SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 11-K
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/x/ ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
or
/ / TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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, 2003 AND 2002 AND YEAR ENDED DECEMBER 31, 2003
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Financial Statements and Supplemental Schedule
(Modified Cash Basis)
December 31, 2003 and 2002 and year ended December 31, 2003
Contents
Report of Independent Registered Public Accounting Firm.......................1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Benefits (Modified Cash Basis).........2
Statement of Changes in Net Assets Available for Benefits
(Modified Cash Basis).....................................................3
Notes to Financial Statements (Modified Cash Basis)...........................4
SUPPLEMENTAL SCHEDULE
Schedule H Line 4i - Schedule of Assets (Held at End of Year)
(Modified Cash Basis).....................................................9
EXHIBITS
23.2 Consent of Independent Accountants
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 28, 2004
By:/s/Earl Wall
-----------------------
Earl Wall
Senior Vice President, Secretary,
General Counsel and Plan Administrator
Report of Independent Registered Public Accounting Firm
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, 2003 and 2002, and the related statement of changes in net
assets available for benefits (modified cash basis) for the year ended December
31, 2003. 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 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. 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 U.S. generally accepted accounting principles.
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, 2003 and 2002, and changes
therein (modified cash basis) for the year ended December 31, 2003, on the basis
of accounting described in Note 2.
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, 2003 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 28, 2004
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Statements of Net Assets Available for Benefits
(Modified Cash Basis)
December 31
2003 2002
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Assets
Investments, at fair value $ 11,329,013 $ 7,650,367
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---------------------------------------
Net assets available for benefits $ 11,329,013 $ 7,650,367
=======================================
See accompanying notes.
2
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Statement of Changes in Net Assets Available for Benefits
(Modified Cash Basis)
Year ended December 31, 2003
Additions:
Investment income:
Interest and dividends $ 183,514
Net appreciation in fair value of investments 2,157,803
------------------
------------------
2,341,317
Contributions:
Participants 1,057,451
Employer 469,929
Rollover 24,673
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1,552,053
------------------
Total additions 3,893,370
Deductions:
Benefits paid to participants 214,724
------------------
------------------
Total deductions 214,724
------------------
------------------
Net increase 3,678,646
Net assets available for benefits:
Beginning of year 7,650,367
------------------
End of year $ 11,329,013
==================
See accompanying notes.
3
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS)
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 $6,000 and $28,000 as of
December 31, 2003 and 2002, respectively.
Upon enrollment, a participant may direct employee contributions in 1-15%
increments to any of the plans funds options. Participants may change their
investment option daily online with Merrill Lynch, but their percent
contribution can only be changed quarterly. Employer contributions are invested
in the participant's investment options using the participant's percent
selections. At any time, the participant may change his contribution to 0%.
FORFEITURES
Forfeitures of matching contributions of $14,389 were used to reduce employer
contributions during 2003.
4
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 semi-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.
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.
5
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
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 U.S.
generally accepted accounting principles. 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.
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:
2003 2002
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Investments at fair value as determined
by quoted market price:
Triad Guaranty Inc. Common Stock $ 3,806,030 $ 3,255,875
Merrill Lynch Retirement Preservation Trust 2,154,170 1,417,740
Davis New York Venture Fund 1,574,415 827,778
Alger Capital Appreciation Portfolio 762,572 510,153
PIMCO Total Return Fund 722,264 498,223
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TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 2003, the Plan's investments (including investments purchased, sold, as
well as held during the year) appreciated in value as follows:
Net Appreciation
in Fair Value During
Year
--------------------
Triad Guaranty Inc. Common Stock $1,233,230
Mutual Funds 924,573
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$2,157,803
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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. RISKS AND UNCERTAINTIES
The Plan invests in various investment securities. 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
participants account balances and the amounts reported in the statements of net
assets available for benefits.
7
TRIAD GUARANTY INC.
401(K) PROFIT-SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
(MODIFIED CASH BASIS) (CONTINUED)
6. INCOME TAX STATUS
The underlying non-standardized prototype plan has received an opinion letter
from the Internal Revenue Service (IRS) dated June 4, 2002 stating that the form
of the plan is qualified under Section 401 of the Internal Revenue Code, and
therefore, the related trust is tax exempt. In accordance with Revenue Procedure
2002-6 and Announcement 2001-77, the Plan Sponsor has determined that it is
eligible to and has chosen to rely on the current IRS prototype plan opinion
letter. 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.
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SUPPLEMENTAL SCHEDULE
9
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, 2003
(a) (b) (c)
Description of Investment,
Including Maturity Date, Rate of (e)
Identity of Issue, Borrower, Interest, Collateral, Par or Current
Lessor or Similar Party Maturity Value Value
---- ------------------------------------------------------------------------------ -----------------
* Triad Guaranty Inc. Common Stock 75,591 shares $ 3,806,030
Davis New York Venture Fund 57,210 shares 1,574,415
Dreyfus Founders Discovery Fund 2,096 shares 54,585
Alger Capital Appreciation Portfolio 96,042 shares 762,572
PIMCO Total Return Fund 67,438 shares 722,264
Federated International Equity Fund 24,690 shares 380,468
* Merrill Lynch Fundamental Growth Fund 12,158 shares 197,561
Van Kampen American Value Fund 4,152 shares 88,363
* Merrill Lynch Small Cap Value Fund 13,089 shares 334,295
PIMCO Innovation Fund 2,301 shares 39,235
PIMCO Mid-Cap Growth Fund 5,505 shares 109,830
* Merrill Lynch S&P 500 Index Fund 27,302 shares 372,403
AIM Balanced Fund 1,912 shares 45,754
MFS Intl New Discovery Fund 9,539 shares 172,648
State Street Research Emerging Growth 5,445 shares 72,201
The Oakmark EQ & INC Fund 2,495 shares 54,815
* Merrill Lynch Retirement Preservation Trust 2,154,170 shares 2,154,170
Other Assets 374,434 shares 374,434
Various maturities with rates
Loans ranging from 5.00%
to 7.75% 12,970
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$11,329,013
=================
* Indicates party in interest to the Plan
Note: Cost information has not been included because all investments are participant directed.
10