<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-15298
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3365950
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
----------------------------
(Address of principal executive offices)
(Zip Code)
609-282-6996
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
- ------
Equity in commodity futures trading accounts:
Cash and option premiums $ 8,252,433 $ 8,505,137
Net unrealized profit on open contracts 89,462 258,842
Accrued interest 32,125 30,544
------------------- -------------------
TOTAL $ 8,374,020 $ 8,794,523
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit Shares payable $ 10,993 $ 116,259
Brokerage commissions payable 66,294 69,620
Redemptions payable 177,384 47,201
Administrative fees payable 1,746 1,832
------------------- -------------------
Total liabilities 256,417 234,912
------------------- -------------------
PARTNERS' CAPITAL:
General Partners (339 and 339 Units) 93,518 94,122
Limited Partners (29,087 and 30,490 Units) 8,024,085 8,465,489
------------------- -------------------
Total partners' capital 8,117,603 8,559,611
------------------- -------------------
TOTAL $ 8,374,020 $ 8,794,523
=================== ===================
NET ASSET VALUE PER UNIT
(Based on 29,426 and 30,829 Units outstanding) $ 275.86 $ 277.65
=================== ===================
</TABLE>
See notes to consolidated financial statements.
2
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THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, March 31,
1999 1998
------------------- ---------------------
<S> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 279,849 $ 386,389
Change in unrealized (218,516) (174,955)
------------------- ---------------------
Total trading results 61,333 211,434
------------------- ---------------------
Interest income 93,642 124,335
------------------- ---------------------
Total revenues 154,975 335,769
------------------- ---------------------
EXPENSES:
Profit Shares 10,994 42,662
Brokerage commissions 197,966 232,670
Administrative fees 5,210 6,123
------------------- ---------------------
Total expenses 214,170 281,455
------------------- ---------------------
NET INCOME $ (59,195) $ 54,314
=================== =====================
NET INCOME PER UNIT:
Weighted average number of
units outstanding 30,505 34,817
=================== =====================
Weighted average net
income per Limited Partner
and General Partner Unit $ (1.94) $ 1.56
=================== =====================
</TABLE>
See notes to consolidated financial statements.
3
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THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------------------
For the three months ended March 31, 1999 and 1998
--------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1997 34,965 $ 9,497,912 $ 142,826 $ 9,640,738
Net income - 53,516 798 54,314
Redemptions (360) (100,243) - (100,243)
------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 1998 34,605 9,451,185 $ 143,624 $ 9,594,809
============= ================= ================= =================
PARTNERS' CAPITAL,
December 31, 1998 30,829 $ 8,465,489 $ 94,122 $ 8,559,611
Net loss - (58,591) (604) (59,195)
Redemptions (1,403) (382,813) - (382,813)
------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 1999 29,426 $ 8,024,085 $ 93,518 $ 8,117,603
============= ================= ================= =================
</TABLE>
See notes to consolidated financial statements.
4
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THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared without audit. In
the opinion of management, the consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of The Futures Expansion Fund Limited
Partnership/Joint Venture (the "Partnership" or the "Fund") as of March 31,
1999 and December 31, 1998, and the results of its operations for the three
months ended March 31, 1999 and 1998. However, the operating results for the
interim periods may not be indicative of the results expected for the full
year.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1998 (the "Annual
Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for fiscal
years beginning after June 15, 1999. This Statement supercedes SFAS No. 119
("Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments") and SFAS No. 105 ("Disclosure of information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments
with Concentrations of Credit Risk") whereby disclosure of average aggregate
fair values and contract/notional values, respectively, of derivative
financial instruments is no longer required for an entity such as the
Partnership which carries its assets at fair value. Such Statement sets
forth a much broader definition of a derivative instrument. The General
Partner does not believe that the application of the provisions of such
statement has a significant effect on the financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other contract
that has all three of the following characteristics (1) one or more
underlyings, notional amounts or payment provisions (2) requires no initial
net investment or a smaller initial net investment than would be required
relative to changes in market factors (3) terms require or permit net
settlement. Generally, derivatives include a future, forward, swap or option
contract, or other financial instrument with similar characteristics such as
caps, floors and collars.
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 the market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's net 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 such derivative
instruments held by the Joint Venture as well as the volatility and liquidity
in the markets in which the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk
exposure, 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
5
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begun to deviate from past practice and trading policies or to be trading
erratically (which has not occurred to date), the General Partner's basic
risk control procedures consist simply of the ongoing process of Trading
Manager monitoring with the market risk controls being applied by the Trading
Manager.
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 credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit included on the Consolidated
Statements of Financial Condition.
The Joint Venture has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively with
Merrill Lynch entities as counterparties and brokers.
6
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
MONTH-END NET ASSET VALUE PER UNIT
--------------------------------------
Jan. Feb. Mar.
--------------------------------------
1998 $281.99 $274.64 $277.27
--------------------------------------
1999 $264.44 $272.54 $275.86
--------------------------------------
Performance Summary
January 1, 1998 to March 31, 1998
The principal feature of the currency markets in the first quarter was U.S.
dollar strength. Short positions versus the dollar in the Japanese yen, Swiss
franc, German mark and Spanish peseta were profitable. Swiss franc and German
mark puts were profitable as well.
In the energy markets, short positions in crude oil, heating oil, London gas
oil and unleaded gasoline and a long position in natural gas were profitable.
Stock index futures trading was unprofitable in the first quarter due
primarily to losses on short positions in the Japanese Nikkei and Topix, the
Hong Kong Hang Seng and the Standard & Poor's 500(R) Stock indices.
Losses were also sustained in agricultural commodity trading. Short
positions in cotton and both sides of London cocoa and coffee were unprofitable.
Short positions in sugar and corn were profitable.
Interest rates were flat, with gains on French, German, Italian and Spanish
10-year government bonds and short-term Eurodollar deposits offset by losses in
Australian, Japanese and Canadian 10-year government bonds and short-term
Euroyen deposits.
Metals were also flat in the first quarter, with gains in nickel and
aluminum offset by losses in gold, copper and silver.
January 1, 1999 to March 31, 1999
In the first quarter of 1999, currency, interest rate and energy trading was
profitable while losses were incurred in metal and agricultural commodity
trading. A small loss was incurred in stock index futures trading as well.
In currency trading versus the dollar, short positions in European
currencies, particularly the Euro, were quite profitable, notwithstanding the
common knowledge that the new Euro would be a strong currency. These gains
outweighed losses from yen trading.
Energy prices increased in the latter part of the quarter, and gains on long
positions in crude oil, heating oil, unleaded gasoline and London gasoil
substantially exceeded the losses on short positions held earlier in the year.
Interest rate trading was profitable in the first quarter due to long
positions in European interest rate futures and short positions in U.S. interest
rate futures. These gains outweighed losses on short positions in Japanese
government bond futures which had been very profitable in December. Losses on
these short positions were partially recouped in March by profits on long
positions.
In the stock index sector of the portfolio, losses on a short position in
the Hong Kong Hang Seng index outweighed profits on long positions in the
Japanese Nikkei and Topix indices.
In the agricultural commodity markets coffee, sugar and corn trading were
unprofitable.
In the metals sector of the portfolio, losses on industrial metal trading
outweighed a gain on a short position in gold.
7
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THE YEAR 2000 COMPUTER ISSUE
As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address
the Year 2000 problem (the "Y2K problem"), as more fully described in the
Partnership's 1998 Form 10-K. The failure of Merrill Lynch's technology systems
relating to a Y2K problem would likely have a material adverse effect on the
company's business, results of operations, and financial condition. This effect
could include disruption of normal business transactions, such as the
settlement, execution, processing, and recording of trades in securities,
commodities, currencies, and other assets. The Y2K problem could also increase
Merrill Lynch's exposure to risk and legal liability and its need for liquidity.
The renovation phase of Merrill Lynch's Year 2000 efforts, as described in the
Partnership's 1998 Form 10-K, was approximately 99.7% completed as of April 16,
1999, and production testing was approximately 99.1% completed as of that date.
In March and April 1999, Merrill Lynch continued its participation in U.S.
industrywide testing sponsored by the Securities Industry Association. These
tests involved an expanded number of firms, transactions, and conditions
compared with those previously conducted.
In light of the interdependency of the parties in or serving the financial
markets, there can be no assurance that all Y2K problems will be identified and
remedied on a timely basis or that all remediation will be successful.
Disruption or suspension of activity in the world's financial markets is also
possible. In some non-U.S. markets in which Merrill Lynch does business, the
level of awareness and remediation efforts relating to the Y2K problem are
thought to be less advanced than in the U.S. Management is unable at this point
to ascertain whether all significant third parties will successfully address the
Y2K problem. Merrill Lynch will continue to monitor third parties' Year 2000
readiness to determine if additional or alternative measures are necessary. The
failure of exchanges, clearing organizations, vendors, service providers,
clients and counterparties, regulators, or others to resolve their own
processing issues in a timely manner could have a material adverse effect on
Merrill Lynch's business, results of operations, and financial condition.
As of March 26, 1999, the total estimated expenditures for the Year 2000
compliance initiative are approximately $520 million. This estimate includes
$104 million of occupancy, communications, and other related overhead
expenditures as Merrill Lynch is applying a fully costed pricing methodology for
this project. Of the total estimated expenditures, approximately $157 million
remains to be spent, primarily on continued testing, contingency planning, and
risk management. There can be no assurance that the costs associated with
remediation efforts will not exceed those currently anticipated by Merrill
Lynch, or that the possible failure of such remediation efforts will not have a
material adverse effect on Merrill Lynch's business, results of operations, or
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three months of
fiscal 1999.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 11, 1999 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 11, 1999 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 0 0
<RECEIVABLES> 8,374,020 9,737,380
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 8,374,020 9,737,380
<SHORT-TERM> 0 0
<PAYABLES> 256,417 142,571
<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> 8,117,603 9,594,809
<TOTAL-LIABILITY-AND-EQUITY> 8,374,020 9,737,380
<TRADING-REVENUE> 61,333 211,434
<INTEREST-DIVIDENDS> 93,642 124,335
<COMMISSIONS> 214,170 281,455
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (59,195) 54,314
<INCOME-PRE-EXTRAORDINARY> (59,195) 54,314
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (59,195) 54,314
<EPS-PRIMARY> (1.94) 1.56
<EPS-DILUTED> (1.94) 1.56
</TABLE>
