Kong
Hang Seng and the Standard & Poor's 500(R) Stock indices.
Losses were also sustained in agricultural commodity trading. Short positions in
cotton and both sides of London cocoa and coffee were unprofitable. Short
positions in sugar and corn were profitable.
Interest rates were flat, with gains on French, German, Italian and Spanish
10-year government bonds and short-term Eurodollar deposits offset by losses in
Australian, Japanese and Canadian 10-year government bonds and short-term
Euroyen deposits.
Metals were also flat in the first quarter, with gains in nickel and aluminum
offset by losses in gold, copper and silver.
April 1, 1998 to June 30, 1998
In the currency sector of the portfolio, profits from short positions in the
Japanese yen were outweighed by losses from European currency trading against
the U.S. dollar. Non-dollar cross rate trading was narrowly profitable.
In the interest rate sector of the portfolio, long positions in the Japanese
10-year government bonds were profitable but these gains were outweighed by
losses from U.S., European, Canadian and Australian interest rate futures
trading.
In the stock index sector of the portfolio, a short position in the Hong Kong
Hang Seng index and both sides of the Standard & Poor's 500(R) Stock Index were
profitable. Small losses were sustained in Australian and Japanese stock index
futures trading.
In the energy sector of the portfolio, profits from short positions in London
aluminum and zinc outweighed losses on short positions in gold and copper.
In agricultural commodities, short positions in sugar and coffee were quite
profitable, as was a long position in cotton. Small losses were sustained in
trading cocoa and orange juice.
July 1, 1998 to September 30, 1998
Declining interest rates in the industrialized countries resulted in profits on
long positions in Japanese, German, French, Italian and Spanish 10-year
government bonds, U.S. Treasury 10-year notes and 30-year bonds, and short-term
Eurodollar deposits.
8
<PAGE>
Commodity trading was unprofitable in the third quarter with losses on copper
and aluminum, natural gas and unleaded gasoline, and coffee and cotton
outweighing gains on crude oil, heating oil and London gasoil, sugar and corn.
Currency trading was narrowly unprofitable. Losses on short positions in
European currencies in July and August outweighed gains on long positions in
September.
In stock index futures trading, losses on short positions in the Australian All
Ordinaries and the Japanese Nikkei indices outweighed gains on a short position
in the Hong Kong Hang Seng index.
Year 2000 Compliance
- --------------------
As the millennium approaches, Merrill Lynch has undertaken initiatives to
address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly interpret the year as
1900. Left uncorrected, the Y2K problem may cause information technology
systems (e.g., computer databases) and non-information technology systems (e.g.,
elevators) to produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal Y2K
problem and that the company is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. Merrill Lynch
expects the renovation phase (as discussed below) of its Year 2000 efforts to be
substantially completed by December 31, 1998, thereby allowing the company to
focus on additional testing efforts and integration of the Year 2000 programs of
recent acquisitions during 1999. In order to focus attention on the Y2K
problem, management has deferred certain other technology projects; however this
deferral is not expected to have a material adverse effect on the company's
business, results of operations, or financial condition.
The failure of Merrill Lynch's technology systems relating to a Y2K problem
would likely have a material adverse effect on the company's business, results
of operations, or financial condition. This effect could include disruption of
normal business transactions, such as the settlement, execution, processing, and
recording of trades in securities, commodities, currencies, and other assets.
The Y2K problem could also increase Merrill Lynch's exposure to risk and its
need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative, which
is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been organized
into six segments or phases: planning, pre-renovation, renovation, production
testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000 Compliance
Initiative, including its annual budget and strategy, and determining the level
of expert knowledge available within Merrill Lynch regarding particular systems
or applications. The pre-renovation phase involved developing a detailed
enterprisewide inventory of applications and systems, identifying the scope of
necessary renovations to each application or system, and establishing a
conversion schedule. During the renovation phase, source codes are actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase validates that a system can run successfully in a Year 2000
environment. Finally, the integration testing phase, which will occur
throughout 1999, validates that a system can successfully interface with both
internal and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and testing
of computer systems for the Y2K problem were approved. All plans for both
mission-critical and non-mission-critical systems are tracked and monitored.
The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.
As part of the production testing and certification phases, Merrill Lynch has
performed, and will continue to perform, both internal and external Year 2000
testing intended to address the risks from the Y2K problem. In July 1998,
Merrill Lynch participated in an industrywide Year 2000 systems test sponsored
by the Securities Industry Association ("SIA"), in which selected firms tested
their computer systems in mock stock trades that simulated dates in December
1999 and January 2000. Merrill Lynch will participate in further industrywide
testing sponsored by the SIA, currently scheduled for March and April 1999,
which will involve an expanded number of firms, transactions, and conditions.
Merrill Lynch also participated in a test sponsored by the Bank of England's
Central Gilts Office.
Each business area within Merrill Lynch also continues to develop specific
contingency plans, with the particular choice of contingency action dependent on
the severity of the problem being addressed, the availability of alternative
products, and the level of importance of the business activity supported by the
problematic system. As part of the Year 2000 Compliance Initiative, Merrill
Lynch has undertaken a business readiness/risk management effort in which each
line of business will identify scenarios in order to develop plans to reduce
risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with whom it
has important relationships that may be associated with information technology
Y2K problems, as well as parties that may be associated with non-information
technology Y2K problems, such as landlords. Management is unable, at this
point, to ascertain whether all such third parties will successfully address the
Y2K problem, particularly parties outside the U.S., where it is believed that
remediation efforts relating to the Y2K problem may be less advanced than in the
U.S. Merrill Lynch will continue to monitor third parties' Year 2000 readiness
to determine whether additional or alternative measures are necessary. Such
measures may include the selection of alternate third parties or other efforts
designed to mitigate some of the effects of a third party's noncompliance. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation efforts will be successful.
The failure of securities exchanges, clearing organizations, vendors, clients,
or regulators to resolve their own processing issues in a timely manner could
have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated to the
Year 2000 Compliance Initiative. As of the end of the 1998 third quarter, the
total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160 million
is remaining. The majority of these remaining expenditures are expected to
cover software remediation, testing, and contingency planning. There can be no
assurance that the costs associated with such remediation efforts will not
exceed those currently anticipated by Merrill Lynch, or that the costs
associated with the remediation efforts or the possible failure of such
remediation efforts would not have a material adverse effect on Merrill Lynch's
business, results of operations, or financial condition.
European Economic and Monetary Union ("EMU")
- --------------------------------------------
As of January 1, 1999, the "euro" will be adopted as the common legal currency
of participating member states of the EMU. The euro and participating member
currencies will co-exist through July 1, 2002, with the euro gradually replacing
member national currencies. The introduction of and conversion to the euro is
expected to have significant implications for the business, as well as the
computer systems and operational processes, of Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the European financial markets, including the creation
of a unified, more liquid capital market in Europe. As financial markets in EMU
member states converge and local barriers are removed, competition is expected
to increase. Merrill Lynch does not expect the introduction of the euro to have
a negative effect on its business, currency risk, or competitive positioning in
the European markets. The International Swaps and Derivatives Association, Inc.
has established an EMU protocol agreement that parties to derivatives contracts
may use to amend their agreements to ensure continuity of contract during the
conversion period. Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to the
euro and the associated systems and operational implications and challenges has
been divided into three phases: analysis, mobilization, and implementation. The
analysis phase began in the third quarter of 1997 and focused upon analyzing the
likely implications of the EMU and assessing the operational and systems impact
on Merrill Lynch. During this phase, a database containing the primary
compliance challenges of the EMU was developed, and working groups were
established to drive the EMU preparation effort within the different product
lines and principal operating locations. The mobilization phase began in the
fourth quarter of 1997 and focused upon developing project plans and
establishing an organizational and project structure to address various business
requirements. The implementation phase, which began in December 1997, is
concerned with implementing the operational and systems changes identified as
necessary to ensure Merrill Lynch's compliance with EMU. The implementation
phase is expected to continue into the first quarter of 1999 to resolve any
post-conversion issues.
With respect to operational and systems matters, the introduction of the euro
will affect all Merrill Lynch facilities that transact, distribute, or provide
custody or recordkeeping for securities or cash denominated in the currency of a
participating member state. Merrill Lynch systems or procedures that handle
such securities or cash may require modification. The procedural and systems
modifications that Merrill Lynch has identified as necessary for conversion to
the euro include, but are not limited to, such activities as:
. modification of application systems to enable the systems to recognize and
process the euro on an ongoing basis;
. conversion of data, which will require updates to master files to reflect
redenomination;
. alteration of transaction data that includes converting trading and cash
positions from member currency to the euro;
. procedural modifications to reflect the replacement of member currency bank
accounts and settlement instructions with euro equivalents; and
. development of the capability for certain business functions to translate
member currencies into euro at a fixed exchange rate until July 2002.
The introduction of the euro exposes Merrill Lynch to operational and systems
risks in that the necessary systems modifications will affect clearance,
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper accounting
for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent on
the euro-compliance of third parties, such as trading counterparties, financial
intermediaries (for example, securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors. Merrill Lynch will
monitor risks associated with third parties on a regular basis, including, for
example, performing assessments of counterparties' readiness.
In anticipation of the introduction of the euro, the financial authorities and
securities exchanges of certain of the EMU member states are conducting market
tests to assess euro-conversion readiness. Merrill Lynch is participating in
such testing procedures as required, and to date the outcome of each of those
tests has been satisfactory. In addition to participating in the testing
procedures of the EMU member states' financial authorities and securities
exchanges, Merrill Lynch also is implementing its own internal testing
procedures, including four systemwide practice sessions, to prepare for the
conversion. The purpose of these practice sessions is to better ensure that the
conversion plans are comprehensive and that the schedule is acceptable. The
results of such practice sessions will be evaluated and used to identify those
areas in which further modification or remediation is necessary. While Merrill
Lynch will engage in these testing procedures, certain elements of the
conversion process can only be undertaken for the first time during the
conversion. Accordingly, there can be no assurances that the tests will
identify all system deficiencies and necessary modifications prior to the
conversion.
Due to the unprecedented scale of change, including the volume and magnitude
of transactions affected and the number of third parties involved, market
participants are anticipating a period of some disruption immediately following
the conversion. Merrill Lynch has developed, and is continuing to develop,
contingency plans in an effort to reduce the impact of such disruptions on its
business.
As of the end of the 1998 third quarter, the total estimated expenditures
associated with the introduction of and conversion to the euro are expected to
be approximately $79 million, of which approximately $20 million is remaining
(of these amounts, $71 million and $19 million, respectively, pertain to 1998).
These remaining expenditures are expected to be spent on EMU compliance efforts
and project administration. Merrill Lynch expects to become fully EMU-compliant
during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those systems and
operational modifications necessary for the conversion to the euro and is in the
process of implementing the identified modifications. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will not
have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
There are no exhibits required to be filed as part of
this document.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the nine
months of fiscal 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 11, 1998 By /s/ JO ANN DI DARIO
-------------------
Jo Ann Di Dario
Vice President, Chief Financial Officer
and Treasurer
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