10-Q 1 a2086790z10-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 June 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 six months ended June 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 consolidated financial statements have been prepared without audit. In the opinion of management, the consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of The Futures Expansion Fund Limited Partnership and Joint Venture (the "Partnership") as of June 30, 2002, and the results of its operations for the three and six months ended June 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 5 procedures consist simply of the ongoing process of advisor monitoring, with the market risk controls being applied by the Trading Manager itself. 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

Performance Summary JANUARY 1, 2002 to JUNE 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 6 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 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. 7 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. 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. JANUARY 1, 2001 to JUNE 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. 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. 8 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable 9 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 six months of fiscal 2002. 10 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: August 15, 2002 By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Chairman, Chief Executive Officer and Manager (Principal Executive Officer) Date: August 15, 2002 By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 11 EXHIBIT 99 Form of Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code We, Fabio P. Savoldelli and Michael L. Pungello, the chief executive officer and chief financial officer, respectively, of MLIM Alternative Strategies LLC, general partner of The Futures Expansion Fund Limited Partnership, certify that (i) the quarterly report Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of The Futures Expansion Fund Limited Partnership. Date: August 15, 2002 By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Chairman, Chief Executive Officer and Manager (Principal Executive Officer) Date: August 15, 2002 By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 12

FUTURES EXPANSION FUND LTD PARTNERSHIP 10-Q