<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 ___
---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
- ------
Equity in commodity futures trading accounts:
Cash and options premiums $ 8,066,899 $ 8,505,137
Net unrealized profit on open contracts 53,122 258,842
Accrued interest 32,628 30,544
-------------- -------------
TOTAL $ 8,152,649 $ 8,794,523
============== =============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit Shares payable $ 114,414 $ 116,259
Brokerage commissions payable 64,510 69,620
Redemptions payable 113,276 47,201
Administrative fees payable 1,698 1,832
-------------- -------------
Total liabilities 293,898 234,912
-------------- -------------
PARTNERS' CAPITAL:
General Partner (339 and 339 Units) 96,000 94,122
Limited Partner (27,412 and 30,490 Units) 7,762,751 8,465,489
-------------- -------------
Total partners' capital 7,858,751 8,559,611
-------------- -------------
TOTAL $ 8,152,649 $ 8,794,523
============== =============
NET ASSET VALUE PER UNIT
(Based on 27,751 and 30,829 Units outstanding) $ 283.19 $ 277.65
============== =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 244,128 $ (247,935) $ 848,030 $ 130,265
Change in unrealized (412,562) 942,991 (254,832) 487,826
----------- ------------ ----------- -----------
Total trading results (168,434) 695,056 593,198 618,091
----------- ------------ ----------- -----------
Interest income 100,398 108,409 287,256 344,403
----------- ------------ ----------- -----------
Total revenues (68,036) 803,465 880,454 962,494
----------- ------------ ----------- -----------
EXPENSES:
Profit Shares (34,028) 129,226 114,414 129,649
Brokerage commissions 194,004 207,590 593,885 653,246
Administrative fees 5,105 5,463 15,628 17,191
----------- ------------ ----------- -----------
Total expenses 165,081 342,279 723,927 800,086
----------- ------------ ----------- -----------
NET INCOME (LOSS) $ (233,117) $ 461,186 $ 156,527 $ 162,408
=========== ============ =========== ===========
NET INCOME (LOSS) PER UNIT:
Weighted average number of units outstanding 28,329 32,287 29,286 33,669
=========== ============ =========== ===========
Weighted average net income (loss) per Limited
Partner and General Partner Unit $ (8.23) $ 14.28 $ 5.34 $ 4.82
=========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------------------
For the nine months ended September 30, 1999 and 1998
-----------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
---------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1997 34,965 $ 9,497,912 $ 142,826 $ 9,640,738
Redemptions (3,627) (909,980) (47,442) (957,422)
Net income - 162,104 304 162,408
---------- --------------- --------------- -------------
PARTNERS' CAPITAL,
September 30, 1998 31,338 $ 8,750,036 $ 95,688 $ 8,845,724
========== =============== =============== =============
PARTNERS' CAPITAL,
December 31, 1998 30,829 $ 8,465,489 $ 94,122 $ 8,559,611
Redemptions (3,078) (857,387) - (857,387)
Net income - 154,649 1,878 156,527
---------- --------------- --------------- -------------
PARTNERS' CAPITAL
September 30, 1999 27,751 $ 7,762,751 $ 96,000 $ 7,858,751
========== =============== =============== =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Delaware limited partnership)
--------------------------------
AND JOINT VENTURE
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion
of management, the consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of The Futures Expansion Fund Limited
Partnership/Joint Venture (the "Partnership" or the "Fund") as of September
30, 1999, and the results of its operations for the three and nine month
periods ended September 30, 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, 2000, however, the Fund has adopted the
Statement effective January 1, 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 Manager, 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
5
<PAGE>
the Trading Manager has 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
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $281.99 $274.64 $277.27 $254.92 $265.04 $267.36 $250.99 $268.54 $282.27
- ------------------------------------------------------------------------------------------------
1999 $264.44 $272.54 $275.86 $289.39 $279.89 $291.36 $281.46 $282.95 $283.19
- ------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary
January 1, 1998 to September 30, 1998
- -------------------------------------
January 1, 1998 to March 31, 1998
The principal feature of the currency markets in the first quarter was U.S.
dollar strength. Short positions versus the dollar in the Japanese yen, Swiss
franc, German mark and Spanish peseta were profitable. Swiss franc and German
mark puts were profitable as well.
In the energy markets, short positions in crude oil, heating oil, London gas oil
and unleaded gasoline and a long position in natural gas were profitable.
Stock index futures trading was unprofitable in the first quarter due primarily
to losses on short positions in the Japanese Nikkei and Topix, the Hong Kong
Hang Seng and the Standard & Poor's 500(R) Stock indices.
Losses were also sustained in agricultural commodity trading. Short positions in
cotton and both sides of London cocoa and coffee were unprofitable. Short
positions in sugar and corn were profitable.
Interest rates were flat, with gains on French, German, Italian and Spanish 10-
year government bonds and short-term Eurodollar deposits offset by losses in
Australian, Japanese and Canadian 10-year government bonds and short-term
Euroyen deposits.
Metals were also flat in the first quarter, with gains in nickel and aluminum
offset by losses in gold, copper and silver.
April 1, 1998 to June 30, 1998
In the currency sector of the portfolio, profits from short positions in the
Japanese yen were outweighed by losses from European currency trading against
the U.S. dollar. Non-dollar cross rate trading was narrowly profitable.
In the interest rate sector of the portfolio, long positions in the Japanese 10-
year government bonds were profitable but these gains were outweighed by losses
from U.S., European, Canadian and Australian interest rate futures trading.
In the stock index sector of the portfolio, a short position in the Hong Kong
Hang Seng index and both sides of the Standard & Poor's 500(R) Stock Index were
profitable. Small losses were sustained in Australian and Japanese stock index
futures trading.
In the energy sector of the portfolio, profits from short positions in London
aluminum and zinc outweighed losses on short positions in gold and copper.
In agricultural commodities, short positions in sugar and coffee were quite
profitable, as was a long position in cotton. Small losses were sustained in
trading cocoa and orange juice.
July 1, 1998 to September 30, 1998
Declining interest rates in the industrialized countries resulted in profits on
long positions in Japanese, German, French, Italian and Spanish 10-year
government bonds, U.S. Treasury 10-year notes and 30-year bonds, and short-term
Eurodollar deposits.
Commodity trading was unprofitable in the third quarter with losses on copper
and aluminum, natural gas and unleaded gasoline, and coffee and cotton
outweighing gains on crude oil, heating oil and London gasoil, sugar and corn.
Currency trading was narrowly unprofitable. Losses on short positions in
European currencies in July and August outweighed gains on long
7
<PAGE>
positions in September.
In stock index futures trading, losses on short positions in the Australian All
Ordinaries and the Japanese Nikkei indices outweighed gains on a short position
in the Hong Kong Hang Seng index.
January 1, 1999 to September 30, 1999
- -------------------------------------
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.
April 1, 1999 to June 30, 1999
Interest rates generally rose during the second quarter, and short positions in
Japanese 10-year bonds and short-term Euroyen deposits, U.S. Treasury 10-year
and 5-year notes, and German, French and Italian 10-year bonds were profitable.
In currency trading, profits from short positions versus the dollar in the Euro,
Swiss franc and Danish krone and a long position in the Korean won outweighed
losses on short positions in the yen and Norwegian krone and a long position in
the Singapore dollar. These profits were approximately offset by losses from
non-dollar cross-rate trading.
In the stock index sector of the portfolio, long positions in the Japanese
Nikkei and Topix and the Hong Kong Hang Seng Indices were profitable.
In the energy sector of the portfolio, prices fluctuated, and gains from crude
oil and natural gas outweighed losses from heating oil, London gas oil and
unleaded gasoline.
In the metals sector of the portfolio, profits on a long position in aluminum
and a short position in gold outweighed losses from copper and zinc trading.
In the agricultural commodity sector of the portfolio, long positions in corn,
soybeans, wheat and coffee were unprofitable as was a short position in cotton.
July 1, 1999 to September 30, 1999
In the third quarter of 1999, losses from interest rate, stock index and
currency trading narrowly outweighed profits from metal, energy and agricultural
commodity trading.
In the interest rare sector of the portfolio, a loss was incurred on a short
position in Japanese 10-year bonds as interest rates reversed course and fell.
Short positions in U.S. Treasury 5 and 10-year notes and short-term Eurodollar
deposits were also unprofitable. Short positions in European bond futures were
profitable.
Long positions in Japanese and Hong Kong stock index futures were unprofitable
in the third quarter.
Profits on long positions in the yen and a short position in the Thai baht were
outweighed by losses on short positions in the Swiss franc and Euro. Non-dollar
cross rate trading was profitable due to the strength in the yen, but, overall,
currency trading resulted in a small loss.
Metal trading was profitable in the quarter due primarily to gains on a short
position in gold early in the quarter and a long position in gold in September.
Gold made a spectacular move up when central banks announced they would limit
futures gold sales. Gold had been in a downtrend for an extended period, and the
sudden spike caught many market participants with short positions they were
forced to cover.
Energy was profitable in the quarter. Long positions in crude oil, heating oil,
unleaded gasoline and London gas oil benefited from OPEC's success in limiting
production.
8
<PAGE>
Agricultural commodity trading was narrowly profitable in the quarter.
YEAR 2000 COMPLIANCE
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 1998
Annual Report. 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 system efforts, as described
in the 1998 Annual Report, was 100% completed as of June 30, 1999, and
production testing was 100% completed as of that date. In March and April 1999,
Merrill Lynch successfully participated 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.
Merrill Lynch has participated in and continues to participate in numerous
industry tests throughout the world.
Merrill Lynch's business units have developed and tested contingency plans. The
plans identify critical processes, potential Y2K problems, and personnel,
processes, and available resources needed to maintain operations. However, the
failure of exchanges, clearing organizations, vendors, service providers,
clients and counterparties, regulators, or others 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.
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 and contingency planning will
be successful. Public uncertainty regarding successful remediation of the Y2K
problem may cause a reduction in activity in the financial markets. This could
result in reduced liquidity as well as increased volatility. 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. Merrill Lynch's
year-end balance sheet levels will depend on Y2K risks and many other factors,
including business opportunities and customer demand.
As of September 24, 1999, the total estimated expenditures of existing and
incremental resources for the Year 2000 compliance initiative was 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 $40 million, related to continued testing,
contingency planning, and risk management. There can be no assurance that the
costs associated with such efforts will not exceed those currently anticipated
by Merrill Lynch, or that the possible failure of such efforts will not have a
material adverse effect on Merrill Lynch's business, results of operations, or
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the
General Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the nine months of
fiscal 1999.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 12, 1999 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 12, 1999 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 0 0
<RECEIVABLES> 8,152,649 8,794,523
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 8,152,649 8,794,523
<SHORT-TERM> 0 0
<PAYABLES> 293,898 234,912
<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> 7,858,751 8,559,611
<TOTAL-LIABILITY-AND-EQUITY> 8,152,649 8,794,523
<TRADING-REVENUE> 593,198 618,091
<INTEREST-DIVIDENDS> 287,256 344,403
<COMMISSIONS> 723,927 800,086
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 0 0
<INCOME-PRE-EXTRAORDINARY> 156,527 162,408
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 156,527 162,408
<EPS-BASIC> 5.34 4.82
<EPS-DILUTED> 5.34 4.82
</TABLE>
