10-Q 1 a2093527z10-q.txt 10-Q 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, 2002 ------------------ 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 MLIM Alternative Strategies LLC 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 ___ 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 ----------------------------------------------

See notes to consolidated financial statements. 2 THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP ---------------------------------------------- (a Delaware Limited Partnership) ------------------------------ AND JOINT VENTURE ----------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (unaudited)

See notes to consolidated financial statements. 3 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, 2002 and 2001 ----------------------------------------------------- (unaudited)

See notes to consolidated financial statements. 4 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, 2002, and the results of its operations for the three and nine months ended September 30, 2002 and 2001. However, the operating results for the interim periods may not be indicative of the results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2001. 2. FAIR VALUE AND OFF-BALANCE SHEET RISK The nature of this Partnership has certain risks, which cannot be presented on the financial statements. The following summarizes some of those risks. 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 on such derivative instruments as reflected in the Statements of Financial Condition. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Partnership as well as the volatility and liquidity of the markets in which the derivative instruments are traded. The General Partner, MLIM Alternative Strategies LLC ("MLIM AS LLC"), 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. These procedures focus primarily on monitoring the trading of the Millburn Ridgefield Corporation (the "Trading Manager"), calculating the Net Asset Value of the Partnership as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLIM AS LLC does not itself intervene in the markets to hedge or diversify the Partnership's market exposure, MLIM AS LLC 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 or trading policies or to be trading erratically, MLIM AS LLC's basic risk control procedures consist simply of the ongoing process of advisor monitoring, with the market risk controls being applied by the Trading Manager itself. 5 Credit Risk ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, 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 also require margin in the over-the-counter markets. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit, if any, included in the Consolidated Statements of Financial Condition. The Partnership attempts to mitigate this risk by dealing exclusively with Merrill Lynch entities as clearing brokers. The Partnership, in its normal course of business, enters into various contracts, with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") acting as its commodity broker. Pursuant to the brokerage arrangement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, these receivables and payables are offset and reported as a net receivable or payable and included in Equity in commodity futures trading accounts in the Consolidated Statements of Financial Condition. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations MONTH-END NET ASSET VALUE PER UNIT

Performance Summary JANUARY 1, 2002 to SEPTEMBER 30, 2002 ------------------------------------- January 1, 2002 to March 31, 2002 Trading in the energy sector was the most profitable strategy for the Partnership. Trading was volatile throughout the quarter. In March, there was a sharp upsurge in energy prices based on expectations of global economic recovery and trepidation regarding the possible impact of Middle East violence on energy supply. Long positions in crude oil, heating oil, unleaded gasoline, London gas oil and natural gas were profitable. The interest sector was up slightly for the quarter. In January, significant profits on a short position in Japanese ten-year bonds was offset by losses on short positions in German five and ten-year bonds, British ten-year bonds and U.S. Treasury five and ten-year notes. In February, interest rates moderated slightly in the U.S. resulting in profits on long positions in short-term Eurodollar deposits and U.S. Treasury five-year notes. In March, interest rates in Europe and the U.S. rose as economic activity began to improve. This resulted in profits on short positions in German five and ten-year bonds and British 6 ten-year bonds. Long-term interest rates fell in Japan resulting in profits on a long position in ten-year Japanese bonds. Metal trading was almost flat for the quarter. In January, small losses were sustained on long positions in gold, zinc and aluminum. In February, long positions in copper and aluminum resulted in marginal losses. In March, small profits on long positions in gold, zinc and copper were offset by a small loss on a long position in aluminum. Stock index trading posted losses on difficult market conditions. In January, gains on short positions in the S&P 500 and Japanese Topix were narrowly outweighed by losses on long positions in the German DAX, Hong Kong Hang Seng, NASDAQ 100 and Japanese Nikkei. In February, short positions in the NASDAQ 100 and Hong Kong Hang Seng were profitable but were offset by losses on short positions in the Japanese Topix and Nikkei. In March, both sides of the Hong Kong Hang Seng were unprofitable. Trading in agricultural commodities was unprofitable for the quarter. In January, a long position in sugar was unprofitable. In February, a long position in cotton and short positions in coffee and sugar resulted in marginal losses. In March, short positions in sugar and cotton were unprofitable while a long position in coffee resulted in a small gain. Trading in the currencies sector incurred losses for the Partnership. In January, the U.S. dollar strengthened considerably, particularly versus the Japanese yen. Short positions in the Japanese yen, Euro and Swiss franc were profitable early on. In February, the U.S. dollar sold off against major currencies and losses were sustained on short positions in the Japanese yen, Euro and Swiss franc. The currency markets presented a volatile and difficult environment in March. Short positions versus the U.S. dollar in the Swiss franc and Euro were unprofitable, as were long and short positions of the Japanese yen. April 1, 2002 to June 30, 2002 Profits resulting from trading in the currency sector provided the Partnership with a rate of return of over 17% (on the total net assets of the Partnership) for the second quarter. The decline in the U.S. dollar continued through June unabated. Positions versus the U.S. dollar were profitable as were non-U.S. dollar cross trades involving the Euro. The interest rate sector was profitable for the Partnership despite its slow start. The Partnership entered the quarter positioned for rising U.S. and European interest rates. As rates declined, losses were sustained on short positions. Positions were corrected in the quarter. Despite the weakening U.S. dollar, interest rates on U.S. Treasuries fell on concerns about the economic recovery and declines in the stock market in May and June. Long positions brought in sizable profits. The trading in stock indices found profits from its short positions in the NASDAQ 100, German DAX, Hong Kong's Hang Seng, and Japanese Topix index futures. June was a difficult month for stocks globally. The S&P 500 lost over 7% and the NASDAQ lost over 9%. The metals sector sustained slight losses for the quarter. In June, the uptrend in gold reversed and losses were sustained on a long position eliminating profits earned earlier in the quarter. Trading activity was also in the zinc, copper and aluminum markets. 7 Losses were experienced in the agricultural commodities markets. Long positions in sugar and short positions in corn futures were mostly to blame. Energy futures experienced whipsaw markets and trading brought in losses for the Partnership. The rally in petroleum prices corrected in April and the run up had completely reversed by May. July 1, 2002 to September 30, 2002 Interest rates were the profitable sector for the Partnership during the third quarter. Rates on government debt declined in both the U.S. and Europe in response to eroding expectations for economic recovery and lackluster stock markets. In the U.S., factors such as the mortgage industry seeking protection from the surge in mortgage refinancing, corporate debt facing upward pressure and the government debt prices rising due to continued flight to quality played major roles in the sector. In Germany, the re-election of the center-left coalition was taken as a negative for reform and growth for their economy, causing rates to drop. In Japan, the Bank of Japan's announcement of the purchase of stocks from major banks to stabilize the stock market caused the unintentional sell off of Japanese Government Bonds, which the Partnership had to cover quickly to limit losses on those positions. The consistent downward trend of the global stock markets proved profitable for the Partnership's stock index futures positions. The trend following models capitalized through short positions. The energy sector showed mixed performance throughout the quarter but finished with gains. Energy prices were supported by supply concerns and tensions over Iraq, making long positions in crude oil products profitable. Metals trading brought in slight gains for the Partnership. The weakening economic climate was a factor in price declines for industrial metals, bringing in gains of short positions in aluminum, copper and zinc. Shorts positions in gold brought in slight losses for the quarter. Agriculture commodity trading was virtually flat for the quarter. Corn provided small profits due to concerns over the lack of rain during the growing season. Positions were also held in cotton and coffee, both incurring small losses. Currencies were unprofitable for the quarter. U.S. dollar positions were effected by increased volatility as the U.S. dollar decline ended at the end of July and began its upturn in August. Non U.S. dollar cross trading was generally unprofitable for the quarter. The Partnership, as a member of a class of plaintiffs, received a settlement payment in August relating to certain copper trades made by a number of investors, including the Partnership, during a period in the mid-1990s. Members of the class were those who purchased or sold Comex copper futures or options contracts between June 24, 1993 and June 15, 1996. The effect of the settlement payment was included in the Partnership's performance in August. JANUARY 1, 2001 to SEPTEMBER 30, 2001 ------------------------------------- January 1, 2001 to March 31, 2001 Trading in the currency sector was the most profitable for the Partnership. Short Japanese yen positions were profitable in January. In March, long positions in the strengthened U.S. dollar versus the Japanese yen, Thai Baht, Singapore dollar, Euro, Swiss franc and Canadian dollar resulted in gains. 8 Interest rate trading was profitable during the quarter. As interest rates generally declined, the Partnership's long positions in the Japanese and German ten-year bonds and U.S. Treasury five and ten-year notes were profitable. Stock index trading was moderately profitable on short positions in the S&P 500, DAX German Stock Index and Japanese Nikkei and Topix indices. Trading in agricultural commodities was slightly profitable. The gains were realized from the Partnership's short positions in cotton and sugar. Trading in the metals market was close to flat. Slight losses were incurred from both long and short positions of aluminum and gold. The Partnership realized losses in the energy market. As energy prices rallied in January, short positions in crude oil, heating oil, unleaded gas and natural gas were unprofitable. In March, both long and short positions in heating oil and London gas oil sustained losses. April 1, 2001 to June 30, 2001 Energy trading was the sole successful trading strategy for the Partnership. Substantial gains were generated on short positions in natural gas. Losses were sustained on several long positions in crude oil and London gas oil. Trading in the metals markets was moderately unsuccessful. Long and short positions in gold had mixed results. Several short positions in aluminum were unprofitable. Trading in agricultural commodities was slightly unprofitable. Losses on both sides of sugar outweighed gains on short positions in cotton. Coffee trading was flat throughout the quarter. Currency trading produced losses throughout the quarter. The downtrend in the Japanese yen and Euro reversed in April, leading to losses in short positions. Non U.S. dollar cross rate trading was unprofitable. Stock index trading was unprofitable. Losses were sustained on long and short positions in all markets, particularly in the Japanese Topix, German Dax, Hong Kong Hang Seng and NASDAQ indices. The Partnership realized losses in the interest rate sector. Declines in rates in Japan led to losses on short positions in Japanese ten-year bonds. The Federal Reserve continued to cut rates causing losses in short positions in U.S. Treasury five and ten-year notes and 30-year bonds. July 1, 2001 to September 30, 2001 Stock index trading was profitable throughout the quarter. Global equity markets were weak prior to the September 11 terrorist attacks and dropped substantially thereafter. Short positions in the German Dax, Hong Kong Hang Seng, Japanese Topix and NASDAQ 100 indices were all profitable. Trading in the interest rate sector was profitable after a slow start for the quarter. Short and long positions of Japanese ten-year bonds were unprofitable. Interest rates declined in the U.S. and Europe in August resulting in profits on long futures positions in U.S. Treasury five and ten-year notes, short-term Eurodollar deposits and British ten-year bonds. U.S. interest rates dropped after September 11 as the U.S. 9 Federal Reserve reduced rates, flooding the system with liquidity. This benefited the Partnership's various long positions. Metals trading was also successful. Short aluminum positions were profitable as the perception of imminent recession hurt industrial commodities. A long position in gold in September was profitable as investors flocked to gold for safety in the aftermath of the terrorist attacks. Trading in agricultural commodities was slightly unprofitable. Small losses offset small gains as commodity prices were generally weak. Losses were sustained in the currency markets. The Euro staged a significant comeback in July, resulting in losses in short Euro positions versus the U.S. dollar and British pound. The Bank of Japan intervened vigorously in an effort to avert Japanese yen appreciation versus the U.S. dollar and Euro, leading to losses in long Japanese yen and Euro positions. Trading in the energy markets was unprofitable. Losses were sustained in July on various short positions when the energy markets rallied on OPEC's decision to curtail production. The Partnership had several long positions when the September 11 attacks occurred. The initial reaction to the attacks was an upward spike in price, but this promptly gave way to a perception that recession would reduce energy demand. Prices dropped sharply, resulting in losses on long positions in crude oil, heating oil, London gas oil and unleaded gasoline. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable Item 4. Controls and Procedures MLIM Alternative Strategies LLC, the General Partner of The Futures Expansion Fund Limited Partnership, with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership within 90 days of the filing date of this quarterly report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no pending proceedings to which the Partnership or MLIM AS LLC 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 2002. 11 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: MLIM ALTERNATIVE STRATEGIES LLC (General Partner) Date: November 14, 2002 By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Chairman, Chief Executive Officer and Manager (Principal Executive Officer) Date: November 14, 2002 By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 12 EXHIBIT 99 Form of Certification Pursuant to Section 1350 of Chapter 63 ------------------------------------------------------------ of Title 180 of the United States Code -------------------------------------- I, Fabio P. Savoldelli, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Futures Expansion Fund Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of board of directors (or persons performing the equivalent function): a) all significant deficiencies, if any, in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ----------------------- By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Chairman, Chief Executive Officer and Manager (Principal Executive Officer) 13 EXHIBIT 99 Form of Certification Pursuant to Section 1350 of Chapter 63 ------------------------------------------------------------ of Title 180 of the United States Code -------------------------------------- I, Michael L. Pungello, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Futures Expansion Fund Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of board of directors (or persons performing the equivalent function): b) all significant deficiencies, if any, in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ----------------------- By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 14

FUTURES EXPANSION FUND LTD PARTNERSHIP 10-Q