10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2001

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO ________________

Commission File Number 000-21949

PACIFICARE HEALTH SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	95-4591529
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)

3120 Lake Center Drive, Santa Ana, California 92704

(Address of Principal Executive Offices, Including Zip Code)

(Registrant’s Telephone Number, Including Area Code) (714) 825-5200

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]     No  [   ]

      There were approximately 33,657,000 shares of common stock outstanding on April 30, 2001.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1: Financial Statements
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
	Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Quantitative and Qualitative Disclosures About Market Risk
PART II: OTHER INFORMATION
	Item 1: Legal Proceedings
	Item 5: Other Information
	Item 6: Exhibits and Reports on Form 8-K
Signatures
Exhibits
Exhibit 15
Exhibit 20
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3
Exhibit 99.4

PACIFICARE HEALTH SYSTEMS, INC.

FORM 10-Q
INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000		1
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000		2
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000		3
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 5.	Other Information		27
Item 6.	Exhibits and Reports on Form 8-K		28
Signatures			29
Exhibits			30

i

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per-share data)

			March 31,			December 31,
			2001			2000
			(unaudited)
ASSETS
Current assets:
	Cash and equivalents		$	1,226,033		$	1,251,635
	Marketable securities			935,587			864,013
	Receivables, net			412,264			410,694
	Prepaid expenses and other current assets			44,396			42,852
	Deferred income taxes			138,143			139,712
		Total current assets		2,756,423			2,708,906
Property, plant and equipment at cost, net				231,185			225,551
Marketable securities-restricted				116,818			94,402
Goodwill and intangible assets, net				2,241,490			2,261,637
Other assets				29,894			32,940
			$	5,375,810		$	5,323,436
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Medical claims and benefits payable		$	1,275,400		$	1,270,800
	Accounts payable and accrued liabilities			464,640			446,081
	Unearned premium revenue			617,790			598,215
	Long-term debt due within one year			735,154			161
		Total current liabilities		3,092,984			2,315,257
Long-term debt due after one year				101,376			836,556
Deferred income taxes				145,417			145,633
Other liabilities				19,190			20,746
Minority interest				—			1,684
Stockholders’ equity:
	Common stock, $0.01 par value; 200,000 shares authorized; issued 47,186 shares in 2001 and 46,986 shares in 2000			472			470
	Unearned compensation			(4,438	)		—
	Additional paid-in capital			1,611,911			1,613,944
	Accumulated other comprehensive income (loss)			3,629			(2,975	)
	Retained earnings			1,102,340			1,089,192
	Treasury stock, at cost; 13,532 shares in 2001 and 2000			(697,071	)		(697,071	)
		Total stockholders’ equity		2,016,843			2,003,560
			$	5,375,810		$	5,323,436

See accompanying notes.

1

PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(amounts in thousands, except per-share data)

			Three Months Ended
			March 31,
			2001			2000
Revenue:
	Commercial premiums		$	1,230,152		$	1,187,701
	Medicare premiums			1,732,435			1,580,785
	Other income			38,066			34,177
	Net investment income			30,046			25,108
		Total operating revenue		3,030,699			2,827,771
Expenses:
Health care services:
	Commercial services			1,100,675			974,281
	Medicare services			1,571,938			1,382,259
		Total health care services		2,672,613			2,356,540
Marketing, general and administrative expenses				292,919			299,718
Amortization of goodwill and intangible assets				20,917			20,456
Impairment, disposition, restructuring and other (credits) charges				(928	)		5,600
Office of Personnel Management credits				—			(2,964	)
Operating income				45,178			148,421
Interest expense				(20,135	)		(20,182	)
Income before income taxes				25,043			128,239
Provision for income taxes				11,895			53,604
Net income			$	13,148		$	74,635
Basic earnings per share			$	0.39		$	2.04
Diluted earnings per share			$	0.39		$	2.04

See accompanying notes.

2

PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)

					Three Months Ended
					March 31,
					2001			2000
Operating activities:
	Net income				$	13,148		$	74,635
	Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
		Amortization of goodwill and intangible assets				20,917			20,456
		Depreciation and amortization				15,130			10,660
		Deferred income taxes				(2,696	)		1,019
		Provision for doubtful accounts				1,491			958
		Impairment, disposition, restructuring and other (credits) charges				(928	)		5,600
		Loss on disposal of property, plant and equipment				869			882
		Unearned compensation amortization				347			—
		Tax benefit realized for stock option exercises				21			39
		Office of Personnel Management credits				—			(2,964	)
		Other noncash items				—			(333	)
		Changes in assets and liabilities, net of effects from acquisitions and dispositions:
			Receivables, net			(3,061	)		(86,797	)
			Prepaid expenses and other assets			1,502			1,601
			Medical claims and benefits payable			4,600			70,960
			Accounts payable and accrued liabilities			17,920			16,551
			Unearned premium revenue			19,575			20,296
				Net cash flows provided by operating activities		88,835			133,563
Investing activities:
	(Purchase) sale of marketable securities, net					(60,921	)		24,765
	Purchase of marketable securities-restricted					(22,416	)		(4,466	)
	Purchase of property, plant and equipment					(21,667	)		(14,908	)
	Net cash (paid for) acquired from acquisitions					(500	)		11,515
	Proceeds from the sale of property, plant and equipment					34			1,442
				Net cash flows (used in) provided by investing activities		(105,470	)		18,348
Financing activities:
	Purchase of minority interest in consolidated subsidiary					(8,821	)		—
	Principal payments on long-term debt					(187	)		(265,082	)
	Proceeds from issuance of common stock					41			482
	Common stock repurchases					—			(94,338	)
	Proceeds from borrowings of long-term debt					—			261,912
				Net cash flows used in financing activities		(8,967	)		(97,026	)
Net (decrease) increase in cash and equivalents						(25,602	)		54,885
Beginning cash and equivalents						1,251,635			849,064
Ending cash and equivalents					$	1,226,033		$	903,949

See accompanying notes.
Table continued on next page.

3

PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
(amounts in thousands)

			Three Months Ended
			March 31,
			2001			2000
Supplemental cash flow information:
	Cash paid during the year for:
		Income taxes, net of refunds	$	(17,260	)	$	46
		Interest	$	22,152		$	22,279
Supplemental schedule of noncash investing and financing activities:
	Stock-based compensation		$	259		$	5,917
Details of accumulated other comprehensive income (loss):
	Change in marketable securities		$	10,653		$	4,497
	Less change in deferred income taxes			(4,049	)		(1,586	)
	Change in stockholders’ equity		$	6,604		$	2,911
Details of businesses acquired in purchase transactions:
	Fair value of assets acquired		$	770		$	251,580
	Less liabilities assumed or created			(270	)		(129,304	)
	Cash paid for fair value of assets acquired			500			122,276
	Less cash acquired from acquisitions			—			(133,791	)
		Net cash paid for (acquired from) acquisitions	$	500		$	(11,515	)

See accompanying notes.
Table continued from previous page.

4

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(unaudited)

1. Basis of Presentation

PacifiCare Health Systems, Inc. is one of the nation’s largest health care services companies, serving members in the commercial and Medicare health maintenance organization (“HMO”) lines of business. Following the rules and regulations of the Securities and Exchange Commission (“SEC”), we have omitted footnote disclosures that would substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and the notes included in our December 31, 2000 Annual Report on Form 10-K, filed with the SEC in March 2001.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, needed to present fairly the financial results for these interim periods. The consolidated results of operations presented for the interim periods are not necessarily indicative of the results for a full year.

Reclassifications. We reclassified certain prior year amounts in the accompanying condensed consolidated financial statements to conform to the 2001 presentation.

2. Acquisitions and Dispositions

2000 Acquisitions. On February 1, 2000, we completed our acquisition of Harris Methodist Texas Health Plan, Inc. and Harris Methodist Health Insurance Company, Inc. (together, “Harris”), a health plan and insurance company in Texas, for an approximate purchase price of $122 million. This acquisition added approximately 250,000 commercial members and 50,000 Medicare members to our Texas HMO and was accounted for as a purchase. The related goodwill and acquired intangible assets are being amortized over periods ranging from three to 30 years. The operating results of these entities are included in our consolidated financial statements from the acquisition date.

During the first half of 2000, we assumed approximately 18,000 members in Colorado and approximately 21,000 members in Washington for a purchase price of approximately $6 million. These membership assumptions were the result of transition agreements signed with QualMed Plans for Health of Colorado, Inc. in September 1999 and with QualMed Washington Health Plans, Inc. in October 1999, each a subsidiary of Health Net, Inc.

2000 Dispositions. In June 2000, we announced our intention to exit our Ohio HMO operations. This plan affected approximately 35,000 commercial members and 3,500 Medicare members located in Ohio and Kentucky who were enrolled in our plans during 2000. The exit was completed in January 2001. We entered into an agreement with Anthem Blue Cross and Blue Shield to assist in transitioning Ohio’s commercial membership. Medicare members were provided a choice of another Medicare+Choice HMO or traditional fee-for-service Medicare. In connection with the disposition, we recognized pretax charges of approximately $4 million ($2 million or $0.07 diluted loss per share, net of tax).

3. Long-Term Debt

Beginning January 1, 1999, and continuing through the January 1, 2002 final maturity date, the amount available to borrow under our credit facility declines incrementally every six months. At March 31, 2001, we had an outstanding balance of $735 million, leaving $215 million available for additional borrowings under the credit facility. On April 18, 2001, we paid $30 million of the outstanding balance. The next mandatory incremental reduction will occur on July 1, 2001. At that time the total amount available for borrowing will be $800 million. The facility also requires mandatory step-down payments if the principal balance exceeds certain thresholds. Based on the March 31, 2001 balance, no payments are required until the final maturity date.

5

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

Interest under the credit facility is variable and is presently based on the London Interbank Offered Rate (“LIBOR”) plus a spread. Based on the outstanding balance at March 31, 2001, the average overall rate, excluding the facility fee, was 7.9 percent. The terms of the credit facility contain various covenants, usual for financings of this type, including a minimum net worth requirement, a minimum fixed charge coverage requirement, leverage ratios and limits on the amount of stock we may repurchase. At March 31, 2001, we were in compliance with all such covenants. Our wholly owned subsidiary, PacifiCare Health Plan Administrators, Inc., fully and unconditionally guarantees the credit facility. We have no assets or operations separate from our wholly owned subsidiaries. Our
non-guarantor subsidiaries were immaterial to our consolidated financial position as of March 31, 2001.

We also have $100 million in senior notes outstanding that we assumed when we acquired FHP International Corporation (“FHP”) in 1997. These notes mature on September 15, 2003 and bear an interest rate of seven percent payable semiannually.

4. Stockholders’ Equity

Minority Interest. In June 2000, PacifiCare and Compaq Computer Corporation (“Compaq”) agreed to jointly invest in a newly formed Internet company for seniors called SeniorCo, Inc. PacifiCare had majority ownership of approximately 80 percent of the outstanding voting shares at December 31, 2000. The 2000 operating results of this entity were included in our consolidated financial statements from the date of its formation, partially offset by the portion of operating results allocated to minority stockholders, primarily Compaq. In the first quarter of 2001, we purchased all outstanding stock of SeniorCo, Inc. from minority stockholders for $9 million. Of this amount, $6 million was paid to Compaq, as a return on their original investment of $8 million. No operating results were allocated to minority stockholders in 2001.

Restricted Stock Awards. In the first quarter of 2001, as part of an employee recognition and retention program, we granted 84,000 shares of restricted common stock to certain employees in exchange for approximately 1.5 million stock options with exercise prices per share of $53.00 or more. An additional 90,000 shares of restricted common stock were granted to others. Restrictions on these shares will expire and are amortized as earned over the vesting period, not exceeding four years. All shares of restricted stock were issued from our 1996 Officer and Key Employee Stock Option Plan, as amended. For employees, the amount of unearned compensation recorded is based on the market value of the shares on the date of issuance and is included as a separate component of stockholders’ equity. For
non-employees, the amount of unearned compensation is based on the market value of the shares at each reporting period until the shares are vested. As of March 31, 2001, $4 million of unearned compensation was recorded and will be amortized over the vesting periods. Related expense (charged to marketing, general and administrative expenses) for the first quarter of 2001 was $0.3 million. No restricted shares were forfeited during the period.

Treasury Stock. In October 1999, our board of directors approved a stock repurchase program that allows us to repurchase up to 12 million shares of our outstanding common stock, including any shares purchased from UniHealth Foundation, a non-profit public benefit corporation and one of our largest stockholders (see “UniHealth Foundation Stock Purchase Agreement” below). We have suspended the repurchase of our shares on the open market.

As of March 31, 2001, we held approximately 14 million treasury shares totaling $697 million. These shares were purchased pursuant to the October 1999 program discussed above and prior repurchase programs. We have reissued, and will continue to reissue these shares for our employee benefit plans or for other corporate purposes.

UniHealth Foundation Stock Purchase Agreement. In May 1999, we entered into a stock purchase agreement with UniHealth Foundation to repurchase up to 5.9 million shares of our common stock held by UniHealth Foundation. During 2000, we purchased 1.5 million shares for a total of $57 million under this agreement. On

6

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

February 9, 2001, we announced an agreement with UniHealth Foundation, whereby UniHealth Foundation agreed to waive its right to sell 909,500 shares of our common stock back to us. In exchange for this waiver, we agreed not to exercise our right of first refusal to acquire up to 1 million shares of our common stock. On March 8, 2001, we announced an additional agreement with UniHealth Foundation, that allows UniHealth Foundation to sell its remaining 3.5 million shares of our common stock on the open market through June 15, 2001, subject to our insider trading policy.

5. Impairment, Disposition, Restructuring, Office of Personnel Management (“OPM”) and Other (Credits) Charges

We recognized net pretax (credits) charges for the three months ended March 31, 2001 and 2000 as follows:

								Diluted Loss
		Pretax (Credits)			Net-of-Tax			(Earnings)
		Charges			Amount			Per Share
		(amounts in millions, except per share data)
2001
Gain from contract termination agreement		$	(1.2	)	$	(0.6	)	$	(0.02	)
Restructuring change in estimates			0.3			0.1			0.00
	Total impairment, disposition, restructuring and other credits	$	(0.9	)	$	(0.5	)	$	(0.02	)
2000
Restructuring charge		$	9.0		$	5.2		$	0.14
Other changes in estimates			(3.4	)		(2.0	)		(0.05	)
OPM credits			(3.0	)		(1.7	)		(0.05	)
	Total impairment, disposition, restructuring, OPM and other charges	$	2.6		$	1.5		$	0.04

Gain from Contract Termination Agreement. During the first quarter of 2001, we recognized other credits of $1 million for a gain from a contract termination agreement.

Restructuring Change in Estimates. During the first quarter of 2001, we recognized a credit for a change in the January 2000 restructuring estimate of $0.1 million, offset by a charge for a change in the December 2000 restructuring estimate of $0.4 million. The change in estimates related to severance and related employee benefits.

Restructuring Charge.

January 2000. In January 2000, we announced a plan to strengthen our operations and improve our competitive advantage and growth opportunities. In connection with this plan, we recognized restructuring charges of $9 million in the first quarter of 2000. The restructuring charge included severance and related employee benefits for employees whose positions were eliminated by December 31, 2000. The majority of the terminations were in the sales and marketing and human resources departments where the corporate and regional functions were centralized and consolidated. The total number of employees terminated was approximately 270. Of this total, 209 employees have left as of March 31, 2001, and approximately 60 employees, whose positions were eliminated, accepted other positions within the company.

No increases to the January 2000 restructuring charge have been made. A total of $2 million of the restructuring charge was not required due to changes in estimates related to severance and related employee benefits and was released during 2000. We paid approximately $0.7 million to terminated employees during the quarter ended

7

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

March 31, 2001. The remaining accrual will be relieved throughout 2001 and early 2002, as severance payments are completed. During 2000, we realized net annualized marketing, general and administrative salary savings from the January 2000 restructuring of approximately $11 million as a result of centralization and consolidation of corporate and regional functions.

December 2000. In the fourth quarter of 2000, an additional restructuring charge of $15 million was recognized in connection with our December announcement to further streamline our operations to enhance cost efficiency. Approximately $11 million of the restructuring charge was for severance and related employee benefits for employees whose positions will be eliminated by August 2001. More than half of the reductions were related to sales and marketing positions, primarily for the Medicare+Choice program, resulting from our decision to limit new enrollment for 2001 in approximately 40 percent of our Medicare markets due to rising health care costs and insufficient federal funding. The remaining reductions affected many areas throughout the regions and our corporate headquarters. The other $4 million of the restructuring charge related to lease terminations for excess office space.

The total number of employees terminated was approximately 500, with 400 having left as of March 31, 2001. The elimination of positions began January 2, 2001. During the quarter ended March 31, 2001, we paid approximately $4 million to terminated employees. We expect that $6 million of the remaining accrual will be paid by the end of 2001, and the remainder will be paid in 2002. Cash flows from operations are expected to fund the restructuring charge. During 2001, we expect net annual marketing, general and administrative salary savings from our December 2000 restructuring of approximately $22 million as a result of streamlining our operations.

The following table presents the restructuring activity:

			Pretax		2000			Balance at					Changes in			Balance at
			Charge		Activity			December 31, 2000		Payments			Estimate			March 31, 2001
			(amounts in millions)
January 2000 restructuring:
	Severance and separation benefits		$	9.0	$	(6.7	)	$	2.3	$	(0.7	)	$	(0.1	)	$	1.5
December 2000 restructuring:
	Severance and separation benefits			11.0		—			11.0		(4.4	)		0.4			7.0
	Lease cancellations and commitments			4.2		—			4.2		(0.3	)		—			3.9
		Total December 2000 restructuring		15.2		—			15.2		(4.7	)		0.4			10.9
Total restructuring			$	24.2	$	(6.7	)	$	17.5	$	(5.4	)	$	0.3		$	12.4

Other Changes in Estimates. In the first quarter of 2000, we recognized other credits for changes in estimates of $3 million. We successfully settled certain contingencies related to acquisitions and dispositions in 1997 and 1998 including pending and threatened litigation, as well as indemnifications made to the buyers of sold subsidiaries.

OPM Credits. In the first quarter of 2000, we recognized OPM credits of $3 million as a result of 1996 and 1997 Oklahoma HMO premiums received.

6. Commitments and Contingencies

Physician Instability and Insolvency. Our insolvency reserves include write-offs of certain uncollectable receivables from physicians, and the estimated cost of unpaid health care claims normally covered by our capitation payments. Depending on state law, we may be held liable for unpaid health care claims that were previously the

8

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

responsibility of the capitated physician and for which we have already paid capitation. These reserves also include estimates for potentially insolvent physicians that we have specifically identified, where conditions indicate claims are not being paid or have slowed considerably. The balance of our insolvency reserves included in medical claims and benefit payable was $31 million at March 31, 2001 and $34 million at December 31, 2000. Based on information currently available, we believe that any liability in excess of amounts accrued would not materially affect our consolidated financial position. However, our evaluation of the likely impact of claims asserted against us could change in the future and an unfavorable outcome, depending on the amount and timing, could have a material effect on our results of operations or cash flows for a future period.

KPC Medical Management. In the second quarter of 2000, we, along with other HMOs loaned approximately $12 million to KPC Medical Management, Inc. (“KPC”), a purchaser of some of the former MedPartners Network practices, and Chaudhuri Medical Corporation, an affiliate of KPC. Our portion of the loan was approximately $3 million. The principal and interest of the loan are guaranteed by Caremark Rx, Inc., formerly MedPartners, Inc.

In the third quarter of 2000, we, along with six other HMOs loaned approximately $30 million to real estate entities affiliated with KPC. Our portion of this loan was approximately $10 million. A portion of each plan’s loan was used to pay outstanding physician and hospital claims for its members and operating expenses of certain KPC medical entities. In November 2000, KPC and its medical affiliates filed for reorganization under Chapter 11 of the bankruptcy code.

Because we believed that KPC’s financial condition was uncertain, we fully reserved both loans in the quarter each loan was made. KPC is in the process of liquidating its assets through the Chapter 11 bankruptcy protection. We are monitoring KPC’s bankruptcy as well as the financial condition of the KPC real estate entities. KPC has asserted claims against us, but has not yet quantified these claims. As a result, we cannot be certain that our loans are the extent of our exposure. We believe that any ultimate insolvency liability would not materially affect our consolidated financial position. However, our evaluation of the likely impact of claims asserted against us could change in the future and an unfavorable outcome, depending on the amount and timing, could have a material effect on our results of operations or cash flows for a future period.

OPM and Related Litigation.

General. Our HMO subsidiaries have commercial contracts with OPM to provide managed health care services to federal employees, annuitants and their dependents under the Federal Employee Health Benefits Program (“FEHBP”). Rather than negotiating rates with HMOs, OPM requires HMOs to provide the FEHBP with a rating methodology comparable to the rating methodology charged to the two employer groups with enrollment closest in size to the FEHBP in the applicable community after making required adjustments. OPM further requires that every HMO certify each year that its rates meet these requirements.

Periodically, OPM’s Office of Inspector General (“OIG”) audits each HMO to verify that the premiums charged are calculated and charged in compliance with these regulations and guidelines. Each audit encompasses a period of up to six years. Following the government’s initial on-site audit, OPM will provide the HMO with a post-audit briefing indicating its preliminary results. Interpretations of the rating regulations and audit findings often raise complex issues. The final resolution and settlement of audits have historically taken more than three years and as many as seven years. We have a number of pending audits that we are seeking to resolve with the United States Department of Justice (“DOJ”).

During the audit process, OPM may refer its findings to the DOJ if it believes that the health plan knowingly overcharged the government or otherwise submitted false documentation or certifications in violation of the False Claims Act. Under the False Claims Act, an action can be considered knowingly committed if the government contractor acted with actual knowledge, or with reckless disregard or deliberate ignorance of the government’s rules

9

PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

and regulations. If the government were to win a False Claims Act lawsuit against an HMO, the government could obtain trebled damages, a civil penalty of not less than $5,000 nor more than $10,000 for each separate alleged false claim, and the government could permanently disqualify the HMO from participating in all federal government programs.

In late 1997, we established a formal corporate compliance program to specifically address potential issues that may arise from the FEHBP rating process, to work with OPM to understand its interpretation of the rules and guidelines prior to completion of the rating process, to standardize the FEHBP rating process among all of our HMOs, and to help reduce the likelihood that future government audits will result in any significant findings. Based upon the results of a limited number of audits that have been conducted for contract years 1998 and later, we believe that this program has been effective.

OPM Litigation. We have contracts that were audited by the OIG, that we acquired through our merger with FHP in 1997. The OIG is alleging that the former FHP Arizona, California, Colorado, Guam and Ohio HMO subsidiaries as well as former FHP Illinois, New Mexico and Utah HMO subsidiaries that we sold in 1997 and 1998, overcharged the government from 1990 through 1997. Several of these contract years have already been audited, but are yet to be settled. We responded to the audit reports, challenging many of the auditors’ assertions. OIG’s allegations were referred to the DOJ for review of potential claims under the False Claims Act.

The OIG conducted an audit of our Oregon HMO subsidiary. The OIG issued a draft audit report in July 1997, alleging that we overcharged the government for contract years 1991 through 1996. We responded to this draft audit report in April 1998, strongly disagreeing with OIG’s claims. In March 2000, we were notified that the auditors had referred the above-mentioned audit report to the DOJ for review of potential claims under the False Claims Act. When our legal counsel met with the U.S. Attorney in May 2000, the U.S. Attorney stated that a letter would be sent specifying additional information that was needed. On April 9, 2001, we received a letter from the U.S. Attorney that specified additional information that our Oregon subsidiary needs to supply to it. We are currently preparing a response to this letter. The DOJ has until June 1, 2001 to decide whether to file a claim.

The OIG conducted an audit of our California HMO subsidiary. The OIG issued a draft audit report in January 1998, alleging that we overcharged the government for contract years 1993 through 1996. We responded to this draft audit report in May 1998, strongly disagreeing with OIG’s claims. In January 2001, we were notified that the auditors had referred the above-mentioned audit report to the DOJ for review of potential claims under the False Claims Act.

In connection with the various audit issues and disputes with OPM, we have been advised that a complaint has been filed against us relating to our billings to OPM for various FEHBP plans. We are working with the DOJ to resolve these disputes, and several settlement meetings have taken place. We intend to continue to negotiate with OPM on any existing or future unresolved matters to attain a mutually satisfactorily result. We cannot be certain that any ongoing future negotiations will be concluded satisfactorily, that additional audits will not be referred to the DOJ or that additional, possibly material, liabilities will not be incurred. Such liability could have a material effect on our results of operations or cash flows of a future period if resolved unfavorably.

Class Action Legal Proceedings. On November 21, 2000, Michael Russ filed a purported class action complaint against PacifiCare and several of our present and former directors and executive officers in the Central District of California. This complaint was consolidated with other subsequent complaints into a single proceeding. The complaints relate to the period between October 27, 1999 and October 10, 2000 and primarily allege that we made false projections about our financial performance in 2000. We deny all material allegations and intend to defend the actions vigorously.

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PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

On November 2, 1999, Jose Cruz filed a purported class action complaint against PacifiCare, our California subsidiary, and FHP in the San Francisco Superior Court. On November 9, 1999, Cruz filed a first amended purported class action complaint that omitted FHP as a defendant. The amended complaint relates to the period from November 2, 1995 to the present and purports to be filed on behalf of all enrollees in our health care plans operating in California other than Medicare and Medicaid enrollees. The amended complaint alleges that we have engaged in unfair business acts in violation of California law, engaged in false, deceptive and misleading advertising in violation of California law and violated the California Consumer Legal Remedies Act. It also alleges that we have received unjust payments as a result of our conduct. The amended complaint seeks injunctive and declaratory relief, an order requiring the defendants to inform and warn all California consumers regarding our financial compensation programs, unspecified monetary damages for restitution of premiums and disgorgement of improper profits, attorneys’ fees and interest. We moved to compel arbitration and the court denied our motion. We have filed an appeal on this denial and deny all material allegations in the amended complaint and intend to defend the action vigorously.

On November 22, 1999, Debbie Hitsman filed a purported class action complaint against PacifiCare in the United States District Court for the Southern District of Mississippi, Hattiesburg Division. The complaint relates to the period from November 22, 1995 to the present and purports to be on behalf of all enrollees in our health care plans other than Medicare and Medicaid enrollees. The complaint alleges causes of action for violations of the Racketeer-Influenced and Corrupt Organizations Act and Employee Retirement Income Security Act of 1974 (“ERISA”). The complaint seeks an unspecified amount of compensatory and treble damages, injunctive and restitutionary relief, attorneys’ fees, the imposition of a constructive trust and interest. On June 23, 2000, Hitsman filed and served an additional complaint in the United States District Court for the Southern District of Miami as a purported part of a multi-district litigation proceeding against another managed care company, Humana. Subsequently, Dr. Dennis Breen and other doctors joined the Florida proceeding making allegations similar to those from other providers. These providers, including the California Medical Association, accuse us of imposing unfair contract terms, unnecessarily denying health care for our members, delaying payments for authorized health care and reimbursing physicians at rates that are not sufficient to cover the physician’s cost of providing the health care.

In October 2000, the multi-district litigation panel consolidated the Hitsman cases, the Breen case, the California Medical Association case and certain provider cases in the Southern District of Florida. In December 2000, the court granted our motion to compel arbitration of all of the Hitsman claims and all of Dr. Breen’s claims except for his claims for violations of the Racketeer-Influenced and Corrupt Organizations Act and conspiracy and aiding and abetting claims that stem from contractual relationships with other managed care companies. We have appealed the denial of the arbitration of these claims. Our motion to dismiss the Breen claims was granted, however, the plaintiff was given the permission to amend. An amended complaint was filed on March 27, 2001. We deny all material allegations and intend to defend the actions vigorously.

In 1997, William Madruga and another individual filed a purported class action suit against PacifiCare and several of our directors and officers in the United States District Court for the Central District of California. The complaint relates to the period from the date of proxy statement for the FHP acquisition through our November 1997 announcement that earnings for the fourth quarter of 1997 would be lower than expected. The complaint primarily alleges that we previously omitted and/or misrepresented material facts with respect to our costs, earnings and profits. In November 1999, May 2000, and again in January 2001, the court dismissed the Madruga case in part without permission to amend and in part with permission to amend the complaint. The plaintiffs filed a fourth amended complaint in March 2001. We deny all material allegations and intend to defend the actions vigorously.

Industry Litigation. In 2000, Aetna U.S. Healthcare, Inc. and affiliated entities (“Aetna”) settled claims brought by the Attorney General of Texas by consenting to modify some of its business practices in Texas. The Attorney General of Texas has filed similar claims against our Texas HMO and has proposed to settle the lawsuit on the same terms as the Aetna settlement. The business practices in question relate primarily to our Texas HMO’s commercial operations. Resolution of a proposed settlement is still pending. We are unable to predict whether we will ultimately reach a settlement with the Attorney General on these or other terms or the impact that the ultimate settlement could have on our operations. These changes ultimately could adversely affect the HMO industry and could have a material effect on our financial position, results of operations or cash flows of a future period.

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PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2001
(unaudited)

Other Litigation. We are involved in legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages which are not covered by insurance. Based on current information and review, including consultation with our lawyers, we believe any ultimate liability that may arise from these actions (including all OPM and related litigation, class action legal proceedings and industry litigation) would not materially affect our consolidated financial position, results of operations or cash flows. However, our evaluation of the likely impact of these actions could change in the future and an unfavorable outcome, depending upon the amount and timing, could have a material effect on our results of operations or cash flows of a future period.

Regulatory Oversight. In November 2000, our Texas subsidiary was placed under administrative oversight by the Texas Department of Insurance due to various issues including delegated and non-delegated claims processing timeliness. In April 2001, the Texas Department of Insurance released its administrative oversight of our Texas subsidiary. The release is contingent upon a commitment to provide a detailed corrective action plan and follow-up reporting to the Texas Department of Insurance.

7. Earnings Per Share

We calculated the denominators for the computation of basic and diluted earnings per share as follows:

		Three Months Ended
		March 31,
		2001		2000
		(amounts in thousands)
Shares outstanding at the beginning of the period			33,454		37,252
Weighted average number of shares issued:
	Treasury stock acquired, net of shares issued		—		(752	)
	Stock options exercised		20		5
Denominator for basic earnings per share			33,474		36,505
Employee stock options and other dilutive potential common shares(1)			333		97
Denominator for diluted earnings per share			33,807		36,602

(1) Certain options to purchase common stock were not included in the calculation of diluted earnings per share because their exercise prices were greater than the average market price of our common stock for the periods presented. For the three months ended March 31, 2001, these weighted options outstanding totaled 8.0 million, with exercise prices ranging from $31.34 to $114.00 per share. For the three months ended March 31, 2000, these weighted options outstanding totaled 6.2 million with exercise prices ranging from $48.85 to $114.00 per share.

8. Comprehensive Income

Comprehensive income represents our net income plus changes in equity, other than those changes resulting from investments by, and distributions to our stockholders. Such changes include unrealized gains or losses on our available-for-sale securities. Our comprehensive income totaled $20 million for the three months ended March 31, 2001 and $78 million for the three months ended March 31, 2000.

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9. Subsequent Event

On May 3, 2001, the California Supreme Court issued its decision in McCall v. PacifiCare, et al. The Court found that certain claims by Medicare beneficiaries, relating to an alleged improper denial of Medicare covered services, are not subject to the Medicare Act’s administrative review process and may be litigated in state court. We are reviewing the decision with our lawyers and evaluating options regarding further judicial review of this decision. We are currently unable to predict whether this decision will have a material effect on our financial position, results of operations or cash flows of a future period.

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Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Overview. We sell health maintenance organization (“HMO”) and HMO-related products primarily to members in two groups: the commercial programs for employer-group members and individuals and the Secure Horizons program for Medicare beneficiaries. Our specialty managed care HMOs and HMO-related products and services supplement our commercial and Secure Horizons programs. These include pharmacy benefit management, behavioral health services, life and health insurance and dental and vision services.

Events significant to our business in 2001 include the following:

• The Benefits Improvement and Protection Act of 2000 (“BIPA”) was passed by Congress in December 2000, effective for 2001. Under the new law, Medicare+Choice will receive increased government funding over the next five years beginning on March 1, 2001. The changes for 2001 include increases to the monthly minimum payment floors, increases in the minimum annual payment update from two percent to three percent and modifications to the risk adjuster. Premiums are subject to periodic risk adjustments, based upon certain health status information relating to each Medicare+Choice enrollee. These adjustments are determined from data that we, and all other Medicare+Choice contracting organizations, are required to submit to the Health Care Financing Administration (“HCFA”).

• Effective March 1, 2001, we withdrew our commercial HMO product from 24 Texas counties. This exit affected approximately 3,000 members.

2001 Compared With 2000

Membership. Total HMO membership decreased seven percent to 3.7 million members at March 31, 2001 from 4 million members at March 31, 2000. Our total HMO membership excludes employer self-funded members and Preferred Provider Organization (“PPO”) and indemnity members.

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			At March 31, 2001						At March 31, 2000
Membership Data			Commercial		Medicare		Total		Commercial		Medicare		Total
HMO Membership:
	Arizona			135,500		110,000		245,500		109,100		96,500		205,600
	California			1,714,000		544,300		2,258,300		1,815,000		576,100		2,391,100
	Colorado			238,400		63,400		301,800		312,300		77,600		389,900
	Guam			45,400		—		45,400		52,400		—		52,400
	Nevada			36,100		32,100		68,200		31,800		30,400		62,200
	Ohio			—		—		—		47,800		6,300		54,100
	Oklahoma			93,900		32,100		126,000		83,600		29,800		113,400
	Oregon			95,000		29,100		124,100		106,600		33,300		139,900
	Texas			247,200		159,900		407,100		328,100		109,300		437,400
	Washington			86,200		63,600		149,800		97,700		61,600		159,300
		Total HMO membership		2,691,700		1,034,500		3,726,200		2,984,400		1,020,900		4,005,300
Other membership:
	Employer self-funded			52,200		—		52,200		50,000		—		50,000
	PPO and indemnity			44,400		—		44,400		50,400		—		50,400
	Medicare supplement			14,700		—		14,700		1,500		—		1,500
		Total other membership		111,300		—		111,300		101,900		—		101,900
		Total HMO & other membership		2,803,000		1,034,500		3,837,500		3,086,300		1,020,900		4,107,200
PBM(1):
	PBM internal HMO							3,726,200						4,005,300
	PBM external							666,600						712,500
		Total PBM						4,392,800						4,717,800
Dental:
	Dental internal HMO							544,300						807,600
	Dental external							350,900						395,200
		Total dental						895,200						1,202,800
Behavioral health:
	Behavior health internal HMO							2,618,500						2,300,000
	Behavioral health external							1,462,400						1,149,300
		Total behavioral health						4,080,900						3,449,300

(1) Pharmacy benefit management.

Commercial HMO membership decreased 10 percent at March 31, 2001 compared to the same period in the prior year due to:

• Membership decreases as a result of our exit of all HMO operations in Ohio;

• Membership decreases as a result of 2001 county exits in Colorado and Texas;

• Membership decreases in Colorado, attributable to premium rate increases that averaged 16 percent in 2001; and

• Membership decreases in California primarily due to premium renewal increases and provider network disruption.

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Medicare membership increased one percent at March 31, 2001 compared to the same period in the prior year due to:

• Competitor exits in Texas where Secure Horizons will remain; partially offset by

• Membership decreases as a result of our exit of all HMO operations in Ohio; and

• Membership decreases as a result of 2000 and 2001 county exits, capacity waivers and voluntary closure notices in Arizona, California, Colorado, Ohio, Oregon, Texas and Washington.

Employer self-funded membership increased four percent at March 31, 2001 compared to the same period in the prior year primarily due to additional California membership, partially offset by membership losses in Colorado and Ohio. PPO and indemnity membership decreased 12 percent at March 31, 2001 compared to the prior year primarily due to membership losses in California, Ohio and Texas.

Commercial Premiums. Commercial premiums include specialty HMOs and indemnity insurance results. Commercial premiums increased four percent or $42 million to $1.2 billion for the three months ended March 31, 2001, from $1.2 billion for the three months ended March 31, 2000 as follows:

	Three Months Ended
	March 31, 2001
	(amounts in millions)
Premium rate increases that averaged 10 percent	$	112
The inclusion of one additional month’s premiums from the Harris acquisition		20
Net membership decreases (excluding Ohio), primarily in California, Colorado and Texas		(69	)
Premium and membership losses resulting from the disposition of our Ohio HMO		(21	)
Increase over prior year	$	42

Medicare Premiums. Medicare premiums increased 10 percent or $152 million to $1.7 billion for the three months ended March 31, 2001, from $1.6 billion for the three months ended March 31, 2000 as follows:

	Three Months Ended
	March 31, 2001
	(amounts in millions)
Premium rate increases that averaged six percent	$	113
Membership increases, primarily in Texas, offset by membership decreases (excluding Ohio), primarily in California and Colorado		28
The inclusion of one additional month’s premiums from the Harris acquisition		20
Premium and membership losses resulting from the disposition of our Ohio HMO		(9	)
Increase over prior year	$	152

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Other Income. Other income increased 11 percent or $4 million to $38 million for the three months ended March 31, 2001, from $34 million for the three months ended March 31, 2000. The increase was primarily due to increased mail-service revenues of our pharmacy benefit management company, Prescription Solutions. Prescription Solutions generates mail-service revenues, where we, rather than network retail pharmacies, collect the member copayments.

Net Investment Income. Net investment income increased 20 percent or $5 million to $30 million for the three months ended March 31, 2001, from $25 million for the three months ended March 31, 2000. This increase was due to higher overall invested balances and higher realized gains over the previous year’s quarter.

Consolidated Medical Care Ratio. The consolidated medical care ratio (health care services as a percentage of premium revenue) increased for the three months ended March 31, 2001 compared to the same period in the prior year.

		Three Months Ended
		March 31,
		2001			2000
Medical care ratio:
	Consolidated		90.2	%		85.1	%
	Commercial		89.5	%		82.0	%
	Medicare		90.7	%		87.4	%

Commercial health care costs for the three months ended March 31, 2001 were increased by $7 million ($4 million or $0.12 diluted loss per share, net of tax), for changes in estimates related to December 31, 2000 and prior medical claims and benefits payable. This increase was offset by a $13 million ($7 million or $0.21 diluted earnings per share, net of tax) favorable change in prior period estimates, related to December 31, 2000 and prior, within the Medicare product line.

Health care costs for the three months ended March 31, 2000 were reduced by a $9 million provider credit ($5 million or $0.14 diluted earnings per share, net of tax), of which $6 million related to our commercial product line. This reduction was a result of our favorable resolution of prior-period estimates relating to a provider contract. Excluding the effects of these changes in estimates, the medical care ratios were as follows:

		Three Months Ended
		March 31,
		2001			2000
Medical care ratio excluding the provider credit:
	Consolidated		90.4	%		85.4	%
	Commercial		88.9	%		82.5	%
	Medicare		91.5	%		87.6	%

The commercial medical cost trend between March 31, 2000 and 2001 ranged from 12 percent to 14 percent, and the Medicare medical cost trend between March 31, 2000 and 2001 ranged from seven percent to nine percent.

Commercial Medical Care Ratio. The commercial medical care ratio includes the specialty HMOs and indemnity insurance results. The commercial medical care ratio for the three months ended March 31, 2001 increased compared to the same period in the prior year due to:

• Higher inpatient, physician, outpatient and emergency service utilization under fee-for-service or risk-based contracts; and

• Higher prescription drug costs; partially offset by

• Premium rate increases.

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Medicare Medical Care Ratio. The Medicare medical care ratio increased for the three months ended March 31, 2001 compared to the same period in the prior year due to:

• Higher inpatient, outpatient and emergency service utilization under fee-for-service or risk-based contracts; and

• Higher prescription drug costs; partially offset by

• Premium rate increases including BIPA, effective March 1, 2001.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses decreased two percent or $7 million to $293 million for the three months ended March 31, 2001, from $300 million for the three months ended March 31, 2000. For the three months ended March 31, 2001, marketing, general and administrative expenses as a percentage of operating revenue (excluding net investment income) decreased compared to the same period in the prior year primarily due to higher operating revenue in 2001.

	Three Months Ended
	March 31,
	2001			2000
Marketing, general and administrative expenses as a percentage of operating revenue		9.8	%		10.7	%

Impairment, Disposition, Restructuring, Office of Personnel Management (“OPM”) and Other (Credits) Charges. We recognized net pretax credits of $0.9 million ($0.5 million or $0.02 diluted earnings per share, net of tax) during the first quarter. See Note 5 of the Notes to Condensed Consolidated Financial Statements.

Operating Income. Operating income decreased 70 percent or $103 million to $45 million for the three months ended March 31, 2001, from $148 million for the three months ended March 31, 2000. Operating income as a percentage of operating revenue was 1.5 percent for the three months ended March 31, 2001 and was 5.2 percent for the three months ended March 31, 2000. Factors contributing to the changes are discussed above.

Interest Expense. Interest expense of $20 million for the three months ended March 31, 2001 was comparable to the same period in the prior year.

Provision for Income Taxes. Provision for income taxes decreased 78 percent or $42 million to $12 million for the three months ended March 31, 2001, from $54 million for the three months ended March 31, 2000. The effective income tax rate was 47.5 percent for the three months ended March 31, 2001 compared with 41.8 percent for the three months ended March 31, 2000. Because of lower 2001 earnings, the non-deductible goodwill amortization expense is a higher percentage of pretax income, increasing our 2001 effective income tax rate.

Liquidity and Capital Resources

Operating Cash Flows. Our consolidated cash, equivalents and marketable securities increased $46 million or two percent to $2.2 billion at March 31, 2001, from $2.1 billion at December 31, 2000. The combined increase in cash, equivalents and marketable securities was primarily related to the reinvestment of our current year earnings and the 2000 income tax refund received in 2001.

Cash flows from operations, excluding the impact of deferred revenue, were $69 million at March 31, 2001 and $113 million at March 31, 2000. The decrease is primarily related to changes in assets and liabilities as discussed below in “Other Balance Sheet Explanations.”

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Investing Activities. For the three months ended March 31, 2001, our investing activities used $105 million in cash compared to $18 million provided during the three months ended March 31, 2000. The purchase of marketable securities resulted in $104 million of the $123 million net decrease over the prior year. Purchases of marketable securities were made to obtain longer duration securities with higher yields during a period of falling interest rates. This compared to a net $20 million of securities sold in the first quarter of 2000 to provide cash to fund the Harris acquisition and share repurchases.

Financing Activities. For the three months ended March 31, 2001, we used $9 million of cash for financing activities compared to $97 million used for the same period in the prior year. The changes were as follows:

• We repurchased 2.1 million shares of our common stock in 2000 for $94 million under our stock repurchase program. No shares were repurchased during the same period in 2001;

• We paid $9 million to minority stockholders for all outstanding stock of our consolidated minority subsidiary; and

• Net payments of $3 million on long-term debt, including net facility payments of $5 million, during 2000. No significant payments were made as of March 31, 2001.

Other Balance Sheet Change Explanations

Receivables, Net. Receivables, net increased $2 million from December 31, 2000 as follows:

• $11 million increase in provider receivables as a result of capitation advances paid to certain providers, which will be recovered through subsequent capitation withhold adjustments; partially offset by

• $8 million decrease in premium receivables, primarily related to a reduction in membership, partially offset by premium rate increases; and

• $1 million decrease in other receivables.

Goodwill and Intangible Assets, Net. Goodwill and intangible assets decreased $20 million from 2000 due to goodwill and intangible amortization expense.

Medical Claims and Benefits Payable. Medical claims and benefits payable increased $5 million from December 31, 2000 as follows:

• $18 million increase in capitation liabilities primarily due to premium increases from open enrollment and membership retroactivity; partially offset by

• $10 million decrease in claims incurred but not yet reported due to increased commercial claims processing efforts during the first quarter of 2001, which decreased claims inventory; and

• $3 million net decrease in other provider liabilities.

Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities increased $19 million from December 31, 2000 primarily due to the timing of the current year income tax payments.

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Forward Looking Information Under the Private Securities Litigation Act Of 1995

This document contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, “may,” “will,” “could,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potentially,” “continue,” or “opportunity” or the negative of these terms or other comparable terminology. The statements about our plans, strategies, intentions, expectations and prospects contained throughout the document are forward-looking and are based on current expectations. Actual results may differ materially from those we predict as of the date of this report in the forward-looking statements. In addition, past financial performance is not necessarily a reliable indicator of future performance and investors should not use historical performance to anticipate results or future period trends. In evaluating these statements, you should specifically consider factors, including the risks described below and in other parts of this document.

Revenue-Related Risk Factors. The following are risks relating to our revenues:

Medicare Participation. We have reduced our participation in the Medicare program, which accounted for approximately 60 percent of our total premiums between January 1, 1998 and March 31, 2001, and may continue to reduce our participation in or withdraw entirely from that program. Generally, since the Balanced Budget Act of 1997 went into effect, annual premium increases for Medicare+Choice members have not kept up with increases in the costs of health care. In some of our operating regions, premium rate increases that are lower than the rate of increase in our health care service expenses for our Medicare+Choice members could adversely affect our results of operations. In addition, since 1997, HCFA has established new and expanded requirements for Medicare+Choice organizations and new or expanded standards for quality assurance, beneficiary protection, coordinated open enrollment, program payment and audits, information disclosure and physician and hospital participation, which have and will continue to increase our Medicare administration costs. Such regional gaps between Medicare+Choice premiums and our health care service expenses and increased Medicare administration costs contributed to our decision to cease offering our Medicare+Choice program in 15 counties, effective January 1, 2001 and to freeze enrollment in that program in 42 counties, beginning December 10, 2000. We currently offer our Medicare+Choice program in 101 counties, and may continue to reduce our participation in the Medicare program if federal funding for that program does not increase. If we continue to reduce our participation in the Medicare program or withdraw entirely from that program, our revenue will decline substantially, unless we replace lost revenue from the Medicare program with revenue from other sources, like our Medicare supplement product offerings or internal growth. Without a replacement for any lost revenue from the Medicare program, our results of operations could be adversely affected, for example by increasing our administrative costs as a percentage of our revenue.

Fixed Premiums. Of our commercial business, more than 50 percent of our membership renews on January 1 of each year, with premiums that are generally fixed for a one-year period. In addition, each of our subsidiaries that offers Medicare+Choice plans must submit adjusted community rate ("ACR") proposals, generally by county or service area, to HCFA by July 1 for each such plan that will be offered in a subsequent year. As a result, increases in the costs of health care services in excess of the estimated future health care costs reflected in the premiums or the ACR proposals generally cannot be recovered in the applicable contract year through higher premiums. Many factors, including medical and prescription drug costs that rise faster than premium increases, increases in utilization and costs of medical and hospital services and regulatory changes, could cause actual health care costs to exceed what was estimated and reflected in premiums. To the extent that such excesses occur, our results of operations will be adversely affected.

Underwriting. We use our underwriting systems to establish and assess premium rates based upon accumulated actuarial data, with adjustments for factors such as claims experience. We are enhancing our underwriting capabilities so that we may be able to better price our commercial products, particularly in light of the continuing trend away from capitated contracts to risk-based and fee-for-service contracts, and make market exit decisions for our Medicare markets. The development and implementation of these capabilities will take time and the investment of substantial resources, including the hiring of additional personnel with the requisite experience and skills. If we are not able to develop and implement these capabilities in a timely and cost effective manner, our results of operations and cash flows may be materially and adversely affected.

Membership and Premium Risk Factors. A loss of profitable membership or a change in premium expectations could negatively affect our financial position, results of operations or cash flows. Factors that could contribute to the loss of membership or lower premiums include:

• The inability of our marketing and sales plans to attract new customers or retain existing customers;

• The effect of premium increases, benefit changes and member-paid supplemental premiums and copayments on the retention of existing members and the enrollment of new members;

• Our exit from selected service areas;

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• Our limits on enrollment of new Secure Horizons members in selected markets, through a combination of capacity waivers and voluntary notices;

• Reductions in work force by existing customers and/or buy-downs in benefits by existing customers;

• Negative publicity and news coverage or threats of litigation;

• Our failure to successfully complete and/or integrate acquisitions; and

• The loss of key sales and marketing employees.

Health Care Cost-Related Risk Factors. Our profitability depends, in part, on our ability to control health care costs while providing quality care. Our primary focus is securing cost-effective physician, hospital and other health care contracts to maintain a qualified network in each geographic area we serve.

We have increased the capitation rates we pay some of our physicians and hospitals to improve network stability and to reflect the increased costs incurred by our capitated physicians and hospitals. We have reduced benefits, increased copayments and instituted or increased member-paid supplemental premiums in some markets for our Secure Horizons members. The various changes we made to premium rates, benefits, copayments and member-paid supplemental premiums did not offset our increased health care costs for 2000 for two primary reasons. During 2000 more of our hospital providers shifted to per-diem, fee-for-service or risk-based contracts than we anticipated when we designed our 2000 programs. Hospital utilization by our members and cost of claims under risk-based hospital arrangements also significantly exceeded our expectations. The trend away from capitation contracts to risk-based and fee-for-service contracts continued during the three months ended March 31, 2001. To the extent that we have entered into and may continue to increasingly enter into risk-based contracts and fee-for-service contracts with physicians and hospitals, our ability to control our health care costs and profitability will increasingly depend on our ability to accurately predict member utilization of health care services and claims costs, and may be less than our ability to control health care costs under capitation contracts. We expect that the changes to our benefits programs and increased premiums for our Secure Horizons members in 2001 will not offset our rising health care costs in some markets.

As a result of these trends, the following are risks relating to our health care costs:

• Utilization. Under fee-for-service and risk-based contracts, we risk incurring higher than expected health care costs due to increased utilization of hospital and physician services. To reduce the risk of higher than medically warranted utilization, we are focusing on developing medical management programs to manage health care costs and investing in the development of systems to monitor and manage the utilization of health care services, while maintaining quality of care. These medical management programs and systems for monitoring and managing medical utilization are unproven and may not improve our ability to manage our health care costs to the extent that we expect. Our consolidated medical care ratio could continue to increase if our programs for controlling utilization are not successful.

• Insolvency. Under capitated contracts, we face the risk of a physician group or a physician association becoming insolvent. Depending on state law, we may be held liable for unpaid health care claims that were previously the responsibility of the capitated physician and for which we have already paid capitation. To reduce this insolvency risk, we have developed contingency plans that include shifting members to other physicians and reviewing operational and financial plans to monitor and maximize financial and network stability. Some of our physicians require more frequent monitoring. Additionally, we collect security reserves from capitated physicians to further mitigate insolvency risk. We may incur additional health care costs in the event of physician instability where we are unable to reach an agreement that is mutually beneficial. These costs may be incurred when we need to contract with other physicians at less than cost-effective rates to continue providing health care to our members. We also maintain insolvency reserves that include estimates for potentially insolvent physicians, where conditions indicate claims are not being paid or have slowed considerably. We believe that our March, 31, 2001 insolvency reserves, intended to pay for March, 31, 2001 and prior health care services that may not be paid by insolvent or unstable physicians, are adequate. To the extent that we do not accurately estimate the timing, amount or outcome of claims asserted against us based on physician groups or physician associations with whom we have capitation contracts becoming insolvent, our results of operations or cash flows could be materially and adversely affected.

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• Retroactive Adjustments. Some of the fee-for-service and risk-based arrangements may be signed following the effective date of the contract and may provide for retroactive adjustments to the beginning of the contract year. The retroactive adjustment feature can result in a material change in our estimate of health care costs. To mitigate this risk, we have instituted policies and procedures intended to prevent future retroactive contract adjustments.

• Health Care Providers. In any particular market, health care providers could refuse to contract, demand higher payments, or take other actions that could result in higher health care costs or difficulty meeting regulatory or accreditation requirements. In some markets, some health care providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions. If health care providers refuse to contract with us, use their market position to negotiate favorable contracts, or place us at a competitive disadvantage, those activities could adversely affect our ability to market products or to be profitable in those markets. In addition, payment or other disputes between us and health care providers and among health care providers may result in a disruption in the provision of services to our members or a reduction in the services available.

• Incurred But Not Reported or Paid. We estimate the amount of our reserves for incurred but not reported or paid ("IBNR") claims, primarily using standard actuarial methodologies based upon historical data. These standard actuarial methodologies include, among other factors, the average interval between the date services are rendered and the date claims are received and paid, denied claims activity, expected health care cost inflation, seasonality patterns and changes in membership. The estimates for submitted claims and IBNR are made on an accrual basis and adjusted in future periods as required. Such estimates could understate our actual liability for claims and benefits payable. Any adjustments to such estimates could adversely affect our results of operations in future periods.

• ACR Filings. In addition to the regular ACR proposals submitted in June 2000, we were required to re-submit ACR proposals in January 2001 in accordance with BIPA. In our ACR resubmission, BIPA required that we use increased funding to do one or more of the following: to reduce member premiums or cost sharing; to enhance benefits; to contribute to a benefits stabilization fund; or to stabilize or enhance beneficiary access to physicians and hospitals (so long as such action does not result in increased beneficiary premiums, cost-sharing, or reduced benefits). Our January 2001 ACR submission has been filed in accordance with BIPA and accompanying ACR instructions, and has been accepted by HCFA.

We have been notified by HCFA that audits of the ACR proposals will be conducted in Arizona, Oklahoma, Oregon and Washington in 2001. We cannot be certain that any ongoing and future audits will be concluded satisfactorily. We may incur additional, possibly material, liability as a result of these audits. The incurrence of such liability could have a material effect on results of operations or cash flows of a future period.

• Claims Processing. Due to the continuing trend away from capitated contracts to risk-based and fee-for-service contracts, we have increased exposure to financial and regulatory risk for the accurate and timely processing of claims since we typically process claims under our risk-based contracts but often do not under our capitated contracts. From November 2000 until April 20, 2001, our Texas subsidiary was placed under administrative oversight by the Texas Department of Insurance due to various issues including untimely claims processing. Our release from administrative oversight is contingent upon a commitment to provide a detailed corrective action plan and follow-up reporting to the Texas Department of Insurance. In addition, the California Department of Managed Health Care issued a censure against us for late payment of claims to physicians and hospitals. In March 2001, we reached a settlement with the California Department of Managed Health Care, whereby related interest and penalties will not exceed $2 million. The late payments were caused by a large increase in claims volume associated with the rapid shift from capitation contracts to risk-based and fee-for-service contracts. If our claims processing system is unable to handle the increased claims volume resulting from the continuing trend away from capitated contracts to risk-based and fee-for-service contracts, we may continue to be subject to regulatory censure and penalties, which could have a material adverse effect on our operations and results of operations. In addition, if our claims processing system is unable to handle such increased claims volume, the data we use for our IBNR estimates could be incomplete and our ability to estimate claims liabilities and establish adequate reserves could be adversely affected.

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• Pharmacy. Our prescription drug costs have been rising for the past few years. The increases are due to the introduction of new drugs costing significantly more than existing drugs, direct consumer advertising by the pharmaceutical industry creating consumer demand for particular brand drugs, patients seeking medications to address lifestyle changes, higher prescribed doses of medications and enhanced pharmacy benefits for members such as reduced copayments and higher benefit maximums. Our efforts to mitigate these trends and ensure appropriate utilization include formulary management, physician education, successful pharmaceutical contracting and increased utilization of our in-house mail-service pharmacy operated by Prescription Solutions.

Formularies are lists of physician-recommended drugs in different therapeutic classes that have been reviewed for safety, efficacy and value. These lists help ensure that members get the right prescription at the right time in the right dose, avoiding potential adverse effects. Formularies also ensure that the costs are effectively managed; if two medications have the same effect, the less expensive option is recommended. Medically necessary drugs not included in the formulary can be obtained through our authorization process provided they are not specifically excluded from coverage or for the treatment of excluded benefits. We continue to conduct member and physician education programs to provide information on the appropriate use of generic drugs, over the counter drugs and antibiotics. Many of our medical groups share the financial risk for prescription drugs as an incentive to find the most effective and cost-efficient treatments for our members. As a way of controlling this health care cost component, we have implemented a decrease in prescription drug benefits for Secure Horizons members in almost all of our geographic areas in 2001.

• Management Information Systems. Our computer-based management information systems are an important part of our efforts to control health care and administrative expenses and improve member and physician and hospital satisfaction. We use these systems to support our internal financial and management accounting and reporting functions as well as for other purposes. These purposes include underwriting, billing, claims processing, medical management, medical cost and utilization trending, member, employer group and physician and hospital service functions, and tracking and analysis of outcome data. The failure of our management information systems to operate could have a material adverse effect on our results of operations or cash flows by temporarily preventing us from performing some or all of those functions or by increasing our administrative costs.

Marketing, General and Administrative Costs-Related Risk Factors. The following are risks relating to our marketing, general and administrative costs:

Management, General and Administrative Expense Increases. Despite our efforts to control and reduce our marketing, general and administrative expenses, these expenses could increase as a result of a number of factors, which could adversely impact our profitability. These factors include:

• Our need for additional advertising, marketing, administrative or management information systems expenditures;

• The success or lack of success of our marketing and sales plans to attract new customers;

• Our need for increased claims administration, personnel and systems;

• Our need for additional investments in medical management, claims processing, underwriting and actuarial resources and technology;

• Integration costs for acquisitions that exceed our expectations; and

• Our inability to achieve efficiency goals and resulting cost savings.

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In addition, our marketing, general and administrative expenses as a percentage of our revenue could increase due to changes in our product mix between Medicare and commercial products and could be adversely affected if we exit Medicare+Choice markets without replacing our revenue from those markets with revenue from other sources, like our Medicare supplement product offerings.

Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), includes administrative simplification provisions directed at standardizing transactions and codes and seeking protections for confidentiality and security of patient data. We expect to modify all of our information systems and business processes to comply with HIPAA regulations regarding standardizing transactions and codes. We also expect to incur expense developing systems and refining processes and contracts to comply with HIPAA. We estimate that our HIPAA compliance costs will approximate $20 million in 2001. Our estimate of HIPAA compliance costs may change as current HIPAA rules evolve and additional rules are released or as we continue to evaluate the work required to meet HIPAA requirements and mandated compliance timeframes. To the extent that our estimated HIPAA compliance costs are less than our actual HIPAA compliance costs, amounts we had budgeted for other purposes will need to be used for HIPAA compliance which may adversely affect our ability to execute some portion of our business strategy.

Additional Risks. The following are additional risks relating to our industry and business:

Industry-Related Litigation. Consumers, physicians and hospitals are currently attacking practices of the HMO industry through a number of separate lawsuits against us, including purported class action lawsuits, and against other national HMOs. These lawsuits, including those filed to date against us, may take years to resolve and, depending upon the outcomes of these cases, may cause or force changes in practices of the HMO industry. These cases also may cause additional regulation of the industry through new federal or state laws. These actions ultimately could adversely affect the HMO industry and could have a material effect on our financial position, results of operations or cash flows and prospects.

OPM Litigation. As part of its periodic audit program, OPM has referred and may continue to refer its findings to the United States Department of Justice ("DOJ") if OPM believes that we may have knowingly overcharged the government or otherwise submitted false documentation or certifications in violation of the False Claims Act. Under the False Claims Act, an action can be considered knowingly committed if the government contractor acted with actual knowledge, or with reckless disregard or deliberate ignorance of the government’s rules and regulations. If the government were to win a False Claims Act lawsuit against us, the government could obtain treble damages, a civil penalty of not less than $5,000 nor more than $10,000 for each separate alleged false claim, and the government could permanently disqualify us from participating in all federal government programs. We cannot be certain that additional audits will not be referred to the DOJ, or that additional, possibly material, liability will not be incurred. Such liability could have a material adverse effect on results of operations or cash flows.

Ordinary Course Legal Proceedings. From time to time, we are involved in legal proceedings that involve claims for coverage encountered in the ordinary course of business. We, like HMOs and health insurers generally, exclude some health care services from coverage under our HMO and other plans. We are, in the ordinary course of business, subject to the claims of our members arising out of decisions to restrict treatment or reimbursement for certain services. The trend away from capitation contracts to shared-risk contracts may result in more claims of this nature as we increase our medical management capabilities and take a more active oversight role in the treatment process. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on our business. In addition, our exposure to potential liability under punitive damage theories may significantly decrease our ability to settle these claims on reasonable terms.

Medicare. HCFA, the United States Department of Health and Human Services ("USDHHS") and state regulatory agencies regulate the benefits provided, premiums paid, quality assurance procedures, marketing and advertising for our Medicare+Choice products. HCFA or the Medicare+Choice plan may terminate our Medicare+Choice contracts or elect not to renew those contracts when those contracts come up for renewal every 12 months. The loss of Medicare contracts or changes in the regulatory requirements governing the Medicare+Choice program or the program itself could have a material adverse effect on our financial position, results of operations or cash flows.

HCFA requires that our HMO subsidiaries submit separate ACR proposals by July 1 for every Medicare+Choice plan they offer to Medicare beneficiaries in the subsequent year. HCFA has contracted with the Office of Inspector General of the USDHHS to conduct more comprehensive audits on one-third of all ACR filings as mandated by law. We have been notified by HCFA that audits of several of our 2000 and 2001 ACR proposals will be conducted. We cannot be certain that any ongoing and future audits will be concluded satisfactorily. We may incur additional, possibly material, liability as a result of these audits. The incurrence of such liability could have a material adverse effect on results of operations or cash flows.

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Competition. We operate in highly competitive markets. Consolidation of acute care hospitals and continuing consolidation of insurance carriers, other HMOs, employer self-funded programs and PPOs, some of which have substantially larger enrollments or greater financial resources than ours, have created competition for physicians, hospitals and members, impacting profitability and the ability to influence medical management. In addition, pharmacy benefit management companies have continued to consolidate, competing with the pharmacy cost management capability of our wholly owned subsidiary, Prescription Solutions. If we are unable to compete effectively in any of our markets for any reason, our business could be adversely affected.

Legislation and Regulation. Recent changes in state and federal legislation have increased and will continue to increase the costs of regulatory compliance, and proposed changes in the law may negatively impact our financial and operating results. These changes may increase our health care costs, decrease our membership or otherwise adversely affect our revenues and our profitability. Regulation and enforcement is increasing both at the state and federal level. Increased regulations, mandated benefits and more oversight, audits and investigations may increase our administrative, litigation and health care costs. The following recent or proposed legislation, regulation or initiatives could materially affect our financial position:

• New and proposed legislation that would hold HMOs liable for medical malpractice (including proposed federal legislation that would remove or limit the federal preemption set forth in Employee Retirement Income Security Act of 1974 (“ERISA”) that precludes most individuals from suing their employer-based health plans for causes of action based upon state law). To date, Arizona, California, Oklahoma, Texas and Washington have enacted legislation that may increase the likelihood of lawsuits against HMOs for malpractice liability;

• Existing and proposed legislation that would limit our ability to manage care and utilization such as “any willing provider” and “direct access” laws;

• New state and proposed federal laws mandating benefits including those that mandate equal coverage for mental health benefits, commonly called mental health parity;

• Federal regulations that place additional restrictions and administrative requirements on the use, electronic retention, transmission and disclosure of personally identifiable health information (see Health Insurance Portability and Accountability Act of 1996);

• Legislation proposals to provide payment and administrative relief for the Medicare+Choice program and regulate drug pricing by the state and federal government could include provisions that impact Secure Horizons;

• Proposed legislation and regulation could also include adverse actions of governmental payors, including reduced Medicare premiums; discontinuance of, or limitations on, governmentally funded programs; recovery by governmental payors of previously paid amounts; the inability to increase premiums or prospective or retroactive reductions to premium rates for federal employees; and adverse regulatory actions;

• New and increased initiatives at the DOJ, the Office of Inspector General of the United States Department of Health and Human Services, the Office of Inspector General of the United States Office of Personnel Management and the various enforcement divisions of the state regulatory agencies governing health care programs. These initiatives pursue both civil and criminal investigations against physicians, hospitals, payors, and pharmaceutical companies for misconduct relating to potential health care fraud and abuse, false claims, ERISA violations, violations of the Medicare program, overbilling of government programs, incorrect reporting of data, and improper denial or mismanagement of care;

• Existing state legislation and regulation that may increase the financial capital requirements of physicians and hospitals who contract with HMOs to accept financial risk for health services. Proposed state legislation, regulation, or litigation that would otherwise limit our ability to capitate physicians and hospitals or delegate financial risk, utilization review, quality assurance or other medical decisions to our contracting physicians and hospitals; and

• Existing state legislation and regulation that may require increases in minimum capital, reserves, and other financial liability requirements. In addition, proposed state legislation that may limit the admissibility of certain assets.

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California Energy Crisis. As a result of various factors, including the deregulation of parts of the California energy market, some locations in California have experienced sporadic periods of electricity outages. This condition is expected to continue into the future and may worsen during periods of peak energy consumption in summer months. While our Data Center has full emergency power back-up, that allows for normal operations during periods of sporadic power outages, our other facilities located in California have limited emergency power generators. Therefore, a prolonged interruption in power supplied to our facilities could affect our ability to conduct our normal operations, including the processing of claims, and could have a material adverse effect on our results of operations, cash flows or financial condition.

Risk-Based Capital Requirements. The National Association of Insurance Commissioners has proposed that states adopt risk-based capital standards that, if implemented, would require increased minimum capitalization limits for health care coverage provided by HMOs and other risk-bearing health care entities. Risk-based capital requirements currently apply for Arizona, Colorado, Indiana, Nevada, Oregon, Texas and Washington. We do not expect California to adopt risk-based capital in 2001, nor do we expect this legislation to have a material impact on our consolidated financial position.

Liquidity and Capital Resources. The final maturity date on our credit facility is January 1, 2002. Our ability to refinance this credit facility depends on our credit rating, results of operations and cash flows from operations. Our ability to repay amounts owed under the credit facility depends on dividends and cash transfers from our subsidiaries. Nearly all of the subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various capital standards imposed by HMO or insurance regulations, which may from time to time impact the amount of funds the subsidiaries can pay to us. Our subsidiaries are not obligated to make funds available to us and creditors of our subsidiaries have superior claim to our subsidiaries’ assets. Additionally, from time to time, we advance funds in the form of a loan or capital contribution to our subsidiaries to assist them in satisfying federal or state financial requirements. We may provide additional funding to a subsidiary if a federal or state legislator imposes additional financial requirements due to concerns about the financial position of the subsidiary or if there is an adverse effect resulting from changes to the risk-based capital requirements. This may in turn affect the subsidiary’s ability to pay dividends or make other cash transfers. We will pursue several options to maintain liquidity and refinance our current credit facility. Options include issuing long-term debt and restructuring the existing line of credit.

Possible Charges. We may announce in the future dispositions of assets or product exits as we continue to evaluate whether our subsidiaries or products fit within our business strategy. We may also record long-lived asset impairment charges if one or more of our subsidiaries with operating losses generates less operating cash flows than we currently expect. In addition, as we refocus and retool our work force to shift from a capitated to a risk-based business model, we expect some positions to change or be eliminated, which could result in future restructuring charges. We cannot be certain that dispositions, impairments or restructuring activities will not result in additional pretax charges. We believe that any disposition, impairment or restructuring charges would not materially affect our current consolidated financial position. However, disposition, impairment or restructuring charges could have a material adverse effect on our results of operations or cash flows.

In February 2000, the Financial Accounting Standards Board issued a revised exposure draft that addresses accounting for business combinations and associated goodwill. If the exposure draft is adopted as proposed on July 1, 2001, the test for measuring goodwill impairment will become much more stringent than current practice. Because of the magnitude of our $2.2 billion net goodwill and intangibles balance at March 31, 2001, it is likely that impairment charges, if any, will have a material adverse effect on our results of operations.

Other. Results may also differ materially from those projected, forecasted, estimated and budgeted by us due to adverse results in ongoing audits or in other reviews conducted by federal or state agencies or health care purchasing cooperatives; adverse results in significant litigation matters; and changes in interest rates causing changes in interest expense and net investment income.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

The principal objective of our asset/liability management activities is to maximize net investment income, while managing levels of interest rate risk and facilitating our funding needs. Our net investment income and interest expense are subject to the risk of interest rate fluctuations. To mitigate the impact of fluctuations in interest rates, we may use derivative financial instruments, primarily interest rate swaps. During 2001 and 2000, we did not have any derivative financial instruments.

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PART II: OTHER INFORMATION

Item 1:	Legal Proceedings
	See Note 6 of the Notes to Condensed Consolidated Financial Statements.
Item 2:	Changes In Securities
	None.
Item 3:	Defaults Upon Senior Securities
	None.
Item 4:	Submission of Matters to a Vote of Security Holders
	None.

Item 5:	Other Information
	On December 18, 2000, we announced the appointment of Michael A. Kaufman, M.D. to Senior Vice President and Chief Medical Officer.
	On January 3, 2001, we announced the appointment of Donald E. Costa to Regional Vice President and Chief Executive Officer for the Northwest Region.
	Mitchell J. Goodstein, Senior Vice President of Health Care Economics, resigned effective January 21, 2001.
	On January 25, 2001, we announced the appointment of John F. Fritz to Senior Vice President and Chief Actuary.
	On February 2, 2001, we announced the appointment of Edward C. Cymerys to Senior Vice President of Pricing and Underwriting.
	On February 20, 2001, we announced the appointment of Susan L. Berkel to Senior Vice President of Finance and Corporate Controller.
	On February 20, 2001, we announced the appointment of Arthur B. Laffer, Ph.D., and Sanford M. Litvack to the Board of Directors.
	On May 7, 2001, we announced the appointment of Ferial O. Bahremand to Senior Vice President of Provider Network Development and Management.

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Item 6: Exhibits and Reports on Form 8-K

      (a) Exhibit Index

Exhibit
Number	Description
15	Letter re: Unaudited Interim Financial Information
20	Independent Accountants’ Review Report
99.1	Second Amended and Restated PacifiCare Health Systems Inc. Stock Unit Deferred Compensation Plan
99.2	Consulting Agreement, dated as of January 1, 2001, between the Registrant and David A. Reed
99.3	Form of Registrants Senior Executive Employment Agreement
99.4	Form of Registrants First Amendment to Senior Executive Employment Agreement

      (b) Reports on Form 8-K:

On January 25, 2001, we filed a Form 8-K in connection with the appointment of Gregory W. Scott as Executive Vice President and Chief Financial Officer.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PACIFICARE HEALTH SYSTEMS, INC. (Registrant)
Date: May 15, 2001	By:  /s/ HOWARD G. PHANSTIEL
		Howard G. Phanstiel President and Chief Executive Officer (Principal Executive Officer)

Date: May 15, 2001	By:  /s/ GREGORY W. SCOTT
		Gregory W. Scott Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
15	Letter re: Unaudited Interim Financial Information
20	Independent Accountants’ Review Report
99.1	Second Amended and Restated PacifiCare Health Systems Inc. Stock Unit Deferred Compensation Plan
99.2	Consulting Agreement, dated as of January 1, 2001, between the Registrant and David A. Reed
99.3	Form of Registrants Senior Executive Employment Agreement
99.4	Form of Registrants First Amendment to Senior Executive Employment Agreement

30 EX-15 2 a72432ex15.txt EXHIBIT 15 1 EXHIBIT 15 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION The Board of Directors PacifiCare Health Systems, Inc. We are aware of the incorporation by reference in the Registration Statement (Form S-8 number 333-44038) and related Prospectus pertaining to the 2000 Employee Plan and 2000 Non-Employee Directors Plan of PacifiCare Health Systems, Inc. and in the Registration Statement (Form S-8 number 333-49272) and related Prospectus pertaining to the 1996 Stock Option Plan for Officers and Key Employees and the related Prospectus pertaining to the 1996 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc. and in the Registration Statement (Form S-8 number 333-48377) and related Prospectus pertaining to the 1997 Premium Priced Stock Option Plan and the related Prospectus pertaining to the Amendment and Restatement of the PacifiCare Health Systems, Inc. Savings and Profit-Sharing Plan of PacifiCare Health Systems, Inc. of our report dated May 1, 2001 (except for Note 9, as to which the date is May 3, 2001) relating to the unaudited condensed consolidated interim financial statements of PacifiCare Health Systems, Inc. that are included in its Form 10-Q for the quarters ended March 31, 2001 and 2000. ERNST & YOUNG LLP Irvine, California May 9, 2001 31 EX-20 3 a72432ex20.txt EXHIBIT 20 1 EXHIBIT 20 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors PacifiCare Health Systems, Inc. We have reviewed the accompanying condensed consolidated balance sheet of PacifiCare Health Systems, Inc. as of March 31, 2001, and the related condensed consolidated statements of operations and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of PacifiCare Health Systems, Inc. as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended [not presented herein] and in our report dated January 31, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP Irvine, California May 1, 2001 Except for Note 9, as to which the date is May 3, 2001 32 EX-99.1 4 a72432ex99-1.txt EXHIBIT 99.1 1 EXHIBIT 99.1 SECOND AMENDED AND RESTATED PACIFICARE HEALTH SYSTEMS, INC. STOCK UNIT DEFERRED COMPENSATION PLAN WHEREAS, PacifiCare Health Systems, Inc., (the "Company") has established a non-qualified stock unit deferred compensation plan to provide supplemental retirement income benefits for a select group of management and highly compensated employees through deferrals of salary and bonuses, effective as of December 18, 1997; WHEREAS, it is believed that providing for deferral of compensation at the election of each executive will be in the best interests of the Company; and WHEREAS, the Company believes that it is in its best interests to amend and restate this plan; and WHEREAS, the Company intends that this plan shall be maintained as a "top hat" plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA: NOW, THEREFORE, it is hereby declared as follows: ARTICLE I DEFINITIONS Whenever the following words and phrases are used in this Plan, they shall have the meanings specified below. Section 1.1 "Beneficiary" or "Beneficiaries" for purposes of this Plan shall have the meaning set forth in Section 4.5. Section 1.2 "Board of Directors" or "Board" means the Board of Directors of the Company. Section 1.3 "Bonus" means any cash incentive compensation payable to a Participant in addition to the Participant's Salary, other than moving expenses, sign-on bonuses or bonuses paid in connection with a promotion, prior to any reduction for any deferrals to a plan qualified under Section 125 or Section 401 (k) of the Code. Section 1.4 "Change of Control" shall have the meaning set forth in Section 4.3. Section 1.5 "Common Stock" means the Company's Common Stock, par value $0.01 per share. Section 1.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2 Section 1.7 "Committee" means the Committee appointed by the Compensation Committee to administer the Plan in accordance with Article III. Section 1.8 "Company" means PacifiCare Health Systems, Inc., a Delaware corporation, or any successor corporation. Section 1.9 "Compensation Committee" shall mean the Compensation Committee of the Board of Directors of the Company. Section 1.10 "Disability." A Participant shall be deemed to be incapacitated or disabled, if such Participant's incapacity or disability prevents a Participant from fully performing his or her duties to an Employer for a period in excess of 90 days and, after such 90-day period, the Company and a physician, duly licensed and qualified in the specialty of the Participant's incapacity or disability, decide in their reasonable judgments, that such incapacity or disability will be permanent or of such continued duration as to prevent a Participant from resuming the rendition of services to the Employer for at least an additional six-month period. Section 1.11 "Eligible Employee" means any Employee of an Employer who the Company has designated to be in executive salary grade of 15 or above, is a Senior Vice President and is scheduled to work at least 32 hours per week. Section 1.12 "Employee" shall mean any employee (as defined in accordance with the Treasury Regulations and Revenue Rulings then applicable under Section 3401 (c) of the Code) of an Employer, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. Section 1.13 "Employer" means the Company (or any successor by merger, consolidation or purchase of substantially all of the Company's assets) and any and all Subsidiaries of the Company. Section 1.14 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Section 1.15 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. Section 1.16 "Participant" means for purposes of this Plan, any Eligible Employee who satisfies the requirements of Section 2.1. Section 1.18 "Payment Eligibility Date" means the first day of the month following the end of the calendar quarter in which a Participant terminates employment for any reason with all Employers or dies. Section 1.19 "Plan" means this Second Amended and Restated Stock Unit Deferred Compensation Plan of PacifiCare Health Systems, Inc., as may be amended from time to time. 2 3 Section 1.20 "Plan Year" means the 12 consecutive month period beginning on January 1 and ending on December 31 of the same year. Section 1.21 "Retirement" or "Retire", for purposes of this Plan, mean termination of a Participant's employment from all Employers, which occurs after the sum of the following two factors meet or exceed fifty-five (55): (i) the Participant's age and (ii) the Participant's number of years of service with all Employers. Section 1.22 "Salary" shall mean the Participant's Salary prior to any reduction for deferrals to a plan qualified under Section 125 or Section 401 (k) of the Code. Section 1.23 "Stock Unit" means a unit representing the right to receive a share of Common Stock in accordance with the terms of this Plan. Section 1.24 "Stock Unit Account" is the cumulative number of Stock Units assigned to a Participant in accordance with Section 2.2. Section 1.25 "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. ARTICLE II DEFERRAL OF COMPENSATION Section 2.1 Eligibility. a. The Company's Chief Executive Officer (the "CEO") may elect to defer (on a pre-tax basis) all, or a portion, of his or her Salary to be paid during a Plan Year by filing an election to participate in this Plan on a form provided by the Committee and filed with the Committee no later than the December 15th of the preceding Plan Year. The election to defer shall apply to the Salary payable during subsequent Plan Years until the CEO makes a new election; provided, however, that the election may not be changed for the first Plan Year after an election is made or for any Plan Year once the Plan Year has begun. The election form filed by the CEO shall signify the CEO's acceptance of the terms of this Plan and the portion of Salary that he elects to defer. Notwithstanding the foregoing, the Committee may, in its sole and absolute discretion, permit the Chief Executive Officer to file an application on or after December 15 if, in its judgment, his or her failure to do so prior to said date was due to reasonable cause, but in no event may such application be filed after December 31. All elections, once made, are irrevocable. b. The Compensation Committee shall determine at least 60 days prior to the beginning of each Plan Year, the Eligible Employees, including the CEO, who may defer all or a portion of Bonus pursuant to the provisions of this Plan for the next Plan Year. The Committee 3 4 shall notify each Eligible Employee of his or her eligibility to participate in this Plan at least 30 days prior to the time he or she must file an application for participation. Any Eligible Employee may defer Bonus by filing an election to participate in this Plan on a form provided by the Committee and filed with the Committee no later than the December 15th of the preceding Plan Year. The election to defer shall apply to the Bonus payable during subsequent Plan Years until the Eligible Employee makes a new election; provided, however, that the election may not be changed for the first Plan Year after an election is made or for any Plan Year once the Plan Year has begun. Notwithstanding the foregoing, the Committee may, in its sole and absolute discretion, permit an Eligible Employee to file an application on or after December 15 if, in its judgment, his or her failure to do so prior to said date was due to reasonable cause, but in no event may such application be filed after December 31. All elections, once made, are irrevocable. Section 2.2 Stock Account. a. Any amount of Salary deferred by the CEO pursuant to Section 2.1 (a) shall be converted into Stock Units of the Company's Common Stock. The number of shares of Common Stock into which the deferred amount shall be converted shall equal the amount of Salary deferred by the CEO multiplied by a risk premium (the "Risk Premium") determined by the Compensation Committee at least 45 days prior to the beginning of the next Plan Year, divided by the closing price of the Common Stock as quoted on Nasdaq on a date selected by the Committee. The Stock Units deferred pursuant to this provision shall be credited to a bookkeeping account established for this purpose (the "Stock Unit Account") in the name of the CEO. The number of Stock Units established by deferrals of Salary under this Plan shall remain constant over the deferral period, except as provided in Section 4.4. b. Any amount of Bonus deferred pursuant to this Section 2.2 by any Participant shall be converted into Stock Units of the Company's Common Stock. The number of shares of Common Stock into which the deferred amount shall be converted shall equal the amount of Bonus deferred multiplied by the Risk Premium divided by the closing price of the Common Stock as quoted on Nasdaq on a date selected by the Committee. The Stock Units deferred pursuant to this provision shall be credited to the Stock Unit Account in the name of each Participant. The number of Stock Units established by deferrals of Bonus and Salary under this Plan shall remain constant over the deferral period, except as provided in Section 4.4. c. No fractional shares shall be deferred under this Plan. Accordingly, if the conversion of Salary and/or a Bonus into Stock Units results in fractional shares, such unit shall be rounded up to the next highest round number. 4 5 Section 2.3 Distribution of Deferred Compensation. (a) In the case of a Participant who terminates employment with all Employers on or after Retirement or who terminates as a result of death or a Disability, the aggregate amount credited to the Stock Unit Account (the "Distributable Amount") shall be paid to the Participant (and after his death to his or her Beneficiary) in the form of substantially equal quarterly installments over five years beginning on a date as soon as administratively possible from his or her Payment Eligibility Date. Notwithstanding the foregoing, a Participant described in the preceding sentence may elect one of the following optional forms of distribution provided that his or her election is filed with the Committee at least one year prior to his or her termination of employment with all Employers: (i) a lump sum of the Distributable Amount payable as soon as administratively possible from the Participant's Payment Eligibility Date; or (ii) substantially equal quarterly installments over three years beginning on a date as soon as administratively possible from the Participant's Payment Eligibility Date. For all purposes under this Plan, a Participant shall not be considered terminated from employment with all Employers if the Participant remains employed by an entity that is an Employer. However, if the Employee is employed by an Employer and such Employer ceases to be an Employer as a result of a sale or other corporate reorganization, such sale or other corporate reorganization shall be treated as termination of employment with all Employers unless immediately following such event and without any break in employment the Participant remains employed by an Employer. (b) In the case of a Participant who terminates employment with all Employers prior to Retirement for reasons other than a Disability, the Distributable Amount shall be paid to the Participant in a lump sum on the Participant's Payment Eligibility Date. (c) A Participant who has not terminated employment with all Employers may change his or her form of payment applicable to the portion of the Stock Unit Account balance attributable to one or more Plan Years to one of the payment forms permitted by this Plan at least one year prior to the payment date to be deferred. The Participant's payment election with respect to a given Plan Year may not be changed after payment of that portion of the Stock Unit Account balance has been made or has begun. Section 2.4 Scheduled Early Distributions. Participants may elect to have Salary and/or Bonus deferred during a given Plan Year be paid on a future date while still employed, provided the payment date (the "Scheduled Payment Date") is at least two years from the last day of such Plan Year. This election shall apply to the compensation deferred for the Plan Year specified by the Participant on his or her payment election. A Participant may elect a different Payment Date for compensation deferred for each Plan Year. In addition, Scheduled Payment Dates elected pursuant to this Section 2.4 may be 5 6 deferred by at least one year, by filing with the Committee written notice at least one year prior to the Scheduled Payment Date. A Participant may elect to defer a Scheduled Payment Date selected by this Section 2.4 once every two years. A distribution pursuant to this Section 2.4 of less than the Participant's entire interest in the Stock Unit Account shall be made pro rata from his or her Stock Unit Accounts. All early distributions pursuant to this Section 2.4 shall be made in either (i) a lump sum payment; (ii) quarterly installments over a period of three years; or (iii) quarterly installments over a period of five years. Notwithstanding the foregoing, if a Participant terminates employment with the all Employers for any reason prior to the date on which a payment is scheduled to be made pursuant to this Section 2.4, the Participant's entire Stock Unit Account balance will be paid pursuant to the provisions of Section 2.3. Section 2.5 Distributions Upon A Change of Control. a. If a Change of Control occurs, the Stock Unit Account balance of each Participant will be paid to the Participant (or Beneficiary) in a lump sum within 30 days after such Change of Control. b. Following a Change in Control, no changes in the Plan, or in any documents evidencing an election to defer compensation, and no adjustments, determinations or other exercises of discretion by the Compensation Committee, the Committee or the Company's board of directors that were made subsequent to the Change in Control and that would have the effect of diminishing a Participant's rights or payments under this Plan or this Section 2.5, or of causing a Participant to recognize income (for federal income tax purposes) with respect to a Participant's Stock Unit Account prior to the actual distribution to a Participant of such Stock Unit Account, shall be effective. Section 2.6. Form of Distribution. Upon the occurrence of any event giving rise to a distribution, amounts deferred under this Plan shall be distributed in shares of Common Stock equal to the number of Stock Units of Common Stock converted on the date of deferral as determined by Article II. Such shares shall be distributed as provided in Sections 2.3, 2.4, 2.5 and 2.7. Section 2.7 Financial Hardship Withdrawals. The Committee may, pursuant to rules adopted by it and applied in a uniform manner, accelerate the date of distribution of all or any portion of a Participant's Stock Unit Account, because of a financial hardship. A financial hardship means an unforeseeable, severe financial emergency resulting from (a) a sudden and unexpected illness or accident of the Participant or his or her dependent (as defined in Section 152(a) of the Code); (b) loss of the Participant's property due to casualty; or (c) other similar extraordinary and unforeseeable circumstances arising out of event beyond the control of the Participant, which may not be relieved through other available resources of the Participant, as determined by the Committee in accordance with uniform rules adopted by it. Payment of any amount with respect to which a Participant has filed a request under this Section 2.7 shall be made as soon as practicable after approval of such request by the Committee, but shall be limited to the amount necessary to satisfy the financial hardship. Distributions made pursuant to this Section 2.7 shall be without penalty. 6 7 Section 2.8 Rollovers. Participants of any existing CEO Stock Unit Deferred Compensation Plan administered by the Company, who have a positive account balance in such plan as of December 31, 1997 and who are employed by an Employer as of December 31, 1997 shall have such positive account balance transferred to and added to a Stock Unit Account under this Plan. Participant's account balances transferred to this Plan pursuant to this Section 3.8 shall be governed by the terms and conditions of this Plan, shall be referred to as the "Existing PHS Rollover Amount" and shall be credited to such Participant's Stock Unit Account as of December 31, 1997. ARTICLE III ADMINISTRATION Section 3.1 Committee. A number of individuals shall be appointed by, and serve at the pleasure of, the Compensation Committee as a committee to administer the Plan (the "Committee"). The number of members comprising the Committee shall be determined by the Compensation Committee, which may from time to time vary the number of members. A member of the Committee may resign by delivering a written notice of resignation to the Compensation Committee. The Compensation Committee may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Committee shall be filled promptly by the Compensation Committee. Section 3.2 Committee Action. The Committee shall act at meetings by affirmative vote of a majority of the members of the Committee. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Committee and such written consent is filed with the minutes of the proceedings of the Committee. A member of the Committee shall not vote or act upon any matter, which relates solely to himself or herself as a Participant. The Chairman or any other member or members of the Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee. Section 3.3 Powers and Duties of the Committee. a. The Committee, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms, shall be the "Plan Administrator" charged with the general administration of the Plan, and shall have all discretionary authority and powers necessary to accomplish its purposes, including, but not by way of limitation, the following: i. To construe and interpret the terms and provisions of this Plan; ii. To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries; 7 8 iii. To maintain all records that may be necessary for the administration of the Plan; iv. To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law; v. To make and publish such rules for the regulation of this Plan, and procedures for the administration of this Plan, as are not inconsistent with the terms hereof; and vi. To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of this Plan as the Committee may from time to time prescribe. Section 3.4 Construction and Interpretation. The Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, which interpretation or construction shall be final and binding on all parties, including but not limited to the Company and any Participant or Beneficiary. The Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan. Section 3.5 Information. To enable the Committee to perform its functions, the Employers shall supply full and timely information to the Committee on all matters relating to the Compensation of all Participants, their death or other cause of termination, and such other pertinent facts as the Committee may require. Section 3.6 Compensation, Expenses and Indemnity. a. The members of the Committee shall serve without compensation for their services hereunder. b. The Committee is authorized at the expense of the Company to employ such legal counsel as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration of the Plan shall be paid by the Company. 8 9 c. To the extent permitted by applicable state law, the Company shall indemnify and hold harmless the Committee and each member thereof, the Board of Directors, Compensation Committee and any delegate of the Committee who is an employee of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to this Plan, other than expenses and liabilities arising out of bad faith or willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under state law. Section 3.7 Quarterly Statements. Under procedures established by the Committee, a Participant shall receive a statement with respect to such Participant's Stock Unit Accounts on a quarterly basis as of each March 31, June 30, September 30 and December 31. Section 3.8 Claim Procedures. a. Claim. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as "Claimant") may file a written request for such benefit with the Plan Administrator, setting forth his or her claim. b. Claim Decision. Upon receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within 90 days and shall, in fact, deliver such reply within such period. The Plan Administrator may, however, extend the reply period for an additional 90 days for special circumstances. If the claim is denied in whole or in part, the Plan Administrator shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (A) the specified reason or reasons for such denial; (B) the specific reference to pertinent provisions of this Plan on which such denial is based; (C) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (D) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (E) the time limits for requesting a review under subsection 3.9(c). c. Request for Review. Within 60 days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review the determination of the Plan Administrator. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review within such 60 day period, he or she shall be barred and estopped from challenging the Plan Administrator's determination. d. Review of Decision. Within 60 days after the Committee's receipt of a request for review, after considering all materials presented by the Claimant, the Committee will inform the Participant in writing, in a manner calculated to be understood by the Claimant, of its decision, 9 10 setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the 60 day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than 120 days after receipt of the request for review. ARTICLE IV MISCELLANEOUS Section 4.1 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of any Employer. Any and all of the assets of each Employer shall be, and remain, the general unpledged, unrestricted assets of such Employer. Each Employer's obligation under this Plan shall be merely that of an unfunded and unsecured promise of such Employer to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. It is the intention of the Company that this Plan (and the Trust described in Article VI) be unfunded for purposes of the Code and for purposes of Title I of ERISA. Section 4.2 Restriction Against Assignment. The Employers shall pay all amounts payable hereunder only to the person or persons designated by this Plan and not to any other person or corporation. No part of a Participant's Account shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Account be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Committee shall direct. Section 4.3 Change of Control. For purposes of this Plan, "Change of Control" means the occurrence of any of the following: (i) a business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is not the Surviving Organization; (ii) any business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is the Surviving Organization, and such business combination occurred with an entity whose market capitalization prior to the transaction was greater than 50 percent of the Company's market capitalization prior to the transaction; (iii) the sale in a transaction or series of transactions of all or substantially all of the Company's assets; 10 11 (iv) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act) other than UniHealth, a California non-profit public benefit corporation ("UniHealth"), acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more of the voting common stock of the Company and the beneficial ownership of the voting common stock of the Company owned by UniHealth at that date is less than or equal to the beneficial ownership interest of voting securities attributable to such other person or group; (v) a dissolution or liquidation of the Company; or (vi) the Company ceases to be subject to the reporting requirements of the Exchange Act as a result of a "going private transaction" (within the meaning of the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any entity where the majority of the members of such entity's board of directors are persons who were members of the Company's board of directors prior to the merger, consolidation or other business combination and the senior management of the surviving entity includes all of the individuals who were the Company's executive management (the Company's chief executive officer and those individuals who report directly to the Company's chief executive officer) prior to the merger, consolidation or other business combination and such individuals are in at least comparable positions with such entity. The Committee may make such determinations and interpretations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with a Change in Control. All such determinations and interpretations by the Committee shall be conclusive. Section 4.4 Change In Company Shares. If the outstanding shares of Common Stock are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another company, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, or if the Company distributes a cash or non-cash dividend to holders of Common Stock or engages in another similar transaction, the Compensation Committee shall make an appropriate and equitable adjustment in the number and kind of units credited to the Stock Unit Account. Any such adjustment made by the Compensation Committee shall be final and binding upon the a Participant, the Company and all other interested persons. Section 4.5 Beneficiary. For purposes of this Plan, "Beneficiary" or "Beneficiaries" mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Participant in accordance with procedures established by the Committee to receive the benefits specified hereunder in the event of the Participant's death. No beneficiary designation shall become effective until it is filed with the Committee. If there is no such designation or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the participant's estate shall be the Beneficiary. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (a) to that person's living parent(s) to act as custodian, (b) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (c) if no parent 11 12 of that person is then living, to a custodian selected by the Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Section 4.6 Withholding. There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes which are required to be withheld by the Company in respect to such payment or this Plan. The Company shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes. Section 4.7 Amendment, Modification, Suspension or Termination. The Compensation Committee may amend, modify, suspend or terminate this Plan in whole or in part, except that no amendment, modification, suspension or termination shall have any retroactive effect to reduce any amounts allocated to a Participant's Stock Account. In the event that this Plan is terminated, the amounts allocated to a Participant's Stock Account shall be distributed to the Participant or, in the event of his or her death, his or her Beneficiary in a lump sum within 30 days following the date of termination. Section 4.8 Governing Law. This Plan shall be construed, governed and administered in accordance with the laws of the United States and, to the extent not preempted by such law, by the laws of the State of California. Section 4.9 Receipt or Release. Any payment to a Participant or the Participant's Beneficiary in accordance with the provisions of the Plan shall to the extent thereof, be in full satisfaction of all claims for benefits under this Plan against the Committee and the Company. The Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. 12 13 Section 4.10 Effective Date. This Plan shall be effective as of November 1, 2000. IN WITNESS WHEREOF, this Plan is adopted as of November 1, 2000. PACIFICARE HEALTH SYSTEMS, INC. ------------------------------------ By: Title: 13 EX-99.2 5 a72432ex99-2.txt EXHIBIT 99.2 1 EXHIBIT 99.2 CONSULTING AGREEMENT This CONSULTING AGREEMENT, dated as of January 1, 2001 (this "Agreement"), is made and entered into by and between PacifiCare Health Systems, Inc., a Delaware corporation ("Company"), and DAVID REED, an individual ("Consultant"), with reference to the following facts: PREAMBLE A. The Company desires to engage Consultant, as a consultant on an independent contracting basis, to act as the Chairman of the Board of Directors of the Company and to assist the Company in the area of executive and strategic management including, without limitation, assistance in strategic planning and transitional management and direction; and B. Consultant desires to accept such engagement, in accordance with the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the above premises and the covenants and promises exchanged by the parties hereinbelow, the Company and Consultant hereby agree as follows: ARTICLE 1 CONSULTING SERVICES 1.1 Duties. The Company hereby engages Consultant as an independent contractor to provide the Company with services as Chairman of the Company's Board of Directors. As Chairman, Consultant shall be responsible for working with and assisting the Executive Committee in carrying out its responsibilities. The Chairman is the primary line of communication between management and the Company's Executive Committee. The Chairman is responsible for (i) oversight of and communicating and coordinating with the Company's Chief Executive Officer in the discharge of his or her duties; (ii) for communicating with and reporting to the Company's Board of Directors; and (iii) responding or determining with the Company's Executive Committee who should respond to investor relations and media inquiries. Consultant agrees to perform those services described above (the "Consulting Services"), and Consultant hereby accepts such engagement. In connection with the performance of the Consulting Services, Consultant shall do and perform any and all services, acts, or things incident thereto which may be necessary, advisable, or appropriate to fully perform the Consulting Services. 1.2 Method of Performing Services. Consultant shall perform the Consulting Services as an independent consultant and the method, details, and means of performing the Consulting Services shall be determined by Consultant in his sole discretion. 1.3 Devotion of Skills and Time. Consultant shall use its best efforts, skills, and abilities to perform the Consulting Services. While Consultant may perform services for other clients as he sees fit, Consultant shall not engage in any activities during the term of this Agreement which would unreasonably interfere with his performance of the Consulting Services as required hereunder or which would interfere with his fiduciary obligations as Chairman of the Board of Directors. 1 2 ARTICLE 2 TERM AND TERMINATION 2.1 Term. The term of this Agreement (the "Term") shall commence on January 1, 2001 and shall continue until the earlier of: (1) Consultant's resignation from or failure to be reelected as Chairman of the Board of Directors of the Company; or (2) this Agreement's termination in accordance with Section 2.2 below. 2.2 Termination. This Agreement may be terminated only as follows: 2.2.1 Written Election. Either the Company or Consultant may terminate this Agreement at any time, without cause, upon sixty (60) calendar days prior written notice to the other party. 2.2.2 Automatic Termination. This Agreement shall automatically terminate upon the bankruptcy, insolvency, death or mental incapacity of Consultant. 2.2.3 Breach. The Company, in its sole discretion, may terminate this Agreement "for cause" effective upon written notice to Consultant if Consultant has committed a material default under, or a breach of, this Agreement, has committed an act of gross misconduct, or has breached his fiduciary duties. For the purposes of this Agreement, the term "act of gross misconduct" shall mean the commission of any theft offense, misappropriation of funds, dishonest or fraudulent conduct, or the use of any Confidential Information (as defined in Section 5.2) in violation of the provisions of Article 5 below. 2.2.4 Nonpayment. Consultant, in his sole discretion, may terminate this Agreement effective upon written notice to the Company if the Company fails to pay the Compensation (as defined in Section 3.1) to Consultant within thirty (30) calendar days of the applicable payment's due date. 2.3 Effect of Termination. No termination of this Agreement shall affect or impair Consultant's right to continue to receive compensation earned through the effective date of this Agreement's termination. No termination of this Agreement shall relieve Consultant from his obligations arising under Article 5 of this Agreement. 2 3 ARTICLE 3 COMPENSATION 3.1 Payment of Consultant Fees. In consideration of the Consulting Services performed on the Company's behalf by Consultant during the Term of this Agreement, the Company shall pay Consultant annual compensation of $125,000, in 12 equal monthly installments, payable on the first of each month. 3.2 Participation in Stock Option Plan. Consultant, as Chairman of the Board of Directors of the Company, is an officer of the Company and therefore shall be entitled to participate in the stock option plan for non-employee Directors, and receive stock options at the same time(s) as Directors receive stock options. As Chairman of the Board of Directors, Consultant shall be entitled to twice as many options per grant as other members of the Board, subject to the approval of the Board of Directors. 3.3 Fees for Attending Board and Committee Meetings. As Chairman of the Board of Directors, Consultant shall be entitled to payment of all fees customarily paid to the Chairman of the Board, which include but are not necessarily limited to: (1) an annual retainer of $40,000; (2) twice the $1,200 fee to which other members of the Board are entitled for attendance at meetings of the Board; (3) the same $1,000 fee that other committee members receive for attendance at meetings of any committee of the Board of which Consultant is a member; (4) twice the $1,000 fee received by other committee members for attendance at meetings of any Board committee of which Consultant is Chairman. Consultant understands and agrees that the various fees set forth above are subject to change from time to time by the Board of Directors of the Company. 3.4 State and Federal Taxes. Consultant acknowledges and agrees that, as an independent contractor, he will be responsible for paying all required state and federal income taxes, social security contributions, self-employment taxes, and other mandatory taxes and contributions and that the Company shall neither withhold any amounts from the Compensation for such taxes or pay such taxes on Consultant's behalf. ARTICLE 4 RELATIONSHIP OF THE PARTIES The Company and Consultant acknowledge and agree that the following provisions shall further define and limit the scope of their relationship. 4.1 Independent Contractors. The Company and Consultant acknowledge and agree that Consultant enters into this Agreement as, and shall continue to be, an independent contractor of the Company and, other than being an officer of the Company by virtue of his position as Chairman of the Board of Directors of the Company, and as authorized by the Board of Directors, Consultant is not, and shall not become, an employee, officer, agent, joint venturer, partner, or owner of the Company or of any of the Company's affiliates. Nothing in this Agreement should be construed as establishing the relationship of employer and employee between the Company (or any affiliate of the Company) and 3 4 Consultant. Without limiting the generality of the foregoing, the Company and Consultant each acknowledges and agrees that Consultant is not an employee of the Company for state or federal tax purposes and that Consultant is not entitled to any benefits accorded the Company's employees, including, without limitation, worker's compensation, disability insurance, or vacation or sick pay. Each party to this Agreement is and shall remain professionally and economically independent of the other. However, Consultant may receive those benefits provided by the Company to members of the Board of Directors. 4.2 Liability for Obligations. Nothing contained in this Agreement shall cause, or be construed as causing, either party hereto to be liable or responsible for any debt, liability, or obligation of the other party owed to any third party, unless such liability or responsibility is assumed in writing by the party sought to be charged therewith. Each party shall be solely responsible for and shall hold the other party harmless against any obligation for payment of wages, salaries, or other compensation (including, without limitation, all state, federal, and local taxes and mandatory employee benefits), insurance, and voluntary employment related or other contractual or fringe benefits as may be due and payable to the party to, or on behalf of, such party's employees, agent, or contractors. ARTICLE 5 GENERAL PROVISIONS 5.1 Notices. Any and all notices, requests, invoices, consents, demands or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given and received (i) when delivered, (regardless of where delivery is made) if delivered personally, including personal delivery by commercial courier (ii) when delivered, if sent by United States registered or certified mail (return receipt requested), or (iii) on the second following business day, if sent by United States Express Mail or overnight courier, in the case of (ii) or (iii) to the parties at the following addresses (or at such other addresses as shall be specified by like notice) with postage or delivery charges prepaid: If to the Company: PacifiCare Health Systems, Inc. 3120 Lake Center Drive Santa Ana, California 92704 Attn: Chief Executive Officer 4 5 If to Consultant: David Reed 24602 Santa Clara Avenue Dana Point, California 92629 5.2 Amendments; Waiver. This Agreement shall be amended, modified, revised or supplemented only by a dated written instrument executed by the Company and Consultant. No waiver of any provision of this Agreement shall be effective unless evidenced by a dated, written instrument executed by the party against whom enforcement is sought. No waiver of any provision hereof shall be construed as a further or continuing waiver of such provision or any other provision hereof. 5.3 Integrated Agreement. This Agreement constitutes the final written integrated expression of all the agreements between the Company (and any affiliate of the Company) and Consultant with respect to Consultant's engagement as a consultant with the Company and is a complete and exclusive statement of those terms. This Agreement supersedes all prior or contemporaneous written or oral memoranda, arrangements, agreements, contracts, communications or understandings between the parties hereto relating to the subject matter hereof. Any representations, promises, warranties, or statements made by either party which differ in any way from the terms of this Agreement shall be given no force or effect. The parties specifically represent, each to the other, that there are no additional or supplemental agreements or contracts between them related in any way to the matters herein contained. 5.4 Severability. In the event that any provision in this Agreement shall be found by a court or governmental authority of competent jurisdiction to be invalid, illegal or unenforceable, such provision shall be construed and enforced as if it had been narrowly drawn so as not to be invalid, illegal or unenforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 5.5 Assignment. Because of the personal nature of the services to be rendered hereunder, this Agreement may not be assigned, in whole or in part, by Consultant. Subject to the foregoing limitation, this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, legatees, devisees, executors(trixes), administrators, legal representatives, successors and assigns. 5.6 Section Headings. The section and article headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 5.7 Gender. The use of any gender in referring to any person on this Agreement shall apply to that individual or entity whether such is masculine, feminine, or neuter. Hence, the use of the words "it" or "its," "him" or "his," or "her" or "hers" shall be interchangeable when the context so requires. 5 6 5.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principals of conflicts of law. 5.9 Confidentiality of Certain Information. Consultant acknowledges and agrees that, during the term of his engagement with the Company, Consultant may have access to certain individually identifiable personal information which is in the Company's possession for the purpose of the Company's performance of its business, and that Consultant and his assistants, employees and agents shall maintain the confidentiality of all such information and shall, in the performance of the Consulting Services, abide by all state and federal laws applicable to the confidentiality of such information. 5.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be considered one and the same agreement. IN WITNESS WHEREOF, the Company and Consultant have executed this Agreement on and as of the date first written above. The Company: PacifiCare Health Systems, Inc. A Delaware corporation By: --------------------------- Title: ------------------------ Consultant: ------------------------------- David Reed 6 EX-99.3 6 a72432ex99-3.txt EXHIBIT 99.3 1 EXHIBIT 99.3 SENIOR EXECUTIVE EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of DATE by and between PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation (the "Company"), with its principal place of business located at 3120 Lake Center Drive, Santa Ana, California 92704 and NAME ("Executive"), residing at ADDRESS. RECITALS WHEREAS, the Company desires to continue Executive's employment in the capacity of TITLE. WHEREAS, the Company and Executive are entering into this Agreement to establish new terms and conditions of the employment relationship. NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows: 1. EMPLOYMENT 1.1 Executive's General Duties. The Company employs Executive and Executive serves the Company in the capacity of TITLE, having such usual and customary duties and authority as an officer of similar capacity in a corporation of comparable size, holdings, and business as that of the Company. Executive shall do and perform all services, acts, or things necessary or advisable to manage and conduct the business of the Company and shall preside over such other areas of corporate activity as specified from time to time by the Board of Directors of the Company. During the term of this Agreement, Executive shall perform such additional or different duties, and accept the election or appointment to such other offices or positions as are mutually agreed upon by Executive and the Company. 1.2 Devotion of Executive. During the term of this Agreement, Executive shall devote his entire productive time, ability, and attention to the business of the Company. Executive shall use Executive's best efforts, skills, and abilities to promote the general welfare and interests of the Company and to preserve, maintain, and foster the Company's business and business relationships with all persons and entities associated therewith, including, without limitation, employer groups, medical service providers, shareholders, affiliates, officers, employees, - 1 - 2 and banks and other financial institutions. The Company shall give Executive a reasonable opportunity to perform Executive's duties and shall neither expect Executive to devote more time, nor assign more duties or functions to Executive, than are customary and reasonable for a person in Executive's position. 2. TERM AND TERMINATION 2.1 Term. The initial term of Executive's employment under this Agreement shall be 18/24 months, commencing on the effective date of this Agreement. The Company may extend this Agreement for successive one-year terms by giving Executive written notice at least 60 days prior to the expiration of the term. Notwithstanding the foregoing, if a Change-of-Control occurs, as defined in Section 5.1(c) of this Agreement, then the term of the Agreement shall be extended for a period of 24 months from the effective date of the Change-of-Control. This Agreement is subject to termination prior to the expiration of its term, as provided in Section 2.2. 2.2 Termination. This Agreement, and Executive's employment with the Company, shall be terminated upon the occurrence of any one of the following events: a. The death of the Executive. b. Executive becomes incapacitated or disabled, which incapacity or disability prevents Executive from fully performing his duties to the Company for a period in excess of 90 days and, after such 90-day period, the Company and a physician, duly licensed and qualified in the specialty of Executive's incapacity, decide in their reasonable judgments, that such incapacity will be of such continued duration as to prevent Executive from resuming the rendition of services to the Company for at least an additional six-month period. For purposes of this Agreement, Executive shall be deemed permanently disabled, and this Agreement terminated upon the date Executive receives written notice from the Company that such determination has been made. c. Executive habitually neglects his duties to the Company or engages in gross misconduct during the term of this Agreement. For the purposes of this Agreement, "gross misconduct" shall mean Executive's misappropriation of funds; securities fraud; insider trading; unauthorized possession of corporate property; the sale, distribution, possession or use of a controlled substance; or conviction of any criminal offense (whether or not such criminal offense is committed in connection with Executive's duties hereunder or in the course of his employment with the Company). In such event, Executive's termination shall be effective immediately upon receipt of written notice from the Company. d. Either party hereto may terminate this Agreement, with or without cause, upon 45 days prior written notice to the other party. Except for the circumstances described in Section 2.2(b) and Section 2.2(c) above, Executive's termination shall be effective 45 days after receipt of such written notice. - 2 - 3 3. COMPENSATION DURING THE TERM OF THIS AGREEMENT 3.1 Base Salary. As long as Executive satisfactorily performs all of his obligations under this Agreement, the Company shall pay Executive an annual base salary, payable in equal installments on the Company's regular payroll dates. As of this date, Executive's annual base salary has been set at $ AMOUNT. On an annual basis, the Company shall review Executive's salary, but shall be under no obligation to increase Executive's salary. Executive authorizes the Company to take such deductions and withholdings from his salary as are required by law, directed by Executive, or as reasonably directed by the Company for its employees, which deductions shall include, without limitation, withholding for federal and state income taxes and social security. 3.2 Benefits. Executive shall be entitled to fully participate in all of the employee benefit plans and programs available to other high-level executives of the Company, including, without limitation, health, dental, and life insurance benefits for Executive and Executive's dependents, pension and profit sharing programs, and vacation and sick leave benefits. However, the terms of this Agreement shall not restrict the Company's right to change, amend, modify, or terminate any existing benefit plan or program, or to change any insurance company or modify any insurance policy adopted incident to such existing benefit plan and program. 3.3 Automobile Allowance. The Company shall provide Executive with a $850.00/$750.00/$550.00 (eight hundred and fifty dollars/seven hundred and fifty dollars/five hundred and fifty dollars) per month automobile allowance. The Company shall furnish Executive with a cellular telephone. Executive shall provide and maintain automobile insurance for Executive's car including collision, comprehensive liability, personal and property damage, and uninsured and underinsured motorist coverage in amounts customarily obtained to cover such contingencies in the State of California. Executive shall provide proof of such coverage to the Company upon the Company's request. 3.4 Reimbursement of Expenses. The Company shall pay for or reimburse Executive for all reasonable travel, entertainment, and other business expenses incurred or paid for by Executive in connection with the performance of his services under this Agreement. The Company shall not be obligated to make any such reimbursement unless Executive presents corresponding expense statements or vouchers and such other supporting information as the Company may from time to time reasonably request. The Company reserves the right to place subsequent limitations or restrictions on business expenses to be incurred or reimbursed. 3.5 Annual Incentive Plan. Executive shall be entitled to participate fully in the Company's 1996 Management Incentive Compensation Plan, as amended (the "MICP"), and as may be further amended, modified, or replaced, from time to time, in accordance with the terms and conditions set forth herein and therein. 3.6 Stock Option Plans. Executive shall be entitled to participate in the applicable Stock Option Plans for Officers and Key Employees of PacifiCare Health Systems, Inc., as amended, and as may be further amended modified or replaced, from time to time, in accordance with the terms and conditions set forth herein and therein. - 3 - 4 3.7 Insurance. During the term of this Agreement, the Company shall insure Executive under its general liability insurance for all conduct committed in good faith while acting in the capacity of TITLE of the Company or in any other capacity to which Executive may be appointed or elected. 3.8 Savings and Profit Sharing Plan. As part of the compensation for services rendered under this Agreement, Executive shall be entitled to participate in the Amended and Restated PacifiCare Health Systems, Inc. Savings and Profit-Sharing Plan, and the trust agreement implemented pursuant thereto, adopted as of July 1999, as amended, and as may be further amended, modified, or replaced, from time to time in accordance with the terms and conditions set forth therein. 3.9 Non-Qualified Deferred Compensation Plans. Executive shall be entitled to participate in any non-qualified deferred compensation plan established by the Company, including, without limitation, the Company's Statutory Restoration Plan, Deferred Compensation Plan, and such other plans as may be applicable, as such plans may be amended, modified or replaced, from time to time, in accordance with the terms set forth herein and therein. 4. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT PURSUANT TO SECTION 2.2 4.1 Death. In the event that this Agreement is terminated by reason of Executive's death, Executive's estate or legal representative shall be entitled to receive the following: a. Payment of benefits under the life insurance policy purchased by the Company on Executive's behalf, if any; b. Payments of benefits under the MICP set forth in Section 3.5 in accordance with the terms of the MICP plan document; c. Executive's legal representative shall be permitted to exercise any vested and unexercised options granted under the 1996 Stock Option Plan and any other existing stock option plans of the Company (collectively, the "Stock Option Plans") in accordance with their terms for a period of one year following Executive's death. 4.2 Disability. In the event that Executive is terminated because of incapacity or disability, the Company shall provide Executive with the following: a. Payment of benefits under the disability insurance policy maintained by the Company on Executive's behalf, if any; - 4 - 5 b. Payment of benefits under the MICP set forth in Section 3.5 in accordance with the terms of the MICP plan document; c. The right to exercise any vested and unexercised options under the Stock Option Plans in accordance with the terms stated therein; d. Payment of the automobile allowance as provided under Section 3.3 for a period of 18 months following the effective date of such termination. 4.3 Neglect, Misconduct or Voluntary Termination. In the event this Agreement is terminated because of Executive's habitual neglect or gross misconduct pursuant to Section 2.2(c) or because of Executive's voluntary termination, the Company shall be relieved from any and all further or future obligations to compensate Executive; provided, however, that Executive shall be able to exercise any vested and unexercised awards under the Stock Option Plans in accordance with the terms set forth therein. 4.4 Discharge. In the event that the Company terminates Executive under circumstances other than a Change-of-Control (as defined herein) and for any reason other than Executive's incapacity or disability or neglect/misconduct as described in Sections 2.2(b) and 2.2(c), respectively, then Executive shall be entitled to the following compensation: a. An amount equal to one and one-half/two times Executive's then current annual salary under Section 3.1; b. An amount equal to one and one-half/two times the average of the last two MICP bonuses paid to Executive. If Executive has been employed by the Company for more than one, but less than two years, then the MICP bonus severance payment shall equal one and one-half/two times the average of the MICP bonus paid to Executive for the prior year and the target for Executive for the current year. If Executive has been employed by the Company for less than one year, Executive will not receive any bonus severance payment. For purposes of this Section 4.4(b), the word "paid" shall include $0.00 for any year in which Executive was eligible for, but was not paid, an MICP bonus; c. The right to exercise any vested and unexercised options under the Stock Option Plans in accordance with their terms within one year of the effective date of such termination; d. Continuation of Executive's and his/her dependents' medical, dental and vision benefits for a period of 18/24 months following the effective date of such termination; e. An amount equal to 18/24 months of Executive's automobile allowance; f. The Company shall provide to Executive outplacement services to assist Executive in securing a position comparable to the one from which Executive was terminated. The Company shall be obligated to provide those outplacement services which are customarily provided by companies of similar size and holdings as those of the Company to executives with comparable responsibility and longevity as Executive and for - 5 - 6 reasonable cost as approved by the Company. The Company's provision of such outplacement services shall not limit, restrict, or reduce, in any manner, any and all other compensation to which Executive is entitled hereunder; g. Executive shall receive, or have paid, the amounts of severance compensation provided in clauses (a), (b), and (e) above in equal installments over a period of 18/24 months. Payments will be made either in biweekly installments on the Company's regular paydays or as currently being paid to Executive; h. Notwithstanding the foregoing, in the event Executive engages in employment, whether as an employee, consultant or contractor with a competitor of the Company during the 18/24 month period in which Executive's salary continues pursuant to this Section 4.4, the severance compensation available to Executive under this Section 4.4 shall be reduced by the amount of any and all gross earnings Executive earns while engaged in employment with any such competitor or competitors. For the purposes of this Section 4.4, a "competitor of the Company" shall include, without limitation, managed care organizations, including a health maintenance organization, competitive medical plan, preferred provider organization, provider sponsored organization ("PSO"), or health or life insurance company which owns a managed care organization, plan or program. Executive agrees to provide immediate notice to Company upon receipt of any gross earnings received by Executive from a competitor of Company. Quarterly, Executive shall provide the Company a certificate certifying as to his/her employment status and if employed, the name and business of his/her current employer; i. If Executive is rehired by Company, payments of severance compensation provided for in this Section 4.4 shall cease; and j. If Executive dies while receiving the salary continuation benefit as provided in this Section 4.4, Executive's estate will receive a lump sum payment of the remaining salary continuation benefit. 5. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT AS A RESULT OF A CHANGE-OF-CONTROL 5.1 Termination of Employment or Resignation for Good Cause a. Executive's Rights. In the event that, during the term of this Agreement, the Company undergoes a Change-of-Control, (as that term is defined below) and if within 24 months after the consummation of such change either (1) Executive is involuntarily terminated, except as provided in Section 5.1(b), or (2) Executive voluntarily terminates his employment for "good cause" as defined in Section 5.1(d), then Executive shall be entitled to the following compensation: 1. A lump sum payment consisting of: (i) an amount equal to two/three times Executive's then annual salary; (ii) an amount equal to two/three times the average of the last two MICP bonuses paid to Executive; (iii) a prorated bonus based on target opportunity for the year in which the Change-of-Control occurs; (iv) an - 6 - 7 amount equal to the equivalent of the cost of 24/36 months of COBRA benefits; and (v) an amount equal to 24/36 months of Executive's automobile allowance. If Executive has been employed for more than one, but less than two years, then the amount attributable to the MICP bonus portion set forth in clause (ii) above shall equal two/three times the average of the MICP bonus paid to Executive for the prior year and the target for Executive for the current year. If Executive has been employed for less than one year, Executive shall receive an amount equal to two/three times target bonus for the current year. For purposes of this Section 5.1(a)(1), the word "paid" shall include $0.00 for any year in which Executive was eligible for, but was not paid, an MICP bonus. 2. The right to exercise any and all unexercised stock options granted under the Stock Option Plans in accordance with their terms, as if all such unexercised stock options were fully vested, within one year of the effective date of such termination; 3. A payment to executive to compensate for any excise penalty or other associated taxes resulting from severance payments exceeding the cap imposed by Internal Revenue Code Section 280(G); 4. The Company shall provide to Executive the outplacement services described in Section 4.4(f). b. Limitation of Benefits. In the event that Executive is terminated within 24 months after a Change-of-Control of the Company, and such termination results from either Executive's death, incapacity or disability or habitual neglect or gross misconduct, then, notwithstanding anything in this Article 5 to the contrary, Executive shall receive only that compensation, if any, to which he is entitled to under Sections 4.1, 4.2 and 4.3, respectively. c. Change-of-Control. As used in this Article 5, the term "Change-of-Control" means and refers to: 1. Any merger, consolidation, or sale of the Company such that any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) acquires beneficial ownership, within the meaning of Rule 13d-3 of the Exchange Act, of 20 percent or more of the voting common stock of the Company; 2. Any transaction in which the Company sells substantially all of its material assets; 3. A dissolution or liquidation of the Company; 4. The Company becomes a non-publicly held company; or - 7 - 8 5. The "Incumbent Directors" cease for any reason to constitute a majority of the Board of Directors. "Incumbent Directors" shall be those directors who, as of December 20, 2000, constitute the Board and any individual who becomes a director subsequent to December 20, 2000 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least fifty percent (50%) of the Incumbent Directors, excluding, however, any such individual who initially assumes office as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or entity other than the Board. d. Good Cause. As used in this Agreement "good cause" for Executive to terminate his employment shall be deemed to exist if Executive voluntarily terminates employment within 24 months of a Change-of-Control for any of the following reasons: 1. Without Executive's express prior written consent, Executive is assigned duties materially inconsistent with Executive's position, duties, responsibilities, or status with the Company which substantially varies from that which existed immediately prior to such Change-of-Control; 2. Without Executive's express prior written consent, Executive experiences a change in his reporting level, titles, or business location (or more than 50 miles from his current business location or residence whichever is closer to the new business location) which substantially varies from that which existed immediately prior to the Change-of-Control; except that if Executive is not located at the Company's corporate headquarters in California, a relocation to the Company's corporate headquarters in California shall not be deemed a substantial variation, unless Executive's reporting level or title is also substantially varied; 3. Without Executive's express prior written consent, Executive is removed from any position held immediately prior to the Change-of-Control, or if Executive fails to obtain reelection to any position held immediately prior to the Change-of-Control, which removal or failure to reelect is not directly related to Executive's incapacity or disability, habitual neglect, gross misconduct or death; 4. Without Executive's express prior written consent, Executive experiences a reduction in salary of more than 10 percent below that which existed immediately prior to the Change-of-Control; 5. Without Executive's express prior written consent, Executive experiences an elimination or reduction of any employee benefit, business expense reimbursement or allotment, incentive bonus program, or any other manner or form of compensation available to Executive immediately prior to the Change-of-Control and such change is not otherwise applied to others in the Company with Executive's position or title; - 8 - 9 6. The Company fails to obtain from any successor, before the succession takes place, a written commitment obligating the successor to perform this Agreement in accordance with all of its terms and conditions; or 7. The Company or any successor thereto purports to terminate Executive pursuant to Section 4.4 without first giving Executive prior written notice thereof that specifies the facts and circumstances, in reasonable detail, serving as the basis for Executive's termination. 5.2 Resignation for Other Than Good Cause After a Change-of-Control. In the event that the Company undergoes a Change-of-Control and Executive remains with the Company for 12 months following the effective date of the Change-of-Control, Executive will be given a 30-day "window period" in which to elect to voluntarily terminate Executive's employment for reasons other than good cause. Should Executive choose to terminate Executive's employment within the 30-day "window period," then Executive shall be entitled to the following compensation: a. One-half the lump sum payment referred to in Section 5.1(a)(1). b. The right to exercise all vested and unexercised stock options granted under the Stock Option Plans in accordance with their terms within one year of the effective date of such termination. c. Outplacement services as defined in Section 4.4(f). 6. CONFIDENTIALITY AND OWNERSHIP OF PROPRIETARY INFORMATION 6.1 Confidential Information. Executive acknowledges that, during the course of Executive's employment with the Company or with any subsidiary or affiliate of the Company, Executive will have access to certain confidential information in the form of know-how, trade secrets, or proprietary information of the Company or its subsidiaries or affiliates ("Confidential Information") and that such Confidential Information will be acquired in confidence and as a fiduciary of the Company or its subsidiaries or affiliates. For the purposes of this Agreement, Confidential Information shall include, without limitation, member health data and medical records, any and all cost and expense data, marketing and customer data, sales manuals, underwriting guidelines, case management policies and procedures, utilization review and quality assurance policies and procedures, provider manuals, individual and group subscriber information (including, the name, address, telephone number, or contact person for an individual or group subscriber), subscriber group manuals, processes, designs, devices, compilations of information, operational techniques operating manuals, symbols, service marks, logos, customer and vendor lists (including, without limitation, lists of subscribers, subscriber groups, clients, brokers, and providers contracting with the Company or any subsidiary or affiliate of the Company), business information, marketing programs, plans, and strategies, research and development plans, contracts and licenses, licensing techniques and practices, advertising and promotional materials, financial information and strategies, computer software and other computer-related materials, copyrightable material, security controls, including computer system passwords, and other legally protected information owned by or used in the respective businesses of the Company or its subsidiaries or affiliates which are confidential or proprietary in nature. In - 9 - 10 addition to the foregoing, Confidential Information also includes any information which is not generally known to the public, or within the market or trade in which the Company competes, and the physical embodiments of such information in any tangible form, whether written or machine-readable in nature, or any information which is marked or designated as "Confidential" or "Proprietary." 6.2 Ownership of Inventions. Executive agrees to assign and does hereby assign to the Company any and all ideas, designs, know-how, programs, improvements, inventions, discoveries and literary creations (collectively referred to as "Inventions") which Executive alone or with others may conceive or make, and which (a) are made wholly or partially with the Company's assets or confidential or trade secret information; or (b) are developed wholly or partially on the Company's time; or (c) relate at the time of conception or reduction to practice to the Company's business, including actual or demonstrably anticipated research or development of the Company; or (d) result from Executive's work for the Company. Such Inventions are and shall be the property of the Company and shall be deemed to be part of the Company's business, whether or not any applications for patents, trademarks or copyrights are filed thereon. Further, all such Inventions shall constitute Confidential Information. Executive shall not claim to own any Inventions relating to the business of the Company. Executive agrees that, upon request of the Company, Executive shall execute any and all papers and do all other lawful acts that may be required by the Company in order to make applications for Letters Patent, of the United States and of any and all other countries, on such Inventions, or that may be required to vest ownership of such applications, patents and copyrights in the Company, or that may be required to prosecute or obtain such patents, or to maintain, preserve or enforce the rights of the Company in such Inventions, patents and copyrights. Except as otherwise prohibited by law (including but not limited to California Labor Code section 2870), and execept for Inventions made prior to commencement of Executive's employment with the Company, in addition to the above assignment of Inventions to the Company, without further consideration, Executive hereby fully, forever, and irrevocably assigns, transfers, and conveys to the Company: (i) all patents, patent applications, copyrights, mask works, trade secrets, and other intellectual property rights in any Invention; and (ii) any and all "Moral Rights" (as defined below) which Executive may have in, to, or with respect to any Invention. For purposes of this Agreement, "Moral Rights" shall mean any rights to claim authorship of an Invention, to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a "moral right." Executive will promptly disclose any Inventions to the Company whether developed or created alone or jointly with others. 6.3 Confidentiality Covenant. Executive acknowledges and agrees that maintaining the confidentiality of all of the Confidential Information is integral to the value of the Company and is vital to the successful operations of the Company and its subsidiaries and affiliates. In view of the foregoing, Executive agrees to maintain the confidentiality of all Confidential Information and to not disclose, divulge, exploit, or use, in any manner whatsoever, the Confidential Information for Executive's own benefit or the benefit of another person. Executive will additionally take all reasonable precautions to prevent the inadvertent or accidental exposure of the Confidential Information. Executive shall not remove any Confidential Information from the Company's premises or make copies of any of such information except for the benefit of the - 10 - 11 Company and in furtherance of Executive's duties as an employee of the Company. Upon Executive's termination of employment with the Company, Executive shall not remove from the Company's premises any materials containing any Confidential Information, and will promptly return to the Company any material which contain Confidential Information which are in Executive's possession or control. 6.4 Equitable Relief. Executive acknowledges and agrees that it would be difficult to measure the damage to the Company (or any subsidiary or affiliate, as the case may be) from any breach of Executive's obligations under this Article 6, that injury to the Company (or to any subsidiary or affiliate, as the case may be) from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Therefore, Executive acknowledges and agrees that the Company, in addition to any of its other rights or remedies, shall be entitled to seek injunctive or other equitable relief without bond or other security in the event of an actual or threatened breach of this Agreement. The obligations of Executive and the rights and remedies of the Company under this Agreement are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies created by applicable patent, copyright, or other laws, including the statutory and common laws governing unfair competition, misappropriation or theft of trade secrets, proprietary rights, or confidential information generally. 6.5 Survival of Obligations. Executive's obligations under this Article 6 shall survive the termination of Executive's employment regardless of the manner of such termination and shall be binding upon Executive's heirs, executors, administrators and legal representatives. The remedies to which the Company is entitled under this Article 6 shall survive the termination of Executive's employment with the Company until the expiration of the statute of limitations period applicable to any claims which may arise under this Article 6. 7. NOTICES All notices or other communications required or permitted to be made hereunder shall be given in writing and sent by either personal delivery, overnight delivery, or United States registered or certified mail, return receipt requested, all of which shall be properly addressed with postal or delivery charges prepaid, to the parties at their respective addresses set forth below, or to such other addresses as either party may designate to the other in accordance with this Article 7: If to the Company: PacifiCare Health Systems, Inc. 3120 Lake Center Drive Santa Ana, California 92704 Attn: President and Chief Executive Officer If to Executive: NAME ADDRESS CITY/STATE ZIP CODE All notices sent by personal delivery shall be deemed given when actually received. All notices sent by overnight delivery shall be deemed received on the next business day. All other notices sent via - 11 - 12 United States mail shall be deemed received no later than two business days after mailing. Any notice given by any method not expressly authorized herein, shall nevertheless be effective if actually received, and shall be deemed given upon actual receipt. 8. GENERAL PROVISIONS 8.1 Severance Agreement. Any payments of compensation made pursuant to Articles 4 and 5 are contingent on Executive executing the Company's standard severance agreement, including a general release of the Company, its owners, partners, stockholders, directors, officers, employees, independent contractors, agents, attorneys, representatives, predecessors, successors and assigns, parents, subsidiaries, affiliated entities and related entities. 8.2 Assignability. This Agreement shall inure to the benefit of, and shall be binding upon the heirs, executors, administrators, successors, and legal representatives of Executive and shall inure to the benefit of, and be binding upon the Company and its successors and assigns. Executive shall not assign, delegate, subdelegate, transfer, pledge, encumber, hypothecate, or otherwise dispose of this Agreement, or any rights, obligations, or duties hereunder, and any such attempted delegation or disposition shall be null and void and without any force or effect; provided, however, that nothing contained herein shall prevent Executive from designating beneficiaries for insurance, death or retirement benefits. 8.3 Entire Agreement. This Agreement is a fully integrated document and contains any and all promises, covenants, and agreements between the parties hereto with respect to Executive's employment. This Agreement supersedes any and all other, prior or contemporaneous, discussions, negotiations, representations, warranties, covenants, conditions, and agreements, whether written or oral, between the parties hereto. Except as expressed herein, the parties have not exchanged any other representations, warranties, inducements, promises, or agreements respecting Executive's employment with the Company. 8.4 Severability. In the event any one or more of the provisions of this Agreement shall be rendered by a court of competent jurisdiction to be invalid, illegal, or unenforceable, in any respect, such invalidity, illegality, or unenforceability shall not affect or impair the remainder of this Agreement which shall remain in full force and effect and enforced accordingly, unless a party demonstrates by a preponderance of the evidence that the invalidated provision was an essential economic term of this Agreement. 8.5 Amendment. This Agreement shall not be changed, amended, or modified, nor shall any performance or condition hereunder be waived, in whole or in part, except by written instrument signed by the party against whom enforcement or waiver is sought. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other or subsequent breach of the same or any other term or condition of this Agreement. 8.6 Governing Law. This Agreement shall be governed by, enforced under, and construed in accordance with the laws of the State of California. - 12 - 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. The Company: PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation By: ---------------------------- Executive: -------------------------------- Name - 13 - EX-99.4 7 a72432ex99-4.txt EXHIBIT 99.4 1 EXHIBIT 99.4 FIRST AMENDMENT TO SENIOR EXECUTIVE EMPLOYMENT AGREEMENT This First Amendment to Senior Executive Employment Agreement, dated as of DATE (the "Amendment"), hereby amends the Senior Executive Employment Agreement, dated as of March 30, 2001 (the "Agreement"), between PacifiCare Health Systems, Inc., a Delaware corporation and NAME, an individual ("Executive"), as follows: 1. AMENDMENT OF SECTION 2.1 OF THE AGREEMENT. The parties hereby amend the Agreement by adding the following sentences at the end of Section 2.1: In the event that at the end of the term of this Agreement, the Company neither renews the Agreement nor offers Executive a new employment agreement, then Executive's employment with the Company shall terminate pursuant to Section 2.2(d) of this Agreement. If the Company offers Executive a new employment agreement but Executive does not accept the new employment agreement, then Executive's continued employment with the Company will be without the benefit of a written employment agreement, in which case Executive's entitlement to severance benefits on termination shall be governed by then-existing Company policies and practices. 2. LIMITATION OF AMENDMENTS. Except as expressly provided herein, no terms or provisions of any agreement or instrument are modified or changed by this Amendment and the terms and provisions of the Agreement, as amended by this Amendment, shall continue in full force and effect. 3. GOVERNING LAW. This Amendment shall be construed, interpreted and enforced in accordance with, and governed by California law. 4. CAPITALIZED TERMS. Capitalized terms not defined herein shall have the meanings ascribed to them in the Agreement. 5. DUPLICATE ORIGINALS; EXECUTION IN COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be an original but all of which together shall constitute one and the same instrument. 6. WAIVERS AND AMENDMENTS. Neither this Amendment nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 7. SECTION HEADINGS. The titles of the sections hereof appear as a matter of convenience only, do not constitute a part of this Amendment and shall not affect the construction hereof. 1 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. The Company: PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation ---------------------------------------- By: Title: Executive: ---------------------------------------- Name 2 -----END PRIVACY-ENHANCED MESSAGE-----

EX-15

   1

                                                                      EXHIBIT 15


               LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION


The Board of Directors
PacifiCare Health Systems, Inc.

We are aware of the incorporation by reference in the Registration Statement
(Form S-8 number 333-44038) and related Prospectus pertaining to the 2000
Employee Plan and 2000 Non-Employee Directors Plan of PacifiCare Health Systems,
Inc. and in the Registration Statement (Form S-8 number 333-49272) and related
Prospectus pertaining to the 1996 Stock Option Plan for Officers and Key
Employees and the related Prospectus pertaining to the 1996 Non-Officer
Directors Stock Option Plan of PacifiCare Health Systems, Inc. and in the
Registration Statement (Form S-8 number 333-48377) and related Prospectus
pertaining to the 1997 Premium Priced Stock Option Plan and the related
Prospectus pertaining to the Amendment and Restatement of the PacifiCare Health
Systems, Inc. Savings and Profit-Sharing Plan of PacifiCare Health Systems, Inc.
of our report dated May 1, 2001 (except for Note 9, as to which the date is
May 3, 2001) relating to the unaudited condensed consolidated interim financial
statements of PacifiCare Health Systems, Inc. that are included in its Form 10-Q
for the quarters ended March 31, 2001 and 2000.


                                                               ERNST & YOUNG LLP

Irvine, California
May 9, 2001


                                       31

EX-20

   1


                                                                      EXHIBIT 20


                     INDEPENDENT ACCOUNTANTS' REVIEW REPORT


The Board of Directors
PacifiCare Health Systems, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of
PacifiCare Health Systems, Inc. as of March 31, 2001, and the related condensed
consolidated statements of operations and the condensed consolidated statements
of cash flows for the three-month periods ended March 31, 2001 and 2000. These
financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of PacifiCare
Health Systems, Inc. as of December 31, 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended [not presented herein] and in our report dated January 31, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

                                                               ERNST & YOUNG LLP


Irvine, California
May 1, 2001
  Except for Note 9, as to which the date is
  May 3, 2001



                                       32

EX-99.1

   1

                                                                    EXHIBIT 99.1

                           SECOND AMENDED AND RESTATED
                         PACIFICARE HEALTH SYSTEMS, INC.
                      STOCK UNIT DEFERRED COMPENSATION PLAN

     WHEREAS, PacifiCare Health Systems, Inc., (the "Company") has established a
non-qualified stock unit deferred compensation plan to provide supplemental
retirement income benefits for a select group of management and highly
compensated employees through deferrals of salary and bonuses, effective as of
December 18, 1997;

     WHEREAS, it is believed that providing for deferral of compensation at the
election of each executive will be in the best interests of the Company; and

     WHEREAS, the Company believes that it is in its best interests to amend and
restate this plan; and

     WHEREAS, the Company intends that this plan shall be maintained as a "top
hat" plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA:

     NOW, THEREFORE, it is hereby declared as follows:

                                    ARTICLE I
                                   DEFINITIONS

     Whenever the following words and phrases are used in this Plan, they shall
have the meanings specified below.

     Section 1.1 "Beneficiary" or "Beneficiaries" for purposes of this Plan
shall have the meaning set forth in Section 4.5.

     Section 1.2 "Board of Directors" or "Board" means the Board of Directors of
the Company.

     Section 1.3 "Bonus" means any cash incentive compensation payable to a
Participant in addition to the Participant's Salary, other than moving expenses,
sign-on bonuses or bonuses paid in connection with a promotion, prior to any
reduction for any deferrals to a plan qualified under Section 125 or Section 401
(k) of the Code.

     Section 1.4 "Change of Control" shall have the meaning set forth in Section
4.3.

     Section 1.5 "Common Stock" means the Company's Common Stock, par value
$0.01 per share.

     Section 1.6 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.



   2

     Section 1.7 "Committee" means the Committee appointed by the Compensation
Committee to administer the Plan in accordance with Article III.

     Section 1.8 "Company" means PacifiCare Health Systems, Inc., a Delaware
corporation, or any successor corporation.

     Section 1.9 "Compensation Committee" shall mean the Compensation Committee
of the Board of Directors of the Company.

     Section 1.10 "Disability." A Participant shall be deemed to be
incapacitated or disabled, if such Participant's incapacity or disability
prevents a Participant from fully performing his or her duties to an Employer
for a period in excess of 90 days and, after such 90-day period, the Company and
a physician, duly licensed and qualified in the specialty of the Participant's
incapacity or disability, decide in their reasonable judgments, that such
incapacity or disability will be permanent or of such continued duration as to
prevent a Participant from resuming the rendition of services to the Employer
for at least an additional six-month period.

     Section 1.11 "Eligible Employee" means any Employee of an Employer who the
Company has designated to be in executive salary grade of 15 or above, is a
Senior Vice President and is scheduled to work at least 32 hours per week.

     Section 1.12 "Employee" shall mean any employee (as defined in accordance
with the Treasury Regulations and Revenue Rulings then applicable under Section
3401 (c) of the Code) of an Employer, whether such employee is so employed at
the time this Plan is adopted or becomes so employed subsequent to the adoption
of this Plan.

     Section 1.13 "Employer" means the Company (or any successor by merger,
consolidation or purchase of substantially all of the Company's assets) and any
and all Subsidiaries of the Company.

     Section 1.14 "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.

     Section 1.15 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.

     Section 1.16 "Participant" means for purposes of this Plan, any Eligible
Employee who satisfies the requirements of Section 2.1.

     Section 1.18 "Payment Eligibility Date" means the first day of the month
following the end of the calendar quarter in which a Participant terminates
employment for any reason with all Employers or dies.

     Section 1.19 "Plan" means this Second Amended and Restated Stock Unit
Deferred Compensation Plan of PacifiCare Health Systems, Inc., as may be amended
from time to time.


                                       2

   3

     Section 1.20 "Plan Year" means the 12 consecutive month period beginning on
January 1 and ending on December 31 of the same year.

     Section 1.21 "Retirement" or "Retire", for purposes of this Plan, mean
termination of a Participant's employment from all Employers, which occurs after
the sum of the following two factors meet or exceed fifty-five (55): (i) the
Participant's age and (ii) the Participant's number of years of service with all
Employers.

     Section 1.22 "Salary" shall mean the Participant's Salary prior to any
reduction for deferrals to a plan qualified under Section 125 or Section 401 (k)
of the Code.

     Section 1.23 "Stock Unit" means a unit representing the right to receive a
share of Common Stock in accordance with the terms of this Plan.

     Section 1.24 "Stock Unit Account" is the cumulative number of Stock Units
assigned to a Participant in accordance with Section 2.2.

     Section 1.25 "Subsidiary" shall mean any corporation in an unbroken chain
of corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing 50
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.

                                   ARTICLE II
                            DEFERRAL OF COMPENSATION

Section 2.1 Eligibility.

     a. The Company's Chief Executive Officer (the "CEO") may elect to defer (on
a pre-tax basis) all, or a portion, of his or her Salary to be paid during a
Plan Year by filing an election to participate in this Plan on a form provided
by the Committee and filed with the Committee no later than the December 15th of
the preceding Plan Year. The election to defer shall apply to the Salary payable
during subsequent Plan Years until the CEO makes a new election; provided,
however, that the election may not be changed for the first Plan Year after an
election is made or for any Plan Year once the Plan Year has begun. The election
form filed by the CEO shall signify the CEO's acceptance of the terms of this
Plan and the portion of Salary that he elects to defer. Notwithstanding the
foregoing, the Committee may, in its sole and absolute discretion, permit the
Chief Executive Officer to file an application on or after December 15 if, in
its judgment, his or her failure to do so prior to said date was due to
reasonable cause, but in no event may such application be filed after December
31. All elections, once made, are irrevocable.

     b. The Compensation Committee shall determine at least 60 days prior to the
beginning of each Plan Year, the Eligible Employees, including the CEO, who may
defer all or a portion of Bonus pursuant to the provisions of this Plan for the
next Plan Year. The Committee


                                       3

   4

shall notify each Eligible Employee of his or her eligibility to participate in
this Plan at least 30 days prior to the time he or she must file an application
for participation. Any Eligible Employee may defer Bonus by filing an election
to participate in this Plan on a form provided by the Committee and filed with
the Committee no later than the December 15th of the preceding Plan Year. The
election to defer shall apply to the Bonus payable during subsequent Plan Years
until the Eligible Employee makes a new election; provided, however, that the
election may not be changed for the first Plan Year after an election is made or
for any Plan Year once the Plan Year has begun. Notwithstanding the foregoing,
the Committee may, in its sole and absolute discretion, permit an Eligible
Employee to file an application on or after December 15 if, in its judgment, his
or her failure to do so prior to said date was due to reasonable cause, but in
no event may such application be filed after December 31. All elections, once
made, are irrevocable.

Section 2.2 Stock Account.

     a. Any amount of Salary deferred by the CEO pursuant to Section 2.1 (a)
shall be converted into Stock Units of the Company's Common Stock. The number of
shares of Common Stock into which the deferred amount shall be converted shall
equal the amount of Salary deferred by the CEO multiplied by a risk premium (the
"Risk Premium") determined by the Compensation Committee at least 45 days prior
to the beginning of the next Plan Year, divided by the closing price of the
Common Stock as quoted on Nasdaq on a date selected by the Committee. The Stock
Units deferred pursuant to this provision shall be credited to a bookkeeping
account established for this purpose (the "Stock Unit Account") in the name of
the CEO. The number of Stock Units established by deferrals of Salary under this
Plan shall remain constant over the deferral period, except as provided in
Section 4.4.

     b. Any amount of Bonus deferred pursuant to this Section 2.2 by any
Participant shall be converted into Stock Units of the Company's Common Stock.
The number of shares of Common Stock into which the deferred amount shall be
converted shall equal the amount of Bonus deferred multiplied by the Risk
Premium divided by the closing price of the Common Stock as quoted on Nasdaq on
a date selected by the Committee. The Stock Units deferred pursuant to this
provision shall be credited to the Stock Unit Account in the name of each
Participant. The number of Stock Units established by deferrals of Bonus and
Salary under this Plan shall remain constant over the deferral period, except as
provided in Section 4.4.

     c. No fractional shares shall be deferred under this Plan. Accordingly, if
the conversion of Salary and/or a Bonus into Stock Units results in fractional
shares, such unit shall be rounded up to the next highest round number.


                                       4

   5

Section 2.3 Distribution of Deferred Compensation.

     (a) In the case of a Participant who terminates employment with all
Employers on or after Retirement or who terminates as a result of death or a
Disability, the aggregate amount credited to the Stock Unit Account (the
"Distributable Amount") shall be paid to the Participant (and after his death to
his or her Beneficiary) in the form of substantially equal quarterly
installments over five years beginning on a date as soon as administratively
possible from his or her Payment Eligibility Date. Notwithstanding the
foregoing, a Participant described in the preceding sentence may elect one of
the following optional forms of distribution provided that his or her election
is filed with the Committee at least one year prior to his or her termination of
employment with all Employers:

          (i)  a lump sum of the Distributable Amount payable as soon as
               administratively possible from the Participant's Payment
               Eligibility Date; or

          (ii) substantially equal quarterly installments over three years
               beginning on a date as soon as administratively possible from the
               Participant's Payment Eligibility Date.

For all purposes under this Plan, a Participant shall not be considered
terminated from employment with all Employers if the Participant remains
employed by an entity that is an Employer. However, if the Employee is employed
by an Employer and such Employer ceases to be an Employer as a result of a sale
or other corporate reorganization, such sale or other corporate reorganization
shall be treated as termination of employment with all Employers unless
immediately following such event and without any break in employment the
Participant remains employed by an Employer.

     (b) In the case of a Participant who terminates employment with all
Employers prior to Retirement for reasons other than a Disability, the
Distributable Amount shall be paid to the Participant in a lump sum on the
Participant's Payment Eligibility Date.

     (c) A Participant who has not terminated employment with all Employers may
change his or her form of payment applicable to the portion of the Stock Unit
Account balance attributable to one or more Plan Years to one of the payment
forms permitted by this Plan at least one year prior to the payment date to be
deferred. The Participant's payment election with respect to a given Plan Year
may not be changed after payment of that portion of the Stock Unit Account
balance has been made or has begun.

Section 2.4 Scheduled Early Distributions.

     Participants may elect to have Salary and/or Bonus deferred during a given
Plan Year be paid on a future date while still employed, provided the payment
date (the "Scheduled Payment Date") is at least two years from the last day of
such Plan Year. This election shall apply to the compensation deferred for the
Plan Year specified by the Participant on his or her payment election. A
Participant may elect a different Payment Date for compensation deferred for
each Plan Year. In addition, Scheduled Payment Dates elected pursuant to this
Section 2.4 may be


                                       5

   6

deferred by at least one year, by filing with the Committee written notice at
least one year prior to the Scheduled Payment Date. A Participant may elect to
defer a Scheduled Payment Date selected by this Section 2.4 once every two
years. A distribution pursuant to this Section 2.4 of less than the
Participant's entire interest in the Stock Unit Account shall be made pro rata
from his or her Stock Unit Accounts. All early distributions pursuant to this
Section 2.4 shall be made in either (i) a lump sum payment; (ii) quarterly
installments over a period of three years; or (iii) quarterly installments over
a period of five years. Notwithstanding the foregoing, if a Participant
terminates employment with the all Employers for any reason prior to the date on
which a payment is scheduled to be made pursuant to this Section 2.4, the
Participant's entire Stock Unit Account balance will be paid pursuant to the
provisions of Section 2.3.

Section 2.5 Distributions Upon A Change of Control.

     a. If a Change of Control occurs, the Stock Unit Account balance of each
Participant will be paid to the Participant (or Beneficiary) in a lump sum
within 30 days after such Change of Control.

     b. Following a Change in Control, no changes in the Plan, or in any
documents evidencing an election to defer compensation, and no adjustments,
determinations or other exercises of discretion by the Compensation Committee,
the Committee or the Company's board of directors that were made subsequent to
the Change in Control and that would have the effect of diminishing a
Participant's rights or payments under this Plan or this Section 2.5, or of
causing a Participant to recognize income (for federal income tax purposes) with
respect to a Participant's Stock Unit Account prior to the actual distribution
to a Participant of such Stock Unit Account, shall be effective.

Section 2.6. Form of Distribution.

     Upon the occurrence of any event giving rise to a distribution, amounts
deferred under this Plan shall be distributed in shares of Common Stock equal to
the number of Stock Units of Common Stock converted on the date of deferral as
determined by Article II. Such shares shall be distributed as provided in
Sections 2.3, 2.4, 2.5 and 2.7.

Section 2.7 Financial Hardship Withdrawals.

     The Committee may, pursuant to rules adopted by it and applied in a uniform
manner, accelerate the date of distribution of all or any portion of a
Participant's Stock Unit Account, because of a financial hardship. A financial
hardship means an unforeseeable, severe financial emergency resulting from (a) a
sudden and unexpected illness or accident of the Participant or his or her
dependent (as defined in Section 152(a) of the Code); (b) loss of the
Participant's property due to casualty; or (c) other similar extraordinary and
unforeseeable circumstances arising out of event beyond the control of the
Participant, which may not be relieved through other available resources of the
Participant, as determined by the Committee in accordance with uniform rules
adopted by it. Payment of any amount with respect to which a Participant has
filed a request under this Section 2.7 shall be made as soon as practicable
after approval of such request by the Committee, but shall be limited to the
amount necessary to satisfy the financial hardship. Distributions made pursuant
to this Section 2.7 shall be without penalty.


                                       6

   7

Section 2.8 Rollovers.

     Participants of any existing CEO Stock Unit Deferred Compensation Plan
administered by the Company, who have a positive account balance in such plan as
of December 31, 1997 and who are employed by an Employer as of December 31, 1997
shall have such positive account balance transferred to and added to a Stock
Unit Account under this Plan. Participant's account balances transferred to this
Plan pursuant to this Section 3.8 shall be governed by the terms and conditions
of this Plan, shall be referred to as the "Existing PHS Rollover Amount" and
shall be credited to such Participant's Stock Unit Account as of December 31,
1997.

                                   ARTICLE III
                                 ADMINISTRATION

Section 3.1 Committee.

     A number of individuals shall be appointed by, and serve at the pleasure
of, the Compensation Committee as a committee to administer the Plan (the
"Committee"). The number of members comprising the Committee shall be determined
by the Compensation Committee, which may from time to time vary the number of
members. A member of the Committee may resign by delivering a written notice of
resignation to the Compensation Committee. The Compensation Committee may remove
any member by delivering a certified copy of its resolution of removal to such
member. Vacancies in the membership of the Committee shall be filled promptly by
the Compensation Committee.

Section 3.2 Committee Action.

     The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter, which relates solely to himself
or herself as a Participant. The Chairman or any other member or members of the
Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.

Section 3.3 Powers and Duties of the Committee.

     a. The Committee, on behalf of the Participants and their Beneficiaries,
shall enforce the Plan in accordance with its terms, shall be the "Plan
Administrator" charged with the general administration of the Plan, and shall
have all discretionary authority and powers necessary to accomplish its
purposes, including, but not by way of limitation, the following:

     i.   To construe and interpret the terms and provisions of this Plan;

     ii.  To compute and certify to the amount and kind of benefits payable to
          Participants and their Beneficiaries;


                                       7

   8

     iii. To maintain all records that may be necessary for the administration
          of the Plan;

     iv.  To provide for the disclosure of all information and the filing or
          provision of all reports and statements to Participants, Beneficiaries
          or governmental agencies as shall be required by law;

     v.   To make and publish such rules for the regulation of this Plan, and
          procedures for the administration of this Plan, as are not
          inconsistent with the terms hereof; and

     vi.  To appoint a plan administrator or any other agent, and to delegate to
          them such powers and duties in connection with the administration of
          this Plan as the Committee may from time to time prescribe.

Section 3.4 Construction and Interpretation.

         The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and
any Participant or Beneficiary. The Committee shall administer such terms and
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan.

Section 3.5 Information.

     To enable the Committee to perform its functions, the Employers shall
supply full and timely information to the Committee on all matters relating to
the Compensation of all Participants, their death or other cause of termination,
and such other pertinent facts as the Committee may require.

Section 3.6 Compensation, Expenses and Indemnity.

     a. The members of the Committee shall serve without compensation for their
services hereunder.

     b. The Committee is authorized at the expense of the Company to employ such
legal counsel as it may deem advisable to assist in the performance of its
duties hereunder. Expenses and fees in connection with the administration of the
Plan shall be paid by the Company.


                                       8

   9

     c. To the extent permitted by applicable state law, the Company shall
indemnify and hold harmless the Committee and each member thereof, the Board of
Directors, Compensation Committee and any delegate of the Committee who is an
employee of the Company against any and all expenses, liabilities and claims,
including legal fees to defend against such liabilities and claims arising out
of their discharge in good faith of responsibilities under or incident to this
Plan, other than expenses and liabilities arising out of bad faith or willful
misconduct. This indemnity shall not preclude such further indemnities as may be
available under insurance purchased by the Company or provided by the Company
under any bylaw, agreement or otherwise, as such indemnities are permitted under
state law.

Section 3.7 Quarterly Statements.

     Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Stock Unit Accounts on a
quarterly basis as of each March 31, June 30, September 30 and December 31.

Section 3.8 Claim Procedures.

     a. Claim. A person who believes that he or she is being denied a benefit to
which he or she is entitled under this Plan (hereinafter referred to as
"Claimant") may file a written request for such benefit with the Plan
Administrator, setting forth his or her claim.

     b. Claim Decision. Upon receipt of a claim, the Plan Administrator shall
advise the Claimant that a reply will be forthcoming within 90 days and shall,
in fact, deliver such reply within such period. The Plan Administrator may,
however, extend the reply period for an additional 90 days for special
circumstances. If the claim is denied in whole or in part, the Plan
Administrator shall inform the Claimant in writing, using language calculated to
be understood by the Claimant, setting forth: (A) the specified reason or
reasons for such denial; (B) the specific reference to pertinent provisions of
this Plan on which such denial is based; (C) a description of any additional
material or information necessary for the Claimant to perfect his or her claim
and an explanation why such material or such information is necessary; (D)
appropriate information as to the steps to be taken if the Claimant wishes to
submit the claim for review; and (E) the time limits for requesting a review
under subsection 3.9(c).

     c. Request for Review. Within 60 days after the receipt by the Claimant of
the written opinion described above, the Claimant may request in writing that
the Committee review the determination of the Plan Administrator. The Claimant
or his or her duly authorized representative may, but need not, review the
pertinent documents and submit issues and comments in writing for consideration
by the Committee. If the Claimant does not request a review within such 60 day
period, he or she shall be barred and estopped from challenging the Plan
Administrator's determination.

     d. Review of Decision. Within 60 days after the Committee's receipt of a
request for review, after considering all materials presented by the Claimant,
the Committee will inform the Participant in writing, in a manner calculated to
be understood by the Claimant, of its decision,


                                       9

   10

setting forth the specific reasons for the decision and containing specific
references to the pertinent provisions of this Agreement on which the decision
is based. If special circumstances require that the 60 day time period be
extended, the Committee will so notify the Claimant and will render the decision
as soon as possible, but no later than 120 days after receipt of the request for
review.

                                   ARTICLE IV
                                  MISCELLANEOUS

Section 4.1 Unsecured General Creditor.

     Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interest in any specific property
or assets of any Employer. Any and all of the assets of each Employer shall be,
and remain, the general unpledged, unrestricted assets of such Employer. Each
Employer's obligation under this Plan shall be merely that of an unfunded and
unsecured promise of such Employer to pay money in the future, and the rights of
the Participants and Beneficiaries shall be no greater than those of unsecured
general creditors. It is the intention of the Company that this Plan (and the
Trust described in Article VI) be unfunded for purposes of the Code and for
purposes of Title I of ERISA.

Section 4.2 Restriction Against Assignment.

     The Employers shall pay all amounts payable hereunder only to the person or
persons designated by this Plan and not to any other person or corporation. No
part of a Participant's Account shall be liable for the debts, contracts, or
engagements of any Participant, his or her Beneficiary, or successors in
interest, nor shall a Participant's Account be subject to execution by levy,
attachment, or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any right to alienate, anticipate, sell, transfer,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever. If any Participant, Beneficiary or successor in interest is
adjudicated bankrupt or purports to anticipate, alienate, sell, transfer,
commute, assign, pledge, encumber or charge any distribution or payment from the
Plan, voluntarily or involuntarily, the Committee, in its discretion, may cancel
such distribution or payment (or any part thereof) to or for the benefit of such
Participant, Beneficiary or successor in interest in such manner as the
Committee shall direct.

Section 4.3 Change of Control.

     For purposes of this Plan, "Change of Control" means the occurrence of any
of the following: (i) a business combination effectuated through the merger or
consolidation of the Company with or into another entity where the Company is
not the Surviving Organization; (ii) any business combination effectuated
through the merger or consolidation of the Company with or into another entity
where the Company is the Surviving Organization, and such business combination
occurred with an entity whose market capitalization prior to the transaction was
greater than 50 percent of the Company's market capitalization prior to the
transaction; (iii) the sale in a transaction or series of transactions of all or
substantially all of the Company's assets;


                                       10

   11

(iv) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of
the Exchange Act) other than UniHealth, a California non-profit public benefit
corporation ("UniHealth"), acquires beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more
of the voting common stock of the Company and the beneficial ownership of the
voting common stock of the Company owned by UniHealth at that date is less than
or equal to the beneficial ownership interest of voting securities attributable
to such other person or group; (v) a dissolution or liquidation of the Company;
or (vi) the Company ceases to be subject to the reporting requirements of the
Exchange Act as a result of a "going private transaction" (within the meaning of
the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any
entity where the majority of the members of such entity's board of directors are
persons who were members of the Company's board of directors prior to the
merger, consolidation or other business combination and the senior management of
the surviving entity includes all of the individuals who were the Company's
executive management (the Company's chief executive officer and those
individuals who report directly to the Company's chief executive officer) prior
to the merger, consolidation or other business combination and such individuals
are in at least comparable positions with such entity. The Committee may make
such determinations and interpretations and adopt such rules and conditions as
it, in its absolute discretion, deems appropriate in connection with a Change in
Control. All such determinations and interpretations by the Committee shall be
conclusive.

Section 4.4 Change In Company Shares.

     If the outstanding shares of Common Stock are hereafter changed into or
exchanged for a different number or kind of shares or other securities of the
Company, or of another company, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or combination of shares, or if the Company distributes a cash or non-cash
dividend to holders of Common Stock or engages in another similar transaction,
the Compensation Committee shall make an appropriate and equitable adjustment in
the number and kind of units credited to the Stock Unit Account. Any such
adjustment made by the Compensation Committee shall be final and binding upon
the a Participant, the Company and all other interested persons.

Section 4.5 Beneficiary.

     For purposes of this Plan, "Beneficiary" or "Beneficiaries" mean the person
or persons, including a trustee, personal representative or other fiduciary,
last designated in writing by a Participant in accordance with procedures
established by the Committee to receive the benefits specified hereunder in the
event of the Participant's death. No beneficiary designation shall become
effective until it is filed with the Committee. If there is no such designation
or if there is no surviving designated Beneficiary, then the Participant's
surviving spouse shall be the Beneficiary. If there is no surviving spouse to
receive any benefits payable in accordance with the preceding sentence, the
participant's estate shall be the Beneficiary. In the event any amount is
payable under the Plan to a minor, payment shall not be made to the minor, but
instead be paid (a) to that person's living parent(s) to act as custodian, (b)
if that person's parents are then divorced, and one parent is the sole custodial
parent, to such custodial parent, or (c) if no parent


                                       11

   12

of that person is then living, to a custodian selected by the Committee to hold
the funds for the minor under the Uniform Transfers or Gifts to Minors Act in
effect in the jurisdiction in which the minor resides. If no parent is living
and the Committee decides not to select another custodian to hold the funds for
the minor, then payment shall be made to the duly appointed and currently acting
guardian of the estate for the minor or, if no guardian of the estate for the
minor is duly appointed and currently acting within 60 days after the date the
amount becomes payable, payment shall be deposited with the court having
jurisdiction over the estate of the minor.

Section 4.6 Withholding.

     There shall be deducted from each payment made under the Plan or any other
compensation payable to the Participant (or Beneficiary) all taxes which are
required to be withheld by the Company in respect to such payment or this Plan.
The Company shall have the right to reduce any payment (or compensation) by the
amount of cash sufficient to provide the amount of said taxes.

Section 4.7 Amendment, Modification, Suspension or Termination.

     The Compensation Committee may amend, modify, suspend or terminate this
Plan in whole or in part, except that no amendment, modification, suspension or
termination shall have any retroactive effect to reduce any amounts allocated to
a Participant's Stock Account. In the event that this Plan is terminated, the
amounts allocated to a Participant's Stock Account shall be distributed to the
Participant or, in the event of his or her death, his or her Beneficiary in a
lump sum within 30 days following the date of termination.

Section 4.8 Governing Law.

     This Plan shall be construed, governed and administered in accordance with
the laws of the United States and, to the extent not preempted by such law, by
the laws of the State of California.

Section 4.9 Receipt or Release.

     Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall to the extent thereof, be in full
satisfaction of all claims for benefits under this Plan against the Committee
and the Company. The Committee may require such Participant or Beneficiary, as a
condition precedent to such payment, to execute a receipt and release to such
effect.


                                       12

   13

Section 4.10 Effective Date.

     This Plan shall be effective as of November 1, 2000.

     IN WITNESS WHEREOF, this Plan is adopted as of November 1, 2000.


                                            PACIFICARE HEALTH SYSTEMS, INC.


                                            ------------------------------------
                                            By:
                                            Title:


                                       13

EX-99.2

   1

                                                                    EXHIBIT 99.2


                              CONSULTING AGREEMENT

     This CONSULTING AGREEMENT, dated as of January 1, 2001 (this "Agreement"),
is made and entered into by and between PacifiCare Health Systems, Inc., a
Delaware corporation ("Company"), and DAVID REED, an individual ("Consultant"),
with reference to the following facts:

                                    PREAMBLE

     A. The Company desires to engage Consultant, as a consultant on an
independent contracting basis, to act as the Chairman of the Board of Directors
of the Company and to assist the Company in the area of executive and strategic
management including, without limitation, assistance in strategic planning and
transitional management and direction; and

     B. Consultant desires to accept such engagement, in accordance with the
terms and subject to the conditions set forth in this Agreement.

     NOW, THEREFORE, in consideration of the above premises and the covenants
and promises exchanged by the parties hereinbelow, the Company and Consultant
hereby agree as follows:

                                    ARTICLE 1

                               CONSULTING SERVICES

     1.1 Duties. The Company hereby engages Consultant as an independent
contractor to provide the Company with services as Chairman of the Company's
Board of Directors. As Chairman, Consultant shall be responsible for working
with and assisting the Executive Committee in carrying out its responsibilities.
The Chairman is the primary line of communication between management and the
Company's Executive Committee. The Chairman is responsible for (i) oversight of
and communicating and coordinating with the Company's Chief Executive Officer in
the discharge of his or her duties; (ii) for communicating with and reporting to
the Company's Board of Directors; and (iii) responding or determining with the
Company's Executive Committee who should respond to investor relations and media
inquiries. Consultant agrees to perform those services described above (the
"Consulting Services"), and Consultant hereby accepts such engagement. In
connection with the performance of the Consulting Services, Consultant shall do
and perform any and all services, acts, or things incident thereto which may be
necessary, advisable, or appropriate to fully perform the Consulting Services.

     1.2 Method of Performing Services. Consultant shall perform the Consulting
Services as an independent consultant and the method, details, and means of
performing the Consulting Services shall be determined by Consultant in his sole
discretion.

     1.3 Devotion of Skills and Time. Consultant shall use its best efforts,
skills, and abilities to perform the Consulting Services. While Consultant may
perform services for other clients as he sees fit, Consultant shall not engage
in any activities during the term of this Agreement which would unreasonably
interfere with his performance of the Consulting Services as required hereunder
or which would interfere with his fiduciary obligations as Chairman of the Board
of Directors.


                                       1
   2

                                    ARTICLE 2

                              TERM AND TERMINATION

     2.1 Term. The term of this Agreement (the "Term") shall commence on January
1, 2001 and shall continue until the earlier of: (1) Consultant's resignation
from or failure to be reelected as Chairman of the Board of Directors of the
Company; or (2) this Agreement's termination in accordance with Section 2.2
below.

     2.2 Termination. This Agreement may be terminated only as follows:

          2.2.1 Written Election. Either the Company or Consultant may terminate
this Agreement at any time, without cause, upon sixty (60) calendar days prior
written notice to the other party.

          2.2.2 Automatic Termination. This Agreement shall automatically
terminate upon the bankruptcy, insolvency, death or mental incapacity of
Consultant.

          2.2.3 Breach. The Company, in its sole discretion, may terminate this
Agreement "for cause" effective upon written notice to Consultant if Consultant
has committed a material default under, or a breach of, this Agreement, has
committed an act of gross misconduct, or has breached his fiduciary duties. For
the purposes of this Agreement, the term "act of gross misconduct" shall mean
the commission of any theft offense, misappropriation of funds, dishonest or
fraudulent conduct, or the use of any Confidential Information (as defined in
Section 5.2) in violation of the provisions of Article 5 below.

          2.2.4 Nonpayment. Consultant, in his sole discretion, may terminate
this Agreement effective upon written notice to the Company if the Company fails
to pay the Compensation (as defined in Section 3.1) to Consultant within thirty
(30) calendar days of the applicable payment's due date.

     2.3 Effect of Termination. No termination of this Agreement shall affect or
impair Consultant's right to continue to receive compensation earned through the
effective date of this Agreement's termination. No termination of this Agreement
shall relieve Consultant from his obligations arising under Article 5 of this
Agreement.


                                       2
   3

                                    ARTICLE 3

                                  COMPENSATION

     3.1 Payment of Consultant Fees. In consideration of the Consulting Services
performed on the Company's behalf by Consultant during the Term of this
Agreement, the Company shall pay Consultant annual compensation of $125,000, in
12 equal monthly installments, payable on the first of each month.

     3.2 Participation in Stock Option Plan. Consultant, as Chairman of the
Board of Directors of the Company, is an officer of the Company and therefore
shall be entitled to participate in the stock option plan for non-employee
Directors, and receive stock options at the same time(s) as Directors receive
stock options. As Chairman of the Board of Directors, Consultant shall be
entitled to twice as many options per grant as other members of the Board,
subject to the approval of the Board of Directors.

     3.3 Fees for Attending Board and Committee Meetings. As Chairman of the
Board of Directors, Consultant shall be entitled to payment of all fees
customarily paid to the Chairman of the Board, which include but are not
necessarily limited to: (1) an annual retainer of $40,000; (2) twice the $1,200
fee to which other members of the Board are entitled for attendance at meetings
of the Board; (3) the same $1,000 fee that other committee members receive for
attendance at meetings of any committee of the Board of which Consultant is a
member; (4) twice the $1,000 fee received by other committee members for
attendance at meetings of any Board committee of which Consultant is Chairman.
Consultant understands and agrees that the various fees set forth above are
subject to change from time to time by the Board of Directors of the Company.

     3.4 State and Federal Taxes. Consultant acknowledges and agrees that, as an
independent contractor, he will be responsible for paying all required state and
federal income taxes, social security contributions, self-employment taxes, and
other mandatory taxes and contributions and that the Company shall neither
withhold any amounts from the Compensation for such taxes or pay such taxes on
Consultant's behalf.

                                    ARTICLE 4

                           RELATIONSHIP OF THE PARTIES

     The Company and Consultant acknowledge and agree that the following
provisions shall further define and limit the scope of their relationship.

     4.1 Independent Contractors. The Company and Consultant acknowledge and
agree that Consultant enters into this Agreement as, and shall continue to be,
an independent contractor of the Company and, other than being an officer of the
Company by virtue of his position as Chairman of the Board of Directors of the
Company, and as authorized by the Board of Directors, Consultant is not, and
shall not become, an employee, officer, agent, joint venturer, partner, or owner
of the Company or of any of the Company's affiliates. Nothing in this Agreement
should be construed as establishing the relationship of employer and employee
between the Company (or any affiliate of the Company) and


                                       3
   4

Consultant. Without limiting the generality of the foregoing, the Company and
Consultant each acknowledges and agrees that Consultant is not an employee of
the Company for state or federal tax purposes and that Consultant is not
entitled to any benefits accorded the Company's employees, including, without
limitation, worker's compensation, disability insurance, or vacation or sick
pay. Each party to this Agreement is and shall remain professionally and
economically independent of the other. However, Consultant may receive those
benefits provided by the Company to members of the Board of Directors.

     4.2 Liability for Obligations. Nothing contained in this Agreement shall
cause, or be construed as causing, either party hereto to be liable or
responsible for any debt, liability, or obligation of the other party owed to
any third party, unless such liability or responsibility is assumed in writing
by the party sought to be charged therewith. Each party shall be solely
responsible for and shall hold the other party harmless against any obligation
for payment of wages, salaries, or other compensation (including, without
limitation, all state, federal, and local taxes and mandatory employee
benefits), insurance, and voluntary employment related or other contractual or
fringe benefits as may be due and payable to the party to, or on behalf of, such
party's employees, agent, or contractors.

                                    ARTICLE 5

                               GENERAL PROVISIONS

     5.1 Notices. Any and all notices, requests, invoices, consents, demands or
other communications required or permitted to be given hereunder shall be in
writing and shall be deemed to have been duly given and received (i) when
delivered, (regardless of where delivery is made) if delivered personally,
including personal delivery by commercial courier (ii) when delivered, if sent
by United States registered or certified mail (return receipt requested), or
(iii) on the second following business day, if sent by United States Express
Mail or overnight courier, in the case of (ii) or (iii) to the parties at the
following addresses (or at such other addresses as shall be specified by like
notice) with postage or delivery charges prepaid:

     If to the Company:

     PacifiCare Health Systems, Inc.
     3120 Lake Center Drive
     Santa Ana, California  92704
     Attn: Chief Executive Officer


                                       4
   5

     If to Consultant:

     David Reed
     24602 Santa Clara Avenue
     Dana Point, California  92629

     5.2 Amendments; Waiver. This Agreement shall be amended, modified, revised
or supplemented only by a dated written instrument executed by the Company and
Consultant. No waiver of any provision of this Agreement shall be effective
unless evidenced by a dated, written instrument executed by the party against
whom enforcement is sought. No waiver of any provision hereof shall be construed
as a further or continuing waiver of such provision or any other provision
hereof.

     5.3 Integrated Agreement. This Agreement constitutes the final written
integrated expression of all the agreements between the Company (and any
affiliate of the Company) and Consultant with respect to Consultant's engagement
as a consultant with the Company and is a complete and exclusive statement of
those terms. This Agreement supersedes all prior or contemporaneous written or
oral memoranda, arrangements, agreements, contracts, communications or
understandings between the parties hereto relating to the subject matter hereof.
Any representations, promises, warranties, or statements made by either party
which differ in any way from the terms of this Agreement shall be given no force
or effect. The parties specifically represent, each to the other, that there are
no additional or supplemental agreements or contracts between them related in
any way to the matters herein contained.

     5.4 Severability. In the event that any provision in this Agreement shall
be found by a court or governmental authority of competent jurisdiction to be
invalid, illegal or unenforceable, such provision shall be construed and
enforced as if it had been narrowly drawn so as not to be invalid, illegal or
unenforceable, and the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.

     5.5 Assignment. Because of the personal nature of the services to be
rendered hereunder, this Agreement may not be assigned, in whole or in part, by
Consultant. Subject to the foregoing limitation, this Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
heirs, legatees, devisees, executors(trixes), administrators, legal
representatives, successors and assigns.

     5.6 Section Headings. The section and article headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.

     5.7 Gender. The use of any gender in referring to any person on this
Agreement shall apply to that individual or entity whether such is masculine,
feminine, or neuter. Hence, the use of the words "it" or "its," "him" or "his,"
or "her" or "hers" shall be interchangeable when the context so requires.


                                       5
   6

     5.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to
principals of conflicts of law.

     5.9 Confidentiality of Certain Information. Consultant acknowledges and
agrees that, during the term of his engagement with the Company, Consultant may
have access to certain individually identifiable personal information which is
in the Company's possession for the purpose of the Company's performance of its
business, and that Consultant and his assistants, employees and agents shall
maintain the confidentiality of all such information and shall, in the
performance of the Consulting Services, abide by all state and federal laws
applicable to the confidentiality of such information.

     5.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.

     IN WITNESS WHEREOF, the Company and Consultant have executed this Agreement
on and as of the date first written above.

The Company:                                     PacifiCare Health Systems, Inc.
                                                 A Delaware corporation



                                                 By:
                                                     ---------------------------
                                                 Title:
                                                        ------------------------

Consultant:
                                                 -------------------------------
                                                 David Reed


                                       6

EX-99.3

   1

                                                                    EXHIBIT 99.3


                      SENIOR EXECUTIVE EMPLOYMENT AGREEMENT


     This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
DATE by and between PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation (the
"Company"), with its principal place of business located at 3120 Lake Center
Drive, Santa Ana, California 92704 and NAME ("Executive"), residing at ADDRESS.

                                    RECITALS

     WHEREAS, the Company desires to continue Executive's employment in the
capacity of TITLE.

     WHEREAS, the Company and Executive are entering into this Agreement to
establish new terms and conditions of the employment relationship.

     NOW, THEREFORE, in consideration of the following covenants, conditions and
promises contained herein, and other good and valuable consideration, the
Company and Executive hereby agree as follows:

1.   EMPLOYMENT

     1.1  Executive's General Duties. The Company employs Executive and
Executive serves the Company in the capacity of TITLE, having such usual and
customary duties and authority as an officer of similar capacity in a
corporation of comparable size, holdings, and business as that of the Company.

     Executive shall do and perform all services, acts, or things necessary or
advisable to manage and conduct the business of the Company and shall preside
over such other areas of corporate activity as specified from time to time by
the Board of Directors of the Company. During the term of this Agreement,
Executive shall perform such additional or different duties, and accept the
election or appointment to such other offices or positions as are mutually
agreed upon by Executive and the Company.

     1.2  Devotion of Executive. During the term of this Agreement, Executive
shall devote his entire productive time, ability, and attention to the business
of the Company. Executive shall use Executive's best efforts, skills, and
abilities to promote the general welfare and interests of the Company and to
preserve, maintain, and foster the Company's business and business relationships
with all persons and entities associated therewith, including, without
limitation, employer groups, medical service providers, shareholders,
affiliates, officers, employees,


                                     - 1 -
   2

and banks and other financial institutions. The Company shall give Executive a
reasonable opportunity to perform Executive's duties and shall neither expect
Executive to devote more time, nor assign more duties or functions to Executive,
than are customary and reasonable for a person in Executive's position.

2.   TERM AND TERMINATION

     2.1  Term. The initial term of Executive's employment under this Agreement
shall be 18/24 months, commencing on the effective date of this Agreement. The
Company may extend this Agreement for successive one-year terms by giving
Executive written notice at least 60 days prior to the expiration of the term.
Notwithstanding the foregoing, if a Change-of-Control occurs, as defined in
Section 5.1(c) of this Agreement, then the term of the Agreement shall be
extended for a period of 24 months from the effective date of the
Change-of-Control. This Agreement is subject to termination prior to the
expiration of its term, as provided in Section 2.2.

     2.2  Termination. This Agreement, and Executive's employment with the
Company, shall be terminated upon the occurrence of any one of the following
events:

          a.   The death of the Executive.

          b.   Executive becomes incapacitated or disabled, which incapacity or
     disability prevents Executive from fully performing his duties to the
     Company for a period in excess of 90 days and, after such 90-day period,
     the Company and a physician, duly licensed and qualified in the specialty
     of Executive's incapacity, decide in their reasonable judgments, that such
     incapacity will be of such continued duration as to prevent Executive from
     resuming the rendition of services to the Company for at least an
     additional six-month period. For purposes of this Agreement, Executive
     shall be deemed permanently disabled, and this Agreement terminated upon
     the date Executive receives written notice from the Company that such
     determination has been made.

          c.   Executive habitually neglects his duties to the Company or
     engages in gross misconduct during the term of this Agreement. For the
     purposes of this Agreement, "gross misconduct" shall mean Executive's
     misappropriation of funds; securities fraud; insider trading; unauthorized
     possession of corporate property; the sale, distribution, possession or use
     of a controlled substance; or conviction of any criminal offense (whether
     or not such criminal offense is committed in connection with Executive's
     duties hereunder or in the course of his employment with the Company). In
     such event, Executive's termination shall be effective immediately upon
     receipt of written notice from the Company.

          d.   Either party hereto may terminate this Agreement, with or without
     cause, upon 45 days prior written notice to the other party. Except for the
     circumstances described in Section 2.2(b) and Section 2.2(c) above,
     Executive's termination shall be effective 45 days after receipt of such
     written notice.


                                     - 2 -
   3

3.   COMPENSATION DURING THE TERM OF THIS AGREEMENT

     3.1  Base Salary. As long as Executive satisfactorily performs all of his
obligations under this Agreement, the Company shall pay Executive an annual base
salary, payable in equal installments on the Company's regular payroll dates. As
of this date, Executive's annual base salary has been set at $ AMOUNT. On an
annual basis, the Company shall review Executive's salary, but shall be under no
obligation to increase Executive's salary. Executive authorizes the Company to
take such deductions and withholdings from his salary as are required by law,
directed by Executive, or as reasonably directed by the Company for its
employees, which deductions shall include, without limitation, withholding for
federal and state income taxes and social security.

     3.2  Benefits. Executive shall be entitled to fully participate in all of
the employee benefit plans and programs available to other high-level executives
of the Company, including, without limitation, health, dental, and life
insurance benefits for Executive and Executive's dependents, pension and profit
sharing programs, and vacation and sick leave benefits. However, the terms of
this Agreement shall not restrict the Company's right to change, amend, modify,
or terminate any existing benefit plan or program, or to change any insurance
company or modify any insurance policy adopted incident to such existing benefit
plan and program.

     3.3  Automobile Allowance. The Company shall provide Executive with a
$850.00/$750.00/$550.00 (eight hundred and fifty dollars/seven hundred and fifty
dollars/five hundred and fifty dollars) per month automobile allowance. The
Company shall furnish Executive with a cellular telephone. Executive shall
provide and maintain automobile insurance for Executive's car including
collision, comprehensive liability, personal and property damage, and uninsured
and underinsured motorist coverage in amounts customarily obtained to cover such
contingencies in the State of California. Executive shall provide proof of such
coverage to the Company upon the Company's request.

     3.4  Reimbursement of Expenses. The Company shall pay for or reimburse
Executive for all reasonable travel, entertainment, and other business expenses
incurred or paid for by Executive in connection with the performance of his
services under this Agreement. The Company shall not be obligated to make any
such reimbursement unless Executive presents corresponding expense statements or
vouchers and such other supporting information as the Company may from time to
time reasonably request. The Company reserves the right to place subsequent
limitations or restrictions on business expenses to be incurred or reimbursed.

     3.5  Annual Incentive Plan. Executive shall be entitled to participate
fully in the Company's 1996 Management Incentive Compensation Plan, as amended
(the "MICP"), and as may be further amended, modified, or replaced, from time to
time, in accordance with the terms and conditions set forth herein and therein.

     3.6  Stock Option Plans. Executive shall be entitled to participate in the
applicable Stock Option Plans for Officers and Key Employees of PacifiCare
Health Systems, Inc., as amended, and as may be further amended modified or
replaced, from time to time, in accordance with the terms and conditions set
forth herein and therein.


                                     - 3 -
   4

     3.7  Insurance. During the term of this Agreement, the Company shall insure
Executive under its general liability insurance for all conduct committed in
good faith while acting in the capacity of TITLE of the Company or in any other
capacity to which Executive may be appointed or elected.

     3.8  Savings and Profit Sharing Plan. As part of the compensation for
services rendered under this Agreement, Executive shall be entitled to
participate in the Amended and Restated PacifiCare Health Systems, Inc. Savings
and Profit-Sharing Plan, and the trust agreement implemented pursuant thereto,
adopted as of July 1999, as amended, and as may be further amended, modified, or
replaced, from time to time in accordance with the terms and conditions set
forth therein.

     3.9  Non-Qualified Deferred Compensation Plans. Executive shall be entitled
to participate in any non-qualified deferred compensation plan established by
the Company, including, without limitation, the Company's Statutory Restoration
Plan, Deferred Compensation Plan, and such other plans as may be applicable, as
such plans may be amended, modified or replaced, from time to time, in
accordance with the terms set forth herein and therein.

4.   COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT PURSUANT TO SECTION 2.2

     4.1  Death. In the event that this Agreement is terminated by reason of
Executive's death, Executive's estate or legal representative shall be entitled
to receive the following:

          a.   Payment of benefits under the life insurance policy purchased by
     the Company on Executive's behalf, if any;

          b.   Payments of benefits under the MICP set forth in Section 3.5 in
     accordance with the terms of the MICP plan document;

          c.   Executive's legal representative shall be permitted to exercise
     any vested and unexercised options granted under the 1996 Stock Option Plan
     and any other existing stock option plans of the Company (collectively, the
     "Stock Option Plans") in accordance with their terms for a period of one
     year following Executive's death.

     4.2  Disability. In the event that Executive is terminated because of
incapacity or disability, the Company shall provide Executive with the
following:

          a.   Payment of benefits under the disability insurance policy
     maintained by the Company on Executive's behalf, if any;


                                     - 4 -
   5

          b.   Payment of benefits under the MICP set forth in Section 3.5 in
     accordance with the terms of the MICP plan document;

          c.   The right to exercise any vested and unexercised options under
     the Stock Option Plans in accordance with the terms stated therein;

          d.   Payment of the automobile allowance as provided under Section 3.3
     for a period of 18 months following the effective date of such termination.

     4.3  Neglect, Misconduct or Voluntary Termination. In the event this
Agreement is terminated because of Executive's habitual neglect or gross
misconduct pursuant to Section 2.2(c) or because of Executive's voluntary
termination, the Company shall be relieved from any and all further or future
obligations to compensate Executive; provided, however, that Executive shall be
able to exercise any vested and unexercised awards under the Stock Option Plans
in accordance with the terms set forth therein.

     4.4  Discharge. In the event that the Company terminates Executive under
circumstances other than a Change-of-Control (as defined herein) and for any
reason other than Executive's incapacity or disability or neglect/misconduct as
described in Sections 2.2(b) and 2.2(c), respectively, then Executive shall be
entitled to the following compensation:

          a.   An amount equal to one and one-half/two times Executive's then
     current annual salary under Section 3.1;

          b.   An amount equal to one and one-half/two times the average of the
     last two MICP bonuses paid to Executive. If Executive has been employed by
     the Company for more than one, but less than two years, then the MICP bonus
     severance payment shall equal one and one-half/two times the average of the
     MICP bonus paid to Executive for the prior year and the target for
     Executive for the current year. If Executive has been employed by the
     Company for less than one year, Executive will not receive any bonus
     severance payment. For purposes of this Section 4.4(b), the word "paid"
     shall include $0.00 for any year in which Executive was eligible for, but
     was not paid, an MICP bonus;

          c.   The right to exercise any vested and unexercised options under
     the Stock Option Plans in accordance with their terms within one year of
     the effective date of such termination;

          d.   Continuation of Executive's and his/her dependents' medical,
     dental and vision benefits for a period of 18/24 months following the
     effective date of such termination;

          e.   An amount equal to 18/24 months of Executive's automobile
     allowance;

          f.   The Company shall provide to Executive outplacement services to
     assist Executive in securing a position comparable to the one from which
     Executive was terminated. The Company shall be obligated to provide those
     outplacement services which are customarily provided by companies of
     similar size and holdings as those of the Company to executives with
     comparable responsibility and longevity as Executive and for


                                     - 5 -
   6

     reasonable cost as approved by the Company. The Company's provision of such
     outplacement services shall not limit, restrict, or reduce, in any manner,
     any and all other compensation to which Executive is entitled hereunder;

          g.   Executive shall receive, or have paid, the amounts of severance
     compensation provided in clauses (a), (b), and (e) above in equal
     installments over a period of 18/24 months. Payments will be made either in
     biweekly installments on the Company's regular paydays or as currently
     being paid to Executive;

          h.   Notwithstanding the foregoing, in the event Executive engages in
     employment, whether as an employee, consultant or contractor with a
     competitor of the Company during the 18/24 month period in which
     Executive's salary continues pursuant to this Section 4.4, the severance
     compensation available to Executive under this Section 4.4 shall be reduced
     by the amount of any and all gross earnings Executive earns while engaged
     in employment with any such competitor or competitors. For the purposes of
     this Section 4.4, a "competitor of the Company" shall include, without
     limitation, managed care organizations, including a health maintenance
     organization, competitive medical plan, preferred provider organization,
     provider sponsored organization ("PSO"), or health or life insurance
     company which owns a managed care organization, plan or program. Executive
     agrees to provide immediate notice to Company upon receipt of any gross
     earnings received by Executive from a competitor of Company. Quarterly,
     Executive shall provide the Company a certificate certifying as to his/her
     employment status and if employed, the name and business of his/her current
     employer;

          i.   If Executive is rehired by Company, payments of severance
     compensation provided for in this Section 4.4 shall cease; and

          j.   If Executive dies while receiving the salary continuation benefit
     as provided in this Section 4.4, Executive's estate will receive a lump sum
     payment of the remaining salary continuation benefit.

5.   COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT AS A RESULT OF A
     CHANGE-OF-CONTROL

     5.1  Termination of Employment or Resignation for Good Cause

          a.   Executive's Rights. In the event that, during the term of this
     Agreement, the Company undergoes a Change-of-Control, (as that term is
     defined below) and if within 24 months after the consummation of such
     change either (1) Executive is involuntarily terminated, except as provided
     in Section 5.1(b), or (2) Executive voluntarily terminates his employment
     for "good cause" as defined in Section 5.1(d), then Executive shall be
     entitled to the following compensation:

          1.   A lump sum payment consisting of: (i) an amount equal to
     two/three times Executive's then annual salary; (ii) an amount equal to
     two/three times the average of the last two MICP bonuses paid to Executive;
     (iii) a prorated bonus based on target opportunity for the year in which
     the Change-of-Control occurs; (iv) an


                                     - 6 -
   7
          amount equal to the equivalent of the cost of 24/36 months of COBRA
          benefits; and (v) an amount equal to 24/36 months of Executive's
          automobile allowance. If Executive has been employed for more than
          one, but less than two years, then the amount attributable to the MICP
          bonus portion set forth in clause (ii) above shall equal two/three
          times the average of the MICP bonus paid to Executive for the prior
          year and the target for Executive for the current year. If Executive
          has been employed for less than one year, Executive shall receive an
          amount equal to two/three times target bonus for the current year. For
          purposes of this Section 5.1(a)(1), the word "paid" shall include
          $0.00 for any year in which Executive was eligible for, but was not
          paid, an MICP bonus.

               2.   The right to exercise any and all unexercised stock options
          granted under the Stock Option Plans in accordance with their terms,
          as if all such unexercised stock options were fully vested, within one
          year of the effective date of such termination;

               3.   A payment to executive to compensate for any excise penalty
          or other associated taxes resulting from severance payments exceeding
          the cap imposed by Internal Revenue Code Section 280(G);

               4.   The Company shall provide to Executive the outplacement
          services described in Section 4.4(f).

          b.   Limitation of Benefits. In the event that Executive is terminated
     within 24 months after a Change-of-Control of the Company, and such
     termination results from either Executive's death, incapacity or disability
     or habitual neglect or gross misconduct, then, notwithstanding anything in
     this Article 5 to the contrary, Executive shall receive only that
     compensation, if any, to which he is entitled to under Sections 4.1, 4.2
     and 4.3, respectively.

          c.   Change-of-Control. As used in this Article 5, the term
     "Change-of-Control" means and refers to:

               1.   Any merger, consolidation, or sale of the Company such that
          any individual, entity or group (within the meaning of Section
          13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
          amended (the "Exchange Act")) acquires beneficial ownership, within
          the meaning of Rule 13d-3 of the Exchange Act, of 20 percent or more
          of the voting common stock of the Company;

               2.   Any transaction in which the Company sells substantially all
          of its material assets;

               3.   A dissolution or liquidation of the Company;

               4.   The Company becomes a non-publicly held company; or


                                     - 7 -
   8

               5.   The "Incumbent Directors" cease for any reason to constitute
          a majority of the Board of Directors. "Incumbent Directors" shall be
          those directors who, as of December 20, 2000, constitute the Board and
          any individual who becomes a director subsequent to December 20, 2000
          whose election, or nomination for election by the Company's
          shareholders, was approved by a vote of at least fifty percent (50%)
          of the Incumbent Directors, excluding, however, any such individual
          who initially assumes office as a result of an actual or threatened
          election contest with respect to the election or removal of directors
          or other actual or threatened solicitation of proxies or consents by
          or on behalf of a person or entity other than the Board.

          d.   Good Cause. As used in this Agreement "good cause" for Executive
     to terminate his employment shall be deemed to exist if Executive
     voluntarily terminates employment within 24 months of a Change-of-Control
     for any of the following reasons:

               1.   Without Executive's express prior written consent, Executive
          is assigned duties materially inconsistent with Executive's position,
          duties, responsibilities, or status with the Company which
          substantially varies from that which existed immediately prior to such
          Change-of-Control;

               2.   Without Executive's express prior written consent, Executive
          experiences a change in his reporting level, titles, or business
          location (or more than 50 miles from his current business location or
          residence whichever is closer to the new business location) which
          substantially varies from that which existed immediately prior to the
          Change-of-Control; except that if Executive is not located at the
          Company's corporate headquarters in California, a relocation to the
          Company's corporate headquarters in California shall not be deemed a
          substantial variation, unless Executive's reporting level or title is
          also substantially varied;

               3.   Without Executive's express prior written consent, Executive
          is removed from any position held immediately prior to the
          Change-of-Control, or if Executive fails to obtain reelection to any
          position held immediately prior to the Change-of-Control, which
          removal or failure to reelect is not directly related to Executive's
          incapacity or disability, habitual neglect, gross misconduct or death;

               4.   Without Executive's express prior written consent, Executive
          experiences a reduction in salary of more than 10 percent below that
          which existed immediately prior to the Change-of-Control;

               5.   Without Executive's express prior written consent, Executive
          experiences an elimination or reduction of any employee benefit,
          business expense reimbursement or allotment, incentive bonus program,
          or any other manner or form of compensation available to Executive
          immediately prior to the Change-of-Control and such change is not
          otherwise applied to others in the Company with Executive's position
          or title;


                                     - 8 -
   9

               6.   The Company fails to obtain from any successor, before the
          succession takes place, a written commitment obligating the successor
          to perform this Agreement in accordance with all of its terms and
          conditions; or

               7.   The Company or any successor thereto purports to terminate
          Executive pursuant to Section 4.4 without first giving Executive prior
          written notice thereof that specifies the facts and circumstances, in
          reasonable detail, serving as the basis for Executive's termination.

     5.2  Resignation for Other Than Good Cause After a Change-of-Control. In
the event that the Company undergoes a Change-of-Control and Executive remains
with the Company for 12 months following the effective date of the
Change-of-Control, Executive will be given a 30-day "window period" in which to
elect to voluntarily terminate Executive's employment for reasons other than
good cause. Should Executive choose to terminate Executive's employment within
the 30-day "window period," then Executive shall be entitled to the following
compensation:

          a.   One-half the lump sum payment referred to in Section 5.1(a)(1).

          b.   The right to exercise all vested and unexercised stock options
     granted under the Stock Option Plans in accordance with their terms within
     one year of the effective date of such termination.

          c.   Outplacement services as defined in Section 4.4(f).

6.   CONFIDENTIALITY AND OWNERSHIP OF PROPRIETARY INFORMATION

     6.1  Confidential Information. Executive acknowledges that, during the
course of Executive's employment with the Company or with any subsidiary or
affiliate of the Company, Executive will have access to certain confidential
information in the form of know-how, trade secrets, or proprietary information
of the Company or its subsidiaries or affiliates ("Confidential Information")
and that such Confidential Information will be acquired in confidence and as a
fiduciary of the Company or its subsidiaries or affiliates. For the purposes of
this Agreement, Confidential Information shall include, without limitation,
member health data and medical records, any and all cost and expense data,
marketing and customer data, sales manuals, underwriting guidelines, case
management policies and procedures, utilization review and quality assurance
policies and procedures, provider manuals, individual and group subscriber
information (including, the name, address, telephone number, or contact person
for an individual or group subscriber), subscriber group manuals, processes,
designs, devices, compilations of information, operational techniques operating
manuals, symbols, service marks, logos, customer and vendor lists (including,
without limitation, lists of subscribers, subscriber groups, clients, brokers,
and providers contracting with the Company or any subsidiary or affiliate of the
Company), business information, marketing programs, plans, and strategies,
research and development plans, contracts and licenses, licensing techniques and
practices, advertising and promotional materials, financial information and
strategies, computer software and other computer-related materials,
copyrightable material, security controls, including computer system passwords,
and other legally protected information owned by or used in the respective
businesses of the Company or its subsidiaries or affiliates which are
confidential or proprietary in nature. In


                                     - 9 -
   10

addition to the foregoing, Confidential Information also includes any
information which is not generally known to the public, or within the market or
trade in which the Company competes, and the physical embodiments of such
information in any tangible form, whether written or machine-readable in nature,
or any information which is marked or designated as "Confidential" or
"Proprietary."

     6.2  Ownership of Inventions. Executive agrees to assign and does hereby
assign to the Company any and all ideas, designs, know-how, programs,
improvements, inventions, discoveries and literary creations (collectively
referred to as "Inventions") which Executive alone or with others may conceive
or make, and which (a) are made wholly or partially with the Company's assets or
confidential or trade secret information; or (b) are developed wholly or
partially on the Company's time; or (c) relate at the time of conception or
reduction to practice to the Company's business, including actual or
demonstrably anticipated research or development of the Company; or (d) result
from Executive's work for the Company. Such Inventions are and shall be the
property of the Company and shall be deemed to be part of the Company's
business, whether or not any applications for patents, trademarks or copyrights
are filed thereon. Further, all such Inventions shall constitute Confidential
Information. Executive shall not claim to own any Inventions relating to the
business of the Company. Executive agrees that, upon request of the Company,
Executive shall execute any and all papers and do all other lawful acts that may
be required by the Company in order to make applications for Letters Patent, of
the United States and of any and all other countries, on such Inventions, or
that may be required to vest ownership of such applications, patents and
copyrights in the Company, or that may be required to prosecute or obtain such
patents, or to maintain, preserve or enforce the rights of the Company in such
Inventions, patents and copyrights. Except as otherwise prohibited by law
(including but not limited to California Labor Code section 2870), and execept
for Inventions made prior to commencement of Executive's employment with the
Company, in addition to the above assignment of Inventions to the Company,
without further consideration, Executive hereby fully, forever, and irrevocably
assigns, transfers, and conveys to the Company: (i) all patents, patent
applications, copyrights, mask works, trade secrets, and other intellectual
property rights in any Invention; and (ii) any and all "Moral Rights" (as
defined below) which Executive may have in, to, or with respect to any
Invention. For purposes of this Agreement, "Moral Rights" shall mean any rights
to claim authorship of an Invention, to object to or prevent the modification of
any Invention, or to withdraw from circulation or control the publication or
distribution of any Invention, and any similar right, existing under judicial or
statutory law of any country in the world, or under any treaty, regardless of
whether or not such right is denominated or generally referred to as a "moral
right." Executive will promptly disclose any Inventions to the Company whether
developed or created alone or jointly with others.

     6.3  Confidentiality Covenant. Executive acknowledges and agrees that
maintaining the confidentiality of all of the Confidential Information is
integral to the value of the Company and is vital to the successful operations
of the Company and its subsidiaries and affiliates. In view of the foregoing,
Executive agrees to maintain the confidentiality of all Confidential Information
and to not disclose, divulge, exploit, or use, in any manner whatsoever, the
Confidential Information for Executive's own benefit or the benefit of another
person. Executive will additionally take all reasonable precautions to prevent
the inadvertent or accidental exposure of the Confidential Information.
Executive shall not remove any Confidential Information from the Company's
premises or make copies of any of such information except for the benefit of the


                                     - 10 -
   11

Company and in furtherance of Executive's duties as an employee of the Company.
Upon Executive's termination of employment with the Company, Executive shall not
remove from the Company's premises any materials containing any Confidential
Information, and will promptly return to the Company any material which contain
Confidential Information which are in Executive's possession or control.

     6.4  Equitable Relief. Executive acknowledges and agrees that it would be
difficult to measure the damage to the Company (or any subsidiary or affiliate,
as the case may be) from any breach of Executive's obligations under this
Article 6, that injury to the Company (or to any subsidiary or affiliate, as the
case may be) from any such breach would be impossible to calculate, and that
money damages would therefore be an inadequate remedy for any such breach.
Therefore, Executive acknowledges and agrees that the Company, in addition to
any of its other rights or remedies, shall be entitled to seek injunctive or
other equitable relief without bond or other security in the event of an actual
or threatened breach of this Agreement. The obligations of Executive and the
rights and remedies of the Company under this Agreement are cumulative and in
addition to, and not in lieu of, any obligations, rights, or remedies created by
applicable patent, copyright, or other laws, including the statutory and common
laws governing unfair competition, misappropriation or theft of trade secrets,
proprietary rights, or confidential information generally.

     6.5  Survival of Obligations. Executive's obligations under this Article 6
shall survive the termination of Executive's employment regardless of the manner
of such termination and shall be binding upon Executive's heirs, executors,
administrators and legal representatives. The remedies to which the Company is
entitled under this Article 6 shall survive the termination of Executive's
employment with the Company until the expiration of the statute of limitations
period applicable to any claims which may arise under this Article 6.

7.   NOTICES

     All notices or other communications required or permitted to be made
hereunder shall be given in writing and sent by either personal delivery,
overnight delivery, or United States registered or certified mail, return
receipt requested, all of which shall be properly addressed with postal or
delivery charges prepaid, to the parties at their respective addresses set forth
below, or to such other addresses as either party may designate to the other in
accordance with this Article 7:

         If to the Company:   PacifiCare Health Systems, Inc.
                              3120 Lake Center Drive
                              Santa Ana, California 92704
                              Attn: President and Chief Executive Officer

         If to Executive:     NAME
                              ADDRESS
                              CITY/STATE
                              ZIP CODE

All notices sent by personal delivery shall be deemed given when actually
received. All notices sent by overnight delivery shall be deemed received on the
next business day. All other notices sent via


                                     - 11 -
   12

United States mail shall be deemed received no later than two business days
after mailing. Any notice given by any method not expressly authorized herein,
shall nevertheless be effective if actually received, and shall be deemed given
upon actual receipt.

8.   GENERAL PROVISIONS

     8.1  Severance Agreement. Any payments of compensation made pursuant to
Articles 4 and 5 are contingent on Executive executing the Company's standard
severance agreement, including a general release of the Company, its owners,
partners, stockholders, directors, officers, employees, independent contractors,
agents, attorneys, representatives, predecessors, successors and assigns,
parents, subsidiaries, affiliated entities and related entities.

     8.2  Assignability. This Agreement shall inure to the benefit of, and shall
be binding upon the heirs, executors, administrators, successors, and legal
representatives of Executive and shall inure to the benefit of, and be binding
upon the Company and its successors and assigns. Executive shall not assign,
delegate, subdelegate, transfer, pledge, encumber, hypothecate, or otherwise
dispose of this Agreement, or any rights, obligations, or duties hereunder, and
any such attempted delegation or disposition shall be null and void and without
any force or effect; provided, however, that nothing contained herein shall
prevent Executive from designating beneficiaries for insurance, death or
retirement benefits.

     8.3  Entire Agreement. This Agreement is a fully integrated document and
contains any and all promises, covenants, and agreements between the parties
hereto with respect to Executive's employment. This Agreement supersedes any and
all other, prior or contemporaneous, discussions, negotiations, representations,
warranties, covenants, conditions, and agreements, whether written or oral,
between the parties hereto. Except as expressed herein, the parties have not
exchanged any other representations, warranties, inducements, promises, or
agreements respecting Executive's employment with the Company.

     8.4  Severability. In the event any one or more of the provisions of this
Agreement shall be rendered by a court of competent jurisdiction to be invalid,
illegal, or unenforceable, in any respect, such invalidity, illegality, or
unenforceability shall not affect or impair the remainder of this Agreement
which shall remain in full force and effect and enforced accordingly, unless a
party demonstrates by a preponderance of the evidence that the invalidated
provision was an essential economic term of this Agreement.

     8.5  Amendment. This Agreement shall not be changed, amended, or modified,
nor shall any performance or condition hereunder be waived, in whole or in part,
except by written instrument signed by the party against whom enforcement or
waiver is sought. The waiver of any breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other or
subsequent breach of the same or any other term or condition of this Agreement.

     8.6  Governing Law. This Agreement shall be governed by, enforced under,
and construed in accordance with the laws of the State of California.


                                     - 12 -
   13

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.

The Company:                                    PACIFICARE HEALTH SYSTEMS, INC.,
                                                a Delaware corporation


                                                By:
                                                    ----------------------------



Executive:                                      --------------------------------
                                                Name


                                     - 13 -

EX-99.4

   1

                                                                    EXHIBIT 99.4


                               FIRST AMENDMENT TO
                      SENIOR EXECUTIVE EMPLOYMENT AGREEMENT


This First Amendment to Senior Executive Employment Agreement, dated as of DATE
(the "Amendment"), hereby amends the Senior Executive Employment Agreement,
dated as of March 30, 2001 (the "Agreement"), between PacifiCare Health Systems,
Inc., a Delaware corporation and NAME, an individual ("Executive"), as follows:

     1.   AMENDMENT OF SECTION 2.1 OF THE AGREEMENT. The parties hereby amend
the Agreement by adding the following sentences at the end of Section 2.1:

     In the event that at the end of the term of this Agreement, the Company
     neither renews the Agreement nor offers Executive a new employment
     agreement, then Executive's employment with the Company shall terminate
     pursuant to Section 2.2(d) of this Agreement. If the Company offers
     Executive a new employment agreement but Executive does not accept the new
     employment agreement, then Executive's continued employment with the
     Company will be without the benefit of a written employment agreement, in
     which case Executive's entitlement to severance benefits on termination
     shall be governed by then-existing Company policies and practices.

     2.   LIMITATION OF AMENDMENTS. Except as expressly provided herein, no
terms or provisions of any agreement or instrument are modified or changed by
this Amendment and the terms and provisions of the Agreement, as amended by this
Amendment, shall continue in full force and effect.

     3.   GOVERNING LAW. This Amendment shall be construed, interpreted and
enforced in accordance with, and governed by California law.

     4.   CAPITALIZED TERMS. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Agreement.

     5.   DUPLICATE ORIGINALS; EXECUTION IN COUNTERPARTS. This Amendment may be
executed in two or more counterparts, each of which shall be an original but all
of which together shall constitute one and the same instrument.

     6.   WAIVERS AND AMENDMENTS. Neither this Amendment nor any term hereof may
be changed, waived, discharged or terminated orally, or by any action or
inaction, but only by an instrument in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought.

     7.   SECTION HEADINGS. The titles of the sections hereof appear as a matter
of convenience only, do not constitute a part of this Amendment and shall not
affect the construction hereof.


                                       1
   2

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.

The Company:                            PACIFICARE HEALTH SYSTEMS, INC.,
                                        a Delaware corporation


                                        ----------------------------------------
                                        By:
                                        Title:



Executive:
                                        ----------------------------------------
                                        Name



                                        2