NONQUALIFIED STOCK OPTION
AGREEMENT
This AGREEMENT
(this “Agreement”) is made as of September 30,
2008 (the “Effective Date”) by and between
HealthMarkets, Inc. (formerly UICI), a Delaware corporation
(together with its successors and assigns, the
“Company”), and Steven P. Erwin
(“Optionee”).
WHEREAS,
on the Effective Date the Company and Optionee entered into an
employment agreement with respect to Optionee’s employment as
the Executive Vice President and Chief Financial Officer of the
Company and certain related terms (the “Employment
Agreement”);
WHEREAS,
the Company, acting through the Compensation Committee with the
consent of the Board has agreed to grant to Optionee, effective on
the Effective Time, Options (as defined in Section 2 of this
Agreement) under the Company’s 2006 Management Option Plan
(the “Plan”) to purchase a number of shares of the
Company’s Class A-1 Common Stock (the
“Shares”) on the terms and subject to the conditions
set forth in this Agreement and the Plan;
WHEREAS,
as a condition precedent to the Company’s grant of the
Options (as defined in Section 2 of this Agreement) to Optionee,
Optionee has committed to purchase Shares pursuant to a
subscription agreement dated September 30, 2008 and Optionee
is executing and delivering a counterpart of the Stockholders
Agreement and thereby agrees to be bound by the Stockholders’
Agreement as a “Management Stockholder” thereunder (as
amended with respect to Optionee pursuant to the Employment
Agreement);
WHEREAS,
future securities in the Company (including those being acquired
pursuant to this Agreement) owned by Optionee shall be subject to
the terms of the Stockholders Agreement (as amended with respect to
Optionee pursuant to the Employment Agreement).
NOW,
THEREFORE, in consideration of the promises and of the mutual
agreements contained in this Agreement, the parties hereto hereby
agree as follows:
1.
Certain Definitions . Capitalized terms used, but not
otherwise defined, in this Agreement will have the meanings given
to such terms in the Company’s 2006 Management Option Plan
(the “Plan”). As used in this Agreement:
(a)
“Board” means the Board of Directors of the
Company.
(b)
“Call Right” has the meaning specified in
Section 8 of this Agreement.
(c)
“Cause” has the meaning specified in the Employment
Agreement.
(d)
“Change of Control” has the meaning specified in the
Employment Agreement.
(e)
“Company” has the meaning specified in the introductory
paragraph of this Agreement.
(f)
“Compensation Committee” means the Executive
Compensation Committee of the Board.
(g)
“Disability” has the meaning specified in the
Employment Agreement.
(h)
“Distributed Securities” means any Shares that have
been distributed to investors in investment funds managed by the
Sponsors or any of their affiliates.
(i)
“Effective Date” has the meaning specified in the
introductory paragraph of this Agreement.
(j)
“Employment Agreement” has the meaning specified in the
first Whereas clause of this Agreement.
(k)
“Fair Market Value” shall have the meaning specified
in, and shall be construed and determined in accordance with the
procedures set forth in, the Employment Agreement.
(l)
“Good Reason” has the meaning specified in the
Employment Agreement.
(m)
“Internal Rate of Return” means the pretax compounded
annual internal rate of return realized by the Sponsors, based on
the aggregate amount invested by the Sponsors in respect of all
Sponsor Investments and the aggregate amount of actual cash
received by, and Distributed Securities distributed to, the
Sponsors in respect of all Sponsor Investments and including, as a
return on each Sponsor Investment, any cash dividends, cash
distributions, cash sales or cash interest made by the Company or
any Subsidiary in respect of such Sponsor Investment, in each case,
following the Effective Date, assuming all Sponsor Investments were
purchased by one Person and were held continuously by such Person,
and excluding any other amounts payable that are not directly
attributable to a Sponsor Investment (including, without
limitation, any management, transaction, monitoring or similar
fees). The Internal Rate of Return shall be determined assuming
that (i) any Sponsor Investments made before the Effective Date
were made by the Sponsors on the Effective Date and (ii) the
value of such Sponsor Investments shall be equal to the product of
(x) the number of Shares in the Company and its affiliated
entities held by the Sponsors on the Effective Date and
(y) the Fair Market Value of each such Shares on the Effective
Date (which, for the avoidance of doubt, shall be equal to the
Option Price). For purposes of determining Internal Rate of Return
in respect of Distributed Securities, the fair market value of
those securities on the date on which the Distributed Securities
are distributed shall be used for purposes of calculating the
annual internal rate of return, and such date shall be deemed the
date on which the return on the Sponsor Investment was received by
the Sponsors.
(n)
“Options” has the meaning specified in Section 2
of this Agreement.
(o)
“Optionee” has the meaning specified in the
introductory paragraph of this Agreement.
(p)
“Option Price” has the meaning specified in
Section 2 of this Agreement.
(q)
“Performance-Based Options” has the meaning specified
in Section 2 of this Agreement.
(r)
“Plan” has the meaning specified in the second Whereas
clause of this Agreement.
(s)
“Shares” has the meaning specified in the second
Whereas clause of this Agreement.
(t)
“Sponsor Investment” means direct or indirect equity
investments in the Company made by the Sponsors, but excluding any
purchases or repurchases of equity interests on any securities
exchange or any national market system after an Initial Public
Offering. The term “Sponsor Investment” excludes any
investment originally made by the Sponsors in a Person other than
the Company or a Subsidiary.
(u)
“Sponsors” means Blackstone Management Associates IV
L.L.C., DLJ Merchant Banking Partners IV, L.P. and GS Maverick Co.
and their respective affiliates.
(v)
“Time-Based Options” has the meaning specified in
Section 2 of this Agreement.
2.
Grant of Stock Option/Exercise Price . Subject to and
upon the terms, conditions, and restrictions set forth in this
Agreement, including, without limitation, Section 9 and the
Plan, the Company hereby grants to Optionee options to purchase
175,000 Shares (the “Options”). The Options may be
exercised from time to time in accordance with the terms of this
Agreement. Subject to adjustment as hereinafter
provided,
(a) 150,000 of the
Shares subject to the Option (the “Time-Based Options”)
may be purchased pursuant to the Options at a price (the
“Option Price”) of $24.00 per Share; and
(b) 25,000 of the
Shares subject to the Option (the “Performance-Based
Options”) may be purchased pursuant to the Options at an
Option Price of $24.00 per Share.
The Options are
intended to be nonqualified stock options and shall not be treated
as an “incentive stock option” within the meaning of
that term under Section 422 of the Code, or any successor
provision thereto.
3.
Term of Options . The term of the Options shall
commence at the Effective Date and, unless earlier terminated in
accordance with the terms of this Agreement, shall expire ten (10)
years from the Effective Date.
4.
Right to Exercise . Unless terminated as hereinafter
provided and subject to the occurrence of the Effective Time and
except as otherwise provided in Section 7, the Options shall
become exercisable only as follows:
(a) The
Time-Based Options shall become exercisable (i.e. vested) with
respect to one-third of the Time-Based Options (50,000) on the
first anniversary of the Effective Date and the remainder of
Time-Based Options (100,000) shall vest in equal quarterly
installments thereafter until the third anniversary of the
Effective Date, in each case, subject to Optionee’s remaining
in the continuous employ of the Company or any Subsidiary through
the applicable vesting date; provided that the Time-Based Options
shall become fully exercisable upon a Change of Control.
(b) The
Performance-Based Options shall become exercisable upon actual
realization by the Sponsors (based on cash proceeds received) of a
1.6x or greater cash-on-cash return on the value of their equity
investment in the Company and its subsidiaries as of the Effective
Date (including, for this purpose, cash dividends and distributions
after the Effective Date); provided that, if the Performance-Based
Options have not become exercisable in accordance with the
preceding provision as of the fourth anniversary of the Effective
Date, then on or after the fourth anniversary of the Effective
Date, the Performance-Based Options shall only become exercisable
if the Sponsors also attain a 15% or greater Internal Rate of
Return from and after the Effective Date (collectively, the
“Performance Targets”), in each case, subject to
Optionee’s remaining in the continuous employ of the Company
or any Subsidiary
as of any such
date. The achievement of the Performance Targets shall be
determined in the good faith opinion of the Board using the
Company’s stock price valuation as of the Effective Date
($24.00 per Share). The Board shall, if requested by Optionee, send
documentation to Optionee setting out in reasonable detail the
basis for the relevant calculations. For the avoidance of doubt,
the Performance Targets shall not be deemed to be “Management
Objectives” as defined in the Plan.
(c) Following
a transaction or series of transactions involving the Company
pursuant to which the Sponsors receive solely cash (and not
marketable securities) with respect of all of the Shares held by
the Sponsors, any Performance-Based Options that have not vested
and become exercisable shall immediately terminate and be
cancelled. Optionee shall have the opportunity to earn the
Performance-Based Options prior to such time unless such
Performance-Based Options are otherwise cancelled, terminated or
expire in accordance with their terms. For the avoidance of doubt,
the Performance-Based Options, if not exercisable, shall not be
cancelled in connection with a Change of Control in which the
Sponsors receive marketable securities if the Performance Targets
would have been satisfied if the value of such securities had been
included as “cash.” In this event, the
Performance-Based Options shall remain in effect on and following
such Change of Control until the earlier of (i) the remaining
term of the Performance-Based Options and (ii) the first
anniversary of the date of termination of Optionee’s
employment, and, to the extent not already vested, shall become
exercisable if, during such period, upon conversion of such
marketable securities into cash (or other distribution or
disposition) by the Sponsors, the Performance Targets are satisfied
(provided, that for the avoidance of doubt if the Change of Control
occurs before the fourth anniversary of the Effective Date, the 15%
or greater Internal Rate of Return shall not be deemed a
Performance Target for vesting purposes on or following the Change
of Control, including for purposes of Section 7(b) and 7(c)). In
the case of the Performance-Based Options, the Sponsors agree to
provide Optionee (as well as to the Company if the Sponsors are no
longer in control of the successor entity) with notice that the
Performance Targets have been satisfied within 30 days
following such event.
5.
Option Nontransferable . Optionee may not transfer or
assign all or any part of the Options other than by will or by the
laws of descent and distribution. The Options may be exercised,
during the lifetime of Optionee, only by Optionee, or in the event
of Optionee’s legal incapacity, by Optionee’s guardian
or legal representative acting on behalf of Optionee in a fiduciary
capacity under state law and court supervision. Optionee shall be
entitled to the privileges of ownership with respect to Shares
purchased and delivered to Optionee upon the exercise of all or
part of the Options.
6.
Notice of Exercise; Payment .
(a) To
the extent then exercisable, the Option may be exercised in whole
or in part by written notice to the Company stating the number of
Shares for which the Options are being exercised and the intended
manner of payment. The date of such notice shall be the exercise
date. Payment equal to the aggregate Option Price of the Shares
being purchased pursuant to an exercise of
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