Item 1. BUSINESS
General
Main Place Funding, LLC (“Main Place”), a Delaware limited liability company, is a wholly owned subsidiary of Bank of America, N.A. (the “Parent”), which is a wholly owned indirect subsidiary of Bank of America Corporation (the “Corporation”).
Main Place is the successor by merger of Main Place Real Estate Investment Trust (“MPREIT”) with and into Main Place. MPREIT was established on October 29, 1996 as a Maryland real estate investment trust to consolidate the acquisition, holding and management of certain closed-end residential mortgage loans owned by certain affiliates of the Corporation. MPREIT was the successor by merger of Main Place Funding Corporation (“MPFC”) with and into MPREIT on November 1, 1996. On October 15, 1998, Main Place Holdings Corporation, the former parent of MPREIT, merged with and into Main Place, and on December 23, 1998, MPREIT merged with and into Main Place, its parent company.
As a result of the December 23, 1998 merger, the Parent held a 99 percent membership interest in Main Place. Main Place Trust, a Delaware business trust, held the other 1 percent membership interest. In connection with the merger of MPREIT with and into Main Place, all outstanding MPREIT Class A Trust Shares were cancelled. All outstanding MPREIT Class B Trust Shares were converted into rights to receive cash. In connection with the merger with MPREIT, Main Place assumed MPREIT’s obligations under the Series 1995-2 and Series 1997-1 mortgage-backed bonds. On August 15, 2002, Main Place Trust was liquidated into the Parent. Currently the Parent holds a 100 percent membership interest in Main Place.
On October 21, 2002, Main Place adopted an Amended and Restated Limited Liability Company Agreement, which removed certain restrictions on the business activities of Main Place and permitted it to engage in any activity and to exercise any powers permitted to limited liability companies under the laws of the State of Delaware.
Financial Warranty Agreements
Main Place is in the business of entering into financial warranty agreements with third parties. As of December 31, 2006, Main Place was a party to three financial warranty agreements with third-party trusts. These trusts are open-ended diversified, registered investment companies. Under the terms of these warranty agreements, Main Place provides financial warranties in order to ensure that the trusts are able to redeem all of the outstanding shares of specified series on the warranty maturity dates for an amount at least equal to an aggregate protected amount. For each of the agreements entered into by Main Place with a third party, Main Place has also entered into a financial warranty agreement with the Parent. Under the terms of these agreements, the Parent provides financial warranties in favor of Main Place corresponding to Main Place’s obligations under the financial warranties with the third parties.
Main Place’s financial warranties are structured to include investment constraints and certain pre-defined triggers that would require the underlying assets or portfolio of the relevant trust to be liquidated and invested in zero-coupon bonds and/or corporate bonds that mature at a preset future date. Main Place is required to fund any shortfall at the preset future date between the value of the trust’s assets and a preset amount. These financial warranties are recorded as derivatives on the balance sheet and marked to market with adjustments recorded in the statement of income. As of December 31, 2006, the aggregate net asset value of outstanding shares subject to these financial warranties with third party trusts totaled $328 million. Main Place has never made a payment to fund any shortfall amount under these products and management believes that the probability of such a payment under these financial warranties is remote.
Pioneer Principal Protection Trust Agreement
On October 29, 2002, Main Place entered into a financial warranty agreement with Pioneer Principal Protection Trust on behalf of its series Pioneer Protected Principal Plus Fund and Pioneer Investment Management, Inc. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place provided a financial warranty to the trust in the amount of up to $180.3 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is January 8, 2010.
On December 20, 2002, Main Place entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $180.3 million, corresponding to Main Place’s obligations under the financial warranty in favor of Pioneer Principal Protection Trust on behalf of its series, Pioneer Protected Principal Plus Fund.
Merrill Lynch Principal Protected Trust Agreements
On November 1, 2002, Main Place entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Fundamental Growth Principal Protected Fund and Merrill Lynch Investment Managers, L.P. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place provided a financial warranty in the amount of up to $265.9 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is December 1, 2009.
On November 13, 2002, Main Place entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $265.9 million, corresponding to Main Place’s obligations under the financial warranty in favor of Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Fundamental Growth Principal Protected Fund.
On November 1, 2002, Main Place also entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Basic Value Principal Protected Fund and Fund Asset Management, L.P. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place provided a financial warranty in the amount of up to $335.8 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is December 1, 2009.
On November 13, 2002, Main Place also entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $335.8 million, corresponding to Main Place’s obligations under the financial warranty in favor of Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Basic Value Principal Protected Fund.
On January 20, 2004, a termination agreement was entered into among Main Place and the Parent. Under the terms of this termination agreement, the Parent is no longer committed to provide the financial warranty discussed above. Consistent with Main Place’s warranty with Oppenheimer Principal Protected Trust II, no warranty was issued under the financial warranty agreement.
On February 15, 2006, BlackRock, Inc. & Merrill Lynch agreed to merge their investment management businesses. As part of the merger with BlackRock, the Merrill Lynch Principal Protected Trust Agreements became the BlackRock Principal Protected Trust Agreements on September 29, 2006 when the merger was completed.
Item 1A.
Item 1A. RISK FACTORS
Based on Main Place’s business operations, financial condition, and the fact that Main Place has no outstanding securities, Main Place does not believe that it is subject to any significant factors or material risks that are required to be disclosed.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
Main Place does not own or lease any physical property and no such property is necessary for the conduct of Main Place’s business.
Item 3.
Item 3. LEGAL PROCEEDINGS
Main Place has no material legal actions or proceedings pending against it.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction I (2) (c) to Form 10-K.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of Main Place’s membership interests are owned by the Parent, and as a result there is no public trading market for the interests. Main Place may from time to time make distributions to the Parent. No distribution was made to the Parent in 2006 or 2005. There are no limitations on Main Place’s ability to make distributions to the Parent contained in its Amended and Restated Limited Liability Company Agreement, the financial warranty agreements, any forms of indebtedness or guarantees, or other agreements.
Main Place does not have any equity compensation plans under which its equity securities are issued. Main Place did not issue or repurchase any of its equity securities during 2006.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction I (2) (a) to Form 10-K.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Main Place’s primary business activity in 2003 and beyond is presently expected to be entering into financial warranty agreements in favor of third parties for a fee.
2006 compared to 2005
Total income for the year ended December 31, 2006 was $355.8 million, representing an increase of $130.1 million compared to 2005. The increase was primarily a result of increased interest on time deposits placed due to higher interest rates. In addition, trading losses and fees for the year ended December 31, 2006 decreased $1.1 million, to a loss of $141 thousand. The decreased trading losses were due primarily to the decrease in the aggregate net asset value of outstanding shares subject to the financial warranty agreements reducing the value of the agreements.
Total expenses (excluding income taxes) for the year ended December 31, 2006 were $214 thousand, representing a increase of $8 thousand compared to 2005.
Total net income for the year ended December 31, 2006 was $220.0 million, representing an increase of $83.1 million from 2005. As discussed above, the increase was primarily a result of increased interest on time deposits placed due to higher interest rates. Income tax expense for the year ended December 31, 2006 was $135.6 million, representing an increase of $47.0 million from 2005 due to increased interest income.
2005 compared to 2004
Total income for the year ended December 31, 2005 was $225.8 million, representing an increase of $137.4 million compared to 2004. The increase was primarily a result of increased interest on time deposits placed due to higher interest rates. In addition, trading losses and fees for the year ended December 31, 2005 decreased $167 thousand, to $1.2 million. The decreased trading losses were due primarily to the decrease in the aggregate net asset value of outstanding shares subject to the financial warranty agreements reducing the value of the agreements.
Total expenses (excluding income taxes) for the year ended December 31, 2005 were $206 thousand, representing a decrease of $740 thousand compared to 2004. The decrease primarily relates to the termination fee paid by Main Place to the Parent in the first quarter of 2004 in connection with the termination of the Oppenheimer financial warranty agreement.
Total net income for the year ended December 31, 2005 was $136.9 million, representing an increase of $80.9 million from 2004. As discussed above, the increase was primarily a result of increased interest on time deposits placed due to higher interest rates. Income tax expense for the year ended December 31, 2005 was $88.6 million, representing an increase of $57.3 million from 2004 due to increased interest income.
Liquidity & Capital Resources
Main Place’s primary source of liquidity is its cash and cash equivalents on hand and interest income thereon. At December 31, 2006, Main Place had approximately $7.4 billion in cash and cash equivalents, which were held as time deposits and cash with the Parent. At December 31, 2006, Main Place’s maximum obligation under the financial warranties was $782.0 million. Main Place has never made a payment to fund any shortfall amount under these products and management believes that the probability of such a payment under these financial warranties is remote.
Critical Accounting Estimates and Principles
Main Place’s significant accounting principles are described in Note 2 of the financial statements and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Some of Main Place’s accounting principles require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment in applying the accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.
The following is a summary of the more judgmental and critical accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. Management has used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.
Derivative Assets and Liabilities
Main Place engages in derivative trading-related activities. The management process related to the derivative positions is discussed in detail in the Quantitative and Qualitative Disclosures About Market Risk section in Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
Trading profits (losses) and fees represent the amount earned or lost from derivative positions. Derivative positions are marked to market and are recorded based on management’s assessment of market value using market indicators and mathematical models. Trading profits (losses) and fees can be volatile and are largely driven by general market conditions and customer demand. Profit or loss is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment.
Main Place has hedged the market risk on the financial warranties by entering into corresponding warranties with the Parent. Main Place has determined that the fair value of these derivatives is best modeled as the present value of the future cash flows less the expected pay out on the warranties, if any. Currently, Main Place management has determined there is a zero dollar payout on these warranties.
There are numerous assumptions and estimates associated with modeling, and actual results could differ. In addition to the regular review of our assumptions, we mitigate these uncertainties through close monitoring and by examining and updating assumptions on an ongoing basis. If the results of our analysis indicate higher than expected levels of risk, proactive measures are taken to adjust risk levels.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required are listed in the Index to Financial Statements and are incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosures.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Pursuant to Rule 15d-15(b) under the Securities Exchange Act of 1934, Main Place carried out an evaluation, with the participation of Main Place’s management, including Main Place’s President and Principal Financial and Accounting Officer, of the effectiveness and design of Main Place’s disclosure controls and procedures as defined under rule 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. as of the end of the period covered by this report. Based upon that evaluation, Main Place’s President and Principal Financial and Accounting Officer, concluded, as of the end of the period covered by this report, that Main Place’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by Main Place, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, there have been no changes in Main Place’s internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, Main Place’s internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction I (2) (c) to Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction I (2) (c) to Form 10-K.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted in accordance with General Instruction I (2) (c) to Form 10-K.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction I (2) (c) to Form 10-K.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the fiscal years ended December 31, 2006 and 2005, Main Place engaged PricewaterhouseCoopers LLP, as an independent registered public accounting firm principally to perform the annual audit and to render other services, as needed. The following table lists fees paid to PricewaterhouseCoopers LLP, for services rendered in fiscal years 2006 and 2005.
Audit fees include fees for services performed following the standards of the Public Company Accounting Oversight Board for the recurring audit of Main Place’s financial statements. This category also includes fees for audits provided in connection with statutory filings or services that generally only the principal auditor reasonably can provide to a client, such as procedures related to financial statement creation and related adjustments, consents and assistance with and review of documents filed with the Securities and Exchange Commission (SEC).
There were no fees paid for audit related, tax or other services rendered to Main Place by PricewaterhouseCoopers LLP in 2006 and 2005.
Main Place’s management, including Main Place’s President and Principal Financial and Accounting Officer, has adopted procedures for pre-approving certain audit and non-audit services provided by the independent registered public accounting firm. These procedures include reviewing a budget for certain audit and permitted non-audit services. The budget includes a description of, and a budgeted amount for, particular categories of non-audit services that are recurring in nature and therefore anticipated at the time the budget is submitted. Approval from Main Place’s management is required to exceed the budget amount for a particular category of non-audit services and to engage the independent registered public accounting firm for any non-audit services not included in the budget. For both types of pre-approval, Main Place’s management considers whether such services are consistent with SEC rules on auditor independence. Main Place’s management also considers whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with Main Place’s business, people, culture, accounting systems, risk profile, and whether the services enhance the Company’s ability to manage or control risks and improve audit quality.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. The financial statements listed in the Index to Financial Statements are filed as part of this report.
b. The exhibits filed as part of this report are listed in the Index to Exhibits.
Supplementary Information to be Furnished With Reports filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
No annual report or proxy materials have been sent to security holders during the fiscal year ended December 31, 2006. No annual report or proxy materials will be sent to security holders subsequent to the filing of this annual report on Form 10-K.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MAIN PLACE FUNDING, LLC
Page
Report of Independent Registered Public Accounting Firm
Financial Statements
Statement of Income for the Years Ended December 31, 2006, 2005 and 2004
Balance Sheet as of December 31, 2006 and 2005
Statement of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Statement of Changes in Member’s Equity for the Years Ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Member of Main Place Funding, LLC:
In our opinion, the accompanying balance sheet and the related statement of income, statement of changes member’s equity and statement of cash flows present fairly, in all material respects, the financial position of Main Place Funding, LLC (the “Company”) at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 30, 2007
Main Place Funding, LLC
Statement of Income
(Dollars in Thousands)
See accompanying notes to financial statements.
Main Place Funding, LLC
Balance Sheet
(Dollars in Thousands)
See accompanying notes to financial statements.
Main Place Funding, LLC
Statement of Cash Flows
(Dollars in Thousands)
See accompanying notes to financial statements.
Main Place Funding, LLC
Statement of Changes in Member’s Equity
(Dollars in Thousands)
See accompanying notes to financial statements.
Notes to Financial Statements
Note 1 - Description of Business
Main Place Funding, LLC (“Main Place”), a Delaware limited liability company, is a wholly owned subsidiary of Bank of America, N.A. (the “Parent”), which is a wholly owned indirect subsidiary of Bank of America Corporation (the “Corporation”).
Main Place was established originally as a Maryland real estate investment trust to consolidate the acquisition, holding and management of certain closed-end residential mortgage loans owned by certain affiliates of the Corporation. In August 2002, Main Place Trust, a Delaware business trust, was liquidated into the Parent. The Parent holds a 100 percent membership interest in Main Place. Main Place is also considered a single-member LLC under current tax law.
On October 21, 2002, Main Place adopted an Amended and Restated Limited Liability Company Agreement which removed certain restrictions on the business activities of Main Place permitting it to engage in any activity and to exercise any powers permitted to limited liability companies under the laws of the State of Delaware.
Main Place operates a business of entering into financial warranty agreements in favor of third parties for a fee. As of December 31, 2006, Main Place was a party to three financial warranty agreements with third-party trusts. These trusts are open-ended diversified, registered investment companies. Under the terms of these warranty agreements, Main Place provides financial warranties in order to ensure that the trusts are able to redeem all of the outstanding shares of specified series on the warranty maturity dates for an amount at least equal to an aggregate protected amount. For each of the agreements entered into by Main Place with a third party, Main Place has also entered into a financial warranty agreement with the Parent. Under the terms of these agreements, the Parent provides financial warranties in favor of Main Place corresponding to Main Place’s obligations under the financial warranties with the third parties.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for annual financial information and with the instructions to the Form 10-K. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from these estimates. Significant estimates made by management are discussed in these footnotes as applicable. Accounting policies followed in the presentation of annual financial results are presented in Note 2 on pages 15 to 16 of this report.
On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007. The adoption of SFAS 155 is not expected to have a material impact on Main Place’s financial condition and results of operations.
On July 13, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. Main Place adopted FIN 48 on January 1, 2007. The adoption of FIN 48 will not have an impact on the Main Place’s financial condition and results of operations.
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is effective for Main Place’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the effect of SFAS 157 on Main Place’s financial condition and results of operations.
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. SFAS 159 is effective for the Corporation’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS 159 on the Corporation’s financial condition and results of operations.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, amounts due from affiliated banks and investments in time deposits with an original maturity of less than 90 days.
Derivatives
All derivatives are recognized on the balance sheet at estimated fair value and changes in fair value are recorded in the statement if income.
Income Taxes
Main Place is classified as a single-member LLC and, as such, is disregarded as an entity separate from its owners for income tax purposes. The predominant practice for single-member LLCs is to provide for income taxes in their separate financial statements. The accompanying financial statements include an income tax provision for the years ended December 31, 2006, 2005 and 2004 (see Note 5).
Main Place accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), resulting in two components of Income Tax Expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the applicable period. Balance sheet amounts of deferred taxes are recognized on the temporary differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax liabilities or assets between periods. Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with certain temporary differences will be recognized. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur.
Main Place’s operating results are included in the consolidated federal income tax return and certain combined state income tax returns of the Corporation. The method of allocating income tax expense is determined under a tax allocation agreement between Main Place and the Corporation. This allocation agreement specifies that income tax expense will be computed for all subsidiaries on a separate company method, taking into account tax planning strategies and the tax position of the consolidated group.
Note 3 - Derivatives - Financial Warranty Agreements
Main Place is in the business of entering into financial warranty agreements with third parties. As of December 31, 2006, Main Place was a party to three financial warranty agreements with third party trusts. The aggregate net asset value of outstanding shares subject to these financial warranty agreements was $327.5 million and $395.8 million at December 31, 2006 and December 31, 2005, respectively. For each of the agreements entered into by Main Place with a third party, Main Place has also entered into a financial warranty agreement with the Parent.
On October 29, 2002, Main Place entered into a financial warranty agreement with Pioneer Principal Protection Trust, on behalf of its series Pioneer Protected Principal Plus Fund and Pioneer Investment Management, Inc. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as
amended. Under the terms of the agreement, Main Place provided a financial warranty to the trust in the amount of up to $180.3 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is January 8, 2010.
On December 20, 2002, Main Place entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $180.3 million, corresponding to Main Place’s obligations under the financial warranty in favor of Pioneer Principal Protection Trust, on behalf of its series, Pioneer Protected Principal Plus Fund.
On November 1, 2002, Main Place entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Fundamental Growth Principal Protected Fund and Merrill Lynch Investment Managers, L.P. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place provided a financial warranty in the amount of up to $265.9 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is December 1, 2009.
On November 13, 2002, Main Place entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $265.9 million, corresponding to Main Place’s obligations under the financial warranty in favor of Merrill Lynch Principal Protected Trust, on behalf of its series, Merrill Lynch Fundamental Growth Principal Protected Fund.
On November 1, 2002, Main Place also entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series, Merrill Lynch Basic Value Principal Protected Fund and Fund Asset Management, L.P. The trust is an open-ended diversified, registered investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place provided a financial warranty in the amount of up to $335.8 million in order to ensure that the trust is able to redeem all of the outstanding shares of the series on the maturity date, as defined in the financial warranty agreement. The last day upon which the financial warranty may be drawn is December 1, 2009.
On November 13, 2002, Main Place also entered into a financial warranty agreement with the Parent. Under the terms of this agreement, the Parent provided a financial warranty in favor of Main Place in the amount of up to $335.8 million, corresponding to Main Place’s obligations under the financial warranty in favor of Merrill Lynch Principal Protected Trust, on behalf of its series, Merrill Lynch Basic Value Principal Protected Fund.
Main Place structures these financial warranties to include investment constraints and certain pre-defined triggers that would require the underlying assets or portfolio of the relevant trust to be liquidated and invested in zero-coupon bonds that mature at a preset future date. Main Place is required to fund any shortfall at the preset future date between the value of the trust’s assets and a preset amount. These financial warranties are booked as derivatives and marked to market in the trading portfolio. Main Place has never made a payment to fund any shortfall amount under these products and management believes that the probability of such a payment under these financial warranties is remote.
On February 15, 2006, BlackRock, Inc. & Merrill Lynch agreed to merge their investment management businesses. As part of the merger with BlackRock, the Merrill Lynch Principal Protected Trust Agreements became the BlackRock Principal Protected Trust Agreements on September 29, 2006 when the merger was completed.
Note 4 - Affiliate Transactions
Main Place maintains its cash and cash equivalent accounts with the Parent. Main Place had $7.4 billion and $7.1 billion of time deposits placed with the Parent at December 31, 2006 and 2005, respectively. Interest income on time deposits placed with the Parent for the years ended December 31, 2006, 2005 and 2004 was $356.0 million, $227.0 million and $89.7 million, respectively.
The Parent pays for substantially all general and administrative expenses incurred by the Company, including but not limited to compensation and incentive benefits and office overhead. The Parent charged the Company a management fee of $100 thousand in both 2006 and 2005 to reflect the charge for their services and, these amounts are included in other general and operating expenses.
As described more fully in Note 3, the Parent has entered into financial warranty agreements with Main Place. Under the terms of these agreements, the Parent provides financial warranties in favor of Main Place, where the maximum obligation under the financial warranties is $782.0 million, which corresponds with Main Place’s obligations under financial warranty agreements in favor of third parties.
Accrued expenses due to affiliates at December 31, 2006 and 2005 were $117.2 million and $60.1million, respectively, primarily reflecting income taxes due to the Parent.
Note 5 - Income Taxes
The components of income tax for the years ended December 31, 2006, 2005 and 2004 are as follows (dollars in thousands):
A reconciliation of the expected federal income tax expense using the federal statutory rate of 35 percent to the actual income tax expense for the years ended December 31, 2006, 2005 and 2004, is as follows (dollars in thousands):
Main Place had no deferred tax assets or liabilities at December 31, 2006 and 2005.
Current federal taxes payable to the Corporation, inclusive of current state taxes payable to the Parent, was approximately $117.2 million and $60.1 million at December 31, 2006 and 2005, respectively, which are included in accrued expenses due to affiliates on the accompanying balance sheet.
Note 6 - Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments,” requires the disclosure of the estimated fair values of financial instruments. The fair value of an instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if available, are utilized as estimates of the fair values of financial
instruments. Fair values of items for which no quoted market prices exist have been derived based on management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. The estimation methods for individual classifications of financial instruments are more fully described below. Different assumptions could significantly affect these estimates. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual instruments’ values and should not be considered an indication of the fair value of Main Place.
Short-Term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents, accounts receivable from and accrued expenses due to affiliates and interest receivable approximates the fair value. These financial instruments generally expose Main Place to limited credit risk, have no stated maturities or have maturities of less than 90 days and carry interest rates, which approximate market.
Derivatives
Derivative assets and liabilities are recognized on the balance sheet at estimated fair value, with changes in fair value recorded in the statement of income. Management calculates the fair value of the financial warranty agreements as the present value of the estimated future cash flows. The estimated future cash flows are based on the estimated fees to be received from the funds, as disclosed in Note 3, and paid to the Parent. These fees are calculated based on the net asset value of the aforementioned funds as of December 31, 2006.
Main Place Funding, LLC
Form 10-K
Index to Exhibits
(1) Incorporated by reference from the Form 10-K previously filed on April 1, 2002