def14c
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
o Preliminary Information Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
þ Definitive Information Statement
HealthMarkets, Inc.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
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o Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11 |
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(3) Per unit price or other underlying value of transaction computed
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o Fee paid previously with
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o Check box if any part of the fee is offset as provided by Exchange Act
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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
TABLE OF CONTENTS
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 Companys 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 Companys 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 Companys 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 Companys agent
stock accumulation plans;
3. The ratification of the selection of KPMG LLP as the
Companys 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
Isnt 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.
2
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:
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up to six directors nominated or designated by the investment
affiliates of Blackstone and any permitted transferee thereof
(collectively, the Blackstone Investor Group);
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up to two directors nominated or designated by the investment
affiliates of Goldman Sachs and any permitted transferee thereof
(collectively, the GS Investor Group);
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up to one director nominated or designated by the investment
affiliates of DLJ Merchant Banking and any permitted transferee
thereof (collectively, the DLJ Investor Group, and
each of the Blackstone Investor Group, the GS Investor Group and
the DLJ Investor Group, a Private Equity Investor
Group);
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one member of management, which we refer to as the
management director, to be nominated by Private
Equity Stockholders holding a majority of the
Class A-1
Common Stock held by Private Equity Stockholders; and
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additional directors, including directors who may be considered
independent under various SEC and stock exchange definitions to
the extent deemed necessary or advisable.
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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
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Groups 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.
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Year
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First
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Elected
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Background
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Director
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Allen F. Wise
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64
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Mr. Wise was elected a director
and chairman of the Board of Directors of HealthMarkets in July
2006. Mr. Wise does not serve on any committees of the
Board. He also serves as chairman of the board of directors of
Coventry Health Care, a national managed health care company
based in Bethesda, Md. For eight years Mr. Wise served as
Coventry Health Cares president and chief executive
officer. Prior to his tenure at Coventry Health Care, he was
executive vice president at UnitedHealth Group, Inc., and its
predecessor, MetraHealth Companies, Inc. Earlier in his career,
Mr. Wise served as president and chief executive officer of
Wise Health System, a health care investment company; president
and chief executive officer of Keystone Health Plan; and served
as chief operating officer of Independence Blue Cross.
Mr. Wise is a director of Magellan Health Services, Inc. (a
manager of behavioral health and radiology benefits).
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2006
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William J. Gedwed
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51
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Mr. Gedwed has been a director of
the Company since June 2000 and has served as President and
Chief Executive Officer since July 1, 2003. Mr. Gedwed
is a member of the Executive Committee and the Nominating
Committee of the Board. Mr. Gedwed also currently serves as
Chairman and Director of The MEGA Life and Health Insurance
Company, Mid-West National Life Insurance Company of Tennessee,
The Chesapeake Life Insurance Company and Fidelity First
Insurance Company (subsidiaries of the Company). Mr. Gedwed
currently serves as a Director of NMC Holdings, Inc. and Motor
Club Investors Inc. He also served as a director
and/or
executive officer of other subsidiaries of NMC Holdings, Inc.
until December 2005.
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2000
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4
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Year
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Director
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Chinh E. Chu
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40
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Mr. Chu has been a director of the
Company since April 2006 and served as Chairman of the Board
from April 2006 until July 2006. Mr. Chu is a member of the
Executive Committee, Executive Compensation Committee,
Compliance & Governance Committee and Nominating
Committee of the Board. Mr. Chu is a Senior Managing
Director of The Blackstone Group LP, which he joined in 1990.
Mr. Chu received a BS in Finance from the University of
Buffalo. He currently serves as a director of Celanese
Corporation, Nalco Holdings LLC, SunGard Data Systems, Inc.,
Graham Packaging Holdings Company, Financial Guaranty Insurance
Company and Encore Medical Corporation.
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2006
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Adrian M. Jones
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42
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Mr. Jones has been a director of
the Company since April 2006. Mr. Jones is a member of the
Executive Committee, Executive Compensation Committee,
Compliance & Governance Committee and Investment
Committee of the Board. Mr. Jones has been a Managing
Director of Goldman, Sachs & Co. since 2002.
Mr. Jones joined Goldman, Sachs & Co.s
Investment Banking Division in 1994 and moved to its Merchant
Banking Division in 1998. Before joining Goldman Sachs,
Mr. Jones served as a lieutenant in the Irish Army and
worked at Bank of Boston. Mr. Jones earned a BA from
University College Galway, an MA in Economics from University
College Dublin and an MBA from Harvard Business School.
Mr. Jones currently serves on the boards of directors of
Burger King Corporation, Autocam Corporation and Signature
Hospital Holdings.
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2006
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5
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Director
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Mural R. Josephson
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58
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Mr. Josephson has been a director
of the Company since May 2003 and is a member of the Audit
Committee and Executive Compensation Committee of the Board.
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. He has
served as a director of Omni Youth Services (a non-profit social
welfare agency located in Buffalo Grove, Illinois) since October
2003, as a director of SeaBright Insurance Holdings, Inc. (a
publicly-traded company providing multi-jurisdictional
workers compensation insurance) since February 2004, as a
director of PXRE Group Ltd. (a publicly-traded company providing
primarily catastrophe and risk excess reinsurance products and
services) since August 2004 and as a director of ALPS
Corporation and its wholly-owned subsidiary, Attorneys Liability
Protection Society, Inc. (a privately-held insurance company
that writes attorney errors and omissions coverage) since
January 1, 2006. Mr. Josephson received his B.S. in
Accountancy from Northern Illinois University in 1970.
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2003
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Matthew S. Kabaker
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30
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Mr. Kabaker has been a director of
the Company since April 2006. Mr. Kabaker is a member of
the Audit Committee, Investment Committee, Compliance &
Governance Committee, and Executive Compensation Committee of
the Board. Mr. Kabaker is a Principal of The Blackstone
Group, which he joined in 1998. Mr. Kabaker received a BA
in Philosophy, Politics & Economics from the University
of Pennsylvania. Mr. Kabaker currently serves on the boards
of directors of TRW Automotive, Financial Guaranty Insurance
Company, Ariel Reinsurance Holdings and Michaels Stores, Inc.
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2006
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6
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Year
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Director
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Andrew S. Kahr
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66
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Mr. Kahr has been a director of
the Company since August 2006. Mr. Kahr is employed by
Global Financial Innovation, SA, St. Moritz, Switzerland. He
served as a financial services consultant with Eden Properties,
SA, St. Moritz, Switzerland from March 2003 to October 2006.
Following his retirement as chairman and chief executive officer
of Providian Corporation in 1986, Mr. Kahr served as a
financial services consultant with Sodemo, SA, St. Moritz,
Switzerland, from February 1986 until March 2003. Mr. Kahr
holds a BA from Harvard College and a Ph.D. in Mathematics from
the Massachusetts Institute of Technology.
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2006
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Kamil M. Salame
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38
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Mr. Salame has been a director of
the Company since April 2006. Mr. Salame is a member of the
Executive Committee, Nominating Committee, and Investment
Committee of the Board. Mr. Salame is a partner of DLJ
Merchant Banking Partners, the leveraged buyout business of
Credit Suisses asset management business. Mr. Salame
joined DLJ Merchant Banking Partners in 1997. Previously, he was
a member of DLJs Leveraged Finance Group. Mr. Salame
is a director of Aspen Insurance Holdings Limited, Merrill
Corporation, Professional Career Development Institute, LLC and
US Express Leasing, Inc. Mr. Salame received a JD from
Columbia Law School, an MBA from Columbia Business School and a
BS from Georgetown University.
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2006
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Steven J. Shulman
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55
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Mr. Shulman began serving as a
director of the Company in July 2006. Mr. Shulman is a
member of the Executive Compensation Committee of the Board. He
also serves as chairman and chief executive officer of Magellan
Health Services, Inc. (a manager of behavioral health and
radiology benefits). Prior to joining Magellan Health Services,
Mr. Shulman founded IHCG, an early-stage healthcare
technology venture fund, and served as its Chairman and Chief
Executive Officer from 2000 to 2002. Prior to IHCG, he was
employed by Prudential Healthcare, Inc. as its Chairman,
President and Chief Executive Officer from 1997 to 1999.
Mr. Shulman co-founded Value Health, Inc., a New York Stock
Exchange-listed specialty managed health care company, and
served as President of its Pharmacy and Disease Management Group
and director from 1991 to 1997. Mr. Shulman is a member of
the board of directors of IHCG, Digital Insurance (a private
employee benefit service company).
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2006
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7
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Nathaniel M. Zilkha
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31
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Mr. Zilkha has been a director of
the Company since April 2006. Mr. Zilkha is a member of the
Audit Committee of the Board. Mr. Zilkha has been a Vice
President of Goldman, Sachs & Co., since 2004. For the
last five years, he has worked in the Principal Investment Area
of Goldman, Sachs & Co., where he focuses on
investments in healthcare services, life sciences and medical
devices. Mr. Zilkha holds a BA from Princeton University.
Mr. Zilkha currently serves on the boards of directors of
XLHealth Corporation, Signature Hospital Holdings, Diveo
Broadband Networks, Inc. and iHealth Technologies, Inc.
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2006
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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.
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Change in
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Pension
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Value and
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Fees
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Non-Equity
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Nonqualified
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Earned or
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Incentive Plan
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Deferred
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Paid in
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Stock
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Option
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Compensation
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Compensation
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All Other
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Name
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Cash ($)
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Awards ($)
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Awards(12) ($)
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($)
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Earnings
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Compensation ($)
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Total ($)
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Allen F. Wise(1)
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100,000
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85,012
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(6)
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185,012
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Steven J. Shulman(2)
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62,500
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9,168
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(7)
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71,668
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Mural R. Josephson(3)
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152,750
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13,459
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(8)
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166,209
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Andrew S. Kahr(4)
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75,000
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3,301
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(9)
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78,301
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Dennis C. McCuistion(5)
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56,750
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1,018
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(10)
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300,000
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(11)
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357,768
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Richard T. Mockler(5)
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21,000
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118
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(10)
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300,000
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(11)
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321,118
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R.H. Mick Thompson(5)
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47,000
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300,000
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(11)
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347,000
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Chinh E. Chu
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Adrian M. Jones
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Matthew S. Kabaker
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Kamil M. Salame
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Nathaniel M. Zilkha
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(1) |
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Elected a director effective July 1, 2006. Mr. Wise
receives an annual retainer for Board membership of $200,000. |
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(2) |
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Elected a director effective June 9, 2006. Mr. Shulman
receives annual retainers for the following: Board
membership $100,000; Executive Compensation
Committee membership $25,000. |
8
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(3) |
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Mr. Josephson receives annual retainers for the following:
Board membership $100,000; Chairmanship of the Audit
Committee $50,000; Executive Compensation Committee
membership $25,000 |
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(4) |
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Elected a director effective August 30, 2006. Mr. Kahr
receives an annual retainer for Board membership of $150,000 |
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(5) |
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Ceased being a director effective April 5, 2006. |
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(6) |
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74,323 options were outstanding at December 31, 2006. |
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(7) |
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6,757 options were outstanding at December 31, 2006. |
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(8) |
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4,045 options were outstanding at December 31, 2006.
Excludes cash payment of $87,991 in connection with the Merger
whereby options to purchase shares were cancelled and converted
into the right to receive payment equal to the difference
between $37.00 and the exercise price of the options. |
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(9) |
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4,200 options were outstanding at December 31, 2006. |
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(10) |
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No options were outstanding at December 31, 2006. |
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(11) |
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Represents $150,000 paid and $150,000 accrued to
Messrs. McCuistion, Mockler and Thompson, respectively,
under Consulting Agreements entered into in June 2006. |
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(12) |
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Calculated in accordance with Statement of Financial Accounting
Standards 123R. Represents compensation expense recognized in
2006 for financial statement reporting purposes. Excludes cash
payments made to Messrs. McCuistion and Mockler in the
amount of $2,851 and $31,938, respectively, in connection with
the Merger whereby options to purchase shares were cancelled and
converted into the right to receive payment equal to the
difference between $37.00 and the exercise price of the options. |
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
Companys then directors attended the Annual Stockholder
Meeting held October 12, 2006.
Stockholder
Communication with Our Board
All current members of the Companys Board are listed under
the heading More About Our Company on the
Companys 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
9
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.
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Compliance &
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Executive
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Director
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Audit
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Executive
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Investment
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Governance
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Nominating
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Compensation
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Allen F. Wise
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William J. Gedwed
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x
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x
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Chinh E. Chu
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x
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*
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x
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*
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x
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*
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x
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*
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Adrian M. Jones
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x
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x
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x
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x
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Mural R. Josephson
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x
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*
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x
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Matthew S. Kabaker
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x
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x
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*
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x
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x
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Andrew S. Kahr
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Kamil M. Salame
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x
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x
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x
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Steven J. Shulman
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x
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Nathaniel M. Zilkha
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x
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Fiscal 2006 Meetings
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8
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0
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1
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0
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0
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3
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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 Companys risks and control environment,
overseeing the integrity of the Companys financial
statements and financial reporting and compliance with legal and
regulatory requirements and evaluating the Companys audit
processes. The Audit Committee confers with the Companys
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 Companys
independent registered public accounting firm and approves any
significant non-audit relationship with the independent
registered public accounting firm.
KPMG LLP, the Companys 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 Companys 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.
10
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 Companys 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 Committees 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 Companys 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 Companys
compliance and regulatory functions, including the assessment on
a periodic basis of the processes related to the Companys
risk and control environment, the oversight of the integrity of
the Companys compliance with legal and regulatory
requirements and evaluation of the Companys 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
Companys 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.
11
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 candidates
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
Companys 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 Companys 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
Companys compensation programs and remuneration
arrangements for its highest-paid executives. The Committee is
authorized to provide assistance to the Companys directors
in fulfilling their responsibility to shareholders to ensure
that the Companys officers, key executives and board
members are compensated in accordance with the Companys
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
CEOs performance in light of those goals and objectives
and sets the CEOs 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 Companys
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
12
information was considered by the Committee in determining 2006
annual bonus compensation for the Companys 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
Companys 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 Companys Executive Compensation Program
The Companys compensation objectives are to support the
Companys overall business strategy and objectives, attract
and retain the best possible executive talent, motivate
executive officers to achieve the Companys 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
Companys 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
13
employment agreements provided for annual base salary, not less
than the executive officers 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
executives 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. Reeds 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 Companys 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.
As discussed above, the base salary of Mr. Boxer was based
on the terms of an employment agreement entered into with the
Company effective September 26, 2006.
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 Companys 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%.
14
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. Boxers 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. Gedweds recommendations and reviewed and approved
2006 bonus compensation for such Named Executive Officers.
Mr. Hauptman, who resigned as the Companys Chief
Financial Officer and assumed a new executive role at the
Companys 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. Gedweds annual bonus
compensation, the Committee evaluated Mr. Gedweds
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. Gedweds performance relative to these
performance objectives and made a final determination regarding
Mr. Gedweds 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 Mercers 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
Companys 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
15
under the 2006 Plan in September 2006 in connection with his
appointment as the Companys 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 executives position and
an evaluation of the executives 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 Companys 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
16
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 participants 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 Companys 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 Companys
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 Companys Board of Directors
authorized the termination of each of the outstanding restricted
stock plans.
Success Bonus Award Plan. On
September 14, 2005, the Companys 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
Companys 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
Companys 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 the Companys
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. Truxals
17
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 Companys 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 Companys 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.
18
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 employees termination or that would have become
exercisable if the employee had remained employed until the
first anniversary of the date of the employees 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
executives 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
executives 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
executives 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. Reeds 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 Companys expense, the Company-paid
portion of the premium for continued participation in the
Companys medical, prescription drug, vision, dental and
life insurance coverage for the two-year period commencing on
the termination date. Mr. Reeds 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 Companys 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 Companys Chairman, chief
executive officer and president or to any of the Companys
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).
19
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
Companys Board of Directors that the Compensation
Discussion and Analysis be included in the Companys
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.
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Change in
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Pension
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Value and
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Nonqualified
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Name and
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Non-Equity
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Deferred
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Principal
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Position
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Year
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Salary
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Bonus(1)
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Awards(2)
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Awards(2)
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Compensation
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Earnings
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Compensation(3)
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Total
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William J. Gedwed,
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2006
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600,000
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750,000
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893,337
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2,040,965
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4,284,302
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Director; President
and CEO
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Michael E. Boxer,
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2006
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119,423
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160,000
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81,127
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22,175
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382,725
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Executive Vice President
and CFO
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Mark D. Hauptman,
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2006
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|
|
|
268,077
|
|
|
|
200,000
|
|
|
|
|
|
|
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
3,623,560
|
|
|
|
4,257,637
|
|
Former Vice President
and CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip J. Myhra,
|
|
|
2006
|
|
|
|
375,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
440,488
|
|
|
|
|
|
|
|
|
|
|
|
4,798,651
|
|
|
|
5,864,139
|
|
Executive Vice
President
Insurance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy A. McQuagge,
|
|
|
2006
|
|
|
|
400,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
612,057
|
|
|
|
|
|
|
|
|
|
|
|
3,399,426
|
|
|
|
5,111,483
|
|
President Agency
Marketing Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James N. Plato,
|
|
|
2006
|
|
|
|
325,000
|
|
|
|
250,000
|
|
|
|
758
|
|
|
|
191,410
|
|
|
|
|
|
|
|
|
|
|
|
1,151,111
|
|
|
|
1,918,279
|
|
President
Life Insurance Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn W. Reed,
|
|
|
2006
|
|
|
|
267,676
|
|
|
|
|
|
|
|
|
|
|
|
138,285
|
|
|
|
|
|
|
|
|
|
|
|
4,262,555
|
|
|
|
4,668,516
|
|
Former Executive
Vice President
and General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Truxal,
|
|
|
2006
|
|
|
|
347,981
|
|
|
|
500,000
|
|
|
|
|
|
|
|
340,544
|
|
|
|
|
|
|
|
|
|
|
|
1,548,242
|
|
|
|
2,736,767
|
|
Former President
Student Insurance Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
(1) |
|
Represents cash bonuses accrued for the year under the annual
bonus plan. |
|
(2) |
|
Calculated in accordance with Statement of Financial Accounting
Standards 123R. Represents compensation expense recognized in
2006 for financial statement reporting purposes. The assumptions
used in the valuation are discussed in Note R to the
Companys Consolidated Financial Statements included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2006. |
|
(3) |
|
The following table contains a breakdown of the compensation and
benefits included under All Other Compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student
|
|
|
and
|
|
|
Special
|
|
|
Additional
|
|
|
Country/Golf
|
|
|
|
Life
|
|
|
Contribution
|
|
|
Personal
|
|
|
Housing
|
|
|
Tax
|
|
|
Success
|
|
|
Bonus
|
|
|
Termination
|
|
|
Event
|
|
|
Incentive
|
|
|
Club
|
|
Name
|
|
Insurance
|
|
|
to 401k Plan
|
|
|
Travel
|
|
|
Allowances
|
|
|
Gross-ups
|
|
|
Bonus
|
|
|
Program
|
|
|
Benefits
|
|
|
Payment
|
|
|
Programs
|
|
|
Dues
|
|
|
William J. Gedwed
|
|
|
720
|
|
|
|
13,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,026,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
Michael E. Boxer
|
|
|
|
|
|
|
|
|
|
|
10,274
|
|
|
|
3,818
|
|
|
|
8,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark D. Hauptman
|
|
|
720
|
|
|
|
13,029
|
|
|
|
|
|
|
|
|
|
|
|
1,063,892
|
|
|
|
2,533,113
|
|
|
|
|
|
|
|
|
|
|
|
3,360
|
|
|
|
9,446
|
|
|
|
|
|
Phillip J. Myhra
|
|
|
720
|
|
|
|
13,200
|
|
|
|
27,001
|
|
|
|
18,000
|
|
|
|
1,352,124
|
|
|
|
3,378,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,446
|
|
|
|
|
|
Troy
A. McQuagge
|
|
|
720
|
|
|
|
11,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,378,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,446
|
|
|
|
|
|
James N. Plato
|
|
|
720
|
|
|
|
12,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,446
|
|
|
|
1,616
|
|
Glenn W. Reed
|
|
|
720
|
|
|
|
12,600
|
|
|
|
23,184
|
|
|
|
12,000
|
|
|
|
15,105
|
|
|
|
2,533,113
|
|
|
|
|
|
|
|
1,653,714
|
|
|
|
|
|
|
|
9,446
|
|
|
|
2,673
|
|
William J. Truxal
|
|
|
720
|
|
|
|
13,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126,729
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
7,593
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
Closing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Exercise or
|
|
Market
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Base
|
|
Price of
|
|
Fair
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
Securities
|
|
Price of
|
|
Common
|
|
Value of
|
|
|
|
|
|
|
Under Equity Incentive Plan Awards
|
|
Underlying
|
|
Option
|
|
Stock on
|
|
Option
|
|
|
|
|
Board Action
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Options
|
|
Awards
|
|
Grant Date
|
|
Awards
|
Name
|
|
Grant Date
|
|
Date
|
|
(#)
|
|
(#)(1)
|
|
(#)
|
|
(#)(1)
|
|
($/Share)(2)
|
|
($/Share)(2)
|
|
($)(3)
|
|
William J. Gedwed
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,533
|
(4)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
796,153
|
|
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,534
|
(5)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
755,835
|
|
|
|
|
09/25/2006
|
|
|
|
08/30/2006
|
|
|
|
|
|
|
|
17,383
|
(6)
|
|
|
|
|
|
|
|
|
|
|
37.00
|
|
|
|
38.37
|
|
|
|
201,643
|
|
Michael E. Boxer
|
|
|
09/26/2006
|
|
|
|
09/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,167
|
(4)
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
411,102
|
|
|
|
|
09/26/2006
|
|
|
|
09/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,166
|
(5)
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
377,331
|
|
|
|
|
09/26/2006
|
|
|
|
09/26/2006
|
|
|
|
|
|
|
|
8,791
|
(6)
|
|
|
|
|
|
|
|
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
100,042
|
|
|
|
|
09/29/2006
|
|
|
|
09/29/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,081
|
(4)
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
71,208
|
|
|
|
|
09/29/2006
|
|
|
|
09/29/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,081
|
(5)
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
65,371
|
|
|
|
|
09/29/2006
|
|
|
|
09/29/2006
|
|
|
|
|
|
|
|
1,520
|
(6)
|
|
|
|
|
|
|
|
|
|
|
38.37
|
|
|
|
38.37
|
|
|
|
17,328
|
|
Mark D. Hauptman
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,667
|
(4)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
99,237
|
|
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,666
|
(5)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
94,199
|
|
|
|
|
09/25/2006
|
|
|
|
08/30/2006
|
|
|
|
|
|
|
|
2,166
|
(6)
|
|
|
|
|
|
|
|
|
|
|
37.00
|
|
|
|
38.37
|
|
|
|
25,126
|
|
Phillip J. Myhra
|
|
|
05/08/2006
|
|
|
|
05/08/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,767
|
(4)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
397,734
|
|
|
|
|
05/08/2006
|
|
|
|
05/08/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,766
|
(5)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
375,820
|
|
|
|
|
09/25/2006
|
|
|
|
08/30/2006
|
|
|
|
|
|
|
|
8,691
|
(6)
|
|
|
|
|
|
|
|
|
|
|
37.00
|
|
|
|
38.37
|
|
|
|
100,641
|
|
Troy A. McQuagge
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,667
|
(4)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
557,237
|
|
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,666
|
(5)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
528,999
|
|
|
|
|
09/25/2006
|
|
|
|
08/30/2006
|
|
|
|
|
|
|
|
12,166
|
(6)
|
|
|
|
|
|
|
|
|
|
|
37.00
|
|
|
|
38.37
|
|
|
|
141,126
|
|
James N. Plato
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,950
|
(4)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
79,578
|
|
|
|
|
06/26/2006
|
(7)
|
|
|
06/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,950
|
(5)
|
|
|
37.00
|
|
|
|
37.00
|
|
|
|
75,546
|
|
|
|
|
09/25/2006
|
|
|
|
08/30/2006
|
|
|
|
|
|
|
|
1,737
|
(6)
|
|
|
|
|
|
|
|
|
|
|
37.00
|
|
|
|
38.37
|
|
|
|
20,149
|
|
|
|
|
(1) |
|
Represents options granted under the HealthMarkets 2006
Management Option Plan. Options have a ten year term and vest
over time as described below. Excludes options previously
granted under the 1987 Stock Option Plan that were converted
into options to acquire
Class A-1
Common Stock in connection with the Merger. |
21
|
|
|
(2) |
|
Options were granted with an exercise price equal to fair market
value on the date of grant. The fair market value of the
Companys stock is set by the Board of Directors on a
quarterly basis. |
|
(3) |
|
The grant date fair value of these awards was calculated in
accordance with Statement of Financial Accounting
Standards 123R. Refer to
page F-71
of HealthMarkets 2006
Form 10-K
for all valuation assumptions regarding options included in this
column. |
|
(4) |
|
Represents approximately one-third of the total options granted,
awarded by the Board of Directors to the NEOs on the date
indicated. These options vest in 20% increments over five years
with an exercise price equal to the fair market value on the
grant date (Time-Based Options). |
|
(5) |
|
Represents approximately one-third of the total options granted,
awarded by the Board to the NEOs on the date indicated. These
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 on the grant date. The exercise price increases 10%
each year beginning on the second anniversary of the grant date
(Tranche C Options). |
|
(6) |
|
Approximately one-third of the total options awarded by the
Board to the NEOs on the date indicated vest in increments of
25%, 25%, 17%, 17% and 16% over five years, provided that the
Company shall have achieved certain specified performance
targets at an exercise price equal to the fair market value on
the grant date (Performance-Based Options). On
August 30, 2006, the Board established the performance
criteria for the first vesting tranche of the Performance-Based
Options. The performance criteria for achievement of the first
vesting tranche were communicated to the NEOs on
September 25, 2006. At December 31, 2006, the
performance criteria for the remaining four vesting tranches had
not been determined. The first vesting tranche of the
Performance-Based Options is included in the Grant of Plan-Based
Awards table above. Performance-Based Options where performance
goals have not been established have been excluded from the
Grant of Plan-Based Awards table. The following table describes
such Performance-Based Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based
|
|
|
|
|
|
|
|
|
|
Options Excluded
|
|
|
|
|
|
|
|
|
|
from the
|
|
|
Exercise or Base
|
|
|
|
|
|
|
Outstanding Awards
|
|
|
Price of Option
|
|
|
|
|
|
|
Table
|
|
|
Awards
|
|
Name
|
|
Board Action Date
|
|
|
(#)
|
|
|
($/Share)
|
|
|
William J. Gedwed
|
|
|
06/26/2006
|
|
|
|
52,150
|
|
|
|
37.00
|
|
Michael E. Boxer
|
|
|
09/26/2006
|
|
|
|
26,376
|
|
|
|
38.37
|
|
|
|
|
09/29/2006
|
|
|
|
4,561
|
|
|
|
38.37
|
|
Mark D. Hauptman
|
|
|
06/26/2006
|
|
|
|
6,501
|
|
|
|
37.00
|
|
Phillip J. Myhra
|
|
|
05/08/2006
|
|
|
|
26,076
|
|
|
|
37.00
|
|
Troy A. McQuagge
|
|
|
06/26/2006
|
|
|
|
36,501
|
|
|
|
37.00
|
|
James N. Plato
|
|
|
06/26/2006
|
|
|
|
5,213
|
|
|
|
37.00
|
|
|
|
|
(7) |
|
Represents options originally granted on May 8, 2006 that
were cancelled and reissued on June 26, 2006. On
May 8, 2006, the Board of Directors adopted the
HealthMarkets 2006 Management Stock Option Plan and approved
options grants to all NEOs under the Plan. On June 26,
2006, the Company cancelled options granted to NEOs on
May 8, 2006, with the exception of Mr. Myhras
options, and replaced them with a new grant consisting of the
same number of options. The options were cancelled and replaced
in order to meet the performance-based exceptions of otherwise
non-deductible executive compensation in excess of one million
dollars. |
22
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth information concerning stock
options held by the Named Executive Officers at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
Option
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
Exercisable(1)
|
|
|
Unexercisable (2)(3)
|
|
|
($)
|
|
|
Date
|
|
|
William J. Gedwed
|
|
|
135
|
|
|
|
|
|
|
|
9.25
|
|
|
|
03/10/2007
|
|
|
|
|
69
|
|
|
|
|
|
|
|
9.25
|
|
|
|
06/02/2007
|
|
|
|
|
22,523
|
|
|
|
|
|
|
|
9.25
|
|
|
|
06/14/2010
|
|
|
|
|
|
|
|
|
156,450
|
|
|
|
37.00
|
|
|
|
06/26/2016
|
|
Michael E. Boxer
|
|
|
|
|
|
|
79,124
|
|
|
|
38.37
|
|
|
|
09/26/2016
|
|
|
|
|
|
|
|
|
13,682
|
|
|
|
38.37
|
|
|
|
09/26/2016
|
|
Mark D. Hauptman
|
|
|
9,189
|
|
|
|
|
|
|
|
9.25
|
|
|
|
03/13/2008
|
|
|
|
|
4,505
|
|
|
|
|
|
|
|
9.25
|
|
|
|
06/14/2010
|
|
|
|
|
|
|
|
|
19,499
|
|
|
|
37.00
|
|
|
|
06/26/2016
|
|
Phillip J. Myhra
|
|
|
|
|
|
|
78,224
|
|
|
|
37.00
|
|
|
|
05/08/2016
|
|
Troy A. McQuagge
|
|
|
27,568
|
|
|
|
|
|
|
|
9.25
|
|
|
|
03/13/2008
|
|
|
|
|
13,514
|
|
|
|
|
|
|
|
9.25
|
|
|
|
06/14/2010
|
|
|
|
|
|
|
|
|
109,499
|
|
|
|
37.00
|
|
|
|
06/26/2016
|
|
James N. Plato
|
|
|
2,568
|
|
|
|
|
|
|
|
9.25
|
|
|
|
03/06/2007
|
|
|
|
|
5,514
|
|
|
|
|
|
|
|
9.25
|
|
|
|
03/13/2008
|
|
|
|
|
5,631
|
|
|
|
|
|
|
|
9.25
|
|
|
|
06/14/2010
|
|
|
|
|
|
|
|
|
15,637
|
|
|
|
37.00
|
|
|
|
06/26/2016
|
|
|
|
|
(1) |
|
Includes options outstanding under the 1987 Stock Options Plan.
In connection with the Merger, options to purchase shares under
the 1987 Stock Option Plan became fully vested and were
converted into options to acquire
Class A-1
Common Stock at an exercise price of $9.25. |
|
(2) |
|
Excludes performance-based options where no performance criteria
have been established. These options are not considered
outstanding for accounting purposes and no compensation cost has
been recorded through December 31, 2006. Performance-based
options were excluded as follows: Gedwed 52,150,
Boxer 30,937, Hauptman 6,501,
Myhra 26,076, McQuagge 36,501 and
Plato 5,213. |
|
(3) |
|
Represents options granted under the 2006 Management Option
Plan. Please refer to Notes 4, 5 and 6 to the Grants of
Plan-Based Awards table for description of vesting. |
Option
Exercises and Stock Vested
The following table summarizes options exercised by the Named
Executive Officers during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired
|
|
|
Realized
|
|
|
Acquired
|
|
|
Realized
|
|
|
|
on Exercise
|
|
|
on Exercise
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
William J. Gedwed
|
|
|
689
|
|
|
|
19,714
|
|
|
|
|
|
|
|
|
|
Mark D. Hauptman
|
|
|
4,613
|
|
|
|
140,281
|
|
|
|
|
|
|
|
|
|
Phillip J. Myhra
|
|
|
107,000
|
(1)(2)
|
|
|
1,970,230
|
(1)(2)
|
|
|
|
|
|
|
|
|
Troy A. McQuagge
|
|
|
3,690
|
|
|
|
112,213
|
|
|
|
|
|
|
|
|
|
James N. Plato
|
|
|
5,000
|
(1)(3)
|
|
|
135,710
|
(1)(3)
|
|
|
1,000(5
|
)
|
|
|
37,000(5
|
)
|
Glenn W. Reed
|
|
|
57,000
|
(1)(4)
|
|
|
1,070,500
|
(1)(4)
|
|
|
|
|
|
|
|
|
William J. Truxal
|
|
|
9,586
|
|
|
|
291,510
|
|
|
|
|
|
|
|
|
|
23
|
|
|
(1) |
|
In connection with the Merger, each outstanding option to
purchase shares previously granted under the 1987 Stock Option
Plan became fully vested and was cancelled and converted into
the right to receive a payment equal to the difference between
$37.00 and the exercise price of the options. Payment was made
on April 7, 2006 |
|
(2) |
|
Includes 105,000 shares and $1,909,500 value realized upon
conversion of options as indicated in Note (1). |
|
(3) |
|
Includes 5,000 shares and $135,710 value realized upon
conversion of options as indicated in Note (1). |
|
(4) |
|
Includes 57,000 shares and $1,070,500 value realized upon
conversion of options as indicated in Note (1). |
|
(5) |
|
In connection with the Merger, restrictions on shares of
restricted stock lapsed. |
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 Companys Common
Stock was $50.00 as of December 31, 2006 (the fair market
value as determined by the Executive Committee of the Board),
then these Named Executive Officers would be entitled to the
following payments upon a termination of employment or change of
control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
Involuntary
|
|
|
Change in
|
|
|
Termination
|
|
|
|
|
|
|
Termination for
|
|
|
Termination
|
|
|
Control or
|
|
|
for Cause or
|
|
|
|
|
|
|
Good Reason
|
|
|
without Cause
|
|
|
Death, Disability
|
|
|
Retirement
|
|
Name
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
William J Gedwed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
22,257
|
|
|
|
22,257
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
252,496
|
|
|
|
252,496
|
|
|
|
1,454,290
|
|
|
|
|
|
Michael E. Boxer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
900,000
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
900,000
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
1,716
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
245,345
|
|
|
|
245,345
|
|
|
|
961,255
|
|
|
|
|
|
Mark D. Hauptman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
25,169
|
|
|
|
25,169
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
31,457
|
|
|
|
31,457
|
|
|
|
181,255
|
|
|
|
|
|
Phillip J. Myhra
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
562,500
|
|
|
|
562,500
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
16,159
|
|
|
|
16,159
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
116,429
|
|
|
|
116,429
|
|
|
|
715,397
|
|
|
|
|
|
Troy A. McQuagge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
25,353
|
|
|
|
25,353
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
176,717
|
|
|
|
176,717
|
|
|
|
1,017,855
|
|
|
|
|
|
James N. Plato
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(1
|
)
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
Target Incentive Bonus
|
|
|
(2
|
)
|
|
|
487,500
|
|
|
|
487,500
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
(3
|
)
|
|
|
16,159
|
|
|
|
16,159
|
|
|
|
|
|
|
|
|
|
Stock Option Vesting
Acceleration
|
|
|
(4
|
)
|
|
|
25,229
|
|
|
|
25,229
|
|
|
|
145,355
|
|
|
|
|
|
|
|
|
(1) |
|
Represents two times base salary. See discussion of
Employment and Consulting Agreements below. |
|
(2) |
|
Represents two times target bonus. See discussion of
Employment and Consulting Agreements below. |
24
|
|
|
(3) |
|
Represents company portion of current benefit cost for two year
continuation period. See discussion of Employment and
Consulting Agreements below. For these purposes, we have
assumed that health care costs will increase at the rate of
10% per year. |
|
(4) |
|
Represents expense to be recorded upon acceleration of option
vesting based on occurrence of noted event, calculated in
accordance with Statement of Financial Accounting
Standards 123R. In the event of a Voluntary Termination for
Good Reason or an Involuntary Termination Without Cause, actual
value to the Named Executive Officers would be as follows:
Gedwed $1,558,861; Boxer $335,770;
Hauptman $824,856; Myhra $316,355;
McQuagge $2,267,305; and Plato $622,037.
This assumes a per share price of $50 (the fair market value of
the Companys Common Stock as of
12/31/06, as
determined by the Executive Committee of the Board). |
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 Companys 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 executives 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 executives 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
executives 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 Companys Star HRG Division) and William J. Truxal
(former President of the Companys Student Insurance
Division) also executed employment agreements with the Company.
Mr. Cooks agreement terminated effective
July 11, 2006, upon the sale of substantially all of the
assets comprising the Companys Star HRG operations, and
Mr. Truxals agreement terminated effective
December 1, 2006, upon the sale of substantially all of the
assets comprising the Companys 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. Reeds 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
25
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 Companys expense, the
Company-paid portion of the premium for continued participation
in the Companys 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
Companys 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 Companys
Class A-1
Common Stock under the HealthMarkets 2006 Management Stock
Option Plan; was given the right to purchase 18,243 shares
of the Companys
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
Companys
Class A-1
Common Stock at $38.37 per share.
26
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
Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Percent of
|
|
|
Percent of
|
|
|
Percent of
|
|
|
|
Shares
|
|
|
Class A-1
|
|
|
Class A-2
|
|
|
Total
|
|
Name & Address
|
|
Beneficially
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
of Beneficial Owner
|
|
Owned(1)
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Five Percent (5%)
Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone Investor Group
|
|
|
16,486,486.4865
|
|
|
|
61.0
|
%
|
|
|
|
|
|
|
54.1
|
%
|
c/o The Blackstone Group
345 Park Avenue
New York, NY 10154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman Sachs Investor Group
|
|
|
6,756,756.7567
|
|
|
|
25.0
|
%
|
|
|
|
|
|
|
22.2
|
%
|
c/o Goldman Sachs & Co.
85 Broad Street,
10th Floor
New York, NY 10154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DLJ Investor Group
|
|
|
3,378,378.3784
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
11.1
|
%
|
c/o DLJ Merchant Banking
Partners
Eleven Madison Avenue
New York, New York10010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustees under the HealthMarkets
Agents Total Ownership Fund Trust, as amended and
restated effective as of October 1, 2005(2)
|
|
|
2,355,633.0000
|
|
|
|
|
|
|
|
68.2
|
%
|
|
|
7.7
|
|
c/o HealthMarkets, Inc.
9151 Boulevard 26
North Richland Hills, TX 76180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustees under the Dynamic Equity
Fund Program Trust, as amended and restated effective as of
August 1, 2005(3)
|
|
|
1,072,988.0000
|
|
|
|
|
|
|
|
31.1
|
%
|
|
|
3.5
|
%
|
c/o HealthMarkets, Inc.
9151 Boulevard 26
North Richland Hills, TX 76180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officers and
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Gedwed
|
|
|
79,192.3200
|
|
|
|
.3
|
%
|
|
|
|
|
|
|
.3
|
%
|
Michael E. Boxer
|
|
|
18,243.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
.1
|
%
|
Mark D. Hauptman
|
|
|
18,307.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
.1
|
%
|
Phillip J. Myhra
|
|
|
82,357.1600
|
|
|
|
.3
|
%
|
|
|
|
|
|
|
.3
|
%
|
Troy A. McQuagge
|
|
|
44,772.0000
|
|
|
|
.2
|
%
|
|
|
|
|
|
|
.2
|
%
|
James N. Plato
|
|
|
13,713.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
|
|
Glenn W. Reed(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Truxal(5)
|
|
|
23,666.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
.1
|
%
|
Chinh E. Chu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adrian M. Jones
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mural R. Josephson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew S. Kabaker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kamil M. Salame
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen F. Wise
|
|
|
27,027.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
.1
|
%
|
Steven J. Shulman
|
|
|
20,270.0000
|
|
|
|
.1
|
%
|
|
|
|
|
|
|
.1
|
%
|
Nathaniel M. Zilkha
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew S. Kahr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and
directors (19 individuals) as a group:
|
|
|
327,353.4800
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
1.1
|
%
|
27
|
|
|
(1) |
|
Includes in each case shares that the holder may obtain upon
exercise of options exercisable within 60 days of
March 30, 2007. |
|
(2) |
|
Represents vested shares of
Class A-2
common stock held by participants in the Companys
Agents Total Ownership Plan, as Amended and Restated
Effective April 5, 2006. |
|
(3) |
|
Represents vested shares of
Class A-2
common stock held by participants in the Companys
Agents Contribution to Equity Plan, as Amended and
Restated Effective April 5, 2006. |
|
(4) |
|
Mr. Reeds employment with the Company terminated
effective August 31, 2006. |
|
(5) |
|
Mr. Truxals employment with the Company terminated
effective December 1, 2006. |
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the
Companys directors, executive and certain other officers,
and any persons holding more than ten percent of the
Companys Common Stock, are required to report their
ownership of the Companys Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the
Commission). Specific due dates for these reports
have been established and the Company is required to report in
this Information Statement any failure to file by these dates
during 2006. Based solely upon a review of Reports on
Forms 3, 4 and 5 and any amendments thereto furnished to
the Company pursuant to Section 16 of the Securities
Exchange Act of 1934, as amended, and written representations
from the executive officers and directors that no other reports
were required, and except as otherwise stated in this paragraph,
the Company believes that all of such reports were filed on a
timely basis by executive officers and directors during 2006,
except for one transaction reporting the grant of stock options
to Mural R. Josephson, which was reported approximately one day
late. In addition, the reporting of pricing modifications to
existing options in connection with the Merger was filed late on
behalf of Messrs. Michael Colliflower, William Gedwed, Mark
Hauptman, Jack McCarty, Troy McQuagge, James Plato, and William
Truxal.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On April 5, 2006, the Company completed a merger providing
for the acquisition of the Company by affiliates of a group of
private equity investors, including affiliates of The Blackstone
Group, Goldman Sachs Capital Partners and DLJ Merchant Banking
Partners (the Private Equity Investors). 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 through
HealthMarkets agent stock accumulation plans) received
$37.00 in cash per share.
Immediately prior to the Merger, Gladys J. Jensen, individually
and in her capacity as executor of the estate of the late Ronald
L. Jensen (the Companys founder and former Chairman),
beneficially held approximately 17.04% of the outstanding shares
of the Company, and the adult children of Mrs. Jensen
beneficially held in the aggregate approximately 10.09% of the
outstanding shares of the Company. As a result of the Merger,
Mrs. Jensen and her adult children divested their holdings
in the Company, and affiliates of The Blackstone Group, Goldman
Sachs Capital Partners and DLJ Merchant Banking Partners
acquired, as of the effective date of the Merger, approximately
55.3%, 22.7% and 11.3%, respectively, of the Companys
outstanding equity securities. At December 31, 2006,
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners held approximately
55.1%, 22.6% and 11.3%, respectively, of the Companys
outstanding equity securities.
Certain members of the Board of Directors of the Company are
affiliated with the Private Equity Investors. In particular,
Chinh E. Chu and Matthew Kabaker serve as a Senior Managing
Director and a Principal, respectively, of The Blackstone Group,
Adrian M. Jones and Nathaniel Zilkha serve as a Managing
Director and a Vice President, respectively, of Goldman,
Sachs & Co., and Kamil M. Salame is a partner of DLJ
Merchant Banking Partners.
The Company maintains written policies and procedures for review
and approval of related party transactions. These policies
provide that any material transaction entered into between the
Company and any related party shall be valid for all purposes if
such transaction is assessed to be fair to the Company and is
approved in advance by a majority of the Companys
disinterested outside directors. Material transactions are
defined as any arrangement, contract or transaction involving
payments by or from the Company equal to or greater than
$250,000 (in any twelve
28
month period) or $1 million (over the term of such
arrangement, contract or transaction). Related parties are
defined as any person or entity that is an affiliate of the
Company or any entity in which an affiliate of the Company has a
5% or greater equity interest. Affiliates of the Company are
persons or entities controlled by, controlling, or under common
control with, the Company, including directors and officers of
the Company and their immediate family members.
Set forth below is a summary description of all material
transactions between the Company and the Private Equity
Investors and all other parties related to the Company. The
Company believes that the terms of all such transactions with
all related parties are and have been on terms no less favorable
to the Company than could have been obtained in arms
length transactions with unrelated third parties.
Transactions
with the Private Equity Investors
Transaction
and Monitoring Fee Agreements
At the closing of the Merger, the Company entered into separate
Transaction and Monitoring Fee Agreements with advisory
affiliates of each of the Private Equity Investors. In
accordance with the terms of the Transaction and Monitoring Fee
Agreements, at the closing of the Merger the Company paid a
one-time transaction fee in the amount of $18.9 million,
$6.0 million and $3.0 million to advisory affiliates
of The Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners, respectively. The Company also
reimbursed affiliates of The Blackstone Group for loan
commitment and other fees in the amount of $13.0 million
previously incurred by such affiliates of The Blackstone Group
in connection with the Merger.
The advisory affiliates of each of the Private Equity Investors
also agreed to provide to the Company ongoing monitoring,
advisory and consulting services, for which the Company agreed
to pay to affiliates of each of The Blackstone Group, Goldman
Sachs Capital Partners and DLJ Merchant Banking Partners an
annual monitoring fee in an amount equal to $7.7 million,
$3.2 million and $1.6 million, respectively. The
annual monitoring fees are in each case subject to upward
adjustment in each year based on the ratio of the Companys
consolidated earnings before interest, taxes, depreciation and
amortization (EBITDA) in such year to consolidated EBITDA in the
prior year, provided that the aggregate monitoring fees paid to
all advisors pursuant to the Transaction and Monitoring Fee
Agreements in any year shall not exceed the greater of
$15.0 million or 3% of consolidated EBITDA in such year.
The aggregate annual monitoring fees in the amount of
$12.5 million payable with respect to 2006 were paid in
full to the advisory affiliates of the Private Equity Investors
on April 5, 2006 (the closing date of the Merger). In
addition, in accordance with the Transaction and Monitoring Fee
Agreements, on April 5, 2006 (the closing date of the
Merger), the Company paid to the affiliates of each of The
Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners monitoring fees in the aggregate
amount of approximately $3.7 million related to services
rendered by such parties during the period commencing on
September 15, 2005 (the date of execution of the Agreement
and Plan of Merger) and ended on December 31, 2005.
In accordance with the terms of the Transaction and Monitoring
Fee Agreements, the Company also agreed to reimburse the
advisory affiliates of the Private Equity Investors for
out-of-pocket
expenses incurred in connection with the monitoring services and
to indemnify the advisory affiliates for certain claims and
expenses incurred in connection with the engagement.
Interest
Rate Swaps
At the effective date of Merger, an affiliate of The Blackstone
Group assigned to the Company three interest rate swap
agreements with an aggregate notional amount of
$300.0 million. At the effective date of the Merger, the
interest rate swaps had an aggregate fair value of approximately
$2.0 million.
Transaction
Fee Agreements
In accordance with the terms of separate Future Transaction Fee
Agreements, each dated as of May 11, 2006, affiliates of
each of the Private Equity Investors agreed to provide to the
Company certain financial and strategic advisory services with
respect to future acquisitions, divestitures and
recapitalizations. For such services, affiliates of The
Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners are entitled to
29
receive 0.6193%, 0.2538% and 0.1269%, respectively, of the
aggregate enterprise value of any units acquired, sold or
recapitalized by the Company.
In connection with the sale completed on July 11, 2006 of
substantially all of the assets comprising the Companys
Star HRG operations, the Company remitted to The Blackstone
Group, Goldman Sachs Capital Partners and DLJ Merchant Banking
Partners the amount of $941,000, $386,000 and $193,000,
respectively, pursuant to the terms of the Future Transaction
Fee Agreements. In connection with the sale completed on
December 1, 2006 of substantially all of the assets
comprising the Companys Student Insurance Division, on
December 14, 2006 the Company remitted to affiliates of
each of The Blackstone Group, Goldman Sachs Capital Partners and
DLJ Merchant Banking Partners the amount of $619,000, $254,000
and $127,000, respectively, pursuant to the terms of the Future
Transaction Fee Agreements.
In accordance with the terms of the Future Transaction Fee
Agreements, the Company also agreed to reimburse the advisory
affiliates of the Private Equity Investors for
out-of-pocket
expenses incurred in connection with the advisory services and
to indemnify the advisory affiliates for certain claims and
expenses incurred in connection with the engagement.
Group
Purchasing Organization
Effective June 1, 2006, the Company agreed to participate
in a group purchasing organization (GPO)
that acts as the Companys agent to negotiate with third
party vendors the terms upon which the Company will obtain goods
and services in various designated categories that are used in
the ordinary course of the Companys business. On behalf of
the various participants in its group purchasing program, the
GPO extracts from such vendors pricing terms for such goods and
service that are believed to be more favorable than participants
could obtain for themselves on an individual basis. In
consideration for such favorable pricing terms, each participant
has agreed to obtain from such vendors not less than a specified
percentage of the participants requirements for such goods
and services in the designated categories. In connection with
purchases by participants, the GPO receives a commission from
the vendor in respect of such purchases. In consideration of The
Blackstone Groups facilitating the Companys
participation in the GPO and in monitoring the services that the
GPO provides to the Company, the GPO has agreed to remit to an
affiliate of The Blackstone Group a portion of the commission
received from vendors in respect of purchases by the Company
under the GPO purchasing program. The Companys
participation during 2006 was nominal with respect to purchases
by the Company under the GPO purchasing program in accordance
with the terms of this arrangement.
MEGA
Advisory Agreement- Student and Star HRG
Pursuant to the terms of an advisory agreement, dated
August 18, 2006, The Blackstone Group agreed to provide
certain financial and mergers and acquisition advisory services
to MEGA in connection with the sale by MEGA of MEGAs Star
HRG and Student Insurance operations. The terms of the advisory
agreement were approved by the Oklahoma Insurance Department
effective September 21, 2006. In accordance with the terms
of the advisory agreement, MEGA paid to an advisory affiliate of
The Blackstone Group a one-time investment banking fee in the
amount of $1.5 million in connection with the sale
completed on July 11, 2006 of substantially all of the
assets comprising MEGAs Star HRG operations and a one-time
investment banking fee in the amount of $1.0 million in
connection with the sale completed on December 1, 2006 of
substantially all of the assets comprising MEGAs Student
Insurance Division. The Company also agreed to reimburse The
Blackstone Group for
out-of-pocket
expenses incurred in connection with the advisory services and
to indemnify The Blackstone Group and its affiliates for certain
claims and expenses incurred in connection with the engagement.
The Company reimbursed The Blackstone Group and its affiliates
$94,000 for expenses incurred with the advisory services.
Pursuant to the terms of an amendment, dated December 29,
2006, to the advisory agreement, The Blackstone Group provided
certain tax structuring advisory services to MEGA in connection
with the sale by MEGA of MEGAs Student Insurance
operations, for which MEGA paid to an advisory affiliate of The
Blackstone Group in 2007, a tax structuring fee in the amount of
$1.0 million. The terms of the amendment were approved by
the Oklahoma Insurance Department effective February 8,
2007.
30
Placement
Agreement
The Company entered into a placement agreement, dated
August 18, 2006, with The Blackstone Group, pursuant to
which the Company paid to an advisory affiliate of The
Blackstone Group a fee in the amount of $1.5 million for
securities placement and structuring services in connection with
a private placement of securities by Grapevine Finance LLC
completed on August 16, 2006. The Company has also agreed
to reimburse The Blackstone Group for
out-of-pocket
expenses incurred in connection with the placement services and
agreed to indemnify The Blackstone Group and its affiliates for
certain claims and expenses incurred in connection with the
engagement.
Registration
Rights Agreement
The Company is a party to a registration rights and coordination
committee agreement, dated as of April 5, 2006 (the
Registration Rights Agreement), with the investment
affiliates of each of the Private Equity Investors, providing
for demand and piggyback registration rights with respect to the
class A-1
common stock. Certain management stockholders are also expected
to become parties to the Registration Rights Agreement.
Following an initial public offering of the Companys
stock, the Private Equity Investors affiliated with The
Blackstone Group will have the right to demand such registration
under the Securities Act of its shares for public sale on up to
five occasions, the Private Equity Investors affiliated with
Goldman Sachs Capital Partners will have the right to demand
such registration on up to two occasions, and the Private Equity
Investors affiliated DLJ Merchant Banking Partners will have the
right to demand such registration on one occasion. No more than
one such demand is permitted within any
180-day
period without the consent of the board of directors of the
Company.
In addition, the Private Equity Investors have, and, if they
become parties to the Registration Rights Agreement, the
management stockholders will have, so-called
piggy-back rights, which are rights to request that
their shares be included in registrations initiated by the
Company or by any Private Equity Investors. Following an initial
public offering of the Companys stock, sales or other
transfers of the Companys stock by parties to the
Registration Rights Agreement will be subject to pre-approval,
with certain limited exceptions, by a Coordination Committee
that will consist of representatives from each of the Private
Equity Investor groups. In addition, the Coordination Committee
shall have the right to request that the Company effect a
shelf registration.
Transactions
with Mrs. Jensen and Affiliates of Mrs. Jensen
Special
Investment Risks, Ltd.
Special Investment Risks, Ltd. (SIR) (formerly
United Group Association, Inc. (UGA) is owned by the
estate of Ronald L. Jensen (the Companys founder and
former Chairman), of which Gladys J. Jensen
(Mr. Jensens surviving spouse) serves as independent
executor. Immediately prior to the Merger, Mrs. Jensen,
individually and in her capacity as executor of the estate of
Mr. Jensen, beneficially held approximately 17.04% of the
outstanding shares of the Company.
From the Companys inception through 1996, SIR sold health
insurance policies that were issued by AEGON USA and coinsured
by the Company or policies issued directly by the Company.
Effective January 1, 1997, the Company acquired the agency
force of SIR. In accordance with the terms of the asset sale to
the Company, SIR retained the right to receive all commissions
on policies written prior to January 1, 1997, including the
policies previously issued by AEGON and coinsured by the Company
and the policies previously issued directly by the Company. The
commissions paid to SIR on the coinsured policies issued by
AEGON are based on commission rates negotiated and agreed to by
AEGON and SIR at the time the policies were issued prior to
1997, and the commission rates paid on policies issued directly
by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share
of commissions payable to SIR on co-insured policies issued by
AEGON. During 2006 (covering the period from January 1,
2006 through April 5, 2006), SIR received insurance
commissions of $29,000 on the policies issued by AEGON prior to
January 1, 1997 and coinsured by the Company. During 2006
(covering the period from January 1, 2006 through
April 5, 2006), SIR received commissions of $543,000 on
policies issued prior to January 1, 1997 and issued
directly by the Company.
In accordance with the terms of an amendment, dated
July 22, 1998, to the terms of the sale of the UGA assets
to the Company, SIR was granted the right to retain 10% of net
renewal commissions (computed at the UGA
31
Association Field Services agency level) on any new business
written by the UGA agency force after January 1, 1997. In
an effort to simplify the calculation of the payments to be made
to Mr. Jensen and to clarify with specificity the business
subject to this override arrangement, effective October 1,
2003 the Company and SIR entered into an amendment to the asset
sale agreement, the principal effect of which is to change the
basis of the override calculation from a multiple of renewal
commissions received by UGA Association Field
Services to a multiple of commissionable renewal premium
received. Based on managements projections of future
business, the Company estimated that the absolute amount of
future override commission to be paid to SIR pursuant to the
amendment would not vary in any material respect from that
expected to be paid in accordance with the prior arrangement.
During 2006 (covering the period from January 1, 2006
through April 5, 2006), the Company paid to SIR the amount
of $1.2 million pursuant to this arrangement.
On May 19, 2006, the Company and SIR entered into a
Termination Agreement, pursuant to which SIR received an
aggregate of $47.5 million. All payments owing to SIR under
the asset sale agreement for policies written after
January 1, 1997 were discharged in full, SIR released the
Company and certain of its subsidiaries from all liability under
the asset sale agreement, and the asset sale agreement was
terminated. In addition, the Company and SIR agreed,
respectively, to indemnify the other party for all losses,
damages and other liabilities incurred in connection with the
breach of any covenant, agreement, representation or warranty
made by the respective party under the terms of the Termination
Agreement.
In 2006 (covering the period from January 1, 2006 through
April 5, 2006), SIR paid to the Company $39,000 to fund
obligations of SIR owing to the Companys agent stock
accumulation plans. SIR incurred this obligation prior to the
Companys purchase of the UGA agency in 1997.
Richland
State Bank
Richland State Bank (RSB) is a state-chartered bank
in which Mrs. Jensen, as executor of the estate of
Mr. Jensen, holds a 100% equity interest. RSB provides
student loan origination services for the former College
Fund Life Insurance Division of MEGA and Mid-West.
Pursuant to a Loan Origination and Purchase Agreement, dated
June 12, 1999 and as amended, RSB originated student loans
and resold such loans to UICI Funding Corp. 2
(Funding) (a wholly owned subsidiary of the Company)
at par (plus accrued interest). During 2006 (covering the period
from January 1, 2006 through April 5, 2006), RSB
originated for the College Fund Life Division student loans
in the aggregate principal amount plus accrued interest of
$1.6 million.
On July 28, 2005, the Companys Board of Directors
approved the execution and delivery of a new Loan Origination
and Purchase Agreement among the Company, UICI Funding
Corp. 2, RSB and Richland Loan Processing Center, Inc. (a
wholly owned subsidiary of RSB), pursuant to which RSB
originates and funds, and Richland Loan Processing Center, Inc.
provides underwriting, application review, approval and
disbursement services, in connection with private student loans
generated under the Companys College Fund Life
Division Program. For such services, RSB earns a fee in the
amount of 150 basis points (1.5%) of the original principal
amount of each disbursed student loan. The agreement further
provides that UICI Funding Corp. 2 will continue to purchase (at
par) the private loans funded and originated by Richland State
Bank. During 2006 (covering the period from January 1, 2006
through April 5, 2006), RSB generated origination fees in
the amount of $26,000 pursuant to the terms of this agreement.
During 2006 (covering the period from January 1, 2006
through April 5, 2006), RSB collected on behalf of, and
paid to, UICI Funding Corp. 2 $150,000 in guarantee fees paid by
student borrowers in connection with the origination of student
loans.
During 2006 (covering the period from January 1, 2006
through April 5, 2006), UICI Funding Corp. 2 received from
RSB interest income in the amount of $29,000 generated on money
market accounts maintained by the Company at, and on
certificates of deposit issued by, RSB.
32
Specialized
Association Services, Inc.
Specialized Association Services, Inc. (SAS) (which
is controlled by the adult children of Mrs. Jensen)
provides administrative and other services to the membership
associations that make available to their members the
Companys health insurance products.
Effective December 31, 2002, SAS and Benefit Administration
for the Self-Employed, LLC (BASE 105) (an 80% owned
subsidiary of the Company) entered into an agreement effective
January 1, 2003 (the January 2003 Agreement),
pursuant to which SAS purchased from BASE 105 a benefit provided
to association members. In 2006 (covering the period from
January 1, 2006 through April 5, 2006), SAS paid BASE
105 the amount of $174,000 in accordance with this arrangement.
Effective January 1, 2006, the January 2003 Agreement was
terminated, and BASE 105 commenced providing the benefit
directly to the membership associations. The payment received by
BASE 105 in 2006 was related to 2005 activities.
During 2002, SAS began purchasing directly from MEGA certain
ancillary benefit products (including accidental death, hospital
confinement and emergency room benefits) for the benefit of the
membership associations that make available to their members the
Companys health insurance products. In 2006, the aggregate
amount paid by SAS to MEGA for these benefit products was
$822,000. Effective January 1, 2006, this arrangement with
SAS was terminated, and MEGA commenced providing the ancillary
benefit products directly to the membership associations. The
payment received by MEGA in 2006 was related to 2005 activities.
Transactions
with Certain Members of Management and Certain Other
Employees
Transactions
with National Motor Club
William J. Gedwed (a director and the Chief Executive Officer of
the Company) holds a 5.3% equity interest in NMC Holdings, Inc.
(NMC), the ultimate parent company of National Motor
Club of America (NMCA).
Effective January 1, 2003, MEGA and NMCA entered into an
administrative services agreement for a term ending on
December 31, 2004, pursuant to which MEGA agreed to issue
life, accident and health insurance polices to NMCA for the
benefit of NMCA members in selected states. NMCA, in turn,
agreed to provide to MEGA certain administrative and record
keeping services in connection with the NMCA members for whose
benefit the policies have been issued. Effective January 1,
2005, MEGA and NMCA entered into a new three-year administrative
agreement for a term ending on December 31, 2007 on terms
similar to those contained in the agreement that terminated on
December 31, 2004. MEGA terminated this agreement effective
January 1, 2007. During 2006, NMCA paid to MEGA the amount
of $1.1 million pursuant to the terms of this agreement.
During 2006, NMCA paid the Company $270,000, and subsidiaries of
NMCA paid the Company an aggregate of $46,000, for printing and
various other services.
Other
Transactions
On April 1, 2002, the Company, through a subsidiary,
entered into a Loan Servicing Agreement (as amended, the
Servicing Agreement) with Affiliated Computer
Services (formerly known as AFSA Data Corporation)
(ACS), pursuant to which ACS provides computerized
origination, billing, record keeping, accounting, reporting and
loan management services with respect to a portion of the
Companys CFLD-I student loan portfolio. Mr. Dennis
McCuistion, who was a director of the Company effective
May 19, 2004 through April 5, 2006, is also a director
of ACS. During 2006 (covering the period from January 1,
2006 through April 5, 2006), the Company paid ACS $281,000
pursuant to the terms of the Servicing Agreement.
Effective June 19, 2006, the Company entered into separate
agreements with each of R.H. Mick Thompson, Dennis McCuistion
and Richard Mockler (directors of the Company until
April 5, 2006), in accordance with which the former
directors agreed to provide certain advisory services and
assistance to the Company and its subsidiaries with respect to
insurance regulatory, governmental affairs, accounting, media
and public relations matters for a one year term commencing on
July 1, 2006 and ending on June 30, 2007. For such
services, the Company agreed to pay to each former director a
consulting fee in the amount of $300,000, which fee is payable
in equal quarterly installments in the amount of $75,000. The
Company also agreed to reimburse each former director for
reasonable
33
out-of-pocket
business travel expenses and other reasonable
out-of-pocket
expenses related to the services to be provided under the
agreements, and the Company agreed to indemnify each of the
former directors for certain claims and expenses incurred in
connection with the engagement.
AUDIT
COMMITTEE REPORT
The Audit Committee consists of three directors and operates
under a written charter. On August 8, 2006, the Committee
reviewed its charter and, after assessing the adequacy thereof,
approved an amended Charter.
The Audit Committee held eight (8) meetings in 2006. The
meetings facilitated communication with senior management and
employees, the Companys internal auditor and KPMG LLP, the
Companys independent registered public accounting firm.
The Committee held discussions with the internal auditor and
independent registered public accounting firm, both with and
without management present, on the results of their examinations
and the overall quality of the Companys financial
reporting and internal controls.
The Audit Committee has the sole authority to appoint or replace
the independent registered public accounting firm, and the
Committee is responsible for the oversight of the scope of the
independent registered public accounting firms role and
the determination of its compensation. The Committee regularly
evaluates the performance and independence of the Companys
independent registered public accounting firm and, in addition,
has reviewed and pre-approved all services provided by KPMG LLP
during 2006.
The Audit Committee oversees the Companys financial
reporting process on behalf of the Board of Directors.
Management, however, has the primary responsibility to establish
and maintain a system of internal controls over financial
reporting, to plan and conduct audits and to prepare
consolidated financial statements in accordance with generally
accepted accounting principles.
KPMG LLP, the Companys independent registered public
accounting firm, is responsible for performing an independent
audit of the Companys consolidated financial statements in
conformity with the auditing standards of the Public Company
Accounting Oversight Board (United States) and issuing a report
thereon. The Audit Committee is responsible for monitoring and
reviewing these procedures. It is not the Committees duty
or responsibility to conduct auditing or accounting reviews or
procedures. The members of the Audit Committee are not employees
of the Company and are not necessarily accountants or auditors
by profession or experts in the fields of accounting or
auditing. Therefore, the Audit Committee has relied, without
independent verification, on managements representation
that the consolidated financial statements of the Company have
been prepared with integrity and objectivity and in conformity
with generally accepted accounting principles and on the
representations of the independent registered public accounting
firm included in their report on the Companys consolidated
financial statements.
In fulfilling its oversight responsibilities, the Committee has
met and held discussions with management and representatives of
KPMG LLP regarding the fair and complete presentation of the
Companys financial results, including a discussion of the
quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements. The
Committee has discussed significant accounting policies applied
by the Company in its financial statements, as well as
alternative treatments. The Committee has reviewed and discussed
with the Companys management and representatives of KPMG
LLP the annual audited and quarterly unaudited consolidated
financial statements of the Company for the 2006 fiscal year
(including the disclosures contained under the caption
Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2006 and each of the
Companys Quarterly Reports on
Form 10-Q
filed during 2006).
The Committee has also reviewed with representatives of KPMG LLP
such matters as are required to be discussed with the Committee
under Statement on Auditing Standards No. 61,
Communications with Audit Committees. In addition, the
Committee has discussed with the independent registered public
accounting firm its independence from management and the
Company, including the matters in the written disclosures
required by the Independence Standards Board Standard
No. 1, Independence Discussions with Audit Committees, and
considered the compatibility of non-audit services with the
registered public accounting firms independence. The Audit
Committee has also received a written report from KPMG LLP
regarding its independence and other matters. The
34
Audit Committee has determined that the provision of non-audit
services should not compromise KPMG LLPs independence.
The Audit Committee has also reviewed the certifications of
Company executive officers contained in the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 filed with the
SEC, as well as reports issued by KPMG LLP, included in the
Companys Annual Report on
Form 10-K
related to its audit of the Companys consolidated
financial statements. The Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 did not include
a report on managements assessment regarding internal
control over financial reporting or an attestation report of
KPMG. The Company concluded that, as of December 31, 2006,
the Company is not an accelerated filer under
Rule 12b-2
of the Exchange Act, and, accordingly, was not obligated to
furnish the information required by Items 308(a) and
(b) of
Regulation S-K.
In reliance on the reviews and discussions referred to above,
the Committee recommended to the Board of Directors (and the
Board has approved) that the audited financial statements be
included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006 for filing with the
Securities and Exchange Commission. The Committee has selected
and appointed the Companys independent registered public
accounting firm, subject to stockholder ratification.
Mural R. Josephson, Chairman
Matthew S. Kabaker
Nathaniel M. Zilkha
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
In addition to retaining KPMG LLP to audit HealthMarkets
consolidated financial statements for 2006, HealthMarkets and
its affiliates retained KPMG LLP and other accounting and
consulting firms to provide advisory, auditing and consulting
services in 2006. The Company understands the need for KPMG LLP
to maintain objectivity and independence in its audit of the
Companys consolidated financial statements. To minimize
relationships that could appear to impair the objectivity of
KPMG LLP, the HealthMarkets Audit Committee has restricted the
non-audit services that KPMG LLP may provide to HealthMarkets
primarily to tax services and merger and acquisition due
diligence and audit services, and the Audit Committee has
determined that HealthMarkets will obtain non-audit services
from KPMG LLP only when the services offered by KPMG LLP are
more effective or economical than comparable services available
from other service providers.
The Audit Committee Charter provides that the Committee shall
approve all non-audit engagement fees and terms with the
independent registered public accounting firm and all other
compensation to be paid to the independent registered public
accounting firm. The Committee has the authority to delegate
pre-approvals of non-audit services to a single member of the
Audit Committee, and the Chairman of the Committee has been
authorized to pre-approve non-audit services up to $75,000 for
any one transaction, not to exceed an aggregate of $250,000 in
any one year. Fees for non-audit services exceeding these
amounts must be approved by the full Committee. As a matter of
policy the Chairman requests the Committee to ratify his
approval of the non-audit fees at the next quarterly meeting.
The Audit Committee has authorized management to approve
non-audit fees up to $50,000, subject to a requirement that
management report to the Chairman quarterly on any approval by
management of such non-audit fees.
In determining the appropriateness of a particular non-audit
service to be performed by the registered public accounting
firm, the Audit Committee shall consider whether the service
facilitates the performance of the audit, improves the
Companys financial reporting process or is otherwise in
the public interest.
35
The aggregate fees billed for professional services by KPMG LLP
in 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
Type of Fees
|
|
2006
|
|
|
2005
|
|
|
Audit Fees(a)
|
|
$
|
2,568,000
|
|
|
$
|
3,845,000
|
|
Audit-Related Fees(b)
|
|
|
297,000
|
|
|
|
143,000
|
|
Tax Fees
|
|
|
|
|
|
|
57,000
|
|
All Other Fees
|
|
|
22,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,887,000
|
|
|
$
|
4,075,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes in 2006 and 2005 fees in the amount of $-0- and
$2,681,000, respectively, relating to the audit of internal
controls required by the Sarbanes-Oxley Act. |
|
(b) |
|
Includes in 2006 and 2005 fees in the amount of $183,000 and
$143,000, respectively, for professional services associated
with the Merger transaction. |
For purposes of the table above, audit fees are fees
that the Company paid to KPMG LLP for the audit of the
Companys consolidated financial statements included in
HealthMarkets Annual Report on
Form 10-K
and review of financial statements included in Quarterly Reports
on
Form 10-Q,
and for services that are normally provided by the independent
registered public accounting firm in connection with statutory
and regulatory filings or engagements; audit-related
fees represent fees billed by KPMG LLP for assurance and
related services that are reasonably related to the performance
of the audit or review of the Companys financial
statements; tax fees are fees for tax compliance,
tax advice and tax planning; and all other fees are
fees billed by the accounting firm to the Company for any
services not included in the first three categories (which other
fees consist primarily of online research subscription fees,
seminar attendance fees). All fees in each fee category were
approved by the Companys Audit Committee.
PROPOSAL 2
AMENDMENT
TO CERTIFICATE OF INCORPORATION
The Company maintains the Agents Total Ownership Plan, as
Amended and Restated Effective April 5, 2006 (the
ATOP) and the Agents Contribution to Equity
Plan, as Amended and Restated Effective April 5, 2006 (the
ACE), pursuant to which the Company provides a
continuing incentive to agents to sell insurance policies and
ancillary products by awarding shares of HealthMarkets
Class A-2
Common Stock, $0.01 par value per share, to participants.
The ATOP and the ACE provide that the Company may, in certain
limited circumstances, redeem shares of
Class A-2
Common Stock held by participants for less than six
(6) months. The current Certificate of Incorporation limits
redemption of
Class A-2
Common Stock to only those shares outstanding for more than six
(6) months. To permit redemption in accordance with the
terms of the ATOP and the ACE, the Board of Directors
unanimously approved an amendment to the Companys
Certificate of Incorporation, and recommended approval of the
amendment by the stockholders, to amend Article IX,
Section 1 of the Companys Certificate of
Incorporation. As amended, the Certificate of Incorporation
would permit the redemption of
Class A-2
Common Stock outstanding for less than six (6) months where
such redemption is permitted under the ATOP and the ACE. The
proposed amendment to the Companys Certificate of
Incorporation, amending Article IX, Section 1, appears
below. The language in bold represents the proposed additional
language:
ARTICLE IX
Section 1. REDEMPTION OF
CLASS A-2
COMMON STOCK. (a) Subject to Section 2
of this Article IX, until a Qualified IPO or a Change of
Control, if (i) the agent contract of any Qualified Holder
is terminated for Cause, or (ii) a Qualified Holder
voluntarily terminates his or her agent contract with the
Corporation or with any Affiliate of the Corporation or the
agent contract of any Qualified Holder is terminated other than
for Cause (in case of either of clause (i) or (ii), a
TERMINATION EVENT), then the Corporation shall have
the option to redeem any or all shares of
Class A-2
Common Stock outstanding for more than six (6) months at
the Redemption Price at any time within twelve
(12) months from the Termination Event (the
REDEMPTION PERIOD); provided,
36
however, that the foregoing shall not restrict or
limit the Corporations ability to redeem shares of
Class A-2
Common Stock outstanding for less than six (6) months
acquired pursuant to the Agents Total Ownership Plan, as
Amended and Restated Effective April 5, 2006, and the
Agents Contribution to Equity Plan, as Amended and
Restated Effective April 5, 2006, or any amendments thereof
or successors thereto, in each case subject to and as expressly
provided in such plans. Notwithstanding the foregoing, the
Board may extend the Redemption Period in its sole and
absolute discretion if the Board makes a good faith
determination that it would be advisable and in the best
interests of the Corporation to extend the
Redemption Period in light of the availability under or
limitations imposed by any credit agreement or other debt
agreement of the Corporation and the Corporations capital
and liquidity position.
(b) Subject to Section 2 of this Article IX,
until a Qualified IPO or a Change of Control, if a Potential
Change of Control has occurred, and the Board has determined in
good faith that an actual Change of Control will occur within
twenty (20) business days of the date of such determination
by the Board (a CHANGE OF CONTROL EVENT), then the
Corporation shall have the option to redeem any or all shares of
Class A-2
Common Stock outstanding for more than six (6) months prior
to the Change of Control from any or all Qualified Holders at
the Redemption Price; provided, however, that the
foregoing shall not restrict or limit the Corporations
ability to redeem shares of
Class A-2
Common Stock outstanding for less than six (6) months
acquired pursuant to the Agents Total Ownership Plan, as
Amended and Restated Effective April 5, 2006, and the
Agents Contribution to Equity Plan, as Amended and
Restated Effective April 5, 2006, or any amendments thereof
or successors thereto, in each case subject to and as expressly
provided in such plans.
Management believes that this amendment to the Companys
Certificate of Incorporation will eliminate an inconsistency
between the Certificate of Incorporation and the terms of the
stock accumulation plans maintained for the benefit of the
independent insurance agents associated with the Companys
independent agent field forces, including UGA
Association Field Services and Cornerstone America.
The affirmative vote of a majority of the outstanding shares of
common stock is needed to ratify the amendment to the
Companys Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THE STOCKHOLDERS VOTE
FOR ADOPTION OF THE AMENDMENT TO THE COMPANYS
CERTIFICATE OF INCORPORATION, AS DESCRIBED ABOVE.
PROPOSAL 3
PROPOSAL TO
RATIFY THE APPOINTMENT OF
KPMG LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Although Delaware law does not require that the selection by the
Audit Committee of the Companys independent registered
public accounting firm be approved each year by the
stockholders, the Board of Directors believes it is appropriate
to submit the Audit Committees selection to the
stockholders for their approval and to abide by the result of
the stockholders vote. Subject to ratification by the
stockholders, the Audit Committee reappointed the firm of KPMG
LLP as the Companys independent registered public
accounting firm to audit the financial statements of the Company
for the fiscal year ending December 31, 2007. In
recommending ratification by the stockholders of the appointment
of KPMG LLP, the Board of Directors has satisfied itself as to
that firms professional competence and standing. However,
if the stockholders do not ratify the appointment of KPMG LLP,
the Audit Committee may investigate the reasons for the
stockholders rejection and may consider whether to retain
KPMG LLP or to appoint another independent registered public
accounting firm. Furthermore, even if the appointment is
ratified, the Audit Committee in its discretion may direct the
appointment of a different independent registered public
accounting firm at any time during the year if it determines
that such a change would be in the best interests of the Company
and its stockholders.
Representatives of KPMG LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement
if they so desire. Such representatives will also be available
to respond to appropriate questions from stockholders at the
meeting.
37
THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS RECOMMEND THE
RATIFICATION OF THE SELECTION OF KPMG LLP AS THE COMPANYS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL
YEAR ENDING DECEMBER 31, 2007.
4. OTHER
BUSINESS
Neither the Board nor management is aware of any matters to be
presented at the Annual Meeting other than those referred to in
the Notice of Annual Meeting and this Information Statement.
STOCKHOLDER
PROPOSALS FOR THE 2008 ANNUAL MEETING
Unless we indicate otherwise, proposals that stockholders intend
to present at the next annual meeting of stockholders must
comply with Item 4 of Schedule 14C and must be
received at the principal executive offices of the Company, 9151
Boulevard 26, North Richland Hills, Texas 76180 not later
than March 2, 2008, which is 60 days prior to the date
of the first anniversary of the mailing of the Information
Statement for our 2007 Stockholders Meeting.
By Order of the Board of Directors,
PEGGY G. SIMPSON
Corporate Secretary
North Richland Hills, Texas
May 1, 2007
38