-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ov430LmAi7zRKRUSfidaYkfYxG5Daeyvb08alZl6r5GmpTrnc1Kb9MHawaM+O/LG jBrVlf3AymDiKjGLo5AWEw== 0000950137-03-001748.txt : 20030326 0000950137-03-001748.hdr.sgml : 20030325 20030326163752 ACCESSION NUMBER: 0000950137-03-001748 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030522 FILED AS OF DATE: 20030326 EFFECTIVENESS DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIAD GUARANTY INC CENTRAL INDEX KEY: 0000911631 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 561838519 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22342 FILM NUMBER: 03618619 BUSINESS ADDRESS: STREET 1: 101 SOUTH STRATFORD RD STREET 2: SUITE 103 CITY: WINSTON-SALEM STATE: NC ZIP: 27104 BUSINESS PHONE: 3367231282 MAIL ADDRESS: STREET 1: 101 SOUTH STRATFORD ROAD STREET 2: SUITE 103 CITY: WINSTON-SALEM STATE: NC ZIP: 27104 DEF 14A 1 c75635ddef14a.txt DEFINITIVE PROXY STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement. [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2)). [X] Definitive Proxy Statement. [ ] Definitive Additional Materials. [ ] Soliciting Material Pursuant to Section 240.14a-12 TRIAD GUARANTY INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): - -------------------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- 5) Total fee paid: - -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: - -------------------------------------------------------------------------------- 2) Form, Schedule or Registration Statement No.: - -------------------------------------------------------------------------------- 3) Filing Party: - -------------------------------------------------------------------------------- 4) Date Filed: - -------------------------------------------------------------------------------- PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER. SEC 1913 (02-02) [TRIAD GUARANTY INC. LOGO] TRIAD GUARANTY INC. 101 South Stratford Road, Suite 500 Winston-Salem, North Carolina 27104 ------------------ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 22, 2003 To the Stockholders of TRIAD GUARANTY INC. NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Triad Guaranty Inc. (the "Company") will be held at Adam's Mark, 425 North Cherry Street, Winston-Salem, North Carolina, on Thursday, May 22, 2003, at 2:00 p.m. Eastern Time, for the purpose of considering and acting upon the following matters: 1. To elect six directors to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified; and 2. To consider and act upon such other business as may properly come before the meeting or any adjournments thereof. Stockholders of record as of the close of business on April 1, 2003 shall be entitled to notice of and to vote at the meeting. The transfer books will not be closed. For ten days prior to the meeting, a list of stockholders entitled to vote at the meeting will be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, at the offices of the Company, 101 South Stratford Road, Winston-Salem, North Carolina 27104. Stockholders who do not expect to attend the meeting in person are urged to execute and return the accompanying proxy in the envelope enclosed. By order of the Board of Directors Earl F. Wall Secretary Winston-Salem, North Carolina April 7, 2002 PROXY STATEMENT TRIAD GUARANTY INC. ANNUAL MEETING OF STOCKHOLDERS MAY 22, 2003 GENERAL INFORMATION This proxy statement is being furnished to the stockholders of Triad Guaranty Inc., a Delaware corporation (the "Company"), 101 South Stratford Road, Winston-Salem, North Carolina 27104, in connection with the solicitation of proxies by its Board of Directors for use at the annual meeting of stockholders to be held on Thursday, May 22, 2003 and at any adjournments thereof. The approximate date on which this proxy statement and the accompanying proxy are first being sent to stockholders is April 7, 2003. The proxy is revocable at any time before it is voted by a subsequently dated proxy, by written notification to the persons named therein as proxies, which may be mailed or delivered to the Company at the above address, or by attendance at the meeting and voting in person. All shares represented by effective proxies will be voted at the meeting and at any adjournments thereof. If the enclosed proxy is properly executed and returned in time for voting with a choice specified thereon, the shares represented thereby will be voted as indicated thereon. If no specification is made, the proxy will be voted by the proxy committee for the election as directors of the nominees named below (or substitutes therefor, if any nominees are unable or refuse to serve), and in its discretion upon such matters not presently known or determined which may properly come before the meeting. The Company is a holding company which, through its wholly-owned subsidiary, Triad Guaranty Insurance Corporation ("Triad"), provides private mortgage insurance coverage in the United States to residential mortgage lenders and investors. The Company has one class of stock outstanding, Common Stock, par value $.01 per share ("Common Stock"). On April 1, 2003, 14,272,494 shares of Common Stock were outstanding and entitled to one vote each on all matters to be considered at the meeting. Stockholders of record as of the close of business on April 1, 2003 are entitled to notice of and to vote at the meeting. There are no cumulative voting rights with respect to the election of directors. Inspector(s) of election will be appointed to tabulate the number of shares of Common Stock represented at the meeting in person or by proxy, to determine whether or not a quorum is present and to count all votes cast at the meeting. The inspector(s) of election will treat abstentions and broker nonvotes as shares that are present and entitled to vote for purposes of determining the presence of a quorum. With respect to the tabulation of votes cast on a specific proposal presented to the stockholders at the meeting, abstentions will be considered as present and entitled to vote with respect to that specific proposal, whereas broker nonvotes will not be considered as present and entitled to vote with respect to that specific proposal. PRINCIPAL HOLDERS OF COMMON STOCK The following table shows, with respect to each person who is known to be the beneficial owner of more than 5% of the Common Stock of the Company: (i) the total number of shares of Common Stock beneficially owned as of February 1, 2003; and (ii) the percent of the Common Stock so owned as of that date:
AMOUNT AND NATURE PERCENT OF NAME AND ADDRESS OF OF BENEFICIAL COMMON BENEFICIAL OWNER OWNERSHIP STOCK - ------------------- ----------------- ---------- Collateral Investment Corp.(2)(3)(6)........................ 2,677,500 18.9% Collateral Mortgage, Ltd.(4)(5)(7).......................... 2,572,500 18.2% T. Rowe Price Associates(11)................................ 1,356,900 9.5%
The following table shows with respect to each director and director nominee of the Company, the executive officers of the Company named in the Executive Compensation Table, and all directors and executive officers as a group, ten in number: (i) the total number of shares of Common Stock beneficially owned as of February 15, 2003; and (ii) the percent of the Common Stock so owned as of that date:
AMOUNT AND NATURE PERCENT OF OF BENEFICIAL COMMON NAME OF BENEFICIAL OWNER OWNERSHIP(1) STOCK - ------------------------ ----------------- ---------- William T. Ratliff, III(8).................................. 232,439(9)(10) 1.6% Darryl W. Thompson.......................................... 334,812(9) 2.4% David W. Whitehurst......................................... 54,625(9) * Robert T. David............................................. 26,919(9) * Michael A. F. Roberts....................................... 0 0 Richard S. Swanson.......................................... 0 0 Kenneth N. Lard............................................. 14,489(9) * Ron D. Kessinger............................................ 43,694(9) * Michael R. Oswalt........................................... 16,083(9) * Earl F. Wall................................................ 36,011(9) * ------- --- 759,072 All directors and executive officers as a group (10 persons)(8)............................................... 762,385(9) 5.4%
- --------------- * Less than one percent. (1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934. Unless otherwise stated below, each such person has sole voting and investment power with respect to all such shares. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. (2) The business address of Collateral Investment Corp., an insurance holding company ("CIC"), is 1900 Crestwood Boulevard, Birmingham, Alabama 35210-2034. (3) Mr. William T. Ratliff, Jr. is a vice president and director of CIC and beneficially owns 24.34% of the outstanding voting capital stock of CIC. Accordingly, Mr. Ratliff, Jr. may be deemed to be the beneficial owner of the shares of Common Stock owned by CIC. The business address of Mr. Ratliff, Jr. is 1900 Crestwood Boulevard, Birmingham, Alabama 35210-2034. Mr. Ratliff, Jr. is the father of Mr. William T. Ratliff, III. 2 (4) The business address of Collateral Mortgage, Ltd., a mortgage banking and real estate lending firm ("CML"), is 1900 Crestwood Boulevard, Birmingham, Alabama 35210-2034. (5) Collat, Inc. ("Collat") is the general partner of CML and as such may be deemed to be the beneficial owner of the shares of Common Stock owned by CML. Mr. Ratliff, Jr. is vice president and a director of Collat. Mr. Ratliff, Jr. beneficially owns 29.69% of the outstanding limited partnership interests in CML. Accordingly, Mr. Ratliff, Jr. may be deemed to be the beneficial owner of the shares of Common Stock owned by CML. The business address of Collat and Mr. Ratliff, Jr. is 1900 Crestwood Boulevard, Birmingham, Alabama 35210-2034. (6) 1,550,000 shares of Common Stock owned by CIC are pledged to secure two bank loans. (7) 1,912,500 shares of Common Stock owned by CML are pledged to secure four bank loans. (8) Mr. William T. Ratliff, III is president and a director of CIC and beneficially owns 27.12% of the outstanding voting capital stock of CIC. Mr. Ratliff, III beneficially owns 7.72% of the outstanding limited partnership interests in CML. Mr. Ratliff, III is also president and a director of Collat, the general partner of CML, and beneficially owns 50.2% of the outstanding voting capital stock of Collat. Accordingly, Mr. Ratliff, III may be deemed to be the beneficial owner of the shares of Common Stock owned by CIC and CML. The business address of Mr. Ratliff, III is 1900 Crestwood Boulevard, Birmingham, Alabama 35210-2034. Mr. Ratliff, III is the son of Mr. Ratliff, Jr. No other director or executive officer of the Company beneficially owns any capital stock of CIC or partnership interests in CML. (9) Includes shares of Common Stock which could be acquired through the exercise of stock options as follows: Mr. Ratliff, III, 170,787 shares; Mr. Thompson, 311,982 shares; Mr. Whitehurst, 36,288 shares; Mr. David, 20,919 shares; Mr. Lard, 7,583 shares; Mr. Oswalt, 11,887 shares; Mr. Kessinger, 21,808 shares; Mr. Wall, 22,896 shares; all directors and executive officers as a group, 606,483 shares. (10) Includes 1,500 shares owned by Mr. Ratliff's wife and 5,900 shares owned by his minor children. (11) Number of shares reported on Schedule 13G filed by T. Rowe Price Associates ("Price") with the Securities and Exchange Commission. Price has sole voting power with respect to 519,000 shares and sole dispositive power with respect to all 1,356,900 shares. The business address of Price is 100 E. Pratt Street, Baltimore, Maryland 21202. 3 ELECTION OF DIRECTORS NOMINEES AND DIRECTORS At the meeting, six directors are to be elected to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. All of the nominees except for Richard S. Swanson are presently directors of the Company. In light of the Sarbanes-Oxley Act of 2002 and proposed changes to NASDAQ listing requirements, the board has determined to increase the number of independent directors serving on the board. As part of this initiative, Mr. Swanson has been nominated for election as a director. The affirmative vote of the holders of a plurality of the shares of Common Stock represented in person or by proxy at the annual meeting is required to elect directors. It is intended that, in the absence of contrary specifications, votes will be cast pursuant to the enclosed proxies for the election of such nominees. Should any of the nominees become unable or unwilling to accept nomination or election, it is intended, in the absence of contrary specifications, that the proxies will be voted for the balance of those named and for a substitute nominee or nominees. However, the Company now knows of no reason to anticipate such an occurrence. All of the nominees have consented to be named as nominees and to serve as directors if elected. The following persons are nominees for election as directors of the Company: WILLIAM T. RATLIFF, III Age -- 49 Director since -- 1993 Mr. Ratliff has been the Chairman of the Board of the Company since 1993. Mr. Ratliff has also been Chairman of the Board of Triad since 1989, President of Collateral Investment Corp. ("CIC") since 1990 and was President and General Partner of Collateral Mortgage, Ltd. ("CML") from 1987 to 1995. Mr. Ratliff has been Chairman of New South Federal Savings Bank ("New South") since 1986 and President and a director of New South Bancshares, Inc., New South's parent company, since 1995. From March 1994 until December 1996, Mr. Ratliff served as President of Southwide Life Insurance Corp., of which he had been Executive Vice President since 1983. Mr. Ratliff joined CML in 1981 after completing his doctoral degree with a study of planning processes in an insurance company. Previously, he trained and worked as an educator, counselor and organizational consultant. DARRYL W. THOMPSON Age -- 62 Director since -- 1993 Mr. Thompson has been President and Chief Executive Officer of the Company since 1993. Mr. Thompson has also been President, Chief Executive Officer and a Director of Triad since its inception in 1987. From 1986 to 1989, Mr. Thompson also served as President and Chief Executive Officer of Triad Life Insurance Company, which sold mortgage insurance products. From 1976 to 1985, Mr. Thompson served as Senior Vice President/Southeast Division Manager of Mortgage Guaranty Insurance Corporation. Mr. Thompson joined Mortgage Guaranty Insurance Corporation in 1972. 4 DAVID W. WHITEHURST Age -- 53 Director since -- 1993 Mr. Whitehurst is the owner of DW Investments, LLC, a real estate and investment holding company. Mr. Whitehurst was Executive Vice President, Chief Financial Officer and Treasurer of the Company from 1993 until 1999, and served as Secretary of the Company from 1993 until 1996. Mr. Whitehurst has also been a Director of Triad since 1989 and was a Vice President from 1989 until 1999. He was Executive Vice President and Chief Operating Officer of CIC from 1995 until 2000 and was Chief Financial Officer of CIC until 2002. He was a director of New South from 1989 to 2001. Mr. Whitehurst was President, Treasurer and a Director of Southland National Insurance Corp. and its subsidiaries from 1997 until July 2000. Mr. Whitehurst is a certified public accountant. ROBERT T. DAVID Age -- 64 Director since -- 1993 Mr. David is President and Chief Executive Officer of Integrated Photonics, Inc., a manufacturer of laser optic instruments. From 1995 until 1996, Mr. David was the Garrett Professor of Business Administration at Berry College in Rome, Georgia. From 1988 through 1994, Mr. David was Vice President and Dean of the Samford University School of Business. MICHAEL A. F. ROBERTS Age -- 61 Director since -- 2002 Mr. Roberts was an Advisory Managing Director of Salomon Smith Barney from 1999 to 2002. Prior to that he was Head of the Firm's Insurance Investment Banking Group since the formation of the Firm in 1997. During the period 1987 to 1997 he was the Founder and Head of Smith Barney's Insurance Investment Banking Group. From 1982 to 1987 he was the Chief Administrative Officer of Smith Barney's Investment Banking Department. In 1977 he formed Smith Barney's West Coast Investment Banking Group headquartered in San Francisco which he headed until 1982. He joined the Firm in 1969 and served as a Managing Director (or its equivalent) from 1973 until 2002. RICHARD S. SWANSON Age -- 53 Director nominee Mr. Swanson is Chairman of Home Street Bank, a regional savings bank and mortgage company headquartered in Seattle, Washington. He served as President and CEO of Home Street Bank from 1990 through 2001, and as its Executive Vice President and General Counsel from 1988 through 1989. Previously, Mr. Swanson was an attorney in private practice specializing in corporate and real estate finance. Mr. Swanson also serves as a director and Vice Chair of the Federal Home Loan Bank of Seattle, and as Chair of the Washington State Tobacco Settlement Authority. THE BOARD OF DIRECTORS The business and affairs of the Company are managed under the direction of the Board of Directors. During 2002, the Board of Directors met thirteen times. No director attended fewer than 75% of the aggregate number of meetings of the Board of Directors and the committees on which he served. BOARD COMMITTEES The Board of Directors has three standing committees, the Executive Committee, the Audit Committee and the Compensation Committee. The Executive Committee is empowered to exercise the authority of the Board of Directors in the management of the business and affairs of the Company between meetings of the Board of Directors, except as such authority 5 may be limited by the provisions of the General Corporation Law of the State of Delaware. The Executive Committee, which is composed of Messrs. Ratliff (Chairman), Thompson and Whitehurst, did not act during 2002. The Audit Committee appoints the independent auditors for the following year. The Audit Committee also reviews the scope of the annual audit, the annual and quarterly financial statements of the Company and the auditor's report thereon and the auditor's comments relative to the adequacy of the Company's system of internal controls and accounting systems. The Audit Committee, which is composed of Messrs. Roberts (Chairman), David and Whitehurst, met 8 times in 2002. The Compensation Committee reviews management compensation levels and provides recommendations regarding salaries and other compensation for the Company's officers, including bonuses, grants of stock options and other incentive programs. The Compensation Committee serves as the committee that administers the Company's 1993 Long-Term Stock Incentive Plan. The Compensation Committee, which is composed of Messrs. David (Chairman) and Roberts, met five times in 2002. The Company does not have a standing nominating committee of the Board of Directors. This function is performed by the Board of Directors. The Company's Certificate of Incorporation establishes procedures, including advance notice procedures, with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors. In general, notice must be received by the Company at its principal executive offices not less than 60 days nor more than 90 days prior to meetings of stockholders of the Company. Such notice must set forth all information with respect to each such nominee as required by the federal proxy rules. Such notice must be accompanied by a signed statement of such nominee consenting to be a nominee and a director, if elected. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION GENERAL The purpose of the Company's executive compensation program is to enable the Company to attract, retain and motivate qualified executives to insure the long-term success of the Company and its business strategies. The Company's overall compensation philosophy is as follows: - to attract, retain and motivate qualified executive talent critical for the long-term success of the Company; - to reinforce strategic performance objectives through the use of incentive compensation programs; and - to create a mutuality of interest between executive officers and the stockholders through compensation structures that align compensation with the rewards and risks of strategic decision making. The Compensation Committee's objectives include linking compensation to improving return on equity using economic value added ("EVA") concepts. (EVA is a registered trademark of Stern Stewart & Co.) Accordingly, beginning with the 1996 calendar year, the Compensation Committee developed certain models for measuring EVA and determining the portion of that value which will be available for incentive compensation awards. These concepts were incorporated in a set of program guidelines (the "EVA Program") approved by the Board of Directors and implemented for 1996. Under the EVA Program as established by the Compensation Committee and the Board of Directors, it is expected that the Company will provide a return to stockholders based on the estimated current cost of capital and market risk associated with an investment in the Company's business. To the extent the Company provides a rate of return in excess of this "cost of capital," there has been economic value added to the Company and a discretionary bonus pool based on a portion of the EVA is established to provide incentive compensation to 6 senior management. Awards of amounts in the bonus pool to individual participants are based on the individual's contribution to the Company during the year as determined by the Committee after considering recommendations of the Chairman and the President and an evaluation of expected operating results in the future. It is intended that any amounts allocated to the bonus pool be payable to participants over a four year period, subject to the right of the Committee to reduce or suspend any such payouts, and subject to review of the individual participants on an annual basis. Awards under the Program are made in the form of cash bonuses and equity grants within guidelines established under the EVA Program. In establishing the EVA Program, it is the Committee's long-term objective that incentive compensation (cash and equity awards) become a more significant component in the total executive compensation package. The Committee believes this approach will create a stronger mutuality of interests between the Company's executive officers and stockholders by requiring the executive officers to share in the Company's operating results and stock market performance. Under the EVA Program, incentive compensation awards in the future could be significantly greater or less than awards made in 2002 and prior years. All of the Company's executive officers currently participate in the EVA Program. The Company, through its wholly-owned subsidiary, Triad, has employment agreements described elsewhere in this proxy statement with Messrs. Thompson, Kessinger, Lard, Oswalt and Wall. These agreements are intended to secure for the Company the continued services of the officers and provide them appropriate incentives for maximum effort on behalf of the Company. Salary levels established under the employment agreements are subject to annual review. The Company also maintains the 1993 Long-Term Stock Incentive Plan (the "Stock Incentive Plan" or "Plan") under which grants of restricted Common Stock and options to purchase stock have been made as described elsewhere in this proxy statement. The compensation of each of the executive officers of the Company is composed of base compensation and incentive compensation (Mr. Ratliff is eligible to receive only incentive compensation as discussed below). The 2002 compensation of the Company's Chief Executive Officer, Mr. Thompson, was subject to the same policies as are applicable to all other executive officers of the Company. All executive compensation awards for 2002 were determined by the Compensation Committee. Mr. Ratliff is employed by New South and does not receive a separate salary from the Company for his services to the Company. Triad is party to an Administrative Services Agreement with CIC and New South described elsewhere herein. The services of Mr. Ratliff to the Company are charged to the Company under the Administrative Services Agreement. The Compensation Committee believes that the terms of this agreement are no less favorable to the Company than could be obtained from unaffiliated third parties. Mr. Ratliff is also eligible to receive incentive compensation based upon the Compensation Committee's evaluation of his contributions to the Company. See "Directors' Compensation." Overall executive compensation levels for 2002 were higher than for 2001. Consistent with the Company's results for 2002, cash bonuses and stock option awards to the executive officers were also higher in 2002 than in 2001. Section 162(m) under the Internal Revenue Code (the "Code") adopted in 1993 limits the deductibility for federal income tax purposes of certain compensation paid to top executives of publicly held corporations. Certain types of compensation may be excluded from the limitations under Section 162(m). The Compensation Committee believes that the tax aspects of executive compensation awards are one of several important considerations and it will continue to review the applicability of the Code limitations to its executive compensation programs. However, the Committee intends to maintain the flexibility to take any actions which it deems to be in the interests of the Company and its stockholders. Policies relative to each of the elements of compensation of the executive officers are discussed below. 7 BASE COMPENSATION The Committee's approach to base compensation is to offer competitive salaries, consistent with its long-term objective that base salaries become a smaller component in the total executive compensation package. Those executive officers covered by employment agreements receive base salaries under those agreements, subject to annual review, and are eligible for incentive compensation awards as well. The Committee makes salary decisions in an annual review with input from the Chief Executive Officer. In the case of Mr. Thompson, the Committee is guided by the recommendation of the Chairman of the Board. The Committee's review considers the decision-making responsibilities of each position and the experience, work performance, and overall contribution of the executive officer to the Company in relationship to overall Company performance. In general, the salary decisions are subjective with no quantitative measures utilized. In establishing the 2002 salaries of the Company's executive officers, the Compensation Committee considered the responsibilities, experience and performance of the individual in relationship to the Company's growth and financial results. The Committee also took into account the compensation of executives at comparable companies (companies within the private mortgage insurance industry as well as those outside the industry). The 2002 average base salaries of the executive officers which appear in the Executive Compensation Table increased by approximately 7% in 2002. INCENTIVE COMPENSATION The Company's incentive compensation awards for 2002 were based on the guidelines established by the Compensation Committee under the EVA Program. Awards granted under the EVA Program consist of a maximum of 50% in cash to the Chairman, the President or an Executive Vice President and a maximum of 65% in cash to a Senior Vice President or Vice President, or such lesser cash percentages as may be determined by the Committee. The balance of the awards are made in the form of equity grants under the Company's Stock Incentive Plan. Total incentive compensation for each executive under the EVA Program is determined by the Compensation Committee. The Compensation Committee determines the individuals to whom the awards are granted, the type and amount of awards to be granted, the timing of grants and the terms, conditions and provisions of awards to be granted, and the restrictions related thereto. In making those awards, the Committee considers the recommendations of the Company's Chairman and President, the responsibilities of each individual, and his past performance and contributions to the Company and anticipated future contributions to the Company, in relationship to the Company's overall performance. CASH AWARDS The average cash bonus awarded to the executive officers named in the Executive Compensation Table was 130% of their base salaries in 2001 and 144% in 2002. Awards for 2002 were made consistent with the guidelines established under the EVA Program. EQUITY AWARDS Pursuant to the Company's Stock Incentive Plan, certain directors, officers and key employees of the Company are eligible to receive long-term incentives in a variety of forms including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, phantom stock and other stock-based awards. The purpose of the Stock Incentive Plan is to enable the Company to attract and retain the best available directors, executive personnel and other key employees in order to provide for the Company's long-term growth and business success. The Compensation Committee believes that the grant of awards whose value is related to the value of the Company's 8 Common Stock aligns the interests of the Company's directors, executive officers and key employees with its stockholders. For 2002, all awards to the executive officers under the Stock Incentive Plan represented the equity portion of the overall incentive compensation award for such individual. The Committee considered grants under the Plan in the form of shares of restricted stock valued at the market price of the Company's Common Stock on the date of grant or in the form of ten-year stock options exercisable at either the market price on the date of grant or 130 percent of that price. The Committee utilized a Black-Scholes pricing model and applied a discount for non-transferability of options and deferred vesting to determine the number of "at the market options" or "premium priced options" which would be awarded relative to shares of restricted stock. For 2002, the awards to all of the executive officers were made in the form of shares of restricted stock and at the market or premium priced options for ten years. These awards are summarized in footnotes to the Executive Compensation Table elsewhere herein. The salary and incentive compensation, including cash and equity amounts, paid by the Company to its chief executive officer and the other four most highly compensated executive officers of the Company in 2002 is set forth in the tables that follow this report. The Compensation Committee believes that the executive officers of the Company are dedicated to increasing profitability and stockholder value and that the compensation policies that the Board and the Compensation Committee have established and administer contribute to this focus. COMPENSATION COMMITTEE Robert T. David, Chairman Michael A. F. Roberts The foregoing Report of the Board of Directors on Executive Compensation shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such information by reference. 9 EXECUTIVE COMPENSATION TABLE The following table sets forth certain information regarding the compensation paid or accrued by the Company to or for the account of the Chief Executive Officer and the four most highly compensated executive officers of the Company during each of the Company's fiscal years ended December 31, 2002, 2001 and 2000:
LONG TERM COMPENSATION AWARDS(2) ANNUAL COMPENSATION ---------------------------------------- ALL OTHER ----------------------- RESTRICTED STOCK SECURITIES UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) AWARDS(3)(4)(5) OPTIONS(#)(6)(7)(8)) ($)(9) - --------------------------- --------- ----------- ---------------- --------------------- ------------ Darryl W. Thompson........ 2002 $244,000 $400,000 12,060 $5,500 Chief Executive 2001 232,183 379,500 9,620 5,250 Officer 2000 232,183 287,500 47,925 5,250 Ron D. Kessinger.......... 2002 185,400 306,000 9,240 5,500 Executive Vice President 2001 180,000 285,000 7,220 10,000 5,250 and Chief Financial 2000 180,000 200,000 3,350 5,250 Officer Kenneth N. Lard........... 2002 175,000 178,580 10,000 5,550 Executive Vice President 2001 168,000 142,450 5,250 2000 160,000 94,850 10,000 5,250 Michael R. Oswalt......... 2002 125,000 133,900 2,180 5,550 Senior Vice President 2001 110,250 123,500 5,060 5,250 and Treasurer 2000 105,000 108,750 6,050 5,250 Earl F. Wall.............. 2002 138,000 230,100 3,740 5,550 Senior Vice President, 2001 120,750 215,800 8,840 5,250 Secretary and General 2000 115,000 135,000 7,500 5,250 Counsel
- --------------- (1) The Company maintains an executive bonus program pursuant to which cash bonuses may be awarded annually to officers and other key employees of the Company as a part of overall incentive compensation awards. (2) Number of shares of Common Stock subject to options, or awards of restricted stock, granted during or with respect to the year indicated under the Company's Stock Incentive Plan. See "Report of the Compensation Committee of the Board -- Incentive Compensation." (3) As part of its 2002 incentive compensation awards, the Company in February 2003 granted 12,060 shares of restricted stock to Mr. Thompson; 9,240 shares of restricted stock to Mr. Kessinger; 2,180 shares of restricted stock to Mr. Oswalt; and 3,740 shares of restricted stock to Mr. Wall. The value of shares of restricted stock is based upon the closing price of the Company's Common Stock on the date of grant ($33.18). One-third of the restricted shares granted will be vested and transferable on January 1, 2004, another third will be vested and transferable on January 1, 2005, and on January 1, 2006 all of the restricted shares will be vested and transferable. Holders of restricted stock are entitled to receive dividends or other distributions with respect to such shares during the period of restriction. The restricted stock awards become immediately vested and transferable in the event of a change of control of the Company. (4) As a part of its 2001 incentive compensation awards, the Company in January 2002 granted 9,620 shares of restricted stock to Mr. Thompson and 7,220 shares of restricted stock to Mr. Kessinger under the Company's Stock Incentive Plan. The value of shares of restricted stock is based upon the closing price of the Company's 10 Common Stock on the date of grant ($39.49). One-third of the restricted shares became vested and transferable on January 1, 2003, another third will be vested and transferable on January 1, 2004, and on January 1, 2005 all of the restricted shares will be vested and transferable. Holders of restricted stock are entitled to receive dividends or other distributions with respect to such shares during the period of restriction. The restricted stock awards become immediately vested and transferable in the event of a change of control of the Company. (5) As part of its 2000 incentive compensation awards, the Company in January 2001 granted 3,350 shares of restricted stock to Mr. Kessinger under the Company's Stock Incentive Plan. The value of shares of restricted stock is based upon the closing price of the Company's Common Stock on the date of grant ($30.00). One-third of the restricted shares became vested and transferable on January 1, 2002, another third became vested and transferable on January 1, 2003, and on January 1, 2004 all of the restricted shares will be vested and transferable. Holders of restricted stock are entitled to receive dividends or other distributions with respect to such shares during the period of restriction. The restricted stock awards become immediately vested and transferable in the event of a change of control of the Company. (6) As a part of its 2002 incentive compensation awards, the Company in February 2003 granted stock options to Mr. Lard to purchase 10,000 shares of Common Stock under the Company's Stock Incentive Plan at the exercise price of $33.18 per share. One-third of the options granted will be vested and exercisable on December 31, 2003, another third will be vested and exercisable on December 31, 2004, and on December 31, 2005 all of the options granted will be vested and exercisable. All options will become immediately vested and exercisable in the event of a change of control of the Company. The exercise price of $33.18 was the closing market price of the Company's Common Stock on the date of grant. (7) As a part of its 2001 incentive compensation awards, the Company in January 2002 granted stock options to purchase 8,840 shares of Common Stock at the exercise price of $39.49 per share to Mr. Wall and 5,060 shares of Common Stock at the exercise price of $39.49 per share to Mr. Oswalt. One-third of the options granted became vested and exercisable on December 31, 2002, another third will be vested and exercisable on December 31, 2003, and on December 31, 2004 all of the options granted will be vested and exercisable. All options will become immediately vested and exercisable in the event of a change of control of the Company. The exercise price of $39.49 was the closing market price of the Company's Common Stock on the date of grant. (8) As a part of its 2000 incentive compensation awards, the Company in January 2001 granted stock options to the named executive officers to purchase shares of Common Stock under the Company's Stock Incentive Plan in the amounts and at the exercise prices indicated: Mr. Thompson, 47,925 shares at $39.00 per share; Mr. Lard, 10,000 shares at $30.00 per share; Mr. Kessinger, 10,000 shares at $30.00 per share; Mr. Oswalt, 6,050 shares at $39.00 per share; and Mr. Wall, 7,500 shares at $39.00 per share. One-third of the options granted became vested and exercisable on December 31, 2001, another third became vested and exercisable on December 31, 2002, and on December 31, 2003 all of the options granted will be vested and exercisable. All options will become immediately vested and exercisable in the event of a change of control of the Company. The exercise price of $30.00 was the closing market price of the Company's Common Stock on the date of grant. The exercise price of $39.00 is 130% of the closing market price of the Company's Common Stock on the date of grant. (9) Matching contributions made by the Company pursuant to its 401(k) Profit Sharing Retirement Plan. 11 EMPLOYEE STOCK OPTIONS Option Grants. The following table sets forth certain information regarding options to purchase shares of Common Stock granted to the executive officers of the Company named in the Executive Compensation Table during the Company's 2002 fiscal year:
INDIVIDUAL GRANTS ------------------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES SECURITIES OPTIONS OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) OPTIONS GRANTED EMPLOYEES IN PRICE --------------------------- NAME (#)(1) FISCAL YEAR ($/SH)(2) EXPIRATION DATE 5%($) 10%($) - ---- --------------- ------------ --------- ---------------- ----------- ----------- Michael R. Oswalt.... 5,060 6.78% $39.49 January 24, 2012 $125,664 $318,460 Earl F. Wall......... 8,840 11.84 39.49 January 24, 2012 219,540 556,361
- --------------- (1) All options granted under the Company's Stock Incentive Plan are nonqualified stock options. The options were granted in January 2002. One third of the options granted became vested and exercisable on December 31, 2002, one-third will be vested and exercisable on December 31, 2003, and one-third will be vested and exercisable on December 31, 2004. All options will become immediately vested and exercisable in the event of a change of control of the Company. (2) The option exercise price of $39.49 was the closing market price of the Company's Common Stock on the date of grant. (3) The assumed annual rates of appreciation of 5% and 10% would result in the price of the Company's Common Stock increasing over such ten-year periods to $64.32 and $102.43, respectively (based on the grant date price of $39.49). Option Exercises. The following table sets forth certain information regarding options to purchase shares of Common Stock exercised during the Company's 2002 fiscal year and the number and value of unexercised options to purchase shares of Common Stock held at the end of the Company's 2002 fiscal year by the executive officers of the Company named in the Executive Compensation Table:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT NUMBER OF YEAR END(#) FISCAL YEAR END ($)(1) SHARES ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- --------------- ---------- ------------------------- ------------------------- Darryl W. Thompson............ 150,000 $5,227,232 311,982/15,975 $4,695,861/ $0 Ron D. Kessinger.............. 21,808/ 3,334 136,485/22,871 Kenneth N. Lard............... 7,059 109,782 7,583/ 3,334 22,864/22,871 Michael R. Oswalt............. 31,743 740,471 11,887/ 5,391 24,217/ 0 Earl F. Wall.................. 17,150 401,763 22,896/ 8,394 90,659/ 0
- --------------- (1) Value of unexercised options is equal to the difference between the fair market value per share of Common Stock at December 31, 2002 and the option exercise price per share multiplied by the number of shares subject to options. 12 EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES NUMBER OF SECURITIES TO BE ISSUED WEIGHTED-AVERAGE REMAINING AVAILABLE UPON EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS - ------------- -------------------- -------------------- -------------------- Equity compensation plans approved by security holders..................................... 950,305 $25.94 472,148 Equity compensation plans not approved by security holders............................ 0 0 0 Total......................................... 950,305 $25.94 472,148
EMPLOYMENT AGREEMENTS In October 1993, the Company, through its wholly-owned subsidiary Triad, entered into employment agreements with Messrs. Thompson and Kessinger. These agreements had initial terms of two years and upon expiration extend automatically for successive one-year terms unless terminated by either party. Similar agreements were entered into with Mr. Lard in January 1997 and with Messrs. Wall and Oswalt in May 2002. Base annual salary for 2003 under the agreements is as follows: Mr. Thompson, $253,000; Mr. Kessinger, $193,000; Mr. Wall, $144,000; Mr. Oswalt, $130,000 and Mr. Lard, $182,000. The agreements are terminable by Triad in the event of the death of the employee, absence over a period of time due to incapacity, a material breach of duties and obligations under the agreement or other serious misconduct. The agreements also are terminable by Triad without cause; provided, however, that in such event, the executive is entitled to a cash amount equal, in the case of Messrs. Thompson, Kessinger, Oswalt and Wall, to 200% of the total base annual salary paid to such executive during the two previous calendar years and, in the case of Mr. Lard, the total base annual salary and cash bonuses paid to such executive during the previous two calendar years. The employment agreements provide that in the event of a change of control of the Company (as defined in the agreements) and the termination of the executive's employment by the executive as a result of his relocation or certain specified adverse changes in his employment status or compensation, the executive is entitled to a cash amount equal, in the case of Messrs. Thompson, Kessinger, Oswalt and Wall, to 200% of the total base annual salary paid to such executive during the two previous calendar years and, in the case of Mr. Lard, the total base annual salary and cash bonuses paid to such executive during the previous two calendar years. The employment agreements contain certain noncompetition provisions restricting each executive from competing with the business of Triad for a period of two years following termination of his employment. DIRECTORS' COMPENSATION Directors who are employees of the Company or any of its subsidiaries do not receive any compensation for serving as directors of the Company. For 2002, directors who were not employees of the Company or any of its subsidiaries or affiliates received an annual retainer of $40,000 of which at least 25% must be paid in the form of restricted shares of Common Stock or options to purchase shares of Common Stock. In addition, Mr. Ratliff is eligible to receive incentive compensation based upon the Compensation Committee's evaluation of his contributions to the Company. For 2002, Mr. Ratliff was awarded a cash bonus in the amount of $130,000 and Mr. Ratliff 13 was awarded stock options to purchase 11,760 shares of Common Stock at $33.179 per share.(1) All directors are reimbursed for expenses incurred in attending board meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is composed of Messrs. David and Roberts. Neither member of the Compensation Committee is or was formerly an officer or employee of the Company or any of its subsidiaries. CERTAIN TRANSACTIONS The Company engaged in certain transactions with CIC, CML and their affiliates New South Federal Savings Bank and Southland National Insurance Corp. ("Southland") during 2002 including those described below. CIC and CML own 18.9% and 18.2%, respectively, of the Common Stock of the Company. Mr. Ratliff, Chairman of the Board of the Company, is also President of CIC, former President and former General Partner of CML, and Chairman of the Board of New South. Mr. Whitehurst, a director of the Company, was Executive Vice President of CIC through July 2002. All transactions between the Company and CIC, CML, New South or Southland have been, and will be, on terms no less favorable to the Company than could have been, or than could be, obtained from unaffiliated third parties. Investment Advisory Agreement. Triad is a party to an investment advisory agreement with CML under which CML provides investment advice and services to Triad and assists Triad in executing purchases and sales of investments. Under the investment advisory agreement, Triad pays CML a quarterly fee based upon the value of assets under supervision. During 2002, Triad incurred fees of $410,731 pursuant to the investment advisory agreement. Administrative Services Agreement. Triad is a party to an administrative services agreement with CIC and New South under which CIC or New South provide Triad with certain management services. Under the administrative services agreement, Triad pays CIC and New South an annual fee based on the estimated cost of providing the services. During 2002, Triad incurred fees of $90,000 pursuant to the administrative services agreement. - --------------- (1) One-third of the options granted will be vested and exercisable on December 31, 2003, another third will be vested and exercisable on December 31, 2004, and on December 31, 2005 all of the options granted will be vested and exercisable. All options will become immediately vested and exercisable in the event of a change of control of the Company. The exercise price of $33.179 is the closing market price of the Company#s Common Stock on the date of grant. 14 PERFORMANCE GRAPH The following graph compares the cumulative total return on the Company's Common Stock with the cumulative total return of the Nasdaq Stock Market (U.S.) Index, the Nasdaq Financial Stocks Index and the Nasdaq Insurance Stocks Index for the period beginning December 31, 1993 and for each year end through December 31, 2002. [PERFORMANCE GRAPH]
- ------------------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------- Triad Guaranty Inc.... 101.56 79.69 165.62 269.52 543.73 413.66 426.55 621.07 680.04 691.10 - ------------------------------------------------------------------------------------------------------------------- NASDAQ Stock Market (U.S.).............. 99.69 97.48 137.82 169.55 207.68 292.81 543.05 326.92 259.36 179.28 - ------------------------------------------------------------------------------------------------------------------- NASDAQ Finance Stocks.............. 98.80 99.09 144.37 185.33 283.99 275.90 274.06 296.01 325.25 334.22 - ------------------------------------------------------------------------------------------------------------------- NASDAQ Insurance Stocks.............. 94.72 89.16 126.65 144.36 211.83 188.73 145.51 183.82 197.04 198.57 - -------------------------------------------------------------------------------------------------------------------
The graph assumes $100 invested on October 22, 1993 in the Company's Common Stock, the Nasdaq Stock Market (U.S.) Index, the Nasdaq Financial Stocks Index and the Nasdaq Insurance Stocks Index. The Nasdaq indices were prepared for Nasdaq by the Center for Research in Security Prices at the University of Chicago. The foregoing table shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such information by reference. 15 REPORT OF THE AUDIT COMMITTEE The following is the report of the Audit Committee with respect to the Company's audited financial statements for the fiscal year ended December 31, 2002. The Audit Committee acts pursuant to the Audit Committee Charter, a copy of which is attached as Appendix "1" to this Proxy Statement. The following report of the Audit Committee does not constitute "soliciting material" and should not be deemed to be "filed" with the Securities and Exchange Commission or incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this report by reference in any of those filings. FINANCIAL STATEMENTS The Audit Committee has reviewed and discussed the Company's audited financial statements, internal controls and the overall quality of the Company's financial reporting with management and with Ernst & Young LLP, the Company's independent auditors. The Audit Committee has discussed with Ernst & Young LLP the matters required to be discussed by Statement of Auditing Standards No. 61 which includes, among other items, matters related to the conduct of the audit of the Company's financial statements. The Audit Committee has also received written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1, which relates to the auditors' independence from the Company and its related entities, and has discussed with Ernst & Young LLP its independence from the Company. Based on the review and discussions referred to above, the Audit Committee recommended to the Company's Board of Directors that the Company's audited financial statements be included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. INDEPENDENCE The Audit Committee Charter provides that the Audit Committee shall consist of at least three directors, each of whom, in the opinion of the Board of Directors is independent under the rules of the National Association of Securities Dealers ("NASD"), and, as applicable, under the Sarbanes-Oxley Act of 2002. The Charter further provides that subject to the applicable rules of the NASD, a director who is not "independent" as defined under the NASD rules may be appointed to the Audit Committee if the Board of Directors determines that such appointment is in the best interests of the Company and its stockholders. Two of the members of the Audit Committee, Messrs. Roberts and David, are independent under the NASD rules. The third member, Mr. Whitehurst, is not independent under the NASD rules because he was employed by CIC, an affiliate of the Company, during the past year, and received compensation from the Company and its affiliates in excess of $60,000 during the previous fiscal year. The NASD rules permit the Company to appoint one non-independent director to the Audit Committee if the Company's Board, under exceptional and limited circumstances, determines that membership on the Committee by a non-independent director is required by the best interests of the Company and its stockholders. The Board believes that Mr. Whitehurst's extensive background in financial, business, accounting and financial oversight matters allows him to provide valuable advice and counsel to the Audit Committee. The Board therefore has determined that Mr. Whitehurst's service on the Audit Committee is in the best interests of the Company and its stockholders. 16 SELECTION OF INDEPENDENT AUDITORS The Audit Committee expects to meet prior to the annual meeting to select the Company's independent auditors for fiscal year 2003. AUDIT COMMITTEE Michael A. F. Roberts, Chairman Robert T. David David W. Whitehurst RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS The Company's consolidated financial statements for the year ended December 31, 2002 were audited by Ernst & Young LLP, independent auditors. Representatives of Ernst & Young LLP are expected to attend the annual meeting to respond to appropriate questions and to make an appropriate statement if they desire to do so. AUDIT FEES The aggregate fees, including expenses reimbursed, billed by Ernst & Young LLP for professional services rendered for the audit of the consolidated financial statements of the Company and its subsidiaries for fiscal year 2002, the reviews of the Company's quarterly financial statements during fiscal year 2002 and audit related services were $177,800. ALL OTHER FEES The aggregate fees, including expenses reimbursed, billed by Ernst & Young LLP for services rendered to the Company and its subsidiaries, other than the services described above, for fiscal year 2002 were $81,747. The Audit Committee has considered whether the provision of the non-audit services provided by Ernst & Young LLP to the Company is compatible with maintaining Ernst & Young LLP's independence. STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING Stockholders intending to present a proposal for consideration at the Company's next annual meeting may do so by following the procedures prescribed in Rule 14a-8 under the Securities Exchange Act of 1934 and the Company's Certificate of Incorporation. To be eligible for inclusion in the Company's proxy statement, stockholder proposals must be received by the Company no later than December 9, 2003. Notice to the Company of a stockholder proposal submitted otherwise than pursuant to Rule 14a-8 will be considered untimely if received by the Company after February 21, 2004, and the proxies named in the accompanying form of proxy may exercise discretionary voting power with respect to any such proposal as to which the Company does not receive a timely notice. OTHER MATTERS The Company is not aware of any matters, other than those referred to herein, which will be presented at the meeting. If any other appropriate business should properly be presented at the meeting, the proxies named in the accompanying form of proxy will vote the proxies in accordance with their best judgment. 17 EXPENSES OF SOLICITATION All expenses incident to the solicitation of proxies by the Company will be paid by the Company. In addition to solicitation by mail, arrangements have been made with brokerage houses and other custodians, nominees, and fiduciaries to send the proxy material to their principals, and the Company will reimburse them for their reasonable out-of-pocket expenses in doing so. Proxies may also be solicited personally or by telephone or telegraph by employees of the Company. Winston-Salem, North Carolina April 7, 2003 18 APPENDIX 1 Revised March 21, 2003 TRIAD GUARANTY INC. AUDIT COMMITTEE CHARTER ORGANIZATION This charter governs the operations of the audit committee. The committee shall review and reassess the adequacy of the charter at least annually. The committee shall be appointed by the board of directors and shall consist of at least three directors, each of whom shall have been determined by the Board to be "independent" under the rules of the National Association of Securities Dealers, Inc. ("NASD") and, as applicable, under the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). Subject to applicable requirements of the NASD, a director who is not independent as defined under the NASD rules may be appointed to the committee if the board of directors determines that such appointment is in the best interests of the Company and its stockholders. The Board shall also determine that each committee member is financially literate and at least one member shall have professional accounting or related financial management experience which attests to such person's financial sophistication, and to the extent required by the Sarbanes-Oxley Act, that at least one committee member is an "audit committee financial expert" as defined by the Securities and Exchange Commission (the "SEC") (or if no member is an "audit committee financial expert", the reason for not having an "audit committee financial expert" on the committee). STATEMENT OF POLICY The audit committee, in its capacity as a committee of the board of directors, shall provide independent review and oversight with respect to: - the Company's financial statements and the financial reporting processes; - the Company's systems of internal accounting and financial controls; - the annual independent audit of the Company's financial statements; and - legal compliance and ethics programs as may be established by Company management and the board. In so doing, it is the responsibility of the committee to maintain free and open communication between the committee, the independent auditors and management of the Company. In discharging its oversight role, the committee shall have full access to all books, records, facilities, and personnel of the Company and the authority to retain outside counsel or other advisers in order to fully and properly discharge its responsibilities. SCOPE OF RESPONSIBILITIES AND FUNCTIONS Management shall be responsible for preparing the Company's financial statements, and the independent auditors shall be responsible for auditing those financial statements and reviewing the Company's unaudited interim financial statements. The primary responsibility of the audit committee shall be to oversee the Company's financial reporting process and report the results of its activities to the board. 1-1 The following shall be the principal functions of the audit committee in carrying out its oversight responsibilities. These are set forth as a guide, with the understanding that the committee may supplement them as it deems appropriate. - The committee shall be directly responsible for the appointment, compensation and oversight of the work of the Company's independent auditor, including resolution of any disagreement between management and the auditor regarding financial reporting. The independent auditor shall report directly to the committee. - The committee shall annually discuss with the auditors their independence from management and the Company and the matters included in the written disclosures required by the Independent Standards Board. - The committee shall pre-approve all auditing services and permitted non-audit services (as defined in the Sarbanes-Oxley Act), including the fees and terms thereof, to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit services described in Section 202 of the Sarbanes-Oxley Act and the rules and regulations of the Securities and Exchange Commission. The committee may form and delegate authority to subcommittees, consisting of one or more members, to grant pre-approvals of permitted non-audit services, provided that decisions of such subcommittees to grant pre-approvals shall be presented to the full committee at its next scheduled meeting. - The committee shall also take reasonable steps to ensure that the auditors communicate the following items to the committee prior to the Company's filing of an audit report with the SEC: - critical accounting policies and practices; - all alternative treatments within GAAP for policies and practices related to material items that have been discussed with management, including the ramifications of such use and the auditors' preferred treatment; and - other material written communications provided to management, including but not limited to management representation letters, reports on internal controls, engagement letters and schedules of unadjusted differences. - The committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters. - The committee shall discuss with the independent auditors the overall scope and plans for their audits, including the adequacy of staffing and compensation. Also, the committee shall discuss with management and the independent auditors the adequacy and effectiveness of the Company's internal accounting and financial controls, including the Company's system to monitor and manage business risk, and any legal and ethical compliance programs. Further, the committee shall meet separately with the independent auditors, with and without management present, to discuss the results of their examinations. - The committee shall review and discuss with management and the independent auditors the Company's interim financial statements prior to the filing of the Company's Quarterly Report on Form 10-Q. Also, the committee shall discuss the results of the quarterly review and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The chair or a designated subcommittee of the committee may represent the entire committee for purposes of this review. 1-2 - The committee shall review and discuss with management and the independent auditors its recommendation regarding the inclusion of the annual audited financial statements in the Company's Annual Report on Form 10-K (or the annual report to stockholders if distributed prior to the filing of Form 10-K). The committee also shall discuss with the independent auditors the results of the annual audit and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. 1-3 TRIAD GUARANTY INC. C/O EQUISERVE TRUST COMPANY, N.A. P.O. BOX 8694 EDISON, NJ 08818-8694 TRIAD GUARANTY INC. 101 SOUTH STRATFORD ROAD WINSTON-SALEM, NORTH CAROLINA 27104 Dear Stockholder: Your vote is important to us, and we encourage you to exercise your right to vote your shares of common stock. On behalf of the Board of Directors, we urge you to sign, date, and return the proxy card in the enclosed postage-paid envelope as soon as possible. We appreciate your confidence in us and your cooperation with this solicitation. Sincerely, Triad Guaranty Inc. DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL PLEASE MARK [X] VOTES AS IN THIS EXAMPLE. 1. Election of Directors. -------------------------------------------------------- NOMINEES: (01) Robert T. David, (02) William T. Ratliff, III, TRIAD GUARANTY INC. (03) Michael A.F. Roberts, (04) Richard S. Swanson, -------------------------------------------------------- (05) Darryl W. Thompson, (06) David W. Whitehurst THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF Marking FOR indicates voting for all listed nominees or a DIRECTORS. substitute therefor if any nominee is unable or, for good cause, refuses to serve. If you do not wish your shares THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE voted "For" a particular nominee, mark the "For all nominees MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. except" box and write the name(s) of the nominee(s) on the IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR line provided. Your shares will be voted for the remaining PROPOSAL 1. THIS PROXY IS REVOCABLE AT ANY TIME. nominee(s). In their discretion, the Proxies are authorized to vote FOR WITHHELD upon such other business as may properly come before the ALL [ ] [ ] FROM ALL meeting. NOMINEES NOMINEES FOR ALL NOMINEES EXCEPT [ ] _______________________________________ Mark the box at the right if an address change has been noted on the reverse side of this card. [ ] IMPORTANT: Please sign exactly as your name(s) appear(s) to the left. In the case of joint holders, all should sign. When signing as an attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Signature: _____________________________ Date: ________________ Signature: _____________________________ Date: ________________
DETACH HERE TRIAD GUARANTY INC. 101 SOUTH STRATFORD ROAD WINSTON-SALEM, NORTH CAROLINA 27104 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The holder(s) signing on the reverse side hereby appoint(s) William T. Ratliff, III and David W. Whitehurst, or either of them, as attorneys and proxies, each with the power to appoint a substitute, and hereby authorize(s) them to represent and to vote, as designated on the reverse side, all the shares of Common Stock of Triad Guaranty Inc. (the "Company") held of record by such holder(s) on April 1, 2003 at the Annual Meeting of Stockholders to be held on May 22, 2003, or any adjournment thereof. - -------------------------------------------------------------------------------- PLEASE VOTE, DATE, AND SIGN ON REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. - -------------------------------------------------------------------------------- HAS YOUR ADDRESS CHANGED? - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----