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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, 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
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(Exact Name of Registrant as
specified in its charter)
Delaware 13-3365950
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(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
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(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>
September 30, December 31,
2000 1999
(unaudited)
------------------- -------------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and option premiums $ 5,548,595 $ 6,714,860
Net unrealized (loss) profit on open contracts (104,733) 321,369
Accrued interest 30,802 32,088
------------------- -------------------
TOTAL $ 5,474,664 $ 7,068,317
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Profit Shares payable $ 61 $ 5,571
Brokerage commissions payable 43,341 55,913
Redemptions payable 150,904 51,928
Administrative fees payable 1,140 1,471
------------------- -------------------
Total liabilities 195,446 114,883
------------------- -------------------
PARTNERS' CAPITAL:
General Partners (341 and 339 Units) 76,804 88,018
Limited Partners (23,098 and 26,442 Units) 5,202,414 6,865,416
------------------- -------------------
Total partners' capital 5,279,218 6,953,434
------------------- -------------------
TOTAL $ 5,474,664 $ 7,068,317
=================== ===================
NET ASSET VALUE PER UNIT
(Based on 23,439 and 26,781 Units outstanding) $ 225.23 $ 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 For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ (65,387) $ 244,128 $ (278,980) $ 848,030
Change in unrealized 8,839 (412,562) (426,131) (254,832)
------------ ------------- ------------- -------------
Total trading results (56,548) (168,434) (705,111) 593,198
------------ ------------- ------------- -------------
Interest income 92,769 100,398 278,924 287,256
------------ ------------- ------------- -------------
Total revenues 36,221 (68,036) (426,187) 880,454
------------ ------------- ------------- -------------
EXPENSES:
Profit Shares - (34,028) 61 114,414
Brokerage commissions 135,122 194,004 444,528 593,885
Administrative fees 3,556 5,105 11,698 15,628
------------ ------------- ------------- -------------
Total expenses 138,678 165,081 456,287 723,927
------------ ------------- ------------- -------------
NET INCOME (LOSS) $ (102,457) $ (233,117) $ (882,474) $ 156,527
============ ============= ============= =============
NET INCOME (LOSS) PER UNIT:
Weighted average number of
units outstanding 24,804 28,329 25,683 29,286
============ ============= ============= =============
Weighted average net
income (loss) per General Partner
and Limited Partner Unit $ (4.13) $ (8.23) $ (34.36) $ 5.34
============ ============= ============= =============
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 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
Redemptions (3,078) - (857,387) (857,387)
Net Income - 1,878 154,649 156,527
------------- ---------------- ----------------- -----------------
PARTNERS' CAPITAL,
September 30, 1999 27,751 $ 96,000 $ 7,762,751 $ 7,858,751
============= ================ ================= =================
PARTNERS' CAPITAL,
December 31, 1999 26,781 $ 88,018 $ 6,865,416 $ 6,953,434
Redemptions (3,342) (388) (791,354) (791,742)
Net Loss - (10,826) (871,648) (882,474)
------------- ---------------- ----------------- -----------------
PARTNERS' CAPITAL,
September 30, 2000 23,439 $ 76,804 $ 5,202,414 $ 5,279,218
============= ================ ================= =================
</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
(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") as of September 30, 2000, and the results
of its operations for the three and nine months ended September 30, 2000 and
September 30, 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. SFAS No. 133
is further amended by SFAS No. 138, which clarifies issues surrounding
interest risk, foreign currency denominated items, normal purchases and sales
and net hedging. 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 SFAS No. 133, as amended by SFAS No. 137,
had a significant effect on the financial statements, nor will the
application of the provisions of SFAS No. 138 have 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
5
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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, 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.
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>
1999 $264.44 $272.54 $275.86 $289.39 $279.89 $291.36 $281.46 $282.95 $283.19
----------------------------------------------------------------------------------------------------
2000 $264.16 $258.89 $244.12 $245.36 $240.78 $229.50 $225.87 $231.34 $225.23
----------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary
January 1, 1999 to September 30, 1999
-------------------------------------
January 1, 1999 to March 31, 1999
6
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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.
7
<PAGE>
In the interest rate 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.
Agricultural commodity trading was narrowly profitable in the quarter.
January 1, 2000 to September 30, 2000
-------------------------------------
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.
8
<PAGE>
April 1, 2000 to June 30, 2000
In energy trading, after a short decline, there was a price rise in crude oil
and its products providing profits from long positions in crude oil, heating
oil, unleaded gasoline, London gas oil.
In agricultural commodity trading, profitable long positions in sugar and short
positions in coffee outweighed losses from long positions in wheat. Positions in
sugar consistently returned profits throughout the quarter.
Profits on long positions in the S&P 500 and Australian All Ordinaries indices
were offset by losses on short positions in the Japanese Topix, NASDAQ 100 and
German DAX indices and on both sides of the Hong Kong Hang Seng index.
In metals trading, losses on short positions in aluminum and long positions in
zinc outweighed profits on a short position in gold.
In the interest rates sector, the Partnership was positioned for fluctuating
interest rates throughout the quarter, as losses were sustained on long
positions in U.S. Treasury 5 and 10-year notes and German 5 and 10-year bonds.
The Partnership's profitable positions versus the dollar included short Danish
krone, Canadian dollar and Thai baht and the Euro. Losses prevailed towards the
end of the quarter. In non-dollar cross rate trading, a long position in the
pound versus the Euro fluctuated throughout the period.
July 1, 2000 to September 30, 2000
Energy trading was slightly profitable for the Partnership during the quarter.
Energy markets, which had sold off in July, resumed their uptrend with a strong
rally in August and continued into September. Due to the volatility in this
sector, the Partnership reduced its positions in this sector by mid quarter.
The Partnership had slight losses in agriculture mainly due to positions in
sugar, cotton and coffee.
Interest rate trading was unprofitable early in the quarter as positions in 10
year British and German bonds and 5 year German bonds sustained losses. Interest
rates, which have presented a difficult trading environment since February,
returned to profitability in August on long positions in U.S. Treasury 5 and 10
year notes, 30 year bonds as well as short term Euro deposits. Although Japan
abandoned its zero interest rate policy in August, September incurred losses in
a short position in Japanese Government Bonds when the rise in Japanese
long-term interest rates reversed.
Stock index futures, which were in a difficult trading environment in the first
half of the year, returned to profitability in July and remained so throughout
the quarter.
In July and August, currency trading versus the dollar was profitable. The Euro
hit all time lows against the dollar and yen in early September, so the
Partnership's short Euro positions had additional gains despite central bank
intervention late in the quarter. Notwithstanding these gains, the currency
trading as a whole sustained losses as a long position in the yen, a long
position in the euro versus the pound and both sides of the pound/yen cross were
unprofitable.
In spite of gains in long positions in copper, metals trading was unprofitable
during the quarter as losses were incurred from long positions in aluminum and
gold as well as both sides of zinc.
9
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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
As part of a restructuring of Merrill Lynch's investment
management operations, Merrill Lynch Investment Partners Inc.
("MLIP") and other Merrill Lynch advisory entities are being
consolidated under Merrill Lynch Investment Managers, L.P.
("MLIM"), the principal Merrill Lynch investment management
affiliate. MLIP is now part of MLIM's Alternative Investments
group, headed by Ron Rosenberg, Managing Director and former head
of Merrill Lynch's Global Hedge Fund Sales and International Fixed
Income Group. Fabio Savoldelli, Managing Director and head of MLIM
- Alternative Strategies, has assumed management responsibilities
for MLIP's business, reporting to Mr. Rosenberg. In connection with
this consolidation, John R. Frawley, Jr., the President of MLIP,
and certain other MLIP staff members have left Merrill Lynch,
effective October 20, 2000.
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 2000.
10
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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: November 14, 2000 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Duly Authorized Signatory
Vice President, Chief Financial Officer
and Treasurer
11
