ITEM 1: BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS:
The Futures Expansion Fund Limited Partnership (the "Fund") was organized under the Delaware Revised Uniform Limited Partnership Act on August 13, 1986. Its single public offering of units of limited partnership interest ("Units") commenced on October 27, 1986, and the Fund began trading on January 2, 1987 through a joint venture (the "Joint Venture") with and under the direction of Millburn Ridgefield Corporation ("Millburn"). Millburn Ridgefield has been the Fund's sole trading advisor since inception. The Fund, through the Joint Venture, engages in the speculative trading of commodity futures, options on futures, forward contracts on currencies, financial instruments, stock indices, metals, energy and agricultural products. The Fund's objective is to achieve, through speculative trading, substantial capital appreciation over time.
Merrill Lynch Alternative Investments LLC ("MLAI LLC"), a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which, in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the Fund. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), is the Fund's commodity broker.
Merrill Lynch Alternative Investments LLC was formerly known as MLIM Alternative Strategies LLC ("MLIM AS LLC"). As of February 28, 2003, MLIM Alternative Strategies LLC changed its name to Merrill Lynch Alternative Investments LLC, as part of an internal Merrill Lynch reorganization. This change did not affect the personnel involved in the management of the Fund. As used herein, the capitalized term "MLAI LLC" also refers to the general partner at times when its name was MLIM Alternative Strategies LLC, as applicable.
As of December 31, 2002, the capitalization of the Fund was $5,535,305, and the Net Asset Value per Unit, originally $100 as of January 2, 1987, had risen to $288.52.
Through December 31, 2002, the highest month-end Net Asset Value per Unit was $305.50 (September 30, 2002) and the lowest was $100.05 (September 30, 1987).
(b) FINANCIAL INFORMATION ABOUT SEGMENTS:
The Fund's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." The Fund does not engage in sales of goods or services.
(c) NARRATIVE DESCRIPTION OF BUSINESS:
GENERAL
The Fund trades in the international futures, options on futures and forward markets with the objective of achieving substantial capital appreciation over time.
One of the objectives of the Fund is to provide diversification for a limited portion of the risk segment of the Limited Partners' portfolios. Commodity pool performance has historically demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Fund's returns have, in fact, frequently been significantly non-correlated with the United States stock and bond markets.
The Joint Venture Agreement between the Fund and Millburn may be terminated by MLAI LLC, acting on behalf of the Fund, under certain circumstances involving, for example, substantial losses or changes in control of Millburn.
MILLBURN
Millburn is one of the longest operating of all active managed futures advisors. Principals of Millburn have been managing client assets in the futures and forward markets since 1972, and as of December 31,
2002 Millburn was managing approximately $559 million of client and proprietary capital in these markets. As of such date, Millburn and its affiliates were also managing over $1 billion in other disciplines.
Millburn uses a highly systematic trend-following approach which relies primarily on technical, market-related information. Millburn regards its strategies as long-term in nature, and gives substantial emphasis to risk management -- through, for example, analysis of leverage, implementation of "stop-loss" liquidation points on all open positions and ongoing rebalancing of portfolio commitments based on volatility risk assessments of the different markets traded.
Millburn implements multiple systems in analyzing each market in which it trades. Only if all systems implemented in a market generate a positive trading signal will a "full position" be taken. A "full position" represents the maximum exposure that the risk control overlay in the trading system will allow in a given market based on account equity, market volatility and other factors. Because Millburn utilizes multiple trading systems, a negative signal in one system may be offset by positive signals in the other systems. Partial positions may be taken if one or more trading systems generate a neutral or negative trading signal while the other system(s) generate positive signal(s). This multi-system approach is intended to help to filter out the "whipsaw" effect which short-term "noise" price fluctuations and reversals can otherwise have on trend-following systems -- resulting in the dissipation of account equity through the frequent acquisition and liquidation of positions. The use of multiple evaluative models gives Millburn's strategy a degree of internal diversification which has the potential to increase its risk control capabilities.
As is the case with most trend-following systems, Millburn seeks to achieve cumulative profitability through capturing sustained price trends of significant duration and magnitude. Such trends tend to be relatively infrequent (often occurring only two to three times or less during a year in any given market). The early determination of the beginning and end of such major trends is an important feature of successful trading. Millburn's technical trading systems are designed with the objective that they will generate a trading signal when market conditions indicate a trend is likely to occur. If the trend is not subsequently confirmed or quickly reverses itself, positions are closed out in an attempt to limit capital losses. Positions which are profitable are maintained until the trading systems indicate that the trend has ended.
The money management principles, computer assisted research into historical trading data, and experience of the principals of Millburn are factors upon which decisions concerning the percentage of assets to be used for each market traded and the size of positions taken or maintained are based. From time to time, decisions to increase or decrease the size of a position, long or short, may be made. Such decisions also require the exercise of judgment and may include consideration of the volatility of the particular market; the pattern of price movements, both inter-day and intra-day; open interest; volume of trading; changes in spread relationships between various forward contracts; and overall portfolio balance and risk exposure.
With respect to the execution of trades, Millburn may rely to an extent upon the judgment of others, including dealers, bank traders and floor brokers. No assurance is given that Millburn can execute trades regularly at or near the desired buy or sell point.
The trading method, systems and money management principles utilized by Millburn are proprietary and confidential. The foregoing description is general and is not intended to be complete.
USE OF PROCEEDS AND INTEREST INCOME
MARKET SECTORS. The Fund trades in a diversified group of markets under the direction of Millburn. Millburn can, and does, from time to time materially alter the allocation of its overall trading commitments among different market sectors. There is essentially no restriction on the commodity interests which may be traded by Millburn or the rapidity with which Millburn may alter its market sector allocations.
Management's discussion and analysis contains information relating to the market sectors traded by the Fund. There can, however, be no assurance as to which markets may be included in the Fund's portfolio or in which market sectors the Fund's trading may be concentrated at any one time or over time.
MARKET TYPES. The Fund trades on a variety of United States and foreign futures exchanges. Substantially all of the Fund's off-exchange trading takes place in the highly liquid, institutionally-based currency forward markets.
Many of the Fund's currency trades are executed in the spot and forward foreign exchange markets (the "FX Markets") where there are no direct execution costs. Instead, the participants, banks and dealers, in the FX Markets take a "spread" between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Fund. In its exchange of futures for physical ("EFP") trading, the Fund acquires cash currency positions through banks and dealers. The Fund pays a spread when it exchanges these positions for futures. This spread reflects, in part, the different settlement dates of the cash and the futures contracts, as well as prevailing interest rates, but also includes a pricing spread in favor of the banks and dealers, which may include a Merrill Lynch entity.
As in the case of its market sector allocations, the Fund's commitments to different types of markets -- U.S. and non-U.S., regulated and non-regulated -- differ substantially from time to time, as well as over time.
The Fund's financial statements contain information relating to the types of markets traded by the Fund. There can, however, be no assurance as to which markets the Fund may trade or as to how the Fund's trading may be concentrated at any one time or over time.
CUSTODY OF ASSETS. All of the Fund's assets are currently held in CFTC-regulated customer accounts at MLPF&S.
INTEREST PAID BY MERRILL LYNCH ON THE FUND'S U.S. DOLLAR AND NON-U.S. DOLLAR ASSETS. The Fund's U.S. dollar assets are maintained at MLPF&S. On assets held in U.S. dollars, Merrill Lynch credits the Fund with interest at the prevailing 91-day U.S. Treasury bill rate. The Fund is credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest, which Merrill Lynch pays to the Fund, from possession of such assets.
Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized and unrealized losses on the Fund's non-U.S. dollar-denominated positions.
CHARGES
The following table summarizes the charges incurred by the Fund during 2002, 2001 and 2000.
------------------------
The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund's U.S. dollar assets maintained at MLPF&S.
The Fund's average month-end Net Assets during 2002, 2001 and 2000 equaled $5,220,051, $5,922,361, and $6,049,763, respectively.
During 2002, 2001 and 2000, the Fund earned $85,992, $205,992, and $363,374 in interest income, or approximately 1.65%, 3.48% and 6.01% of the Fund's average month-end Net Assets.
DESCRIPTION OF CURRENT CHARGES
REGULATION
MLAI LLC, Millburn and MLPF&S are each subject to regulation by the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association ("NFA"). Other than in respect of its periodic reporting requirements under the Securities Exchange Act of 1934, the Fund itself is generally not subject to regulation by the Securities and Exchange Commission. However, MLAI LLC itself is registered as an "investment adviser" under the Investment Advisers Act of 1940.
(i) through (xii) -- not applicable.
(xiii) The Fund has no employees.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS:
The Fund does not engage in material operations in foreign countries, nor is a material portion of the Fund's revenue derived from customers in foreign countries. However, the Fund trades, from the United States, on a number of foreign commodity exchanges. The Fund does not engage in the sales of goods or services.
ITEM 2:
ITEM 2: PROPERTIES
The Fund does not use any physical properties in the conduct of its business.
The Fund's administrative offices are the administrative offices of MLAI LLC (Merrill Lynch Alternative Investments LLC, Princeton Corporate Campus, 800 Scudders Mill Road - Section 2G, Plainsboro, New Jersey 08536). MLAI LLC performs all administrative services for the Fund from MLAI LLC's offices.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
Merrill Lynch -- the sole stockholder of Merrill Lynch Group, Inc. (which is the indirect parent of MLAI LLC) -- as well as certain of its subsidiaries and affiliates have been named as defendants in civil actions, arbitration proceedings and claims arising out of their respective business activities. Although the ultimate outcome of these actions cannot be predicted at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the result of these matters will not be materially adverse to the business operations or the financial condition of MLAI LLC or the Fund.
MLAI LLC itself has never been the subject of any material litigation.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Fund has never submitted any matter to a vote of its Limited Partners.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 5(a)
(a) MARKET INFORMATION:
There is no established public trading market for the Units, nor will one develop. Rather, Limited Partners may redeem Units as of the end of each month at Net Asset Value.
(b) HOLDERS:
As of December 31, 2002, there were 199 holders of Units, including MLAI LLC.
(c) DIVIDENDS:
The Fund has made no distributions, nor does MLAI LLC presently intend to make any distributions in the future.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS:
Item 5(b)
Not applicable.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited financial statements of the Fund:
- -------------------------------------------------------------------------------- MONTH-END NET ASSET VALUE PER UNIT - --------------------------------------------------------------------------------
Pursuant to CFTC policy, monthly performance is presented from January 1, 1998, even though the Units were outstanding prior to such date.
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP DECEMBER 31, 2002
TYPE OF POOL: Single Advisor/Publicly-Offered/Non-"Principal Protected"(1) INCEPTION OF TRADING: January 2, 1987 AGGREGATE SUBSCRIPTIONS: $56,741,035 CURRENT CAPITALIZATION: $5,535,305 WORST MONTHLY DRAWDOWN(2): (11.32)% (10/99) WORST PEAK-TO-VALLEY DRAWDOWN(3): (23.41)% (4/01-4/02)
-------------
NET ASSET VALUE PER UNIT, DECEMBER 31, 2002: $288.52
- -------------------------------------------------------------------------------- MONTHLY RATES OF RETURN(4) - --------------------------------------------------------------------------------
(1) Certain funds, including funds sponsored by MLAI LLC, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 1998 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 1998 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL OVERVIEW
The Fund's success depends on Millburn's ability to recognize and capitalize on trends and other profit opportunities in different sectors of the world economy. Millburn's trading methods are confidential, so that substantially the only information that can be furnished regarding the Fund's results of operations is its performance record, as set forth above. Unlike most operating businesses, general economic or seasonal conditions have no direct effect on the profit potential of the
Fund, while, at the same time, its past performance is not necessarily indicative of future results. Because of the speculative nature of its trading, operational or economic trends have little relevance to the Fund's results. Millburn believes, however, that there are certain market conditions -- for example, markets with strong price trends -- in which the Fund has a better opportunity of being profitable than in others.
RESULTS OF OPERATIONS
GENERAL
MLAI LLC believes that futures funds should be regarded as medium- to long-term (i.e., three to five year) investments, but it is difficult to identify trends in the Fund's operations and virtually impossible to make any predictions regarding future results based on the results to date. An investment in the Fund may be less successful over a longer than a shorter period.
Markets with sustained price trends tend to be more favorable to managed futures investments than whipsaw, choppy markets, but (i) this is not always the case, (ii) it is impossible to predict when price trends will occur and (iii) Millburn's systems are affected differently by trending markets as well as by particular types of trends.
MLAI LLC attempts to control credit risk in the Fund's futures, forward and options trading by trading only through MLPF&S. MLPF&S acts solely as a broker to the Fund's trades; it does not advise with respect to, or direct, any such trading.
MLAI LLC relies primarily on Millburn's risk management policies and strategies to control the market risk inherent in the Fund's trading. MLAI LLC reviews the positions acquired by Millburn on a daily basis in an effort to determine whether such policies and strategies are being followed and whether the overall positions of the Fund may have become what MLAI LLC determines as being excessively concentrated in a limited number of markets -- in which case MLAI LLC may discuss the possibility of rebalancing or deleveraging the Fund's portfolio with Millburn. To date, however, MLAI LLC has not intervened so as to require any rebalancing or deleveraging of Millburn's trading.
MLAI LLC may consider making distributions to investors under certain circumstances (for example, if substantial profits are recognized); however, MLAI LLC has not done so to date and does not presently intend to do so.
PERFORMANCE SUMMARY
The Fund's overall trading strategy was profitable for the year. Significant gains were realized in the financial futures sectors.
Trading in interest rates was the most profitable sector for the Fund during 2002. Most of the profits were earned between June and September. The trend of declining interest rates created a profitable environment for the trading strategies. 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 Fund had to cover quickly to limit losses on those positions. The consistent downward trend of the global stock markets
also proved profitable for the Fund's stock index futures positions. The trend following models capitalized through short positions.
Currencies were also very profitable for the year. 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 profits in the sector were mitigated later in the year but recovered significantly in December. World events late in the year had macroeconomic significance, which the Fund's trading strategy was designed to exploit. In addition to the U.S./Iraqi confrontation, there was also the Venezuelan strike, which crippled industry in that country, the nuclear threat in North Korea and weakening equity prices throughout world.
Metals trading brought in slight gains for the Fund. The weakening economic climate was a factor in price declines for industrial metals, bringing in gains of short positions in aluminum, copper and zinc. Gold was the major beneficiary of the unstable situations throughout the global climate. Long positions were profitable later in the year.
The energy sector showed mixed performance throughout the year but completed the year with slight losses. In March, there was a sharp upsurge in energy prices based on expectation of global economic recovery and trepidation regarding the possible impact of the Middle East violence on the energy supply. Throughout the year, trading continued to be volatile. By the end of the year, the Venezuelan strike, the U.S./Iraqi confrontation and cold weather brought some positive performance back to the energy sector.
Agricultural commodities trading was the weakest performer for the year. Positions in corn, coffee, cotton, and sugar bounced around and showed no significant trend in prices.
The Fund's overall trading strategy was unprofitable for 2001 as significant losses were sustained in the energy sector.
Stock index trading was the most profitable strategy for the Fund. Trading on short positions in the S&P 500 and DAX German Stock indices was successful early in the year. A mid year lull resulted in losses on both long and short positions in all markets. Global equity market continued to be weak up to the September 11 terrorist attacks and dropped substantially thereafter. Various short positions were highly profitable.
Trading in the interest rates sector was also successful for the Fund. As interest rate generally declined, the Fund's long positions in the Japanese and German ten-year bonds were profitable early in the year. By mid year, Japan and the Federal Reserve continued to cut rates, causing losses in short positions in Japanese ten-year bonds and U.S. Treasury five and ten-year notes. U.S. interest rates dropped after September 11, flooding the system with liquidity. At the end of October, the U.S. Treasury announced that no additional 30-year bonds would be auctioned. These events benefited the Fund's various long positions.
Trading in the currency sector sustained slight profits at the end of the year. In March, long positions in the strengthened U.S. dollar versus the Japanese yen, Thai baht, Singapore dollar, Euro and Canadian dollar resulted in gains. The downward trend in the Japanese yen and Euro reversed in April, leading to losses in short positions. The Bank of Japan intervened vigorously in the third quarter to avert Japanese yen appreciation versus the U.S. dollar and Euro, leading to losses in long Japanese yen and Euro positions. During December, the Japanese yen continued to weaken, resulting in gains in short Japanese yen positions versus the U.S. dollar, British pound and Euro.
Metals trading was slightly unprofitable. Trading in the metals markets was close to flat. Long and short
gold and aluminum positions had mixed results throughout the year. A long gold position in September was profitable as investors flocked to gold for safety in the aftermath of the September 11 attacks.
Agricultural commodities trading sustained losses during the year. Agricultural commodity prices were generally weak. Small gains were realized in the first quarter on short positions in cotton and sugar. But these were offset by losses in short positions of coffee, cotton and sugar in the remainder of the year.
The Fund realized significant losses in the energy market. As energy prices rallied in January, short positions in crude oil, heating oil and natural gas were unprofitable. Losses were sustained in July on various short positions when the energy market rallied on OPEC's decision to curtail production. The September 11 attacks resulted in a perception that recession would reduce energy demand. Prices dropped sharply, causing losses in long positions in crude oil, heating oil, London gas oil and unleaded gasoline.
The Fund's overall trading strategy was profitable for the year as gains were realized in the energy, currency and interest rate and stock indices sectors. Metals and agriculture commodities trading was unprofitable. Significant gains were posted in energy trading as OPEC restricted production and subsequently demand increased, leading to higher oil and gas prices.
Trading in the energy sector generated the most profits for the Fund. The year began with OPEC cutting production. Inclement weather in the northeastern United States increased demand and coupled with limited supplies, caused prices to surge. Long positions in crude oil and heating oil were profitable. Energy markets, which had sold off in July, resumed their uptrend with a strong rally in August and continued into September. The run up in natural gas prices continued in December.
Currency trading was profitable despite the losses early in the year from non-U.S. cross currency trades in both the European and Asian markets. The Euro hit all time lows against the U.S. dollar and the Japanese yen in early September despite the European Central Bank intervention, benefiting the Fund's short Euro positions. December was quite profitable on the resurgence of the Euro versus both the U.S. dollar and Japanese yen and the weakness of the Japanese yen versus the U.S. dollar.
The interest rate sector posted gains for the year. In March, intermediate and long-term interest rates fell in the U.S. and Europe, leading to profitable long positions in U.S. Treasury five and ten-year notes and 30-year bonds and German and British ten-year bonds. Interest rates, which have presented a difficult and volatile trading environment since February, returned to profitability in August. November was very profitable as the action in global interest rates was similar to that of August and September 1998 when Russia defaulted and devalued, stock markets plunged and capital flew to the safest and most liquid government securities.
Trading in stock market indices sustained losses. Significant worldwide decline in equity prices occurred early in February. 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 third and fourth quarters. However, the gains could not offset the first half year's losses.
Metals trading was unprofitable for the year. Long positions in most metals, particularly copper and gold, resulted in losses. Gains were primarily realized on short positions.
Trading in agricultural commodities resulted in modest losses for the Fund. Long and short positions in
sugar were slightly profitable, but not enough to offset losses in the cotton and wheat sectors.
LIQUIDITY; CAPITAL RESOURCES
The Fund's costs are generally proportional to its asset base, and, within broad ranges of capitalization, the Millburn's trading positions (and the resulting gains and losses) should increase or decrease in approximate proportion to the size of the Fund account managed by Millburn.
Inflation per se is not a significant factor in the Fund's profitability, although inflationary cycles can give rise to the type of major price movements that can have a materially favorable or adverse impact on the Fund's performance.
In its trading to date, the Fund has from time to time had substantial unrealized gains and losses on its open positions. These gains or losses are received or paid on a periodic basis as part of the routine clearing cycle on exchanges or in the over-the-counter markets (the only over-the-counter market in which the Fund trades is the inter-bank forward market in currencies). In highly unusual circumstances, market illiquidity could make it difficult for Millburn to close out open positions, and any such illiquidity could expose the Fund to significant losses, or cause it to be unable to recognize unrealized gains.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Net Income by Quarter Eight Quarters through December 31, 2002
The financial statements required by this Item are included in Exhibit 13.01.
The supplementary financial information ("information about oil and gas producing activities") specified by Item 302 of Regulation S-K is not applicable. MLAI LLC promoted the Fund and is its controlling person.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with independent auditors on accounting and financial disclosure.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 10(a) and 10(b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
As a limited partnership, the Fund itself has no officers or directors and is managed by MLAI LLC. Trading decisions are made by Millburn on behalf of the Fund.
The managers and executive officers of MLIM AS LLC and their respective business backgrounds are as follows:
ROBERT M. ALDERMAN Chairman, Chief Executive Officer and Manager
STEVEN B. OLGIN Vice President, Chief Administrative Officer and Manager
MICHAEL L. PUNGELLO Vice President, Chief Financial Officer and Treasurer
Mr. Alderman was born in 1960. Mr. Robert M. Alderman is Chairman, Chief Executive Officer and Manager of MLAI LLC. Mr. Alderman is a Managing Director of MLIM and global head of Retail Sales and Business Management for Alternative Investments. Prior to re-joining Merrill Lynch and the International Private Client Group in 1999, he was a partner in the Nashville, Tennessee based firm of J.C. Bradford & Co. where he was the Director of Marketing, and a National Sales Manager for Prudential Investments. Mr. Alderman first joined Merrill Lynch in 1987 where he worked until 1997. During his tenure at Merrill Lynch, Mr. Alderman has held positions in Financial Planning, Asset Management and High Net Worth Services. He received his Master's of Business Administration from the Carroll School of Management Boston College and a Bachelor of Arts from Clark University.
Steven B. Olgin was born in 1960. Mr. Olgin is a Vice President, Chief Adminstrative Officer and a Manager of MLAI LLC. He joined MLAI LLC in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science in Business Administration and a Bachelor of Arts in Economics. In 1986, he received his Juris Doctor from The John Marshall Law School. Mr. Olgin is a member of the Managed Funds Association's Government Relations Committee and has served as an arbitrator for the National Futures Association. Mr. Olgin is a member of the Illinois Bar.
Michael L. Pungello was born in 1957. Mr. Pungello is a Vice President, Chief Financial Officer and Treasurer of MLAI LLC. He was First Vice President and Senior Director of Finance for Merrill Lynch's Operations, Services and Technology Group from January 1998 to March 1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche LLP, and was a partner in their financial services practice from June 1990 to December 1997. He graduated from Fordham University in 1979 with a Bachelor of Science in Accounting and received his Master's of Business Administration in Finance from New York University in 1987.
As of December 31, 2002, the principals of MLAI LLC had no investment in the Fund, and MLAI LLC's general partner interest in the Fund was valued at $56,550.
As of February 28, 2003, MLAI LLC acts as general partner to three public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: John W. Henry & Co./Millburn L.P., ML JWH Strategic Allocation Fund L.P. and the Fund. Because MLAI LLC serves as the sole general partner of each of these funds, the officers and managers of MLAI LLC effectively manage them as officers and directors of such funds. Prior to February 28, 2003, MLAI LLC (while still known as MLIM AS LLC) acted as general partner of six public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES:
None.
(d) FAMILY RELATIONSHIPS:
None.
(e) BUSINESS EXPERIENCE:
See Item 10(a) and (b) above.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS:
None.
(g) PROMOTERS AND CONTROL PERSONS:
Not applicable.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The managers and officers of MLAI LLC are remunerated by MLAI LLC in their respective positions. The Fund does not itself have any officers, managers or employees. The Fund pays Brokerage Commissions to an affiliate of MLAI LLC and Administrative Fees to MLAI LLC. MLAI LLC or its affiliates may also receive certain economic benefits from possession of the Fund's U.S. dollar assets. The managers and officers receive no "other compensation" from the Fund, and the managers receive no compensation for serving as managers of MLAI LLC. There are no compensation plans or arrangements relating to a change in control of either the Fund or MLAI LLC.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS:
(b) SECURITY OWNERSHIP OF MANAGEMENT:
As of December 31, 2002, MLAI LLC owned 196 Units (Unit-equivalent general partnership interest), which was 1.02% of the total Units outstanding.
(c) CHANGES IN CONTROL:
None.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS BETWEEN MERRILL LYNCH AND THE FUND
All of the service providers to the Fund, other than Millburn, are affiliates of Merrill Lynch. Merrill Lynch negotiated with Millburn over the level of its advisory fees and Profit Shares. However, none of the fees paid by the Fund to any Merrill Lynch party were negotiated, and they are higher than would have been obtained in arms-length bargaining.
The Fund indirectly pays Merrill Lynch through MLPF&S and MLAI substantial Brokerage Commissions and Administrative Fees, respectively, as well as bid-ask spreads on forward currency trades. The Fund also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions.
Within the Merrill Lynch organization, MLAI LLC is the direct beneficiary of the revenues received by different Merrill Lynch entities from the Fund. MLAI LLC controls the management of the Fund and serves as its promoter. Although MLAI LLC has not sold any assets, directly or indirectly, to the Fund, MLAI LLC makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI LLC or any of its principals and the Fund.
MLAI LLC pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI LLC is ultimately paid back for these expenditures from the revenues it receives from the Fund.
(b) CERTAIN BUSINESS RELATIONSHIPS:
MLPF&S, an affiliate of MLAI LLC, acts as the principal commodity broker for the Fund.
In 2002, the Fund expensed: (i) Brokerage Commissions of $512,653 to MLPF&S, which included $107,802 in consulting fees earned by Millburn; and (ii) Administrative Fees of $13,491 to MLAI LLC. In addition, MLAI
LLC and its affiliates may have derived certain economic benefits from possession of a portion of the Fund's assets, as well as from foreign exchange and EFP trading.
See Item 1(c), "Narrative Description of Business -- Charges" and "-- Description of Current Charges" for a discussion of other business dealings between MLAI LLC affiliates and the Fund.
(c) INDEBTEDNESS OF MANAGEMENT:
The Fund is prohibited from making any loans, to management or otherwise.
(d) TRANSACTIONS WITH PROMOTERS:
Not applicable.
ITEM 14:
ITEM 14: CONTROLS AND PRODECURES
Merrill Lynch Alternative Investments 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 Fund within 90 days of the filing date of this annual report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Fund'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.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS (FOUND IN EXHIBIT 13.01):
(a)2.8(d) FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.
(a)3. EXHIBITS:
The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
(b) REPORT ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 ALTERNATIVE INVESTMENTS LLC General Partner
By: /s/ Robert M. Alderman ---------------------- Robert M. Alderman Chairman, Chief Executive Officer and Manager (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 31, 2003 by the following persons on behalf of the Registrant and in the capacities indicated.
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
EXHIBIT 99
FORM OF CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 180 OF THE UNITED STATES CODE
I, Robert M. Alderman, certify that:
1. I have reviewed this annual report on Form 10-K of The Futures Expansion Fund Limited Partnership;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies 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 annual report whether 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: March 31, 2003
- ---------------------- By /s/ ROBERT M. ALDERMAN ---------------------- Robert M. Alderman Chairman, Chief Executive Officer and Manager (Principal Executive Officer)
EXHIBIT 99 (a)
AS ADOPTED TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report of The Futures Expansion Fund Limited Partnerhip on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Robert M. Alderman, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that:
1. This annual report fully complies with the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of The Futures Expansion Fund Limited Partnership.
Date: March 31, 2003
- ---------------------- By /s/ ROBERT M. ALDERMAN ---------------------- Robert M. Alderman Chairman, Chief Executive Officer and Manager (Principal Executive Officer)
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 annual report on Form 10-K of The Futures Expansion Fund Limited Partnerhip;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies 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 annual report whether 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: March 31, 2003
- ---------------------- By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
EXHIBIT 99 (a)
AS ADOPTED TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report of The Futures Expanion Fund Limited Partnerhip on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Michael L. Pungello, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that:
1. This annual report fully complies with the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of The Futures Expansion Fund Limited Partnership.
Date: March 31, 2003
- ------------------------ By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
2002 FORM 10-K
INDEX TO EXHIBITS