<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, 1997
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
----------------------------------------------
(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
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Limited Partnership Units
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant: the registrant is a limited partnership; as of February 1,
1998, limited partnership units with an aggregate value of $9,171,054 were
outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
ANNUAL REPORT FOR 1997 ON FORM 10-K
Table of Contents
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<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C>
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 7
Item 3. Legal Proceedings...................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders.................................... 7
</TABLE>
PART II
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<TABLE>
<CAPTION>
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 8
Item 6. Selected Financial Data.............................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.......................... 14
Item 8. Financial Statements and Supplementary Data.......................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 15
</TABLE>
PART III
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<TABLE>
<CAPTION>
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant................................... 15
Item 11. Executive Compensation............................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 17
Item 13. Certain Relationships and Related Transactions....................................... 18
</TABLE>
PART IV
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<TABLE>
<CAPTION>
<S> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 18
</TABLE>
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<PAGE>
PART I
ITEM 1: BUSINESS
--------
(a) General Development of Business:
-------------------------------
The Futures Expansion Fund Limited Partnership (the "Partnership" or
the "Fund") was organized under the Delaware Revised Uniform Limited Partnership
Act on August 13, 1986. Its sole public offering of units of limited partnership
interest ("Units") commenced on October 27, 1986, and the Partnership began
commodity futures, forwards and options trading on January 2, 1987 through a
Joint Venture (the "Joint Venture") with and under the direction of Millburn
Ridgefield Corporation ("Millburn Ridgefield" or the "Trading Advisor").
Millburn Ridgefield has been the Fund's sole Trading Advisor since inception.
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. The Fund's
objective is achieving, through speculative trading, substantial capital
appreciation over time.
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.")
The initial capitalization of the Fund was $56,741,035. Units were
sold only as of a single closing, January, 2, 1987. Through December 31, 1997,
Units with an aggregate Net Asset Value of $64,158,120 had been redeemed
(including December 31, 1997 redemptions which were not actually paid out until
January 1998). As of December 31, 1997, the capitalization of the Fund was
$9,640,738, and the Net Asset Value per Unit, originally $100 as of January 2,
1987, had risen to $275.73. As of December 31, 1997, the Fund had 389 Limited
Partners.
Through December 31, 1997, the net gain in the Net Asset Value per Unit was
175.73%. The highest month-end Net Asset Value per Unit through December 31,
1997 was $295.54 (July, 1997) and the lowest $100.05 (September, 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 substantial capital appreciation
over time.
One of the objectives of the Fund is to provide diversification for a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance 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.
-1-
<PAGE>
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, 1998 Millburn Ridgefield was managing approximately $798 million of client
and proprietary capital in these markets. As of such date, Millburn Ridgefield
and its affiliates were also managing over $625 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 determina tion 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.
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.
-2-
<PAGE>
USE OF PROCEEDS AND INTEREST INCOME
General. The Fund's assets are used 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 markets. 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 International 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 commitments to any of these
different types of markets.
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. 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; and (b) 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.
-3-
<PAGE>
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
----------------------------------------------------------
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 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
----------------------------------------------------------------------
Assets. Under the single currency margining system implemented for the
- ------
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 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 provided by MLF. 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.
------------------
-4-
<PAGE>
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Fund for a period prior to
November 1996. Accordingly, Merrill Lynch has credited certain amounts to the
Fund's investors (directly, not by crediting the Fund itself). For current
Merrill Lynch clients, this credit, which includes compounded interest, appeared
on the December 1997 account statements. The total amount of the adjustment is
approximately $502,000.
CHARGES
The following table summarizes the charges incurred by the Fund during
1995, 1996 and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
% OF AVERAGE % OF % OF
DOLLAR MONTH-END DOLLAR AVERAGE DOLLAR AVERAGE
COST AMOUNT NET ASSETS AMOUNT MONTH-END AMOUNT MONTH-END
- ---- ------ ------------ ------ NET ASSETS ------ NET ASSETS
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions $1,208,671 12.27% $1,120,320 11.94% $1,022,449 10.05%
Administrative - - 24,001 0.26 26,392 0.26
Fees
Profit Shares 471,976 4.79 206,261 2.20 278,351 2.73
------- ---- ------- ---- ------- ----
Total $1,680,647 17.06% $1,350,582 14.40% $1,327,192 13.04%
========== ====== ========== ====== ========== ======
</TABLE>
____________
____________________________
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."
The Fund's average month-end Net Assets during 1995, 1996 and 1997
equaled $9,852,663, $9,384,974 and $10,177,610, respectively.
During 1995, and 1996 and 1997 the Fund earned $468,023 , $382,717 and
$470,192 in interest income, or approximately 4.75%, 4.08%, and 4.62% 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 11.92% to 9.50% per annum.
-5-
<PAGE>
______________________________
DESCRIPTION OF CURRENT CHARGES
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- ---------------------------------------------------------
<S> <C> <C>
MLF Brokerage Commissions A flat-rate monthly commission of 0.7917 of 1% of the
Fund's month-end assets (a 9.50% annual rate).
During 1995, 1996, and 1997, 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 $120, $102 and $84, respectively. The
round-turn rates for 1995 and 1996 reflect Brokerage
Commissions at the rate of 11.92% per annum. As of
February 1, 1997, this rate was reduced to 9.50%.
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 The Fund pays MLIP a monthly Administrative Fee
equal to 0.020833 of 1% of the Fund's month-end
assets (0.25% annually). 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 Bid-ask spreads The counterparties other than MLIB with which the
Counterparties F/X Desk deals also each receive bid-ask spreads on
the forward trades executed with the Fund.
MLIP F/X Desk service fees 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 Profit Share 20% of any New Trading Profit achieved by the Fund
Ridgefield as of the end of each calendar year and upon
redemption of Units.
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected
Others to be negligible.
</TABLE>
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<PAGE>
REGULATION
The General Partner, Millburn Ridgefield and the Commodity Broker are
each subject to regulation by the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association. Other than in respect of its
periodic reporting requirements under the Securities Exchange Act of 1934, 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
-----------------
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP) -- as well as certain of its subsidiaries and
affiliates have been named as defendants in civil actions, arbitration
proceedings and claims arising out of their respective business activities.
Although the ultimate outcome of these actions cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with certainty, it
is the opinion of management that the result of these matters will not be
materially adverse to the business operations or the financial condition of MLIP
or the Fund.
MLIP itself has never been the subject of any material litigation.
On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF
and others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements. MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its
Limited Partners.
-7-
<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, 1997, there were 390 holders of Units, including
the General Partner.
(c) Dividends:
---------
The Partnership has made no distributions since trading commenced, nor
does the General Partner presently intend to make any distributions in the
future.
-8-
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the
audited financial statements of the Partnership.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
- --------------------- -------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain $1,551,671 $1,800,104 $2,689,922 $2,206,016 $ 369,871
Change in Unrealized (Loss) Gain (102,280) (39,401) 405,757 (891,323) 1,010,906
---------- ---------- ---------- ---------- ----------
Total Trading Results 1,449,391 1,760,703 3,095,679 1,314,693 1,380,777
Interest Income 470,192 382,717 468,023 290,482 216,417
---------- ---------- ---------- ---------- ----------
Total Revenues 1,919,583 2,143,420 3,563,702 1,605,175 1,597,194
---------- ---------- ---------- ---------- ----------
Expenses:
Brokerage Commissions 1,022,449 1,120,320 1,208,671 1,056,436 1,196,550
Administrative Fees 26,392 24,001 - - -
Profit Shares 278,351 206,261 471,976 119,420 83,410
---------- ---------- ---------- ---------- ----------
Total Expenses 1,327,192 1,350,582 1,680,647 1,175,856 1,279,960
---------- ---------- ---------- ---------- ----------
Net Income $ 592,391 $ 792,838 $1,883,055 $ 429,319 $ 317,234
========== ========== ========== ========== ==========
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
- ------------------ ---------- ---------- ---------- ---------- ----------
Fund Net Asset Value $9,640,738 $9,895,616 $9,891,103 $8,863,340 $9,610,371
Net Asset Value per Unit $275.73 $260.29 $238.96 $195.94 $185.64
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</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>
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
- ------------------------------------------------------------------------------------------------------------------
1997 $277.32 $292.65 $283.51 $274.35 $277.52 $277.13 $295.54 $270.69 $273.08 $266.48 $265.12 $275.73
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January
1, 1993, even though the Units were outstanding prior to such date.
-10-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
DECEMBER 31, 1997
Type of Pool: Single Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
Inception of Trading: January 2, 1987
Aggregate Subscriptions: $56,741,035
Current Capitalization: $9,640,738
Worst Monthly Drawdown/(2)/: (10.92)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (12.90)% (2/96-5/96)
_____________
Net Asset Value per Unit, December 31, 1997: $275.73
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- ------------------------------------------------------------
MONTH 1997 1996 1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 6.54% 5.48% (3.30)% (7.91)% (3.10)%
- ------------------------------------------------------------
February 5.53 (10.92) 6.09 (1.56) 5.14
- ------------------------------------------------------------
March (3.12) 0.44 15.22 6.67 (0.87)
- ------------------------------------------------------------
April (3.23) 4.87 3.81 (2.70) 5.23
- ------------------------------------------------------------
May 1.16 (7.17) (1.88) 4.53 (2.32)
- ------------------------------------------------------------
June (0.14) 3.66 0.68 5.06 (3.17)
- ------------------------------------------------------------
July 6.64 1.14 (3.10) (3.03) 4.29
- ------------------------------------------------------------
August (8.41) (2.37) 0.57 (6.21) (8.23)
- ------------------------------------------------------------
September 0.88 2.45 (2.29) 3.12 0.33
- ------------------------------------------------------------
October (2.42) 9.27 (0.60) 2.41 (1.77)
- ------------------------------------------------------------
November (0.51) 2.78 (0.20) 4.39 1.24
- ------------------------------------------------------------
December 4.00 0.67 6.50 1.89 7.69
- ------------------------------------------------------------
Compound Annual 5.93% 8.93% 21.95% 5.55% 3.36%
Rate of Return
- ------------------------------------------------------------
</TABLE>
(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, 1993 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, 1993 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 OPERATIONS
-------------
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
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 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.
-12-
<PAGE>
1996
1996 began with the East Coast blizzard, continuing difficulties in
federal budget talks and an economic slowdown having a negative impact on many
markets. The Fund was profitable in January due to strong profits in currency
trading as the U.S. dollar reached a 23-month high against the Japanese yen. In
February, however, the Fund incurred its worst monthly loss due to the sudden
reversals in several strong price trends and considerable volatility in the
currency and financial markets. During March, large profits were taken in the
crude oil and gasoline markets as strong demand continued and talks between the
United Nations and Iraq were suspended. This trend continued into the second
quarter, during which strong gains were also recognized in the agricultural
markets as a combination of drought and excessive rain drove wheat and grain
prices to historic highs. In the late summer and early fall months, the Fund
continued to trade profitably as trending prices in a number of key markets
favorably impacted the Fund's performance. In September heating oil hit a five-
year high on soaring prices in Europe, and the Fund was also able to capitalize
on downward trends in the metals markets. Strong trends in the currency and
global bond markets produced significant gains in October and November, but the
year ended with declining performance as December witnessed the reversal of
several strong upward trends and increased volatility in key markets.
1997
Trend reversals and extreme market volatility, affected by such factors
as the Asian flu and El Nino, were characteristic of most of 1997. However, the
year proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
In 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. However, the
dollar underwent two significant corrections during the year. The first
correction occurred 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. From August through mid-November, the dollar
corrected against the Eurocurrencies in advance of a well-advertised tightening
by the Bundesbank. By mid-December the dollar had bounced back to new highs
against the yen and was rallying against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, 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. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
In energy markets, a slump in crude oil prices was characteristic of
its lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-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. In December, financial and economic problems in Asia reduced
demand for oil, and in combination with ample supplies, resulted in crude oil
prices declining once again.
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.
-13-
<PAGE>
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.
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.
THE YEAR 2000 COMPUTER ISSUE
Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting, and computer maintenance. These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations, or cash flows in future periods. However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients, or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk. Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
Not Applicable.
-14-
<PAGE>
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.
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 directors and executive officers of MLIP as of February 1, 1998 and
their respective business backgrounds are as follows.
<TABLE>
<CAPTION>
<S> <C>
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael A. Karmelin Chief Financial Officer, Vice
President and Treasurer
Steven B. Olgin Vice President, Secretary and Director
of Administration
</TABLE>
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("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 formation in 1990 through its
dissolution in 1994. Mr. Frawley is currently serving his fourth consecutive
one-year term as Chairman of the Managed Funds Association (formerly, the
Managed Futures Association), a national trade association that represents the
managed futures, hedge funds and fund of funds industry. Mr. Frawley is also a
Director of that organization. Mr. Frawley 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.
-15-
<PAGE>
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 International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.
Joseph H. Moglia was born in 1949. He is a director of MLIP. In
1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University
of Delaware. He taught at the high school and college level for sixteen years.
Mr. Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Institutional Sales, and Director of the Municipal Division. He is
currently Senior Vice President and Director of the Investment Strategy and
Product Group in Merrill Lynch Private Client, and Director of Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and,
from July 1995 until January 1998, Mr. Jones was Chairman of the Board of
Directors 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. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From
1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree
from Harvard University, where he also served as Associates Fellow (1985-1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of MLPF&S's Structured Investments Group since 1995.
Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial
Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April
1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc.
("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin
joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From
May 1994 to April 1997, he was the Chief Financial Officer of ML Hubbard,
responsible for its accounting, treasury and tax functions. Prior to joining ML
Hubbard, Mr. Karmelin held several senior financial positions with ML&Co and
MLPF&S from December 1985 to December 1993, including Vice President/Senior
Financial Officer Corporate Real Estate and Purchasing, Manager Commitment
Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior
to joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years,
where he held a variety of financial positions. Mr. Karmelin holds a B.B.A.
degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business
Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accounting examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
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 Funds Association's Government Relations Committee
and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
Messrs. Moglia and Bodurtha became Directors in January 1998.
As of December 31, 1997, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$142,826.
-16-
<PAGE>
MLIP acts as general partner to twelve 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 L.P., The SECTOR Strategy Fund/SM/ II 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:
-----------------------------
Not applicable.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The directors and officers of the General Partner are remunerated by
the General Partner 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 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, 1997, no person or "group" is known to be or have
been the beneficial owner of more than five percent of the Units.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1997, the Trading Advisor owned 1,026 Units and the
General Partner owned 518 Units (unit-equivalent general partnership interests),
which was less than 2% of the total Units outstanding.
(c) Changes in Control:
------------------
None.
-17-
<PAGE>
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 1997 the Partnership accrued: (i) Brokerage Commissions of
$1,022,449 to the Commodity Broker, which included $211,173 in consulting fees
accrued by the Commodity Broker to the Trading Advisors; and (ii)
Administrative Fees of $26,392 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.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
(a)1. Financial Statements (found in Exhibit 13.01): Page:
----------------------------------------------------- -----
Independent Auditors' Report 1
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996 2
For the years ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-11
</TABLE>
(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.
-18-
<PAGE>
(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.
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 International Bank, Merrill Lynch Investment
Partners Inc., Merrill Lynch Futures Inc. and the Fund.
Exhibit 10.06: Is incorporated herein by reference from Exhibit 10.06
- -------------
contained in the Registrant's report on Form 10-K for the year
ended December 31, 1996.
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 incorporated herein by reference from Exhibit 10.07(a)
- ---------------- contained in the Registrant's report on Form 10-K for the year
ended December 31, 1996.
10.07(b) Form of Amendment to the Customer Agreement among the Partnership
and MLF.
Exhibit 10.07(b): Is incorporated herein by reference from Exhibit 10.07(b)
- ---------------- contained in the Registrant's report on Form 10-K for the year
ended December 31, 1996.
-19-
<PAGE>
13.01 1997 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 1997.
-20-
<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.
Chairman, Chief Executive Officer, President
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 25, 1998 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. Chairman, Chief Executive Officer, President and March 25, 1998
- -----------------------
John R. Frawley, Jr. Director (Principal Executive Officer)
/s/Michael A. Karmelin Vice President, Chief Financial Officer, and March 25, 1998
- ----------------------
Michael A. Karmelin Treasurer (Principal Financial and Accounting Officer)
/s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998
- ---------------------
Jeffrey F. Chandor Marketing and Research, and Director
/s/Allen N. Jones Director March 25, 1998
- -----------------
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>
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1998
PARTNERS INC.
</TABLE>
By: /s/John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
-21-
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1997 Annual Report and Independent Auditors' Report
-22-
<PAGE>
THE FUTURES EXPANSION FUND
LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
AND JOINT VENTURE
Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995 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 "Partnership")
ended its tenth fiscal year of trading on December 31, 1997 with a Net Asset
Value ("NAV") per Unit of $275.73, representing an increase of 5.93% from the
December 31, 1996 NAV per Unit of $260.29.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
REPORT OF THE TRADING ADVISOR
MILLBURN RIDGEFIELD
In 1997, the most profitable portfolio sector for the Fund was currencies. Also
profitable were interest rate, stock index and energy futures trading.
Agricultural commodity trading was flat. Metal futures trading was the only
portfolio sector where material losses were sustained.
In the currency sector of the portfolio, the major part of the year's profits
came from Japanese yen trading versus the U.S. dollar. Significant profits also
resulted also resulted from Deutsche mark trading versus the dollar. Toward the
end of the year, short positions in the Singapore dollar and the Malaysian
ringgit contributed to performance.
In the interest rate sector of the portfolio the most profitable geographic area
was Japan where long positions in Japanese ten-year government bonds and in
Euroyen deposits made a substantial contribution to profits. Other profitable
positions included Australian, Italian and Spanish 10-year government bonds and
U.S. Treasury 10-year notes.
In the stock index sector of the portfolio, Japan was again the most profitable
area with short positions in the Nikkei and Topix indices making substantial
profit contributions. Also profitable were the Hong Kong Hang Seng and
Australian All Ordinaries markets.
In the energy markets, profits from natural gas trading outweighed losses from
crude oil, heating oil, London gasoil and unleaded gasoline.
In agricultural commodity trading, corn was flat and wheat was unprofitable,
while in tropical "soft"
<PAGE>
commodity trading, profits on long positions in coffee outweighed losses from
London cocoa, London coffee, orange juice and sugar.
In the metals sector of the portfolio, copper, gold and zinc trading were
profitable, but these gains were substantially outweighed by losses from
aluminum and nickel trading.
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>
<CAPTION>
TABLE OF CONTENTS
- -----------------------------------------------------------------
<S> <C>
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995:
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
</TABLE>
<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 with Millburn Ridgefield
Corporation ( the "Joint Venture") as of December 31, 1997 and 1996, and the
related consolidated statements of income and changes in partners' capital for
each of the three years in the period ended December 31, 1997. 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 and its Joint Venture as of December 31, 1997 and 1996 and the
results of their operations for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
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, 1997 AND 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
ASSETS
<S> <C> <C>
Accrued interest (Note 3) $ 44,081 $ 35,182
Equity in commodity futures trading accounts:
Cash and options premiums 9,715,506 9,669,947
Net unrealized profit on open contracts 435,225 537,505
------------------ ------------------
TOTAL $ 10,194,812 $ 10,242,634
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 193,011 $ 39,043
Brokerage commissions payable (Note 3) 80,591 99,580
Administrative fees payable (Note 3) 2,121 2,133
Profit Shares payable (Note 2) 278,351 206,262
------------------ ------------------
Total liabilities 554,074 347,018
------------------ ------------------
PARTNERS' CAPITAL:
General Partner (518 Units and 518 Units) 142,826 134,829
Limited Partners (34,447 Units and 37,500 Units) 9,497,912 9,760,787
------------------ ------------------
Total partners' capital 9,640,738 9,895,616
------------------ ------------------
TOTAL $ 10,194,812 $ 10,242,634
================== ==================
NET ASSET VALUE PER UNIT
(Based on 34,965 and 38,018 Units outstanding) $ 275.73 $ 260.29
================== ==================
See notes to consolidated financial statements.
</TABLE>
-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, 1997, 1996 AND 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 1,551,671 $ 1,800,104 $ 2,689,922
Change in unrealized (102,280) (39,401) 405,757
---------------- ---------------- ----------------
Total trading results 1,449,391 1,760,703 3,095,679
Interest income (Note 3) 470,192 382,717 468,023
---------------- ---------------- ----------------
Total revenues 1,919,583 2,143,420 3,563,702
---------------- ---------------- ----------------
EXPENSES:
Profit Shares (Note 2) 278,351 206,261 471,976
Brokerage commissions (Note 3) 1,022,449 1,120,320 1,208,671
Administrative fees (Note 3) 26,392 24,001 -
---------------- ---------------- ----------------
Total expenses 1,327,192 1,350,582 1,680,647
---------------- ---------------- ----------------
NET INCOME $ 592,391 $ 792,838 $ 1,883,055
================ ================ ================
NET INCOME PER UNIT
Weighted average number of Units
outstanding (Note 4) 36,889 38,474 43,021
================ ================ ================
Net income per weighted average $ 16.06 $ 20.61 $ 43.77
General Partner and Limited
Partner Unit
================ ================ ================
See notes to consolidated financial statements.
</TABLE>
-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, 1997, 1996 AND 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partner General Partner Total
------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
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
Redemptions (3,053) (847,269) - (847,269)
Net Income - 584,394 7,997 592,391
------------ ------------------ ------------------ ----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 34,965 $ 9,497,912 $ 142,826 $ 9,640,738
============ ================== ================== ================
</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, 1997, 1996 AND 1995
- ------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Futures Expansion Fund Limited Partnership (the "Partnership") was
organized under the Delaware Revised Uniform Limited Partnership Act on August
13, 1986 and commenced trading activities on January 2, 1987. The
Partnership, through its joint venture with Millburn Ridgefield Corporation
(the "Trading Manager"), engages in the speculative trading of futures,
options on futures and forward contracts on a wide range of commodities.
Merrill Lynch Investment Partners Inc. (formerly Merrill Lynch 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 has agreed to
maintain a General Partner's interest of at least 1% of the total capital of
the Partnership. 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 97%. 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
profit on open contracts in the Consolidated Statements of Financial Condition
at the difference between the original contract value 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,
accounting, printing, postage and similar administrative expenses of the
Partnership, including the Partnership's share of any such costs incurred by
the Joint Venture (Note 2). The General Partner receives an administrative
fee as well
-5-
<PAGE>
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, 1997.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of such
Partner's Units at 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 is in effect for successive one-year terms, but in
fact given the single advisor structure of the Joint Venture, the Joint
Venture and the Partnership would terminate were the Joint Venture Agreement
not to be renewed. The Joint Venture Agreement was renewed for the year ended
December 31, 1998. 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 assets are held at MLF in cash. On the cash
held at MLF, the Joint Venture receives interest from Merrill Lynch at the
prevailing 91-day U.S. 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 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 General Partner has determined that there may have been a miscalculation
in the interest credited to the Joint Venture for a period prior to November
1996 (such period may extend prior to that covered by these financial
statements). Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997
with interest which was compounded. Former investors who do not maintain a
Merrill Lynch customer account will be credited as their response forms are
processed. The total amount of the adjustment is approximately $502,000.
Since the amount was paid directly to investors by the General Partner, it is
not reflected in these financial statements. The General Partner has
determined that interest has been calculated appropriately since November
1996.
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). Effective February 1, 1997, the Joint
Venture's brokerage commission percentage was reduced to .729 of 1% (a 9.5%
annual rate) of the Joint Venture's month-end assets. 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, 1997, 1996 and 1995, was
approximately $ 84, $102 and $120, respectively (not including, in calculating
round-turn equivalents, forward contracts on a futures-equivalent basis).
MLF paid 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. Effective January 1, 1997, the annual consulting fees
were reduced to .167 of 1% (a 2% annual rate) of the Joint Venture's month-end
assets after reduction for a portion of the brokerage commissions.
The Partnership trades forward contracts through a foreign exchange service
desk (the "F/X Desk") established by MLIP. The F/X Desk gives the Partnership
access to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB"). MLIP or another Merrill Lynch entity charges a
service fee equal to, at current exchange rates, approximately $5.00 to $12.50
on each purchase or sale (not round-turn) of a futures contract-equivalent
face amount of a given currency traded in the forward markets. No service
fees are charged on trades awarded to MLIB (which receives bid-ask spreads on
such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Partnership acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Partnership's other F/X Desk trading. When the Partnership
exchanges these positions for futures, there is a differential between the
prices of the two positions. This differential reflects, in part, the
different settlement dates of the cash and the futures contracts and
prevailing interest rates, but also includes a pricing spread in favor of MLIB
or another Merrill Lynch entity. The Advisor, to date, has made little use of
EFPs.
-7-
<PAGE>
The Partnership's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes
of disclosing net income per weighted average Unit. The weighted average
Units outstanding at December 31, 1997, 1996 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed based
on the respective length of time each was outstanding during the preceding
period.
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 total trading results revenues by reporting category for the
years ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Total Trading Results
-----------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Interest Rates and Stock Indices $ 679,273 $ 640,339 $ 1,596,343
Commodities (8,456) (465,306) (115,263)
Currencies 1,280,992 846,362 1,292,619
Energy 42,962 845,777 509,756
Metals (545,380) (106,469) (187,776)
---------------- ----------------- -----------------
$ 1,449,391 $ 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 does 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 Trading Manager 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
-8-
<PAGE>
process of Trading Manager monitoring with the market risk controls being
applied by the Trading Manager.
Fair Value
----------
The derivative instruments traded by the Joint Venture are marked to market
daily with the resulting unrealized profit 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, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------- ---------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C>
Interest Rates $ 33,617,268 $ 16,297,078 $ 44,152,280 $ 7,715,055
and Stock Indices
Commodities 1,853,301 1,608,555 2,035,313 1,506,581
Currencies 16,123,114 24,881,223 32,144,464 54,783,905
Energy - 2,919,411 1,991,507 -
Metals 921,166 3,847,958 1,725,155 3,277,971
------------------------- ------------------------- ------------------------- ------------------------
$ 52,514,849 $ 49,554,225 $ 82,048,719 $ 67,283,512
========================= ========================= ========================= ========================
</TABLE>
Substantially all of the Joint Venture's derivative financial instruments
outstanding as of December 31, 1997, expire within one year.
The contract/notional values of the Joint Venture's open exchange-traded and
non-exchange traded open derivative instrument positions as of December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------- -------------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
---------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Exchange-
Traded $ 36,346,629 $ 21,506,634 $ 49,419,307 $ 10,883,476
Non-Exchange-
Traded 16,168,220 28,047,591 32,629,412 56,400,036
---------------------- --------------------- ---------------------- ----------------------
$ 52,514,849 $ 49,554,225 $ 82,048,719 $ 67,283,512
====================== ===================== ====================== ======================
</TABLE>
-9-
<PAGE>
The average fair values, based on contract/notional values, of the Joint
Venture's derivative instrument positions which were open as of the end of
each calendar month during the years ended December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------- ---------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
--------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Rates $ 41,346,354 $ 24,621,142 $ 34,097,774 $ 25,837,354
and Stock Indices
Commodities 1,878,924 1,911,620 1,770,860 1,475,802
Currencies 51,748,337 57,472,839 56,150,940 64,659,715
Energy 2,157,602 1,639,384 2,288,126 621,942
Metals 4,407,862 4,749,545 4,654,430 5,759,826
--------------------- ---------------------- ---------------------- ---------------------
$ 101,539,079 $ 90,394,530 $ 98,962,130 $ 98,354,639
===================== ====================== ====================== =====================
</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 markets 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.
-10-
<PAGE>
The gross unrealized profit and the net unrealized profit on the Joint
Venture's open derivative instrument positions as of December 31, 1997 and
1996 were are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- --------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit Profit Profit
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exchange-
Traded $ 492,147 $ 398,368 $ 458,316 $ 325,910
Non-Exchange-
Traded 394,483 36,857 791,431 211,595
---------------- -------------- ----------------- -------------
$ 886,630 $ 435,225 $ 1,249,747 $ 537,505
================ ============== ================= =============
</TABLE>
The Partnership controls its credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Partnership, in 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.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
The Futures Expansion Fund Limited Partnership
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 0 0
<RECEIVABLES> 10,194,812 10,242,634
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 10,194,812 10,242,634
<SHORT-TERM> 0 0
<PAYABLES> 554,074 347,018
<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> 9,640,738 9,895,616
<TOTAL-LIABILITY-AND-EQUITY> 10,194,812 10,242,634
<TRADING-REVENUE> 1,449,391 1,760,703
<INTEREST-DIVIDENDS> 470,192 382,717
<COMMISSIONS> 1,022,449 1,120,320
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 592,391 792,838
<INCOME-PRE-EXTRAORDINARY> 592,391 792,838
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 592,391 792,838
<EPS-PRIMARY> 16.06 20.61
<EPS-DILUTED> 16.06 20.61
</TABLE>
