PRELIMINARY INFORMATION STATEMENT

 

 

May 1, 2007

 

Dear Fellow Stockholder:

 

I cordially invite you to attend the 2007 Annual Meeting of Stockholders of HealthMarkets, Inc. The meeting this year will be held at 10:00 a.m., Central Daylight Time, on Wednesday, May 23, 2007, at the offices of HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, Texas. The attached notice of annual meeting and Information Statement describes the items currently anticipated to be acted upon by the stockholders at the Annual Meeting. Please note that no proxies will be solicited by the Board of Directors in connection with the meeting.

 

One of the purposes of the Information Statement is to give you important information regarding HealthMarkets’ Board of Directors and executive management. We urge you to read the Information Statement carefully.

 

On behalf of the management and directors of HealthMarkets, Inc., I want to thank you for your continued support and confidence in HealthMarkets. We look forward to seeing you at the 2007 Annual Meeting.

 

Sincerely,

 

WILLIAM J. GEDWED

President and Chief Executive Officer

 

HEALTHMARKETS, INC.
9151 BOULEVARD 26
NORTH RICHLAND HILLS, TEXAS 76180

 

NOTICE OF ANNUAL MEETING

 

Dear Stockholder:

 

You are cordially invited to attend the 2007 Annual Meeting of Stockholders of HealthMarkets, Inc. to be held on Wednesday, May 23, 2007 at 10:00 a.m., Central Daylight Time, at the Company’s offices located at 9151 Boulevard 26, North Richland Hills, Texas 76180.

 

This Information Statement is being delivered in connection with the following matters:

 

1. Electing ten (10) directors to serve until our next annual stockholders’ meeting,

 

2. Approving the amendment of HealthMarkets’ Certificate of Incorporation to permit the redemption of Class A-2 Common Stock outstanding for less than six (6) months where such redemption is permitted under the Company’s agent stock accumulation plans,

 

3. Ratifying the appointment of KPMG LLP to serve as HealthMarkets’ independent registered public accounting firm, and

 

4. Any other matters that may properly come before the Annual Meeting or any postponement or its adjournment.

 

Members of HealthMarkets’ Board of Directors and stockholders holding approximately 88.6% of our outstanding Common Stock as of March 30, 2007, have indicated that they intend to vote in favor of electing the proposed slate of directors, approving the amendment of HealthMarkets’ Certificate of Incorporation, and ratifying the appointment of the Company’s independent registered public accountants. Therefore, the proposals will be assured of receiving the required vote and will be approved at the Annual Meeting and will become effective immediately following the Annual Meeting.

 

By Order of the Board of Directors,

 

PEGGY G. SIMPSON

Corporate Secretary

 

Date: May 1, 2007

 

WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

INFORMATION STATEMENT FOR THE 2007 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD MAY 23, 2007

 

General

 

This Information Statement is being distributed in connection with the 2007 Annual Meeting of Stockholders (the “Annual Meeting”) of HealthMarkets, Inc., a Delaware corporation (“we”, “our”, “us” or other words of similar import), to be held at our offices located at 9151 Boulevard 26, North Richland Hills, Texas on May 23, 2007, at 10:00 a.m., Central Daylight Time.

 

This Information Statement includes information relating to the proposals to be voted on at the meeting, the voting process, compensation of directors and our most highly paid officers, and other required information.

 

This Information Statement is being furnished to our stockholders for informational purposes only, and we will bear all of the costs of the preparation and dissemination of this Information Statement. Each person who is receiving this Information Statement also is receiving a copy of our Annual Report on Form 10-K for the year ended December 31, 2006. We intend to commence distribution of this Information Statement, together with the notice and any accompanying materials, on or about May 1, 2007.

 

Our Board of Directors has approved, and has recommended that the stockholders approve, the following proposals (collectively, the “Proposals”):

 

1. The election of the slate of ten (10) directors proposed by our Nominating Committee to serve until the next annual meeting of stockholders and until their respective successors are chosen and qualified;

 

2. The amendment of HealthMarkets’ Certificate of Incorporation to permit the redemption of Class A-2 Common Stock outstanding for less than six (6) months where such redemption is permitted under the Company’s agent stock accumulation plans;

 

3. The ratification of the selection of KPMG LLP as the Company’s independent registered public accountants to audit the accounts of the Company for the fiscal year ending December 31, 2007; and

 

4. Such other business as may properly come before the meeting or any adjournments or postponements thereof.

 

Merger

 

On April 5, 2006, HealthMarkets, Inc. (formerly UICI) completed its merger (the “Merger”) providing for the acquisition of the Company by affiliates of a group of private equity investors, including The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners. The stock ownership of each of these private equity firms is set forth below under the caption “Security Ownership of Certain Beneficial Owners and Management.” As a result of the Merger, holders of record on April 5, 2006 of HealthMarkets common shares (other than shares held by certain members of management and shares held through HealthMarkets’ agent stock accumulation plans) received $37.00 in cash per share.

 

In the transaction, HealthMarkets’ public shareholders received aggregate consideration of approximately $1.6 billion, of which approximately $985.0 million was contributed as equity by the private equity investors. The balance of the Merger consideration was financed with the proceeds of a $500.0 million term loan facility extended by a group of banks, the proceeds of $100.0 million of trust preferred securities issued in a private placement, and Company cash on hand in the amount of approximately $42.8 million.

 

Voting

 

The Board of Directors has selected the close of business on March 30, 2007 (the “Record Date”) as the time for determining the holders of record of our Class A-1 Common Stock and Class A-2 Common Stock, par value

$0.01 per share (collectively, “Common Stock”), entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. Shares of Common Stock outstanding on the record date are the only securities that entitle holders to vote at the annual meeting or any adjournment or postponement thereof. Each share of Class A-1 Common Stock and Class A-2 Common Stock is entitled to one vote per share on all matters to be presented at the meeting.

 

Members of the Board of Directors, members of management and other significant holders of our Class A-1 Common Stock (collectively, the “Consenting Stockholders”) own a total of 26,900,160 shares, or approximately 88.6% of our total voting power. Because the Consenting Stockholders have indicated that they will vote in favor of all of the Proposals and because such Consenting Stockholders control more than a majority of the voting power, the Proposals are assured of receiving the required vote and being adopted and, thus, we are not soliciting any proxies.

 

Stockholders attending the Annual Meeting are welcome to vote at the annual meeting and may address any matters that may properly come before the meeting.

 

How Many Shares of HealthMarkets Common Stock were Outstanding as of the Record Date?

 

As of March 30, 2007, our record date, 30,355,947 shares of our Common Stock were issued and 30,354,995 shares were outstanding, consisting of 26,900,160 shares of Class A-1 Common Stock and 3,454,835 shares of Class A-2 Common Stock. Each share owned entitles the holder to one vote for each share so held. A list of our Stockholders entitled to vote is available at our executive offices at 9151 Boulevard 26, North Richland Hills, Texas 76180. The telephone number of our executive offices is (817) 255-5200.

 

How Many Shares are needed to constitute a Quorum at the meeting?

 

The presence, in person or by proxy, of stockholders holding at least a majority of the voting power are necessary to constitute a quorum at the Annual Meeting. However, the stockholders present at the Annual Meeting may adjourn the meeting despite the absence of a quorum.

 

What Vote is Required to Approve the Proposals?

 

A plurality of the votes cast is required to elect directors. For all of the other Proposals, the affirmative vote of the holders of a majority of the voting power of the shares present or represented by proxy is required to approve the other Proposals. Abstentions will have the same effect as votes against the Proposals, although abstentions will count toward the presence of a quorum.

 

Why Isn’t HealthMarkets Required to Solicit Proxies for the Proposals?

 

As indicated above, the Consenting Stockholders have indicated they will vote in favor of the Proposals, thereby ensuring that such Proposals will be adopted. Therefore, the solicitation of proxies is not necessary, and, in order to eliminate the costs and management time involved, our Board of Directors has decided not to solicit proxies.

 

When Will Each Proposal Become Effective?

 

The Proposals will be effective immediately following the completion of the 2007 Annual Meeting, which is at least 20 days after the mailing of this Information Statement. We are mailing this Statement on or about May 1, 2007 and will hold our Annual Meeting on May 23, 2007.

 

How Can Stockholders Participate in the Meeting?

 

Each stockholder of record as of the record date can participate in the Annual Meeting personally or through another person or persons designated to act for such stockholder by proxy.

 

How Will Our Stockholders Know When the Proposals are Effective?

 

Those stockholders that attend the Annual Meeting will be notified then of the effectiveness of the Proposals. In addition, we will notify our stockholders of the effective dates of the Proposals described in this Information Statement when we file our Form 10-Q for the quarter ended June 30, 2007, which will be the first Quarterly Report on Form 10-Q following the Annual Meeting.

 

Who Will Pay for the Costs Associated with this Information Statement?

 

HealthMarkets will pay all costs associated with distributing this Information Statement, including the costs of printing and mailing.

 

No additional action is required by you in connection with the Proposals. However, Section 14(c) of the Exchange Act requires the mailing to our stockholders of the information set forth in this Information Statement at least twenty (20) days prior to the earliest date on which the corporate action may be taken.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

Election of Directors

 

Ten (10) directors will be elected at the Annual Meeting, each of whom is expected to serve until our next annual meeting of stockholders and until his successor has been duly elected and qualified. All of the nominees are currently directors of the Company, and each nominee has consented to being named as a nominee and to serve, if elected.

 

In connection with the Merger, we entered into a stockholders agreement with various investment affiliates of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking (the “Private Equity Stockholders”), as well as certain management stockholders. The Stockholders Agreement provides that the Board of Directors of the Company consist of the following:

 

 

The allocation of board representation to the Private Equity Investor Groups will be reduced as the ownership interest of Class A-1 Common Stock of such Private Equity Investor Group is reduced. The Blackstone Investor Group will have the ability to designate a majority of the directors for so long as it holds a majority of the shares of Class A-1 Common Stock issued to the Private Equity Stockholders in the Merger. Each Private Equity Investor Group will lose its right to designate directors entirely when its ownership of shares of Class A-1 Common Stock is less than the greater of (i) five percent of the shares of Class A-1 Common Stock issued to the Private Equity Stockholders in the Merger and (ii) three percent of the then-outstanding shares of Class A-1 Common Stock.

 

Generally, each director will have one vote. However, if the Blackstone Investor Group nominates or designates fewer than the maximum number of directors to which it is entitled, then the Blackstone Investor

Group’s directors will have aggregate voting power on board matters equal to the maximum number of directors that the Blackstone Investor Group is entitled to nominate or designate divided by the number of directors they have actually nominated or designated.

 

The Blackstone Investor Group has designated Chinh E. Chu and Matthew S. Kabaker for nomination as directors. The GS Investor Group has designated Adrian M. Jones and Nathaniel M. Zilkha for nomination as directors. The DLJ Investor Group has designated Kamil M. Salame for nomination as a director. William J. Gedwed has been designated as the management director. Messrs. Allen F. Wise, Mural R. Josephson, Andrew S. Kahr and Steven J. Shulman have been designated as additional directors.

 

THE BOARD OF DIRECTORS HAS NOMINATED THE FOLLOWING SLATE OF DIRECTORS TO HEALTHMARKETS’ BOARD AND HAS RECOMMENDED APPROVAL OF THEIR ELECTION TO SERVE UNTIL THE NEXT ANNUAL MEETING OF ITS STOCKHOLDERS IN 2008 OR UNTIL THEIR RESPECTIVE SUCCESSORS ARE ELECTED AND QUALIFIED. IF A NOMINEE IS UNAVAILABLE FOR ELECTION, THE BOARD MAY REDUCE THE NUMBER OF DIRECTORS TO BE ELECTED AT THE MEETING.

 

 

INFORMATION ABOUT THE BOARD OF DIRECTORS

 

Director Compensation for the 2006 Fiscal Year

 

The following table shows the compensation paid to our directors for their services during the fiscal year ended December 31, 2006. Directors who are our employees do not receive additional compensation for their services as directors. Accordingly, Mr. Gedwed receives, and Mr. Reed received, no compensation for their services as directors. Messrs. Chu, Jones, Kabaker, Salame and Zilkha, members of our Board designated by the Private Equity Stockholders, are not considered to be independent and therefore also do not receive compensation for their services. We provide our independent directors with an annual retainer for Board and Committee membership and have, historically, awarded stock option grants to our independent directors. We reimburse all directors for travel and lodging expenses they incur in connection with their attendance at directors’ meetings and meetings of the stockholders of the Company.

 

 

 

 

 

Director Independence

 

The Board has determined that Messrs. Wise, Shulman, Kahr and Josephson are “independent,” as that term is defined under the listing standards of the New York Stock Exchange. Mr. Gedwed is not “independent” due to his affiliation with the Company. At the time he served on the Board, Mr. Reed also was not considered “independent” due to his affiliation with the Company. Messrs. Chu, Jones, Kabaker, Salame and Zilkha are not “independent” due to their respective affiliations with the Private Equity Stockholders.

 

Annual Meeting Attendance

 

We encourage but do not require our directors to attend the Annual Meeting of Stockholders. Two (2) of the Company’s then directors attended the Annual Stockholder Meeting held October 12, 2006.

 

Stockholder Communication with Our Board

 

All current members of the Company’s Board are listed under the heading “More About Our Company” on the Company’s website (www.healthmarkets.com). Stockholders may communicate directly with the HealthMarkets Board of Directors, including the Chairman of the Audit Committee, the Chairman of the Nominating Committee and/or the non-management directors individually or as a group. All communications should be directed to our Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180. In addition, we maintain contact information, both telephone and email, on our website under the heading “Contact Us.” The envelope should clearly indicate the person or persons to whom the Corporate Secretary should forward the communication. Communications will be distributed to the Board, or to any individual director or directors as appropriate, depending on the facts and circumstances outlined in the communications, with the exception of spam, business solicitations and advertisements, product inquiries and suggestions, resumes and other forms of job inquiries, surveys, and obvious “junk” and mass mailings.

 

Board Meetings, Attendance, and Executive Sessions

 

During the fiscal year ended December 31, 2006, the Board of Directors met eight (8) times and took action on other occasions by unanimous consent of its members. Each member of the Board of Directors who held such position in 2006 attended at least 75% in the aggregate of all meetings of the Board and any committee on which

such Board Member served. The Board met in executive session during all regularly scheduled meetings, without management present, and plans to continue that practice going forward.

 

Board Committees

 

To assist the Board in the discharge of its responsibilities, the Company has established a standing Audit Committee, Executive Committee, Investment Committee, Compliance & Governance Committee, Nominating Committee, and Executive Compensation Committee. The following chart shows the composition of the committees of the Board of Directors and the number of meetings held by each committee during fiscal year 2006.

 

 

 

x — Committee Member

 

* — Committee Chair

 

The functions and composition of these Board committees are described below:

 

Audit Committee, Financial Expert

 

The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities by assessing the processes related to the Company’s risks and control environment, overseeing the integrity of the Company’s financial statements and financial reporting and compliance with legal and regulatory requirements and evaluating the Company’s audit processes. The Audit Committee confers with the Company’s independent registered public accounting firm and internal auditors regarding audit procedures, including proposed scope of examination, audit results and related management letters. The Audit Committee reviews the services performed by the independent registered public accounting firm in connection with determining their independence, reviews the reports of the independent registered public accounting firm and internal auditors, and reviews recommendations about internal controls. The Committee selects and appoints the Company’s independent registered public accounting firm and approves any significant non-audit relationship with the independent registered public accounting firm.

 

KPMG LLP, the Company’s independent registered public accounting firm, has direct access to the Audit Committee and may discuss any matters that arise in connection with their audits, the maintenance of internal controls, and any other matters relating to the Company’s financial affairs. The Audit Committee may authorize the independent registered public accounting firm to investigate any matters that the Audit Committee deems appropriate and may present its recommendations and conclusions to the Board.

 

Since joining the Board in May 2003, Mr. Josephson has served as the Audit Committee Chairman. The Board of Directors has determined that Mr. Josephson, who is independent of management of the Company, is an “audit committee financial expert”, as that term is defined under applicable Securities Exchange Act rules. Following his retirement in October 2002 as Senior Vice President and Chief Financial Officer of Lumbermens Mutual Casualty Company (the lead company of Kemper Insurance Companies), Mr. Josephson has served as a consultant to various financial institutions. In July 1998, Mr. Josephson retired as a partner with KPMG LLP after 28 years with the firm.

Mr. Josephson is a licensed Certified Public Accountant in the State of Illinois, and is a member of the American Institute of Certified Public Accountants. The other members of the Audit Committee are not “independent.”

 

The Audit Committee operates under a written charter adopted by the Board of Directors. The charter is available for review on the Corporate Governance page of the Company’s website (www.healthmarkets.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180. The Committee reviews and assesses the adequacy of its charter on an annual basis.

 

The Audit Committee has adopted procedures governing the receipt, retention and handling of concerns regarding accounting, internal accounting controls or auditing matters that are reported by employees, stockholders and other persons. Employees may report such concerns confidentially and anonymously by utilizing a toll free hot line number [(877) 778-5463] or by accessing Report-It [www.reportit.net], a third party reporting service. All others may direct such concerns in writing to the Board of Directors, Audit Committee and/or the non-management directors c/o our Corporate Secretary, HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

The Audit Committee’s Report appears elsewhere in this Information Statement.

 

Executive Committee

 

The Executive Committee has the authority of the full Board of Directors in the management and affairs of the Company, except that the Committee may not effect certain fundamental corporate actions, including (a) declaring a dividend, (b) amending the Certificate of Incorporation or By-Laws, (c) adopting an agreement of merger or consolidation, or (d) imposing a lien on substantially all of the assets of the Company. In practice, the Executive Committee meets infrequently and does not act except on matters that are not sufficiently important to require action by the full Board of Directors. Although the Executive Committee did not meet during fiscal 2006, the Committee took action on selected occasions by unanimous consent of its members.

 

Investment Committee

 

The Investment Committee coordinates with the Investment/Finance Committees of the Company’s insurance subsidiaries in supervising and implementing the investments of the funds of the Company and its insurance subsidiaries.

 

Compliance & Governance Committee

 

The Compliance & Governance Committee was established by the Board of Directors on August 30, 2006. The Committee develops and recommends to the Board the Corporate Governance Guidelines applicable to the Company; oversees the evaluation of the Board and management, and reviews the succession plan of the Chief Executive Officer and other key officer positions. The Committee also oversees and monitors the Company’s compliance and regulatory functions, including the assessment on a periodic basis of the processes related to the Company’s risk and control environment, the oversight of the integrity of the Company’s compliance with legal and regulatory requirements and evaluation of the Company’s overall compliance program. The Committee also makes recommendations concerning the structure, size and membership of the various committees of the Board of Directors.

 

The Compliance & Governance Committee operates under a written charter adopted by the Board of Directors. The charter is available for review on the Corporate Governance page of the Company’s website (www.healthmarkets.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

Nominating Committee

 

The Nominating Committee identifies individuals qualified to become Board members consistent with criteria approved by the Board and recommends that the Board select the director nominees to be voted on at the next annual meeting of stockholders. None of the members of the Nominating Committee are “independent.”

 

As a result of the Merger and the terms of the Stockholders’ Agreement that provide for the designation of directors by the Private Equity Investor Groups, the Board of Directors has determined that it is not appropriate to

establish specific qualifications for nominees or a formal process for identifying and evaluating such nominees for director.

 

In carrying out its responsibilities to nominate directors, the Nominating Committee will consider candidates recommended by the Board of Directors and by stockholders of the Company. All suggestions by stockholders for nominees for director for 2008 must be made in writing and received by the Corporate Secretary of the Company, 9151 Boulevard 26, North Richland Hills, Texas 76180 not later than March 2, 2008 (see “Stockholder Proposals for the 2008 Annual Meeting”). The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Director Nominee Recommendation”. The letter must identify the author as a stockholder and provide a brief summary of the candidate’s qualifications, as well as contact information for both the candidate and the stockholder. At a minimum, candidates for election to the Board must meet the independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Candidates should also have relevant business and financial experience, and must be able to read and understand fundamental financial statements. The Committee has not historically received director candidate recommendations from the Company’s stockholders but will consider all relevant qualifications as well as the needs of the Company in terms of compliance with the Securities and Exchange Commission rules.

 

The Nominating Committee operates under a written charter adopted by the Board of Directors, which is available for review on the Corporate Governance page of the Company’s website (www.healthmarkets.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

Although the Nominating Committee did not meet during 2006, the Committee took action on selected occasions by unanimous consent of its members.

 

The Nominating Committee did not receive any recommendations from stockholders regarding candidates to serve on the Board for the 2007 Annual Stockholder Meeting.

 

Executive Compensation Committee

 

The Executive Compensation Committee administers the Company’s compensation programs and remuneration arrangements for its highest-paid executives. The Committee is authorized to provide assistance to the Company’s directors in fulfilling their responsibility to shareholders to ensure that the Company’s officers, key executives and board members are compensated in accordance with the Company’s total compensation objectives and executive compensation policy. The Company is also authorized to advise, recommend, and approve compensation policies, strategies, and pay levels necessary to support organizational objectives. The Committee may form and delegate to subcommittees when appropriate.

 

The Committee reviews and approves corporate goals and objectives relative to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives and sets the CEO’s compensation level based on this evaluation. The Committee meets in executive session without the CEO to determine his compensation. The Committee receives recommendations from the CEO as to compensation of other executive officers, and the CEO participates in Committee discussions regarding the compensation of such officers.

 

The Committee also makes recommendations to the Board with respect to incentive-compensation plans and equity-based plans, evaluates, from time to time, the compensation to be paid to directors for their service on the Board or any committee thereof, and prepares a report on executive compensation as required by the Securities and Exchange Commission to be included in the Information Statement.

 

Historically, the Committee has engaged the services of an independent compensation consultant to assess the Company’s compensation program and to obtain additional information relative to administering executive compensation decisions. As discussed in the Compensation Discussion and Analysis, the Committee had access to compensation information prepared by Mercer Human Resources Consulting, Inc. in March 2007, which

information was considered by the Committee in determining 2006 annual bonus compensation for the Company’s executives.

 

The Executive Compensation Committee operates under a written charter adopted by the Board of Directors, which is available for review on the Corporate Governance page of the Company’s website (www.healthmarkets.com). Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

 

The Board has determined that Messrs. Chu, Kabaker and Jones are not “independent” as that term is defined under the listing standards of the New York Stock Exchange, due to their respective affiliations with the Private Equity Stockholders. During 2006, no Executive Compensation Committee member was an officer or employee of us or our subsidiaries, or formerly an officer, nor had any relationship otherwise requiring disclosure under the rules of the Securities and Exchange Commission. None of our executive officers served as a member of the Executive Compensation Committee or as a director of any company where an executive officer of that company is a member of our Executive Compensation Committee. The members of the Executive Compensation Committee thus do not have any compensation committee interlocks or insider participation. Certain relationships and related transactions that may indirectly involve our board members are described below under the caption “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.”

 

Family Relationships

 

There are no family relationships between any of the directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

During the past five years, none of the directors or executive officers has been involved in any legal proceedings that are material to the evaluation of their ability or integrity.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of the Company’s Executive Compensation Program

 

The Company’s compensation objectives are to support the Company’s overall business strategy and objectives, attract and retain the best possible executive talent, motivate executive officers to achieve the Company’s performance objectives, and reward individual performance and contributions. We intend that our executive compensation program will effectively and appropriately compensate our executives and will guide their activities in response to targeted incentives we provide.

 

Prior to the April 5, 2006 Merger in which the Private Equity Stockholders acquired the Company, our compensation programs and policies were administered and overseen by a compensation committee composed entirely of independent directors. Following the Merger, the Executive Compensation Committee (the “Committee”) (of which Chinh Chu (Chairman), Matthew Kabaker, Adrian Jones, Mural R. Josephson and Steven Shulman serve as members) administers the Company’s compensation programs and remuneration arrangements for its highest-paid executives. As discussed in more detail above under the heading “Compensation Committee Interlocks and Insider Participation in Compensation Decisions,” several of the members of the Committee are not considered “independent.”

 

In connection with the Merger, in September 2005, Messrs. Gedwed, Myhra, McQuagge, and Truxal entered into employment commitment agreements, the principal terms of which were requested by and negotiated with The Blackstone Group after the key terms of the Merger were agreed upon. These employment commitment agreements set forth the principal terms and conditions of employment for each of these executive officers following completion of the Merger. Upon completion of the Merger, these officers entered into definitive employment agreements containing the terms set forth in the employment commitment agreements. Upon completion of the Merger, Messrs. Hauptman and Plato also entered into definitive employment agreements with the Company. In general, the

employment agreements provided for annual base salary, not less than the executive officer’s base salary immediately prior to the Merger, and eligibility for an annual target bonus ranging from a minimum of 75% of annual base salary up to a maximum of 200% of annual base salary (depending upon the executive’s position ). The terms of the employment agreements are discussed in more detail below under the heading “Employment and Consulting Agreements.”

 

In connection with his appointment as Chief Financial Officer, Mr. Boxer entered into an employment agreement with the Company effective September 26, 2006. In addition, on May 24, 2006, the Company entered into an agreement with Mr. Reed providing for the continuation of Mr. Reed’s employment through the later of June 30, 2006 or such date to which the Company and Mr. Reed shall mutually agree. The terms of these agreements are described in more detail below under the heading “Employment and Consulting Agreements.”

 

Components of Executive Compensation

 

Historically, we have used a variety of compensation elements to reach our executive compensation program goals. These include base salary, annual bonus compensation, awards of stock options and restricted stock, certain additional incentive programs, employee benefit plans, and termination and change in control arrangements. We also offer limited perquisites to executive officers. Each component of compensation has been designed to complement the other components and, when considered together, to meet the Company’s overall compensation objectives; however, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation.

 

Base Salaries

 

Base salary is the primary fixed portion of executive pay. It compensates executives for performing their day-to-day duties and responsibilities. As discussed above, the base salaries of Messrs. Gedwed, Hauptman, Myhra, McQuagge, Plato and Truxal for 2006 were based on the terms of the employment commitment agreements and employment agreements entered into in connection with the Merger. These base salaries were the same salaries that the executive officers received in 2005. The executive officers named in the Summary Compensation Table on page 20 below (the “Named Executive Officers” or the “NEOs”) did not receive an increase in base salary at the beginning of 2006 and did not receive any adjustments to their salaries following the Merger.

 

Annual Bonus Compensation

 

The Company has established and implemented an annual bonus compensation plan for senior executives, pursuant to which the Company has set a maximum bonus potential for each executive as a percentage of base compensation. The annual bonus compensation plan is designed to achieve the Company’s objective of linking compensation to annual performance results, attracting, motivating and retaining high-caliber leadership, and aligning the interests of senior executives and stockholders.

 

The target bonuses established for the Named Executive Officers in 2006 ranged from 75% to 200% of base salary and were based on the terms of the employment agreements. Following year end, Mr. Gedwed met with Messrs. Boxer, Myhra, McQuagge, and Plato and evaluated their performance for the year. Mr. Gedwed made recommendations to the Committee for these Named Executive Officers (other than Mr. Boxer) based on the following performance objectives and relative weightings:

 

1. Corporate earnings performance: 20%.

 

2. Business unit earnings performance: 30%.

 

3. Growth prospects: 20%.

 

4. Regulatory compliance: 20%.

 

5. Management abilities: 10%.

 

The executive was rated for each performance goal and, based on the relative weighting of each goal, Mr. Gedwed developed an overall score for each executive, which served as the basis for his recommendation to the Compensation Committee.

 

Due to his short tenure with the Company (which commenced on September 26, 2006), Mr. Boxer’s 2006 annual bonus was based exclusively on an evaluation of his performance with respect to the management abilities objective.

 

The final determination of annual bonus compensation payouts with respect to 2006 performance for Messrs. Boxer, Myhra, McQuagge, and Plato was made at a meeting of the Committee held on March 29, 2007, at which time the Committee considered Mr. Gedwed’s recommendations and reviewed and approved 2006 bonus compensation for such Named Executive Officers. Mr. Hauptman, who resigned as the Company’s Chief Financial Officer and assumed a new executive role at the Company’s Agency Marketing Group in September 2006, received his 2006 bonus in February 2007 following his review with Mr. McQuagge, consistent with other employees who are not direct reports of the CEO. Messrs. Reed and Truxal, who were no longer employed by the Company, did not receive bonuses.

 

With respect to Mr. Gedwed’s annual bonus compensation, the Committee evaluated Mr. Gedwed’s performance based on the following performance objectives, each of which the Committee weighted equally:

 

1. Corporate earnings performance.

 

2. Development of management team.

 

3. Corporate performance related to sales, insurance products, provider networks, administrative cost reduction, strategic initiatives, corporate branding and regulatory management.

 

During a meeting held on March 29, 2007, the Committee evaluated Mr. Gedwed’s performance relative to these performance objectives and made a final determination regarding Mr. Gedwed’s 2006 bonus.

 

The Committee also had access to the compensation information prepared by Mercer Human Resources Consulting, Inc. (“Mercer”) in March 2007. The analysis was limited to base salary and annual bonus payable to executive officers at a peer group of companies. The analysis was based on proxy data, other publicly disclosed information and Mercer’s own research library. The peer group considered in the Mercer analysis consisted of the following companies: Assurant, Cincinnati Financial, Torchmark, Unitrin, Protective Life, Phoenix Companies, StanCorp Financial Group, AmerUS Group, Great American Financial, Universal American and FBL Financial. Although, this survey information was considered by the Committee in determining annual bonus compensation, no particular weight was accorded the survey information and the Committee did not necessarily attempt to provide a level of compensation at any particular range within the survey group.

 

The annual bonuses paid to Messrs. Gedwed, Boxer, Hauptman, Myhra, McQuagge, and Plato for 2006 ranged from 67% to 175% of base salary and are included in the Bonus column of the Summary Compensation Table on page 20 below.

 

Stock Options

 

On May 8, 2006, the Board of Directors of HealthMarkets adopted the 2006 Management Stock Option Plan (the “2006 Plan”), in accordance with which options to purchase shares of HealthMarkets’ Class A-1 Common Stock may be granted from time to time to officers, employees and non-employee directors of HealthMarkets or any subsidiary. The purpose of the 2006 Plan is to attract and retain officers and other key employees for the Company and its subsidiaries and to provide to such persons incentives and rewards for superior performance. The Board believes that the Company will be able to enhance the prospects for its business objectives and more closely align the interests of outside directors, officers and key employees with those of the Company’s stockholders by providing those individuals with the opportunity to increase their equity interests in the Company on meaningful terms.

 

In May and June of 2006, the Committee granted non-qualified options under the 2006 Plan to Messrs. Gedwed, Hauptman, Myhra, McQuagge and Plato. Mr. Boxer received a grant of non-qualified options

under the 2006 Plan in September 2006 in connection with his appointment as the Company’s Chief Financial Officer. Messrs. Reed and Truxal did not receive grants under the 2006 Plan. Option grants under the 2006 Plan were made in connection with the Merger. Except in the case of a newly-hired executive, it is not currently anticipated that additional option grants will be made to the Named Executive Officers under the 2006 Plan.

 

These options were intended to provide a long-term incentive opportunity to the executives that also linked the interests of the executive with those of the stockholders, as the options provide no value unless the value of the underlying shares increases. The number of stock options granted to a particular executive officer was based on the executive’s position and an evaluation of the executive’s ability to influence the long-term growth and profitability of the Company. The number of options previously granted to, and shares held by, an officer were not considered in determining the number of options granted in May and June of 2006 to the officer. These options are included in the Grants of Plan Based Awards table on page 21 below. The Committee does not time the grant of stock options in consideration of the release of material non-public information.

 

Under the 2006 Plan, the option price may not be less than 100% of the Fair Market Value (as defined below) on the date of grant, except that the option price of an incentive stock option issued to an employee who owns Class A-1 Common Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Company stock may not be less than 110% of the Fair Market Value on the date of grant. Under the 2006 Plan, “Fair Market Value” is defined to mean the fair market value of a share as determined from time to time by the Board in good faith or, in the event of a termination of employment by certain key executives (other than for cause) within six months of an IPO or change of control, the consideration paid per share pursuant to such transaction.

 

The stock options granted to employees under the 2006 Plan vest in three “tranches.” One-third of the options vest in 20% increments over five years with an exercise price equal to the fair market value per share at the date of grant (the “Time-Based Options”). One-third of the options vest in increments of 25%, 25%, 17%, 17% and 16% over five years, provided that the Company shall have achieved certain specified performance targets, with an exercise price equal to the fair market value on the date of grant (the “Performance-Based Options”). Any Performance-Based Options as to which an optionee does not earn the right to exercise in any year shall expire and terminate. The remaining one-third of the options vest in increments of 25%, 25%, 17%, 17% and 16% over five years with an initial exercise price equal to the fair market value at the date of grant. The exercise price increases 10% each year beginning on the second anniversary of the grant date and ending on the fifth anniversary of the grant date (the “Tranche C Options”). Options granted to directors (“Director Options”) vest in 20% increments over five years. Director Options, Time Based Options, Performance-Based Options and Tranche C Options expire ten years following the grant date and become immediately exercisable upon the occurrence of a “Change in Control” (as defined) if the optionee remains in the continuous employ of the Company or any subsidiary until the date of the consummation of such Change in Control.

 

On August 30, 2006, the Committee established financial performance goals for the initial 25% vesting tranche of the Performance-Based Options based on certain earnings criteria. The Committee believes that the criteria selected established an appropriate target for the initial 25% vesting tranche, and viewed the likelihood of the Company achieving such target as approximately fifty percent. At its March 29, 2007 meeting, the Committee determined that the performance goals for the initial 25% vesting tranche had been satisfied. Performance goals for the remaining four vesting tranches of the Performance-Based Options are expected to be established annually by the Committee.

 

Additional Incentive Programs

 

During 2006, the Company’s Named Executive Officers were also entitled to participate in an incentive program (the “BOB II Program”) which was established in August 2002. Pursuant to the BOB II Program, the Company agreed to distribute to “eligible participants” on August 15, 2006, in cash, an aggregate of the dollar equivalent value of 200,000 HealthMarkets shares. Eligible participants in the BOB II Program consisted of full-time employees, including executive officers, of HealthMarkets and its subsidiaries and independent agents associated with HealthMarkets’ insurance subsidiaries who were employed by or contracted with HealthMarkets and its subsidiaries, as the case may be, at the close of business on August 15, 2002 and who remained employed by or contracted with HealthMarkets and its subsidiaries at the close of business on August 15, 2006. In accordance

with the BOB II Program, each eligible participant was entitled to receive his or her portion of the aggregate cash payment determined by reference to a formula based on, among other things, such eligible participant’s tenure with HealthMarkets and its subsidiaries and level of compensation. Each eligible participant in the BOB II Program received on August 15, 2006 an amount (subject to any applicable withholding tax) in cash equal to the number of shares subject to such awards held by such participant multiplied by $38.37 per share. Compensation under the BOB II Program for each Named Executive Officer did not exceed $10,000 per person and is included in the “All Other Compensation” column of the Summary Compensation Table. A BOB III program, with substantially similar features to BOB II, was made effective on January 31, 2007, with an expected payout on August 15, 2010.

 

Payments Related to the Merger or Dispositions

 

Outstanding Stock Options.  In connection with the Merger, each outstanding option to purchase shares of HealthMarkets Common Stock granted under the Company’s 1987 Amended and Restated Stock Option Plan became fully vested, and (except with respect to 360,030 options granted under the 1987 Plan that were held by certain executive officers and converted into options to acquire shares of Class A-1 Common Stock) each option granted under the 1987 Plan was cancelled and converted into the right to receive a payment (subject to any applicable withholding taxes) equal to the difference between $37.00 and the exercise price for the option.

 

Restricted Stock.  From time to time, the Company made awards of restricted shares of the Company’s Common Stock to eligible participants. These restricted shares generally vested on the second anniversary of the date of grant and were otherwise forfeitable if the participant ceased to provide material services to the Company as an employee, independent contractor, consultant, advisor, director or otherwise for any reason other than death prior to vesting. Shares of restricted stock also vested upon a change of control (as defined in the applicable award) or upon the death of the participant. The Committee determined not to award restricted stock to any eligible participant with respect to 2005 or 2006 performance. To the extent not already lapsed, all applicable forfeiture provisions of the outstanding restricted shares lapsed in connection with the Merger and, effective August 30, 2006, the Company’s Board of Directors authorized the termination of each of the outstanding restricted stock plans.

 

Success Bonus Award Plan.  On September 14, 2005, the Company’s Board of Directors adopted a Success Bonus Award Plan as an employee incentive and retention program to help retain employees and provide an incentive to employees (including executive officers) who were expected to be key to a successful completion of the Merger. Under the terms of the Success Bonus Award Plan, a participant was entitled to receive his or her award if the participant continued to be employed by the Company or any of the Company’s subsidiaries through the date of completion of any transaction resulting in a change of control of the Company (including the Merger). If a participant ceased to be employed before that date, he or she would not be entitled to an award, unless the Executive Compensation Committee determined otherwise. If the Merger (or another transaction that would qualify as a change of control under the plan) was not completed before June 30, 2006, participants would not have been entitled to receive awards under the plan. The total pool available for award to participants under the plan was $20.3 million. In accordance with the terms of the plan, on November 1, 2005 the Committee designated participants in the plan and awarded success bonuses to be paid to such participants at the times and in the manner as prescribed by the plan. With the exception of Mr. Boxer, who was not an employed by the Company at the time the Committee designated participants in the Success Bonus Award Plan, all Named Executive Officers received payments under the plan on April 7, 2006. Compensation under the Success Bonus Award Plan payable to the Named Executive Officers is included in the “All Other Compensation” column of the Summary Compensation Table on page 20 below.

 

Bonuses Related to Sale of Student Insurance Division.  On November 3, 2006, the Company’s Board of Directors approved a bonus program for Mr. Truxal and certain other employees in connection with the sale to UnitedHealth Care, Inc. (“United”) of substantially all of the assets comprising MEGA’s Student Insurance Division (the “Student Bonus Program”). The program rewarded Mr. Truxal for his contributions to the success of the Student Insurance business and his role in the negotiations leading up to the execution and delivery of the purchase agreement. The program also makes certain future bonus payments contingent on downward or upward adjustments of the purchase price, pursuant to the terms of the purchase agreement. At the completion of the sale on December 1, 2006, Mr. Truxal received a bonus payment from the Company in the amount of $400,000. Compensation paid to Mr. Truxal under the Student Bonus Program is included in the “All Other Compensation” column of the Summary Compensation Table on page 20 below. At the completion of the Sale, Mr. Truxal’s

employment with the Company terminated and he became an employee of United. Provided that his employment with United has not been terminated for cause, Mr. Truxal is eligible to earn an additional bonus from the Company of $240,000 on October 1, 2007 if the Company is not obligated to refund to United a portion of the purchase price under certain clawback provisions set forth in the purchase agreement. In addition, provided that his employment with United has not been terminated for cause, Mr. Truxal is eligible to earn an additional bonus from the Company of $160,000 in December 2008 if certain additional earnout amounts are payable to the Company pursuant to the purchase agreement.

 

HealthMarkets 401(k) and Savings Plan

 

The Company maintains for the benefit of its and its subsidiaries’ employees the HealthMarkets 401(k) and Savings Plan (the “Employee Savings Plan”). The Employee Savings Plan enables eligible employees to make pre-tax contributions to the Employee Savings Plan (subject to overall limitations) and to direct the investment of such contributions among several investment options. The Employee Savings Plan, which is made available to all employees, is intended to assist in attracting and retaining employees by providing them with a tax-advantaged means to save a portion of their earnings for retirement purposes.

 

Prior to the Merger, a second feature of the Employee Savings Plan constituted an employee stock ownership plan (the “ESOP”), contributions to which were invested primarily in shares of HealthMarkets Common Stock. The ESOP feature allowed participants to receive from HealthMarkets and its subsidiaries discretionary matching contributions and to share in certain supplemental contributions made by HealthMarkets and its subsidiaries. Effective upon completion of the Merger, the Employee Plan was amended to eliminate the ESOP feature.

 

The Company now makes certain matching contributions and supplemental contributions to participants’ accounts in cash. All contributions made on behalf of the Named Executive Officers were calculated using the same formula as is used for all other eligible employees. Contributions by the Company and its subsidiaries to the Employee Plan currently vest in prescribed increments over a six-year period.

 

Employee Benefit Plans

 

The Company offers benefit plans such as vacation, medical, prescription drug, vision, dental and term life insurance coverage to the Named Executive Officers on the same basis as offered to all employees. The Company offers these plans to attract, motivate and retain high-caliber employees.

 

The Company does not maintain a pension plan or non-qualified deferred compensation plan for executives or its other employees.

 

Perquisites

 

Historically, the Company has not made available a broad array of perquisites and personal benefits to its executive officers. The Company has chosen to offer only a very limited number of perquisites to its executives as an incremental benefit to recognize their position within the Company and as an accommodation to certain executives who maintain a residence in States other than the location of their Company office. In 2006, the Company reimbursed personal travel and housing expenses for two Named Executive Officers — Messrs. Boxer and Reed — who commuted to the Company’s Texas headquarters from primary residences in other States. The Company also reimbursed travel and housing expenses for Mr. Myhra in connection with certain personal travel. The Company furnished such executives with tax gross-ups for income attributable to such payments. The Company believes that these payments enhanced its ability to attract and retain these executives. The Company chose to provide the tax gross-ups to preserve the level of benefits intended to be provided under these arrangements. In connection with his appointment as Executive Vice President of the Company’s Agency Marketing Group, and certain travel requirements associated with that position, that Company paid Mr. Hauptman a de minimus special event bonus in 2006. The Company also chose to pay club dues for Messrs. Plato and Reed for business entertainment purposes. The value of each of these perquisites is included in the “All Other Compensation” column of the Summary Compensation Table on page 20 below.

 

Severance and Change of Control Agreements

 

Generally, currently outstanding stock options provide for post-termination exercise periods ranging from the earlier of ninety (90) calendar days or the remaining term of the option (in the case of voluntary terminations by the employee), to the earlier of one (1) year or the remaining term of the option (in the case of termination due to death or disability, termination by the employee for good reason, termination by the Company without cause, or voluntary termination by the employee). Termination of employment for cause results in expiration of all options on the date of the termination.

 

Change of control provisions are contained in various Company plans applicable to the Named Executive Officers as well to other employees. Options granted under the 2006 Plan provide that upon the occurrence of a “Change of Control” (as defined in the 2006 Plan), if the employee has remained in the continuous employ of the Company, and his or her employment terminates for any reason (other than a termination for cause by the Company or a voluntary termination by the employee), the employee may exercise any options exercisable as of the date of the employee’s termination or that would have become exercisable if the employee had remained employed until the first anniversary of the date of the employee’s termination.

 

Under the terms of employment agreements with the Company, the Named Executive Officers (other than Messrs. Reed and Truxal, who are no longer employed by the Company) are entitled to severance payments in the event of their termination in certain specified circumstances. These executives would be entitled to receive severance equal to two times the executive’s base salary plus target bonus payable in monthly installments, continuation of welfare benefits for two years, as well as a pro-rata bonus, based on the executive’s target bonus, if such termination occurs after the last day of the first quarter of the applicable fiscal year. These executives are entitled to full change-of-control parachute excise tax gross up protection on all payments and benefits due to the executive, including such payments and benefits due to the executive in connection with the Merger; provided, however, that following a change of control of HealthMarkets (other than in connection with the Merger), the surviving corporation will be entitled to reduce the executive’s payments (but not by more than 10%) if the reduction would allow the avoidance of the imposition of any excise tax associated with the change of control. In addition, each of these executives has agreed to two-year post-termination non-competition and non-solicitation covenants. The terms of the Employment Agreements are described in more detail under the heading “Employment and Consulting Agreements.”

 

Under Mr. Reed’s Employment Agreement, the Company agreed to pay him termination payments in the aggregate amount of $1.6 million, which are being paid in 24 monthly installments following the termination of his employment on August 31, 2006. The Company recorded an expense for the entire $1.6 million in 2006. Mr. Reed is also entitled to receive, at the Company’s expense, the Company-paid portion of the premium for continued participation in the Company’s medical, prescription drug, vision, dental and life insurance coverage for the two-year period commencing on the termination date. Mr. Reed’s Employment Agreement also provides for full change of control parachute excise tax gross-up protection on all payments and benefits due to Mr. Reed. In addition, he is subject to two-year post-termination non-competition and non-solicitation restrictions.

 

We believe that these change of control arrangements benefit the Company and its stockholders by assuring key employees that we are aware of the issues they could face upon a change of control; by providing key employees with financial assurances so that they can perform their jobs with a minimum of distraction in the face of a pending change of control; by encouraging key employees to stay with the Company while a change of control is occurring, so that an acquiring company can retain individuals who have been key to the Company’s success; and by helping the Company recruit employees who may have similar agreements with other companies.

 

Accounting and Tax Issues

 

Section 162(m) of the U.S. Internal Revenue Code limits the deductibility of compensation in excess of $1.0 million paid to the Company’s Chairman, chief executive officer and president or to any of the Company’s four highest-paid other executive officers unless certain specific and detailed criteria are satisfied. The Committee considers the anticipated tax treatment to the Company and its executive officers in its review and establishment of compensation programs and payments, but has determined that it will not necessarily seek to limit compensation to that amount otherwise deductible under Section 162(m).

COMPENSATION COMMITTEE REPORT

 

The Executive Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis appearing above. Based on the review and discussions referred to above, the Executive Compensation Committee recommends to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Information Statement on Schedule 14C.

 

EXECUTIVE COMPENSATION COMMITTEE

 

Chinh E. Chu (Chairman)

Matthew S. Kabaker

Adrian M. Jones

Mural R. Josephson

Steven J. Shulman

 

SUMMARY COMPENSATION TABLE

 

The following table summarizes all compensation for services to us and our subsidiaries for the fiscal year ended December 31, 2006, earned by or awarded or paid to the persons who were the chief executive officer, the chief financial officer, the three other most highly compensated executive officers of the Company serving as such at December 31, 2006, and two other former officers who would have been among the next three most highly compensated executive officers but for the fact that they were not serving at December 31, 2006.

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth information concerning option grants to the Named Executive Officers during the fiscal year ended December 31, 2006.

 

 

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information concerning stock options held by the Named Executive Officers at December 31, 2006:

 

 

 

 

Option Exercises and Stock Vested

 

The following table summarizes options exercised by the Named Executive Officers during 2006.

 

 

 

Potential Payments upon Termination or Change-in-Control

 

Assuming that (i) Messrs. Gedwed, Boxer, Hauptman, Myhra, McQuagge, and Plato were terminated on December 31, 2006 and (ii) that the price of the Company’s Common Stock was $50.00 as of December 31, 2006 (the fair market value as determined by the Executive Committee of the Board), then these Named Executive Officers would be entitled to the following payments upon a termination of employment or change of control:

 

 

 

 

 

Employment and Consulting Agreements

 

Under the terms of separate employment agreements with the Company (the principal terms of which were requested by and negotiated with The Blackstone Group after the key terms of the Merger were agreed upon), each of William J. Gedwed (President and Chief Executive Officer), Mark D. Hauptman (Vice President, Chief Accounting Officer and former Chief Financial Officer), Troy A. McQuagge (President, Agency Marketing Group), Phillip J. Myhra (Executive Vice President, Insurance Operations and Risk Management), and James N. Plato (President, Life Insurance Division (collectively, the “Continuing Executives”) continue to serve in each of their respective positions (other than Mr. Hauptman, who now serves as Executive Vice President of the Company’s Agency Marketing Group) and receive an annual base salary in an amount not less than their respective base salary immediately before the Merger. The Continuing Executives are also eligible for an annual target bonus ranging from a minimum of 75% of annual base salary to a maximum of 200% of annual base salary. Each of the Continuing Executives is also entitled to new equity award grants and participation in employee benefit plans and has agreed to retain all or a portion of their respective HealthMarkets equity and equity-based awards. The employment agreements have an initial employment term of two or three years from the Merger that automatically renew annually upon the expiration of the initial employment term, unless either party gives notice.

 

In addition, under the terms of their employment agreements, the Continuing Executives are entitled to severance payments in the event of their termination in certain specified circumstances. The Continuing Executives would be entitled to receive severance equal to two times the executive’s base salary plus target bonus payable in monthly installments, continuation of welfare benefits for two years, as well as a pro-rata bonus, based on the executive’s target bonus, if such termination occurs after the last day of the first quarter of the applicable fiscal year. The Continuing Executives are entitled to full change-of-control parachute excise tax gross up protection on all payments and benefits due to the executive, including such payments and benefits due to the executive in connection with the Merger; provided, however, that following a change of control of HealthMarkets (other than in connection with the Merger), the surviving corporation will be entitled to reduce the executive’s payments (but not by more than 10%) if the reduction would allow the avoidance of the imposition of any excise tax associated with the change of control. In addition, each of the Continuing Executives has agreed to two-year post-termination non-competition and non-solicitation covenants.

 

In connection with the Merger, Timothy L. Cook (former President of the Company’s Star HRG Division) and William J. Truxal (former President of MEGA’s Student Insurance Division) also executed employment agreements with the Company. Mr. Cook’s agreement terminated effective July 11, 2006, upon the sale of substantially all of the assets comprising the Company’s Star HRG operations, and Mr. Truxal’s agreement terminated effective December 1, 2006, upon the sale of substantially all of the assets comprising MEGA’s Student Insurance Division.

 

On May 24, 2006, the Company entered into an agreement with Glenn W. Reed, the former Executive Vice President and General Counsel of the Company. The agreement provides, among other things, that Mr. Reed’s employment with the Company would extend from the date of the agreement through the later of June 30, 2006 or such date to which the Company and Mr. Reed shall mutually agree (the “termination date”), during which term Mr. Reed would continue to receive his annualized base salary. The termination date was subsequently established by Mr. Reed and the Company as August 31, 2006. Following termination of the employment term, the Company has agreed to pay to Mr. Reed termination payments in the aggregate amount of $1.6 million, which will be paid in 24 monthly installments. The Company recorded an expense for the entire $1.6 million in 2006. Mr. Reed is also

entitled to receive, at the Company’s expense, the Company-paid portion of the premium for continued participation in the Company’s medical, prescription drug, vision, dental and life insurance coverage for the two-year period commencing on the termination date. Upon the termination date, Mr. Reed resigned from all offices, committees and/or directorships that he then held with the Company, its subsidiaries and their respective affiliates. The agreement also provides for full change of control parachute excise tax gross-up protection on all payments and benefits due to Mr. Reed. In addition, he is subject to two-year post-termination non-competition and non-solicitation restrictions.

 

In connection with the appointment of Michael E. Boxer as the Company’s Executive Vice President and Chief Financial Officer effective September 26, 2006, the Company entered into an employment agreement with Mr. Boxer on terms substantially similar to the employment agreements with the Continuing Executives described above. In addition, Mr. Boxer was awarded a grant of options for 105,500 shares of the Company’s Class A-1 Common Stock under the HealthMarkets 2006 Management Stock Option Plan; was given the right to purchase 18,243 shares of the Company’s Class A-1 Common Stock at fair market value; and, if he elected to exercise the right to purchase such shares, the Company agreed to award him additional stock options to purchase an equivalent number of shares. On September 29, 2006, Mr. Boxer exercised this right and purchased 18,243 shares of the Company’s Class A-1 Common Stock at $38.37 per share.

 

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information as of March 30, 2007 (except as noted) with respect to the Common Stock ownership of (a) each person known by management to own beneficially five percent or more of the Company’s Common Stock, (b) each director of the Company, each nominee for director of the Company and each Named Executive Officer and (c) all directors and executive officers as a group: