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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 11-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22342
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TRIAD GUARANTY INC. 401 (K) PROFIT SHARING PLAN
(Full title of the Plan)
TRIAD GUARANTY INC.
101 SOUTH STRATFORD ROAD
WINSTON-SALEM, NORTH CAROLINA 27104
(Name of issuer of the securities held pursuant to the
plan and the address of its principal executive office)
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Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Financial Statements and Supplemental Schedule
(Modified Cash Basis)
As of December 31, 2005 and 2004,
and for the Year Ended December 31, 2005
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
EXHIBIT:
23.2 Consent of Independent Registered Public Accounting Firm
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 23, 2006
By: /s/ Earl F. Wall
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Earl F. 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, 2005 and 2004, and the related statement of changes in net
assets available for benefits (modified cash basis) for the year ended December
31, 2005. 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. We were not engaged to perform an
audit of the Plan's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Plan's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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.
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) at December 31, 2005 and 2004, and changes
therein (modified cash basis) for the year ended December 31, 2005, 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, 2005, 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.
/s/ Ernst & Young LLP
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June 22, 2006
Greensboro, North Carolina
1
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Statements of Net Assets Available for Benefits
(Modified Cash Basis)
December 31
2005 2004
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ASSETS
Investments, at fair value $14,242,735 $13,843,546
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Net assets available for benefits $14,242,735 $13,843,546
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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, 2005
Additions:
Investment income (loss):
Interest and dividends $ 323,711
Net depreciation in fair value of investments (619,782)
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(296,071)
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Contributions:
Participants 1,193,994
Employer 476,076
Rollover 87,715
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1,757,785
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Total additions 1,461,714
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Deductions:
Benefits paid to participants 1,062,525
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Total deductions 1,062,525
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Net increase 399,189
Net assets available for benefits:
Beginning of year 13,843,546
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End of year $ 14,242,735
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See accompanying notes.
3
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Notes to Financial Statements
(Modified Cash Basis)
December 31, 2005
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) as amended. The Plan became effective October 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 who are age 50 or older during the calendar year and make the
maximum allowable pre-tax contribution to the plan are entitled to make an
additional "catch-up contribution", up to a maximum of $4,000 for 2005.
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. For 2005, the Company matched 50% of contributions up to 8% of the
participant's eligible compensation. The discretionary percentage match is
determined by the Plan sponsor. Additional amounts may be contributed at the
option of the Plan sponsor.
Upon enrollment, a participant may direct employee contributions to any of the
Plan's fund options. Participants may change their investment options daily
online with Merrill Lynch, but can change their contribution percents only
quarterly. Participants can elect to discontinue their contributions to the Plan
at any time, however, those participants must wait until the next available
entrance date to participate again. Employer contributions are invested in the
participant's investment options using the participant's percent selections.
4
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Notes to Financial Statements
(Modified Cash Basis) (continued)
1. DESCRIPTION OF PLAN (continued)
FORFEITURES
Forfeitures of matching contributions totaling $20,377 in 2005 were used to
reduce employer contributions during the year. At December 31, 2005 and 2004,
forfeitures of $46,144 and $20,377 were outstanding.
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 own 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 of service, 40% vested after 2 years,
60% vested after 3 years, 80% vested after 4 years and 100% vested after 5
years.
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.
5
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Notes to Financial Statements
(Modified Cash Basis) (continued)
1. DESCRIPTION OF PLAN (continued)
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 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. Beneficiaries of
Plan participants have the same benefit payment options as disabled or retired
participants upon the death of participants.
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 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 fair value of the participation units owned by the
Plan in the collective trust are based on quoted redemption values on the last
business day of the plan year. The participant loans are valued at their
outstanding balances, which approximate their fair value.
6
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Notes to Financial Statements
(Modified Cash Basis) (continued)
2. SUMMARY OF ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The financial statements are prepared on a modified cash basis, which is a basis
of accounting other than U.S. generally accepted accounting principles. 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:
2005 2004
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Investments at fair value as determined by quoted
market price:
Triad Guaranty Inc. Common Stock $ 2,982,434 $ 3,931,157
Merrill Lynch Retirement Preservation Trust 2,838,771 2,803,980
Davis New York Venture Fund 2,115,662 1,955,243
PIMCO Total Return Fund 1,061,470 963,423
Alger Capital Appreciation Portfolio 995,219 944,358
Merrill Lynch S&P 500 Index Fund 861,178 -
During 2005, the Plan's investments (including investments purchased, sold, as
well as held during the year) depreciated in value as follows:
Net Appreciation/
(Depreciation)
in Fair Value During
Year
---------------------
Triad Guaranty Inc. Common Stock ($1,070,023)
Mutual Funds 481,621
Self Directed Brokerage Accounts (31,380)
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($ 619,782)
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7
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Notes to Financial Statements
(Modified Cash Basis) (continued)
4. EXEMPT PARTY-IN-INTEREST TRANSACTIONS
Investment funds managed by Merrill Lynch, the trustee of the Plan, qualify as
party-in-interest. The Plan sponsor pays all fees for investment manager
services. The Plan also holds common stock of the Company that qualifies as
party-in-interest.
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.
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.
8
SUPPLEMENTAL SCHEDULE
Triad Guaranty Inc.
401(k) Profit-Sharing Plan
Schedule H, Line 4i -- Schedule of Assets
(Held at End of Year) (Modified Cash Basis)
EIN #56-1838519 Plan #001
December 31, 2005
(c)
Description of Investment,
(b) Including Maturity Date, Rate (e)
Identity of Issue, Borrower, of Interest, Collateral, Par Current
(a) Lessor or Similar Party or Maturity Value Value
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*Triad Guaranty Inc. Common Stock 67,798 shares $ 2,982,434
*Merrill Lynch Retirement Preservation Trust 2,838,771 shares 2,838,771
Davis New York Venture Fund 62,779 shares 2,115,662
PIMCO Total Return Fund 101,092 shares 1,061,470
Alger Capital Appreciation Portfolio 101,449 shares 995,219
*Merrill Lynch S&P 500 Index Fund 56,323 shares 861,178
Federated International Equity Fund 34,490 shares 660,486
MFS Intl New Discovery Fund 27,184 shares 648,078
Self-directed accounts 598,194 shares 598,194
*Merrill Lynch Value Opportunities Fund 20,307 shares 519,659
*Merrill Lynch Fundamental Growth Fund 16,430 shares 307,904
Van Kampen American Value Fund 9,269 shares 252,499
Allianz CCM Mid-Cap Fund 5,755 shares 153,029
Blackrock Small/Mid-Cap Growth 8,973 shares 128,594
The Oakmark EQ & INC Fund 1,948 shares 48,516
AIM Basic Balanced Fund 2,154 shares 26,394
Dreyfus Founders Discovery Fund 553 shares 15,830
Allianz RCM Global Tech 382 shares 14,881
Participant Loans Various maturities with rates
ranging from 5.00% to 7.75% 13,083
Cash 854
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$ 14,242,735
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* Indicates party in interest to the Plan
Note: Cost information has not been included because all investments are
participant directed.
9