Countrywide Financial Corporation
401(k) Savings and Investment Plan
NOTES TO FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1 — DESCRIPTION OF PLAN
The following description of the Countrywide Financial Corporation (the Company) 401(k) Savings and Investment Plan (the Plan) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.
A. General
The Plan is a defined contribution plan covering all full-time employees of the Company immediately upon their hire date if they are age 21 or older. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
B. Contributions
Each year, participants may contribute up to 40 percent of pretax annual compensation, as defined in the Plan document. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. The Company makes a discretionary matching contribution equal to 50 percent of the first 6 percent of eligible earnings, as defined in the Plan, that the participant contributes. Contributions are subject to certain limitations. During the years ended December 31, 2005 and 2004, the Company’s discretionary matching contributions were made entirely in Company common stock.
C. Participant Accounts
Each participant’s account is credited with the participant’s contribution, discretionary matching contribution and an allocation of Plan earnings. Allocations of Plan earnings are based on account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
D. Vesting
Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Vesting in the Company’s discretionary matching contribution portion of their accounts plus actual earnings thereon is based on years of service. Participants begin vesting in Company contributions after one year of credited service and are fully vested after five years of credited service.
E. Participant Loans Receivable
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their total vested account balances. Loan terms may range up to 15 years for the purpose of purchasing a primary residence, and up to five years for all other purposes. The loans are secured by the balance in the participant’s account and earn interest at rates established by the Plan administrator. The current interest rates of participant loans receivable ranges from 4.0% to 11.5%. Principal and interest is paid ratably through semi-monthly payroll deductions.
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Countrywide Financial Corporation
401(k) Savings and Investment Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 1 - DESCRIPTION OF PLAN - Continued
F. Payment of Benefits
On termination of service before the normal retirement age of 65, a participant may elect to defer distribution until normal retirement age or receive a lump sum payment equal to the vested share of the participant’s account. Effective March 28, 2005, if or when the participant’s total vested benefit value is $1,000 or less, the Plan requires the administrator to direct the trustee to pay the entire vested benefit to the participant in a lump sum. Prior to March 28, 2005, the same occurred if the participant’s total vested benefit value was $5,000 or less.
Effective March 28, 2005, if the participant’s total vested benefit value is between $1,000 and $5,000 and the participant does not elect to rollover or receive the distribution, the Plan requires the administrator to direct the trustee to pay the entire vested benefit to the participant in a direct rollover to an individual retirement plan designated by the administrator.
On termination of service due to death, disability or normal retirement, participants or their beneficiaries may elect to receive a lump sum amount equal to the value of the participant’s vested interest in his or her account.
G. Forfeited Matching Contributions
At December 31, 2005, forfeited non-vested accounts totaled $2,510,753. During the year, $2,117,321 was forfeited and this amount, less investment losses of $1,855 less administration expenses of $133,088 had not yet been used to reduce the Company’s discretionary matching contributions as of December 31, 2005. Employer contributions of $3,215,832 were used to fund contributions to participant’s accounts.
At December 31, 2004, forfeited non-vested accounts totaled $3,744,207. During the year, $1,935,524 was forfeited and this amount, plus investment earnings of $33,266 less administration expenses of $131,294, had not yet been used to reduce the Company’s discretionary matching contributions as of December 31, 2004. Employer contributions of $44,108 were used to fund contributions to participant’s accounts.
NOTE 2 — SUMMARY OF ACCOUNTING POLICIES
A. Basis of Accounting
The financial statements of the Plan are prepared under the accrual method of accounting. The Company may pay administrative expenses of the Plan, with the exception of costs incurred for loans, which are paid for by participants who have loans.
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Countrywide Financial Corporation
401(k) Savings and Investment Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES - Continued
B. Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value. Shares of registered investment companies are valued at quoted market prices, which represent the net asset value of shares held by the Plan at year-end. The Company’s common stock is valued at its quoted market price. Participant loans receivable are valued at cost which approximates estimated fair value.
Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date.
C. Payment of Benefits
Benefits are recorded when paid.
D. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
E. Risks and Uncertainties
The Plan invests in various types of investment securities, including mutual funds, actively managed funds and Countrywide Financial Corporation Common Stock. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits.
Certain mutual funds offered by the Plan invest in the securities of foreign companies, which involves special risks and considerations not typically associated with investing in U.S. companies. These risks include devaluation of currencies, less reliable information about issuers, different securities transaction clearance and settlement practices, and possible adverse political and economic developments. Moreover, securities of many foreign companies and their markets may be less liquid and their prices more volatile than similar types of securities of comparable U.S. companies.
As of December 31, 2005 and 2004, approximately 34% and 41%, respectively, of total Plan investments were invested in Countrywide Financial Corporation Common Stock.
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Countrywide Financial Corporation
401(k) Savings and Investment Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 3 — INVESTMENTS
The Plan’s investments are held in a trust fund administered by Fidelity Investments. The fair values of investments that represented five percent or more of the Plan’s net assets consisted of the following:
| | | | December 31, | |
Investment Name | | Investment Description | | 2005
Fair Value | | 2004
Fair Value | |
| | | | (Dollar amounts in thousands) | |
Countrywide Financial Corporation Common Stock * | | Stock | | $ | 269,635 | | $ | 271,605 | |
Spartan U.S. Equity Index Fund | | Mutual Fund | | 60,217 | | 49,034 | |
Fidelity Equity-Income Fund | | Mutual Fund | | 60,072 | | 48,205 | |
Fidelity Diversified International Fund | | Mutual Fund | | 59,841 | | 34,339 | |
PIMCO Total Return Fund | | Mutual Fund | | 50,330 | | 40,556 | |
Fidelity Retirement Money Market Portfolio | | Mutual Fund | | 45,943 | | 40,703 | |
Wasatch Small Cap Growth Fund | | Mutual Fund | | 41,706 | | 26,355 | ** |
All investments less than 5% of Plan assets | | Various | | 205,624 | | 149,217 | |
| | | | | | | |
Total investments | | | | $ | 793,368 | | $ | 660,014 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
* Participantand nonparticipant-directed
** Less than 5% of investments included for comparative purposes
During 2005 and 2004, the Plan’s investments (including gains and losses on investments bought and sold during the year) depreciated in value by approximately $8,578,000 and appreciated in value by approximately $103,054,000, respectively, as follows:
| | Years Ended December 31, | |
| | 2005 | | 2004 | |
| | (Dollar amounts in thousands) | |
| | | | | |
Countrywide Financial Corporation Common Stock * | | $ | (15,684 | ) | $ | 82,154 | |
Stock mutual funds | | 7,106 | | 20,900 | |
| | | | | |
Net (depreciation) appreciation in fair value of investments | | $ | (8,578 | ) | $ | 103,054 | |
* Participant and nonparticipant-directed
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Countrywide Financial Corporation
401(k) Savings and Investment Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 4 — RELATED PARTY TRANSACTIONS
Certain Plan investments are shares of mutual funds managed by Fidelity Investments and shares of common stock of Countrywide Financial Corporation. Fidelity Investments is the trustee and Countrywide Financial Corporation is the plan sponsor as defined by the Plan, and therefore, these transactions qualify as party-in-interest transactions.
NOTE 5 — PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100 percent vested in their accounts.
NOTE 6 — TAX STATUS
The Internal Revenue Service (IRS) has determined and informed the Company by a letter dated June 5, 2002, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (Code). Amendments to the Plan have been made subsequent to the date of the IRS determination letter. However, the Company believes that the Plan is designed and is currently being operated in compliance with the requirements of the Code.
NOTE 7 — SUBSEQUENT EVENT
Effective January 1, 2006, the Plan was amended to include a discretionary Profit Sharing contribution to eligible participants. Eligible participants are participants who were hired on or after January 1, 2006, and are therefore not eligible to participate in the Company’s Defined Benefit Pension Plan, have completed one year of service and are actively employed on the last day of the year. The contribution is currently contemplated to be 2% of eligible compensation, funded in cash or Company Stock. Contributions, if made, will occur at the end of each year, with the first discretionary contribution occurring at the end of 2007. Participants who receive the discretionary Profit Sharing contribution begin vesting after one year of credited service and are fully vested after five years.
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