EXHIBIT 10.01

 

 

                      SENIOR EXECUTIVE EMPLOYMENT AGREEMENT

 

     This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of

March 30, 2001, 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 Howard G. Phanstiel

("Executive").

 

                                    RECITALS

 

     WHEREAS, the Company desires to continue Executive's employment in the

capacity of President and Chief Executive Officer.

 

     WHEREAS, the Company and Executive are entering into this Agreement to

establish the 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 President and Chief Executive

Officer, 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, 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.

 

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2.   TERM AND TERMINATION

 

     2.1  Term. The initial term of Executive's employment under this Agreement

shall be 36 months, commencing on the effective date of this Agreement. The

Company may extend this Agreement for a successive term 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. Except as provided by Section 2.2(f), 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.

 

     2.2  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 Subsections (a), (b), (c), (e) and (f) of this

     Section 2.2, Executive's termination shall be effective 45 days after

     receipt of such written notice.

 

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          e.   Upon the expiration of the term of this Agreement, the Company

     neither extends the Agreement pursuant to Section 2.1 nor offers Executive

     a new employment agreement.

 

          f.   Executive voluntarily terminates his employment, upon written

     notice to the Company, to be effective at the end of the term of this

     Agreement, after the Company offers Executive a new employment agreement

     that either establishes duties materially inconsistent with those described

     in Section 1.1 or reduces Executive's salary by more than 10 percent below

     the salary in effect at the end of the term of this Agreement.

 

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 $900,000. 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 coverage for Executive and Executive's dependents, pension and profit

sharing programs, and vacation and sick leave benefits, 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, the Company's

Statutory Restoration Plan and the Company's Deferred Compensation Plan. The

Company shall have the 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 an

$850.00 (eight hundred fifty dollar) 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

 

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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,

or any replacement plan (the "MICP"), and as may be further amended, modified,

or terminated, 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.

 

     3.7  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 President and Chief Executive Officer

of the Company or in any other capacity to which Executive may be appointed or

elected.

 

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;

 

          b.   Payment of benefits under the MICP set forth in Section 3.5 in

     accordance with the terms of the MICP plan document;

 

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          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 (except for resignation pursuant to Section 2.2(f)), 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 by Company Pursuant to Section 2.2(d) or 2.2(e). In the

event that the Company terminates Executive pursuant to Section 2.2(d) or 2.2(e)

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 two times Executive's then current annual

     salary under Section 3.1;

 

          b.   An amount equal to 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 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 dependents' medical, dental

     and vision benefits for a period of 24 months following the effective date

     of such termination;

 

          e.   An amount equal to 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

 

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     Company to executives with comparable responsibility and longevity as

     Executive and for 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 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 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

     employment status and if employed, the name and business of his 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.

 

     4.5  Resignation by Executive Pursuant to Section 2.2(f). In the event that

     Executive resigns pursuant to Section 2.2(f), then Executive shall be

     entitled to the compensation provided by Section 4.4 of this Agreement.

 

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

 

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     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

          three times Executive's then annual salary; (ii) an amount equal to

          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 amount equal to

          the equivalent of the cost of 36 months of COBRA benefits; and (v) an

          amount equal to 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 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 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 Section 5, the term

     "Change-of-Control" means and refers to:

 

               1.   The acquisition by any Person (as hereinafter defined) of

          Beneficial Ownership (as hereinafter defined) of 20% or more of either

          the then outstanding Stock (the "Outstanding Company Stock") or the

          combined voting power of the then

 

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          outstanding voting securities of the Company entitled to vote

          generally in the election of directors (the "Outstanding Company

          Voting Securities"), provided that, for purposes of this subsection

          (1), the following acquisitions shall not constitute a Change of

          Control: (I) any acquisition by the Company, (II) any acquisition by

          any employee benefit plan (or related trust) sponsored or maintained

          by the Company or any Person that controls, is controlled by or is

          under common control with, the Company or (III) any acquisition by any

          Person pursuant to a transaction which complies with clauses (I), (II)

          and (III) of subsection (3) of this definition; or

 

               2.   Individuals who, as of the Effective Date, constitute the

          Board (the "Incumbent Board") cease for any reason to constitute at

          least a majority of the Board, provided that, for purposes of this

          subsection (2), any individual who becomes a director subsequent to

          the Effective Date whose election, or nomination for election by the

          Company's shareholders, was approved by a vote of at least a majority

          of the directors then comprising the Incumbent Board shall be

          considered as though such individual were a member of the Incumbent

          Board, 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 other than the Board; or

 

               3.   Consummation of a reorganization, merger or consolidation or

          sale or other disposition of all or substantially all of the assets of

          the Company or the acquisition of assets or stock of another

          corporation (a "Business Combination"), in each case, unless,

          following such Business Combination, (I) the Persons who had

          Beneficial Ownership, respectively, of the Outstanding Company Stock

          and Outstanding Company Voting Securities immediately prior to such

          Business Combination have Beneficial Ownership immediately following

          the consummation of such Business Combination, directly or indirectly,

          of more than 50% of, respectively, the then outstanding common shares

          and the combined voting power of the then outstanding voting

          securities entitled to vote generally in the election of directors, as

          the case may be, of the corporation resulting or surviving from such

          Business Combination (including, without limitation, a corporation

          which as a result of such transaction owns the Company or all or

          substantially all of the Company's assets either directly or through

          one or more subsidiaries) in substantially the same proportions as

          their ownership immediately prior to such Business Combination of the

          Outstanding Company Stock and Outstanding Company Voting Securities,

          as the case may be, (II) no Person (excluding any entity resulting

          from such Business Combination or any employee benefit plan (or

          related trust) of the Company or such entity resulting from such

          Business Combination) has Beneficially Ownership, directly or

          indirectly, of 20% or more of, respectively, the then outstanding

          common shares of the entity resulting from such Business Combination

          or the combined voting power of the then outstanding voting securities

          of such entity, except to the

 

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          extent that such ownership existed in respect of the Company prior to

          such Business Combination and (III) at least a majority of the members

          of the board of directors or similar body of the entity resulting from

          such Business Combination were members of the Incumbent Board at the

          time of the execution of the initial agreement, or of the action of

          the Board of Directors, providing for such Business Combination; or

 

               4.   Approval by the shareholders of the Company of a complete

          liquidation or dissolution of the Company.

 

          Notwithstanding the foregoing provisions of this definition, unless

     otherwise determined by the Board, no Change of Control shall be deemed to

     have occurred if (I) Executive is a member of a group that first announces

     a proposal which, if successful, would result in a Change of Control and

     which proposal (including any modifications thereof) is ultimately

     successful, or (II) Executive acquires a two percent (2%) or more equity

     interest in the entity which ultimately acquires the Company pursuant to

     the transaction described in clause (I), above.

 

          For purposes of this definition, "Person" means an individual,

     partnership, joint venture corporation, trust, unincorporated organization,

     government (or agency or political subdivision thereof), group (within the

     meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) or any other

     entity, and "Beneficial Ownership" means beneficial ownership within the

     meaning of Rule 13d-3 promulgated under the Exchange Act.

 

          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 (of more than 50 miles from Executive's 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

 

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          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.

 

               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.

 

               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

 

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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 and any other

protected healthcare information, 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 and may include confidential or

proprietary information received from third parties. In 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 except

for Inventions made prior to commencement of Executive's employment with the

Company, in addition to the above

 

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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

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  No Solicitation. Executive acknowledges and agrees that Executive will

not solicit or participate in or assist in any way in the solicitation of any

employees of Company. For purposes of this provision, "solicitation" means

directly or indirectly influencing or attempting to influence employees of

Company to become employed with any person, partnership, firm, corporation or

other entity.

 

     6.5  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

 

                                      -12-

<PAGE>

 

unfair competition, misappropriation or theft of trade secrets, proprietary

rights, or confidential information generally.

 

     6.6  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.

 

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 address as either party may designate to the other in

accordance with this Article 7:

 

                                      -13-

<PAGE>

 

     If to the Company:    PacifiCare Health Systems, Inc.

                           3120 Lake Center Drive

                           Santa Ana, California 92704

                           Attn: Chairman of the Board

                           of Directors

 

     If to Executive:      Howard G. Phanstiel

                           10601 Wilshire Boulevard, Unit 403

                           Los Angeles, California 90024

 

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 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.

 

                                      -14-

<PAGE>

 

     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.

 

     8.7  Membership on Other Boards. Executive, with the permission and

knowledge of the Company's Board of Directors, may serve on the Board of

Directors of Wedbush Morgan Securities and on the "Advisory Board" of XYZ Auto

Corporation during the course of his Agreement with the Company, as long as such

service does not interrupt Executive in the performance of his duties as the

full-time President and Chief Executive Officer of the Company. From time to

time, Executive may serve on additional Boards with the approval of the

Company's Board of Directors.

 

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as

of the date first written above.

 

Company:                                PACIFICARE HEALTH SYSTEMS, INC.,

                                        a Delaware corporation

 

                                        By:

                                            ------------------------------------

                                              David Reed

                                              Chairman of the Board of Directors

 

 

 

Executive:                              ----------------------------------------

                                              Howard G. Phanstiel

 

                                      -15-