FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended
December 31, 2002
Commission File No. 0-22342
TRIAD GUARANTY INC. 401(K) PROFIT-SHARING PLAN
(Full title of the Plan)
TRIAD GUARANTY INC.
101 SOUTH STRATFORD ROAD, WINSTON-SALEM, NC 27104
(Name of issuer of the securities held pursuant to the
plan and the address of its principal executive office)
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
(MODIFIED CASH BASIS)
TRIAD GUARANTY INC. 401(K) PROFIT-SHARING PLAN
DECEMBER 31, 2002 AND 2001 AND YEAR ENDED DECEMBER 31, 2002 WITH REPORT OF
INDEPENDENT AUDITORS
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Financial Statements and Supplemental Schedule
(Modified Cash Basis)
December 31, 2002 and 2001 and year ended December 31, 2002
Contents
Report of Independent Auditors...............................................1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Benefits (Modified Cash Basis)........3
Statement of Changes in Net Assets Available for Benefits
(Modified Cash Basis).....................................................4
Notes to Financial Statements (Modified Cash Basis)..........................5
SUPPLEMENTAL SCHEDULE
Schedule of Assets (Held at End of Year) (Modified Cash Basis)..............11
EXHIBITS
23.2 Consent of Independent Accountants
99.1 Statement Pursuant to Section 1350(a) of title 18, Untied States Code
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan
Administrator of the Triad Guaranty Inc. 401(k) Profit Sharing Plan, has duly
caused this annual report to be signed by the undersigned thereunto duly
authorized.
TRIAD GUARANTY INC. 401(k) PROFIT-SHARING PLAN
June 26, 2003
By:/s/Earl F. Wall
-----------------------
Earl F. Wall
Senior Vice President, Secretary,
General Counsel and Plan Administrator
Report of Independent Auditors
Plan Administrator of the Triad Guaranty Inc.
401(k) Profit-Sharing Plan
We have audited the accompanying statements of net assets available for benefits
(modified cash basis) of the Triad Guaranty Inc. 401(k) Profit-Sharing Plan as
of December 31, 2002 and 2001, and the related statement of changes in net
assets available for benefits (modified cash basis) for the year ended December
31, 2002. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, these financial statements and the supplemental schedule
were prepared on a modified cash basis of accounting, which is a comprehensive
basis of accounting other than accounting principles generally accepted in the
United States.
In our opinion, the financial statements referred to above present fairly, in
all material respects, information regarding the Plan's net assets available for
benefits (modified cash basis) as of December 31, 2002 and 2001, and changes
therein (modified cash basis) for the year ended December 31, 2002, on the basis
of accounting described in Note 2.
1
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule (modified
cash basis) of assets (held at end of year) as of December 31, 2002 is presented
for purposes of additional analysis and is not a required part of the financial
statements but is supplementary information required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. This supplemental schedule is the
responsibility of the Plan's management. The supplemental schedule (modified
cash basis) has been subjected to the auditing procedures applied in our audits
of the financial statements and, in our opinion, is fairly stated in all
material respects in relation to the financial statements taken as a whole.
ERNST & YOUNG LLP
May 30, 2003
2
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Statements of Net Assets Available for Benefits
(Modified Cash Basis)
December 31
2002 2001
-------------------------------
Assets
Investments, at fair value $7,650,367 $7,208,978
-------------------------------
Net assets available for benefits $7,650,367 $7,208,978
===============================
See notes to financial statements.
3
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Statement of Changes in Net Assets Available for Benefits
(Modified Cash Basis)
Year ended December 31, 2002
Additions:
Investment income:
Interest and dividends $ 4,733
Contributions:
Participants 1,002,873
Employer 390,657
Rollover 22,869
---------------
1,416,399
---------------
Total additions 1,421,132
Deductions:
Net depreciation in fair value of investments 505,322
Benefits paid to participants 474,421
---------------
Total deductions 979,743
---------------
Net increase 441,389
Net assets available for benefits:
Beginning of year 7,208,978
---------------
End of year $ 7,650,367
===============
See notes to financial statements.
4
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS)
DECEMBER 31, 2002
1. DESCRIPTION OF PLAN
The following description of the Triad Guaranty Inc. 401(k) Profit-Sharing Plan
(the "Plan") provides only general information. Participants should refer to the
Plan agreement for a more complete description of the Plan's provisions.
GENERAL
The Plan is a salary deferral 401(k) defined contribution plan covering all
employees of Triad Guaranty Inc. and its subsidiaries (the "Company" or the
"Plan Sponsor") who have at least three months of service and are age eighteen
or older. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The Plan became effective November 1,
1993.
CONTRIBUTIONS
Each year, participants may contribute up to 15% of their annual compensation,
as defined in the Plan. However, these elective deferral contributions may not
exceed the dollar limitation contained in Section 402(g) of the Internal Revenue
Code. Participants may also contribute amounts representing distributions from
other qualified defined benefit or defined contribution plans. In accordance
with the Plan provisions, the Company may match the participant's elective
deferral contribution. The discretionary percentage matched is determined by the
Plan sponsor. Additional amounts may be contributed at the option of the Plan
sponsor. Contributions receivable were approximately $28,000 and $0 as of
December 31, 2002 and 2001, respectively.
FORFEITURES
Forfeitures of matching contributions of $18,557 were used to reduce employer
contributions during 2002.
5
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
1. DESCRIPTION OF PLAN (CONTINUED)
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contributions
(elective deferral contribution) and allocations of (a) the Company's
contributions and (b) the Plan's earnings. Allocations are based on
participants' compensation and account balances. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's account.
VESTING
Participants are immediately vested in their contributions plus actual earnings
thereon. Vesting in the Company contribution portion of their accounts plus
actual earnings thereon is based on years of continuous service. Participants
are 20% vested after 1 year, 40% vested after 2 years, 60% vested after 3 years,
80% vested after 4 years and 100% vested after 5 years of service.
PARTICIPANTS LOANS
Participants may borrow from their fund accounts a minimum of $1,000 up to a
maximum equal to the lesser of $50,000 or 50% of their vested account balance.
Loan terms range from 1-5 years or up to 15 years for the purchase of a primary
residence. The loans are secured by the balance in the participant's account and
bear interest at a rate commensurate with local prevailing rates as determined
quarterly by the plan administrator. Principal and interest are paid ratably
through monthly payroll deductions.
PAYMENT OF BENEFITS
On termination of service, a participant may receive a lump-sum payment equal to
the vested value of his or her account. Upon death, disability or retirement, a
participant may receive either a lump-sum payment equal to the vested value of
his or her account, or choose from several annuity options.
6
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
1. DESCRIPTION OF PLAN (CONTINUED)
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.
2. SUMMARY OF ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements of the Plan are prepared under the modified cash basis
of accounting, which is a comprehensive basis of accounting other than
accounting principles generally accepted in the United States. Under this basis,
investments are recorded at fair value, contributions are recorded when received
and benefits are recorded when paid.
INVESTMENT VALUATION
The Plan's investments are stated at fair value. The shares of the registered
investment companies are valued at quoted market prices, which represent the net
asset values of shares held by the Plan at year-end. Marketable securities are
stated at fair value. The participant loans are valued at their outstanding
balances, which approximate their fair value.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
7
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
3. INVESTMENTS
The Plan's investments are held by a bank administered trust fund. Investments
that represent 5 percent or more of the Plan's net assets as of December 31 are
as follows:
2002 2001
--------------------------
Investments at fair value as determined by
quoted market price:
Triad Guaranty Inc. Common Stock $ 3,255,875 $ 4,267,321
Merrill Lynch Retirement Preservation Trust 1,417,740 -
Davis New York Venture Fund 827,778 885,721
Alger Capital Appreciation Portfolio 510,153 580,468
PIMCO Total Return Fund 498,223 349,697
During 2002, the Plan's investments (including investments bought and sold, as
well as held during the period) appreciated (depreciated) in value as follows:
Net Appreciation
(Depreciation)
in Fair Value During
Year
--------------------
Triad Guaranty Inc. Common Stock $ 163,891
Mutual Funds (669,213)
--------------
$ (505,322)
==============
8
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
4. exempt party-in-interest transactions
All Plan investments are managed by the trustee, Merrill Lynch, and, therefore,
these transactions qualify as a party-in-interest. All fees for the investment
manager services were paid by the Plan sponsor.
Certain administrative functions are performed by officers or employees of the
Company. No such officer or employee receives compensation from the Plan. All
administrative expenses are paid directly by the Plan sponsor.
5. INCOME TAX STATUS
The Plan received an opinion letter from the Internal Revenue Service dated June
4, 2002, stating that the written form of the underlying prototype plan document
is qualified under Section 401(a) of the Internal Revenue Code (the "Code"), and
that any employer adopting this form of the Plan will be considered to have a
plan qualified under Section 401(a) of the Code. Therefore, the related trust is
exempt from taxation. Once qualified, the Plan is required to operate in
conformity with the Code to maintain its qualification. The Plan Administrator
believes the Plan is being operated in compliance with the applicable
requirements of the Code and, therefore, believes that the Plan is qualified and
the related trust is tax exempt.
9
SUPPLEMENTAL SCHEDULE
10
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
EIN: 56-1838519
PLAN NUMBER: 001
SCHEDULE H, LINE 4I
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
(MODIFIED CASH BASIS)
DECEMBER 31, 2002
(c)
Description of
Investment, Including
(a) (b) Maturity Date, Rate
of Interest, Current
Identity of Issue, Borrower, Collateral, Par (e)
Lessor or Similar Party or Maturity Value Value
----- ---------------------------------------- ----------------------- ---------
* Triad Guaranty Inc. Common Stock 88,333 shares $ 3,255,875
Davis New York Venture Fund 39,534 shares 827,778
Dreyfus Founders Discovery Fund 5,084 shares 97,058
Alger Capital Appreciation Portfolio 86,909 shares 510,153
PIMCO Total Return Fund 46,694 shares 498,223
Federated International Equity Fund 26,594 shares 306,098
* Merrill Lynch Fundamental Growth Fund 2,225 shares 28,256
Van Kampen American Value Fund 672 shares 10,146
* Merrill Lynch Small Cap Value Fund 4,031 shares 72,679
PIMCO Innovation Fund 1,649 shares 17,762
PIMCO Mid-Cap Growth Fund 3,643 shares 55,667
* Merrill Lynch S&P 500 Index Fund 17,842 shares 191,979
AIM Balanced Fund 2,291 shares 47,678
* Merrill Lynch Retirement
Preservation Trust 1,417,740 shares 1,417,740
Other Assets 291,397 shares 291,397
Loans Various maturities
with rates ranging
from 5.75% to 7.75% 21,878
-----------
$ 7,650,367
===========
* Indicates party in interest to the Plan
Note: Cost information has not been included because all investments are
participant directed.