<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, 2000
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(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,
2000 1999
(unaudited)
------------------- -------------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and option premiums $ 6,414,285 $ 6,714,860
Net unrealized profit on open contracts 25,624 321,369
Accrued interest 33,241 32,088
------------------- -------------------
TOTAL $ 6,473,150 $ 7,068,317
------------------- -------------------
------------------- -------------------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Profit Shares payable $ 5,632 $ 5,571
Brokerage commissions payable 51,201 55,913
Redemptions payable 61,030 51,928
Administrative fees payable 1,347 1,471
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Total liabilities 119,210 114,883
------------------- -------------------
PARTNERS' CAPITAL:
General Partner (291 and 339 Units) 71,038 88,018
Limited Partners (25,737 and 26,442 Units) 6,282,902 6,865,416
------------------- -------------------
Total partners' capital 6,353,940 6,953,434
------------------- -------------------
TOTAL $ 6,473,150 $ 7,068,317
------------------- -------------------
------------------- -------------------
NET ASSET VALUE PER UNIT
(Based on 26,028 and 26,781 Units outstanding) $ 244.12 $ 259.64
------------------- -------------------
------------------- -------------------
</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
(unaudited)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, March 31,
2000 1999
------------------- ---------------------
<S> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ (39,003) $ 279,849
Change in unrealized (296,376) (218,516)
------------------- ---------------------
Total trading results (335,379) 61,333
Interest income 95,527 93,642
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Total revenues (239,852) 154,975
------------------- ---------------------
EXPENSES:
Profit Shares 61 10,994
Brokerage commissions 162,395 197,966
Administrative fees 4,274 5,210
------------------- ---------------------
Total expenses 166,730 214,170
------------------- ---------------------
NET LOSS $ (406,582) $ (59,195)
------------------- ---------------------
------------------- ---------------------
NET LOSS PER UNIT:
Weighted average number of
units outstanding 26,508 30,505
------------------- ---------------------
------------------- ---------------------
Weighted average net
loss per General Partner
and Limited Partner Unit $ (15.34) $ (1.94)
------------------- ---------------------
------------------- ---------------------
</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, 2000 AND MARCH 31,1999
(unaudited)
<TABLE>
<CAPTION>
General Limited
Units Partner Partners Total
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1998 30,829 $ 94,122 $ 8,465,489 $ 8,559,611
Net loss - (604) (58,591) (59,195)
Redemptions (1,403) - (382,813) (382,813)
------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 1999 29,426 $ 93,518 $ 8,024,085 $ 8,117,603
------------- ----------------- ----------------- -----------------
------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
December 31, 1999 26,781 $ 88,018 $ 6,865,416 $ 6,953,434
Net loss - (4,553) (402,029) (406,582)
Redemptions (753) (12,427) (180,485) (192,912)
------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 2000 26,028 $ 71,038 $ 6,282,902 $ 6,353,940
------------- ----------------- ----------------- -----------------
------------- ----------------- ----------------- -----------------
</TABLE>
4
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THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
AND JOINT VENTURE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 and Joint Venture (the "Partnership" or the "Fund")
as of March 31, 2000, and the results of its operations for the three
months ended March 31, 2000 and March 31, 1999. 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, 1999 (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, as amended by SFAS No. 137.
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 had 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 futures, forwards, swaps
and option contracts, or other financial instruments with similar
characteristics such as caps, floors and collars.
MARKET RISK
Derivative instruments involve varying degrees of off-balance sheet market
risk. 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 the Trading Manager has begun to deviate
from past practice and trading policies or to be trading erratically,
5
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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 Partnership has credit risk in respect of its counterparties and
brokers, but attempts to mitigate this risk by dealing almost exclusively
with Merrill Lynch entities as clearing brokers.
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 (which includes a netting
arrangement), 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 and are included in the
Consolidated Statements of Financial Condition under Equity from commodity
futures trading accounts.
6
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
-----------------------------------------
Jan. Feb. Mar.
-----------------------------------------
<S> <C> <C> <C>
1999 $264.44 $272.54 $275.86
-----------------------------------------
2000 $264.16 $258.89 $244.12
-----------------------------------------
</TABLE>
Performance Summary
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.
JANUARY 1, 2000 TO MARCH 31, 2000
Energy trading generated gains on long positions in crude oil and heating oil.
Prices rose sharply in the energy sector as OPEC production cuts pinched
supplies. The quarter ended by giving back some gains on long positions in crude
oil and London gas oil.
Metals trading produced slight losses for the quarter. Profits on positions in
aluminum and zinc outweighed losses on positions in copper and gold. The quarter
ended with losses on a long position in zinc which were offset by gains on short
positions in gold and aluminum.
Agricultural commodity trading produced losses for the quarter. Gains on
tropical commodities were outweighed by losses on grains. Sugar and cotton
positions failed to capture any trends during the period.
Currency trading produced losses throughout the quarter. Although short
positions versus the U.S. dollar were profitable, they were far outweighed by
losses in non U.S. cross currency trades in both the European and Asian markets.
The interest rate sector had jumped from profitable positions in January to
losses with short positions in U.S. Treasury 5-year and 10-year notes,
short-term Eurodollar deposits, German 5-year and 10-year government bonds and
British gilts and a long position in Japanese 10-year government bonds. In
March, intermediate and long-term interest rates fell in the U.S. and Europe,
leading to profitable long positions in U.S. Treasury 5 and 10-year notes and
30-year bonds, German 5 and 10-year bonds and British 10-year bonds and a short
position in short-term Eurodollar deposits.
Stock index trading was unprofitable for the quarter. The significant worldwide
decline in equity prices early in February resulted in further losses on long
positions in the Hong Kong Hang Seng and the Japanese Nikkei and Topix indices.
The last month of the quarter sustained losses on long positions in the
Australian All Ordinaries, the Hong Kong Hang Seng, the Japanese Topix, the
German DAX, the S&P 500 and the Nasdaq 100 stock indices.
7
<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 2000.
8
<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: May 15, 2000 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 15, 2000 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<CIK> 0000799824
<NAME> ML FUTURES EXPANSION FUND
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 0 0
<RECEIVABLES> 6,473,150 8,374,020
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 6,473,150 8,374,020
<SHORT-TERM> 0 0
<PAYABLES> 119,210 256,417
<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> 6,353,940 8,117,603
<TOTAL-LIABILITY-AND-EQUITY> 6,473,150 8,374,020
<TRADING-REVENUE> (335,379) 61,333
<INTEREST-DIVIDENDS> 95,527 93,642
<COMMISSIONS> 166,730 214,170
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (406,582) (59,195)
<INCOME-PRE-EXTRAORDINARY> (406,582) (59,195)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (406,582) (59,159)
<EPS-BASIC> (15.34) (1.94)
<EPS-DILUTED> (15.34) (1.94)
</TABLE>
