PACIFICARE HEALTH SYSTEMS INC, S-4, 1996-11-18

PACIFICARE HEALTH SYSTEMS INC
S-4, 1996-11-18
HOSPITAL & MEDICAL SERVICE PLANS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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N-T HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 6324 95-4591529
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>

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N-T HOLDINGS, INC.
5995 PLAZA DRIVE
CYPRESS, CA 90630-5028
TELEPHONE: (714) 952-1121
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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ALAN R. HOOPS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
N-T HOLDINGS, INC.
5995 PLAZA DRIVE
CYPRESS, CA 90630-5028
TELEPHONE: (714) 952-1121
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:

<TABLE>
<S> <C>
Michael R. Jacobson, Esq. John D. Hussey, Esq.
COOLEY GODWARD LLP SHEPPARD, MULLIN, RICHTER & HAMPTON
Five Palo Alto Square LLP
3000 El Camino Real 333 South Hope Street, 48th Floor
Palo Alto, California 94306-2155 Los Angeles, California 90071-1448
(415) 843-5000 (213) 620-1780
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after this Registration Statement becomes
effective and the effective time of the proposed mergers of Neptune Merger Corp.
with and into PacifiCare Health Systems, Inc. ("PacifiCare") and of Tree
Acquisition Corp. with and into FHP International Corporation ("FHP"), as
described in the Amended and Restated Agreement and Plan of Reorganization,
dated as of November 11, 1996, attached as APPENDIX A to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement.
--------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE (1) FEE (1)
<S> <C> <C>
Class A Common Stock, $0.01 par value......................... $3,622,864,525(2) $165,934.59(2)
Class B Common Stock, $0.01 par value......................... (2) (2)
Series A Cumulative Convertible Preferred Stock, $0.01 par
value........................................................ (2) (2)
</TABLE>

(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rules 457(f)(1) and (3) based upon the market value per share on November
11, 1996 of the Class A Common Stock and Class B Common Stock of PacifiCare,
and the Common Stock and Series A Cumulative Convertible Preferred Stock of
FHP, less the estimated cash payments to be made to the holders of FHP
securities and, pursuant to Rule 0-11(a)(2), less the fee of $931,903.15
paid by PacifiCare for its filing of the preliminary proxy statement on
September 18, 1996.

(2) Information on the maximum offering price of all the securities listed in
the table is provided pursuant to Rule 457(o).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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- --------------------------------------------------------------------------------
<PAGE>
Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders (the
"PacifiCare Meeting") of PacifiCare Health Systems, Inc. ("PacifiCare") to be
held at PacifiCare's offices, 5995 Plaza Drive, Cypress, California 90630, on
December 31, 1996, at 10:00 a.m., Pacific Standard Time.

At this meeting you will be asked to consider and vote upon, among other
proposals, the approval and adoption of a proposed acquisition transaction (the
"Transaction") involving PacifiCare and FHP International Corporation ("FHP").
Upon consummation of the Transaction: (i) each of PacifiCare and FHP will become
a wholly owned subsidiary of PacifiCare Holding; (ii) each outstanding share of
PacifiCare Class A Common Stock will be converted into the right to receive one
share of PacifiCare Holding Class A Common; (iii) each outstanding share of
PacifiCare Class B Common Stock will be converted into the right to receive one
share of PacifiCare Holding Class B Common; (iv) each outstanding share of FHP
Common Stock will be converted into the right to receive $17.50 in cash and a
mix of PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus; (v) each outstanding share of FHP Preferred Stock will be
converted into the right to receive either (a) $14.113 in cash and 0.50 shares
of PacifiCare Holding Series A Preferred Stock, assuming approval of an
amendment to the FHP Certificate of Incorporation (the "Series A Amendment") or
an irrevocable election by the holder of such share to receive such
consideration whether or not the Series A Amendment is approved (an "Irrevocable
Election"), or (b) if the Series A Amendment is not approved and an Irrevocable
Election as to such share is not made, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the consummation of the Transaction; and (vi) each outstanding share of FHP
Common Stock and FHP Preferred Stock will be converted in part into rights
("Talbert Rights") to purchase a proportionate share (on an as-if-converted
basis) of all of FHP's holdings in Talbert Medical Management Corporation and
Talbert Health Services Corporation. The offering of Talbert Rights will be
commenced promptly after consummation of the Transaction (or as soon thereafter
as legally permissible) and the Talbert Rights will be exercisable for 30 days.

You will also be asked to consider and approve the adoption of an amendment
to the PacifiCare Certificate of Incorporation to exempt the merger of a wholly
owned subsidiary of PacifiCare Holding with and into PacifiCare (the "PacifiCare
Merger") from a requirement of the PacifiCare Certificate of Incorporation that,
in the event of a merger or consolidation of PacifiCare, the holders of
PacifiCare Class B Common Stock receive the same consideration per share as the
consideration per share for the PacifiCare Class A Common Stock in such merger
or consolidation (the "PacifiCare Amendment"). The proposed change is necessary
to permit consummation of the transactions contemplated by the Reorganization
Agreement. All other material provisions of PacifiCare's existing Certificate of
Incorporation will remain the same and will be replicated in the PacifiCare
Holding Certificate of Incorporation.

The Transaction is contingent upon, among other things, the approval of
holders of the PacifiCare Class A Common Stock and the PacifiCare Class B Common
Stock and the holders of FHP Common Stock and the receipt of required regulatory
approvals. The Transaction would be consummated shortly after such approvals are
obtained and the other conditions to the Transaction are satisfied or waived,
which is currently expected to occur in early January 1997.

Also at this meeting, you will be asked to consider and vote upon the
approval and adoption of the Second Amended 1992 Non-Officer Directors Stock
Option Plan of PacifiCare Health Systems, Inc. (the "Second Amended PacifiCare
Directors Plan"). The Second Amended PacifiCare Directors Plan would: (i)
increase the number of shares of PacifiCare Class B Common Stock available for
option grants under such plan; (ii) increase the number of shares of PacifiCare
Class B Common Stock underlying the options automatically granted to eligible
directors each year; and (iii) provide for the automatic grant of options to
purchase shares of PacifiCare Class B Common Stock to eligible directors upon
being elected to the PacifiCare Board of Directors.
<PAGE>
YOUR BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF PACIFICARE, INCLUDING ITS STOCKHOLDERS, AND WILL CREATE A STRONG
NEW COMBINED COMPANY. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
TRANSACTION, THE PACIFICARE AMENDMENT AND THE SECOND AMENDED PACIFICARE
DIRECTORS PLAN AND RECOMMENDS THAT YOU VOTE FOR THE TRANSACTION, FOR THE
PACIFICARE AMENDMENT AND FOR THE SECOND AMENDED PACIFICARE DIRECTORS PLAN.

Attached is a Joint Proxy Statement/Prospectus which provides you with a
detailed description of, among other things, the PacifiCare Meeting, the
Transaction, the PacifiCare Amendment and the Second Amended PacifiCare
Directors Plan.

Approval and adoption of the Transaction requires the affirmative vote of
the majority of the outstanding shares of PacifiCare Class A Common Stock.
Approval and adoption of the PacifiCare Amendment requires the affirmative vote
of a majority of the outstanding shares of PacifiCare Class A Common Stock and a
majority of the outstanding shares of PacifiCare Class B Common Stock, each
voting separately as a class. Approval and adoption of the Second Amended
PacifiCare Directors Plan requires the affirmative vote of a majority of the
outstanding shares of PacifiCare Class A Common Stock voting.

It is important that your shares be represented and voted at the PacifiCare
Meeting, whether or not you plan to attend in person. PLEASE COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE. If you are present at the PacifiCare Meeting, you may, of
course, vote your shares in person.

Very truly yours,

Terry O. Hartshorn
November , 1996 CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders (the
"FHP Meeting") of FHP International Corporation ("FHP") to be held at the FHP
University Building, 3515 Harbor Boulevard, Costa Mesa, California 92626, on
December 31, 1996, at 2:00 p.m., Pacific Standard Time.

At this meeting you will be asked to consider and vote upon, among other
proposals, the approval and adoption of a proposed acquisition transaction (the
"Transaction") involving PacifiCare Health Systems, Inc., ("PacifiCare") and
FHP. Upon consummation of the Transaction: (i) each of PacifiCare and FHP will
become a wholly owned subsidiary of PacifiCare Holding; (ii) each outstanding
share of FHP Common Stock will be converted into the right to receive $17.50 in
cash and a mix of PacifiCare Holding Class A Common and PacifiCare Holding Class
B Common determined by a formula described in the attached Joint Proxy
Statement/Prospectus; (iii) each outstanding share of FHP Preferred Stock will
be converted into the right to receive either (a) $14.113 in cash and 0.50
shares of PacifiCare Holding Series A Preferred Stock, assuming approval of an
amendment to the FHP Certificate of Incorporation (the "Series A Amendment") or
an irrevocable election by the holder of such share to receive such
consideration whether or not the Series A Amendment is approved (an "Irrevocable
Election"), or (b) if the Series A Amendment is not approved and an Irrevocable
Election as to such share is not made, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the consummation of the Transaction; and (iv) each outstanding share of FHP
Common Stock and FHP Preferred Stock will be converted in part into rights
("Talbert Rights"), to purchase a proportionate share (on an as-if-converted
basis) of all of FHP's holdings in Talbert Medical Management Corporation and
Talbert Health Services Corporation. The offering of Talbert Rights will be
commenced promptly after consummation of the Transaction (or as soon thereafter
as legally permissable) and the Talbert Rights will be exercisable for 30 days.
In connection with the Transaction, existing holders of PacifiCare Common Stock
will exchange their shares for shares of PacifiCare Holding on a share for share
basis.

You will also be asked to consider and approve the adoption of the Series A
Amendment to: (i) exempt the FHP Merger from a requirement of the existing FHP
Certificate of Incorporation that, in the event of a merger or consolidation of
FHP, the holders of FHP Preferred Stock are entitled to receive upon conversion
thereof the same consideration per share as the consideration per share they
would have received in the event they converted their FHP Preferred Stock into
FHP Common Stock immediately prior to such merger or consolidation; and (ii)
provide that the holders of FHP Preferred Stock are not entitled to Special
Conversion Rights (as defined in the existing FHP Certificate of Incorporation)
as a result of the FHP Merger. Holders of FHP Preferred Stock desiring to
receive the same consideration such holders would receive assuming approval of
the Series A Amendment whether or not the Series A Amendment is approved may
irrevocably elect to receive such consideration by completing and returning the
Form of Irrevocable Election accompanying these proxy materials in accordance
with the instructions set forth therein, on or before December 27, 1996.

The Transaction is contingent upon, among other things, the approval of the
common stockholders of FHP and PacifiCare and the receipt of required regulatory
approvals. The Transaction would be consummated shortly after such approvals are
obtained and the other conditions to the Transaction are satisfied or waived,
which is currently expected to occur in early January 1997.

YOUR BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF FHP AND ITS STOCKHOLDERS, AND WILL CREATE A STRONG NEW COMBINED
COMPANY. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TRANSACTION AND
RECOMMENDS THAT YOU VOTE FOR THE TRANSACTION AND FOR THE SERIES A AMENDMENT.

Attached is a Joint Proxy Statement/Prospectus which provides you with a
detailed description of, among other things, the FHP Meeting, the Transaction,
the Series A Amendment and the Irrevocable Election.
<PAGE>
Whether or not you plan to attend the FHP Meeting or make an Irrevocable
Election, PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE. If you are present at the FHP
Meeting, you may, of course, vote your shares in person.

Very truly yours,

Westcott W. Price III
VICE CHAIRMAN OF THE BOARD,
November , 1996 PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
NOTICE TO PARTICIPANTS
IN THE
FHP INTERNATIONAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Ladies and Gentlemen:

As a participant in the FHP International Corporation ("FHP") Employee Stock
Ownership Plan (the "Plan"), you have certain rights in FHP Common Stock. This
entitles you to exercise "voting rights" as described below.

At the Annual Meeting of the Stockholders (the "FHP Meeting") of FHP to be
held at the FHP University Building, 3515 Harbor Boulevard, Costa Mesa,
California 92626, on December 31, 1996, at 2:00 p.m., Pacific Standard Time, FHP
Stockholders will be asked to consider and vote upon, among other proposals, the
approval and adoption of a proposed acquisition transaction (the "Transaction")
involving PacifiCare Health Systems, Inc., ("PacifiCare") and FHP. Upon
consummation of the Transaction: (i) each of PacifiCare and FHP will become a
wholly owned subsidiary of PacifiCare Holding; (ii) each outstanding share of
FHP Common Stock will be converted into the right to receive $17.50 in cash and
a mix of PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus; (iii) each outstanding share of FHP Preferred Stock will
be converted into the right to receive either (a) $14.113 in cash and 0.50
shares of PacifiCare Holding Series A Preferred Stock, assuming approval of an
amendment to the FHP Certificate of Incorporation (the "Series A Amendment") or
an irrevocable election by the holder of such share to receive such
consideration whether or not the Series A Amendment is approved (an "Irrevocable
Election"), or (b) if the Series A Amendment is not approved and an Irrevocable
Election as to such share is not made, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the Transaction; and (iv) each outstanding share of FHP Common Stock and FHP
Preferred Stock will be converted in part into rights ("Talbert Rights"), to
purchase a proportionate share (on an as-if-converted basis) of all of FHP's
holdings in Talbert Medical Management Corporation and Talbert Health Services
Corporation. The offering of Talbert Rights will be commenced promptly after
consummation of the Transaction (or as soon thereafter as legally permissible)
and the Talbert Rights will be exercisable for 30 days. In connection with the
Transaction, existing holders of PacifiCare Common Stock will exchange their
shares for shares of PacifiCare Holding on a share-for-share basis.

Wells Fargo Bank is the trustee (the "Trustee") of the Plan and holds all
shares of stock of FHP now in the Plan (the "Shares"). The Plan requires the
Trustee to solicit voting instructions from you and to vote the Shares in
accordance with your instructions. Under the Plan, you are designated as a
"named fiduciary" for voting purposes and, as a named fiduciary, you are
entitled to instruct the Trustee as to how to vote (i) all Shares allocated to
your Plan account and (ii) a proportionate number of unallocated Shares held by
the Plan for future allocation to participants' accounts. You may direct
<PAGE>
the Trustee to vote both the allocated and unallocated Shares by completing,
signing and returning the enclosed voting instruction card. If you want your
voting instructions to be limited only to the Shares allocated to your accounts,
you should mark the box on the instruction card labelled "ALLOCATED SHARES
ONLY."

You should understand that by signing and returning the enclosed instruction
card, you are accepting the designation as a named fiduciary of the Plan.
Accordingly, you should exercise your voting rights prudently and, with respect
to unallocated Shares, in a manner intended to benefit all Participants.

CONFIDENTIAL INSTRUCTIONS

For your information, as explained in the attached Joint Proxy
Statement/Prospectus, the Board of Directors unanimously recommends a vote FOR
the Transaction, FOR the Series A Amendment, FOR election of the three directors
nominated by the Board of Directors and FOR the ratification of the appointment
of the Independent Auditors. However, the Trustee makes no recommendation with
respect to your voting decisions. IN YOUR COMPLETE DISCRETION, YOU MAY FOLLOW
THE FHP BOARD OF DIRECTORS' RECOMMENDATIONS OR YOU MAY VOTE DIFFERENTLY ON ANY
OR ALL ISSUES. As provided in the Plan, your voting instructions will be kept
confidential and will not be disclosed by the Trustee to any person, except as
may be necessary to tabulate your voting instructions.

COMPLETING YOUR VOTING

American Stock Transfer & Trust Company has been asked to receive and
tabulate your voting instructions to the Trustee. In order for your voting
instructions to the Trustee to be effective, you must complete, sign and date
the enclosed instruction card and return it to American Stock Transfer & Trust
Company in the enclosed pre-addressed envelope. Your instruction card must be
received no later than the close of business on December 30, 1996.

HOW THE VOTES ARE COUNTED

IF THE TRUSTEE RECEIVES AN INSTRUCTION CARD FROM YOU ON TIME, IT WILL VOTE
YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE OF THE UNALLOCATED SHARES AS
YOU INSTRUCT. IF THE TRUSTEE DOES NOT RECEIVE AN INSTRUCTION CARD FROM YOU ON
TIME, THE TRUSTEE WILL VOTE YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE
OF THE UNALLOCATED SHARES IN ACCORDANCE WITH THE INSTRUCTIONS OF THE OTHER
PARTICIPANTS WHO PROVIDE TIMELY VOTING INSTRUCTIONS TO THE TRUSTEE. IF YOU SIGN
AND TIMELY RETURN AN INSTRUCTION CARD WITHOUT INDICATING A VOTE, THE TRUSTEE
WILL VOTE YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE OF THE UNALLOCATED
SHARES IN ACCORDANCE WITH THE FHP BOARD OF DIRECTORS' RECOMMENDATIONS LISTED
ABOVE.

As an example of proportionate voting of allocated and unallocated Shares
for which an instruction card is not returned, assume on a particular issue the
Trustee receives a total of 80 "FOR" votes and 20 "AGAINST" votes from all of
the participants who complete and return instruction cards on time. The Trustee
will vote 80% of the allocated and unallocated Shares for which an instruction
card was not returned as a "FOR" vote and 20% of the allocated and unallocated
Shares for which an instruction card is not returned as an "AGAINST" vote on
that issue.

Attached is a Joint Proxy Statement/Prospectus which provides you with a
detailed description of, among other things, the FHP Meeting, the Transaction
and the Series A Amendment. PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING
INSTRUCTION CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE.

Dated: November , 1996

WELLS FARGO BANK (Trustee)
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
5995 PLAZA DRIVE
CYPRESS, CALIFORNIA 90630-5028

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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 31, 1996

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

TO THE STOCKHOLDERS OF PACIFICARE HEALTH SYSTEMS, INC.:

A Special Meeting of Stockholders (the "PacifiCare Meeting") of PacifiCare
Health Systems, Inc., a Delaware corporation ("PacifiCare"), will be held at
PacifiCare's offices at 5995 Plaza Drive, Cypress, California 90630, on December
31, 1996, at 10:00 a.m., Pacific Standard Time, for the purpose of considering
and voting upon the following:

1. The approval and adoption of the Amended and Restated Agreement and Plan
of Reorganization, dated as of November 11, 1996, among PacifiCare, N-T
Holdings, Inc., a Delaware corporation ("PacifiCare Holding"), Neptune
Merger Corp., a Delaware corporation and wholly owned subsidiary of
PacifiCare Holding ("PacifiCare Merger Sub"), Tree Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of PacifiCare Holding
("FHP Merger Sub"), and FHP International Corporation, a Delaware
corporation ("FHP") (the "Reorganization Agreement"), a copy of which is
set forth as Appendix A to the attached Joint Proxy Statement/Prospectus.
Pursuant to the Reorganization Agreement, among other things: (i)
PacifiCare Merger Sub will be merged with and into PacifiCare (the
"PacifiCare Merger"); (ii) FHP Merger Sub will be merged with and into
FHP; and (iii) each of PacifiCare and FHP will become a wholly owned
subsidiary of PacifiCare Holding.

2. The approval and adoption of an amendment to the Certificate of
Incorporation of PacifiCare (the "PacifiCare Amendment") to exempt the
PacifiCare Merger from a requirement of the PacifiCare Certificate of
Incorporation that, in the event of a merger or consolidation of
PacifiCare, the holders of PacifiCare Class B Common Stock receive the
same consideration per share as the consideration per share for the
PacifiCare Class A Common Stock in such merger or consolidation. The
PacifiCare Amendment is necessary to consummate the transactions
contemplated by the Reorganization Agreement.

3. The approval and adoption of the Second Amended 1992 Non-Officer
Directors Stock Option Plan of PacifiCare Health Systems, Inc. (the
"Second Amended PacifiCare Directors Plan"): (i) to increase the number
of shares of PacifiCare Class B Common Stock available for option grants
under such plan; (ii) to increase the number of shares of PacifiCare
Class B Common Stock underlying the options automatically granted to
eligible directors each year; and (iii) to provide for the grant of
options to purchase shares of PacifiCare Class B Common Stock to eligible
directors upon being elected to the PacifiCare Board of Directors.

Only stockholders of record at the close of business on November 11, 1996
are entitled to receive notice of, and to vote at, the PacifiCare Meeting.
Holders of all PacifiCare Class A Common Stock are entitled to vote on all
matters to be considered at the PacifiCare Meeting. Holders of PacifiCare Class
B Common Stock are entitled to vote only on the approval and adoption of the
PacifiCare Amendment. The PacifiCare Merger may take place only if both matters
are approved.

Your attention is directed to the accompanying Joint Proxy
Statement/Prospectus and proxy. PacifiCare invites you to attend the PacifiCare
Meeting in person. Whether or not you plan to attend the PacifiCare Meeting, you
are requested to COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE. Your prompt cooperation is
greatly appreciated.

By Order of the Board of Directors,

Terry O. Hartshorn
CHAIRMAN OF THE BOARD
Cypress, California
November , 1996
<PAGE>
FHP INTERNATIONAL CORPORATION
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 31, 1996
------------------------

TO THE STOCKHOLDERS OF FHP INTERNATIONAL CORPORATION:

The Annual Meeting of Stockholders of FHP International Corporation, a
Delaware corporation ("FHP"), will be held at the FHP University Building, 3515
Harbor Boulevard, Costa Mesa, California 92626, on December 31, 1996, at 2:00
p.m., Pacific Standard Time, to consider and vote on the following matters
described in the Joint Proxy Statement/Prospectus:

1. The approval and adoption of the Amended and Restated Agreement and Plan
of Reorganization, dated as of November 11, 1996, among PacifiCare Health
Systems, Inc., a Delaware corporation ("PacifiCare"), N-T Holdings, Inc.,
a Delaware corporation ("PacifiCare Holding"), Neptune Merger Corp., a
Delaware corporation and wholly owned subsidiary of PacifiCare Holding
("PacifiCare Merger Sub"), Tree Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of PacifiCare Holding ("FHP Merger Sub"), and
FHP (the "Reorganization Agreement"), a copy of which is set forth as
Appendix A to the attached Joint Proxy Statement/Prospectus. Pursuant to
the Reorganization Agreement, among other things: (i) PacifiCare Merger
Sub will be merged with and into PacifiCare; (ii) FHP Merger Sub will be
merged with and into FHP (the "FHP Merger"); and (iii) each of PacifiCare
and FHP will become a wholly owned subsidiary of PacifiCare Holding.

2. The approval and adoption of an amendment to the Restated Certificate of
Incorporation of FHP (the "Series A Amendment") to: (i) exempt the FHP
Merger from a requirement of the existing FHP Certificate of
Incorporation that, in the event of a merger or consolidation of FHP, the
holders of FHP Series A Cumulative Convertible Preferred Stock ("FHP
Preferred Stock") are entitled to receive upon conversion thereof the
same consideration per share as the consideration per share they would
have received in the event they converted their FHP Preferred Stock into
FHP Common Stock immediately prior to such merger or consolidation; and
(ii) provide that the holders of FHP Preferred Stock are not entitled to
Special Conversion Rights (as defined in the existing FHP Certificate of
Incorporation) as a result of the FHP Merger.

3. To elect three directors to hold office for three-year terms.

4. To ratify the appointment of independent auditors.

5. To transact such other business as may properly come before the meeting,
or any adjournments or postponements thereof.

The Board of Directors has fixed the close of business on November 8, 1996,
as the record date for determining stockholders entitled to receive notice of
and to vote at the meeting and at any adjournment or postponement thereof.
Holders of FHP Common Stock are entitled to vote on all matters to be considered
at the Annual Meeting. Holders of FHP Preferred Stock are entitled to vote on
the approval and adoption of the Series A Amendment. All stockholders are
cordially invited to attend the Annual Meeting in person. Whether or not you
plan to attend the Annual Meeting, you are urged to COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST CONVENIENCE IN THE ENCLOSED
ENVELOPE. If you attend the Annual Meeting and wish to vote your own shares in
person, you may withdraw your proxy at that time.

By Order of the Board of Directors,

Westcott W. Price III
VICE CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Santa Ana, California
November , 1996
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
AND
FHP INTERNATIONAL CORPORATION
----------------

JOINT PROXY STATEMENT
FOR STOCKHOLDERS MEETINGS TO BE HELD ON DECEMBER 31, 1996
---------------------
N-T HOLDINGS, INC.
PROSPECTUS

This Joint Proxy Statement/Prospectus is being furnished to holders of
PacifiCare Class A Common Stock and PacifiCare Class B Common Stock in
connection with the solicitation of proxies by the PacifiCare Board of Directors
in connection with the PacifiCare Meeting, and to holders of FHP Common Stock
and holders of FHP Preferred Stock in connection with the solicitation of
proxies by the FHP Board of Directors for use at the FHP Meeting.

The Meetings are each being called to consider and vote upon, among other
things, a proposal to approve and adopt the Reorganization Agreement. The
Reorganization Agreement provides for, among other things, an acquisition
transaction involving PacifiCare and FHP by means of the merger of PacifiCare
Merger Sub with and into PacifiCare and the merger of FHP Merger Sub with and
into FHP. As a result, PacifiCare and FHP will become wholly owned subsidiaries
of PacifiCare Holding and the stockholders of PacifiCare and FHP will become
stockholders of PacifiCare Holding. Upon consummation of the Mergers: (i) each
outstanding share of PacifiCare Class A Common Stock will be converted into the
right to receive one share of PacifiCare Holding Class A Common; (ii) each
outstanding share of PacifiCare Class B Common Stock will be converted into the
right to receive one share of PacifiCare Holding Class B Common; (iii) each
outstanding share of FHP Common Stock will be converted into the right to
receive $17.50 in cash and a mix of PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common as determined in the Reorganization Agreement;
and (iv) each outstanding share of FHP Preferred Stock will be converted into
the right to receive either (a) $14.113 in cash and 0.50 shares of PacifiCare
Holding Preferred, assuming approval of the Series A Amendment or an Irrevocable
Election by the holder of such share, or (b) if the Series A Amendment is not
approved and an Irrevocable Election as to such share is not made, (1) $25.00 in
cash, (2) a mix of cash, PacifiCare Class A Common and PacifiCare Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the Effective Time. By virtue of the Mergers, each outstanding share of FHP
Common Stock and FHP Preferred Stock will be converted in part into Talbert
Rights to purchase a proportionate share (on an as-if-converted basis) of all of
FHP's ownership interest in Talbert. The offering of Talbert Rights will be
commenced promptly after consummation of the Mergers (or as soon thereafter as
legally permissible) and the Talbert Rights will be exercisable for 30 days.

This Joint Proxy Statement/Prospectus is also being furnished: (i) to
holders of PacifiCare Common Stock to consider and vote upon the approval and
adoption of the PacifiCare Amendment to exempt the PacifiCare Merger from a
requirement of the PacifiCare Certificate of Incorporation that, in the event of
a merger or consolidation of PacifiCare, the holders of PacifiCare Class B
Common Stock receive the same consideration per share as the consideration per
share for the PacifiCare Class A Common Stock in such merger or consolidation;
(ii) to holders of PacifiCare Class A Common Stock to consider and vote upon the
approval and adoption of the Second Amended PacifiCare Directors Plan; (iii) to
holders of FHP Capital Stock to consider and vote upon the adoption of the
Series A Amendment to provide for exemption of the FHP Merger from a requirement
that the holders of FHP Preferred Stock, in the event of a merger or
consolidation of FHP, receive the same consideration per share as the
consideration they would have received if they had converted their shares into
FHP Common Stock immediately prior to the effectiveness of such merger or
consolidation, and from a requirement that such holders receive certain special
conversion rights in connection
<PAGE>
with the FHP Merger; and (iv) to holders of FHP Common Stock to consider and
vote upon, (a) the election of three directors of FHP to hold office for
three-year terms and (b) the ratification of the appointment of independent
auditors.

The proposed Mergers are contingent upon, among other things, the approval
of the holders of PacifiCare Class A Common Stock and PacifiCare Class B Common
Stock and the holders of FHP Common Stock and the receipt of required regulatory
approvals. The proposed Mergers will be consummated shortly after such approvals
are obtained and the other conditions to the Mergers are satisfied or waived,
which is currently expected to be in early January 1997.

All information contained or incorporated by reference herein concerning
PacifiCare has been furnished by PacifiCare, and all information contained or
incorporated by reference herein concerning FHP and Talbert has been furnished
by FHP and Talbert, respectively.

Certain capitalized terms are defined in the Glossary.

This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
and Form of Irrevocable Election are first being mailed to stockholders of each
of PacifiCare and FHP on or about November , 1996.
------------------------

THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGERS ARE COMPLEX TRANSACTIONS. STOCKHOLDERS OF FHP
AND PACIFICARE ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT
PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" BEGINNING AT PAGE 18.
------------------------

THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGERS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------

The date of this Joint Proxy Statement/Prospectus is November , 1996.

ii
<PAGE>
AVAILABLE INFORMATION

Each of PacifiCare and FHP is subject to the informational requirements of
the Exchange Act, and in accordance therewith files reports, proxy statements
and other information with the Commission. The reports, proxy statements and
other information filed by each of PacifiCare and FHP with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material may also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.

This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto
filed by PacifiCare Holding, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission and to which portions
reference is hereby made for further information with respect to PacifiCare
Holding, PacifiCare, FHP, the Mergers, the securities offered hereby and related
matters. The Registration Statement and the exhibits thereto may be inspected
without charge at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained from the Commission at
prescribed rates.

The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission (Commission
file number 0-14181) by PacifiCare pursuant to the Exchange Act are incorporated
by reference into this Joint Proxy Statement/Prospectus:

1. PacifiCare's Annual Report on Forms 10-K and 10-K/A for the fiscal year
ended September 30, 1995;

2. PacifiCare's Quarterly Reports on Form 10-Q for the quarterly periods
ended December 31, 1995 and March 31, 1996, and Forms 10-Q and 10-Q/A for
the quarterly period ended June 30, 1996; and

3. PacifiCare's Current Report on Form 8-K filed on September 23, 1996.

The following documents previously filed with the Commission (Commission
file number 0-14796) by FHP pursuant to the Exchange Act are incorporated by
reference into this Joint Proxy Statement/Prospectus:

1. FHP's Annual Report on Form 10-K for the fiscal year ended June 30,
1996;

2. FHP's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996; and

3. FHP's Current Reports on Form 8-K filed on August 19, 1996 and September
24, 1996.

The information relating to PacifiCare and FHP contained in this Joint Proxy
Statement/
Prospectus does not purport to be comprehensive and should be read together with
the information in the documents incorporated by reference herein.

All documents filed by PacifiCare and FHP pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of the PacifiCare Meeting and the FHP
Meeting shall be deemed to be incorporated by reference into this Joint Proxy
Statement/Prospectus and to be a part hereof from the dates of filing such
documents or reports. Any statement contained herein or in a document
incorporated or deemed to be incorporated

iii
<PAGE>
by reference herein shall be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which is also incorporated or
is deemed to be incorporated herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
------------------------

THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN CERTAIN EXHIBITS TO DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM A
COPY OF THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR
ORAL REQUEST, IN THE CASE OF PACIFICARE DOCUMENTS, TO PACIFICARE HEALTH SYSTEMS,
INC., 5995 PLAZA DRIVE, CYPRESS, CALIFORNIA 90630-5028, ATTENTION: INVESTOR
RELATIONS, TELEPHONE NUMBER (714) 952-1121, AND, IN THE CASE OF FHP DOCUMENTS,
TO FHP INTERNATIONAL CORPORATION, P.O. BOX 25186, SANTA ANA, CALIFORNIA
92799-5186, ATTENTION: INVESTOR RELATIONS DEPARTMENT, TELEPHONE NUMBER (714)
825-6600. IN ORDER TO ENSURE DELIVERY PRIOR TO THE MEETINGS, REQUESTS SHOULD BE
RECEIVED BY DECEMBER 23, 1996.
------------------------

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING AND THE SOLICITATIONS MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY PACIFICARE OR FHP. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF EITHER PACIFICARE OR
FHP SINCE THE DATE HEREOF.

iv
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ iii
GLOSSARY................................................................................................... viii
SUMMARY.................................................................................................... 1
The Companies............................................................................................ 1
The PacifiCare Special Meeting........................................................................... 1
The FHP Annual Meeting................................................................................... 3
The Mergers and Related Transactions..................................................................... 5
Risk Factors............................................................................................. 10
Market Prices............................................................................................ 11
Selected Historical and Pro Forma Financial and Operating Data........................................... 12
Comparative Per Share Data............................................................................... 17
RISK FACTORS............................................................................................... 18
Risk Factors Related to the Business of PacifiCare....................................................... 18
Risk Factors Related to the Business of FHP.............................................................. 20
Common Risk Factors Related to the Mergers............................................................... 21
THE COMPANIES.............................................................................................. 23
PacifiCare Holding....................................................................................... 23
PacifiCare............................................................................................... 23
FHP...................................................................................................... 23
THE PACIFICARE MEETING..................................................................................... 25
Purpose of the PacifiCare Meeting........................................................................ 25
Date, Time and Place of Meeting.......................................................................... 25
Record Date and Outstanding Shares....................................................................... 25
Voting of Proxies........................................................................................ 25
Vote Required............................................................................................ 25
Board Recommendations.................................................................................... 26
Quorum; Abstentions; Broker Non-Votes.................................................................... 26
Solicitation of Proxies and Expenses..................................................................... 26
Availability of Accountants.............................................................................. 26
THE FHP MEETING............................................................................................ 27
Purpose of the FHP Meeting............................................................................... 27
Date, Time and Place of Meeting.......................................................................... 27
Record Date and Outstanding Shares....................................................................... 27
Voting of Proxies........................................................................................ 27
Vote Required of FHP Common Stock........................................................................ 27
Vote Required of FHP Preferred Stock..................................................................... 28
Effect of Failure to Approve the Series A Amendment...................................................... 29
Board Recommendations.................................................................................... 29
Quorum; Abstentions; Broker Non-Votes.................................................................... 29
Solicitation of Proxies and Expenses..................................................................... 29
THE MERGERS AND RELATED TRANSACTIONS....................................................................... 30
Merger Consideration..................................................................................... 30
Background of the Mergers................................................................................ 34
Recommendations of the Boards of Directors and Reasons for the Mergers................................... 36
Opinions of Financial Advisors........................................................................... 42
Financing of FHP Merger Consideration.................................................................... 49
</TABLE>

v
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<TABLE>
<CAPTION>
PAGE
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Conversion of Shares; Procedures for Exchange of Certificates; No Fractional Shares...................... 51
<S> <C>
Talbert Rights Offering.................................................................................. 53
Regulatory Matters....................................................................................... 57
Estimated Synergies...................................................................................... 58
Factors for Forward Looking Information.................................................................. 59
Stock Options; Benefit Plans............................................................................. 60
Voting and Non-Disposition Agreements.................................................................... 62
Affiliate Agreements..................................................................................... 63
Interests of Certain Persons in the Mergers.............................................................. 63
Dividends................................................................................................ 65
Nasdaq National Market................................................................................... 65
Merger Expenses and Fees and Other Costs................................................................. 65
Accounting Treatment..................................................................................... 66
Certain Federal Income Tax Consequences.................................................................. 66
Appraisal Rights......................................................................................... 71
THE REORGANIZATION AGREEMENT............................................................................... 73
General.................................................................................................. 73
Merger Consideration..................................................................................... 73
Corporate Matters........................................................................................ 73
Conditions to the Mergers................................................................................ 74
Representations and Warranties........................................................................... 75
Certain Covenants........................................................................................ 76
Non-Solicitation......................................................................................... 78
Indemnification and Insurance............................................................................ 78
Termination.............................................................................................. 79
Expenses and Termination Fees............................................................................ 80
No Survival of Representations and Warranties............................................................ 80
Amendment; Waiver........................................................................................ 80
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PACIFICARE................................................ 81
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF FHP....................................................... 82
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................................................. 83
DESCRIPTION OF PACIFICARE HOLDING CAPITAL STOCK............................................................ 93
PacifiCare Holding Class A Common and Class B Common..................................................... 93
PacifiCare Holding Preferred............................................................................. 95
COMPARISON OF RIGHTS OF STOCKHOLDERS....................................................................... 101
Comparison of Stockholder Rights with Respect to PacifiCare Holding and PacifiCare....................... 101
Comparison of Stockholder Rights with Respect to PacifiCare Holding and FHP.............................. 101
MANAGEMENT OF PACIFICARE HOLDING........................................................................... 105
Directors................................................................................................ 105
Committees of the PacifiCare Holding Board of Directors.................................................. 108
Compensation of Directors................................................................................ 108
Executive Officers....................................................................................... 109
Compensation of Executive Officers....................................................................... 109
OWNERSHIP OF PACIFICARE, FHP AND PACIFICARE HOLDING........................................................ 110
PacifiCare............................................................................................... 110
FHP...................................................................................................... 113
PacifiCare Holding....................................................................................... 115
SECOND AMENDED PACIFICARE DIRECTORS PLAN................................................................. 116
</TABLE>

vi
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<TABLE>
<CAPTION>
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OTHER INFORMATION FOR THE FHP MEETING...................................................................... 118
<S> <C>
Election of Directors.................................................................................... 118
Nonemployee Director Compensation........................................................................ 121
Executive Compensation................................................................................... 123
Change in Control Employment Agreements.................................................................. 126
Compensation Committee Report on Executive Compensation for the Fiscal Year Ended June 30, 1996.......... 126
FHP Compensation Committee Interlocks and Insider Participation.......................................... 128
Performance Graph of FHP................................................................................. 129
Appointment of Independent Auditors...................................................................... 129
Additional Information................................................................................... 130
EXPERTS.................................................................................................... 130
LEGAL MATTERS.............................................................................................. 130
FUTURE STOCKHOLDER PROPOSALS............................................................................... 131
REPORT OF INDEPENDENT AUDITORS............................................................................. F-1
N-T HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET............................................. F-2
N-T HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET.................................... F-3
APPENDICES:
APPENDIX A -- Amended and Restated Agreement and Plan of Reorganization
APPENDIX B -- Fairness Opinion of Dillon, Read & Co. Inc. dated as of August 30, 1996
APPENDIX C -- Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated dated as of August 4, 1996
APPENDIX D -- Delaware Statutes Regarding Appraisal Rights
APPENDIX E -- Second Amended PacifiCare Directors Plan
</TABLE>

vii
<PAGE>
GLOSSARY

1995 ACQUISITIONS. PacifiCare's fiscal year 1995 acquisitions of Preferred
Solutions, ValuCare and Pacific Health Plans.

ACQUISITION PROPOSAL. See definition on page 78.

ACQUISITIONS. The Mergers and the 1995 Acquisitions, together.

ACT. The Securities Act of 1933, as amended.

ANTITRUST DIVISION. The Antitrust Division of the United States Department of
Justice.

AS-IF-CONVERTED FHP MERGER CONSIDERATION. The consideration to be received by
the holders of FHP Preferred Stock if the Series A Amendment is not approved and
if the holders do not exercise their Special Conversion Rights. These holders
will receive consideration upon surrender of their FHP Preferred Stock as if
they had converted their FHP Preferred Stock into FHP Common Stock immediately
prior to the Effective Time.

AST. American Stock Transfer & Trust Company, the transfer agent for FHP.

AVERAGE CLOSING PRICE OF PACIFICARE CLASS B COMMON STOCK. The average closing
price of PacifiCare Class B Common Stock as quoted in the Wall Street Journal
for the 20 trading days prior to the trading day immediately before the date of
the FHP Meeting.

BANK OF AMERICA. Bank of America National Trust and Savings Association.

CAPITATION FEE. A negotiated per capita fee paid periodically, usually monthly,
to a health care provider based on the number of HMO members who have selected
such health care provider.

CAPITATION CONTRACT. A contract between an HMO and a health care provider
involving the compensation of the health care provider through Capitation Fees.

CASH CONSIDERATION. The aggregate amount of cash payable to the holders of FHP
Capital Stock in connection with the FHP Merger, other than cash payable to
holders who exercise and perfect appraisal rights under the DGCL.

CLOSING. The closing under the Reorganization Agreement.

CLOSING PRICE/SIGNING PRICE RATIO. See definition on page 30.

CODE. The Internal Revenue Code of 1986, as amended.

COMMISSION. The Securities and Exchange Commission.

CONVERSION NOTICE. The notice delivered by FHP in accordance with the FHP
Certificate in connection with a "Change of Control" (as defined in the FHP
Certificate). If the Series A Amendment is not approved, a Conversion Notice
will be delivered to all holders of FHP Preferred Stock other than those who
have made an Irrevocable Election with respect to all of their FHP Preferred
Stock.

CREDIT AGREEMENT. See definition on page 49.

DGCL. The Delaware General Corporation Law.

DILLON READ. Dillon, Read & Co. Inc., financial advisor to PacifiCare.

DILLON READ OPINION. Written opinion of Dillon Read for the PacifiCare Board of
Directors, dated as of August 30, 1996.

EFFECTIVE TIME. The effective time of the Mergers as provided in the
Reorganization Agreement.

EPS. Earnings per share.

ESOP. The FHP Employee Stock Ownership Plan.

EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.

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EXCHANGE AGENT. ChaseMellon Shareholder Services L.L.C.

FEHBP. The Federal Employees Health Benefits Program, a program providing for
managed health care services to federal employees, annuitants and their
dependents under commercial contracts between health care services organizations
and OPM.

FHP. FHP International Corporation, a Delaware corporation.

FHP CAPITAL STOCK. The FHP Common Stock and FHP Preferred Stock, together.

FHP CERTIFICATE. The Restated Certificate of Incorporation of FHP.

FHP COMMON STOCK. The Common Stock, $0.05 par value, of FHP.

FHP MEETING. FHP's Annual Meeting of Stockholders or any adjournment or
postponement thereof, at which the approval of the FHP Merger will be
considered.

FHP MERGER. The merger of FHP Merger Sub with and into FHP.

FHP MERGER SUB. Tree Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of PacifiCare Holding.

FHP OPTIONS. Options to purchase FHP Common Stock.

FHP PREFERRED STOCK. The Series A Cumulative Convertible Preferred Stock, $0.05
par value, of FHP.

FHP RECORD DATE. The close of business on November 8, 1996. Holders of FHP
Capital Stock on this date are entitled to vote at the FHP Meeting.

FHP REQUIRED VOTE. The affirmative vote of the holders of a majority of the
outstanding shares of FHP Common Stock entitled to vote to approve and adopt the
Reorganization Agreement.

FHP STOCKHOLDER VOTING AGREEMENTS. See definition on page 28.

FHP SURVIVING CORPORATION. FHP, as the surviving corporation of the FHP Merger.

FINAL CLASS A/COMMON SHARE RATIO. See definition on page 30.

FINAL CLASS B/COMMON SHARE RATIO. See definition on page 30.

FINAL EXCHANGE RATIO. See definition on page 30.

FIRST AMENDED REORGANIZATION AGREEMENT. The Amended and Restated Agreement and
Plan of Reorganization, dated as of September 17, 1996, among PacifiCare,
PacifiCare Holding, PacifiCare Merger Sub, FHP Merger Sub and FHP.

FTC. The Federal Trade Commission.

GROUP MODEL HMO. An HMO that contracts with one large multi-specialty medical
group, which typically receives a Capitation Fee for each HMO member who has
selected such health care provider, regardless of the number of physician
visits.

HCFA. The Health Care Financing Administration, a federal agency which
administers the provision of services to Medicare beneficiaries.

HMO. A health maintenance organization.

HSR ACT. The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

IRREVOCABLE ELECTION. An irrevocable election on the part of a holder of FHP
Preferred Stock to receive the Series A Merger Consideration whether or not the
Series A Amendment is approved.

IRREVOCABLE ELECTION DEADLINE. 5:00 p.m., Eastern Standard Time, on December
27, 1996.

IRS. Internal Revenue Service.

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LIBOR. The London interbank offered rate at which Eurodollar deposits are
offered in the London interbank market.

MEETINGS. The FHP Meeting and PacifiCare Meeting, together.

MERGERS. The FHP Merger and the PacifiCare Merger, together.

MERRILL LYNCH. Merrill Lynch, Pierce, Fenner & Smith Incorporated, financial
advisor to FHP.

MERRILL LYNCH OPINION. The opinion of Merrill Lynch to the FHP Board of
Directors dated as of August 4, 1996.

MULTIPLIER. See definition on page 30.

NYSE. New York Stock Exchange.

NETWORK MODEL HMO. An HMO that contracts with more than one medical group to
provide services generally for Capitation Fees.

OPM. The Office of Personnel Management, a federal agency which administers
managed health care services for federal employees, annuitants, and their
dependents.

ORIGINAL REORGANIZATION AGREEMENT. The Agreement and Plan of Reorganization,
dated as of August 4, 1996, among PacifiCare, PacifiCare Holding, PacifiCare
Merger Sub, FHP Merger Sub and FHP.

OTHER PERSONS. See definition on page 28.

PPO. An organization of providers of health care services which contracts with
HMOs and other payors to provide health care services at discounted fee for
service rates generally in exchange for prompt payment and anticipated increases
in patient volume. Providers under such contracts are referred to as preferred
providers.

PACIFICARE. PacifiCare Health Systems, Inc., a Delaware corporation.

PACIFICARE AMENDMENT. An amendment to the PacifiCare Certificate to exempt the
PacifiCare Merger from a requirement of the PacifiCare Certificate that, in the
event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the
consideration per share for the PacifiCare Class A Common Stock in such merger
or consolidation.

PACIFICARE CERTIFICATE. The Certificate of Incorporation of PacifiCare, as
amended.

PACIFICARE CLASS A COMMON STOCK. Class A Common Stock, $0.01 par value, of
PacifiCare.

PACIFICARE CLASS B COMMON STOCK. Class B Common Stock, $0.01 par value, of
PacifiCare.

PACIFICARE COMMON STOCK. The PacifiCare Class A Common Stock and PacifiCare
Class B Common Stock, together.

PACIFICARE DIRECTORS STOCK OPTION PLAN. The Amended 1992 Non-Officer Directors
Stock Option Plan of PacifiCare Health Systems, Inc.

PACIFICARE HOLDING. N-T Holdings, Inc., a Delaware corporation. Upon
consummation of the Mergers, PacifiCare Holding will be the parent of FHP and
PacifiCare.

PACIFICARE HOLDING CAPITAL STOCK. The PacifiCare Holding Common and the
PacifiCare Holding Preferred, together.

PACIFICARE HOLDING CLASS A COMMON. Class A Common Stock, $0.01 par value, of
PacifiCare Holding.

PACIFICARE HOLDING CLASS B COMMON. Class B Common Stock, $0.01 par value, of
PacifiCare Holding. PacifiCare Holding Class B Common has limited voting rights.

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PACIFICARE HOLDING COMMON. The PacifiCare Holding Class A Common and PacifiCare
Holding Class B Common, together.

PACIFICARE HOLDING PREFERRED. Series A Cumulative Convertible Preferred Stock,
$0.01 par value, of PacifiCare Holding.

PACIFICARE MEETING. PacifiCare's Special Meeting of Stockholders or any
adjournment or postponement thereof, at which the approval of the PacifiCare
Merger and the PacifiCare Amendment will be considered.

PACIFICARE MERGER. The merger of PacifiCare Merger Sub with and into
PacifiCare.

PACIFICARE MERGER SUB. Neptune Merger Corp., a Delaware corporation and a
wholly owned subsidiary of PacifiCare Holding.

PACIFICARE RECORD DATE. The close of business on November 11, 1996. Holders of
PacifiCare Common Stock on this date are eligible to vote at the PacifiCare
Meeting.

PACIFICARE REQUIRED VOTE. The affirmative vote of the holders of a majority of
the outstanding shares of PacifiCare Class A Common Stock entitled to vote to
approve and adopt the Reorganization Agreement and the affirmative vote of the
holders of a majority of the outstanding shares of PacifiCare Class A Common
Stock entitled to vote and the holders of a majority of the outstanding shares
of PacifiCare Class B Common Stock entitled to vote, each voting separately as a
class, to approve and adopt the PacifiCare Amendment.

PACIFICARE SPECIAL COMMITTEE. The Special Opportunities Committee of the
PacifiCare Board of Directors, which is comprised of three independent
directors.

PACIFICARE SURVIVING CORPORATION. PacifiCare, as the surviving corporation of
the PacifiCare Merger.

REORGANIZATION AGREEMENT. The Amended and Restated Agreement and Plan of
Reorganization, dated as of November 11, 1996, among PacifiCare, PacifiCare
Holding, PacifiCare Merger Sub, FHP Merger Sub and FHP.

RESTATED CERTIFICATE. The Amended and Restated Certificate of Incorporation of
PacifiCare Holding to be effective if the Series A Amendment is approved. The
Restated Certificate is attached to the Reorganization Agreement as Exhibit 1.4.

RESTRUCTURING PLAN. A plan to restructure the operations of FHP announced in
June 1995.

SECOND AMENDED PACIFICARE DIRECTORS PLAN. The Second Amended 1992 Non-Officer
Directors Stock Option Plan of PacifiCare Health Systems, Inc.

SECOND REQUEST. A request for additional information and documentary materials
issued by the FTC or Antitrust Division pursuant to the HSR Act.

SECTION 351. Section 351 of the Code.

SERIES A AMENDMENT. An amendment to the FHP Certificate to: (i) exempt the FHP
Merger from a requirement of the existing FHP Certificate that, in the event of
a merger or consolidation of FHP, the holders of FHP Preferred Stock are
entitled to receive upon conversion thereof the same consideration per share as
the consideration per share they would have received in the event they converted
their FHP Preferred Stock into FHP Common Stock immediately prior to such merger
or consolidation; and (ii) provide that the holders of FHP Preferred Stock are
not entitled to Special Conversion Rights (as defined in the existing FHP
Certificate) as a result of the FHP Merger.

SERIES A MERGER CONSIDERATION. See definition on page 31.

SERIES A REQUIRED VOTE. The affirmative vote of the holders of a majority of
the outstanding shares of FHP Common Stock entitled to vote and the holders of
66 2/3% of the outstanding shares of FHP Preferred Stock entitled to vote, each
voting separately as a class, to approve and adopt the Series A Amendment.

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STAFF MODEL HMO. An HMO that employs physicians to provide health care to its
members. All premiums and other revenues accrue to the HMO, which compensates
physicians.

STATED VALUE. Twenty-five dollars ($25.00)

SURVIVING CORPORATIONS. FHP Surviving Corporation and PacifiCare Surviving
Corporation, together.

TALBERT. The combined businesses of TMMC and THSC and, if TMMHC acquires such
companies, TMMHC.

TALBERT RIGHTS. Rights to purchase, in aggregate, 2,767,500 shares of common
stock of TMMHC or TMMC, as the case may be.

TALBERT RIGHTS OFFERING. The offering of the Talbert Rights to the holders of
FHP Capital Stock as part of the consideration payable in the FHP Merger.

THSC. Talbert Health Services Corporation, a Delaware corporation.

TMMC. Talbert Medical Management Corporation, a Delaware corporation.

TMMHC. Talbert Medical Management Holdings Corporation, a Delaware corporation
which may be formed to acquire all of the shares of TMMC and THSC owned by FHP.

UNIHEALTH. A California nonprofit public benefit corporation, and the parent
corporation in a multi-state health care delivery system consisting of seven
nonprofit medical centers and various for-profit health care companies,
including one HMO.

UNIHEALTH VOTING AGREEMENT. See definition on page 26.

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SUMMARY

THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT, AND IS NOT INTENDED
TO BE, COMPLETE BY ITSELF. THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. PACIFICARE'S
AND FHP'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/
PROSPECTUS, THE APPENDICES ATTACHED HERETO AND THE DOCUMENTS REFERRED TO OR
INCORPORATED BY REFERENCE HEREIN. STOCKHOLDERS OF PACIFICARE AND FHP ARE URGED
TO REVIEW CAREFULLY ALL OF THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE REORGANIZATION AGREEMENT ATTACHED AS APPENDIX A AND
THE OTHER APPENDICES ATTACHED HERETO. CERTAIN CAPITALIZED TERMS ARE DEFINED IN
THE GLOSSARY.

THE COMPANIES

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PacifiCare Holding................ PacifiCare Holding is a newly formed Delaware
corporation. It has conducted no business other than
that incident to its formation, its execution of the
Reorganization Agreement, the making of various
regulatory filings in connection with the Mergers and
the preparation of this Joint Proxy
Statement/Prospectus. Upon consummation of the Mergers,
it will be the parent of both PacifiCare and FHP and its
business will be that currently conducted by PacifiCare
and FHP. The full name, address and telephone number of
PacifiCare Holding are: N-T Holdings, Inc., c/o
PacifiCare Health Systems, Inc., 5995 Plaza Drive,
Cypress, California 90630, (714) 952-1121. See "The
Companies -- PacifiCare Holding."
PacifiCare........................ PacifiCare, a Delaware corporation, is one of the
nation's leading managed health care services companies,
and is a leader in the management, development and
marketing of diversified HMO products and related
services. The full name, address and telephone number of
PacifiCare are: PacifiCare Health Systems, Inc., 5995
Plaza Drive, Cypress, California 90630, (714) 952-1121.
See "The Companies -- PacifiCare."
FHP............................... FHP, a Delaware corporation, is one of the nation's
leading managed health care companies. Through its
subsidiaries it delivers managed health care services
and sells indemnity health, group life and workers'
compensation insurance. The full name, address and
telephone number of FHP are: FHP International
Corporation, 3120 Lake Center Drive, Santa Ana,
California 92704, (714) 825-6600. See "The Companies --
FHP."

THE PACIFICARE SPECIAL MEETING

Time, Date and Place.............. A special meeting of the stockholders of PacifiCare will
be held at the offices of PacifiCare, 5995 Plaza Drive,
Cypress, California 90630 on Tuesday, December 31, 1996
at 10:00 a.m. Pacific Standard Time.
Matters to be Considered at the
PacifiCare Meeting.............. At the PacifiCare Meeting, the stockholders of
PacifiCare will be asked to vote upon the approval and
adoption of the Reorganization Agreement, the PacifiCare
Amendment and the Second Amended PacifiCare Directors
Plan.
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Vote Required..................... Approval and adoption of the Reorganization Agreement
requires the affirmative vote of holders of a majority
of the outstanding shares of PacifiCare Class A Common
Stock entitled to vote. Approval and adoption of the
PacifiCare Amendment requires the affirmative vote of
holders of a majority of the outstanding shares of
PacifiCare Class A Common Stock entitled to vote and a
majority of the outstanding shares of PacifiCare Class B
Common Stock entitled to vote, each voting as a separate
class. Approval and adoption of the Second Amended
PacifiCare Directors Plan requires the affirmative vote
of a majority of the outstanding shares of PacifiCare
Class A Common Stock voting.
Recommendation of the PacifiCare
Board of Directors.............. The PacifiCare Board of Directors believes that the
terms of the Reorganization Agreement are in the best
interests of PacifiCare and its stockholders and that
the Mergers will create a strong new combined company.
The PacifiCare Board of Directors has unanimously
approved the Reorganization Agreement and the Second
Amended PacifiCare Directors Plan and recommends a vote
FOR the approval and adoption of the Reorganization
Agreement, FOR the approval and adoption of the
PacifiCare Amendment and FOR the approval and adoption
of the Second Amended PacifiCare Directors Plan. See
"The Mergers and Related Transactions -- Recommendations
of the Boards of Directors and Reasons for the Mergers
-- PacifiCare."
Opinion of Financial Advisor...... Dillon Read has delivered its written opinion to the
PacifiCare Board of Directors to the effect that, as of
its date and subject to the various limitations and
assumptions set forth therein, the consideration to be
paid to the holders of FHP Capital Stock pursuant to the
First Amended Reorganization Agreement was fair to
PacifiCare and its stockholders from a financial point
of view. See "The Merger and Related Transactions --
Opinions of Financial Advisors -- Opinion of Dillon
Read."
UniHealth Voting Agreement........ As of the PacifiCare Record Date, UniHealth held
approximately 47.7% of the outstanding PacifiCare Class
A Common Stock. Pursuant to the UniHealth Voting
Agreement, UniHealth has agreed to vote such shares in
favor of approval and adoption of the Reorganization
Agreement and the approval and adoption of the
PacifiCare Amendment, and has delivered to FHP an
irrevocable proxy with respect to the same. UniHealth
has indicated that it intends to vote the shares of
PacifiCare Class B Common Stock it holds, representing
approximately 1.5% of the outstanding shares of such
class at the PacifiCare Record Date, in favor of
approval and adoption of the PacifiCare Amendment. See
"The Merger and Related Transactions -- Voting and
Non-Disposition Agreements."
Record Date; Shares Outstanding
and Entitled to Vote............ The PacifiCare Record Date is November 11, 1996. On that
date there were outstanding 12,379,658 shares of
PacifiCare Class A Common Stock and 18,912,018 shares of
PacifiCare Class B Common Stock.
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Security Ownership of Directors,
Executive Officers and their
Affiliates...................... At the PacifiCare Record Date, directors and executive
officers of PacifiCare and their affiliates (other than
UniHealth) owned approximately 2.0% of PacifiCare Class
A Common Stock then outstanding and approximately 1.0%
of PacifiCare Class B Common Stock then outstanding.
Such stockholders have indicated that they intend to
vote their shares in favor of approval and adoption of
the Reorganization Agreement and in favor of approval
and adoption of the PacifiCare Amendment. As noted
above, UniHealth owned approximately 47.7% and 1.5% of
the PacifiCare Class A Common Stock and PacifiCare Class
B Common Stock then outstanding, respectively. UniHealth
has entered into a voting agreement with respect to such
PacifiCare Class A Common Stock. See "Ownership of
PacifiCare, FHP and PacifiCare Holding."
Second Amended PacifiCare
Directors Plan.................. See "Second Amended PacifiCare Directors Plan" for a
discussion of the proposed amendments to the plan.

THE FHP ANNUAL MEETING

Time, Date and Place.............. The annual meeting of FHP will take place at FHP
University Building, 3515 Harbor Boulevard, Costa Mesa,
California 92626 on December 31, 1996 at 2:00 p.m.
Pacific Standard Time.
Matters to be Considered at the
FHP Meeting..................... At the FHP Meeting, the stockholders of FHP will be
asked to consider and vote upon the following proposals:
(i) the adoption and approval of the Reorganization
Agreement; (ii) the adoption and approval of the Series
A Amendment; (iii) the election of three directors to
hold office for three-year terms; and (iv) the
ratification of the appointment of independent auditors.
Vote Required..................... Approval and adoption of the Reorganization Agreement
requires the affirmative vote of a majority of the
outstanding shares of FHP Common Stock entitled to vote.
Approval and adoption of the Series A Amendment requires
the affirmative vote of a majority of the outstanding
shares of FHP Common Stock entitled to vote and 66 2/3%
of the outstanding shares of FHP Preferred Stock
entitled to vote (including shares of FHP Preferred
Stock as to which Irrevocable Elections have been made).
Directors will be elected by a plurality of the votes
cast by the holders of FHP Common Stock. Ratification of
the appointment of the independent auditors requires the
affirmative vote of a majority of the votes cast by
holders of FHP Common Stock present and entitled to
vote.
Irrevocable Election by Holders of
FHP Preferred Stock............. By following the procedures described herein, holders of
FHP Preferred Stock may make an Irrevocable Election to
receive the Series A Merger Consideration, whether or
not the Series A Amendment is approved. Holders of FHP
Preferred Stock desiring to make an Irrevocable Election
should
</TABLE>

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complete the Form of Irrevocable Election accompanying
this Joint Proxy Statement/Prospectus in accordance with
the instructions set forth in such form and transmit the
Form of Irrevocable Election and all documents required
thereby to AST, no later than the Irrevocable Election
Deadline. If AST has not received a properly completed
Form of Irrevocable Election, accompanied by all
required documents, by the Irrevocable Election Deadline
(unless the procedures for guaranteed delivery are
followed and such certificates are received by AST by
the third business day after the Irrevocable Election
Deadline), the Irrevocable Election will not be
effective. See "The Mergers and Related Transactions --
FHP -- Irrevocable Election by FHP Preferred
Stockholders."
Effect of the Failure to Approve
the Series A Amendment.......... Approval of the Series A Amendment is not a condition to
the completion of the FHP Merger. If the Series A
Amendment is not approved, and the Mergers are
consummated, holders of FHP Preferred Stock who have not
made an Irrevocable Election will have the right to
exercise special conversion rights or to receive the
same consideration as such holders would have received
had the FHP Preferred Stock been converted into FHP
Common Stock immediately prior to the Effective Time.
See "The Merger and Related Transactions -- Merger
Consideration -- FHP Preferred Stock."
Recommendation of the FHP Board of
Directors....................... The FHP Board of Directors believes that the terms of
the Reorganization Agreement and the Series A Amendment
are in the best interests of FHP and its stockholders
and that the Mergers will create a strong new combined
company. By unanimous vote, the FHP Board of Directors
has approved the Reorganization Agreement and the Series
A Amendment and recommends a vote FOR approval and
adoption of the Reorganization Agreement, FOR adoption
and approval of the Series A Amendment, FOR election of
the three nominees identified herein and FOR
ratification of the appointment of independent auditors.
See 'The Mergers and Related Transactions --
Recommendations of the Boards of Directors and Reasons
for the Merger -- FHP."
Opinion of the Financial
Advisor......................... Merrill Lynch has delivered its written opinion to the
FHP Board of Directors to the effect that, as of the
date of the Original Reorganization Agreement and
subject to the various assumptions and limitations set
forth therein, the proposed consideration to be received
in the Mergers by the holders of FHP Capital Stock was
fair to such holders from a financial point of view. In
addition, Merrill Lynch has reviewed the First Amended
Reorganization Agreement and the Reorganization
Agreement and determined that the changes reflected
therein did not require any modification to their
opinion. See "The Merger and Related Transactions --
Opinions of Financial Advisors -- Opinion of Merrill
Lynch."
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FHP Stockholder Voting
Agreements...................... Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W.
Price III have entered into the FHP Stockholder Voting
Agreements with respect to shares beneficially owned by
them and by certain Other Persons. As of the FHP Record
Date, Messrs. Anderson, Burdge and Price, collectively,
beneficially owned and were entitled to vote
approximately 2.4% of the outstanding FHP Common Stock
and approximately 9.8% of the outstanding FHP Preferred
Stock, and the Other Persons, collectively, beneficially
owned and were entitled to vote approximately 1.2% of
the outstanding FHP Common Stock and approximately 6.9%
of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i)
agreed to vote and to use their best efforts to cause
the Other Persons to vote their respective shares in
favor of the Reorganization Agreement and the Series A
Amendment; and (ii) granted proxies and caused the Other
Persons to grant proxies to PacifiCare with respect to
the same. See "The Mergers and Related Transactions --
Voting and Non-Disposition Agreements."
Record Date, Shares Outstanding
and Entitled to Vote............ The FHP Record Date is November 8, 1996. On that date
there were outstanding 41,214,595 shares of FHP Common
Stock and 21,035,804 shares of FHP Preferred Stock.
These share numbers include, respectively, 1,791 and
5,971 shares issuable to former shareholders of
companies which FHP acquired who have not yet received
FHP stock certificates.
Voting of ESOP Shares............. Each participant in the ESOP is entitled to instruct the
ESOP trustee on how to vote all shares allocated to such
participant's account under the ESOP, and a
proportionate number of unallocated shares held by the
ESOP for future allocations to such participant's
account. See "The FHP Meeting -- Vote Required of FHP
Common Stock."
Security Ownership of Directors,
Executive Officers and their
Affiliates...................... As of the FHP Record Date, directors and executive
officers of FHP and their affiliates and Other Persons
beneficially owned and were entitled to vote
approximately 4.2% of FHP Common Stock then outstanding
and approximately 17.4% of FHP Preferred Stock then
outstanding. Such stockholders have indicated that they
intend to vote their shares in favor of the
Reorganization Agreement and the Series A Amendment. See
"Ownership of PacifiCare, FHP and PacifiCare Holding."

THE MERGERS AND RELATED TRANSACTIONS

General........................... At the Effective Time, subsidiaries of PacifiCare
Holding will be merged with and into PacifiCare and FHP.
PacifiCare and FHP will thereupon become wholly owned
subsidiaries of PacifiCare Holding and the stockholders
of each of PacifiCare and FHP will receive the
consideration described below.
Effect on Holders of FHP Common
Stock........................... At the Effective Time, each share of FHP Common Stock
will be converted into the right to receive $17.50 in
cash, a mix of
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PacifiCare Holding Class A Common and PacifiCare Holding
Class B Common, and Talbert Rights. The fraction of a
share of PacifiCare Holding Class A Common to be
received will be equal to the quotient of 2,350,000
divided by the number of shares of FHP Common Stock
outstanding immediately prior to the Effective Time
plus, if the Series A Amendment is not approved, the
number of shares of FHP Common Stock into which the
outstanding FHP Preferred Stock could be converted at
that time (excluding shares of FHP Preferred Stock for
which an Irrevocable Election is made). The fraction of
a share of PacifiCare Holding Class B Common to be
received is determined by a formula, which may be found
on page 30 of this Joint Proxy Statement/Prospectus. The
formula is based in part on the average closing price of
the PacifiCare Class B Common Stock during the 20
trading days ending with the trading day prior to the
FHP Meeting. The following tables set forth these
fractions assuming certain values for the "Average
Closing Prices of PacifiCare Class B Common Stock," an
assumed number of shares of FHP Common Stock and FHP
Preferred Stock outstanding, and assuming the Series A
Amendment is approved:
</TABLE>

<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK RATIO RATIO RATIO
--------------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .057 .172 .229
$80.00 .057 .188 .245
$62.90 to $73.10 .057 .201 .258
$55.00 .057 .216 .273
$47.60 or less .057 .230 .287
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The following table shows the same fractions assuming
that the Series A Amendment is not approved and that no
holder of FHP Preferred Stock has made an Irrevocable
Election:
</TABLE>

<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK RATIO RATIO RATIO
--------------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .040 .189 .229
$80.00 .040 .205 .245
$62.90 to $73.10 .040 .218 .258
$55.00 .040 .233 .273
$47.60 or less .040 .247 .287
</TABLE>

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In the event that the Series A Amendment is not approved
and an Irrevocable Election is made, the final ratios
will be between those set forth in the above tables.

See "The Mergers and Related Transactions -- Merger
Consideration," "Description of PacifiCare Holding
Capital Stock" and "The Mergers and Related Transactions
-- Talbert Rights Offering."
Effect on Holders of FHP Preferred
Stock........................... At the Effective Time, each share of FHP Preferred
Stock, assuming approval of the Series A Amendment or
the making of an Irrevocable Election as to such share,
will be converted into the right to receive: $14.113 in
cash, 0.50 shares of
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PacifiCare Holding Preferred, and Talbert Rights. The
new PacifiCare Holding Series A Preferred is generally
similar to the FHP Preferred Stock except that it pays
an annual dividend of $1.00 per share rather than $1.25
per share and is convertible into PacifiCare Holding
Class B Common. If the Series A Amendment is not
approved and an Irrevocable Election as to such share
has not been made, at the Effective Time, each share of
FHP Preferred Stock will be treated in accordance with
the FHP Certificate. Each holder (other than a holder
who has made an Irrevocable Election) will be given the
opportunity to exercise certain special conversion
rights and thereupon receive $25.00 in cash or a mix of
cash and PacifiCare Holding Common. If these rights are
not exercised, the holders (other than holders who have
made an Irrevocable Election) will receive the same
consideration as if they had converted the FHP Preferred
Stock into FHP Common Stock immediately prior to the
Effective Time. See "The Mergers and Related
Transactions -- Merger Consideration," "Description of
PacifiCare Holding Capital Stock" and "The Mergers and
Related Transactions -- Talbert Rights Offering."
Effect on Holders of PacifiCare
Common Stock.................... At the Effective Time, each share of PacifiCare Class A
Common Stock then outstanding will be converted into the
right to receive one share of PacifiCare Holding Class A
Common and each share of PacifiCare Class B Common Stock
will be converted into the right to receive one share of
PacifiCare Holding Class B Common. Prior to the
Effective Time, there has been no public market for
PacifiCare Holding Common. See "Description of
PacifiCare Holding Capital Stock."
Talbert; Talbert Rights
Offering........................ By virtue of the FHP Merger, at the Effective Time, the
shares of FHP Capital Stock will be converted in part
into rights to purchase, in the aggregate, an
approximately 92% ownership interest in Talbert for an
aggregate price of approximately $60 million. Talbert,
through TMMC and THSC, organizes and manages physician
and dentist practice groups that contract with HMOs and
other payors to provide health care services to their
members. As of September 30, 1996, Talbert had
approximately 360 affiliated physicians and 80 dentists
providing comprehensive care in 54 medical centers in
Southern California, Utah, Arizona, New Mexico and
Nevada. See "The Mergers and Related Transactions --
Talbert Rights Offering."
Effect on Holders of Stock
Options......................... See "The Mergers and Related Transactions -- Stock
Options; Benefit Plans."
Amendment to the PacifiCare
Certificate of Incorporation.... In order to permit the PacifiCare Merger to occur, the
stockholders of PacifiCare are being asked to amend the
PacifiCare Certificate. The PacifiCare Certificate
currently requires that holders of PacifiCare Class B
Common Stock receive in a merger the same consideration
per share as
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holders of PacifiCare Class A Common Stock. PacifiCare
stockholders are being asked to approve an amendment to
the PacifiCare Certificate to permit holders of
PacifiCare Class B Common Stock to receive PacifiCare
Holding Class B Common while holders of PacifiCare Class
A Common Stock receive PacifiCare Holding Class A
Common. See "Amendment of the Certificate of
Incorporation of PacifiCare."
Financing of Merger
Consideration................... It is currently anticipated that all of the
approximately $1.0 billion of cash required to pay the
Cash Consideration for the FHP Merger and the fees and
expenses of the Mergers will be funded out of a credit
facility of PacifiCare Holding. PacifiCare Holding has
entered into the Credit Agreement, with Bank of America,
as agent, providing, on the terms and subject to the
conditions set forth therein, for a five-year,
unsecured, reducing revolving credit facility of $1.5
billion. See "The Mergers and Related Transactions --
Financing of FHP Merger Consideration."
Regulatory Matters................ The consummation of the Mergers is subject to certain
filings and approvals with federal and state agencies
regulating HMOs and insurance companies. Applications
for such approvals have been filed and such approvals
are currently expected to be obtained prior to the end
of 1996. There can be no assurance, however, when or
whether such approvals will be received, or what actions
PacifiCare Holding will be required to take or what
terms and conditions will be imposed on PacifiCare
Holding to obtain such approvals. PacifiCare and FHP
have each received a Second Request from the FTC under
the HSR Act, which has the effect of delaying
consummation of the Mergers until 20 days after
PacifiCare and FHP each substantially comply with the
Second Request, unless the FTC grants early termination
of the HSR Act waiting period. There can be no assurance
that a challenge to the Mergers on antitrust grounds
will not be made, or, if such a challenge is made,
PacifiCare or FHP would prevail or would not be required
to divest certain assets or to accept certain conditions
in order to consummate the Mergers. See "The Mergers and
Related Transactions -- Regulatory Matters."
Conditions to the Mergers;
Termination; Termination Fees... The obligations of PacifiCare and FHP to consummate the
Mergers are subject to various conditions, including
obtaining required stockholder and regulatory approvals,
the absence of any orders or other legal restraint or
prohibition preventing closing, the absence of certain
litigation, the absence of a material adverse change in
either FHP or PacifiCare since the Original
Reorganization Agreement was signed, the accuracy of
representations and warranties, the compliance by both
parties with the covenants contained in the
Reorganization Agreement and the receipt of certain
legal opinions and other certifications. See "The
Reorganization Agreement -- Conditions to the Mergers."
The
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Reorganization Agreement may be terminated and the
Mergers abandoned prior to the Effective Time by mutual
consent of PacifiCare and FHP; by either PacifiCare or
FHP if the Mergers are not consummated prior to April
30, 1997, or for certain other reasons. See "The
Reorganization Agreement -- Termination." If the
Reorganization Agreement is terminated under certain
circumstances, FHP will pay PacifiCare $50 million. If
the Reorganization Agreement is terminated under certain
other circumstances, PacifiCare will pay FHP $50
million. If the Mergers are not consummated solely by
reason of a breach by PacifiCare caused by the
termination of the agreements related to the financing
of the Mergers or if PacifiCare is otherwise unable to
procure such financing, then PacifiCare will pay FHP
$100 million as liquidated damages. See "The
Reorganization Agreement -- Expenses and Termination
Fees."
Board of Directors after the
Mergers......................... The PacifiCare Holding Board of Directors after the
Mergers will consist of the existing PacifiCare Board of
Directors, Jack R. Anderson and Joseph F. Prevratil,
current directors of FHP designated by the FHP Board of
Directors, and Craig T. Beam and Bradley C. Call,
designated by the PacifiCare Board of Directors.
Interests of Certain Persons in
the Mergers..................... FHP has entered into substantially identical employment
agreements dated various dates with certain of its
executive officers. Upon a "Change of Control" (as
defined in the employment agreements), the employment
agreements provide that FHP will continue to employ such
executives for a period of three years commencing on the
"Effective Date" of the "Change of Control." Each
agreement contains provisions concerning the level of
such executive's responsibilities and salary during the
three-year term. Each agreement also contains
termination provisions under various circumstances. If
FHP terminates such executive's employment other than
for cause, death or disability during the three-year
term, FHP will be required to pay salary and other
benefits for the remaining portion of such executive
officer's employment term and such executive's stock
options will vest under certain circumstances. See "The
Mergers and Related Transactions -- Interests of Certain
Persons in the Mergers -- Officers and Directors of
FHP." Pursuant to the provisions of PacifiCare's stock
option plans, upon the consummation of the Mergers, all
unvested options held for at least six months issued
under the PacifiCare Directors Stock Option Plan will
vest in full and all other unvested options held for at
least six months by directors, officers, employees and
consultants will be eligible to vest in full; provided,
however, that PacifiCare will seek waivers of this
acceleration provision from certain of its executive
officers in exchange for the grant of additional
options. See "The
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Mergers and Related Transactions -- Interests of Certain
Persons in the Mergers -- Options Held by Directors and
Officers of PacifiCare."
Appraisal Rights.................. Pursuant to the DGCL, holders of shares of FHP Capital
Stock may exercise appraisal rights in connection with
the FHP Merger in accordance with and subject to the
provisions of the DGCL. Holders of PacifiCare Common
Stock will not have appraisal rights in connection with
the Mergers. See "The Mergers and Related Transactions
-- Appraisal Rights," and Appendix D.
Nasdaq Listing.................... It is intended that the PacifiCare Holding Class A
Common, Class B Common and Preferred to be issued in the
Mergers will be listed on the Nasdaq National Market.
See "The Mergers and Related Transactions -- Nasdaq
National Market." Prior to the Effective Time, there has
been no public market for any of this stock.
Accounting Treatment.............. The FHP Merger will be accounted for by PacifiCare
Holding under the "purchase" method of accounting. The
PacifiCare Merger will be treated as a reorganization
with no change in the recorded amount of PacifiCare
assets and liabilities. See "The Mergers and Related
Transactions -- Accounting Treatment."
Tax Consequences.................. In general, except with respect to any Cash
Consideration and the fair market value of the Talbert
Rights to be received in the FHP Merger, the Mergers
have been structured to qualify as tax-free transactions
under the Code. The obligations of PacifiCare and FHP to
consummate the Mergers are conditioned on receipt by
PacifiCare of an opinion from Cooley Godward LLP,
counsel to PacifiCare, and by FHP of an opinion from
Sheppard, Mullin, Richter & Hampton LLP, counsel to FHP,
in each case based on certain factual representations
and assumptions set forth in such opinions, that the
Mergers so qualify. See "The Mergers and Related
Transactions -- Certain Federal Income Tax
Consequences."
PacifiCare Holding Capital
Stock........................... PacifiCare Holding will issue in the Mergers PacifiCare
Holding Class A Common, PacifiCare Holding Class B
Common, and if the Series A Amendment is approved or if
any Irrevocable Election is made, PacifiCare Holding
Preferred. The PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common is substantially
identical to the PacifiCare Class A Common Stock and
Class B Common Stock. The Series A Preferred Stock is
similar to the FHP Series A Preferred Stock, except that
it has an annual dividend of $1.00 per share rather than
$1.25 per share and is convertible into PacifiCare
Holding Class B Common at a conversion rate based upon
the Final Exchange Ratio. See "Description of PacifiCare
Holding Capital Stock."

RISK FACTORS

Risk Factors...................... See "Risk Factors" and "The Merger and Related
Transactions -- Regulatory Matters."
</TABLE>

10
<PAGE>
MARKET PRICES

PacifiCare Common Stock is listed on the Nasdaq National Market under the
symbols "PHSYA" and "PHSYB." FHP Capital Stock is also listed on the Nasdaq
National Market under the symbols "FHPC" and "FHPCA." There is no public market
for any PacifiCare Holding Capital Stock. The following table sets forth the
high and low closing prices per share of PacifiCare Class A Common Stock,
PacifiCare Class B Common Stock, FHP Common Stock and FHP Preferred Stock as
reported by Nasdaq for the periods indicated. FHP's fiscal year end is June 30th
and PacifiCare's fiscal year end is September 30th.
<TABLE>
<CAPTION>
PACIFICARE CLASS A PACIFICARE CLASS B
FHP COMMON STOCK FHP
PREFERRED
COMMON STOCK COMMON STOCK STOCK
-------------------- -------------------- -------------------- ---------
HIGH LOW HIGH LOW HIGH LOW HIGH
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR ENDED DECEMBER 31, 1994
Quarter ended March 31st..................... $ 57 $ 38 1/4 $ 56 3/8 $ 37 3/4 $ 29 $ 24 $ --
Quarter ended June 30th...................... 59 3/4 47 1/2 59 1/2 47 1/2 25 1/4 20 3/4 24 1/2
Quarter ended September 30th................. 79 3/16 47 75 46 30 1/2 21 3/4 28 1/4
Quarter ended December 31st.................. 79 60 3/4 74 3/4 60 1/2 29 25 1/4 27 1/4
CALENDAR YEAR ENDED DECEMBER 31, 1995
Quarter ended March 31st..................... 76 1/4 61 77 62 29 1/2 24 1/4 27 1/2
Quarter ended June 30th...................... 75 1/8 44 1/2 76 1/4 44 29 1/2 19 3/4 27 1/2
Quarter ended September 30th................. 68 1/2 49 3/4 71 48 1/2 26 5/8 22 1/2 26
Quarter ended December 31st.................. 89 3/8 64 1/2 91 66 1/4 29 23 1/8 26 7/8
CALENDAR YEAR ENDED DECEMBER 31, 1996
Quarter ended March 31st..................... 98 3/4 75 1/4 99 1/2 78 1/2 33 1/2 27 3/8 29 5/8
Quarter ended June 30th...................... 83 3/4 63 7/8 86 3/4 65 1/4 31 3/4 26 5/8 28 3/8
Quarter ended September 30th................. 84 3/4 59 5/8 91 59 3/4 37 5/8 22 31 1/4
Quarter ended December 31st
(through November 14, 1996)................ 82 5/8 64 1/8 85 1/4 68 3/4 37 33 3/4 30 7/8

LOW
---------
<S> <C>
CALENDAR YEAR ENDED DECEMBER 31, 1994
Quarter ended March 31st..................... $ --
Quarter ended June 30th...................... 23 1/4
Quarter ended September 30th................. 22 3/8
Quarter ended December 31st.................. 24 3/8
CALENDAR YEAR ENDED DECEMBER 31, 1995
Quarter ended March 31st..................... 23 3/8
Quarter ended June 30th...................... 21 3/8
Quarter ended September 30th................. 22 7/8
Quarter ended December 31st.................. 23 1/4
CALENDAR YEAR ENDED DECEMBER 31, 1996
Quarter ended March 31st..................... 26
Quarter ended June 30th...................... 25 1/8
Quarter ended September 30th................. 21 7/8
Quarter ended December 31st
(through November 14, 1996)................ 28 1/4
</TABLE>

On August 2, 1996, the last trading day before public announcement of the
execution of the Original Reorganization Agreement, the closing price of
PacifiCare Class A Common Stock, PacifiCare Class B Common Stock, FHP Common
Stock and FHP Preferred Stock as reported by Nasdaq were $68 3/4 per share,
$67 3/4 per share, $27 7/8 per share and $25 3/8 per share, respectively.

On November , 1996, the last trading day before the date of this Joint
Proxy Statement/ Prospectus, the closing price of PacifiCare Class A Common
Stock, PacifiCare Class B Common Stock, FHP Common Stock and FHP Preferred Stock
as reported by Nasdaq were $ per share, $ per share, $
per share, and $ per share, respectively.

PACIFICARE AND FHP STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE PACIFICARE CLASS A COMMON STOCK, PACIFICARE CLASS B COMMON
STOCK, FHP COMMON STOCK AND FHP PREFERRED STOCK.

11
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
PACIFICARE SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following data for each of the five fiscal years in the period ended
September 30, 1995 are derived from the audited consolidated financial
statements of PacifiCare. The following selected historical financial data for
the nine months ended June 30, 1995 and 1996 are derived from the unaudited
consolidated financial statements of PacifiCare. The following summary financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," found in the consolidated
financial statements and related notes and other financial information contained
in PacifiCare's Forms 10-K and 10-K/A for the fiscal year ended September 30,
1995 and Forms 10-Q and 10-Q/ A for the quarterly period ended June 30, 1996,
which are incorporated herein by reference. See "Incorporation of Certain
Documents by Reference" and "Available Information."

<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
FISCAL YEARS ENDED SEPTEMBER 30, 30,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 (1) 1995 (1) 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
Total operating revenue................ $1,242,357 $1,686,314 $2,221,073 $2,893,252 $3,731,022 $2,715,616 $3,416,212
Expenses:
Health care services................. 1,053,239 1,393,645 1,850,469 2,374,258 3,077,135 2,238,504 2,855,936
Marketing, general and administrative
expenses............................ 158,985 229,881 279,865 394,620 498,445 364,349 425,147
Amortization of intangibles.......... 399 2,239 3,495 3,444 7,199 4,863 6,904
Disposition and restructuring charges
(2)................................. -- -- -- -- -- -- 17,147
OPM reserve charge (3)............... -- -- -- -- -- -- 25,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....................... 29,734 60,549 87,244 120,930 148,243 107,900 86,078
Interest income........................ 14,960 17,725 23,459 28,588 39,406 27,815 34,749
Interest expense....................... (173) (3,422) (2,376) (4,050) (5,549) (4,723) (1,737)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of a change in
accounting principle.................. 44,521 74,852 108,327 145,468 182,100 130,992 119,090
Provision for income taxes............. 18,819 31,262 45,631 60,875 74,005 53,328 50,664
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle........ 25,702 43,590 62,696 84,593 108,095 77,664 68,426
Cumulative effect on prior years of a
change in accounting principle (4).... -- -- -- 5,658 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................. $ 25,702 $ 43,590 $ 62,696 $ 90,251 $ 108,095 $ 77,664 $ 68,426
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share:
Before cumulative effect of a change
in accounting principle............. $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 3.62 $ 2.64 $ 2.16
Cumulative effect on prior years of a
change in accounting principle...... -- -- -- 0.20 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share..................... $ 1.10 $ 1.78 $ 2.25 $ 3.22 $ 3.62 $ 2.64 $ 2.16
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of shares of
common stock and equivalents
outstanding........................... 23,346 24,509 27,847 28,004 29,864 29,378 31,654

OPERATING DATA:
Medical loss ratio (5):
Commercial........................... 84.0% 80.2% 82.5% 80.5% 82.5% 82.2% 83.5%
Medicare............................. 87.1% 86.6% 85.6% 85.2% 84.3% 84.6% 85.1%
Operating income margin (6)............ 2.4% 3.6% 3.9% 4.2% 4.0% 4.0% 3.8%
Period-end HMO membership:
Commercial........................... 567 742 807 949 1,216 1,176 1,407
Medicare (7)......................... 159 214 290 409 541 506 589
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............................ 726 956 1,097 1,358 1,757 1,682 1,996
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 21,837 $ 49,550 $ 162,781 $ 231,242 $ 320,615 $ 403,485
Goodwill and intangible assets............. $ 8,625 $ 83,004 $ 79,591 $ 167,085 $ 295,794 $ 289,189
Total assets............................... $ 322,328 $ 498,082 $ 693,646 $1,105,548 $1,385,372 $1,264,657
Long-term debt due after one year.......... $ 2,280 $ 18,488 $ 21,821 $ 101,137 $ 11,949 $ 5,555
Shareholders' equity....................... $ 99,678 $ 198,884 $ 319,294 $ 413,358 $ 732,024 $ 812,698
</TABLE>

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

(1) Operating results of the 1995 Acquisitions are included in the historical
operating results of PacifiCare from the date of acquisition. See "Unaudited
Pro Forma Financial Information."

(2) Disposition and restructuring charges include (i) a $9.3 million loss ($0.26
per share, net of tax) associated with the disposition of Pasteur Delivery
Systems, the Staff Model HMO subsidiary located in Florida, and (ii) a
restructuring charge of $7.8 million ($0.15 per share, net of tax)
associated with the discontinuation of certain specialty health care
products and services and the restructuring of regional operations.

(3) The OPM reserve charge consisted of a $25 million ($0.47 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents.

(4) PacifiCare adopted the liability method of accounting for income taxes in
its financial statements for the fiscal year ended September 30, 1994. The
cumulative effect of adopting the liability method for periods prior to
October 1, 1993 resulted in a benefit of $5.7 million ($0.20 per share).

(5) Health care costs as a percentage of premium revenue. Medicare medical loss
ratios include Medicaid premiums and health care costs, which were
immaterial to the resulting ratios.

(6) Operating income before disposition, restructuring and OPM reserve charges
as a percentage of total operating revenue.

(7) Includes Medicaid membership, which as of September 30, 1994 and 1995 was 22
and 60, respectively, and as of June 30, 1996 was 52.

13
<PAGE>
FHP SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following data for each of the five fiscal years in the period ended
June 30, 1996 are derived from the audited consolidated financial statements of
FHP. The following selected historical financial data for the three months ended
September 30, 1995 and 1996 are derived from the unaudited consolidated
financial statements of FHP. The following summary financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," found in the consolidated financial statements and
related notes and other financial information contained in FHP's Form 10-K for
the fiscal year ended June 30, 1996 and Form 10-Q for the quarterly period ended
September 30, 1996, which are incorporated herein by reference. See
"Incorporation of Certain Documents by Reference" and "Available Information."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 (1) 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
Revenue............................. $1,586,086 $2,005,854 $2,472,958 $3,909,380 $4,179,284 $ 1,004,633 $1,098,699
Expenses:
Health care services.............. 1,324,700 1,681,144 2,057,689 3,238,489 3,530,928 849,816 929,695
Marketing, general and
administrative expenses.......... 231,916 269,645 332,249 490,196 479,480 117,037 124,644
Amortization of intangibles....... -- -- -- 31,506 31,133 8,089 7,366
Restructuring charges (2)......... -- -- -- 75,110 9,659 5,759 --
OPM reserve charge (3)............ -- -- -- -- 45,000 -- --
---------- ---------- ---------- ---------- ---------- ------------- ----------
Operating income.................... 29,470 55,065 83,020 74,079 83,084 23,932 36,994
Interest income..................... 22,211 14,919 20,365 32,079 36,174 9,136 9,099
Interest expense.................... (189) (211) (6,565) (25,972) (21,141) (6,424) (2,493)
---------- ---------- ---------- ---------- ---------- ------------- ----------
Income before income taxes.......... 51,492 69,773 96,820 80,186 98,117 26,044 43,600
Provision for income taxes.......... 18,602 25,607 37,510 42,894 53,964 12,717 20,056
---------- ---------- ---------- ---------- ---------- ------------- ----------
Net income.......................... 32,890 44,166 59,310 37,292 44,153 13,967 23,544
Preferred stock dividends........... 1,032 25,337 26,425 6,607 6,575
---------- ---------- ---------- ---------- ---------- ------------- ----------
Net income attributable to
common stock....................... $ 32,890 $ 44,166 $ 58,278 $ 11,955 $ 17,728 $ 7,320 $ 16,969
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Earnings per share.................. $ 1.00 $ 1.33 $ 1.71 $ 0.29 $ 0.43 $ 0.18 $ 0.40
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Weighted average number of shares of
common stock and equivalents
outstanding........................ 32,921 33,270 34,051 41,057 41,524 41,016 42,059
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Fully diluted earnings per share
(4)................................ $ 1.00 $ 1.31 $ 1.71 $ -- $ -- $ -- $ 0.40
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Fully diluted weighted average
number
of shares (4)...................... 32,945 33,587 34,717 -- -- -- 59,300
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
OPERATING DATA:
Medical loss ratio (5).............. 83.5% 83.8% 83.2% 82.8% 84.5% 84.6% 84.6%
Adjusted operating income margin
(6)................................ 1.9% 2.8% 3.4% 3.8% 3.3% 3.0% 3.4%
Period-end HMO membership:
Commercial........................ 468 540 1,364 1,404 1,516 1,417 1,526
Medicare.......................... 248 298 348 375 397 383 406
---------- ---------- ---------- ---------- ---------- ------------- ----------
Total........................... 716 838 1,712 1,779 1,913 1,800 1,932
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital................................ $ 54,141 $ (29,034) $ (141,860) $ (78,379) $ (60,167) $ (38,766)
Goodwill and other intangibles, net............ -- 2,848 1,082,701 1,059,507 1,028,374 1,021,008
Total assets................................... $ 615,659 $ 745,684 $2,169,269 $2,315,816 $2,013,879 $ 2,044,218
Long-term debt due after one year.............. $ 23,279 $ 20,802 $ 377,986 $ 337,817 $ 104,184 $ 100,222
Shareholders' equity........................... $ 311,381 $ 364,422 $1,113,136 $1,140,141 $1,167,629 $ 1,191,701
</TABLE>

- ------------------------------
(1) Operating results of TakeCare, Inc. acquisition are included in the
historical operating results of FHP from the date of acquisition.
(2) Restructuring charges of $75.1 million ($0.85 per share, net of tax) for the
fiscal year ended June 30, 1995 related to the Restructuring Plan, which
involved (i) the discontinuance of certain services and programs, (ii) a
reduction in work force, and (iii) the write-down of certain owned and
operated hospitals. Restructuring charge of $9.7 million ($0.15 per share,
net of tax) for the fiscal year ended June 30, 1996 involves additional
charges relating to implementing the Restructuring Plan and disposal of
certain owned and operated hospitals.
(3) The OPM reserve charge consisted of a $45.0 million ($0.68 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents. One claim of $15 million plus interest was settled in the
first quarter of fiscal year 1997 for $12 million.
(4) Fully diluted earnings per share are not presented for the fiscal years
ended June 30, 1995 and 1996 and the three months ended September 30, 1995
because they are antidilutive.
(5) Health care costs as a percentage of premium revenue.
(6) Operating income as a percentage of revenue, before restructuring charges
and OPM reserve charge.

14
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Summary Unaudited Pro Forma Financial Information set forth below has
been derived from the Unaudited Pro Forma Financial Information included
elsewhere in this Joint Proxy Statement/ Prospectus. The Summary Unaudited Pro
Forma Financial Information reflects the combined effect
of the Mergers and the 1995 Acquisitions as if such transactions had occurred at
the beginning of each period presented for purposes of the pro forma income
statement data and on June 30, 1996 for purposes of the pro forma balance sheet
data. The Summary Unaudited Pro Forma Financial Information does not include the
pro forma effect of the Talbert Rights Offering. See "Unaudited Pro Forma
Financial Information."

The Summary Unaudited Pro Forma Financial Information set forth below and
the Unaudited Pro Forma Financial Information included elsewhere herein do not
purport to present the combined financial position or results of operations of
PacifiCare and FHP had the Acquisitions assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future. The Summary Unaudited Pro Forma Financial
Information set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, the Unaudited Pro Forma Financial
Information included elsewhere in this Joint Proxy Statement/Prospectus.

PacifiCare currently reports its financial information on the basis of a
September 30 fiscal year. FHP currently reports its financial information on the
basis of a June 30 fiscal year. The Unaudited Pro Forma Condensed Consolidated
Statement of Income for the fiscal year ended September 30, 1995 includes
PacifiCare's historical results of operations for the fiscal year ended
September 30, 1995 and FHP's historical results of operations for the fiscal
year ended June 30, 1995. The Unaudited Pro Forma Condensed Consolidated
Statement of Income for the nine months ended June 30, 1996 includes the
historical results of operations of both PacifiCare and FHP for the nine months
ended June 30, 1996. The Unaudited Pro Forma Balance Sheet includes the
historical balance sheets of both PacifiCare and FHP as of June 30, 1996.

The Summary Unaudited Pro Forma Financial Information should be read in
conjunction with: (i) such historical financial statements, and the notes
thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus; (ii) the selected historical financial data appearing
elsewhere in this Joint Proxy Statement/Prospectus; and (iii) the unaudited pro
forma financial information and comparative per share data, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus. See
"Incorporation of Certain Documents by Reference," "Available Information,"
"Selected Historical and Pro Forma Financial and Operating Data," "Summary --
Unaudited Pro Forma Financial Information," and "Summary -- Comparative Per
Share Data."

The Summary Unaudited Pro Forma Financial Information set forth below and
the Unaudited Pro Forma Financial Information included elsewhere herein assumed
that the FHP Merger will be accounted for under the purchase method of
accounting. The stock consideration portion of the purchase price assumed a
market price for PacifiCare Class A Common Stock of $71.00 and an Average
Closing Price of PacifiCare Class B Common Stock of $74.00. The Reorganization
Agreement provides for an adjustment to the number of shares to be issued to the
stockholders of FHP if the Average Closing Price of PacifiCare Class B Common
Stock is less than $62.90 or greater than $73.10. The increases in the market
price for PacifiCare Class A Common Stock and the Average Closing Price of
PacifiCare Class B Common Stock (from assumed values of $67.00 and $68.00,
respectively) resulted in: (i) the issuance of 479,000 fewer shares of
PacifiCare Holding Class B Common Stock; (ii) additional pro forma purchase
price consideration of $38.6 million; and (iii) had the effect of reducing pro
forma earnings per share by $0.01 for the nine months ended June 30, 1996 and
had no effect on pro forma earnings per share for the fiscal year ended
September 30, 1995. The Final Class A/ Common Share Ratio and Final Class
B/Common Share Ratio and the conversion ratio with respect to the PacifiCare
Holding Preferred will be based upon the Average Closing Price of the PacifiCare
Class B Common Stock calculated at the Effective Time. The purchase price used
to calculate goodwill will be based on the trading prices of PacifiCare Holding
Class A Common and PacifiCare Holding Class B Common following the Effective
Time.

15
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED JUNE
SEPTEMBER 30, 1995 30, 1996
------------------ -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Total operating revenue................................................... $ 7,711,064 $ 6,590,863
Expenses:
Health care services.................................................... 6,373,908 5,537,048
Marketing, general and administrative expenses.......................... 999,547 786,724
Amortization of intangibles............................................. 70,338 52,911
Disposition and restructuring charges (1)............................... 75,110 21,047
OPM reserve charge (2).................................................. -- 70,000
------------------ -------------
Operating income.......................................................... 192,161 123,133
Interest income........................................................... 67,916 61,787
Interest expense.......................................................... (110,075) (75,194)
------------------ -------------
Income before income taxes................................................ 150,002 109,726
Provision for income taxes................................................ 78,550 64,263
------------------ -------------
Net income................................................................ 71,452 45,463
Preferred stock dividends................................................. 10,518 7,889
------------------ -------------
Net income attributable to common stock................................... $ 60,934 $ 37,574
------------------ -------------
------------------ -------------
Weighted average common shares and equivalents outstanding used to
calculate earnings per share (3)......................................... 40,955 42,745
------------------ -------------
------------------ -------------
Earnings per share attributable to common stock........................... $ 1.49 $ 0.88
------------------ -------------
------------------ -------------
Ratio of earnings to fixed charges (4).................................... 2.2x 2.2x
------------------ -------------
------------------ -------------
Ratio of earnings to fixed charges and preferred stock dividends (5)...... 1.9x 1.8x
------------------ -------------
------------------ -------------

JUNE 30, 1996
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.......................................................................... $ 321,334
Working capital............................................................................... 238,018
Goodwill and intangible assets................................................................ 2,528,838
Total assets.................................................................................. 4,469,811
Long-term debt due after one year............................................................. 1,123,866
Shareholders' equity.......................................................................... 1,923,065
</TABLE>

- ------------------------------
(1) Disposition and restructuring charges include (i) a $9.3 million loss ($0.19
per share, net of tax) associated with the disposition of Pasteur Delivery
Systems, the Staff Model HMO subsidiary located in Florida for the nine
months ended June 30, 1996, and (ii) a restructuring charge of $75.1 million
($1.10 per share, net of tax) and $11.7 million ($0.16 per share, net of
tax) associated with the discontinuation of certain specialty health care
products and services and related reduction in workforce and asset sales and
write-offs for the fiscal year ended September 30, 1995 and the nine months
ended June 30, 1996, respectively.

(2) The OPM reserve charge consisted of a $70.0 million ($0.98 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents.

(3) See "Unaudited Pro Forma Financial Information" for calculation of weighted
average common shares and equivalents outstanding.

(4) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of deferred financing costs and the interest
component of capitalized leases, and the portion of operating lease expense
which management believes is representative of the interest component of
rental expense.

(5) For purposes of computing the ratio of earnings to fixed charges and
preferred stock dividends, earnings include income before fixed charges,
provision for Federal and state income taxes and minority interests. Fixed
charges and preferred stock dividends consist of preferred stock dividends,
interest expense, including amortization of deferred financing costs and the
interest component of capitalized leases, and the portion of operating lease
expense which management believes is representative of the interest
component of rental expense.

16
<PAGE>
COMPARATIVE PER SHARE DATA

The following table sets forth for PacifiCare and FHP certain historical and
pro forma equivalent per share data for the fiscal year ended September 30, 1995
and for the nine months ended June 30, 1996 and at June 30, 1996. The exchange
ratios used to calculate the purchase price assume that (i) each outstanding
share of FHP Common Stock will be converted into the right to receive $17.50 in
cash and a mix of PacifiCare Holding Class A Common and PacifiCare Holding Class
B Common at a Final Exchange Ratio of 0.256, and (ii) each outstanding share of
FHP Preferred Stock will be converted into the right to receive $14.113 in cash
and 0.50 shares of PacifiCare Holding Preferred, assuming approval of the Series
A Amendment. The actual number of shares of PacifiCare Holding Class A Common,
PacifiCare Holding Class B Common and PacifiCare Holding Preferred to be
exchanged for all of the outstanding PacifiCare Common Stock and FHP Capital
Stock will be determined at the Effective Time based on the approval or
disapproval of the Series A Amendment by the holders of FHP Preferred Stock, the
number of shares of FHP Preferred Stock as to which Irrevocable Elections, if
any, are made if the Series A Amendment is not approved and the formulas
described in detail in "The Merger and Related Transactions -- Merger
Consideration." The following data should be read in conjunction with the
Summary Unaudited Pro Forma Financial Information and the PacifiCare and FHP
Selected Historical Financial and Operating Data, including the notes thereto,
included elsewhere herein. The unaudited pro forma combined per share data are
not necessarily indicative of the operating results that would have been
achieved had the Mergers been consummated as of the beginning of each period
presented and should not be construed as representative of future earnings.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------------
<S> <C> <C>
PACIFICARE -- HISTORICAL:
Net income per share.................................................... $ 3.62 $ 2.16
Cash dividends per share................................................ -- --
Book value per share (1)................................................ $ 23.70 $ 26.06
FHP -- HISTORICAL (2):
FHP Common Stock:
Income per common and common equivalent share......................... $ 0.29 $ 0.25
Cash dividends per share.............................................. -- --
Book value per share (1).............................................. $ 28.35 $ 28.63
FHP Preferred Stock (3):
Cash dividends per share.............................................. $ 1.25 $ 0.94
PACIFICARE HOLDING -- PRO FORMA (4):
PacifiCare Holding Common:
Income per common and common equivalent share......................... $ 1.49 $ 0.88
Cash dividends per share.............................................. -- --
Book value per share.................................................. n/a $ 45.81
PacifiCare Holding Preferred (3):
Cash dividends per share.............................................. $ 1.00 $ 0.75
</TABLE>

- ------------------------
(1) The historical book value per share is computed by dividing total
shareholders' equity by the number of shares of common stock outstanding at
the end of the period. The outstanding shares of common stock do not include
shares issuable upon exercise of options or convertible securities.

(2) The fiscal year ended September 30, 1995 includes FHP's historical results
of operations for the fiscal year ended June 30, 1995.

(3) The FHP Preferred Stock and the PacifiCare Holding Preferred each have a $25
per share liquidation preference.

(4) Adjusted to give effect to the Mergers.

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<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY
BY PACIFICARE AND FHP STOCKHOLDERS IN DETERMINING WHETHER OR NOT TO VOTE IN
FAVOR OF THE APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT.

RISK FACTORS RELATED TO THE BUSINESS OF PACIFICARE

GOVERNMENT CONTRACTS. PacifiCare's Secure Horizons-Registered Trademark-
programs provide services to Medicare beneficiaries pursuant to contracts with
HCFA. The Secure Horizons programs are subject to regulation by HCFA and certain
state agencies. HCFA requires that HMOs be federally qualified or meet similar
requirements as a competitive medical plan in order to be eligible for Medicare
risk contracts. HCFA has the right to audit HMOs operating under Medicare risk
contracts to determine the quality of care being rendered and the degree of
compliance with HCFA's contracts and regulations. The risk contracts are subject
to periodic unilateral revisions by HCFA based on certain demographic
information relating to the Medicare population and the cost of providing health
care in a particular geographic area. PacifiCare's Medicare risk contracts are
automatically renewed every 12 months unless PacifiCare or HCFA elects either
not to renew or to terminate them. HCFA may unilaterally terminate PacifiCare's
Medicare risk contracts if PacifiCare fails to continue to meet compliance and
eligibility standards. Termination of PacifiCare's Medicare risk contracts would
have a material adverse effect on PacifiCare.

Because the use of health care services by Medicare beneficiaries generally
exceeds the use of services by those who are under the age of 65, PacifiCare's
Medicare risk contracts generate substantially larger per member revenue than
PacifiCare's non-Medicare plans. Premium revenue for each Secure Horizons member
is usually more than three times that of a commercial member, reflecting, in
part, the higher medical and administrative costs of serving a Medicare member.
As a result, although members in the Secure Horizons programs represented
approximately 30% of PacifiCare's membership at June 30, 1996, they accounted
for approximately 57% of the consolidated premium revenue for the nine months
ended June 30, 1996 and a disproportionate amount of PacifiCare's operating
profit. The Secure Horizons programs are subject to certain risks relative to
commercial programs, such as higher comparative medical costs, higher levels of
utilization, government and regulatory reporting requirements, the possibility
of reduced or insufficient government reimbursement in the future and higher
marketing and advertising costs associated with selling to individuals rather
than to groups.

As a result of HCFA's regulations governing PacifiCare's Medicare risk
programs, the "medical loss ratio" (health care expenses as a percentage of
premium revenue), as determined prospectively through formulas established by
HCFA for PacifiCare's Medicare risk contracts in a particular region, may not be
less than the medical loss ratio for PacifiCare's non-Medicare contracts in such
region. If PacifiCare were to fall out of compliance with these regulations, it
would have to provide additional benefits, reduce the supplemental premiums
charged to its Medicare members or accept a lower payment from HCFA to increase
the medical loss ratio for the Medicare risk contracts to the level of the
medical loss ratio for the non-Medicare contracts. This regulation could
materially and adversely affect PacifiCare.

Secure Horizons premiums are determined through formulas established by HCFA
for PacifiCare's Medicare risk contracts in a particular region. If these
premiums are reduced, or if premium rate increases in a particular region are
lower than the rate of increase in health care service expenses for Secure
Horizons members in such region, PacifiCare could be materially and adversely
affected. PacifiCare has attempted to mitigate this risk by paying approximately
78% of the health care service expenses for the Secure Horizons program by
utilizing Capitation Fees.

PacifiCare's Secure Horizons programs are not permitted, under federal
regulations, to account for more than one-half of PacifiCare's total HMO members
in each of PacifiCare's non-contiguous geographic state markets. This limitation
may constrain PacifiCare's rate of growth in markets where PacifiCare is able to
add Medicare members at a faster rate than commercial members.

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<PAGE>
GOVERNMENT REGULATION AND AUDITS. PacifiCare's HMOs are licensed and
subject to state and federal statutes and regulations which extensively regulate
the activities and licensing of HMOs and subject the HMOs to periodic
examination by governmental agencies. Among the areas regulated by state and
federal law are procedures for quality assurance, resolution of grievances,
enrollment requirements, the relationship between the HMO and its health care
providers and the HMO's financial condition. To comply with such regulations, it
may be necessary for PacifiCare's HMOs to make changes from time to time in
their services, procedures, structure and marketing methods. Some of the changes
may be caused by changes in federal and state statutes and regulations that
govern PacifiCare's HMOs. Although PacifiCare intends to maintain its HMOs'
federal qualifications, state licenses and Medicare contracts, there can be no
assurance that it can do so. Additional governmental regulation or future
interpretation of existing regulations could materially and adversely affect
PacifiCare.

PacifiCare's HMOs have commercial contracts with OPM to provide managed
health care services to employees under the FEHBP. OPM, as a normal course of
business, audits health plans with which it contracts to, among other things,
verify that premiums charged under OPM contracts are established in compliance
with community rating and other requirements under the FEHBP. OPM audits for
multiple periods are in various stages of completion for several of PacifiCare's
HMO subsidiaries. PacifiCare incurred a pre-tax charge of $25 million to its
results of operations for the three and nine months ended June 30, 1996 to
increase reserves in anticipation of negotiations relating to potential
governmental claims for contracts with OPM. PacifiCare intends to negotiate with
OPM on all matters to attain a mutually satisfactory result. There can be no
assurance, however, that these negotiations will be concluded satisfactorily or
that additional, possibly material, liability will not be incurred. PacifiCare
believes that any ultimate liability in excess of amounts accrued as a result of
the audits by OPM would not materially and adversely affect PacifiCare.

In the normal course of business, the governmental agencies with which
PacifiCare contracts periodically review the premiums paid to PacifiCare under
these programs to detect whether any excess premiums have been paid. If such
agencies discover, in connection with any such review, that excess premiums were
paid to PacifiCare, adjustments to current or future premiums would be made. If
such adjustments were significant, they could materially and adversely affect
PacifiCare.

LEGISLATION. Government regulation of health care coverage products and
services is a changing area of law that varies from jurisdiction to
jurisdiction. Changes in applicable laws and regulations are continually being
considered and the interpretation of existing laws and rules may also change
from time to time. Regulatory agencies generally have broad discretion in
promulgating regulations and in interpreting and enforcing laws and rules. While
PacifiCare is unable to predict what regulatory changes may occur or the impact
on PacifiCare of any particular change, PacfiCare's operations and financial
results could be negatively affected by regulatory changes. Although PacifiCare
believes that it would benefit from legislative proposals encouraging the use of
managed health care, there can be no assurance that the enactment of any of such
reforms would not materially and adversely affect PacifiCare. The continued
consideration and enactment of "anti-managed care" laws and regulations, such as
"any willing provider" laws and limits on utilization management, by federal and
state bodies may make it more difficult for PacifiCare to control medical costs
and could adversely affect financial results.

DEPENDENCE UPON HEALTH CARE PROVIDERS. The profitability of PacifiCare and
the success of its long-range business plans depends upon its ability to attract
and retain qualified health care providers. PacifiCare's HMOs contract with
physicians, physician groups and hospitals to arrange for a comprehensive range
of health care services for their members. Contracts with health care providers
generally are negotiated on an annual basis. Generally, there is no requirement
that the provider continue its relationship with PacifiCare upon expiration of
the annual period. PacifiCare has, however, entered into a number of provider
service contracts with terms up to 10 years. PacifiCare's ability to expand is
dependent, in part, on competitive premium pricing and its ability to secure
cost effective

19
<PAGE>
contracts with additional physicians or to ensure that existing physician groups
expand their operations to accommodate PacifiCare's new HMO membership.
Achieving such objectives with respect to competitive premium pricing and
physician contracts is becoming difficult due to increasing competition. In
addition, increased competition in the health care industry has resulted in the
consolidation of health care providers, resulting in larger provider groups
being created and fewer groups with which PacifiCare can contract. Further, the
financial viability of the resulting provider groups may be adversely affected
by consolidation, rendering them unable to adequately service the membership and
meet contractual obligations. Inability to contract, loss of contracts with
providers or inability to service members could materially and adversely affect
PacifiCare.

HEALTH CARE COST CHANGES. PacifiCare's profitability is dependent, in part,
on its ability to maintain effective control over health care costs while
providing members with quality care. Factors such as health care reform, levels
of utilization of health care services, new technologies, hospital costs, major
epidemics, and numerous other external influences may affect the ability of HMOs
to control health care costs.

Trends in health care prices and utilization have a substantial effect on
PacifiCare's financial results. Historically, increases in health care prices
and utilization have caused health care costs to rise faster than general
inflation. Recently, these increases have moderated, but there can be no
assurance that health care prices or utilization will not again increase at a
more rapid pace. If health care costs do begin to increase more rapidly, there
can be no assurance that PacifiCare will be able to meet its goal of maintaining
price increases at least sufficient to cover increases in health care costs.
Competitive pressures, demands from providers and customers, applicable
regulations or other factors may materially and adversely affect PacifiCare's
ability to limit the impact of health care cost increases by reducing the
amounts paid to providers or by increasing prices.

COMPETITION. The health care industry is highly competitive, both
nationally and in PacifiCare's various markets. PacifiCare has many competitors,
including indemnity insurance carriers, other HMOs, employer self-funded
programs and PPOs, many of which have substantially larger enrollments or
greater financial resources than PacifiCare. PacifiCare also faces competition
from hospitals, health care facilities and other health care providers who have
combined and formed their own networks to contract directly with employer groups
for the delivery of health care services. California, the largest market in
which PacifiCare competes, is served by a large number of HMOs and is one of the
markets most heavily penetrated by HMOs in the United States. Competition for
members in PacifiCare's markets has resulted in an increase in benefits and
price competition. In such an increasingly competitive environment, PacifiCare
believes that a comprehensive range of products and services, along with a
strong provider network, must be provided in order to remain competitive.
Increased competition could result in a decline in revenue or in price
reductions that could materially and adversely affect PacifiCare.

RISK FACTORS RELATED TO THE BUSINESS OF FHP

HEALTH CARE RISKS. FHP is generally subject to risks relating to its health
care business and operations similar to those set forth herein for PacifiCare,
and FHP's operations, profitability or business prospects could be similarly
adversely affected. See "-- Risk Factors Related to the Business of PacifiCare."

OFFICE OF PERSONNEL MANAGEMENT AUDITS. FHP's HMO subsidiaries have
contracts with OPM to provide or arrange managed health care services under
FEHBP for federal employees, annuitants and their dependents. These contracts
with OPM and applicable government regulations establish premium rating
requirements for the FEHBP. Periodically, FHP's HMO subsidiaries are subject to
audits by the government to, among other things, verify that premiums charged
under OPM contracts are established in compliance with community rating and
other requirements under the FEHBP.

In the third quarter of fiscal year 1996, FHP increased reserves by
recording a pretax charge of $45 million ($28.7 million net of tax), in
anticipation of negotiations to address existing and potential

20
<PAGE>
governmental claims arising from the OPM audits, as discussed below. FHP's
reserves reflect management's recognition that FEHBP rate audits and claims
based thereon are being handled differently by the government than in the past
and reflect the extent of business FHP's subsidiaries have conducted with OPM
over many years. Based on FHP management's understanding of the government's
current interpretation of the community rating standard requirements, FHP
management currently believes that FHP has established adequate reserves to
settle any claims that may arise from present or future FEHBP rate audits for
the years between and including 1987 through 1996, or that amounts in excess of
reserves, if any, necessary to settle any such claims would not be such as to
have a material adverse effect on the consolidated financial position or on the
results of operations or cash flows of FHP.

In the third quarter of fiscal 1996, the United States Department of Justice
notified FHP that the government believed FHP may have violated the False Claims
Act in community rate certifications that were the subject of a draft OPM audit
report covering the operations of one of FHP's HMO subsidiaries during the years
1987 through 1991, and that it believed the government's actual damages to be
approximately $15 million. In October 1996, FHP reached an agreement with the
government to resolve these claims. The agreement called for FHP to pay $12
million, which amount FHP understands will be allocated by OPM to the FEHBP
Contingency Reserve Funds for the regions covered by FHP's contracts. FHP did
not pay any fine or penalty under the agreement. Under the terms of the
agreement, the government released FHP from all claims under the subject
contracts for the years covered by the draft audit report.

OPM has opened two additional audits for years as far back as 1990 at two of
FHP's other HMO subsidiaries. In October 1996, OPM sent a draft audit report
with respect to FHP's TakeCare subsidiary, alleging certain defects in the
subsidiary's rating practices for the years 1990 through 1994, and requesting
that FHP comment on the draft findings. FHP currently is evaluating the draft
audit report and is preparing a response. It is likely that the final TakeCare
audit report will recommend that OPM seek a monetary recovery from FHP and that
such recommended recovery will be for a substantial amount. Based upon positions
taken by the government with respect to the 1987-1991 draft audit report
discussed above, FHP management believes that the other open audit and other
possible future audits may allege defective rating practices and result in
claims for adjustments from OPM. FHP management cannot determine if such claims
will result in further referrals to the Department of Justice and further False
Claims Act claims.

LITIGATION. FHP, through the operations currently comprising Talbert, has
historically directly provided medical services. During the ordinary course of
business, FHP has become a party to pending and threatened legal actions and
proceedings, a significant number of which involve claims of medical
malpractice. FHP management is of the opinion, taking into account FHP's
insurance coverage and reserves that have been established, that the outcome of
currently known legal actions and proceedings will not, singly or in the
aggregate, have a material adverse effect on the consolidated financial position
or results of operations or cash flow of FHP. However, there can be no assurance
of the foregoing or that a future claim will not exceed available insurance
coverages or reserves or that insurance policies will continue to be available
with adequate coverages at reasonable premiums. Any substantial increase in the
cost of such insurance or the unavailability of any such coverages could
materially and adversely affect FHP or PacifiCare Holding following the Mergers.

COMMON RISK FACTORS RELATED TO THE MERGERS

INTEGRATION OF BUSINESS OPERATIONS. The Mergers and any similar
acquisitions may affect PacifiCare Holding's ability to integrate and manage its
overall business effectively. There can be no assurance that PacifiCare Holding
will be able to successfully integrate the administrative, management and
service operations of its FHP and PacifiCare subsidiaries, that such integration
will occur in a timely or efficient manner, if at all, or that the uncertainty
associated with such integration will not result in the loss of providers,
employers, members or key employees. The failure to achieve such integration in
a timely or efficient manner could materially and adversely affect PacifiCare
Holding.

Because of the inherent uncertainties associated with combining two large
companies, there can be no assurance that the combined company will be able to
realize the synergies and cost savings that PacifiCare and FHP currently expect
to realize as a result of the Mergers. See "The Merger and

21
<PAGE>
Related Transactions -- Estimated Synergies." Furthermore, there can be no
assurance that the synergies and cost savings which are realized, if any, will
not be offset by increases in other expenses or losses.

REGULATORY APPROVAL OF THE MERGERS. The Mergers are subject to certain
filings and approvals with federal and state agencies regulating HMOs and
insurance companies. There can be no assurance that such approvals will be
granted or that the terms and conditions on which such approvals are obtained
will not materially and adversely affect the Mergers or the operations,
profitability or business prospects of the combined company following the
Mergers. Additionally, pursuant to the requirements of the HSR Act, each of
PacifiCare, FHP, PacifiCare Holding and UniHealth filed Notification and Report
Forms and certain documentary attachments with respect to their acquisitions of
voting securities in the Mergers, and PacifiCare and FHP are each in the process
of responding to a Second Request for additional information and documentary
materials issued by the FTC. A Second Request has the effect of delaying
consummation of the Mergers until 20 days after PacifiCare and FHP each
substantially comply with the Second Request, unless the FTC grants early
termination of the HSR Act waiting period. Additionally, the Attorney General of
the State of California has expressed interest in analyzing the potential
effects of the Mergers in California and has requested copies of all materials
provided to the FTC. PacifiCare and FHP have voluntarily agreed to provide
information to the California Attorney General under the terms of the National
Association of Attorneys General compact.

The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Mergers. At any time before or
after consummation of the Mergers, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Mergers, including seeking to enjoin consummation of the Mergers, to
cause the divestiture of significant assets of PacifiCare or FHP or their
subsidiaries or to impose conditions on PacifiCare Holding with respect to its
business operations. There can be no assurance that a challenge to the Mergers
on antitrust grounds will not be made, or, if such a challenge is made,
PacifiCare or FHP would prevail or would not be required to divest certain
assets or to accept certain conditions in order to consummate the Mergers. See
"The Mergers and Related Transactions -- Regulatory Matters."

VARIATIONS IN VALUE OF FHP COMMON STOCK AND THE FHP MERGER
CONSIDERATION. The relative values of the FHP Common Stock and the FHP Merger
consideration at the Effective Time may vary from the values as of the date
hereof or as of the dates of the respective stockholder votes with respect to
the Mergers because of changes in the operations, profitability and business
prospects of FHP or PacifiCare, market assessments of the likelihood that the
Mergers will be consummated and the timing thereof, the effect of any conditions
or restrictions imposed on or proposed with respect to the Mergers, general
market and economic conditions and other factors. The Final Class A/Common Share
Ratio and Final Class B/Common Share Ratio and the conversion ratio with respect
to the PacifiCare Holding Preferred will be adjusted at the Effective Time to
partially compensate for increases or decreases in the Average Closing Price of
the PacifiCare Class B Common Stock to the extent the increase or decrease
exceeds 7.5% of $68.00. The adjustment, if any, will represent 50% of the change
in excess of 7.5% to a maximum of 30% change, beyond which no further adjustment
will be made. Neither party has the right to terminate the Reorganization
Agreement based on a price change which exceeds 30% of $68.00. See "The Mergers
and Related Consideration -- Merger Consideration."

22
<PAGE>
THE COMPANIES

PACIFICARE HOLDING

PacifiCare Holding, a newly formed Delaware corporation, has not conducted
any business activities to date other than those incident to its formation, its
execution of the Reorganization Agreement and related agreements, its
participation in the preparation of this Joint Proxy Statement/ Prospectus and
the making of various regulatory filings in connection with the transactions
contemplated by the Reorganization Agreement. Immediately following the
consummation of the Mergers, PacifiCare Holding will become a holding company
for PacifiCare and FHP and their respective subsidiaries, and its name will be
changed to "PacifiCare Health Systems, Inc." Accordingly, the businesses
currently conducted by PacifiCare and FHP and their respective subsidiaries will
be the initial businesses of PacifiCare Holding.

The principal executive offices of PacifiCare Holding are located at 5995
Plaza Drive, Cypress, California 90630-5028. PacifiCare Holding's telephone
number is (714) 952-1121.

PACIFICARE

PacifiCare is one of the nation's leading managed health care services
companies, serving as of September 30, 1996, approximately 2,031,000 commercial,
Medicare and Medicaid members. PacifiCare is also a leader in the management,
development and marketing of diversified HMO products and related services.
PacifiCare operates HMOs in California, Florida, Oklahoma, Oregon, Texas and
Washington, which as of September 30, 1996 had a combined commercial membership
of approximately 1,434,000 members. Through internal growth and strategic
acquisitions, PacifiCare believes it has built a strong competitive position in
California and has expanded operations into new and existing geographic markets.

PacifiCare, through its Secure Horizons programs, operates the largest and
one of the fastest growing Medicare risk programs in the United States (as
measured by membership) with approximately 554,000 members enrolled as of
September 30, 1996. PacifiCare believes that its Secure Horizons programs are
attractive to Medicare beneficiaries because they provide a more comprehensive
package of benefits than offered under traditional Medicare and substantially
reduce the member's administrative responsibilities.

PacifiCare's commercial, Medicare and Medicaid program members are provided
some or all of the following health care services: primary and specialty
physician care, hospital care, laboratory and radiology services, prescription
drugs, dental and vision care, skilled nursing care, physical therapy and
psychological counseling. PacifiCare also offers certain specialty products and
services to group purchasers and to other managed care organizations and their
beneficiaries, including life and health insurance, behavioral health service,
dental and vision services and Medicare risk management services.

The principal executive offices of PacifiCare are located at 5995 Plaza
Drive, Cypress, California 90630-5028. PacifiCare's telephone number is (714)
952-1121.

FHP

FHP is one of the nation's leading managed health care companies. FHP,
through its direct and indirect subsidiaries, delivers managed health care
services and sells indemnity health, group life and workers' compensation
insurance. FHP's oldest subsidiary, FHP, Inc., a California corporation, is a
federally qualified, multi-state licensed HMO, which has been operating managed
health care programs since 1961.

As of September 30, 1996, FHP provided a broad range of managed health care
services to more than 1,932,000 HMO members, comprised of commercial and
governmental employees and Medicare beneficiaries, in 11 states and Guam. These
managed health care services include ambulatory and outpatient physician care,
hospital care, prescription drugs, dental and vision care, home health nursing,
skilled nursing care, physical therapy, psychological counseling and health
promotion.

23
<PAGE>
FHP also offers group term life and health insurance products through its
insurance subsidiaries. In addition to its general workers compensation
business, FHP's 24 Hour Managed Care Program-SM- offers in a single package
workers' compensation coverage, HMO plans and group indemnity medical, dental
and life insurance benefit plans through several of its subsidiaries. FHP also
offers third-party administration and utilization review services and several
PPOs.

In June 1995, FHP announced the Restructuring Plan. The Restructuring Plan
was formulated in response to the intensely competitive environment in the HMO
industry and continued declining membership in FHP-operated medical facilities.
The Restructuring Plan consisted of: the sale or other disposition of FHP's
owned and operated hospitals and other in-patient facilities, certain
nonproductive real estate and other assets, a reduction in debt, a reduction in
FHP's workforce, and the creation of three distinct business segments. These
business segments are: (i) a Network Model HMO; (ii) FHP's group life, health
and accident and workers' compensation insurance and related products
(collectively, the "Insurance Group"); and (iii) Talbert, consisting of a
physician practice management company (TMMC), a related ancillary clinical
services provider (THSC) and various affiliated physician and dentist practice
groups. Costs associated with restructuring, including administrative facility
closure costs and employee separation costs, resulted in pretax charges against
earnings of approximately $75.1 million in the fourth quarter of fiscal year
1995, and $9.7 million in fiscal year 1996. During fiscal 1996, as part of the
Restructuring Plan, FHP completed sales of its Fountain Valley, California
hospital campus, its Salt Lake City, Utah hospital campus and certain
non-productive real estate. During fiscal 1996, FHP also transferred the
operations of two sub-acute in-patient facilities to other operators. As of
September 30, 1996, limited amounts of real property scheduled for sale remained
unsold. Net proceeds available from the sales of assets have been used primarily
for the reduction of indebtedness and for various other corporate purposes.

The Restructuring Plan included the creation of TMMC and THSC, effective as
of January 1, 1996, as new subsidiaries of FHP, together with the creation of
several new professional corporations (the "PCs"). Approximately 4,300 of FHP's
employees, including health care professionals, became employees of TMMC, THSC
or the PCs on January 1, 1996. TMMC leases or subleases all of FHP's medical
centers and related assets located in Southern California, Utah, Arizona, Nevada
and New Mexico. FHP's HMOs contracted with the PCs to provide health care
services to approximately 15.8% of FHP's HMO members, who were already receiving
health care in the medical centers. The PCs have entered into long-term practice
management agreements with TMMC, thereby enabling the PCs and TMMC to do
business with other payors and HMOs, as well as with FHP's HMOs. These third
party arrangements are designed to allow TMMC to utilize excess capacity in the
medical centers. TMMC and THSC currently are 92.25% owned by FHP and 7.75% owned
by key employees of FHP and TMMC. Concurrent with the FHP Merger, it is
anticipated that TMMHC will acquire FHP's interest in TMMC and THSC in exchange
for, among other consideration, rights to purchase 92.25% of TMMHC's Common
Stock. FHP and TMMC may determine not to effect the separation in this manner,
in which case the Talbert Rights would be rights to purchase FHP's interest in
TMMC. Pursuant to the FHP Merger, these Talbert Rights will be issued to holders
of FHP Common Stock and FHP Preferred Stock (on an as-if-converted basis). In
addition, TMMHC has authorized options issuable to TMMHC directors and employees
to purchase up to 180,000 shares (5.7% on a fully diluted basis) of TMMHC common
stock, of which options with respect to 70,250 shares were outstanding as of
November 12, 1996. See "The Mergers and Related Transactions -- Talbert Rights
Offering."

The principal executive offices of FHP are located at 3120 Lake Center
Drive, Santa Ana, California 92704. FHP's telephone number is (714) 825-6600.

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<PAGE>
THE PACIFICARE MEETING

PURPOSE OF THE PACIFICARE MEETING

The purpose of the PacifiCare Meeting is to consider and vote upon the
following proposals: (i) the approval and adoption of the Reorganization
Agreement; (ii) the approval and adoption of the PacifiCare Amendment; and (iii)
the approval and adoption of the Second Amended PacifiCare Directors Plan. The
PacifiCare Merger may occur only if both proposals are approved and adopted.

DATE, TIME AND PLACE OF MEETING

The PacifiCare Meeting will be held on December 31, 1996 at PacifiCare's
offices at 5995 Plaza Drive, Cypress, California 90630 at 10:00 a.m., Pacific
Standard Time.

RECORD DATE AND OUTSTANDING SHARES

Only holders of record of PacifiCare Class A Common Stock at the close of
business on the PacifiCare Record Date are entitled to notice of and to vote at
the PacifiCare Meeting on the approval and adoption of the Reorganization
Agreement and the Second Amended PacifiCare Directors Plan. Holders of record of
PacifiCare Common Stock at the close of business on the PacifiCare Record Date
are entitled to notice of and to vote at the PacifiCare Meeting on the approval
and adoption of the PacifiCare Amendment. As of the close of business on the
PacifiCare Record Date, there were 12,379,658 shares of PacifiCare Class A
Common Stock outstanding and entitled to vote and 18,912,018 shares of
PacifiCare Class B Common Stock outstanding and entitled to vote. As of that
date, there were 219 and 196 holders of record of the PacifiCare Class A Common
Stock and the PacifiCare Class B Common Stock, respectively. Each holder of
PacifiCare Class A Common Stock is entitled to one vote for each share of
PacifiCare Class A Common Stock held as of the PacifiCare Record Date, and, with
respect to the vote on the PacifiCare Amendment, each holder of PacifiCare Class
B Common Stock is entitled to one vote for each share of PacifiCare Class B
Common Stock held as of the PacifiCare Record Date.

VOTING OF PROXIES

The PacifiCare proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the Board of Directors of PacifiCare for use at the
PacifiCare Meeting. Stockholders are requested to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to PacifiCare. All proxies that are properly executed and
returned, and that are not revoked, will be voted at the PacifiCare Meeting in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve and adopt the Reorganization Agreement, the PacifiCare
Amendment and the Second Amended PacifiCare Directors Plan. Other than the
proposals specified in the Notice of the PacifiCare Meeting, no other business
will be conducted at the PacifiCare Meeting. A PacifiCare stockholder who has
given a proxy may revoke it at any time before it is exercised at the PacifiCare
Meeting by: (i) delivering to the Secretary of PacifiCare (by any means,
including facsimile) a written notice, bearing a date later than the date of the
proxy, stating that the proxy is revoked; (ii) signing and so delivering a proxy
relating to the same shares and bearing a later date prior to the vote at the
PacifiCare Meeting; or (iii) attending the PacifiCare Meeting and voting in
person (although attendance at the PacifiCare Meeting will not, by itself,
revoke a proxy).

VOTE REQUIRED

Approval and adoption of the Reorganization Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
PacifiCare Class A Common Stock entitled to vote.

Approval and adoption of the PacifiCare Amendment requires the affirmative
vote of the holders of a majority of the outstanding shares of PacifiCare Class
A Common Stock entitled to vote and the holders of a majority of the outstanding
shares of PacifiCare Class B Common Stock entitled to vote, each voting
separately as a class.

Approval and adoption of the Second Amended PacifiCare Directors Plan
requires the affirmative vote of a majority of the outstanding shares of
PacifiCare Class A Common Stock voting.

25
<PAGE>
UniHealth, the largest holder of PacifiCare Class A Common Stock, has
contractually agreed to vote all shares of PacifiCare Class A Common Stock that
it beneficially owns for approval and adoption of the Reorganization Agreement
and the PacifiCare Amendment. Pursuant to a voting and non-disposition
agreement, dated as of August 4, 1996, between FHP and UniHealth (the "UniHealth
Voting Agreement"), UniHealth has agreed, subject to certain limitations, to:
(i) vote the shares of PacifiCare Class A Common Stock beneficially owned by it
in favor of the Reorganization Agreement and the PacifiCare Amendment; (ii) not
dispose of such shares prior to the PacifiCare Meeting; and (iii) grant a proxy
to certain officers of FHP to so vote. UniHealth has indicated that it intends
to vote the shares of PacifiCare Class B Common Stock it holds in favor of
approval and adoption of the PacifiCare Amendment. UniHealth beneficially owns
approximately 47.7% of the outstanding PacifiCare Class A Common Stock and 1.5%
of the outstanding PacifiCare Class B Common Stock. See "The Mergers and Related
Transactions -- Voting and Non-Disposition Agreements" and "Ownership of
PacifiCare, FHP and PacifiCare Holding." The executive officers and directors of
PacifiCare have indicated that they intend to vote in favor of approval of the
Reorganization Agreement and the PacifiCare Amendment. On the PacifiCare Record
Date, such officers and directors beneficially owned approximately 2.0% of the
then outstanding shares of PacifiCare Class A Common Stock and approximately
1.0% of the then outstanding shares of PacifiCare Class B Common Stock.

BOARD RECOMMENDATIONS

THE PACIFICARE BOARD OF DIRECTORS BELIEVES THAT THE MERGERS ARE FAIR TO AND
IN THE BEST INTERESTS OF PACIFICARE AND ITS STOCKHOLDERS AND THEREFORE
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE PACIFICARE AMENDMENT. THE
PACIFICARE BOARD OF DIRECTORS ALSO BELIEVES THAT THE SECOND AMENDED PACIFICARE
DIRECTORS PLAN IS IN THE BEST INTEREST OF PACIFICARE AND UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE SECOND AMENDED PACIFICARE DIRECTORS PLAN.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of the business contemplated herein
at the PacifiCare Meeting is a majority of the shares of the PacifiCare Class A
Common Stock and a majority of the shares of PacifiCare Class B Common Stock
outstanding on the PacifiCare Record Date. Abstentions and broker non-votes each
will be included in determining whether a quorum is present. Abstentions will be
counted towards the tabulation of votes cast; broker non-votes will not be so
counted. Abstentions and broker non-votes each will have the same effect as a
vote against the Reorganization Agreement and the PacifiCare Amendment.

SOLICITATION OF PROXIES AND EXPENSES

PacifiCare will bear the entire cost of the solicitation of the proxies of
PacifiCare stockholders, including preparation, assembly, printing and mailing
of this Joint Proxy Statement/Prospectus, the proxy and any additional
information furnished to its stockholders. PacifiCare has engaged the firm of
Corporate Investor Communications, Inc. ("CIC") to assist it in the distribution
and solicitation of proxies and has agreed to pay CIC a fee of $10,000 plus
expenses for its services. Copies of the solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of PacifiCare Common Stock beneficially owned by others to
forward to such beneficial owners. PacifiCare may reimburse persons representing
beneficial owners of PacifiCare Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram, letter or personal
solicitation by directors, officers or employees of PacifiCare and by CIC. No
additional compensation will be paid to directors, officers or employees for
such services.

AVAILABILITY OF ACCOUNTANTS

A representative of Ernst & Young LLP is expected to be present at the
PacifiCare Meeting. The representative will be available to respond to
appropriate questions, and will have the opportunity to make a statement.

26
<PAGE>
THE FHP MEETING

PURPOSE OF THE FHP MEETING

The purpose of the FHP Meeting is to consider and vote upon the following
proposals: (i) the approval and adoption of the Reorganization Agreement; (ii)
the approval and adoption of the Series A Amendment; (iii) the election of three
directors to hold office for three-year terms; and (iv) the ratification of the
appointment of independent auditors. Approval of the Series A Amendment is not a
condition to the completion of the FHP Merger. Approval and adoption of the
Series A Amendment will result in holders of FHP Preferred Stock receiving cash
and PacifiCare Holding Preferred in lieu of the consideration currently required
by the FHP Certificate. Holders of FHP Preferred Stock making an Irrevocable
Election will receive such consideration whether or not the Series A Amendment
is approved.

DATE, TIME AND PLACE OF MEETING

The FHP Meeting will be held on December 31, 1996 at 2:00 p.m., Pacific
Standard Time, at the FHP University Building, 3515 Harbor Boulevard, Costa
Mesa, California.

RECORD DATE AND OUTSTANDING SHARES

Only holders of record of FHP Capital Stock at the close of business on the
FHP Record Date are entitled to notice of and to vote at the FHP Meeting. As of
the close of business on the FHP Record Date, there were 41,214,595 shares of
FHP Common Stock outstanding and entitled to vote and 21,035,804 shares of FHP
Preferred Stock outstanding and entitled to vote. These share numbers include,
respectively, 1,791 and 5,971 shares issuable to former shareholders of
companies which FHP acquired who have not yet received FHP stock certificates.
As of that date, there were 625 and 158 holders of record of the FHP Common
Stock and the FHP Preferred Stock, respectively. Each holder of FHP Common Stock
is entitled to one vote for each share of FHP Common Stock held as of the FHP
Record Date, and, with respect to the Series A Amendment, each holder of FHP
Preferred Stock is entitled to one vote for each share of FHP Preferred Stock
held as of the FHP Record Date.

VOTING OF PROXIES

The FHP proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the FHP Board of Directors for use at the FHP Meeting.
Stockholders are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to FHP. All
proxies that are properly executed and returned, and that are not revoked, will
be voted at the FHP Meeting in accordance with the instructions indicated on the
proxies or, if no direction is indicated, to approve and adopt the
Reorganization Agreement and the Series A Amendment, to elect the three
nominated directors identified herein and to ratify the appointment of the
independent auditors. FHP's Board of Directors does not presently intend to
bring any business before the FHP Meeting other than the specific proposals
referred to in this Joint Proxy Statement/Prospectus and specified in the notice
of the FHP Meeting. As to any business that may properly come before the FHP
Meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies. An FHP stockholder who has given a proxy may revoke it at any time
before it is exercised at the FHP Meeting, by: (i) delivering to the Secretary
of FHP (by any means, including facsimile) a written notice, bearing a date
later than the date of the proxy, stating that the proxy is revoked; (ii)
signing and so delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the FHP Meeting; or (iii) attending the FHP
Meeting and voting in person (although attendance at the FHP Meeting will not,
by itself, revoke a proxy).

VOTE REQUIRED OF FHP COMMON STOCK

The affirmative vote of the holders of a majority of the outstanding FHP
Common Stock entitled to vote is necessary to adopt and approve the
Reorganization Agreement and the Series A Amendment. The affirmative vote of a
majority of the FHP Common Stock present at the meeting is necessary to ratify
the appointment of the independent auditors. Directors will be elected by a

27
<PAGE>
plurality of the votes cast by the holders of FHP Common Stock. Each share of
FHP Common Stock is entitled to one vote on each matter on which the holders of
such shares are entitled to vote as set forth above.

On the FHP Record Date, directors and executive officers of FHP and their
affiliates and Other Persons (as defined below) beneficially owned and were
entitled to vote approximately 4.2% of the outstanding FHP Common Stock. The
directors and executive officers of FHP have indicated that they intend to vote
their shares of FHP Common Stock in favor of approval and adoption of the
Reorganization Agreement, the Series A Amendment, the election of the three
nominated directors identified herein and the ratification of the independent
auditors.

Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W. Price III have each
entered into a voting and non-disposition agreement with PacifiCare
(collectively the "FHP Stockholder Voting Agreements") with respect to shares
beneficially owned by them and certain shares beneficially owned by family
trusts and relatives as to which they disclaim beneficial ownership ("Other
Persons"). As of the FHP Record Date, Messrs. Anderson, Burdge and Price
beneficially owned and were entitled to vote approximately 2.4% of the
outstanding FHP Common Stock and approximately 9.8% of the outstanding FHP
Preferred Stock, and the Other Persons beneficially collectively owned and were
entitled to vote approximately 1.2% of the outstanding FHP Common Stock and
approximately 6.9% of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i) agreed to vote the
shares beneficially owned by them in favor of the Reorganization Agreement and
the Series A Amendment; (ii) agreed to use their best efforts to cause the Other
Persons to vote in favor of the Reorganization Agreement and the Series A
Amendment; (iii) granted proxies to officers of PacifiCare to vote shares
beneficially owned by them in favor of the Reorganization Agreement and the
Series A Amendment; and (iv) agreed to use their best efforts to cause the Other
Persons to deliver proxies to PacifiCare to vote shares beneficially owned by
such Other Persons in favor of the Reorganization Agreement and the Series A
Amendment. As of the FHP Record Date, proxies with respect to approximately 1.2%
of the outstanding FHP Common Stock and approximately 6.9% of the outstanding
FHP Preferred Stock had been received by PacifiCare from the Other Persons.

Participants in the ESOP are entitled to instruct the ESOP trustee on how to
vote: (i) all shares of FHP Common Stock allocated to participants' accounts
under the ESOP; and (ii) a proportionate number of unallocated shares of FHP
Common Stock held by the ESOP for future allocation to participants' accounts.
Participants will receive a voting instruction card to direct the trustee to
vote both allocated and unallocated shares. If the trustee receives an
instruction card on a timely basis from a participant, it will vote the
participant's allocated shares and his proportionate share of unallocated shares
as the participant instructs. If the trustee does not timely receive an
instruction card from a participant, the trustee will vote the participant's
allocated shares and his proportionate share of unallocated shares in accordance
with the instructions of the other participants who provide voting instructions
to the trustee on a timely basis. If a participant signs and timely returns an
instruction card without indicating a vote, the trustee will vote that
participant's allocated shares in accordance with the recommendations of the
Board of Directors.

VOTE REQUIRED OF FHP PREFERRED STOCK

The affirmative vote of the holders of 66 2/3% of the outstanding FHP
Preferred Stock entitled to vote is necessary to adopt and approve the Series A
Amendment. Each share of FHP Preferred Stock (including shares as to which
Irrevocable Elections have been made) is entitled to one vote on such matter.

As of the FHP Record Date, directors and executive officers of FHP and their
affiliates beneficially owned and were entitled to vote approximately 17.4% of
the outstanding FHP Preferred Stock. The directors and executive officers of FHP
have indicated that they intend to vote their shares of

28
<PAGE>
FHP Preferred Stock in favor of approval of the Series A Amendment. Certain
directors and executive officers of FHP are contractually bound by the FHP
Stockholder Voting Agreements to vote in favor of the Series A Amendment. See
"-- Vote Required of FHP Common Stock."

EFFECT OF FAILURE TO APPROVE THE SERIES A AMENDMENT

In the event that the Series A Required Vote is not received for the Series
A Amendment, then within five days of the Effective Time, FHP shall give the
Conversion Notice in accordance with the FHP Certificate to all holders of FHP
Preferred Stock (other than holders who have made an Irrevocable Election) that
a "Change of Control" (as defined in the FHP Certificate) has occurred and that
such holders have certain "Special Conversion Rights" (as defined in the FHP
Certificate). Each such holder will then have the right to exercise such Special
Conversion Rights or to receive the As-If-Converted Merger Consideration. See
"The Mergers and Related Transactions -- Merger Consideration -- FHP Preferred
Stock."

BOARD RECOMMENDATIONS

THE FHP BOARD OF DIRECTORS BELIEVES THAT THE MERGERS ARE FAIR TO AND IN THE
BEST INTERESTS OF FHP AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL OF THE SERIES A AMENDMENT. THE FHP BOARD OF DIRECTORS ALSO
RECOMMENDS A VOTE FOR THE ELECTION OF THE THREE NOMINATED DIRECTORS IDENTIFIED
HEREIN AND THE RATIFICATION OF THE INDEPENDENT AUDITORS.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of the business contemplated at the
FHP Meeting, other than the adoption and approval of the Series A Amendment, is
a majority of the shares of the FHP Common Stock outstanding on the FHP Record
Date. The required quorum for the approval of the Series A Amendment is a
majority of the shares of FHP Common Stock and a majority of the shares of FHP
Preferred Stock (including shares of FHP Preferred Stock as to which Irrevocable
Elections have been made) outstanding on the FHP Record Date. Abstentions and
broker non-votes each will be included in determining whether a quorum is
present. Abstentions will be counted towards the tabulation of votes cast;
broker non-votes will not be so counted. Abstentions and broker non-votes each
will have the same effect as a vote against the Reorganization Agreement and the
Series A Amendment.

SOLICITATION OF PROXIES AND EXPENSES

FHP will bear the cost of the solicitation of the proxies of FHP
stockholders, except that PacifiCare will bear the cost of assembly, printing
and mailing of this Joint Proxy Statement/Prospectus. FHP has engaged the firm
of Georgeson & Company Inc. ("Georgeson") to assist it in the distribution and
solicitation of proxies and has agreed to pay Georgeson a fee of $10,000 plus
expenses for its services. Copies of the solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of FHP Capital Stock beneficially owned by others to forward
to such beneficial owners. FHP may reimburse persons representing beneficial
owners of FHP Capital Stock for their costs of forwarding solicitation materials
to such beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram, letter or personal solicitation by
directors, officers or employees of FHP and by Georgeson. No additional
compensation will be paid to directors, officers or employees for such services.

29
<PAGE>
THE MERGERS AND RELATED TRANSACTIONS

MERGER CONSIDERATION

FHP

FHP COMMON STOCK. Upon consummation of the FHP Merger, each share of FHP
Common Stock outstanding immediately prior to the Effective Time (except for
shares held by FHP as treasury stock, any shares held by PacifiCare, FHP or any
subsidiary of PacifiCare or FHP and shares for which appraisal rights have been
properly exercised and perfected) shall be converted into the right to receive:

(i) $17.50 in cash;

(ii) the Final Class A/Common Share Ratio (as defined below) of a share
of PacifiCare Holding Class A Common;

(iii) the Final Class B/Common Share Ratio (as defined below) of a share
of PacifiCare Holding Class B Common; and

(iv) Talbert Rights.

See "-- Talbert Rights Offering" and "Description of PacifiCare Holding
Capital Stock."

The Final Class A/Common Share Ratio will be determined by dividing
2,350,000 by the sum of (i) the number of shares of FHP Common Stock issued and
outstanding immediately before the Effective Time and (ii) if the Series A
Amendment is not approved, the number of shares of FHP Common Stock into which
the FHP Preferred Stock outstanding immediately prior to the Effective Time
could be converted (excluding shares of FHP Preferred Stock for which an
Irrevocable Election is made).

The Final Class B/Common Share Ratio will be the difference between the
Final Exchange Ratio and the Final Class A/Common Share Ratio. The Final
Exchange Ratio will be the product of 0.258 and a multiplier ("Multiplier")
ranging in value from 0.8875 to 1.1125. The Multiplier will be determined by:
(i) calculating the "Closing Price/Signing Price Ratio," equivalent to the
quotient of the Average Closing Price of PacifiCare Class B Common Stock divided
by $68.00; and (ii) referring to the table below to locate the corresponding
Multiplier set forth across from the range into which the calculated Closing
Price/Signing Price Ratio falls:

<TABLE>
<CAPTION>
MULTIPLIER CLOSING PRICE/SIGNING PRICE RATIO
- ------------------------------------------------- -------------------------------------------------
<S> <C>
0.8875 above 1.30
One minus (0.5 times (the Closing Price/ Signing 1.075 to 1.30
Price Ratio less 1.075))
1 0.925 to 1.075
One plus (0.5 times (0.925 less the Closing 0.70 to 0.925
Price/Signing Price Ratio))
1.1125 less than 0.70
</TABLE>

The effect of the above formula is to partially offset the effect of changes
in the price of PacifiCare Class B Common Stock above or below the range $62.90
to $73.10.

30
<PAGE>
The following table sets forth the fraction of a share of PacifiCare Holding
Class A Common and PacifiCare Holding Class B Common to be received by a holder
of FHP Common Stock under several different assumptions relating to the Average
Closing Price of PacifiCare Class B Common Stock. The table is calculated on the
assumption that there are 41,214,595 shares of FHP Common Stock and 21,035,804
shares of FHP Preferred Stock outstanding and that the Series A Amendment is
approved.

<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK MULTIPLIER RATIO RATIO RATIO
- --------------------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .8875 .057 .172 .229
$80.00 .9493 .057 .188 .245
$62.90 to $73.10 1.0000 .057 .201 .258
$55.00 1.0581 .057 .216 .273
$47.60 or less 1.1125 .057 .230 .287
</TABLE>

The following table shows the same fractions under the same assumptions
except assuming that the Series A Amendment is not approved (and no Irrevocable
Elections are made):

<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK MULTIPLIER RATIO RATIO RATIO
- --------------------- ----------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
$88.40 or above .8875 .040 .189 .229
$80.00 .9493 .040 .205 .245
$62.90 to $73.10 1.0000 .040 .218 .258
$55.00 1.0581 .040 .233 .273
$47.60 or less 1.1125 .040 .247 .287
</TABLE>

In the event the Series A Amendment is not approved and an Irrevocable
Election is made, the final ratios will be between those set forth in the above
tables.

FHP PREFERRED STOCK. Upon consummation of the FHP Merger, if the Series A
Amendment is approved, each share of FHP Preferred Stock outstanding immediately
prior to the Effective Time (except for shares held by FHP as treasury stock,
any shares held by PacifiCare, FHP, or any subsidiary of PacifiCare or FHP and
shares for which appraisal rights have been properly exercised and perfected)
shall be converted into the right to receive:

(i) $14.113 in cash;

(ii) 0.50 shares of PacifiCare Holding Preferred; and

(iii)Talbert Rights
(collectively, the "Series A Merger Consideration").

See "Description of PacifiCare Holding Capital Stock" and "-- Talbert Rights
Offering."

The PacifiCare Holding Preferred will be convertible into PacifiCare Holding
Class B Common upon the terms and conditions, and will have the rights,
preferences and privileges, set forth in the Restated Certificate. The
PacifiCare Holding Preferred is generally similar to the FHP Preferred Stock
except that it pays an annual dividend of $1.00 per share rather than $1.25 per
share and is convertible into PacifiCare Holding Class B Common. Each share of
FHP Preferred Stock as to which an Irrevocable Election is made would also
receive the Series A Merger Consideration. See "Description of PacifiCare
Holding Capital Stock."

Approval of the Series A Amendment is not a condition to the completion of
the FHP Merger. If the Series A Amendment is not approved, FHP will promptly
(and in any event within five days of the Effective Time) send to each holder of
FHP Preferred Stock who has not made an Irrevocable Election as to all of such
holder's FHP Preferred Stock the Conversion Notice indicating that a "Change of
Control" (as defined in the FHP Certificate) has occurred and that such holders
may exercise certain "Special Conversion Rights" (as defined in the FHP
Certificate), by delivery of written notice of exercise within 55 days after the
date of the Conversion Notice, together with the stock certificates

31
<PAGE>
representing such FHP Preferred Stock, duly endorsed for transfer. Such notice
will also give such holders of FHP Preferred Stock the right to waive their
Special Conversion Rights and instead receive the As-If-Converted FHP Merger
Consideration. Subject to antidilution adjustment, for each share of FHP
Preferred Stock this would be approximately 0.80645 times the consideration
received by a share of FHP Common Stock, or $14.113 in cash; approximately
0.80645 times the Final Class A/Common Stock Ratio of a share of PacifiCare
Class A Common Stock; and approximately 0.80645 times the Final Class B/Common
Stock Ratio of a share of PacifiCare Class B Common Stock.

The Special Conversion Rights will give the holders of FHP Preferred Stock
who have not made an Irrevocable Election as to all of their FHP Preferred Stock
the right to elect to receive, for each share of FHP Preferred Stock as to which
an Irrevocable Election has not been made, in addition to Talbert Rights,
either: (i) the consideration to be received by a holder of a single share of
FHP Common Stock times a fraction, the numerator of which is $25.00 and the
denominator of which is the closing price of FHP Common Stock on the last
business day prior to the date PacifiCare Holding gives the Conversion Notice;
or (ii) $25.00 in cash, plus accrued but unpaid dividends. Notwithstanding the
foregoing, PacifiCare Holding will have the right to pay any such holder who
elects the consideration described in clause (i) of the previous sentence $25.00
in cash per share of FHP Preferred Stock, plus any accrued but unpaid dividends.
Any such holders of FHP Preferred Stock who do not timely exercise their Special
Conversion Rights will thereafter have only the right to surrender their shares
of FHP Preferred Stock and receive the As-If-Converted FHP Merger Consideration.
At assumed prices for PacifiCare Class A Common Stock and PacifiCare Class B
Common Stock of $71.00 and $74.00, respectively (using such prices as an
estimate for the values of the PacifiCare Holding Class A Common and the
PacifiCare Holding Class B Common to be issued) and assuming an Average Closing
Price of PacifiCare Class B Common Stock of $74.00, the As-If-Converted FHP
Merger Consideration would be valued at approximately $29.26 (excluding any
value for the Talbert Rights) and it would be uneconomic for any such holder of
FHP Preferred Stock to exercise such holder's Special Conversion Rights.

The following table sets forth the consideration to be received for a single
share of FHP Preferred Stock if the Series A Amendment is approved (or an
Irrevocable Election as to such share is made) and alternatively if it is not so
approved (and no Irrevocable Elections are made). The table assumes that the
average Closing Price of PacifiCare Class B Common Stock is $74.00 so that the
Final Exchange Ratio is .256, the Final Class A/Common Stock Ratio is .040, the
Final Class B/Common Stock Ratio is .216 and that there are 41,214,595 shares of
FHP Common Stock and 21,035,804 shares of FHP Preferred Stock outstanding at the
Effective Time:

<TABLE>
<CAPTION>
SERIES A
AMENDMENT
APPROVED OR SERIES A
IRREVOCABLE AMENDMENT
ELECTION MADE NOT APPROVED (1)
----------------- -----------------
<S> <C> <C>
Cash....................................................................... $14.113 $14.113
PacifiCare Holding Class A Common.......................................... None 0.032 shares
PacifiCare Holding Class B Common.......................................... None 0.174 shares
PacifiCare Holding Preferred............................................... 0.50 shares(2) None
Talbert Rights............................................................. Yes Yes
</TABLE>

- ------------------------
(1) Assumes Special Conversion Rights are not exercised and no Irrevocable
Elections are made.
(2) Convertible into .206 shares of PacifiCare Holding Class B Common based on
the assumptions set forth above.

IRREVOCABLE ELECTION BY FHP PREFERRED STOCKHOLDERS. By following the
procedures described herein, holders of FHP Preferred Stock may irrevocably
elect to receive in the FHP Merger the Series A Merger Consideration whether or
not the Series A Amendment is approved.

Holders of FHP Preferred Stock desiring to make an Irrevocable Election
should complete the Form of Irrevocable Election accompanying this Joint Proxy
Statement, transmit the certificate(s)

32
<PAGE>
representing shares of FHP Preferred Stock (or comply with the procedures for
guaranteed delivery set forth below) as to which an Irrevocable Election is
made, and otherwise comply with the instructions set forth in the Form of
Irrevocable Election.

In order for an Irrevocable Election to be effective, AST must receive a
properly completed Form of Irrevocable Election, accompanied by all stock
certificates representing shares of FHP Preferred Stock currently held by such
holder as to which an Irrevocable Election is made, no later than 5:00 p.m.,
Eastern Standard Time, on December 27, 1996. Any Irrevocable Election shall be
applicable to all the shares represented by stock certificates delivered.
Holders of FHP Preferred Stock whose stock certificates are not immediately
available may also make an Irrevocable Election by completing this Form of
Irrevocable Election and following the procedures for guaranteed delivery set
forth in the Form of Irrevocable Election, which require that Box C (Guaranty of
Delivery) of the Form of Irrevocable Election be properly completed and duly
executed by a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States (subject to the
condition that the stock certificates, the delivery of which is thereby
guaranteed, are in fact delivered to AST no later than 5:00 p.m., Eastern
Standard Time, on January 2, 1997 (the "Guaranteed Delivery Deadline"). If AST
has not received a properly completed Form of Irrevocable Election, accompanied
by stock certificates, by the Irrevocable Election Deadline (unless the
procedures for guaranteed delivery are followed and such certificates are
received by AST by the Guaranteed Delivery Deadline), the Irrevocable Election
will not be effective.

By completing and submitting the Form of Irrevocable Election (and otherwise
complying with the procedures for making an Irrevocable Election), a holder of
FHP Preferred Stock irrevocably elects, upon consummation of the FHP Merger, to
receive the Series A Merger Consideration for all shares of FHP Preferred Stock
covered by the Form of Irrevocable Election in lieu of such holder's right to
exercise Special Conversion Rights or receive the As-If-Converted FHP Merger
Consideration and irrevocably agrees not to convert such shares of FHP Preferred
Stock to FHP Common Stock or gift, sell, hypothecate or in any other manner
transfer such shares of FHP Preferred Stock to any person who does not expressly
accept such stock subject to such Irrevocable Election and does not agree to be
bound thereby. Notwithstanding the foregoing, the restrictions imposed by the
Irrevocable Election shall lapse if the Reorganization Agreement shall terminate
in accordance with its terms prior to the Effective Time. If a holder of FHP
Preferred Stock fails to make an effective Irrevocable Election, if the
Irrevocable Election is deemed by AST or FHP to be defective in any way, or if
the Form of Irrevocable Election is not accompanied by stock certificates
(unless such holder follows the procedures for guaranteed delivery and such
stock certificates are received by AST prior to the Guaranteed Delivery
Deadline), a holder of FHP Preferred Stock will not receive the Series A Merger
Consideration unless the Series A Amendment is approved and the FHP Merger is
consummated. See "-- FHP Preferred Stock".

Holders of FHP Preferred Stock who make an Irrevocable Election are still
entitled to vote and are encouraged to vote FOR the Series A Amendment either in
person or by proxy.

TALBERT RIGHTS. By virtue of the FHP Merger, each share of FHP Common Stock
and FHP Preferred Stock outstanding immediately prior to the Effective Time
shall be converted in part into rights to purchase a proportionate share (on an
as-if-converted basis) of 2,767,500 shares of common stock of TMMHC or TMMC, as
the case may be. See "-- Talbert Rights Offering."

PACIFICARE

Upon consummation of the PacifiCare Merger (except for shares held by
PacifiCare as treasury stock, any shares held by PacifiCare, FHP or any
subsidiary of PacifiCare or FHP):

(i) each share of PacifiCare Class A Common Stock outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one share of PacifiCare Holding Class A Common; and

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(ii) each share of PacifiCare Class B Common Stock outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one share of PacifiCare Holding Class B Common.

OTHER MATTERS

STOCK OPTIONS AND BENEFIT PLANS. For a description of the treatment of the
FHP and PacifiCare stock options and employee benefit plans, see "-- Stock
Options; Benefit Plans."

APPRAISAL RIGHTS. Holders of the FHP Capital Stock are entitled to exercise
appraisal rights in connection with the FHP Merger. Holders of the PacifiCare
Common Stock are not entitled to exercise appraisal rights in connection with
the PacifiCare Merger. See "-- Appraisal Rights."

STOCK SUBJECT TO CONDITIONS. If any shares of FHP Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with FHP or PacifiCare, then the shares of PacifiCare Holding
Common issued in exchange for the shares of FHP Common Stock or PacifiCare
Common Stock, as the case may be, will also be unvested or subject to the same
repurchase option, risk of forfeiture or other condition, unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement. The certificates evidencing such shares of PacifiCare Holding
Common may accordingly be marked with appropriate legends.

BACKGROUND OF THE MERGERS

Commencing in November 1995, FHP's senior management held discussions with
Merrill Lynch and other investment bankers concerning FHP's strategic
alternatives. These discussions included the possible separation of Talbert, the
making of acquisitions and the possibility of a strategic business combination.

In January 1996, the FHP Board of Directors authorized management to explore
a spin-off of Talbert.

In the period of March through July 1996, members of senior management and
members of the FHP Board of Directors held exploratory discussions with a number
of possible candidates for a business combination.

In June 1996, as part of such discussions, the President of FHP met with the
Chairman of PacifiCare to discuss a possible business combination. Shortly
thereafter, the Presidents and Chief Financial Officers of the two companies met
to commence exploration of a possible combination. Management of PacifiCare
brought the matter to the attention of the PacifiCare Special Committee. Dillon
Read, which had previously been engaged by PacifiCare, analyzed a potential
combination with FHP, as well as other potential strategic alternatives and made
presentations to the PacifiCare Special Committee and the PacifiCare Board of
Directors in late June and early July. The PacifiCare Special Committee and the
PacifiCare Board of Directors requested that management continue exploring a
possible business combination with FHP.

In July 1996, FHP retained Merrill Lynch to serve as its financial advisor
in connection with the exploration of possible business combinations.

On July 11, 1996, a meeting was held between FHP's President and Chief
Financial Officer and PacifiCare's President and Chief Financial Officer in
which a possible business combination was discussed. The July 11th meeting was
followed by a meeting on July 15, 1996, between the Chairman of the FHP Board of
Directors, the President of FHP and the President of PacifiCare at which
PacifiCare indicated a willingness, subject to due diligence, to acquire FHP,
including Talbert, for up to $35 per share. The Chairman and President of FHP
informally advised members of the FHP Board of Directors of the existence of the
proposal on July 15, 1996. Also on July 15, 1996, PacifiCare management and its
financial and legal advisors met with both the PacifiCare Special Committee and
certain members of the UniHealth Board of Directors to further discuss the
potential FHP transaction.

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At a meeting of the FHP Board of Directors held on July 16, 1996, the FHP
Board of Directors was advised of the existence of an oral offer for a business
combination with PacifiCare. The FHP Board of Directors requested that its
Executive Committee explore strategic alternatives and report back to the FHP
Board of Directors.

On July 17, 1996, certain FHP directors and executive officers held
discussions with certain PacifiCare directors and executive officers and Dillon
Read with respect to a proposed business combination. In the July 17, 1996
discussions, the parties discussed a possible transaction at an equivalent value
of $35 per share of which 50% would be paid in cash and 50% would be paid in
shares of PacifiCare Class A Common Stock and Class B Common Stock issued in
proportion to the shares currently outstanding in each such class and in which
stockholders of FHP would receive the right to acquire FHP's holdings in
Talbert. The parties discussed various means of structuring the transaction. The
parties discussed the terms on which FHP Preferred Stock would be converted and
discussed other issues in a business combination, including a price protection
formula for the exchange and the treatment of outstanding FHP Options.
PacifiCare expressed the view that it would not be in a position to issue
PacifiCare Class A and Class B Common Stock in proportion similar to the then
outstanding PacifiCare Class A and Class B Common Stock and would not enter into
a transaction unless there was a break-up fee of $60 million and irrevocable
proxies were made available from Messrs. Anderson, Burdge and Price. FHP
expressed the view that it would not be willing to enter into the transaction
unless the transaction preserved the directors' ability to negotiate an
alternative transaction pursuant to its fiduciary duties to FHP and the break-up
fee was established at a lower amount, among other issues. FHP also indicated
that it would require an irrevocable proxy from UniHealth. The parties failed to
reach agreement on a number of significant issues at the meeting.

Following these discussions, FHP and PacifiCare each undertook a due
diligence investigation of the other. The PacifiCare Special Committee and the
UniHealth Board of Directors were both briefed on the status of the proposed
combination on July 22, 1996. On July 29, 1996, the Chairman and President of
FHP and representatives of Merrill Lynch briefed certain FHP directors on the
status of discussions, the results of due diligence, other alternatives
considered and discussions pursued, and the prospect of further negotiations
with respect to the terms of a transaction.

Representatives of FHP and PacifiCare met again on July 30, 1996. At this
meeting, PacifiCare proposed that the consideration per share of FHP Common
Stock would be $35, payable in a combination of cash and stock, and that the
Talbert shares would be the subject of a rights offering to the holders of FHP
Common Stock and FHP Preferred Stock. The rights offering of shares of Talbert
would be conditioned on the entry into an "at market" provider agreement between
FHP and Talbert and the capitalization of Talbert by FHP, such that Talbert
would have approximately $59 million in cash and a book value not to exceed $60
million. The parties also discussed a proposal to seek an amendment to the terms
of the outstanding FHP Preferred Stock providing for its exchange for cash and a
new PacifiCare Holding Preferred which would bear a 4% dividend and be
convertible into PacifiCare Holding Class B Common. PacifiCare also proposed to
reduce the break-up fee from $60 million to $50 million.

The parties were unable to agree at this meeting on the percentage of shares
to be delivered in PacifiCare Holding Class A Common, on the form of the
transaction, or on a formula for adjusting the number of shares of capital stock
to be issued in the event of changes in the market prices of PacifiCare Common
Stock. FHP had requested that the transaction be structured as a transaction
which would satisfy Section 351 for tax purposes in order that shares received
by FHP stockholders could be received on a tax-free basis. On July 31, 1996, the
parties discussed terms whereby 2,350,000 shares of PacifiCare Holding Class A
Common would be included in the consideration payable for FHP Common Stock and
an amendment would be sought to the terms of the FHP Preferred Stock under which
FHP Preferred Stock would be exchanged for cash and a new series of PacifiCare
Holding Preferred Stock that would be convertible into PacifiCare Holding Class
B Common. In these discussions, the parties agreed to use a Section 351
structure involving PacifiCare Holding, which would own both PacifiCare and FHP.

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Following such discussions, management of each company directed the
preparation of the Original Reorganization Agreement, subject to receipt of
approval of the FHP Board of Directors and the PacifiCare Board of Directors of
the terms and conditions of the proposed transaction.

The PacifiCare Special Committee met on August 1, 1996 and reviewed the
transactions contemplated by the Original Reorganization Agreement. After
hearing presentations from management and PacifiCare's financial and legal
advisors, the PacifiCare Special Committee recommended to the full PacifiCare
Board of Directors that it approve the terms of the Original Reorganization
Agreement, subject to receipt of a fairness opinion from Dillon Read. At a
meeting on August 2, 1996, the full PacifiCare Board of Directors reviewed the
transaction, received presentations from its financial and legal advisors, and
thoroughly discussed the terms of the proposed transaction, including the
remaining issues to be negotiated. The meeting was reconvened on August 4, 1996
at which time Dillon Read presented its written opinion that, as of such date,
the consideration to be paid by PacifiCare pursuant to the Original
Reorganization Agreement was fair to the PacifiCare stockholders from a
financial point of view. The PacifiCare Board of Directors then unanimously
approved the terms of the Original Reorganization Agreement and the PacifiCare
Amendment and directed the officers of PacifiCare to finalize the Original
Reorganization Agreement on terms substantially similar to those presented to
the PacifiCare Board of Directors and to execute a definitive agreement.

On August 3, 1996, a meeting of the FHP Board of Directors was held. With
the advice and assistance of FHP's management and financial and legal advisors,
the FHP Board of Directors reviewed the transactions contemplated by the
proposed Original Reorganization Agreement. At the meeting, FHP's financial and
legal advisors made presentations to its Board of Directors concerning the
proposed transaction, and Merrill Lynch provided its oral opinion to the effect
that as of such date the consideration to be received by the holders of FHP
Capital Stock, other than PacifiCare and its affiliates, was fair to such
stockholders from a financial point of view. The FHP Board of Directors
extensively discussed the terms of the proposed transaction, the feasibility of
consummating the transaction and FHP's alternatives. After discussion, the FHP
Board of Directors unanimously approved the terms of the Original Reorganization
Agreement, the transactions contemplated thereby and the Series A Amendment. The
FHP Board of Directors authorized the President of FHP to complete the
negotiation of the terms of the Original Reorganization Agreement consistent
with the terms presented to it and to execute a definitive agreement. The
Original Reorganization Agreement was executed on August 4, 1996 and was
publicly announced on August 5, 1996.

On September 17, 1996, the parties executed the First Amended Reorganization
Agreement, which provided an alternative exchange formula in the event that the
Series A Amendment was not approved, and which clarified various other
provisions of the Original Reorganization Agreement. A meeting of the PacifiCare
Board of Directors approving the First Amended Reorganization Agreement took
place on August 30, 1996. A meeting of the FHP Board of Directors approving the
First Amended Reorganization Agreement took place on September 17, 1996.

As of November 11, 1996, the parties executed the Reorganization Agreement,
which added provisions for Irrevocable Elections by holders of Series A
Preferred and clarified certain other provisions. A meeting of the PacifiCare
Board of Directors approving the Reorganization Agreement took place on November
9, 1996. A meeting of the FHP Board of Directors approving the Reorganization
Agreement took place on November 13, 1996.

RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGERS

PACIFICARE

At a meeting begun on August 2, 1996 and reconvened on August 4, 1996, the
PacifiCare Board of Directors, by unanimous vote: (i) determined that the terms
of the Original Reorganization Agreement and the transactions contemplated
thereby are in the best interests of PacifiCare and its stockholders; and (ii)
approved the Original Reorganization Agreement and the transactions contemplated
thereby. At such meeting, the PacifiCare Board of Directors also recommended
that PacifiCare stockholders approve and adopt the Original Reorganization
Agreement and approve and adopt the

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PacifiCare Amendment. In reaching the foregoing conclusions and recommendations,
the PacifiCare Board of Directors considered the recommendation of the
PacifiCare Special Committee to enter into the Original Reorganization Agreement
and a number of additional factors including the following:

(i) the presentations and views expressed by management of PacifiCare
(at the August 2-4, 1996 PacifiCare Board of Directors meeting, as well as
previously held meetings of the PacifiCare Board of Directors and the
PacifiCare Special Committee) regarding: (a) the alternatives available to
PacifiCare if it did not pursue a transaction with FHP and the possible
effects on PacifiCare if FHP were to enter into a similar transaction with
another company; (b) the financial condition, results of operations,
business and prospects of each of PacifiCare, FHP and the combined company;
and (c) the long-term changes taking place in the market for managed care
and PacifiCare's strategy relative to them;

(ii) the strategic fit between PacifiCare and FHP, which, in
PacifiCare's view, offers the opportunity for significant synergies (see "--
Estimated Synergies") through, among other things:

(a) opportunities for streamlining administrative functions of the
businesses of PacifiCare and FHP by eliminating redundancies in the
administration of health care operations in areas served by both
companies and by eliminating duplicative corporate functions;

(b) opportunities for efficiencies in sales and marketing by reducing
overlapping advertising and promotion costs and by combining duplicative
operations;

(c) the potential for savings in medical costs in California by
increased utilization of the most cost effective provider contracts of
each company, as well as the possibility of favorable renegotiation when
current contract terms end;

(d) the effect of implementing the separation of Talbert;

(e) the combined company's primary focus on a contiguous geographical
area;

(f) the potential for expanding nationally the combined company's
expertise in providing managed care to Medicare beneficiaries, in part by
leveraging PacifiCare's Secure Horizons brand of products for Medicare
beneficiaries;

(g) the potential for growth by expanding into states which are
currently served by FHP but not PacifiCare; and

(h) opportunities to enhance revenue or reduce costs by utilizing
those capabilities of either FHP or PacifiCare which the other does not
have.

(iii) the fact that PacifiCare stockholders would continue to own more
than 67% of the combined company, subject to adjustment;

(iv) the long-term interests of PacifiCare and its stockholders, as well
as the interests of PacifiCare's employees, customers, providers, creditors
and suppliers and community and societal considerations, including those of
communities in which any office or other facility of PacifiCare is located;

(v) the belief that the combined company would be better able to respond
to the needs of consumers and customers, the increased competitiveness of
the health care industry, and the opportunities that changes in the health
care industry might bring;

(vi) the oral presentation made by Dillon Read at the August 2, 1996
PacifiCare Board of Directors meeting and the opinion of Dillon Read to the
effect that, as of August 4, 1996, the consideration to be paid to the FHP
stockholders pursuant to the Original Reorganization Agreement was fair,
from a financial point of view, to PacifiCare and its stockholders (see "--
Opinions of Financial Advisors -- Opinion of Dillon Read");

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(vii) the sources, and terms and conditions, of capital available to
PacifiCare to finance the transaction with FHP, including the availability
of approximately $1.5 billion to be borrowed in connection with the Mergers,
and the combined company's ability to service such debt (see "-- Financing
of FHP Merger Consideration");

(viii) the terms and conditions of the Original Reorganization Agreement
and the other agreements to be entered into in connection with the Mergers;

(ix) the regulatory approvals required to consummate the Mergers,
including antitrust approvals and insurance and/or various state and federal
regulatory approvals, and the prospects of receiving such approvals;

(x) the results of the due diligence review of FHP conducted by
PacifiCare's management and legal and financial advisors;

(xi) the terms of the proposed PacifiCare Holding Preferred, including
the proposed 4.0% dividend;

(xii) the terms and conditions of the UniHealth Voting Agreement and the
FHP Stockholder Voting Agreements including the fact that the parties to
such FHP agreements had, among other things, agreed: (a) to vote their
shares of FHP in favor of the Original Reorganization Agreement and against
any competing proposal for a merger or business combination involving FHP;
and (b) except in limited circumstances, not to sell or otherwise dispose of
their shares of FHP Common Stock and FHP Preferred Stock other than pursuant
to the Original Reorganization Agreement; and

(xiii) the termination fees potentially payable by or to PacifiCare. See
"The Reorganization Agreement -- Expenses and Termination Fees."

At a meeting held August 30, 1996, the PacifiCare Board of Directors met to
consider the terms of the First Amended Reorganization Agreement and by
unanimous vote of all directors present determined that the terms of the First
Amended Reorganization Agreement and the transactions contemplated thereby are
in the best interests of PacifiCare and its stockholders, approved the First
Amended Reorganization Agreement and the transactions contemplated thereby and
recommended that the PacifiCare stockholders approve and adopt the First Amended
Reorganization Agreement and ratified and readopted their previous approval and
adoption of the PacifiCare Amendment. In addition to the factors described
above, the PacifiCare Board of Directors considered the financial effects if the
FHP Merger were approved and Series A Amendment were not approved by the holders
of FHP Preferred Stock and Dillon Read's oral opinion, subsequently confirmed in
writing, reconfirming its prior opinion that the consideration to be paid to the
FHP stockholders pursuant to the First Amended Reorganization Agreement is fair,
from a financial point of view, to PacifiCare and its stockholders. The full
text of the Dillon Read Opinion, which sets forth the procedures followed, the
factors considered and the asumptions made by Dillon Read, is attached as
Appendix B to this Joint Proxy Statement/Prospectus and is incorporated herein
by reference. Stockholders of PacifiCare are urged to read the Dillon Read
Opinion carefully and in its entirety. See "-- Opinions of Financial Advisors --
Opinion of Dillon Read."

At a meeting held November 9, 1996, the PacifiCare Board of Directors met to
consider the terms of the Reorganization Agreement and by unanimous vote of all
directors present determined that the terms of the Reorganization Agreement and
the transactions contemplated thereby are in the best interests of PacifiCare
and its stockholders, approved the Reorganization Agreement and the transactions
contemplated thereby, recommended that the PacifiCare stockholders approve and
adopt the Reorganization Agreement and ratified and readopted their previous
approval and adoption of the PacifiCare Amendment. In addition to the factors
described above, the PacifiCare Board of Directors considered the potential
effects of adding provisions for the making of Irrevocable Elections by holders
of FHP Preferred Stock. The PacifiCare Board of Directors also noted that the
effect of Irrevocable Elections would be the payment of, if the Series A
Amendment were not approved, consideration

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representing a blend of the consideration that would have been paid under the
First Amended Reorganization Agreement if the Series A Amendment were approved
and if the Series A Amendment were not approved.

The foregoing discussion of the information and factors considered by the
PacifiCare Board of Directors is not intended to be exhaustive, but includes all
material factors considered by the PacifiCare Board of Directors. The PacifiCare
Board of Directors did not assign relative weights to the above factors or
determine that any factor was of particular importance. A determination of
various weightings would, in the view of the PacifiCare Board of Directors, be
impractical. Rather, the PacifiCare Board of Directors viewed its position and
recommendations as being based on the totality of the information presented to,
and considered by, it. In addition, individual members of the PacifiCare Board
of Directors may have given different weight to different factors.

It is expected that if the Mergers are not consummated, PacifiCare's
management, with oversight from the PacifiCare Board of Directors, will continue
to manage PacifiCare as an ongoing business.

FOR THE REASONS DESCRIBED ABOVE, THE PACIFICARE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT, THE PACIFICARE AMENDMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT PACIFICARE
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND
FOR APPROVAL AND ADOPTION OF THE PACIFICARE AMENDMENT.

FHP

At a special meeting held on August 3, 1996, the FHP Board of Directors
unanimously: (i) determined that the terms of the Mergers and the transactions
contemplated thereby were fair and in the best interests of FHP and its
stockholders; and (ii) approved the Original Reorganization Agreement, the
transactions contemplated thereby and the Series A Amendment. At such meeting,
the FHP Board of Directors recommended that the FHP stockholders approve and
adopt the Original Reorganization Agreement and the Series A Amendment. In
reaching these determinations, the FHP Board of Directors consulted with
management of FHP as well as FHP's financial and legal advisors.

In reaching such determination, the FHP Board of Directors considered a
number of factors, including, but not limited to, the following:

(i) the opportunity presented for holders of FHP Common Stock and FHP
Preferred Stock to realize a portion of the value of their investment in
cash, while at the same time retaining a portion of their investment in a
significantly stronger and geographically more diverse participant in the
managed health care industry;

(ii) the opportunity the business combination offers for substantial
synergies (see "-- Estimated Synergies") and the transaction structure which
allows FHP stockholders, to the extent they receive PacifiCare Holding
Common or PacifiCare Holding Preferred in the FHP Merger, to participate in
these synergies through continued ownership of a portion of the combined
company;

(iii) the oral presentation made by Merrill Lynch at the August 3, 1996
FHP Board of Directors meeting, to the effect that, as of August 3, 1996,
the consideration to be received by the holders of FHP Common Stock and FHP
Preferred Stock, other than PacifiCare and its affiliates, was fair to such
stockholders from a financial point of view. The full text of the opinion of
Merrill Lynch, dated as of August 4, 1996, which sets forth the assumptions
made, matters considered and certain limitations on the scope of review
undertaken by Merrill Lynch is attached as Appendix C to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Stockholders
of FHP are urged to read the opinion of Merrill Lynch carefully and in its
entirety (see "Opinions of Financial Advisors -- Opinion of Merrill Lynch");

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(iv) the fact that the rights offering of shares of Talbert would give
holders of FHP Common Stock and FHP Preferred Stock the opportunity to
continue their investment in Talbert, if they so elect, or to potentially
realize additional consideration by selling the rights in the open market,
if a market for the rights develops;

(v) the fact that the FHP Board of Directors believed that it was
unlikely that any other party would propose a business combination that,
taken as a whole, would be more favorable to FHP and its stockholders;

(vi) the uncertainties of the health care industry in the United States,
the likelihood of continued consolidation in the managed health care sector
and the possibility that changes in the industry, depending on their nature,
could be disadvantageous to FHP;

(vii) the historical trading prices of the shares of FHP Common Stock and
the fact that the FHP Merger consideration represented a value (exclusive of
the Talbert Rights) of approximately $35.00 per share for each share of FHP
Common Stock, a premium of approximately $7.125 (26%) over $27.875, the
closing price for the shares of FHP Common Stock on the Nasdaq National
Market on August 2, 1996, the last trading day prior to the announcement of
the execution of the Original Reorganization Agreement and a premium of
$12.00 (52%) over the closing price of $23.00 on July 12, 1996, the last
trading day prior to July 15, 1996, when the initial offer by PacifiCare was
made;

(viii) the belief that the combined company would be better able to
respond to the needs of consumers and customers, the increased
competitiveness of the health care industry, and the opportunities that
changes in the health care industry might bring;

(ix) the fact that as of the date of the Original Reorganization
Agreement approximately 50% of the FHP Merger consideration (excluding the
Talbert Rights) would be paid in cash, that closing would not be subject to
a financing contingency, and that PacifiCare would be obligated to deliver a
financing commitment with respect to the cash portion of the consideration
prior to the execution of the Original Reorganization Agreement;

(x) the opportunity for holders of FHP Preferred Stock to receive
$14.113 in cash plus one-half of a similar share of PacifiCare Holding
Preferred with a dividend yield of 4.0% and the ability to convert such
PacifiCare Holding Preferred into PacifiCare Holding Class B Common;

(xi) the fact that FHP stockholders would be partially protected from
market fluctuation in the value of PacifiCare Holding Common pursuant to a
formula which will provide no adjustment within a range of plus or minus
7.50% from $68.00 per share of PacifiCare Class B Common Stock and an
adjustment of 50.0% on changes greater than 7.50% up to a maximum exchange
ratio of 0.287 (at $47.60) and a minimum exchange ratio of 0.229 (at
$88.40);

(xii) the fact that two FHP designees would become directors of
PacifiCare Holding following the Mergers;

(xiii) the opportunity for holders of FHP Common Stock and FHP Preferred
Stock to receive, as part of the FHP Merger consideration, shares of
PacifiCare Holding Class A Common and Class B Common and PacifiCare Holding
Preferred, respectively, in an exchange that could be tax-free for federal
income tax purposes (see "The Mergers and Related Transactions -- Certain
Federal Income Tax Consequences");

(xiv) the prospects of receiving the regulatory approvals required to
consummate the Mergers, including, among other things, antitrust approvals
and federal and state regulatory approvals;

(xv) the fact that the FHP Board of Directors would have the right to
engage in negotiations with or furnish information to third parties in
response to an unsolicited Acquisition Proposal if, after consultation with
independent counsel, it determines that it is necessary to do so in order to
comply with its fiduciary duties;

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(xvi) the fact that the FHP Board of Directors would have the right, upon
payment to PacifiCare of a termination fee, to terminate the Reorganization
Agreement if the FHP stockholders fail to approve the Reorganization
Agreement and the FHP Board of Directors has withdrawn, amended or modified
in a manner adverse to PacifiCare its unanimous recommendation of the
Reorganization Agreement, or has entered into any agreement with respect to
or has approved or endorsed any competing Acquisition Proposal which the FHP
Board of Directors determines is more favorable to FHP stockholders;

(xvii) the fact that FHP would be entitled to a termination fee of $100
million if PacifiCare is unable to close the transaction due to a financing
breach and a termination fee of $50 million if the PacifiCare Meeting is
held and the PacifiCare stockholders fail to approve the Mergers for any
reason; and

(xviii) the results of the due diligence review of PacifiCare conducted by
FHP's management and legal and financial advisors.

The foregoing discussion of the information and factors considered by the
FHP Board of Directors is not intended to be exhaustive, but includes all
material factors considered by the FHP Board of Directors. The FHP Board of
Directors did not assign relative weights to the above factors or determine that
any factor was of particular importance. A determination of various weightings
would, in the view of the FHP Board of Directors, be impractical. Rather, the
FHP Board of Directors viewed its position and recommendations as being based on
the totality of the information presented to, and considered by, the FHP Board
of Directors. In addition, individual members of the FHP Board of Directors may
have given different weights to different factors.

At a meeting held on September 17, 1996, the FHP Board of Directors
unanimously approved the First Amended Reorganization Agreement and recommended
that the FHP stockholders approve and adopt the First Amended Reorganization
Agreement. In addition to the factors described above, the FHP Board of
Directors considered (i) the effect on FHP stockholders if the FHP Merger was
approved and the Series A Amendment was not approved; and (ii) Merrill Lynch's
determination that the changes reflected in the First Amended Reorganization
Agreement (including the terms of the Restated Certificate) did not require any
modification to the Merrill Lynch Opinion.

At a meeting held on November 13, 1996, the FHP Board of Directors
unanimously approved the Reorganization Agreement and recommended that the FHP
stockholders approve and adopt the Reorganization Agreement. In addition to the
factors described above, the FHP Board of Directors considered (i) that it would
be advantageous to holders of FHP Preferred Stock to have the opportunity to
elect to receive the consideration contemplated by the Reorganization Agreement
even if the Series A Amendment is not approved, and (ii) Merrill Lynch's
determination that the changes reflected in the Reorganization Agreement
(including the terms of the Restated Certificate) did not require any
modification to the Merrill Lynch Opinion.

The full text of the Merrill Lynch Opinion, which sets forth the assumptions
made, general procedures followed, matters considered, methods employed and
limitations in the review undertaken by Merrill Lynch in arriving at its opinion
is attached hereto as Appendix C and is incorporated herein by reference.
Stockholders of FHP are urged to read the Merrill Lynch Opinion carefully and in
its entirety (see "-- Opinions of Financial Advisors -- Opinion of Merrill
Lynch").

It is expected that if the Mergers are not consummated, FHP's management,
with oversight from the FHP Board of Directors, will continue to manage FHP as
an ongoing business.

FOR THE REASONS DESCRIBED ABOVE, THE FHP BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE REORGANIZATION AGREEMENT, THE SERIES A AMENDMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT FHP STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND THE SERIES A
AMENDMENT.

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OPINIONS OF FINANCIAL ADVISORS

OPINION OF DILLON READ

The PacifiCare Board of Directors has received the Dillon Read Opinion to
the effect that the consideration to be paid to the holders of FHP Common Stock
and FHP Preferred Stock pursuant to the First Amended Reorganization Agreement
is fair to PacifiCare and PacifiCare's stockholders from a financial point of
view. THE FULL TEXT OF THE DILLON READ OPINION, WHICH SETS FORTH ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND METHODS EMPLOYED BY
DILLON READ IN ARRIVING AT ITS OPINION IS ATTACHED HERETO AS APPENDIX B AND IS
INCORPORATED HEREIN BY REFERENCE. The summary of the Dillon Read Opinion
contained in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of such opinion. Holders of PacifiCare Common
Stock are urged to and should read the opinion in its entirety.

As of August 4, 1996, Dillon Read: (i) reviewed certain business and
historical financial information relating to PacifiCare and FHP; (ii) reviewed
certain financial forecasts and other data provided to Dillon Read by FHP and
PacifiCare relating to the business prospects of PacifiCare and FHP; (iii)
conducted discussions with senior management of FHP and PacifiCare with respect
to, among other things, the business prospects of PacifiCare and FHP; (iv)
reviewed the historical market trading prices and trading volumes of the FHP
Common Stock; (v) compared the proposed financial terms of the Mergers with the
financial terms of certain other mergers and acquisition transactions that
Dillon Read believed to be generally comparable to the Mergers; (vi) reviewed
publicly available financial and stock market data with respect to certain other
companies in lines of business that Dillon Read believes to be generally
comparable to those of FHP; (vii) considered the pro forma financial effects of
the Mergers on PacifiCare; and (viii) conducted such other financial studies,
analyses and investigations, and considered such other information as Dillon
Read deemed necessary in arriving at its opinion. Dillon Read subsequently
reviewed the differences between the First Amended Reorganization Agreement and
the Original Reorganization Agreement.

In connection with its review, Dillon Read did not assume any responsibility
for independent verification of any of the foregoing information and, with
PacifiCare's consent, relied on its being complete and accurate in all material
respects. In addition, Dillon Read did not make any independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of
PacifiCare or FHP or any of their subsidiaries, nor was Dillon Read furnished
with any such evaluation or appraisal. With respect to financial forecasts,
Dillon Read assumed that they had been reasonably prepared on bases reflecting
the best currently available estimates at the time and judgments of the
respective management of PacifiCare and FHP as to the future financial
performance of their respective companies. Dillon Read's opinion was based upon
market, economic and monetary conditions existing as of the date of the opinion.

The amount of consideration to be paid to the holders of FHP Capital Stock
pursuant to the Reorganization Agreement was determined through negotiations
between PacifiCare and FHP.

In connection with rendering its opinion, Dillon Read considered a variety
of valuation methods. The material valuation methods used are summarized below.
These analyses taken together support Dillon Read's opinion.

COMPARABLE COMPANY ANALYSIS. Using publicly available information, Dillon
Read analyzed, based upon market trading values, multiples of certain financial
criteria (including latest twelve months revenues, latest twelve months earnings
before interest expense, taxes, depreciation and amortization ("EBITDA"),
projected net income for two years and book value) used to value certain other
companies, which, in Dillon Read's judgment, were generally comparable to FHP
for the purpose of this analysis. The comparable company analysis was comprised
of seven publicly held HMO businesses. These businesses included: Foundation
Health Corporation, Health Systems International, Inc., PacifiCare, WellPoint
Health Networks, Inc., Healthsource, Inc., Humana, Inc. and United HealthCare
Corporation.

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The range and mean for market capitalization as a multiple of each of the
indicated statistics for the comparable companies were as follows: (i) book
value -- 1.5x to 3.1x with a mean of 2.1x; (ii) estimated calendar 1996 earnings
(based upon estimates from industry sources) -- 8.3x to 16.5x, with a mean of
12.7x; (iii) estimated calendar 1997 earnings (based upon estimates from
industry sources) -- 7.0x to 13.3x, with a mean of 10.4x. The adjusted market
capitalization (defined as market capitalization plus the book value of debt) as
a multiple of each of the indicated statistics for the comparable companies were
as follows: (i) latest twelve months revenues -- 0.5x to 1.0x, with a mean of
0.7x; and (ii) latest twelve months EBITDA -- 4.9x to 9.2x, with a mean of 7.3x.

Dillon Read analyzed the terms of the Mergers in two sets of analyses: (i)
by examining the operating performance of FHP inclusive of Talbert; and (ii) by
considering the operating performance of FHP recast for the anticipated Talbert
Rights Offering. Including the operations of Talbert, FHP's multiples based upon
the consideration to be paid to the holders of the FHP Common Stock and FHP
Preferred Stock in connection with the Merger, which as of August 4, 1996, had a
value of $35.00 per share, were as follows: (i) book value -- 1.8x; (ii)
estimated calendar year 1996 earnings (based upon estimates from industry
sources) -- 22.4x; (iii) estimated calendar year 1997 earnings (based upon
estimates from industry sources) -- 18.8x; (iv) latest twelve months revenues --
0.6x; and (v) latest twelve months EBITDA -- 10.5x. Excluding Talbert's
operations, FHP's multiples based upon the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock in connection with the
Mergers, were as follows: (i) book value -- 0.7x; (ii) estimated calendar year
1996 earnings (based upon estimates from industry sources adjusted for the
Talbert spin-off) -- 17.5x; (iii) estimated calendar year 1997 earnings (based
upon estimates from industry sources adjusted for the Talbert spin-off) --
15.4x; (iv) latest twelve months revenues -- 0.7x; and (v) latest twelve months
EBITDA -- 8.7x. Dillon Read believed that both analyses yielded multiples that
supported Dillon Read's view as of such date that the consideration to be paid
to the holders of FHP Common Stock and FHP Preferred Stock is fair, from a
financial point of view to PacifiCare and PacifiCare's stockholders, because
taken as a whole, the ratios described above were within the range of, or less
than, selected public comparable multiples.

COMPARABLE MERGERS AND ACQUISITIONS. Using publicly available information,
Dillon Read analyzed, based upon the purchase price of the equity of the
acquired companies and total transaction values, multiples of certain financial
criteria (such as projected net income for two years and for the period 12
months following, book value, revenues and EBITDA) used to value certain mergers
and acquisitions of acquired companies.

The merger and acquisition transactions which were analyzed included eight
transactions completed or pending in the HMO industry which, in Dillon Read's
judgment, were generally comparable to the Mergers for the purposes of this
analysis. The acquisitions reviewed by Dillon Read, in reverse chronological
order of announcement date, included: (i) the acquisition of U.S. Healthcare,
Inc. by Aetna Life and Casualty Company; (ii) the acquisition of Healthwise of
America, Inc. by United HealthCare Corporation; (iii) the acquisition of
CareNetwork, Inc. by Humana, Inc.; (iv) the acquisition of Gencare Health
Systems, Inc. by United HealthCare Corporation; (v) the acquisition of
Intergroup Healthcare Corporation by Foundation Health Corporation; (vi) the
acquisition of TakeCare, Inc. by FHP; (vii) the acquisition of Ramsay-HMO, Inc.
by United HealthCare Corporation; and (viii) the acquisition of HMO America,
Inc. by United HealthCare Corporation.

The range and mean for the purchase price of equity as a multiple of each of
the indicated statistics for the above transactions were as follows: (i)
estimated current calendar year earnings (based upon estimates from industry
sources) -- 20.9x to 28.3x, with a mean of 25.1x; (ii) estimated next calendar
year earnings (based upon estimates from industry sources) -- 18.0x to 23.0x,
with a mean of 20.7x; (iii) estimated earnings for the period twelve months
following (based upon estimates from industry sources) -- 20.1x to 27.2x, with a
mean of 23.3x; and (iv) book value -- 4.3x to 19.6x, with a mean of 9.7x. The
range and mean for the transaction value (defined as purchase price of equity

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plus the book value of debt) as a multiple of each of the indicated statistics
for the group of comparable acquisitions were as follows: (i) latest twelve
months revenues 0.8x to 2.4x with a mean of 1.6x; and (ii) latest twelve months
EBITDA -- 13.7x to 19.1x with a mean of 17.1x.

Including the operations of Talbert, FHP's multiples based upon the
consideration to be paid to the holders of FHP Common Stock and FHP Preferred
Stock in connection with the Mergers (which, at the time Dillon Read performed
its analyses, had a value of approximately $35.00 per share) were as follows:
(i) estimated current calendar year earnings -- 22.4x; (ii) estimated next
calendar year earnings -- 18.8x; (iii) estimated earnings for the period twelve
months following -- 20.2x; (iv) book value -- 1.8x; (v) latest twelve months
revenues -- 0.6x, and (vi) latest twelve months EBITDA -- 10.5x. Excluding FHP's
Talbert operations, FHP's multiples based upon the consideration to be paid to
the holders of FHP Common Stock and FHP Preferred Stock in connection with the
Mergers, were as follows: (i) estimated current calendar year earnings -- 17.5x;
(ii) estimated next calendar year earnings -- 15.4x; (iii) estimated earnings
for the period twelve months following -- 16.5x; (iv) book value -- 1.8x; (v)
latest twelve months revenues -- 0.7x; and (vi) latest twelve months EBITDA --
8.7x. Dillon Read believed that these multiples supported Dillon Read's view
that the consideration to be paid to the holders of the FHP Common Stock and FHP
Preferred Stock is fair, from a financial point of view to PacifiCare and
PacifiCare's stockholders, because taken as a whole, the ratios described above
were within the range of, or less than, the selected comparable acquisition
multiples.

DISCOUNTED CASH FLOW ANALYSIS. Dillon Read calculated the present value of
the future streams of after-tax cash flows that FHP could be expected to produce
in the future. The analysis utilized financial and operating information
relating to the business, operations and prospects of FHP based upon estimates
from industry sources and relied on certain assumptions with respect to FHP's
future business and operations. Dillon Read calculated terminal values for FHP
by applying to projected earnings a range of multiples based on the analysis of
the transaction multiples of comparable HMO transactions. The cash flow streams
and terminal values were then discounted to present values using a range of
discount rates from 12% to 20%, which were chosen based on several assumptions
regarding factors such as inflation rates, interest rates, the inherent risk in
FHP's health plans, as well as the HMO industry as a whole, and the cost of
capital of FHP. The analysis yielded a range of values for FHP Common Stock of
$27.77 to $49.36 per share. Dillon Read believed that the discounted cash flow
analysis supported Dillon Read's view that the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock is fair, from a financial
point of view to PacifiCare and PacifiCare's stockholders, because the
consideration to be paid valued at the time of Dillon Read's analyses was within
the range of present values of FHP's future cash flows.

Dillon Read also calculated the present value of future streams of after-tax
cashflows based on estimates of future FHP operating performance prepared by the
management of PacifiCare which included assumptions regarding various cost
savings and other synergies estimated to result from the Mergers. Dillon Read
used the same terminal multiples and discount rates discussed above. The
analysis yielded a range of values for FHP Common Stock of $36.21 to $64.80 per
share. Dillon Read believed that the discounted cash flow analysis supported
Dillon Read's view that the consideration to be paid to the holders of FHP
Common Stock and FHP Preferred Stock is fair, from a financial point of view to
PacifiCare and PacifiCare's stockholders, because the consideration to be paid
valued at the time of Dillon Read's analyses was below the range of present
values of FHP's future cash flows.

TRADING HISTORY OF THE COMMON STOCK. Dillon Read analyzed the price history
of FHP Common Stock during calendar year 1995 and the first seven months of
calendar year 1996. The trading history of the FHP Common Stock was examined to
evaluate the relative reasonableness of the market price of the FHP Common Stock
in light of historical trading levels. Dillon Read believed that FHP's trading
history supported Dillon Read's view that the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock is fair, from a financial
point of view to PacifiCare and PacifiCare's stockholders, pursuant to the
calculation of the exchange ratio as described herein.

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PRO FORMA MERGER ANALYSIS. Dillon Read also analyzed certain pro forma
financial effects of the Mergers on PacifiCare. This analysis was based upon
certain assumptions, including, without limitation, the following: (i)
PacifiCare's management projections; (ii) FHP projections for the fiscal years
1997 through 2001 pro forma for the separation of Talbert as prepared by
PacifiCare management; and (iii) the operating synergies between 1997 and 2001
as prepared by PacifiCare's management.

Based upon such assumptions, Dillon Read's pro forma analysis of the
financial effects of the Mergers indicated that these effects were accretive to
PacifiCare's net income for the years in the forecasted period of 1997 through
2001.

Dillon Read believes that its analyses must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all factors and analyses, could create a misleading view of
the processes underlying its opinion. Dillon Read did not quantify the effect of
each factor upon its opinion. Dillon Read made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond PacifiCare's and Dillon Read's control. Any
estimates contained in Dillon Read's analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth therein. Estimates of the financial value of companies do not purport to
be appraisals or necessarily reflect the prices at which companies actually may
be sold. Because such estimates inherently are subject to uncertainty, none of
PacifiCare, FHP, PacifiCare Holding, Dillon Read or any other person assumes
responsibility for their accuracy. In rendering its opinion, Dillon Read
expressed no view as to the range of values at which the PacifiCare Holding
Common or PacifiCare Holding Preferred may trade following consummation of the
Mergers, nor did Dillon Read make any recommendations to the PacifiCare
stockholders with respect to how such stockholders should vote on the Mergers,
or to the advisability of disposing of or retaining such PacifiCare Holding
Common or PacifiCare Holding Preferred following the Mergers.

The PacifiCare Board of Directors selected Dillon Read as its financial
advisor because Dillon Read is a nationally recognized investment banking firm
with substantial experience in transactions similar to the Mergers. As a part of
its investment banking business, Dillon Read is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions.

Dillon Read participated in the initial public offering of PacifiCare Common
Stock, has participated in subsequent, additional offerings of PacifiCare Common
Stock, has acted as managing underwriter for some of the additional offerings
and has received customary fees for the rendering of such services. In the
ordinary course of business, Dillon Read trades such common stock for its own
account and the accounts of its customers and, accordingly, may at any time hold
a long or short position in such securities.

Pursuant to the engagement letter between PacifiCare and Dillon Read,
PacifiCare has paid Dillon Read for its services a fee of $1,000,000 and has
agreed to pay Dillon Read for its services an additional fee of approximately
$7,000,000 upon the closing of the Mergers. PacifiCare has also agreed to
reimburse Dillon Read for its reasonable expenses, including attorneys' fees,
and to indemnify Dillon Read against certain liabilities in connection with its
engagement.

OPINION OF MERRILL LYNCH

FHP has retained Merrill Lynch to act as its financial advisor in connection
with the Mergers. Merrill Lynch delivered its oral opinion to FHP's Board of
Directors on August 3, 1996, which opinion was confirmed in writing, as of
August 4, 1996, to the effect that, as of such date, and based upon the
assumptions made, general procedures followed, factors considered and limits on
the review undertaken as set forth in such opinion, the proposed consideration
to be received in the Mergers by the holders of FHP Common Stock and the holders
of FHP Preferred Stock, other than, in each case, PacifiCare and its affiliates,
was fair to such holders from a financial point of view.

THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED, METHODS EMPLOYED AND
LIMITATIONS IN THE REVIEW UNDERTAKEN BY MERRILL LYNCH

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IN ARRIVING AT ITS OPINION IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED
HEREIN BY REFERENCE. The following summary of the Merrill Lynch Opinion
contained in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of such opinion. Holders of the FHP Common Stock
and the FHP Preferred Stock are urged to, and should, read this opinion in its
entirety. Terms defined in this summary shall have such meaning solely for
purposes of this summary and of the Merrill Lynch Opinion. The Merrill Lynch
Opinion is directed only to the fairness from a financial point of view of the
consideration to be received by holders of the FHP Common Stock and the FHP
Preferred Stock (other than, in each case, PacifiCare and its affiliates)
pursuant to the Reorganization Agreement and does not constitute a
recommendation to any stockholder of FHP as to how such stockholder should vote
with respect to the Reorganization Agreement and the transactions contemplated
thereby. The proposed consideration to be received by FHP stockholders pursuant
to the Reorganization Agreement was determined through negotiations between FHP
and PacifiCare.

In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things:
(i) reviewed FHP's Annual Reports, Forms 10-K and related financial information
for the five fiscal years in the period ended June 30, 1995 and FHP's Forms 10-Q
and the unaudited financial information for the quarterly periods ended
September 30, 1995, December 31, 1995 and March 31, 1996; (ii) reviewed
PacifiCare's Annual Reports, Forms 10-K and related financial information for
the five fiscal years in the period ended September 30, 1995 and PacifiCare's
Forms 10-Q and the related unaudited financial information for the quarterly
periods ended December 31, 1995 and March 31, 1996; (iii) reviewed certain
information, including financial forecasts, relating to the business, earnings,
cash flow, assets and prospects of FHP and PacifiCare, furnished to Merrill
Lynch by FHP and PacifiCare; (iv) conducted discussions with members of senior
management of FHP and PacifiCare concerning their respective businesses and
prospects and estimated synergies resulting from the Mergers; (v) reviewed the
historical market prices and trading activity for FHP Common Stock and the
PacifiCare Common Stock and compared them with that of certain publicly traded
companies which Merrill Lynch deemed to be reasonably similar to FHP and
PacifiCare, respectively; (vi) compared the results of operations of FHP and
PacifiCare with that of certain companies which Merrill Lynch deemed to be
reasonably similar to FHP and PacifiCare, respectively; (vii) compared the
proposed financial terms of the transactions contemplated by the Reorganization
Agreement with the financial terms of certain other mergers and acquisitions
which Merrill Lynch deemed to be relevant; (viii) reviewed the Original
Reorganization Agreement; (ix) reviewed a draft (dated July 31, 1996) of Article
IV.C of the proposed Restated Certificate; (x) considered certain pro forma
financial effects of the Mergers; and (xi) reviewed such other financial studies
and analyses and performed such other investigations and took into account such
other matters as Merrill Lynch deemed necessary, including its assessment of
general economic, market and monetary conditions. Merrill Lynch reviewed the
First Amended Reorganization Agreement and the Reorganization Agreement,
including in each case the revised proposed Restated Certificate, and determined
that the changes reflected in those documents did not require any modification
to the Merrill Lynch Opinion. Merrill Lynch so advised the FHP Board of
Directors in writing on September 17, 1996 and November 13, 1996, respectively.

In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by FHP and PacifiCare, and Merrill Lynch did not independently verify such
information or undertake an independent appraisal of the assets or liabilities
of FHP or PacifiCare. Merrill Lynch evaluated FHP on a consolidated basis and
did not perform a separate valuation analysis of Talbert on a stand-alone basis
or attribute any value to the Talbert Rights. With respect to the financial
forecasts furnished by FHP and PacifiCare, Merrill Lynch assumed that they were
reasonably prepared and reflected the best currently available estimates and
judgment of FHP's or PacifiCare's management as to the expected future financial
performance of FHP or PacifiCare, as the case may be. In addition, Merrill Lynch
assumed that the Mergers would qualify as transactions under Section 351.
Merrill Lynch did not express any opinion as to prices at which the PacifiCare
Holding Class A Common, the PacifiCare Holding Class B Common or the PacifiCare
Holding Preferred will trade following consummation of the Mergers. The Merrill
Lynch Opinion is necessarily based on market, economic and other conditions as
they existed on August 4, 1996.

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The following is a summary of the analyses performed by Merrill Lynch in
connection with its presentation to the FHP Board of Directors on August 3, 1996
and the subsequent delivery of the Merrill Lynch Opinion:

ANALYSIS OF IMPLIED MULTIPLES PAID IN THE FHP MERGER. Based on an exchange
ratio of 0.258 and a $68.00 stock price for the PacifiCare Class B Common Stock,
the offer value for the FHP Merger is $2.158 billion (defined as the number of
shares of FHP Common Stock on a fully diluted basis multiplied by $35.00, the
assumed value of the FHP Merger consideration per share of FHP Common Stock),
representing a multiple to FHP management's estimated calendar year 1996 and
fiscal year 1997 projected earnings per share of FHP Common Stock of 21.5x and
19.0x, respectively, or 22.4x and 20.2x analysts' estimated calendar year 1996
and fiscal year 1997 projected EPS. Based on FHP's 1.91 million members at June
30, 1996, the FHP Merger represents a value per member of $1,129.8. Based on an
assumed stock price of $68 per share of PacifiCare Class B Common Stock and the
closing trading price for FHP Common Stock of $26.13 as of July 31, 1996, the
FHP Merger represents a 33.9% premium to such FHP stock price.

ANALYSIS OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Merrill Lynch
compared certain financial information for FHP with the corresponding publicly
available financial information of certain other companies that Merrill Lynch
deemed to be reasonably similar to FHP. In this portion of its analysis, Merrill
Lynch compared certain financial information for nine managed care companies,
four of which, PacifiCare, WellPoint Health Networks, Inc., Health Systems
International Inc. and Foundation Health Corporation, have a dominantly
California presence (the "California Comparable Companies"), and the remaining
five of which, Oxford Health Plans Inc., United HealthCare Corporation, Humana
Inc., Healthsource, Inc. and Aetna Inc., are based predominantly outside of
California (together with the California Comparable Companies, the "Comparable
Companies").

Merrill Lynch compared the market values (defined as the product of primary
common shares outstanding and current per share price) of the Comparable
Companies as a multiple of, among other things, estimated 1996 and 1997 net
income. An analysis of the multiples of market values to estimated 1996 net
income for the Comparable Companies, excluding certain anomalous results,
yielded a mean of 10.7x and a median of 10.0x for the California Comparable
Companies and a mean of 12.7x and a median of 13.0x for all the Comparable
Companies. A similar analysis of 1997 estimated net income yielded a mean of
9.2x and a median of 8.6x for the California Comparable Companies and a mean of
10.4x and a median of 10.2x for all the Comparable Companies. In addition,
Merrill Lynch compared the ratio of the current 1997 price/earnings ratio to
analysts' estimated five-year EPS growth rate for each of the Comparable
Companies. Such analysis yielded a mean of 56.9% and a median of 59.5% for the
California Comparable Companies and a mean of 58.1% and a median of 64.1% for
all the Comparable Companies. Based upon the above, Merrill Lynch obtained an
equity value of FHP Common Stock of $21.00 to $27.00 per share.

ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Merrill Lynch
reviewed certain publicly available information regarding eight selected
business combinations announced since May 1993 involving managed care companies
(collectively, the "Comparable Transactions"). The Comparable Transactions, in
reverse chronological order of public announcement and listed as
acquiror/target, were: Aetna Inc./US Healthcare Corporation; United HealthCare
Corporation/Healthwise of America; WellPoint Health Networks, Inc./Health
Systems International, Inc. (which was terminated); United HealthCare
Corporation/Gencare Health Services, Inc.; Foundation Health
Corporation/Intergroup Health Corporation; United HealthCare Corporation/Ramsay
HMO, Inc.; FHP/TakeCare, Inc.; and United HealthCare Corporation/HMO America
Inc.

Merrill Lynch calculated for each of the Comparable Transactions: (i) the
multiples of offer value to (a) the last twelve months ("LTM") EPS and (b) the
twelve-month forward EPS; and (ii) the ratio of the offer value multiple of the
twelve-month forward EPS to the estimated five-year EPS growth rate. Based upon
its analysis of such multiples for the most relevant Comparable Transactions,
Merrill Lynch used multiple ranges of 23x to 29x, 18x to 22x and 1.1x to 1.3x,
respectively, for its review of

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FHP's estimated fiscal year 1996 EPS, fiscal year 1997 EPS and projected
five-year EPS growth rate. Applying such multiple ranges, Merrill Lynch obtained
an equity value of FHP Common Stock of $32.00 to $38.00 per share.

DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch performed a discounted cash
flow analysis of FHP based upon estimates of projected financial performance
prepared by FHP for the fiscal years 1997 through 2001. Utilizing these
projections, Merrill Lynch calculated a range of FHP equity values based upon
the discounted net present value of FHP's five-year stream of projected
unlevered free cash flow and a projected fiscal year 2001 terminal value. In
performing this analysis, Merrill Lynch utilized discount rates reflecting FHP's
weighted average costs of capital ranging from 13.0% to 15.0% and terminal value
multiples of fiscal year 2001 net income ranging from 12.0x to 16.0x. For
purposes of its analysis, Merrill Lynch assumed FHP had a net debt of $81.0
million consisting of total debt less working capital less long-term marketable
securities (based on estimated June 30, 1996 balance sheet) less option
proceeds. Based on such analysis, Merrill Lynch obtained an equity value of FHP
Common Stock of $28.50 to $39.00 per share.

PRO FORMA ANALYSIS. Merrill Lynch analyzed certain pro forma effects of the
Mergers on PacifiCare's EPS. In conducting its analysis, Merrill Lynch relied
upon financial forecasts provided by FHP and PacifiCare for the fiscal years
1997 through 2001. Merrill Lynch presented to the FHP Board of Directors several
pro forma analyses, including one that assumed realization of 100% of the
synergies estimated by FHP's management (the "FHP Analysis"), one that assumed
realization of 50% of the synergies estimated by FHP's management (the "FHP 50%
Analysis") and one that assumed realization of 100% of the synergies estimated
by PacifiCare's management (the "PacifiCare Analysis"). Based upon such
financial forecasts, Merrill Lynch calculated that under the FHP Analysis and
the FHP 50% Analysis, the Mergers would be 3.4% and 10.9% dilutive,
respectively, to PacifiCare's fully diluted EPS for the fiscal year 1997 and
would be from 13.6% to 19.1% and 2.5% to 10.7%, respectively, accretive to
PacifiCare's fully diluted EPS for the fiscal years 1998 to 2001. Based upon
such financial forecasts, Merrill Lynch also calculated that under the
PacifiCare Analysis, the Mergers would be from 1.6% to 22.6% accretive to
PacifiCare's fully diluted EPS for the fiscal years 1997 through 2001.

EXCHANGE RATIO ANALYSIS. Merrill Lynch reviewed the implied exchange ratio
based on historical prices of FHP Common Stock and the PacifiCare Class B Common
Stock over the period from July 1993 to July 1996 and compared the one-year,
two-year and three-year average implied exchange ratios of 0.1814x, 0.1896x and
0.223x, respectively, to the exchange ratio for the Mergers (prior to any
adjustment) of 0.258x. Merrill Lynch also calculated the range of implied
exchange ratios by dividing the discounted cash flow per share of FHP Common
Stock using the discounted cash flow analysis set forth above as adjusted to
credit FHP stockholders with certain synergies. This analysis resulted in
theoretical exchange ratios of 0.181x to 0.191x, before giving effect to any
assumed synergies; 0.211x to 0.222x, giving FHP stockholders credit for all
synergies contemplated by the FHP 50% Analysis; 0.240x to 0.253x, giving FHP
stockholders credit for all synergies contemplated by the FHP Analysis; and
0.253x to 0.266x, giving FHP stockholders credit for all synergies contemplated
by the PacifiCare Analysis. In addition, Merrill Lynch calculated the relative
contributions to pro forma combined revenue, earnings before interest and tax
("EBIT") and net income, giving effect to the Mergers, from each of FHP and
PacifiCare for the twelve months ending September 30, 1996, and compared such
contributions to the percentage of the economic value FHP stockholders will
receive in the combined Mergers. This analysis resulted in FHP's contributions
to the pro forma combined revenue, EBIT and net income of 31.4%, 29.2% and
25.1%, respectively, for such twelve-month period compared to ownership of 33.3%
of the combined equity.

The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
Opinion. Arriving at a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. In addition, Merrill Lynch believes that its analyses must
be considered as a whole and that selecting portions of such analyses and of the
factors considered therein, without considering all such factors and analyses,
could create an incomplete view of the analyses and the processes underlying the
Merrill Lynch Opinion. The matters considered by Merrill Lynch in its

48
<PAGE>
analyses are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of FHP or
PacifiCare and involve the application of complex methodologies and educated
judgment. Any estimates incorporated in the analyses performed by Merrill Lynch
are not necessarily indicative of actual past or future results or values, which
may be significantly more or less favorable than such estimates. Estimated
values do not purport to be appraisals and do not necessarily reflect the prices
at which businesses or companies may be sold in the future, and such estimates
are inherently subject to uncertainty. With respect to the analyses of selected
Comparable Companies or Comparable Transactions summarized above, no public
company or transaction utilized as a comparison is identical to FHP or
PacifiCare or the Mergers, and such analyses necessarily involve complex
considerations. Accordingly, the analysis of publicly traded Comparable
Companies and Comparable Transactions is not mathematical; rather it involves
complex considerations and judgments concerning the differences in financial and
operating characteristics of the companies and transactions and other factors
that could affect the companies concerned. None of the analyses performed by
Merrill Lynch was assigned a greater significance by Merrill Lynch than any
other.

The FHP Board of Directors selected Merrill Lynch to act as its financial
advisor on the basis of Merrill Lynch's reputation as an internationally
recognized investment banking firm with substantial expertise in transactions
similar to the Mergers. Merrill Lynch is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes.

Merrill Lynch has from time to time provided various investment banking and
other financial advisory services to FHP, and has received customary fees for
the rendering of such services. In the ordinary course of its business, Merrill
Lynch and its affiliates may actively trade the securities of FHP for its or
their own accounts and for the accounts of its customers and, accordingly, at
any time hold a long or short position in such securities.

FHP has agreed to pay Merrill Lynch fees as follows: (i) a cash fee of
$250,000, which was payable on the date of the letter agreement; (ii) an
additional cash fee of $750,000 payable on the delivery of the Merrill Lynch
Opinion; and (iii) if, while Merrill Lynch is retained by FHP, FHP consummates
or enters into an agreement which leads to, a Business Combination (defined as
any merger, consolidation, reorganization, asset sale or other business
combination pursuant to which the business of FHP is combined with that of one
or more purchasers, including, without limitation, the acquisition, directly or
indirectly, by one or more purchasers of control of FHP through a proxy contest,
the acquisition of more than 50% of the voting capital shares of FHP or
otherwise) or within one year after the termination of the letter agreement, a
Business Combination is consummated with one of the potential purchasers listed
in the letter agreement (or any potential purchasers subsequently added by
mutual agreement), then an additional fee of $6,500,000, payable upon the
closing of such Business Combination (less any fees paid previously by FHP to
Merrill Lynch with respect to the separation of Talbert). In such letter, FHP
also agreed to reimburse Merrill Lynch for certain of its reasonable out-
of-pocket expenses and to indemnify Merrill Lynch against certain liabilities
related to or arising out of any transaction contemplated by the letter
agreement.

FINANCING OF FHP MERGER CONSIDERATION

It is currently anticipated that all of the approximately $1.0 billion
required to pay the Cash Consideration pursuant to the FHP Merger and fees and
expenses related to the Mergers will be funded out of borrowings under a new
PacifiCare Holding credit facility.

In connection with the Mergers, PacifiCare Holding has entered into a Credit
Agreement, dated as of October 31, 1996 (the "Credit Agreement") with Bank of
America, as Agent ("Agent"), and a syndicate of financial institutions
(collectively, "Banks") whereby the Banks are obligated to provide a $1.5
billion credit facility (the "Credit Facility") to PacifiCare Holding. Funding
under the Credit Facility is subject to the satisfaction of a variety of
customary borrowing conditions, as described below. PacifiCare's obligation to
consummate the FHP Merger is not subject to obtaining the required financing.

49
<PAGE>
The following summary of the Credit Agreement does not purport to be
complete and is qualified in its entirety by reference to the Credit Agreement,
copies of which have been filed as exhibits to the Registration Statement of
which this Joint Proxy Statement/Prospectus is a part and are incorporated by
reference herein.

The Credit Agreement provides for a five-year, unsecured, reducing revolving
credit facility in an aggregate amount of $1.5 billion with FHP and PacifiCare
providing guarantees under the Credit Facility. PacifiCare Holding may borrow
the full amount of the Credit Facility to fund a portion of the Cash
Consideration and to pay a portion of the fees and expenses incurred in
connection with the Mergers. Thereafter, the Credit Facility will remain
available for general corporate purposes. On the dates set forth below, the
aggregate commitment of the Banks, and maximum amount of loans permitted to be
outstanding, under the Credit Facility will be reduced to the corresponding
amounts:

<TABLE>
<CAPTION>
COMMITMENT REDUCTION DATE AGGREGATE BANK COMMITMENT
- -------------------------- --------------------------
<S> <C>
January 1, 1999 $1,400,000,000
July 1, 1999 $1,300,000,000
January 1, 2000 $1,200,000,000
July 1, 2000 $1,100,000,000
January 1, 2001 $950,000,000
July 1, 2001 $800,000,000
January 1, 2002 $0
</TABLE>

Interest on the borrowings under the Credit Facility will be determined
based on the type of borrowing selected by PacifiCare Holding from time to time.
The three borrowing options are: LIBOR, base rate and competitive bid. Interest
on LIBOR borrowings will be LIBOR for one, two, three, six, or, to the extent
available to all Banks, 12 months, plus the applicable spread. In addition,
pursuant to the competitive bid option, PacifiCare Holding may request the Agent
to solicit competitive bids from the Banks priced at either a margin above or
below LIBOR or at an absolute interest rate. Each Bank will bid at its own
discretion for amounts up to the total amount of the unused commitments and
PacifiCare Holding will be under no obligation to accept any of the bids. The
calculation of the applicable spread will be based on either of two criteria
under a pricing grid, at the option of PacifiCare Holding. Under one
alternative, pricing is based on the ratio of PacifiCare Holding's funded debt
to adjusted EBITDA. Under the other alternative, pricing is based on PacifiCare
Holding's, PacifiCare or FHP's senior unsecured debt ratings as determined by
Standard and Poor's Corporation and Moody's Investors Service, Inc. Under the
pricing grid, the applicable spread ranges from 0.165% to 0.525% per annum over
LIBOR.

A facility fee is payable and accrues from the date of initial funding of
the Credit Facility. The amount of the facility fee varies based on the same
pricing grid and criteria described above and is payable on the full amount of
the Credit Facility, regardless of the amount drawn thereunder. Under the
pricing grid, the facility fee ranges from 0.085% to 0.225% per annum.

A commitment fee is payable from October 31, 1996 through the date of
initial funding under the Credit Facility. The commitment fee will accrue on the
full amount of the Credit Facility at a rate of 0.125% per annum from October
31, 1996 through January 3, 1997 and at a rate of 0.25% thereafter.

The Credit Agreement specifies that the Banks' obligation to effect the
closing of the Credit Facility is subject to conditions customary for financings
of this type, including among other things: (i) no material adverse change in
the financial condition, business operations or properties of PacifiCare and its
subsidiaries, taken as a whole, or FHP and its subsidiaries, taken as a whole;
(ii) no event of default existing under the loan documentation; (iii) no
material amendment of or waiver under any documents pertaining to the
Reorganization Agreement and the documents delivered and entered into in
connection therewith (the "FHP Acquisition Documents"); (iv) accuracy of all
representations and warranties under the FHP Acquisition Documents in all
material respects; (v) no litigation or judgment, order, injunction or other
restraint prohibiting or imposing materially adverse conditions

50
<PAGE>
upon the Mergers or the making of the loans, or performance by PacifiCare
Holding of its obligations, under the Credit Facility; (vi) termination of
PacifiCare's and FHP's existing revolving credit agreements; and (vii) receipt
of satisfactory opinions of counsel to PacifiCare and FHP.

The Credit Agreement includes conditions to borrowing customary for
financings of this type, including without limitation: (i) absence of material
adverse change of PacifiCare Holding and its subsidiaries on a consolidated
basis; (ii) absence of defaults; and (iii) accuracy of specified representations
and warranties.

The Credit Agreement contains representations and warranties which are usual
for financings of this type, including without limitation: (i) corporate
existence and power; (ii) corporate, stockholder and government authorization;
(iii) no violation or conflict with organizational documents, any law or
regulation or any agreement; (iv) compliance with laws and regulations; (v)
enforceability of the FHP Acquisition Documents and loan documentation; (vi)
absence of material adverse change and material litigation; (vii) accuracy of
financial statements; (viii) compliance with Federal Reserve margin
requirements; (ix) taxes; (x) disclosure of capitalization, subsidiaries,
material agreements, properties and employee benefit plans; and (xi) absence of
material misstatements.

The Credit Agreement contains covenants which are usual for financings of
this type, including without limitation: (i) provision of financial statements
and information; (ii) limitations on PacifiCare's, FHP's and their subsidiaries'
lines of business; (iii) limitations on additional indebtedness; (iv)
limitations on fundamental changes, mergers, acquisitions, consolidations and
asset sales; (v) limitations on liens; (vi) limitations on prepayment of other
indebtedness; (vii) limitations on share repurchases, redemptions, dividends,
and distributions except for (a) the repurchase of up to $80 million of
PacifiCare Holding Class A Common, (b) the repurchase of up to $100 million of
PacifiCare Holding Class A Common or Class B Common, and (c) certain other
limited distributions; (viii) limitations on PacifiCare Holding's subsidiaries'
agreements with creditors restricting their ability to make distributions; and
(ix) limitations on investments.

The Credit Agreement contains the following financial covenants: (i) a
minimum net worth requirement; (ii) a fixed charge coverage ratio; and (iii) a
leverage ratio.

The Credit Agreement contains events of default which are usual for
financings of this type, including without limitation: (i) nonpayment of
principal, interest, fees or other amounts; (ii) violation of covenants; (iii)
material breach of representations or warranties; (iv) cross-default; (v)
bankruptcy or insolvency; (vi) certain ERISA events having a material adverse
effect; (vii) a change of control; (viii) certain events relating to compliance
with HMO regulations and actions by HMO regulators; (ix) loss of licenses or
permits having a material adverse effect; (x) certain undischarged judgments;
and (xi) defaults under the guaranties of PacifiCare and FHP.

It is anticipated that the indebtedness incurred through borrowings under
the proposed Credit Facility will be repaid from funds generated internally by
PacifiCare Holding and its subsidiaries and/ or from other sources which may
include, among other things, the proceeds of the private or public sale of
securities; however, no decisions have been made concerning the method
PacifiCare Holding will employ to repay such indebtedness.

CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; NO FRACTIONAL
SHARES

FHP. As soon as practicable after the Effective Time, a letter of
transmittal will be mailed to each holder of record of FHP Common Stock to be
used in forwarding certificates evidencing such shares for surrender and
exchange for certificates evidencing the shares of PacifiCare Holding Class A
Common and PacifiCare Holding Class B Common, together with the cash to which
such holder has become entitled. If the Series A Amendment is approved,
concurrent with the mailing of letters to holders of the FHP Common Stock, a
letter of transmittal will be mailed to each holder of FHP Preferred Stock. The
letter of transmittal is to be used in forwarding certificates evidencing such
shares for surrender (except for shares as to which an Irrevocable Election has
been made), and is required to be properly executed and delivered to the
Exchange Agent for any such holder to receive certificates evidencing the shares
of PacifiCare Holding Preferred and the cash to which such holder

51
<PAGE>
has become entitled. If the Series A Amendment is not approved: (i) mailing of
the letter of transmittal to such holder may be delayed (except as to shares for
which an Irrevocable Election has been made) until the end of the period during
which the Special Conversion Rights may be exercised by such holder; or (ii) the
letter of transmittal may be included with the Conversion Notice. See "-- Merger
Consideration." After receipt of the applicable transmittal form, each holder of
certificates formerly representing shares of FHP Common Stock or FHP Preferred
Stock should surrender such certificates to the Exchange Agent (excluding
certificates already surrendered pursuant to a Form of Irrevocable Election),
together with a properly completed and duly executed transmittal form and such
other documents as may be reasonably required by the Exchange Agent. Each holder
will receive in exchange therefor certificates evidencing the whole number of
PacificCare Holding shares together with the cash to which such holder is
entitled. Such transmittal forms will be accompanied by instructions specifying
other details of the exchange. No fractional shares of PacifiCare Holding Class
A Common, PacifiCare Holding Class B Common or, if applicable, PacifiCare
Holding Preferred will be issued to holders of FHP Common Stock or FHP Preferred
Stock. Instead, cash equal in amount to the fraction of a share of PacifiCare
Holding Class A Common, PacifiCare Holding Class B Common or PacifiCare Holding
Preferred such holder is otherwise entitled to receive times the closing price
of such stock as quoted on the Nasdaq National Market on the first day of
trading after the Mergers become effective will be paid. The Talbert Rights into
which FHP Capital Stock is converted in part will be delivered separately after
the consummation of the Mergers.

FHP STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A TRANSMITTAL FORM OR CONVERSION NOTICE UNLESS SURRENDERED
PURSUANT TO AN IRREVOCABLE ELECTION.

PACIFICARE. As soon as practicable after the Effective Time, a letter of
transmittal will be mailed to each holder of record of PacifiCare Class A Common
Stock and PacifiCare Class B Common Stock to be used in forwarding certificates
evidencing such shares for surrender and exchange for certificates evidencing
the shares of PacifiCare Holding Class A Common or PacifiCare Holding Class B
Common, as applicable, to which such holder has become entitled. After receipt
of the applicable transmittal form, each holder of certificates formerly
representing shares of PacifiCare Class A Common Stock or PacifiCare Class B
Common Stock should surrender such certificates to the Exchange Agent, together
with a properly completed and duly executed transmittal form and such documents
as may reasonably be required by the Exchange Agent. Each holder will receive in
exchange therefor certificates evidencing the whole number of shares of
PacifiCare Holding to which such holder is entitled. Such transmittal forms will
be accompanied by instructions specifying other details of the exchange.

PACIFICARE STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A TRANSMITTAL FORM.

EFFECT ON CERTIFICATES. At the Effective Time, holders of certificates
representing shares of FHP Common Stock, FHP Preferred Stock, PacifiCare Class A
Common Stock and PacifiCare Class B Common Stock will cease to have any rights
as stockholders of FHP or PacifiCare, respectively, other than the right to
receive the consideration to which such holders are entitled pursuant to the
Reorganization Agreement, and the stock transfer books of FHP and PacifiCare
will be closed with respect to all shares of FHP Common Stock, FHP Preferred
Stock, PacifiCare Class A Common Stock and PacifiCare Class B Common Stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of FHP Common Stock, FHP Preferred Stock, PacifiCare Class A Common
Stock or PacifiCare Class B Common Stock will thereafter be made on such stock
transfer books. If, after the Effective Time, a valid certificate previously
representing any of such shares of FHP Common Stock, FHP Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent or to FHP or PacifiCare,
as applicable, such stock certificate will be canceled and exchanged as provided
above.

DIVIDENDS. No dividends or other distributions declared or made with
respect to PacifiCare Holding Class A Common, PacifiCare Holding Class B Common
or, if applicable, PacifiCare Holding

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<PAGE>
Preferred, with a record date after the Effective Time shall be paid to the
holder of any unsurrendered stock certificate. No cash payment shall be paid to
any such holder, until such holder surrenders such stock certificate in
accordance with the foregoing.

TALBERT RIGHTS OFFERING

RIGHTS OFFERING

BASIC SUBSCRIPTION PRIVILEGE. Upon the FHP Merger, shares of FHP Common
Stock and FHP Preferred Stock outstanding immediately before the Effective Time
(the "Talbert Rights Record Date") will be converted in part into the Talbert
Rights. Based upon current expectations concerning the number of shares of FHP
Common Stock that will be outstanding as of the Talbert Rights Record Date, FHP
Stockholders are expected to receive one Talbert Right for each 21.41174 shares
of FHP Common Stock and one Talbert Right for each 26.54897 shares of FHP
Preferred Stock held on the Talbert Rights Record Date. No fractional Talbert
Rights will be issued. The Talbert Rights will be evidenced by transferable
subscription certificates. Each Talbert Right will entitle the holder to
purchase one share of common stock of TMMHC (or, if TMMC and THSC are not
acquired by TMMHC, TMMC) ("Talbert Common Stock") for $21.50 per share (the
"Subscription Price"). Holders of Talbert Rights are entitled to subscribe for
all, or any whole number of, the shares of Talbert Common Stock underlying their
Talbert Rights (the "Basic Subscription Privilege").

ADDITIONAL SUBSCRIPTION PRIVILEGE. Each holder of Talbert Rights who
subscribes in full for all shares of Talbert Common Stock that such person is
entitled to purchase pursuant to the Basic Subscription Privilege will be
entitled to purchase additional shares of Talbert Common Stock at the
Subscription Price from any unsubscribed shares remaining after the exercise,
sale or expiration of all Basic Subscription Privileges (the "Additional
Subscription Privilege"). However, if the total number of shares of Talbert
Common Stock subscribed for pursuant to the Basic Subscription Privilege and the
Additional Subscription Privilege exceeds the total number of shares underlying
the Talbert Rights, the number of shares available for subscription pursuant to
the Additional Subscription Privilege will be allocated, on a pro rata basis, to
the nearest whole share, among those exercising the Additional Subscription
Privilege on the basis of their relative subscriptions pursuant to the
Additional Subscription Privilege.

EXERCISE CAP. The Talbert Rights may not be exercised to the extent that
the holder would as a result of the exercise become the beneficial owner of more
than 8% of the shares of Talbert Common Stock outstanding. However, those FHP
stockholders who were the beneficial owners of FHP Common Stock (on an
as-if-converted basis) in excess of 8% of the outstanding shares of FHP Common
Stock (on an as-if-converted basis) as of the Talbert Rights Record Date (the
"FHP Ownership Percentage") may exercise Talbert Rights to the extent that their
beneficial ownership of Talbert Common Stock does not exceed their FHP Ownership
Percentage.

PROSPECTUS. A preliminary prospectus with respect to the Talbert Rights
Offering will be delivered to holders of FHP Capital Stock prior to the date of
the FHP Meeting. The offering of the Talbert Rights will be made only by means
of a separate prospectus. Holders of FHP Capital Stock are advised to carefully
review the preliminary prospectus and the prospectus relating to the Talbert
Rights Offering prior to deciding whether or not to exercise such rights.
Exercise of the Talbert Rights involves substantial risk of loss.

DELIVERY DATE; SUBSCRIPTION EXPIRATION DATE. The Talbert Rights Offering
will commence promptly after the consummation of the Mergers (or as soon
thereafter as legally permissible). The Talbert Rights will expire at 5:00 p.m.,
Eastern Standard Time, on the 30th day after the commencement of such offering
(the "Expiration Date"). After the Expiration Date, the Talbert Rights will be
void and valueless. TMMHC (or, if TMMC and THSC are not acquired by TMMHC, TMMC)
is not obligated to honor any subscriptions received after the Expiration Date,
regardless of when such subscriptions were sent.

SUBSCRIPTION PROCEDURE. Holders of Talbert Rights may exercise them by
delivering the related subscription certificate (which governs both the Basic
Subscription Privilege and the Additional Subscription Privilege) properly
completed and accompanied by full payment for all shares of Talbert Common Stock
subscribed for to AST on or before the Expiration Date.

53
<PAGE>
PURCHASE, SALE OR TRANSFER OF RIGHTS. The Talbert Rights will be freely
transferable and may be purchased or sold through ordinary investment channels,
including brokers. Application will be made for the quotation of the Talbert
Rights on the Nasdaq National Market.

PROCEEDS. If fully subscribed, the Talbert Rights Offering will result in
net proceeds of approximately $59.5 million.

BUSINESS OF TALBERT

RISK FACTORS. Investment in TMMHC or TMMC, as the case may be, through the
exercise of the Talbert Rights involves significant risks. FHP STOCKHOLDERS
SHOULD CAREFULLY REVIEW THE PROSPECTUS RELATED TO THE TALBERT RIGHTS OFFERING,
INCLUDING THE RISK FACTORS IDENTIFIED THEREIN, BEFORE DECIDING WHETHER OR NOT TO
EXERCISE THE TALBERT RIGHTS.

BUSINESS OF TALBERT. Talbert organizes and manages physician and dentist
practice groups that contract with HMOs and other payors to provide health care
services to their members. As of September 30, 1996, Talbert had approximately
360 affiliated physicians and 80 dentists providing care in 54 medical centers
located in Southern California, Utah, Arizona, New Mexico and Nevada. Through
its affiliated medical groups, Talbert managed over 300,000 capitated enrollees
as of September 30, 1996.

Under a managed care system, HMOs arrange for the provision of health care
for their members, either by employing physicians and other health care
professionals directly or by contracting with independent groups. HMOs often use
Capitation Fees to control costs and minimize risk. However, most physicians
practice individually or in small groups that usually do not have the
administrative capacity, risk management expertise or capital to invest in
sophisticated information systems necessary to manage capitation arrangements
with multiple HMOs.

Physician practice management companies ("PPMCs") such as TMMC have evolved
recently to provide these services, freeing physicians to focus on the practice
of medicine. TMMC offers a broad range of practice management services to its
affiliated medical groups, including (i) provider contract negotiation and
administration, (ii) Medicare risk management, (iii) management information
systems (development, implementation and maintenance), (iv) medical management
(claims administration, utilization and case management, quality assurance and
risk management, and physician credentialing and recruitment), and (v) support
services (including nursing, reception, scheduling, billing, collection and
accounting). Ancillary clinical services (laboratory, radiology, optometry and
pharmacy) are provided by THSC. TMMC provides these services under a management
services agreement with an affiliated medical group, and in return TMMC is
reimbursed for certain clinic operations expenses and receives a management fee
based on the group's revenues after deducting certain reimbursed clinic
operations expenses (except in California, where the management fee is based on
the group's gross revenues). TMMC currently has management services agreements
with four physician practice groups and six dental practice groups and directly
operates one physician practice group in New Mexico, all of which were formerly
associated with FHP Staff Model HMO operations. Over time, Talbert intends to
seek acquisitions or affiliations with additional practice groups in new and
existing markets.

TMMC also represents its managed medical groups in obtaining and negotiating
provider agreements with HMOs and other payors. Under a typical provider
contract, the medical group is responsible for managing all physician-related
covered medical care for each enrollee in exchange for Capitation Fees. Provider
agreements generally include shared risk arrangements and other financial
incentives designed to encourage the provision of high-quality, cost-effective
health care. Talbert's affiliated medical groups and TMMC currently have a total
of 11 provider agreements with FHP, which accounted for nearly 100% of Talbert's
revenues for the nine months ended September 30, 1996. TMMC has entered into
provider agreements with a number of other payors on behalf of its affiliated
medical groups, and expects to further diversify its payor base following its
separation from FHP.

54
<PAGE>
The following table sets forth, as of September 30, 1996, the number of
medical centers, affiliated physicians and capitated enrollees for each of the
states in which Talbert does business:

<TABLE>
<CAPTION>
MEDICAL AFFILIATED CAPITATED
CENTERS PHYSICIANS ENROLLEES
------------- ------------- ---------
<S> <C> <C> <C>
California.................................................. 26 206 132,463
Utah........................................................ 7 80 109,652
Arizona..................................................... 14 41 31,460
New Mexico.................................................. 5 27 25,504
Nevada...................................................... 2 6 4,706
--
--- ---------
Total..................................................... 54 360 303,785
</TABLE>

SEPARATION FROM FHP. TMMC and THSC have operated as subsidiaries of FHP,
providing practice management and ancillary clinical services to the medical
groups that formerly comprised FHP's Staff Model HMO operations and that
currently provide health care to approximately 15.8% of FHP's members. In July
1996, FHP determined to pursue a tax-free spin-off of TMMC and THSC in the
belief that they would be more attractive to other payors if they were not so
closely identified with FHP.

Soon after FHP's decision to spin off TMMC and THSC, FHP agreed to be
acquired by PacifiCare. FHP and PacifiCare have agreed to abandon the tax-free
spin-off of TMMC and THSC, and instead to proceed with the separation of TMMC
and THSC from FHP concurrent with the FHP Merger. To effect this separation, FHP
intends to sell its 92.25% equity interest in both TMMC and THSC to TMMHC at the
closing of the FHP Merger (the 'Talbert Acquisition"). In exchange, FHP will
receive rights to purchase 92.25% of TMMHC's Common Stock, or 2,767,500 shares,
plus a note (the "Note") for $59,501,250, the estimated proceeds of the Talbert
Rights Offering if fully subscribed. By virtue of the FHP Merger, shares of FHP
Common Stock and FHP Preferred Stock will be converted, in part, into the
Talbert Rights, which confer upon the holders, collectively, the right to
purchase 2,767,500 shares of TMMHC's Common Stock. TMMHC will sell to FHP any
shares of TMMHC Common Stock unsubscribed for in the Talbert Rights Offering in
exchange for cancellation of any remaining indebtedness under the Note. FHP and
TMMC may determine not to effect the separation of Talbert in this manner, in
which case the Talbert Rights would be rights to purchase FHP's interest in
TMMC.

TMMHC or TMMC, as the case may be, and FHP will enter into a standstill
agreement with respect to any Talbert Common Stock held by FHP following the
completion of the Talbert Rights Offering (the "Standstill Agreement"). The
Standstill Agreement provides, among other provisions, that, if FHP holds 20% or
less of the outstanding Talbert Common Stock following the completion of the
Talbert Rights Offering, for a period of seven years, FHP: (i) will vote its
shares of Talbert Common Stock in accordance with the votes of the non-FHP
stockholders; (ii) will not acquire additional shares of Talbert Common Stock;
(iii) will be subject to certain restrictions with respect to its ability to
solicit proxies, make acquisition proposals, become a member of a "group" (as
defined in the federal securities laws), or otherwise use its holdings of
Talbert Common Stock to seek to exercise control over the management of TMMHC or
TMMC, as the case may be; and (iv) will be entitled to certain demand
registration rights and the right to participate in future registrations by
TMMHC or TMMC, as the case may be. These provisions, among others, will not
apply if FHP holds more than 20% of the Talbert Common Stock following the
completion of the Talbert Rights Offering.

TMMC will continue to provide practice management services to the Talbert
medical and dental practice groups. The Talbert medical and dental practice
groups will continue to provide care to enrolled members of FHP under their
existing provider agreements until the Effective Time. New provider agreements
covering FHP members will take effect at the Effective Time. These new provider
agreements do not provide the subsidies included in the existing provider
agreements with FHP. FHP will provide certain administrative services to TMMC on
an interim basis. FHP also will continue to lease to TMMC certain medical center
facilities and equipment. Prior to the Talbert Acquisition, TMMHC or TMMC, as
the case may be, will receive, in connection with the FHP Merger, a capital
contribution sufficient to increase its net worth to approximately $60 million
(the "Capital Contribution"). The amount of the Capital Contribution is
currently anticipated to be approximately $70 million.

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<PAGE>
PRINCIPAL STOCKHOLDERS OF TMMHC AND TMMC. TMMHC's Certificate of
Incorporation provides that TMMHC may issue up to 15 million shares of Talbert
Common Stock, and 1.2 million shares of preferred stock, par value $0.01 per
share (the "Talbert Preferred Stock"). Prior to the Talbert Rights Offering,
there will be 232,500 shares of TMMHC Common Stock and no shares of TMMHC
Preferred Stock issued and outstanding. Jack D. Massimino, the President and
Chief Executive Officer of TMMHC, will hold 150,000 shares and the remaining
82,500 shares will be held by a group of 11 other FHP and Talbert managers,
directors and former employees (collectively with Mr. Massimino, the "Management
Investors"). The shares held by the Management Investors are restricted, and
will not be available for purchase in the Talbert Rights Offering. As a result
of the Talbert Acquisition, FHP will acquire rights to purchase another
2,767,500 shares, or 92.25%, of the TMMHC Common Stock. In the event TMMHC does
not acquire FHP's interest in TMMC and THSC, the Talbert Rights will relate to
FHP's interest in TMMC. In such event, the capital structure of, and the
stockholdings of Management Investors in, TMMC will be substantially identical
to TMMHC.

TALBERT SUMMARY FINANCIAL INFORMATION.

The following selected historical financial information for the nine months
ended September 30, 1996 are derived from the unaudited combined financial
statements of Talbert.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenue (1)(2)................................................................................ $ 351,235
Expenses:
Affiliated medical services................................................................. 103,504
Purchased medical services.................................................................. 85,851
Dental services............................................................................. 20,443
Optometry, pharmacy and other primary health care services.................................. 80,181
Clinic operations........................................................................... 45,142
----------
Total cost of health care................................................................. 335,121
Marketing, general and administrative (3)................................................... 18,740
----------
Operating loss................................................................................ (2,626)
Interest income............................................................................... 1,199
Interest expense.............................................................................. (6,504)
----------
Loss before income taxes...................................................................... (7,931)
Benefit for income taxes...................................................................... 3,240
----------
Net loss...................................................................................... $ (4,691)
----------
----------
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
<S> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................................................... $ (29,672)
Total assets.................................................................................. 146,809
Long-term obligations......................................................................... 76,012
Stockholders' deficit (4)..................................................................... (4,590)
</TABLE>

- ------------------------
(1) Revenue is derived from prepaid Capitation Fees for ambulatory services,
plus patient copayments and fee-for service and, for the nine months ended
September 30, 1996, hospital incentive funds. Talbert did not incur any
hospital risk for the period presented.

(2) Nearly 100% of revenue was received from FHP. Revenue from FHP is capitated
by contract, which capitation rates have been subsidized by FHP. New
Capitation Contracts effective upon the Mergers, have been signed. The new
Capitation Contracts do not provide such subsidies.

(3) Includes cost of information system services, general administrative and
other corporate services provided by FHP.

(4) Does not reflect the Capital Contribution that will occur just prior to the
Effective Time that will result in stockholders' equity being approximately
$60 million.

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<PAGE>
REGULATORY MATTERS

STATE REGULATORY APPROVAL. HMOs and insurance companies are closely
regulated by the individual states or territories in which they operate.
Material modifications to the operational structure, financing, ownership or
other fundamental aspects of an HMO or an insurance company trigger state
regulatory oversight processes, which range from a requirement of notice to
state regulatory agencies to a formal review and approval process. In those
jurisdictions with a formal review and approval process, the regulatory agencies
may approve the material modification, approve it with conditions or deny
approval. Conditional approval may require changes in planned operations or
structure. Denial of approval would effectively block the material change.
PacifiCare and FHP anticipate that notice or approval will be required in most
of the jurisdictions in which PacifiCare Holding's regulated subsidiaries will
operate following the Mergers. The specific requirements and the scope of any
regulatory review are anticipated to vary significantly among states. FHP,
through its subsidiaries, operates HMOs and/or insurance companies in Arizona,
California, Colorado, Illinois, Indiana, Kentucky, New Mexico, Nevada, Ohio,
Texas, Utah and Guam. PacifiCare, through its subsidiaries, operates HMOs in
California, Florida, Oklahoma, Oregon, Texas and Washington. In addition,
PacifiCare has a life and health insurance company which is licensed to operate
in 37 states and the District of Columbia. Although requirements vary by state,
regulatory review of the Mergers (where required) will be based on, among other
factors: (i) continued compliance, after the Mergers, with requirements for
licensure of HMOs or insurance companies; (ii) effects on competition; (iii) the
financial condition of the HMO or insurance company after the Mergers; (iv)
plans or proposals for changes in business, corporate structure and management;
(v) competence, experience and integrity of those persons controlling the HMOs
or insurance company's operations; and (vi) whether the Mergers would be
hazardous or prejudicial to those buying health care coverage.

PacifiCare and FHP have filed applications with the regulatory agencies of
all applicable states seeking orders granting regulatory approval. PacifiCare
and FHP expect that required regulatory review will be completed by all states
by the end of the fourth quarter of calendar 1996, although there can be no
assurance that all state regulatory agencies will issue final orders by such
time. Further, there can be no assurance that all required approvals will be
granted, either with or without significant conditions. Affected persons, as
determined by a state regulatory agency, may be able to seek to participate in
proceedings on the Mergers. Although procedures vary by state, orders of state
regulatory agencies may be appealed by certain persons and the effectiveness of
an order could be stayed by the agency or a court while such an appeal is
pending. If approval is stayed, consummation of the Mergers could be delayed
pending such proceedings.

OTHER REGULATORY APPROVALS. Certain aspects of the Mergers will require
notification to, and filings with, various securities and other authorities in
certain states. The Mergers may also require notification to certain state and
federal government agencies that contract with PacifiCare's and FHP's HMOs.

Pursuant to the requirements of the HSR Act, each of PacifiCare, FHP,
PacifiCare Holding and UniHealth on August 22, 1996 filed Notification and
Report Forms and certain documentary attachments with respect to their
acquisitions of voting securities in the Mergers with the FTC and the Antitrust
Division. On September 20, 1996, the FTC issued a Second Request for additional
information and documentary material relevant to the Mergers to PacifiCare and
FHP which extends the waiting periods under the HSR Act and delays consummation
of the Mergers until 20 days after substantial compliance by each of PacifiCare
and FHP with the Second Request, unless the FTC grants early termination of the
HSR Act waiting period. PacifiCare and FHP are currently in the process of
responding to the Second Request. Additionally, the Attorney General of the
State of California has expressed interest in analyzing the potential effects of
the Mergers in California and has requested copies of all materials provided to
the FTC. PacifiCare and FHP have voluntarily agreed to provide information to
the California Attorney General under the terms of the National Association of
Attorneys General compact.

57
<PAGE>
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Mergers. At any time before or
after consummation of the Mergers, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Mergers, including seeking to enjoin consummation of the Mergers, to
cause the divestiture of significant assets of PacifiCare or FHP or their
subsidiaries or to impose conditions on PacifiCare Holding with respect to its
business operations. Based on information available to them, FHP and PacifiCare
do not believe that the consummation of the Mergers will result in the violation
of any antitrust laws. However, there can be no assurance that a challenge to
the Mergers on antitrust grounds will not be made, or, if such a challenge is
made, PacifiCare or FHP would prevail or would not be required to divest certain
assets or to accept certain conditions in order to consummate the Mergers.

ESTIMATED SYNERGIES

PacifiCare has announced publicly that it anticipates that the Mergers will
yield increased operating income primarily resulting from a combination of
reductions in marketing, general and administrative expenses and in medical
costs, the effects of new agreements with Talbert and the elimination of losses
from certain geographic areas. After an initial transition period, the annual
increase in operating income before tax (as compared, for each year, to the
estimated operating income of the two combined companies without synergies), net
of ongoing integration costs, is expected to be approximately $100 million,
increasing through fiscal 2000. The anticipated increase in operating income is
expected to be sufficient to offset the amortization of goodwill and other
intangibles related to the Mergers.

For fiscal 1997, marketing, general and administrative expense reductions
are currently anticipated to be approximately 60% of the total savings, with the
remainder coming primarily from medical cost improvements, the elimination of
losses from Talbert and the elimination of losses from certain geographic areas.
Reductions in marketing, general and administrative expenses are based upon the
combined company assessing its needs for overlapping functions such as
information systems, provider contracting systems, medical credentialing, sales
and marketing, and finance, accounting and other administrative functions,
particularly in overlapping markets and in corporate functions, and upon reduced
advertising and promotional expenditures. Expected reductions in medical costs
are based on assumptions that the combined company will improve provider
contracting and medical management strategies. The Talbert savings are expected
to result from the effects of new contracts entered into in advance of the
Talbert Rights Offering (see "-- Talbert Rights Offering").

After fiscal 1997, the improvements in operating income are expected to
result primarily from reductions in marketing, general and administrative
expenses, medical cost improvements and from savings from Talbert.

Expected income synergies do not include any normal business or other
revenue growth, or the effect of future general economic conditions.

THE ESTIMATES OF SYNERGIES SET FORTH ABOVE WERE NOT PREPARED WITH A VIEW TO
PUBLIC DISCLOSURE. THE ESTIMATES ARE BASED UPON A VARIETY OF ASSUMPTIONS
RELATING TO THE BUSINESS OF PACIFICARE AND FHP WHICH MAY NOT BE REALIZED AND ARE
SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES. THE ESTIMATED SYNERGIES
ARE SUBJECT TO MATERIAL RISKS AND UNCERTAINTIES BEYOND THE CONTROL OF PACIFICARE
AND FHP. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ESTIMATED SYNERGIES
WILL BE REALIZED, AND ACTUAL SYNERGIES, IF ANY, MAY VARY MATERIALLY FROM THOSE
SHOWN. THE INCLUSION OF SUCH ESTIMATES HEREIN SHOULD NOT BE REGARDED AS AN
INDICATION THAT PACIFICARE, FHP, PACIFICARE HOLDING OR ANY OTHER PERSON
CONSIDERS THEM AN ACCURATE PREDICTION OF FUTURE EVENTS. NONE OF PACIFICARE, FHP,
OR PACIFICARE HOLDING OR ANY OTHER PERSON INTENDS PUBLICLY TO UPDATE OR
OTHERWISE PUBLICLY REVISE THE ESTIMATED SYNERGIES SET FORTH ABOVE EVEN IF
EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT SUCH SYNERGIES WILL NOT BE
REALIZED.

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<PAGE>
THE INDEPENDENT ACCOUNTANTS FOR PACIFICARE, FHP AND PACIFICARE HOLDING HAVE
NOT EXAMINED OR COMPILED THESE ESTIMATES AND ACCORDINGLY DO NOT EXPRESS AN
OPINION OR ANY OTHER FORM OF ASSURANCE ON THEM.

THE ESTIMATED SYNERGIES SET FORTH ABOVE CONSTITUTE FORWARD LOOKING
INFORMATION. FOR A DISCUSSION OF FACTORS REGARDING SUCH FORWARD LOOKING
INFORMATION, SEE "-- FACTORS FOR FORWARD LOOKING INFORMATION."

FACTORS FOR FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves without fear of litigation so long as
those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, PacifiCare and FHP hereby identify the following important factors
which could cause PacifiCare's and FHP's actual results to differ materially
from any such results which might be projected, forecast, estimated or budgeted
by PacifiCare or FHP in forward-looking statements, including among other things
the estimated synergies:

(i) Heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the formation of new
products by new and existing competitors, especially with respect to
Medicare products;

(ii) Adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and reserves and
other financial viability requirements, prohibition or limitation of
capitated arrangements or provider financial incentives, benefit mandates
(including mandatory length of stay and emergency room coverage),
limitations on the ability to manage care and utilization and any willing
provider or pharmacy laws;

(iii) Increases in medical costs, including increases in utilization and
costs of medical services and the effects of actions by competitors or
groups of providers;

(iv) Termination of provider contracts or renegotiation thereof at less
cost-effective rates or terms of payment;

(v) Price increases in pharmaceuticals, durable medical equipment and
other covered items;

(vi) Adverse actions of governmental payors, including unilateral
reduction of Medicare and Medicaid premiums payable to PacifiCare or FHP,
discontinuance of or limitations on governmentally-funded programs and
recovery by governmental payors of previously paid amounts;

(vii) Inability to increase premiums or prospective or retroactive
reductions to premium rates for federal employees notwithstanding increases
in medical costs due to competition, government regulation, or other
factors;

(viii) Loss of HMO members;

(ix) Failure to obtain new customers, retain existing customers or
reductions in force by existing customers;

(x) Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers, or academic medical
institutions;

(xi) Adverse publicity and news coverage;

(xii) Inability to carry out marketing and sales plans;

(xiii) Loss or retirement of key executives or key employees;

(xiv) Denial of accreditation by independent quality accrediting agencies;

59
<PAGE>
(xv) Adverse results in ongoing OPM audits or in other reviews conducted
by federal or state agencies or health care purchasing cooperatives;

(xvi) Adverse results in significant litigation matters;

(xvii) Adverse regulatory determinations resulting in loss or limitations
of licensure, certification or contracts with governmental payors;

(xviii) Higher service, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative, or
management information systems expenditures;

(xix) Changes in interest rates causing an increase in interest expense;
and

(xx) Increases by regulatory authorities of minimum capital, reserve and
other financial viability requirements.

In addition to the foregoing, the ability of PacifiCare Holding to realize
the increases in operating income referred to in "-- Estimated Synergies" is
also subject to the following additional uncertainties, among others:

(i) The ability to integrate the PacifiCare and FHP management and
information systems on a timely basis, if at all;

(ii) The ability to eliminate duplicative functions while maintaining
acceptable performance levels;

(iii) The fact that PacifiCare Holding will be subject to greater
operating leverage due to its higher levels of indebtedness relative to
PacifiCare and FHP as of the date of this Joint Proxy Statement/Prospectus;

(iv) The possibility that such integration will result in the loss of
providers, employers, members or key employees of PacifiCare Holding or its
subsidiaries; and

(v) The possibility that the Talbert Rights Offering will not be fully
subscribed, that FHP will continue to own a significant equity interest in
TMMHC and that the synergies related to new contracts with Talbert will not
be realized.

In addition to the foregoing, all of the factors discussed in "Risk Factors"
may cause actual results to differ materially from any such results which might
be projected, forecast, estimated or budgeted by PacifiCare or FHP in
forward-looking statements.

Many of the foregoing factors discussed have been discussed in prior filings
of PacifiCare and FHP with the Commission. The foregoing review of factors
pursuant to the Private Litigation Securities Reform Act of 1995 should not be
construed as exhaustive.

STOCK OPTIONS; BENEFIT PLANS

FHP. Pursuant to the Reorganization Agreement, at least 20 days before the
date of the FHP Meeting, PacifiCare is obligated to notify FHP if it wishes to
provide a mechanism to cash out either vested or all outstanding FHP Options to
purchase FHP Common Stock. If PacifiCare wishes to provide such a mechanism,
PacifiCare shall offer (in a form reasonably acceptable to FHP) to each holder
of applicable FHP Options, the right to receive at the Effective Time, in return
for the cancellation of such option, an amount equal to: (i) the product of the
value of the consideration to be received for each share of FHP Common Stock
covered by the cash out multiplied by the number of shares of FHP Common Stock
with respect to which such option is exercisable, less (ii) the aggregate
exercise price of such options. The amount paid to any holder of FHP Options
following such payment and cancellation shall be net of applicable withholding
taxes. In calculating the consideration to be received for each share of FHP
Common Stock, the value of PacifiCare Holding Class A Common will be deemed to
be equal to the average closing price of PacifiCare Class A Common Stock, as
reported by the Wall Street Journal, during the 20 trading days ending the day
before the FHP Meeting (the "Average Closing Price of PacifiCare Class A Common
Stock"), the value of PacifiCare Class B

60
<PAGE>
Common Stock will be deemed to be equal to the Average Closing Price of
PacifiCare Class B Common Stock and the value of the Talbert Rights will be
deemed to be equal to the average of the closing prices of such rights during
the first five days of trading.

Pursuant to the Reorganization Agreement, PacifiCare Holding and PacifiCare
will cause each FHP Option not cashed out to be replaced, effective as of the
Effective Time, by a substitute option of PacifiCare Holding (an "Exchange
Option") issued under a PacifiCare Holding stock option plan that complies in
all respects with the applicable requirements of Rule 16b-3 promulgated under
the Exchange Act. The per share exercise price of an Exchange Option shall equal
the quotient, rounding up to the nearest cent, of (i) the per share exercise
price of the corresponding FHP Option, less the average closing price at which
the Talbert Rights trade on their first five trading days after issuance, as
quoted in the Wall Street Journal, ("Talbert Rights" for this purpose means the
portion of a Talbert Right into which one share of FHP Common Stock is converted
in part) divided by (ii) the fraction of a share of PacifiCare Holding Class B
Common that the holder of such FHP Option is entitled to purchase for each share
of FHP Common Stock subject to such FHP Option, as determined in the next
sentence. For each share of FHP Common Stock subject to such FHP Option, the
Exchange Option shall entitle the holder thereof to purchase a fraction of a
share of PacifiCare Holding Class B Common equal to the sum of (i) the fraction
of a share of PacifiCare Holding Class B Common into which one share of FHP
Common Stock actually outstanding at the Effective Time is converted pursuant to
the Reorganization Agreement, plus (ii) the fraction of a share of PacifiCare
Holding Class B Common that could be purchased at the Average Closing Price of
PacifiCare Class B Common Stock for $17.50, plus (iii) the fraction of a share
of PacifiCare Holding Class B Common that could be purchased at the Average
Closing Price of PacifiCare Class B Common Stock for an amount equal to the
product of the fraction of a share of PacifiCare Holding Class A Common into
which one share of FHP Common Stock actually outstanding at the Effective Time
is converted pursuant to the Reorganization Agreement times the Average Closing
Price of PacifiCare Class A Common Stock. Any restriction on the exercise of any
FHP Option shall apply to the Exchange Option and the term, exercisability,
vesting schedule and other provisions of such FHP Option shall similarly apply
to the Exchange Option; provided, however, in the case of an Exchange Option of
a person who is an employee of FHP or one of its subsidiaries, such Exchange
Option shall provide that (i) any unvested shares, the vesting of which depends
on achievement by FHP of earnings or financial performance of FHP for a fiscal
year beginning on or after July 1, 1996, shall instead vest no later than 25%
per year over a four-year period, with the first 25% vesting on July 1, 1997;
and (ii) if the holder of such Exchange Option is terminated without cause after
the Mergers and before the date as of which, determined as of the date of
execution of the Original Reorganization Agreement and assuming no termination
of any employee and the application of the vesting schedule in immediately
preceding clause (i) above, there would remain no more than 100,000 shares of
PacifiCare Holding Class B Common subject to such Exchange Options in the
aggregate that are not vested, such option shall thereupon become fully vested;
provided, further, that in the case of an Exchange Option of a person who is an
employee of Talbert, if the Talbert Rights Offering is consummated in such a
manner that Talbert would no longer be considered a subsidiary of FHP for
purposes of such Exchange Option, the employment of such person by FHP or one of
its subsidiaries shall be deemed terminated for the convenience of FHP and the
accelerated vesting rights set forth in the foregoing proviso shall not apply;
and provided, further, that in the case of a holder of an Exchange Option who is
a director of FHP or one of its subsidiaries and who is not an employee of FHP
or any of its subsidiaries, the Exchange Option shall vest immediately when such
holder no longer is serving as a director of PacifiCare Holding or FHP or one of
their subsidiaries. As soon as practicable after the Effective Time, PacifiCare
Holding shall file with the Commission a registration statement on Form S-8 with
respect to the shares of PacifiCare Holding Class B Common underlying the
Exchange Options and use its reasonable best efforts to have such registration
statement declared effective under the Act. FHP may amend certain employment
agreements to adjust the terms and conditions for vesting of FHP Options held by
employees party to such agreements, provided the adjusted vesting is no more
favorable than acceleration upon a "Change of Control" as defined in such
agreements and does not render nondeductible to FHP any amounts under Section
280G of the Code, and further provided any such adjustment shall neither
increase

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<PAGE>
other benefits or amounts payable by FHP nor increase the number of shares or
decrease the exercise price under any FHP Option now outstanding. See "--
Interests of Certain Persons in the Mergers" for a discussion of the
acceleration of vesting of certain FHP Options in connection with the FHP
Merger.

A description of the procedures to be followed by PacifiCare Holding and FHP
with respect to FHP's employee stock purchase plan and other employee benefits
is contained in Sections 4.08(c) and 4.08(d) of the Reorganization Agreement.
See Appendix A attached hereto.

PACIFICARE. At the Effective Time, each outstanding option to purchase
shares of PacifiCare Class B Common Stock (a "PacifiCare Class B Option") under
any of PacifiCare's stock options plans shall be canceled and PacifiCare Holding
shall issue in substitution therefor an option to purchase PacifiCare Holding
Class B Common (a "PacifiCare Holding Class B Substitute Option"). The exercise
price and the number of shares of PacifiCare Holding Class B Common subject to
each PacifiCare Holding Class B Substitute Option shall be identical to the
exercise price and the number of shares of PacifiCare Class B Common Stock
subject to the PacifiCare Class B Option that such PacifiCare Holding Class B
Substitute Option replaces, and each such PacifiCare Holding Class B Substitute
Option shall be subject to substantially all of the other terms and conditions
of the PacifiCare stock option plan it replaces. At the Effective Time, each
outstanding option to purchase shares of PacifiCare Class A Common Stock (a
"PacifiCare Class A Option") shall be converted into an option to purchase a
share of PacifiCare Holding Class A Common (a "PacifiCare Holding Class A
Substitute Option"). The exercise price and the number of shares of PacifiCare
Holding Class A Common subject to each PacifiCare Holding Class A Substitute
Option shall be identical to the exercise price and the number of shares of
PacifiCare Class A Common Stock subject to the PacifiCare Class A Option that
such PacifiCare Holding Class A Substitute Option replaces, and each such
PacifiCare Holding Class A Substitute Option shall be subject to substantially
all of the other terms and conditions of the PacifiCare Class A Option it
replaces. Under the terms of PacifiCare's option plans, the Mergers constitute a
change in control of PacifiCare which will cause all unvested options to vest at
the Effective Time. PacifiCare will seek waivers of this acceleration provision
from certain of its executive officers in exchange for the grant of additional
options. See "The Mergers and Related Transactions -- Interests of Certain
Persons in the Mergers -- Options held by Directors and Officers of PacifiCare."

VOTING AND NON-DISPOSITION AGREEMENTS

Pursuant to the UniHealth Voting Agreement, UniHealth, which holds, as of
the PacifiCare Record Date, in the aggregate approximately 47.7% of the
outstanding PacifiCare Class A Common Stock, has agreed to vote such shares in
favor of the adoption and approval of the Reorganization Agreement and has
delivered to FHP an irrevocable proxy with respect to the same. In addition,
UniHealth has agreed not to sell, transfer or otherwise dispose of shares of
PacifiCare Class A Common Stock beneficially owned or subsequently acquired by
it until the earliest of (i) the consummation of the Mergers, (ii) the
termination of the Reorganization Agreement, or (iii) April 30, 1997.

Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W. Price III have
entered into the FHP Stockholder Voting Agreements with respect to shares
beneficially owned by them and certain shares beneficially owned by Other
Persons. As of the FHP Record Date, Messrs. Anderson, Burdge and Price
beneficially owned and were entitled to vote approximately 2.4% of the
outstanding FHP Common Stock and approximately 9.8% of the outstanding FHP
Preferred Stock, and the Other Persons beneficially collectively owned and were
entitled to vote approximately 1.2% of the outstanding FHP Common Stock and
approximately 6.9% of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i) agreed to vote the
shares beneficially owned by them in favor of the Reorganization Agreement and
the Series A Amendment; (ii) agreed to use their best efforts to cause the Other
Persons to vote in favor of the Reorganization Agreement and the Series A
Amendment; (iii) granted proxies to officers of PacifiCare to vote shares
beneficially owned by them in favor of the Reorganization Agreement and the
Series A Amendment; and (iv) agreed to use their best efforts to cause the Other
Persons to deliver proxies to PacifiCare to vote shares beneficially owned by
such Other Persons in favor of the Reorganization Agreement and the

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<PAGE>
Series A Amendment. As of the FHP Record Date, proxies with respect to
approximately 1.2% of the outstanding FHP Common Stock and approximately 6.9% of
the outstanding FHP Preferred Stock had been received by PacifiCare from the
Other Persons.

AFFILIATE AGREEMENTS

It is a condition to consummation of the Mergers that each stockholder who
may be deemed to be an "affiliate," as such term is defined in Rule 145 of the
Act, of PacifiCare or FHP will execute an agreement that prohibits the sale,
pledge, transfer or other disposition of PacifiCare Holding Class A Common,
PacifiCare Holding Class B Common or PacifiCare Holding Preferred unless at such
time either: (i) such transfer shall be in conformity with the provisions of
Rule 145 under the Act; (ii) the stockholder shall have furnished to PacifiCare
Holding an opinion of counsel reasonably satisfactory to PacifiCare Holding, to
the effect that no registration under the Act would be required in connection
with the proposed offer, sale, pledge, transfer or other disposition; (iii) a
registration statement under the Act covering the proposed offer, sale, pledge,
or other disposition shall be effective under the Act; or (iv) if the
stockholder is a partnership, such transfer shall be a pro rata distribution
from the stockholder to its partners without receipt of consideration, in which
case each distributee shall receive stock certificates bearing appropriate
legends.

INTERESTS OF CERTAIN PERSONS IN THE MERGERS

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF PACIFICARE HOLDING
GENERALLY. From and after the Effective Time, until successors are duly elected
or appointed and qualified in accordance with applicable law, the Board of
Directors of PacifiCare Holding will consist of 12 directors, including the
current directors of PacifiCare immediately prior to the Effective Time, Jack R.
Anderson and Joseph F. Prevratil, current directors of FHP designated by the
Board of Directors of FHP, and Craig T. Beam and Bradley C. Call, designated by
the PacifiCare Board of Directors. The new directors designated by the FHP Board
of Directors shall: (i) be appointed to different classes; (ii) commence to
serve within 60 days of the Effective Time; and (iii) remain as directors until
their successors have been duly elected or until their earlier death, removal or
resignation, provided that they shall be renominated as required to be able to
serve a minimum of three years. If, prior to the end of such period, either of
the directors designated by the FHP Board of Directors becomes unable to serve
as a director, or is no longer qualified to serve as a director, the remaining
director (or his successor) shall select a replacement nominee (which nominee
shall be satisfactory to the PacifiCare Holding Board of Directors) to be
appointed to serve the remaining term.

It is expected that Terry O. Hartshorn will serve as Chairman of the
PacifiCare Holding Board of Directors, that Alan R. Hoops will serve as
PacifiCare Holding's President and Chief Executive Officer and that the other
individuals referred to in "Management of PacifiCare Holding -- Executive
Officers" will be executive officers of PacifiCare Holding.

OPTIONS HELD BY DIRECTORS AND OFFICERS OF PACIFICARE. Pursuant to the
provisions of PacifiCare's stock option plans, upon the consummation of the
Mergers, all unvested options held for at least six months by non-employee
directors and granted under the PacifiCare Directors Stock Option Plan will vest
in full and all other options held for at least six months by directors,
officers and employees of PacifiCare will be eligible to vest in full; however,
PacifiCare is requesting that certain of its executive officers waive this
acceleration provision. In exchange for this waiver, PacifiCare will grant each
of these executive officers additional options to purchase shares of PacifiCare
Class B Common Stock equal to approximately the number of options for which a
waiver is obtained. The grant of these additional options is contingent upon
receipt of the waiver and the closing of the Mergers. The additional options
will have terms consistent with existing options, except that vesting of the
options may be based, in part, upon the future performance of PacifiCare Holding
and the exercise price of such options will be the fair market value of the
PacifiCare Class B Common Stock at the time of grant.

OFFICERS AND DIRECTORS OF FHP. Certain members of FHP's management and
Board of Directors may be deemed to have certain interests in the Mergers that
are in addition to their interests as

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stockholders of FHP generally. The FHP Board of Directors was aware of these
interests and considered them, among other matters, in approving the
Reorganization Agreement and the transactions contemplated thereby.

FHP has entered into employment agreements dated various dates (each, an
"Employment Agreement" and collectively, "Employment Agreements") with each of
the following executives (each, an "Executive"): Gloria L. Austin, Senior Vice
President, Talbert, California Division; Robert N. Franklin, Senior Vice
President, Public Affairs; Larry D. Gray, President, FHP, Inc. (California
Region); Burke F. Gumbiner, Director, Senior Vice President and President,
Insurance Division; Jeffrey H. Margolis, Senior Vice President and Chief
Information Officer; Jack D. Massimino, President and CEO, Talbert; Roger
Moseley, President, Great States Insurance Company; Kenneth S. Ord, Senior Vice
President and Chief Financial Officer; Westcott W. Price III, President, Chief
Executive Officer and Vice Chairman of the Board; Eric D. Sipf, Senior Vice
President; and Michael J. Weinstock, General Counsel, Secretary and Senior Vice
President. Pursuant to Section 4.20 of the Reorganization Agreement, upon
effectiveness of the Mergers, PacifiCare has agreed to perform each of the
Employment Agreements in the same manner and to the same extent that FHP would
be required to perform such agreements. The Employment Agreements with Jack D.
Massimino and Gloria L. Austin may be replaced with similar agreements between
such persons and Talbert.

Each Employment Agreement provides that upon the date (the "Effective Date")
upon which a "Change of Control" occurs (defined under the Employment Agreements
to include the Mergers), FHP will continue to employ the Executive for the
period commencing on the Effective Date and ending on the third anniversary of
the Effective Date (the "Employment Period"). During the Employment Period, the
Executive's position, authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date. During the Employment Period the Executive shall
receive an annual base salary ("Annual Base Salary"), subject to periodic
review, at least equal to twelve times the highest monthly base salary paid or
payable, including any base salary which has been earned but deferred, to the
Executive by FHP and its affiliated companies in respect of the twelve-month
period immediately preceding the month in which the Effective Date occurs. In
addition, the Executive shall be entitled to participate in all benefit programs
applicable to other peer executives of FHP and its affiliated companies.

Each Employment Agreement contains provisions for termination of the
Executive's employment under various circumstances including death, Disability,
Cause or Good Reason (each as defined in the Employment Agreement).

If, during the Employment Period, FHP shall terminate the Executive's
employment other than for Cause, death or Disability or the Executive shall
terminate employment for Good Reason, FHP shall be required to pay to the
Executive the following payments and benefits: (i) bi-weekly salary continuation
at the Executive's Annual Base Salary as if the Executive had remained employed
through the end of the Employment Period; (ii) medical and dental coverage
continuation through the end of the Employment Period at the Executive's benefit
level as the date of termination; (iii) life insurance coverage continuation
through the end of the Employment Period at the Executive's current benefit
level as of the date of termination; (iv) out-placement services; (v) a payment
and other benefits determined by reference to the Executive's participation in
the ESOP and the FHP Money Purchase Pension Plan and in the manner provided in
the Employment Agreement; (vi) payment of all accrued vacation, holiday and
personal leave days as of the date of termination; and (vii) payment of any
unpaid incentive compensation, all as determined in the manner set forth in the
Employment Agreement.

If the Executive's employment is terminated by reason of the Executive's
death during the Employment Period, the Employment Agreement shall terminate
without further obligations to the Executive's legal representatives, other than
for payment of certain benefits specified in the Employment Agreement ("Other
Benefits"). If the Executive's employment is terminated by reason of the
Executive's Disability during the Employment Period, the Employment Agreement
shall terminate without further obligations to the Executive, other than for
payment of accrued obligations and Other

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Benefits. If the Executive's employment is terminated for Cause during the
Employment Period, the Employment Agreement shall terminate without further
obligations to the Executive other than the obligation to pay to the Executive:
(i) his Annual Base Salary through the date of termination; (ii) the amount of
any compensation previously deferred by the Executive; and (iii) Other Benefits,
in each case to the extent theretofore unpaid. If the Executive voluntarily
terminates employment during the Employment Period, excluding termination for
Good Reason, the Employment Agreement shall terminate without further
obligations to the Executive, other than for accrued obligations and the timely
payment or provision of Other Benefits.

Each Employment Agreement also contains provisions with respect to the
acceleration of options. Upon a termination of employment other than voluntarily
or for Cause, Death or Disability, after a Change of Control and prior to the
end of the Employment Period, all outstanding options held by the Executive
vest, except to the extent such vesting would result in an "excess parachute
payment" nondeductible by FHP or would prevent accounting for the Change of
Control as a "pooling-of-interests." Options that do not vest by reason of the
exception become exercisable in accordance with their original vesting schedule
and remain exercisable until 90 days thereafter (or, if earlier, until the
original expiration date), provided that in the case of certain of such
Employment Agreements the Executive satisfies all three of the following
requirements: (i) the Executive must execute and deliver to FHP a Settlement and
Release Agreement waiving all claims against FHP and its affiliates (other than
obligations under the Employment Agreement and vested employee benefits) within
30 days after the Executive's Date of Termination; (ii) at or before the
Effective Time, the Executive must have executed and delivered to FHP a Covenant
Not to Compete for the period through the end of the Employment Period, imposing
certain restrictions upon the Executive conducting the same business in the same
cities and counties as carried on by FHP in California at the Effective Time
(the nature of the restrictions varies depending on the position of the
Executive); and (iii) requiring the Executive to serve without compensation as a
director, after the Effective Time, of any corporation controlling, under common
control with or controlled by FHP, if requested to do so and for so long as such
corporation may require (but not beyond the end of the Employment Period).

Messrs. Price, Ord and Weinstock, respectively, hold 20,250, 3,000 and 3,000
shares of TMMC, of which 15,187.5, 2,250 and 2,250 shares, respectively, are
subject to restrictions on vesting relating to achievement by Talbert of
performance goals and continued employment by FHP. If TMMHC acquires FHP's
interest in TMMC and THSC, such individuals will exchange their shares in TMMC
for an equal number of shares in TMMHC which will be subject to the restrictions
set forth above. In September 1996, the Board of Directors authorized the
removal of such restrictions as they related to continued employment by FHP in
the event of a termination without cause of such individuals following a Change
of Control of FHP.

DIVIDENDS

Pursuant to the Restated Certificate, PacifiCare Holding shall make dividend
payments at the rate of $1.00 per share per annum to the holders of the
PacifiCare Holding Preferred, if any; moreover, PacifiCare Holding shall, on the
first date after the Mergers that dividends are payable, make dividend payments
to reflect the dividend rate payable on the FHP Preferred Stock from the last
dividend payment date prior to the Effective Time for the FHP Preferred Stock to
the Effective Time and the dividend rate payable on the PacifiCare Holding
Preferred from the Effective Time to the first dividend payment after the
Mergers. PacifiCare Holding has no current intention to pay dividends to holders
of PacifiCare Holding Class A Common or PacifiCare Holding Class B Common.

NASDAQ NATIONAL MARKET

The PacifiCare Holding Class A Common, PacifiCare Holding Class B Common and
PacifiCare Holding Preferred have been approved for quotation on the Nasdaq
National Market. Prior to the Effective Time, there has been no public market
for PacifiCare Holding Class A Common, PacifiCare Holding Class B Common or
PacifiCare Holding Preferred.

MERGER EXPENSES AND FEES AND OTHER COSTS

PacifiCare and FHP estimate that they will incur direct transaction costs of
approximately $105 million associated with the Mergers. These nonrecurring
transaction costs will be included as a

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cost of the Mergers and allocated to the assets acquired and liabilities
assumed. In addition, PacifiCare Holding anticipates incurring additional costs
and expenses relating to integrating PacifiCare and FHP. These costs will be
charged to operations as incurred and cannot be reasonably determined at this
time.

Whether or not the Mergers are consummated, except as set forth herein, each
party will bear its own costs and expenses in connection with the Mergers and
the transactions contemplated in the Reorganization Agreement. PacifiCare has
paid to Dillon Read for its services a fee of $1 million and has agreed to pay
Dillon Read an additional fee of approximately $7 million upon the closing of
the Mergers. PacifiCare has also agreed to reimburse Dillon Read for its
reasonable expenses and to indemnify Dillon Read against certain liabilities in
connection with its engagement.

FHP has paid to Merrill Lynch for its services a fee of $1 million and has
agreed to pay Merrill Lynch an additional fee of $6.5 million, payable upon the
closing of the Mergers (less any fees paid previously by FHP to Merrill Lynch
with respect to Talbert). FHP has also agreed to reimburse Merrill Lynch for
certain of its reasonable out-of-pocket expenses and to indemnify Merrill Lynch
against certain liabilities related to or arising out of its engagement.

ACCOUNTING TREATMENT

The FHP Merger will be accounted for by PacifiCare Holding under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. Under the purchase method of accounting, the purchase price of the
FHP Capital Stock, including direct and incremental costs of the FHP Merger,
will be allocated to the assets acquired and liabilities assumed based upon
their estimated fair value, with the excess purchase consideration allocated to
goodwill. The conversion of PacifiCare Class A Common Stock and PacifiCare Class
B Common Stock will be treated as a reorganization with no change in the
recorded amount of PacifiCare's assets and liabilities.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material United States federal income tax
consequences of the Mergers to PacifiCare, FHP, the PacifiCare stockholders and
the FHP stockholders. The summary is based upon the Code, administrative
pronouncements, judicial decisions and Treasury regulations, subsequent changes
to any of which may affect the tax consequences described herein. The summary
does not purport to be a comprehensive description of all of the tax
consequences applicable to a particular taxpayer. In particular, the summary
does not address the tax treatment to holders subject to special tax rules, such
as banks, insurance companies, dealers in securities or stockholders who
acquired their stock pursuant to the exercise of employee stock options or
otherwise as compensation. In addition, the summary only applies to a holder who
is a United States citizen or resident, a United States corporation, partnership
or other entity created or organized under the laws of the United States, or an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source and (i) who holds shares of PacifiCare Common
Stock as capital assets; or (ii) who holds shares of FHP Capital Stock (and
Talbert Rights and stock of Talbert obtainable upon exercise of Talbert Rights)
as capital assets. PacifiCare and FHP stockholders are urged to consult their
tax advisors as to the particular United States federal income tax consequences
to them of the Mergers and as to the foreign, state, local and other tax
consequences thereof.

Except with respect to the Cash Consideration and the fair market value of
the Talbert Rights received by the FHP stockholders pursuant to the FHP Merger,
the Mergers have been structured to qualify as tax-deferred transactions under
the Code. The obligations of PacifiCare and FHP to consummate the Mergers are
conditioned on receipt by PacifiCare of an opinion from Cooley Godward LLP,
counsel to PacifiCare, and by FHP of an opinion from Sheppard, Mullin, Richter &
Hampton LLP, counsel to FHP, that the Mergers so qualify. See "The
Reorganization Agreement -- Conditions to the Mergers." Such opinions shall be
based upon certain facts, assumptions and representations contained in
certificates of officers of PacifiCare Holding, FHP and PacifiCare. Opinions of
counsel are not binding on the IRS or the courts, and the parties do not intend
to request a ruling from the IRS with respect to the Mergers. Accordingly, there
can be no assurance that the IRS will not challenge such conclusion or that a
court will not sustain such challenge.

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Cooley Godward LLP has provided an opinion to PacifiCare to the effect that
neither PacifiCare nor any of its stockholders will recognize gain or loss for
United States federal income tax purposes as a result of the PacifiCare Merger,
and accordingly that the PacifiCare Merger will have the consequences set forth
below under "-- Tax Consequences of the PacifiCare Merger" to PacifiCare and its
stockholders. Sheppard, Mullin, Richter & Hampton LLP has provided an opinion to
FHP to the effect that, under current law, the FHP Merger will constitute a
contribution of FHP Capital Stock by the stockholders of FHP to PacifiCare
Holding pursuant to the FHP Merger in exchange for the PacifiCare Holding Common
and PacifiCare Holding Preferred (together with the Cash Consideration and the
Talbert Rights, collectively, the "FHP Merger Consideration") will constitute
part of a transaction governed by Section 351, and accordingly that the FHP
Merger will have the tax consequences set forth below under "-- Tax Consequences
of the FHP Merger" to the FHP stockholders. Each of such opinions referred to
above is subject to the conditions, qualifications and assumptions set for
therein and has been filed as an exhibit to the Registration Statement.

TAX CONSEQUENCES OF THE PACIFICARE MERGER

TAX CONSEQUENCES TO PACIFICARE STOCKHOLDERS. PacifiCare stockholders will
not recognize income, gain or loss upon the receipt of shares of PacifiCare
Holding Common in exchange for their shares of PacifiCare Common Stock. The tax
basis of the shares of PacifiCare Holding Common received by PacifiCare
stockholders will be the same as the tax basis of the shares of PacifiCare
Common Stock exchanged therefor. The holding period of the shares of PacifiCare
Holding Common received by PacifiCare stockholders will include the holding
period of the shares of PacifiCare Common Stock surrendered therefor.

TAX CONSEQUENCES TO PACIFICARE AND PACIFICARE HOLDING. No income, gain or
loss will be recognized by PacifiCare or PacifiCare Holding pursuant to the
PacifiCare Merger.

TAX CONSEQUENCES OF THE FHP MERGER

TAX CONSEQUENCES TO FHP STOCKHOLDERS. Subject to the discussion below
concerning fractional shares, each FHP stockholder (other than a stockholder who
exercises and perfects appraisal rights and holders of FHP Preferred Stock who
receive all cash following exercise of Special Conversion Rights) will recognize
gain (but not loss) measured by the lesser of either: (i) the sum of the Cash
Consideration and the fair market value at the Effective Time of the Talbert
Rights received by such stockholder pursuant to the FHP Merger; or (ii) the
excess, if any, of (a) the sum of the Cash Consideration plus the fair market
value at the Effective Time of the Talbert Rights and either the PacifiCare
Holding Common or PacifiCare Holding Preferred received by such stockholder
pursuant to the FHP Merger, over (b) the tax basis of such stockholder's FHP
Capital Stock. Such gain, if any, should be treated as long-term capital gain if
such FHP Capital Stock was held as a capital asset for more than one year at the
time of the consummation of the FHP Merger. However, the IRS may contend that
the Talbert Rights Offering should be treated as a distribution in respect of
FHP Capital Stock, and, if such a contention were successful, the fair market
value of the Talbert Rights would be treated as ordinary dividend income to the
extent of FHP's current and accumulated earnings and profits as calculated for
federal income tax purposes. An FHP stockholder who holds more than one block of
FHP Capital Stock (i.e., shares acquired at different times or prices) will
determine the amount of gain recognized and loss not recognized pursuant to the
FHP Merger separately with respect to each such block of FHP Capital Stock. For
this purpose, all of the Cash Consideration, Talbert Rights and PacifiCare
Holding Common or PacifiCare Holding Preferred received by a holder of FHP
Capital Stock will be allocated among the blocks of FHP Common Stock or FHP
Preferred Stock surrendered by such holder in proportion to their relative fair
market values at the Effective Time.

The aggregate tax basis of the shares of PacifiCare Holding Common and
PacifiCare Holding Preferred received by an FHP stockholder, including any
fractional shares deemed to be received, will be the same as the aggregate tax
basis of the shares of FHP Capital Stock exchanged therefor (i) increased by the
gain recognized (as calculated above) and (ii) decreased by the Cash
Consideration and the fair market value at the Effective Time of the Talbert
Rights received by such stockholder. The

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aggregate tax basis will be allocated among the stockholder's PacifiCare Holding
Class A Common, PacifiCare Holding Class B Common and PacifiCare Holding
Preferred received in the FHP Merger, including fractional shares deemed to be
received, in proportion to their relative fair market values at the Effective
Time. The holding period of the shares of PacifiCare Holding Common and shares
of PacifiCare Holding Preferred received by FHP stockholders will include the
holding periods of the shares of FHP Capital Stock surrendered therefor.

FHP stockholders who receive cash with respect to fractional shares will be
treated as having received such fractional shares pursuant to the FHP Merger and
then as having sold those fractional shares in the market for cash. Such FHP
stockholders will recognize gain or loss with respect to such fractional shares
in an amount equal to the difference between the tax basis allocated to such
fractional shares (as calculated above), and the cash so treated as received in
respect thereof. Any such gain or loss will be capital gain or loss and will
constitute long-term capital gain or loss if the holding period of such
fractional shares (as determined above) exceeds one year.

EXERCISE, SALE OR LAPSE OF TALBERT RIGHTS. An FHP stockholder who exercises
Talbert Rights will not recognize gain or loss as a result of such exercise. The
basis of stock received upon such exercise will include both the exercise price
and the fair market value of such Talbert Rights at the Effective Time. The
holding period of the stock acquired will commence upon exercise. An FHP
stockholder who sells Talbert Rights will recognize short-term capital gain or
loss upon the sale. An FHP stockholder who allows a Talbert Right to lapse will
recognize a short-term capital loss when the Talbert Right expires without
having been exercised.

TAX CONSEQUENCES TO FHP. No income, gain or loss will be recognized by FHP
upon the FHP Merger, except that, in connection with the Talbert Rights
Offering, FHP will recognize gain in the amount by which the fair market value
of the Talbert Common Stock exceeds the basis of FHP in its shares of Talbert
Common Stock and will recognize any remaining income, gain or loss with respect
to deferred intercompany transactions between FHP and Talbert.

TAX CONSEQUENCES OF INVESTMENT IN PACIFICARE HOLDING PREFERRED

DIVIDENDS AND OTHER DISTRIBUTIONS. Distributions on PacifiCare Holding
Preferred will be taxable as ordinary dividend income to the extent of
PacifiCare Holding's current or accumulated earnings and profits, as determined
for federal income tax purposes. Any distribution in excess of current or
accumulated earnings and profits will be treated first as a nontaxable recovery
of the holder's tax basis in the PacifiCare Holding Preferred, and thereafter as
gain from the sale or exchange of the PacifiCare Holding Preferred.

Any portion of a distribution on PacifiCare Holding Preferred that is
treated as ordinary dividend income may be eligible for the 70% dividends
received deduction available to corporate holders under Section 243 of the Code
if the holding period and other requirements for such deduction are met, subject
to certain limitations set forth in Sections 246 and 246A of the Code. Section
246(c) of the Code requires that, in order to be eligible for the
dividends-received deduction, a corporate stockholder must generally hold shares
of preferred stock for a 46-day minimum holding period. A taxpayer's holding
period for these purposes is suspended during any period in which a holder has
certain options or contractual obligations with respect to substantially
identical stock or holds one or more other positions with respect to
substantially identical stock that diminishes the risk of loss from holding the
preferred stock. Section 246A of the Code reduces the dividends-received
deduction allowed to a corporate stockholder that has incurred indebtedness
"directly attributable" to its investment in portfolio stock.

Section 1059 of the Code requires a corporate holder of stock to reduce (but
not below zero) its basis in the stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held the stock subject to a risk
of loss for more than two years before the date of the announcement, declaration
or agreement (whichever is earliest) with respect to the "extraordinary
dividend." In addition, upon disposition of such stock, a corporate holder will
recognize gain to the extent the "nontaxed portion" of any "extraordinary
dividend" exceeded the holder's adjusted tax basis for the

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stock. Generally, the "nontaxed portion" of an extraordinary dividend is the
amount excluded from income under Section 243 of the Code (relating to the
dividends-received deduction). An "extraordinary dividend" on the PacifiCare
Holding Preferred is a dividend that (i) equals or exceed 5% of the holder's
adjusted tax basis in the PacifiCare Holding Preferred (reduced for this purpose
by the "nontaxed portion" of any prior "extraordinary dividend"), treating all
dividends having ex-dividend dates within an 85-day period as one dividend, or
(ii) exceeds 20% of the holder's adjusted tax basis in the PacifiCare Holding
Preferred, treating all dividends having ex-dividend dates within a 365-day
period as one dividend. In determining whether a dividend paid on preferred
stock is an extraordinary dividend, a corporate stockholder may elect to
substitute the fair market value of the stock for such holder's tax basis for
purposes of applying these tests, provided such fair market value is established
to the satisfaction of the Secretary of the Treasury as of the day before the
ex-dividend date. An "extraordinary dividend" would also include any amount
treated as a dividend in the case of a redemption that is either non-pro rata as
to all holders of PacifiCare Holding stock or in partial liquidation of
PacifiCare Holding, regardless of the relative size of the dividend and
regardless of the corporate holder's holding period of the PacifiCare Holding
Preferred.

A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate
stockholder deducts in computing taxable income. This results from the fact that
corporate stockholders are required to increase alternative minimum taxable
income by 75% of the excess of adjusted current earnings over alternative
minimum taxable income (determined without regard to this adjusted current
earnings adjustment or the alternative tax net operating loss deduction).

REDEMPTION. A redemption of shares of PacifiCare Holding Preferred will be
treated as a dividend to the extent of PacifiCare Holding's current or
accumulated earnings and profits, unless the redemption (i) is "substantially
disproportionate" with respect to the holder under Section 302(b)(2) of the
Code, (ii) results in a "complete termination" of the holder's stock interest in
PacifiCare Holding under Section 302(b)(3) of the Code, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder under Section
302(b)(1) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code (E.G., shares owned by certain related
individuals and entities and shares that may be acquired upon exercise of an
option or upon conversion of the PacifiCare Holding Preferred), as well as
shares actually owned, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code will be satisfied with respect to any particular holder of PacifiCare
Holding Preferred depends on the facts and circumstances at the time that the
determination must be made, holders of PacifiCare Holding Preferred are urged to
consult their tax advisors to determine such tax treatment.

If a redemption of PacifiCare Holding Preferred is not treated as a dividend
to a particular holder, it will be treated, as to that holder, as a taxable
exchange under Section 302(a) of the Code, with the result that such holder will
recognize gain or loss for federal income tax purposes equal to the difference
between (i) the amount of cash and fair market value of any property received
(less any portion thereof attributable to accumulated and unpaid dividends) and
(ii) the holder's adjusted tax basis in the PacifiCare Holding Preferred so
redeemed. Any such gain or loss will be capital gain or loss if the PacifiCare
Holding Preferred is held as a capital asset, and will be long-term capital gain
or loss if such PacifiCare Holding Preferred has been held for more than one
year. Any such portion attributable to accumulated and unpaid dividends will be
treated as ordinary income.

If a redemption of PacifiCare Holding Preferred is treated as a dividend,
the amount of the distribution will be measured by the amount of cash and the
fair market value of any property received by the holder. The holder's adjusted
tax basis in the redeemed PacifiCare Holding Preferred will be transferred to
any of the holder's remaining stock in PacifiCare Holding. If, however, the
holder has no remaining stock in PacifiCare Holding, such basis could be
transferred to a related person or it may be lost.

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REDEMPTION PREMIUM. Under Section 305(c) of the Code, if the redemption
price of PacifiCare Holding Preferred exceeds its issue price, the difference
("redemption premium") may be taxable as a constructive distribution of
additional PacifiCare Holding Preferred to the holder (treated as a dividend to
the extent of PacifiCare Holding's current and accumulated earnings and profits
and otherwise subject to the treatment described above for distributions) over a
certain period. Because the PacifiCare Holding Preferred provides for an
optional right of redemption by the Company at a price in excess of the issue
price, stockholders could be required to recognize such redemption premium under
a constant interest rate method similar to that provided by the Code for
accruing original issue discount on debt instruments, if, based on all of the
facts and circumstances, the optional redemption is more likely than not to
occur. If stock may be redeemed at more than one time, the time and price at
which such redemption is most likely to occur must be determined based on all of
the facts and circumstances. Applicable regulations promulgated under Section
305(c) of the Code provide a "safe harbor" under which a right to redeem will
not be treated as more likely than not to occur if (i) the issuer and the holder
are not related within the meaning of such regulations; (ii) there are no plans,
arrangements or agreements that effectively require or are intended to compel
the issuer to redeem the stock (disregarding, for this purpose, a separate
mandatory redemption); and (iii) exercise of the right to redeem would not
reduce the yield of the stock, as determined under such regulations. Regardless
of whether the optional redemption is more likely than not to occur,
constructive dividend treatment will not result if the redemption premium does
not exceed a DE MINIMIS amount. PacifiCare Holding intends to take the position
that the existence of PacifiCare Holding's optional redemption right does not
result in a constructive distribution to the holders of PacifiCare Holding
Preferred.

CONVERSION OF PACIFICARE HOLDING PREFERRED. In general, no gain or loss
will be recognized for federal income tax purposes upon the conversion of
PacifiCare Holding Preferred into shares of PacifiCare Holding Common, except
with respect to: (i) cash, if any, received in lieu of fractional shares of
PacifiCare Holding Common; and (ii) shares of PacifiCare Holding Common received
in respect of accrued and unpaid dividends. A holder will recognize taxable gain
or loss on cash received in lieu of fractional shares of PacifiCare Holding
Common in an amount equal to the difference between the amount of cash received
and the portion of the holder's tax basis in the PacifiCare Holding Preferred
attributable to those fractional shares. Shares of PacifiCare Holding Common
received in respect of accrued and unpaid dividends will be treated as a
dividend or other distribution in accordance with the rules described above, in
the amount of the fair market value of such shares. A holder's tax basis for
shares of PacifiCare Holding Common received upon conversion of PacifiCare
Holding Preferred will be equal to such holder's adjusted tax basis in the
PacifiCare Holding Preferred so converted (less the portion of such tax basis
allocable to fractional shares of PacifiCare Holding Common); provided that the
PacifiCare Holding Preferred was held as a capital asset, the holding period of
the PacifiCare Holding Common will include the holding period of the PacifiCare
Holding Preferred so converted, except that the holding period of shares
received in respect of accrued and unpaid dividends will begin upon conversion.

Adjustments in the conversion price of the PacifiCare Holding Preferred (or
the failure to make such adjustments) pursuant to the anti-dilution provisions
thereof to reflect distributions of cash or property to holders of PacifiCare
Holding Common may result in constructive distributions to holders of PacifiCare
Holding Preferred that could be taxable to them as dividends pursuant to Section
305(c) of the Code. If such a constructive distribution were to occur, a holder
of PacifiCare Holding Preferred could be required to recognize ordinary income
for federal income tax purposes without receiving a corresponding distribution
of cash.

SALE OR EXCHANGE OF PACIFICARE HOLDING PREFERRED. If the PacifiCare Holding
Preferred is held as a capital asset, a holder generally will recognize capital
gain or loss for federal income tax purposes upon a sale or exchange of
PacifiCare Holding Preferred in an amount equal to the difference between such
holder's adjusted tax basis in the PacifiCare Holding Preferred and the amount
realized from such disposition. Any such capital gain or loss will be long-term
capital gain or loss if at the time of the sale or exchange the holder held such
PacifiCare Holding Preferred for more than one year.

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OTHER MATTERS

BACKUP WITHHOLDING. Certain noncorporate holders may be subject to backup
withholding at a rate of 31% on payments of Cash Consideration, the Talbert
Rights and cash with respect to fractional shares. Backup withholding will not
apply, however, to a stockholder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who otherwise is exempt from backup withholding. Generally,
each FHP stockholder will provide such certification on Form W-9 (Request for
Taxpayer Identification Number and Certification) or on Form W-8 (Certificate of
Foreign Status).

REPORTING REQUIREMENTS. Each FHP stockholder and each PacifiCare
stockholder (other than stockholders who exercise and perfect appraisal rights)
will be required to retain records and file with such holder's United States
federal income tax return a statement setting forth certain facts relating to
the Mergers. It is also expected that such stockholders will be asked to
indicate their tax basis in the shares surrendered by them pursuant to the
Mergers in the letter of transmittal.

TAX CONSEQUENCES TO FHP STOCKHOLDERS UPON EXERCISE OF APPRAISAL RIGHTS OR
SPECIAL CONVERSION RIGHTS. A holder of FHP Capital Stock who exercises and
perfects appraisal rights with respect to all stock owned actually or
constructively, and a holder of FHP Preferred Stock who exercises Special
Conversion Rights and receives all cash in exchange for such holder's FHP
Preferred Stock, will generally recognize capital gain or loss equal to the
difference between the amount of cash received (other than in respect of any
interest awarded by a court to a dissenting shareholder) and such stockholder's
tax basis in his or her shares of stock. Such capital gain or loss will be
long-term capital gain or loss if such shares have a holding period exceeding
one year at the time of the Mergers. Interest, if any, awarded to a dissenting
stockholder will be includable in such stockholder's income as ordinary income
for United States federal income tax purposes.

APPRAISAL RIGHTS

Stockholders of FHP who do not vote in favor of the FHP Merger may, under
certain circumstances and by following the procedure prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of FHP Capital
Stock. Stockholders of PacifiCare will not have appraisal rights under the DGCL
in connection with the PacifiCare Merger.

If a holder of FHP Capital Stock exercises appraisal rights in connection
with the FHP Merger under Section 262 of the DGCL ("Section 262"), any shares of
FHP Capital Stock in respect of which such rights have been exercised and
perfected will not be converted into the applicable consideration as determined
by the Reorganization Agreement but instead will be converted into the right to
receive such consideration as may be determined by the Delaware Court of
Chancery (the "Court") to be due with respect to such shares pursuant to the
laws of the State of Delaware. This Joint Proxy Statement/ Prospectus is being
sent by personal delivery or by mail to all holders of record of shares of FHP
Capital Stock on the FHP Record Date and constitutes notice of the appraisal
rights available to such holders under Section 262.

The following summary of the provisions of Section 262 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Joint Proxy Statement/Prospectus as Appendix D and incorporated herein by
reference.

Holders of shares of FHP Capital Stock who object to the FHP Merger and who
follow the procedures in Section 262 will be entitled to have their shares of
FHP Capital Stock appraised by the Court and to receive payment of the "fair
value" (determined as set forth below) of such shares as of the Effective Time.

A stockholder of FHP electing to exercise appraisal rights must, prior to
the vote concerning the FHP Merger at the FHP Meeting, perfect his, her or its
appraisal rights by demanding in writing from FHP the appraisal of his, her or
its shares of FHP Capital Stock. A vote against the FHP Merger will not
constitute a demand for appraisal. A stockholder electing to take such action
must do so by a separate written demand as provided in Section 262. A holder of
FHP Capital Stock who elects to

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exercise appraisal rights should mail his, her or its written demand to FHP at
P.O. Box 25186, Santa Ana, California 92799-5186, or deliver such written demand
to FHP at 3120 Lake Center Drive, Santa Ana, California 92704, in each case
addressed to the Corporate Secretary. The demand should specify the holder's
name and mailing address, the number of shares of FHP Capital Stock owned and
that such holder is demanding appraisal of his, her or its shares. Within ten
days after the Effective Time, FHP must provide notice of the Effective Time to
all stockholders who have complied with Section 262 and have not voted in favor
of the FHP Merger. Only a holder of record of shares of FHP Capital Stock (or
his, her or its duly appointed representative) is entitled to assert appraisal
rights for the shares registered in that holder's name.

Within 120 days after the Effective Time, any stockholder who has made a
valid written demand and who has not voted in favor of the FHP Merger may: (i)
file a petition in the Court demanding a determination of the value of shares of
FHP Capital Stock; and (ii) upon written request, receive from FHP a statement
setting forth the aggregate number of shares of FHP Capital Stock not voted in
favor of the FHP Merger and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such statement
must be mailed within ten days after the written request therefor has been
received by FHP.

If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of dissenting shares
entitled to appraisal rights ("Dissenting Shares") and to determine the "fair
value" of the Dissenting Shares exclusive of any element of value arising from
the accomplishment or expectation of the FHP Merger, together with a fair rate
of interest, if any, to be paid upon the value of the Dissenting Shares. In
determining such "fair value", the Court is required to take into account all
relevant factors, including the market value of FHP Capital Stock and the net
asset and earnings value of FHP, and in determining the fair rate of interest,
the Court may consider the rate of interest which FHP would have had to pay to
borrow money during the pendency of the proceeding. Upon application by a
stockholder, the Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of FHP Capital Stock entitled to appraisal.

Any holder of Dissenting Shares who has duly demanded an appraisal under
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions (including the Talbert Rights) on such
Dissenting Shares (except dividends or other distributions payable to
stockholders of record as of a date prior to the Effective Time).

If any holder of shares of FHP Capital Stock who demands appraisal under
Section 262 effectively withdraws or loses his, her or its right to appraisal,
the shares of such holder will be converted into a right to receive the FHP
Merger consideration for such holder's shares of FHP Capital Stock as is
determined in accordance with the Reorganization Agreement; provided, however,
that if such withdrawal or loss of appraisal rights takes place after the
Effective Time, in lieu of Talbert Rights, such holder will receive cash in an
amount equal to the average closing price of the Talbert Rights on their first
five days of trading. A holder will effectively lose his right to appraisal if
such holder votes in favor of the FHP Merger or if no petition for appraisal is
filed within 120 days after the Effective Time, or if the holder delivers to FHP
a written withdrawal of such holder's demand for an appraisal and an acceptance
of the terms of the FHP Merger, except that any such attempt to withdraw made
more than 60 days after the Effective Time requires the written approval of FHP.
A holder of stock represented by certificates may also lose his, her or its
right to appraisal if he, she or it fails to comply with the Court's direction
to submit such certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings.

IN VIEW OF THE COMPLEXITIES OF THE FOREGOING PROVISIONS OF THE DELAWARE LAW,
FHP STOCKHOLDERS WHO ARE CONSIDERING PURSUING APPRAISAL RIGHTS MAY WISH TO
CONSULT LEGAL COUNSEL.

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THE REORGANIZATION AGREEMENT

GENERAL

THE FOLLOWING DESCRIPTION OF THE REORGANIZATION AGREEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE REORGANIZATION AGREEMENT,
WHICH IS INCORPORATED BY REFERENCE HEREIN AND A COPY OF WHICH IS ANNEXED TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX A.

The Reorganization Agreement provides for the merger of FHP Merger Sub with
and into FHP and the merger of PacifiCare Merger Sub with and into PacifiCare.
As a result, the separate existence of FHP Merger Sub and PacifiCare Merger Sub
shall cease. FHP will be the surviving corporation of the FHP Merger and its
separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises, shall continue unaffected by such merger and
PacifiCare will be the surviving corporation of the PacifiCare Merger and its
separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises, shall continue unaffected by such merger.
Upon completion of the Mergers, PacifiCare and FHP will be wholly owned
subsidiaries of PacifiCare Holding and the former stockholders of FHP and
PacifiCare will become stockholders of PacifiCare Holding. FHP Merger Sub and
PacifiCare Merger Sub have been formed solely for the purpose of effecting the
FHP Merger and the PacifiCare Merger, respectively, and there will be no other
activity in FHP Merger Sub and PacifiCare Merger Sub after the Effective Time.
The Mergers will become effective upon the filing of Certificates of Merger with
the Delaware Secretary of State. Such filings are anticipated to take place as
soon as practicable after the receipt of all required regulatory approvals and
the satisfaction or waiver of the other conditions to the Mergers. It is
currently anticipated that the Effective Time will occur in early January 1997.
There can be no assurance, however, that the required regulatory approvals will
be obtained, or that the other conditions to the Mergers will be satisfied by
such date, or at all. See "-- Conditions to the Mergers" and "The Merger and
Related Transactions -- Regulatory Matters."

MERGER CONSIDERATION

CONSIDERATION FOR CAPITAL STOCK. For a description of the consideration to
be received in the Mergers by the holders of FHP Capital Stock and PacifiCare
Common Stock, see "The Mergers and Related Transactions -- Merger
Consideration."

STOCK OPTIONS AND BENEFIT PLANS. For a description of the treatment of the
FHP and PacifiCare stock options and employee benefit plans, see "The Mergers
and Related Transactions -- Stock Options; Benefit Plans."

APPRAISAL RIGHTS. Holders of the FHP Capital Stock are entitled to exercise
appraisal rights in connection with the FHP Merger. Holders of PacifiCare Common
Stock are not entitled to exercise appraisal rights in connection with the
PacifiCare Merger. See "The Mergers and Related Transactions -- Appraisal
Rights."

EXCHANGE OF SHARES. For a description of exchange procedures, see "The
Mergers and Related Transactions -- Conversion of Shares; Procedures for
Exchange of Certificates; No Fractional Shares."

IRREVOCABLE ELECTION. For a discussion of the Irrevocable Election, see
"The Mergers and Related Transactions--Merger Consideration--FHP--Irrevocable
Election by FHP Preferred Stockholders."

CORPORATE MATTERS

As of the Effective Time, the Certificates of Incorporation and Bylaws of
PacifiCare and FHP will be the Certificates of Incorporation and Bylaws of
PacifiCare Surviving Corporation and FHP Surviving Corporation, respectively.

PacifiCare and FHP have agreed to cause PacifiCare Holding to take all
necessary corporate action to cause the PacifiCare Holding Certificate of
Incorporation prior to the Effective Time to be in substantially the form of the
Restated Certificate (and to file a Certificate of Designation creating a

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Series A-1 Preferred Stock with rights, preferences, privileges and restrictions
identical in all substantial respects to those of the FHP Preferred Stock if the
Series A Required Vote is not obtained), and to cause the Bylaws of PacifiCare
Holding prior to the Effective Time to be substantially in the form of the
Bylaws of PacifiCare in effect on the date of execution of the Reorganization
Agreement, subject to certain permitted changes.

Immediately after the Effective Time, the PacifiCare Holding Board of
Directors will consist of 12 persons. For a discussion of the composition of the
PacifiCare Holding Board of Directors, see "The Mergers and Related Transactions
- -- Interests of Certain Persons in the Mergers."

CONDITIONS TO THE MERGERS

The obligations of PacifiCare and PacifiCare Holding to effect the Mergers
and otherwise consummate the transactions contemplated by the Reorganization
Agreement are subject to fulfillment, at or prior to the Closing, of conditions,
among others, to the following general effect:

(i) the representations and warranties of FHP contained in the
Reorganization Agreement shall have been accurate in all material respects
as of the date of execution of the Original Reorganization Agreement and
shall be accurate in all respects as of the date of the Closing as if made
on the date of the Closing, except that any inaccuracies will be disregarded
if the circumstances giving rise to such inaccuracies do not constitute, and
would not reasonably be expected to result in, a material adverse effect on
FHP;

(ii) FHP shall have complied with and performed in all material respects
each covenant contained in the Reorganization Agreement that is required to
be performed by FHP on or prior to the date of the Closing;

(iii) since the date of the Original Reorganization Agreement, there
shall not have been any material adverse effect on FHP and there shall not
have occurred any change or development, or any combination of changes or
developments, that would reasonably be expected to have a material adverse
effect on FHP;

(iv) the Reorganization Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the FHP Required Vote and
the PacifiCare Required Vote, as applicable;

(v) no order to restrain, enjoin or otherwise prevent the consummation
of either of the Mergers shall have been entered by any court or
governmental authority;

(vi) there shall not be pending or threatened any proceeding in which a
governmental authority is or is threatened to become a party or in which
there is a reasonable possibility of an outcome that would have a material
adverse effect on PacifiCare Holding, PacifiCare or FHP: (a) challenging or
seeking to restrain or prohibit the consummation of either of the Mergers;
(b) relating to either of the Mergers and seeking to obtain any damages
material to PacifiCare Holding or PacifiCare; (c) seeking to prohibit or
limit in any material respect PacifiCare Holding's ability to exercise
ownership rights with respect to the stock of the Surviving Corporations; or
(d) which would materially and adversely affect the right of PacifiCare
Holding, the Surviving Corporations or any subsidiary thereof to own the
assets or operate the business of PacifiCare, FHP or any of their
subsidiaries; and

(vii) PacifiCare Holding, PacifiCare and FHP shall have received (a) all
material approvals, licenses, consents, assignments and authorizations of
governmental authorities and other persons as may be required (1) to permit
the performance by PacifiCare Holding, PacifiCare and FHP of their
respective obligations under the Reorganization Agreement and the
consummation of the Mergers and (2) to permit PacifiCare Holding and the
Surviving Corporations and their respective subsidiaries to conduct their
business and operations in the manner currently conducted, and (b) certain
certifications, legal opinions, approvals and assurances as set forth in the
Reorganization Agreement.

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The obligations of FHP to effect the Mergers and otherwise consummate the
transactions contemplated by the Reorganization Agreement are subject to the
fulfillment, at or prior to the Closing, of conditions, among others, to the
following general effect:

(i) the representations and warranties of PacifiCare contained in the
Reorganization Agreement shall have been accurate in all material respects
as of the date of the execution of the Original Reorganization Agreement and
shall be accurate in all respects as of the date of the Closing as if made
on and as of the date of the Closing, except that any inaccuracies will be
disregarded if the circumstances giving rise to such inaccuracies do not
constitute, and would not reasonably be expected to result in, a material
adverse effect on PacifiCare;

(ii) PacifiCare shall have complied with and performed in all material
respects each covenant contained in the Reorganization Agreement that is
required to be performed by PacifiCare on or prior to the date of the
Closing;

(iii) since the date of the Original Reorganization Agreement, there
shall not have been any material adverse effect on PacifiCare, and there
shall not have occurred any change or development, or any combination of
changes or developments, that would reasonably be expected to have a
material adverse effect on PacifiCare;

(iv) the Reorganization Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the FHP Required Vote and
the PacifiCare Required Vote, as applicable;

(v) no order to restrain, enjoin or otherwise prevent the consummation
of either of the Mergers shall have been entered by any court or
governmental authority;

(vi) there shall not be pending or threatened any proceeding in which a
governmental authority is or is threatened to become a party (a) challenging
or seeking to restrain or prohibit the consummation of either of the
Mergers; (b) relating to either of the Mergers and seeking to obtain any
damages material to FHP; (c) seeking to prohibit or limit in any material
respect PacifiCare Holding's ability to exercise ownership rights with
respect to the stock of the Surviving Corporations; or (d) which would
materially and adversely affect the right of PacifiCare Holding, the
Surviving Corporations or any subsidiary thereof to own the assets or
operate the business of PacifiCare or FHP or any of their subsidiaries; and

(vii) FHP shall have received certain certifications, legal opinions,
approvals and assurances as set forth in the Reorganization Agreement.

All the conditions to the Mergers must either be satisfied or waived prior
to the consummation of the Mergers.

REPRESENTATIONS AND WARRANTIES

The Reorganization Agreement contains certain representations and
warranties, including without limitation, representations and warranties by each
of PacifiCare, PacifiCare Holding and FHP as to: (i) organization, subsidiaries
and capitalization; (ii) financial statements and Commission filings; (iii)
absence of certain changes or events; (iv) tax matters; (v) contracts; (vi)
employees; (vii) litigation and claims; (viii) compliance with laws; (ix)
properties; (x) adequacy of disclosure; (xi) transactions with affiliates; (xii)
vote required; (xiii) application of takeover provisions; (xiv) authorization;
(xv) fairness opinions; (xvi) financial advisors; (xvii) enforceability; (xviii)
governmental consents required; (xix) absence of conflicts; (xx) reserves; (xxi)
audits or investigations by governmental entities; (xxii) environmental
provisions; and (xxiii) intellectual property.

The Reorganization Agreement contains further representations and warranties
by PacifiCare and PacifiCare Holding as to: (i) the authorization of PacifiCare
Merger Sub and FHP Merger Sub; (ii) the issuance of PacifiCare Holding Common
and Preferred; and (iii) the formation of PacifiCare Holding.

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CERTAIN COVENANTS

The Reorganization Agreement requires that until the Effective Time FHP
shall conduct its business in the ordinary and usual course consistent with past
practice and use all commercially reasonable efforts to maintain its business
organization and satisfactory relations with persons having business
relationships with FHP. Except as expressly contemplated by the Reorganization
Agreement, FHP shall not:

(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, with certain exceptions;

(ii) split, combine or reclassify any capital stock of FHP or acquire
any capital stock of FHP;

(iii) with certain exceptions, issue, encumber, or transfer, or authorize
or propose the issuance, encumbrance, or transfer of, any shares of FHP
Capital Stock or any securities convertible into, or rights to acquire, any
such securities (except that FHP may issue FHP Common Stock upon the
exercise of outstanding stock options or upon the conversion of outstanding
FHP Preferred Stock);

(iv) amend the Certificate of Incorporation, Bylaws or other
organizational or charter documents of FHP or amend its Amended and Restated
Rights Agreement (the "Restated Rights Plan");

(v) acquire any business or entity;

(vi) dispose of or encumber any of its material assets, except in the
ordinary course of business consistent with past practice;

(vii) except pursuant to existing lines of credit, incur any indebtedness
for borrowed money or guarantee any obligation of any other person,
excluding indebtedness for borrowed money or guaranties that aggregate up to
$20 million or the proceeds of which are used to capitalize Talbert;

(viii) adopt or amend in any material respect any collective bargaining
agreement or FHP employee benefit plan, or enter into or amend any
employment agreement or severance agreement with any director or officer;

(ix) except in the ordinary course of business consistent with past
practice, enter into any material contract or agreement involving payments
in excess of market rates;

(x) change any compensation payable or to become payable to any of its
officers or employees (other than in the ordinary course of business
consistent with past practice, but subject to certain limitations);

(xi) make any capital expenditures in excess of $2.5 million in the
aggregate, except those set forth in a budget reviewed and approved by
PacifiCare and FHP;

(xii) make any loan to or engage in any transaction with any director or
officer;

(xiii) settle or compromise any lawsuit or other proceeding against FHP or
any of its subsidiaries for an amount in excess of $5 million;

(xiv) cause or permit any material amendment, modification or premature
termination to any material contract of FHP;

(xv) cause or agree to the termination or material modification of any
material licensure, qualification or authorization of FHP or any material
subsidiary; or

(xvi) enter into any new contract or amend or modify any existing contract
between FHP and Talbert or to cause any capital transfer between FHP and
Talbert, except as contemplated by the Reorganization Agreement.

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The Reorganization Agreement further provides that prior to the Effective
Time, except as contemplated by the Reorganization Agreement, PacifiCare shall
not:

(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock;

(ii) split, combine or reclassify any capital stock of PacifiCare or
acquire any capital stock of PacifiCare;

(iii) issue, encumber or transfer, or authorize or propose the issuance,
encumbrance or transfer of, any shares of capital stock of PacifiCare or any
securities convertible into, or rights to acquire, any such securities
(except that PacifiCare may issue PacifiCare Common Stock upon the exercise
of outstanding stock options);

(iv) amend the Certificate of Incorporation, Bylaws or other
organizational or charter documents of PacifiCare;

(v) acquire any business or entity;

(vi) dispose of or encumber any of its material assets, except in the
ordinary course of business consistent with past practice; or

(vii) except pursuant to existing lines of credit, incur any indebtedness
for borrowed money or guarantee any obligation of any other person,
excluding indebtedness for borrowed money or guaranties that aggregate up to
$20 million and financing the purpose of which is to consummate the Mergers.

The Reorganization Agreement contains certain other covenants including
covenants relating to: (i) information and access; (ii) preparation and filing
of the Registration Statement; (iii) preparation and filing of disclosure
documents, actions and filings with governmental bodies, agencies, officials or
authorities and other third parties; (iv) public announcements; (v) affiliate
agreements; (vi) tax qualification and opinion back-up certificates; (vii)
notices of certain events; (viii) compliance with regulations; (ix) assumption
of certain FHP employment agreements; and (x) absence of activity by PacifiCare
Holding unrelated to the Mergers.

Pursuant to the Reorganization Agreement, FHP will take all action necessary
in accordance with applicable law to convene the FHP Meeting to vote upon the
adoption and approval of the Reorganization Agreement and the Series A
Amendment, and the recommendation of the FHP Board of Directors that the holders
of FHP Capital Stock adopt and approve the Reorganization Agreement and the FHP
Amendment at the FHP Meeting shall not be withdrawn, amended or modified in a
manner adverse to PacifiCare. Under the Reorganization Agreement, PacifiCare
will take all action necessary in accordance with applicable law to call or
convene the PacifiCare Meeting to vote upon the adoption and approval of the
Reorganization Agreement and the PacifiCare Amendment.

Nothing in the Reorganization Agreement shall prevent the Board of Directors
of FHP or PacifiCare from withdrawing, amending or modifying its recommendation
in favor of the respective Merger and approval and adoption of the
Reorganization Agreement and related matters to the extent that such Board of
Directors shall conclude in good faith, based upon the advice of its outside
counsel, that such withdrawal, amendment or modification is required in order
for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law.

Under the Reorganization Agreement, PacifiCare Holding, PacifiCare and FHP
have agreed to use all commercially reasonable efforts to take, or cause to be
taken, all actions necessary to consummate the Mergers and the other
transactions contemplated by the Reorganization Agreement, subject to certain
exceptions for the benefit of PacifiCare Holding.

PacifiCare, PacifiCare Holding and FHP have reached certain agreements
concerning Talbert. See "The Mergers and Related Transactions -- Talbert Rights
Offering."

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PacifiCare Holding has agreed to assume FHP's 7% Senior Notes Due 2003 in
accordance with the terms thereof if required by applicable law or the terms of
such notes.

NON-SOLICITATION

Pursuant to the Reorganization Agreement, FHP will not, and it will not
authorize or permit any of its subsidiaries, officers, directors or employees or
any of its or its subsidiaries' representatives, directly or indirectly, to: (i)
solicit, initiate or knowingly encourage or induce the making of any Acquisition
Proposal; (ii) furnish non-public information regarding FHP or any of its
subsidiaries in connection with an Acquisition Proposal or potential Acquisition
Proposal; (iii) negotiate or engage in discussions with any third party with
respect to any Acquisition Proposal; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) enter into any letter of intent, contract or other
instrument related directly or indirectly to any Acquisition Proposal (other
than a nondisclosure agreement entered into in accordance with the
Reorganization Agreement or contracts with advisors or consultants). The
foregoing shall not be construed to prohibit FHP or its Board of Directors from
taking any actions or permitting any actions described above (other than any
action described in clause (i) above) with respect to any Acquisition Proposal
to the extent that the FHP Board of Directors shall conclude in good faith,
based upon the advice of its outside counsel, that such action is required in
order for the FHP Board of Directors to act in a manner that is consistent with
its fiduciary obligations under applicable law (provided that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
the Reorganization Agreement and the payment of any fee due under the
termination provisions of the Reorganization Agreement). See "-- Termination"
and "-- Expenses and Termination Fees." An "Acquisition Proposal" shall mean any
proposal (other than any proposal by PacifiCare or PacifiCare Merger Sub or in
connection with the separation of Talbert) regarding: (i) any merger,
consolidation, share exchange, business combination or other similar transaction
or series of related transactions involving FHP; (ii) any sale, lease, exchange,
transfer or other disposition of the assets of FHP or any subsidiary of FHP
constituting more than 50% of the consolidated assets of FHP or accounting for
more than 50% of the consolidated revenues of FHP in any one transaction or in a
series of related transactions; or (iii) any offer to purchase, tender offer,
exchange offer or any similar transaction or series of related transactions made
by any person involving more than 50% of the outstanding shares of the capital
stock of FHP or the filing of any statement on Schedule 14D-1 with the
Commission in connection therewith. FHP will immediately advise PacifiCare
orally and in writing of the receipt of any Acquisition Proposal or any inquiry
relating to an Acquisition Proposal prior to the Effective Time, including a
full description of the terms of such Acquisition Proposal.

INDEMNIFICATION AND INSURANCE

Pursuant to the Reorganization Agreement, with respect to actions, omissions
and events occurring through the Effective Time, all rights to indemnification
existing in favor of the current directors and officers of FHP and PacifiCare as
provided in their respective Certificates of Incorporation and indemnification
agreements shall survive the Mergers and shall be observed by PacifiCare Holding
and the Surviving Corporations.

In addition, under the Reorganization Agreement, PacifiCare Holding will,
from and after the Closing, to the fullest extent permitted under applicable
laws, indemnify, defend and hold harmless the current officers and directors of
PacifiCare and FHP (collectively, the "Indemnified Parties") against all losses,
expenses, claims, damages, liabilities or amounts that are paid in settlement
of, or otherwise incurred in connection with, any claim, action, suit,
proceeding or investigation by reason of the fact that such Indemnified Party
was a director or officer of PacifiCare or FHP prior to the Effective Time and
arising out of actions, omissions and events occurring at or prior to the
Effective Time or in connection with the Mergers and the actions taken in
connection therewith (a "Claim") and shall pay expenses in advance of the final
disposition of any such Claim to each Indemnified Party.

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PacifiCare Holding will maintain in effect for a period of not less than
five years from the Effective Time the current policy of directors' and
officers' liability insurance maintained by PacifiCare and FHP with respect to
matters occurring prior to the Effective Time; however, (i) PacifiCare Holding
may substitute policies of comparable coverage; and (ii) PacifiCare Holding
shall not be required to pay an annual premium for such insurance in excess of
200% of the last annual premium paid by PacifiCare or FHP, as the case may be,
for such insurance prior to the date of execution of the Reorganization
Agreement (the "200% Amount"). In the event the annual premium for such
insurance exceeds the 200% Amount, PacifiCare Holding shall be entitled to
reduce the amount of coverage of such insurance to the amount of coverage that
can be obtained for a premium equal to the 200% Amount.

TERMINATION

Pursuant to the Reorganization Agreement, the Reorganization Agreement may
be terminated prior to the Effective Time, whether before or after approval of
the Mergers by the stockholders of FHP and PacifiCare:

(i) by mutual written consent of the respective Boards of Directors of
PacifiCare and FHP;

(ii) by either PacifiCare or FHP if either of the Mergers shall not have
been consummated by April 30, 1997 (unless the failure to consummate such
Merger is attributable to a failure on the part of the party seeking to
terminate the Reorganization Agreement to perform any material obligation
required to be performed by such party at or prior to the Effective Time);

(iii) by either PacifiCare or FHP if a court of competent jurisdiction or
governmental authority shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting either of the
Mergers;

(iv) by either PacifiCare or FHP if the FHP Meeting shall have been held,
and the Reorganization Agreement and the FHP Merger shall not have been
adopted and approved at such meeting by the FHP Required Vote;

(v) by PacifiCare (at any time prior to the adoption and approval of
Reorganization Agreement and the FHP Merger by the stockholders of FHP by
the FHP Required Vote) if a Triggering Event (as defined below) shall have
occurred;

(vi) by either PacifiCare or FHP if the PacifiCare Meeting shall have
been held, and the Reorganization Agreement, the PacifiCare Merger and any
related matters shall not have been adopted and approved at such meeting by
the PacifiCare Required Vote;

(vii) by PacifiCare if any of FHP's representations and warranties
contained in the Reorganization Agreement shall be or shall have become
materially inaccurate as of the date of the Original Reorganization
Agreement, or if any of FHP's covenants contained in the Reorganization
Agreement shall have been breached in any material respect; provided,
however, that if an inaccuracy in FHP's representations and warranties or a
breach of a covenant by FHP is curable by FHP and FHP is continuing to
exercise all commercially reasonable efforts to cure such inaccuracy or
breach, then PacifiCare may not terminate the Reorganization Agreement under
such provision on account of such inaccuracy or breach; or

(viii) by FHP if any of PacifiCare's or PacifiCare Holding's
representations and warranties contained in the Reorganization Agreement
shall be or shall have become materially inaccurate as of the date of the
Original Reorganization Agreement, or if any of PacifiCare's or PacifiCare
Holding's covenants contained in the Reorganization Agreement shall have
been breached in any material respect; provided, however, that if an
inaccuracy in PacifiCare's or PacifiCare Holding's representations and
warranties or a breach of a covenant by PacifiCare or PacifiCare Holding is
curable by PacifiCare or PacifiCare Holding and PacifiCare or PacifiCare
Holding is continuing to

79
<PAGE>
exercise all commercially reasonable efforts to cure such inaccuracy or
breach, then FHP may not terminate the Reorganization Agreement under such
provision on account of such inaccuracy or breach.

A "Triggering Event" shall be deemed to have occurred if: (i) the FHP Board
of Directors shall have failed to recommend, shall for any reason have withdrawn
or shall have amended or modified in a manner adverse to PacifiCare its
unanimous recommendation in favor of the FHP Merger or approval or adoption of
the Reorganization Agreement, or FHP shall have failed to include in the Joint
Proxy Statement/Prospectus the unanimous recommendation of the FHP Board of
Directors in favor of the FHP Merger and approval and adoption of the
Reorganization Agreement and related matters; (ii) the FHP Board of Directors
shall have approved, endorsed or recommended any Acquisition Proposal; (iii) FHP
shall have entered into any letter of intent, contract or other instrument
related directly or indirectly to any Acquisition Proposal (other than certain
nondisclosure agreements or contracts with advisors or consultants); or (iv) FHP
shall have failed to hold the FHP Meeting as promptly as practicable and in any
event within 60 days after the Registration Statement is declared effective and
any Acquisition Proposal shall have been made during such 60-day period.

EXPENSES AND TERMINATION FEES

Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
by the Reorganization Agreement shall be paid by the party incurring such
expenses, whether or not the Mergers are consummated.

If the Reorganization Agreement is terminated: (i) by either PacifiCare or
FHP after an FHP Meeting at which the Reorganization Agreement has not been
adopted and approved by the holders of FHP Common Stock and a Triggering Event
has occurred; or (ii) by PacifiCare at any time prior to the adoption and
approval of the Reorganization Agreement by the holders of FHP Common Stock and
after a Triggering Event, then FHP shall pay to PacifiCare a fee of $50 million.
If the Reorganization Agreement is terminated after an FHP Meeting at which the
Reorganization Agreement has not been adopted and approved and a Triggering
Event has not occurred and, within 12 months of the date of the FHP Meeting, FHP
enters into an agreement relating to an Acquisition Proposal, FHP shall pay to
PacifiCare a fee of $50 million.

If the Reorganization Agreement is terminated after a PacifiCare Meeting at
which the consummation of the PacifiCare Merger and any related matters are not
adopted and approved, then PacifiCare shall pay to FHP a fee of $50 million. If
the Mergers are not consummated solely by reason of a breach by PacifiCare
caused by its failure to enter into definitive agreements related to the
financing contemplated by the Commitment Letter, or the termination of such
agreements or the failure of PacifiCare to receive the funding contemplated by
the Commitment Letter, and after diligent efforts to find commercially
reasonable alternative financing, then PacifiCare shall pay to FHP a fee of $100
million.

NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES

None of the representations and warranties contained in the Reorganization
Agreement or in any instrument delivered pursuant to the Reorganization
Agreement shall survive the Mergers.

AMENDMENT; WAIVER

The Reorganization Agreement may be amended by an instrument in writing
signed on behalf of each of the parties and with the approval of the respective
Boards of Directors of PacifiCare Holding, FHP and PacifiCare at any time before
or after approval of the Reorganization Agreement by the stockholders of FHP and
the stockholders of PacifiCare; provided, however, that after any such
stockholder approval, no amendment shall be made which would have a material
adverse effect on the stockholders of FHP or the stockholders of PacifiCare
without the further approval of such stockholders. No waiver under the
Reorganization Agreement shall be effective, unless it is expressly set forth in
a written instrument duly executed and delivered.

80
<PAGE>
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PACIFICARE

The PacifiCare Certificate currently provides that, in the event of any
merger or consolidation of PacifiCare with or into another entity (including the
PacifiCare Merger), the holders of PacifiCare Class B Common Stock shall be
entitled to receive the same consideration per share as the consideration per
share received by any holder of PacifiCare Class A Common Stock in such merger
or consolidation.

Absent an amendment to the PacifiCare Certificate, the Mergers could not be
consummated and two classes of common stock could not be retained. As PacifiCare
does not intend, by virtue of the Mergers, to eliminate a capitalization
structure with two classes of common stock, the PacifiCare Amendment will permit
the Mergers to be consummated with a capitalization structure including two
classes of common stock, which will have rights substantially similar to those
currently accorded the PacifiCare Class A Common Stock and the PacifiCare Class
B Common Stock. See "Comparison of Rights of Stockholders -- Comparison of
Stockholder Rights with Respect to PacifiCare Holding and PacifiCare."

If the required vote of the holders of PacifiCare Common Stock is received,
pursuant to the PacifiCare Amendment, the PacifiCare Certificate will be amended
to provide that, in the event of a merger or consolidation of PacifiCare with or
into another entity (whether or not PacifiCare is the surviving entity), the
holders of PacifiCare Class B Common Stock shall be entitled to receive the same
per share consideration as the per share consideration, if any, received by any
holder of the PacifiCare Class A Common Stock in such merger or consolidation;
provided, however, that this restriction shall not apply to the transactions
contemplated by the Reorganization Agreement.

FOR THE REASON DESCRIBED ABOVE, THE PACIFICARE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE PACIFICARE AMENDMENT AND RECOMMENDS THAT PACIFICARE
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE PACIFICARE AMENDMENT.

81
<PAGE>
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF FHP

The FHP Certificate provides that, following a "change of control" (as
defined in the FHP Certificate), FHP is required to offer to holders of FHP
Preferred Stock certain Special Conversion Rights with consideration different
than the Series A Merger Consideration offered to the holders of FHP Preferred
Stock pursuant to the Reorganization Agreement. See "The Mergers and Related
Transactions -- Merger Consideration."

The Board of Directors of FHP believes that the opportunity to receive the
Series A Merger Consideration pursuant to the Reorganization Agreement is in the
best interests of the holders of FHP Preferred Stock. The Series A Merger
Consideration, consisting of $14.113 in cash, 0.50 shares of PacifiCare Holding
Preferred and Talbert Rights, is anticipated to have a higher value than the
Special Conversion Rights unless the trading price of the PacifiCare Holding
Class B Common following the Effective Time is below approximately $48 per share
(assuming the Average Closing Price of PacifiCare Class B Common Stock was at a
similar price).

In order for the holders of FHP Preferred Stock to receive the consideration
contemplated by the Reorganization Agreement in lieu of the consideration to
which such holders otherwise would be entitled, the FHP Board of Directors has
adopted an amendment to the FHP Certificate to: (i) exempt the FHP Merger from a
requirement of the existing FHP Certificate that, in the event of a merger or
consolidation of FHP, the holders of FHP Preferred Stock are entitled to receive
upon conversion thereof the same consideration per share as the consideration
they would have received in the event they converted their FHP Preferred Stock
into FHP Common Stock immediately prior to such merger or consolidation; and
(ii) provide that the holders of FHP Preferred Stock are not entitled to Special
Conversion Rights as a result of the FHP Merger.

The Board of Directors of FHP also negotiated for inclusion of the
Irrevocable Election in the Reorganization Agreement so that in the event the
Series A Amendment is not approved, individual holders of FHP Preferred Stock
could elect to receive the Series A Merger Consideration in lieu of the
consideration provided in the FHP Certificate.

For a discussion of the rights of the PacifiCare Holding Preferred, see
"Description of PacifiCare Holding Capital Stock -- PacifiCare Holding
Preferred," and for a comparison of the rights of the PacifiCare Holding
Preferred to the rights of the FHP Preferred Stock, see "Comparison of Rights of
Stockholders -- Comparison of Stockholder Rights with Respect to PacifiCare
Holding and FHP."

THE FHP BOARD OF DIRECTORS RECOMMENDS THAT FHP STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE SERIES A AMENDMENT. THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING FHP COMMON STOCK AND 66 2/3% OF THE
OUTSTANDING FHP PREFERRED STOCK IS REQUIRED FOR APPROVAL OF THIS PROPOSAL.

82
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following Unaudited Pro Forma Condensed Consolidated Statements Of
Income of PacifiCare Holding for the fiscal year ended September 30, 1995 and
the nine months ended June 30, 1996 present results for PacifiCare Holding as if
the Acquisitions had occurred on October 1, 1994 and 1995, respectively. The
accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet for
PacifiCare Holding as of June 30, 1996 gives effect to the Mergers as if they
had occurred on June 30, 1996.

The FHP Merger will be accounted for under the purchase method of
accounting. Accordingly, the amount of the consideration to be paid in the FHP
Merger will be allocated to assets acquired and liabilities assumed based on
their estimated fair values. The excess of such consideration over the estimated
fair value of such assets and liabilities has been preliminarily allocated to
certain identifiable intangible assets and goodwill. The purchase price
allocation may be adjusted upon completion of the final valuations of FHP's
assets and liabilities and the effect of any such adjustment is not expected to
be significant. The PacifiCare Merger will be treated as a reorganization with
no change in the recorded amount of PacifiCare's assets and liabilities. See
"The Mergers and Related Transactions -- Accounting Treatment." The Unaudited
Pro Forma Condensed Consolidated Financial Statements do not give effect to any
synergies which may be realized as a result of the Mergers. See "The Merger and
Related Transactions -- Estimated Synergies." The Unaudited Pro Forma Condensed
Consolidated Financial Statements do not include the pro forma effect of the
Talbert Rights Offering. Additionally, except as indicated in the notes thereto,
the Unaudited Pro Forma Condensed Consolidated Financial Statements do not
reflect any nonrecurring/unusual restructuring charges that may be incurred as a
result of the integration of FHP. The amount of such charges cannot be
reasonably determined at this time.

The Unaudited Pro Forma Condensed Consolidated Financial Statements are
provided for informational purposes only and do not purport to present the
combined financial position or results of operations of PacifiCare and FHP had
the Mergers and the 1995 Acquisitions assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future.

PacifiCare currently reports its financial information on the basis of a
September 30 fiscal year. FHP currently reports its financial information on the
basis of a June 30 fiscal year. The Unaudited Pro Forma Condensed Consolidated
Financial Statements for the fiscal year ended September 30, 1995 include
PacifiCare's historical results of operations for the fiscal year ended
September 30, 1995 and FHP's historical results of operations for the fiscal
year ended June 30, 1995. The PacifiCare and FHP Unaudited Pro Forma Condensed
Consolidated Financial Statements for the nine months ended June 30, 1996
include the historical results of operations of both PacifiCare and FHP for the
nine months ended June 30, 1996. The Unaudited Pro Forma Condensed Consolidated
Financial Statements include the historical balance sheets of both PacifiCare
and FHP as of June 30, 1996.

The stock consideration portion of the purchase price assumed a market price
for PacifiCare Class A Common Stock of $71.00 and an Average Closing Price of
PacifiCare Class B Common Stock of $74.00. The Reorganization Agreement provides
for an adjustment to the number of shares to be issued to the stockholders of
FHP if the Average Closing Price of PacifiCare Class B Common Stock is less than
$62.90 or greater than $73.10. The increases in the market price for PacifiCare
Class A Common Stock and the Average Closing Price of PacifiCare Class B Common
Stock (from assumed values of $67.00 and $68.00, respectively) resulted in (i)
the issuance of 479,000 fewer shares of PacifiCare Holding Class B Common Stock,
(ii) additional pro forma purchase price consideration of $38.6 million, and
(iii) had the effect of reducing pro forma earnings per share by $0.01 for the
nine months ended June 30, 1996 and had no effect on pro forma earnings per
share for the fiscal year ended September 30, 1995. The Final Class A/Common
Share Ratio and Final Class B/Common Share Ratio and the conversion ratio with
respect to the PacifiCare Holding Preferred will be based upon the Average
Closing Price of the PacifiCare Class B Common Stock calculated at the Effective
Time. The purchase price used to calculate goodwill will be based on the trading
prices of PacifiCare Holding Class A Common and PacifiCare Holding Class B
Common following the Effective Time.

The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with: (i) such historical financial statements, and the
notes thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus; (ii) the selected historical financial data appearing
elsewhere in this Joint Proxy Statement/Prospectus; and (iii) the unaudited
selected pro forma financial information and unaudited comparative per share
data, including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "Incorporation of Certain Documents by Reference,"
"Available Information," "Summary -- Selected Historical and Pro Forma Financial
and Operating Data," and "Summary -- Comparative Per Share Data."

83
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
PACIFICARE
1995 PRO FORMA HOLDING, AS
PACIFICARE FHP ACQUISITIONS ADJUSTMENTS (A) ADJUSTED (O)
------------- ------------- ----------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total operating revenue.............. $ 3,731,022 $ 3,909,380 $ 70,662 $ -- $ 7,711,064
Expenses:
Health care services............... 3,077,135 3,238,489 58,284 -- 6,373,908
Marketing, general and
administrative expenses........... 498,445 490,196 10,906 -- 999,547
Amortization of intangibles........ 7,199 31,506 237 31,396(b) 70,338
Disposition and restructuring
charges........................... -- 75,110 -- -- 75,110
------------- ------------- ----------- -------------- -------------
Operating income..................... 148,243 74,079 1,235 (31,396) 192,161
Interest income...................... 39,406 32,079 371 (3,940)(c) 67,916
Interest expense..................... (5,549) (25,972) (234) (78,320)(d) (110,075)
------------- ------------- ----------- -------------- -------------
Income before income taxes........... 182,100 80,186 1,372 (113,656) 150,002
Provision for income taxes........... 74,005 42,894 418 (38,767)(e) 78,550
------------- ------------- ----------- -------------- -------------
Net income........................... 108,095 37,292 954 (74,889) 71,452
Preferred stock dividends............ -- 25,337 -- (14,819)(f) 10,518
------------- ------------- ----------- -------------- -------------
Net income attributable to common
stock............................... $ 108,095 $ 11,955 $ 954 $ (60,070) $ 60,934
------------- ------------- ----------- -------------- -------------
------------- ------------- ----------- -------------- -------------
Weighted average common shares and
equivalents outstanding used to
calculate earnings per share........ 29,864 41,057 40,955(i)
------------- ------------- -------------
------------- ------------- -------------
Earnings per share attributable to
common stock........................ $ 3.62 $ 0.29 $ 1.49
------------- ------------- -------------
------------- ------------- -------------
Ratio of earnings to fixed charges
(m)................................. 2.2x
-------------
-------------
Ratio of earnings to fixed charges
and preferred stock dividends (n)... 1.9x
-------------
-------------
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

84
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
PACIFICARE
PRO FORMA HOLDING, AS
PACIFICARE FHP ADJUSTMENTS (A) ADJUSTED (O)
------------- ------------- -------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total operating revenue........................ $ 3,416,212 $ 3,174,651 $ -- $ 6,590,863
Expenses:
Health care services......................... 2,855,936 2,681,112 -- 5,537,048
Marketing, general and administrative
expenses.................................... 425,147 361,577 -- 786,724
Amortization of intangibles.................. 6,904 23,910 22,097(b) 52,911
Disposition and restructuring charges........ 17,147 3,900 -- 21,047
OPM reserve charge........................... 25,000 45,000 -- 70,000
------------- ------------- -------------- -----------------
Operating income............................... 86,078 59,152 (22,097) 123,133
Interest income................................ 34,749 27,038 61,787
Interest expense............................... (1,737) (14,717) (58,740)(d) (75,194)
------------- ------------- -------------- -----------------
Income before income taxes..................... 119,090 71,473 (80,837) 109,726
Provision for income taxes..................... 50,664 41,247 (27,648)(e) 64,263
------------- ------------- -------------- -----------------
Net income..................................... 68,426 30,226 (53,189) 45,463
Preferred stock dividends...................... -- 19,818 (11,929)(f) 7,889
------------- ------------- -------------- -----------------
Net income attributable to common stock........ $ 68,426 $ 10,408 $ (41,260) $ 37,574
------------- ------------- -------------- -----------------
------------- ------------- -------------- -----------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per
share......................................... 31,654 41,928 42,745(i)
------------- ------------- -----------------
------------- ------------- -----------------
Earnings per share attributable to common
stock......................................... $ 2.16 $ 0.25 $ 0.88
------------- ------------- -----------------
------------- ------------- -----------------
Ratio of earnings to fixed charges (m)......... 2.2x
-----------------
-----------------
Ratio of earnings to fixed charges and
preferred stock dividends (n)................. 1.8x
-----------------
-----------------
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

85
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996

<TABLE>
<CAPTION>
PACIFICARE
PRO FORMA HOLDING, AS
PACIFICARE FHP ADJUSTMENTS (A) ADJUSTED (N)
------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................ $ 154,461 $ 166,873 $ -- $ 321,334
Marketable securities........................... 522,061 187,919 -- 709,980
Receivables, net................................ 139,494 141,537 -- 281,031
Prepaid expenses................................ 4,708 33,736 -- 38,444
Deferred income taxes........................... 28,773 49,162 -- 77,935
------------- ------------- -------------- -------------
Total current assets........................ 849,497 579,227 -- 1,428,724
Property, plant and equipment, net................ 95,270 231,428 (20,000)(g) 306,698
Assets held for sale.............................. -- 16,470 -- 16,470
Long term investments............................. -- 36,470 -- 36,470
Marketable securities -- restricted............... 24,416 90,499 -- 114,915
Goodwill and intangible assets.................... 289,189 1,028,374 1,211,275(h) 2,528,838
Other assets...................................... 6,285 31,411 -- 37,696
------------- ------------- -------------- -------------
$ 1,264,657 $ 2,013,879 $ 1,191,275 $ 4,469,811
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims and benefits payable............. $ 273,800 $ 367,872 $ -- $ 641,672
Accounts payable and accrued liabilities........ 149,586 216,712 105,300(j) 471,598
Unearned premium revenue........................ 16,426 24,713 -- 41,139
Long-term debt due within one year.............. 6,200 30,097 -- 36,297
------------- ------------- -------------- -------------
Total current liabilities................... 446,012 639,394 105,300 1,190,706
Long-term debt due after one year................. 5,555 104,184 1,014,127(k) 1,123,866
Other liabilities................................. -- 102,672 -- 102,672
Minority interest................................. 392 -- -- 392
Deferred income taxes............................. -- -- 129,110(h) 129,110
Shareholders' equity:
Preferred shares................................ -- 1,052 (947)(l) 105
Common shares................................... 312 2,039 (1,931)(l) 420
Additional paid-in capital...................... 364,053 938,478 171,676(l) 1,474,207
Unrealized holding gain (loss) on
available-for-sale securities, net of taxes.... 684 (2,306) 2,306(h) 684
Retained earnings............................... 447,649 228,366 (228,366)(h) 447,649
------------- ------------- -------------- -------------
Total shareholders' equity.................. 812,698 1,167,629 (57,262) 1,923,065
------------- ------------- -------------- -------------
$ 1,264,657 $ 2,013,879 $ 1,191,275 $ 4,469,811
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

86
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

(a) INTEGRATION SYNERGIES. PacifiCare Holding believes it will achieve synergies
from the integration of the Acquisitions by eliminating redundant
administrative costs and using its greater purchasing power to achieve lower
health care and general and administrative costs. The anticipated impact of
such synergies has not been reflected in the unaudited pro forma condensed
consolidated statements of income. The Unaudited Pro Forma Condensed
Consolidated Financial Statements do not reflect any nonrecurring/unusual
restructuring charges that may be incurred as a result of the integration of
FHP.

(b) AMORTIZATION OF INTANGIBLES. Pro forma adjustment to reflect amortization of
approximately $118.7 million and $2.2 billion relating to the 1995
Acquisitions and the Mergers, respectively, of the excess of the purchase
price over the estimated fair value of the net assets acquired using a range
of estimated useful lives for identifiable intangible assets of 20 to 40
years and a 40 year useful life for goodwill (36 year average useful life
relating to the Mergers assuming first year amortization of $61.3 million;
see Note (h)).

(c) INTEREST INCOME. Pro forma adjustment to reflect the reduction of interest
income from the beginning of the pro forma period assuming cash payments for
the 1995 Acquisitions of $121.7 million were made on October 1, 1994. The
interest income is assumed to be earned at an average rate of 7.0 percent
for the fiscal year ended September 30, 1995.

(d) INTEREST EXPENSE. Pro forma adjustment to reflect additional interest
expense on assumed borrowings under the Credit Facility to finance the Cash
Consideration portion of the Mergers at the weighted average interest rate
of approximately 7.50 percent for the fiscal year ended September 30, 1995
and for the nine months ended June 30, 1996. The pro forma adjustment
assumes interest only payments during the first year following the Effective
Time.

(e) INCOME TAXES. Pro forma adjustment to reflect the tax effects of the
Acquisitions and related non-deductible goodwill amortization at the
statutory rates in effect during the fiscal year ended September 30, 1995
and the nine months ended June 30, 1996 (in thousands).

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
Pro forma adjustments to income before income taxes.................. $ 113,656 $ 80,837
Increase in non-deductible goodwill amortization..................... 17,221 12,061
---------- -------------
96,435 68,776
Statutory tax rate................................................... 40.2% 40.2%
---------- -------------
Pro forma adjustment................................................. $ 38,767 $ 27,648
---------- -------------
---------- -------------
</TABLE>

(f) PREFERRED STOCK DIVIDENDS. Pro forma adjustment to reflect a reduction in
dividend payments as a result of the conversion of FHP Preferred Stock into
cash and PacifiCare Holding Preferred to be issued pursuant to the Mergers
assuming approval of the Series A Amendment and issuance of such shares on
October 1, 1994 and 1995.

(g) PROPERTY, PLANT AND EQUIPMENT. Pro forma adjustment to conform FHP's
accounting policies with those of PacifiCare's related to expensing rather
than capitalizing costs relating to purchased and internally developed
software. This adjustment is reflected in goodwill and intangible assets
(see Note (h)).

(h) GOODWILL AND INTANGIBLE ASSETS. Pro forma adjustment to record the Mergers
and reflect the excess of the purchase price over the net assets acquired
and the related deferred tax effect. The purchase price assumed (i) a market
price of $71.00 and $74.00 for the PacifiCare Holding Class A

87
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and Class B Common, respectively, (ii) approval of the Series A Amendment,
(iii) the exercise of FHP Options resulting in the issuance of 0.9 million
shares of FHP Common Stock and the receipt of $19.6 million in cash
proceeds. The purchase price allocation is based on currently available
information and may be adjusted upon completion of the final valuations of
FHP's assets and liabilities. Based on current information, PacifiCare
Holding does not expect the final purchase price allocation to be materially
different from that assumed in the Unaudited Pro Forma Condensed
Consolidated Balance Sheet (in thousands).

<TABLE>
<S> <C> <C>
Purchase price consideration (1)............................... $2,124,494
Direct transaction costs....................................... 105,300
----------
Total purchase price........................................... 2,229,794
Less FHP shareholders' equity as follows:
Preferred shares........................................... 1,052
Common shares.............................................. 2,039
Additional paid-in capital................................. 938,478
Unrealized holding loss on available-for-sale securities,
net of taxes.............................................. (2,306)
Retained earnings.......................................... 228,366
----------
1,062,165
Plus: FHP goodwill and intangible assets....................... 1,028,374
Conforming accounting adjustments (see Note (g))........... 20,000
----------
Acquisition cost in excess of net assets acquired.............. $2,110,539
----------
----------
Allocation of acquisition cost in excess of net assets
acquired:
Allocation to identifiable intangible assets:
Employer groups............................................ $ 225,370
Provider networks.......................................... 84,500
Bank fees.................................................. 11,300
-----------
Subtotal................................................... $ 321,170
Allocation to goodwill:
Goodwill, before deferred tax adjustment................... 1,789,369
Less FHP goodwill.......................................... 1,028,374
-----------
Subtotal................................................... 760,995
Pro forma increase in deferred tax liability due to step up
in identifiable intangible assets......................... 129,110
----------
Pro forma increase in goodwill............................. 890,105
----------
Net pro forma adjustment to goodwill and intangible assets... $1,211,275
----------
----------
</TABLE>

88
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) The purchase price consideration was derived as follows, using FHP share
and option data as of November 8, 1996 and assuming the Series A
Amendment is approved (in thousands, except per share data):

<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES SHARES
----------- -----------
<S> <C> <C> <C>
Cash Consideration:
FHP shares outstanding........................................... 21,036 41,215
FHP Options assumed exercised.................................... -- 888
----------- -----------
FHP total equivalent shares outstanding.......................... 21,036 42,103
Cash conversion price............................................ $ 14.113 $ 17.50
----------- -----------
Cash portion of purchase price, before proceeds from FHP Options
assumed exercised............................................... $ 296,881 $ 736,803
Proceeds from FHP Options assumed exercised...................... -- 19,557
----------- -----------
Total cash consideration....................................... $ 296,881 $ 717,246 $ 1,014,127
----------- -----------
----------- -----------
Stock Consideration:
PacifiCare Holding Class A Common shares issued.................. 2,350
Assumed Closing Price of PacifiCare Holding Class A Common....... $ 71
-----------
Total PacifiCare Holding Class A Common value.................. 166,850
FHP Common equivalent shares outstanding......................... 42,103
Assumed Final Class B/Common Share Ratio......................... 0.200
-----------
PacifiCare Holding Class B Common shares issued.................. 8,441
Assumed Closing Price of PacifiCare Holding Class B Common....... $ 74
-----------
Total PacifiCare Holding Class B Common value.................. 624,611
FHP Preferred shares outstanding................................. 21,036
Assumed PacifiCare Holding Preferred consideration............... $ 15.16
-----------
Total PacifiCare Holding Preferred value....................... 318,906
-------------
Total purchase price consideration............................... $ 2,124,494
-------------
-------------
</TABLE>

If the holders of the FHP Preferred Stock do not approve the Series A
Amendment, each such holder who does not make an Irrevocable Election as
to all of its shares of FHP Preferred Stock will receive certain Special
Conversion Rights. If such holders waive the Special Conversion Rights,
they will receive the consideration they would have received had the FHP
Preferred Stock been converted into FHP Common Stock immediately prior to
the Mergers. If the Series A Amendment is not approved (and no
Irrevocable Elections are made), PacifiCare Holding would issue an
additional 4.3 million shares of PacifiCare Holding Class B Common. This
would have the effect of reducing earnings per share to $1.35 and $0.80
for the fiscal year ended September 30, 1995 and the nine months ended
June 30, 1996, respectively. There would be no effect on the purchase
price.

If the Series A Amendment is not approved, each share of FHP Preferred
Stock as to which an Irrevocable Election is made would be exchanged for
the Series A Merger Consideration.

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<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In this event, PacifiCare Holding would issue fewer than the additional
4.3 million shares of PacifiCare Holding Class B Common issuable assuming
the Series A Amendment is not approved (and no Irrevocable Elections are
made).

If the holders of the FHP Preferred Stock do not approve the Series A
Amendment, each such holder who does not make an Irrevocable Election as
to all of its shares of FHP Preferred and who does elect to exercise its
Special Conversion Rights would be entitled to receive for each such
share of FHP Preferred Stock as to which an Irrevocable Election has not
been made (i) a mix of cash, PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common determined by a formula described in
this Joint Proxy Statement/Prospectus; or (ii) $25.00 in cash. PacifiCare
Holding will have the right to pay any holder who elects the
consideration described in clause (i) of the previous sentence $25.00 in
cash per share despite their election. If the Series A Amendment is not
approved, no Irrevocable Elections are made and all holders of FHP
Preferred Stock elect to exercise their Special Conversion Rights for all
of their shares, the aggregate purchase price consideration for the FHP
Preferred Stock would not exceed $527 million. Since the consideration to
the holders of FHP Preferred Stock in such instance would be
significantly less than the consideration they would receive (i) assuming
the Series A Amendment is approved, (ii) assuming the Series A Amendment
is not approved and Irrevocable Elections are made or (iii) assuming the
Series A Amendment is not approved and the holders of FHP Preferred Stock
do not exercise their Special Conversion Rights, the pro forma effect of
the alternatives relating to an exercise of Special Conversion Rights are
not presented herein.

(i) COMMON SHARES AND EQUIVALENTS OUTSTANDING. The pro forma adjustment reflects
the following events related to the FHP Merger for the fiscal year ended
September 30, 1995 and the nine months ended June 30, 1996, as more
specifically described below.

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
PacifiCare weighted average common shares and equivalents outstanding...... 29,864 31,654
Issuance of PacifiCare Holding Class A Common.............................. 2,350 2,350
Issuance of PacifiCare Holding Class B Common.............................. 8,441 8,441
Conversion of FHP Options to PacifiCare Holding Options upon consummation
of the Mergers, based on the treasury stock method........................ 300 300
------- -------------
PacifiCare Holding weighted average shares and equivalents outstanding, as
adjusted.................................................................. 40,955 42,745
------- -------------
------- -------------
</TABLE>

- ------------------------
No conversion of the PacifiCare Holding Preferred is assumed.

(j) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. Pro forma adjustment to reflect
estimated transaction costs (see Note (h)).

(k) LONG-TERM DEBT DUE AFTER ONE YEAR. Pro forma adjustment to reflect assumed
borrowings under the Credit Facility to finance the Cash Consideration
portion of the Mergers (see Note (d)).

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<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(l) SHAREHOLDERS' EQUITY. Pro forma adjustment to reflect issuance of stock as a
result of the Mergers (see Note (h)).

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN
STOCK STOCK CAPITAL TOTAL
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Issuance of PacifiCare
Holding Class A Common................................... $ 24 $ 166,826 $ 166,850
Issuance of PacifiCare
Holding Class B Common................................... 84 624,527 624,611
Issuance of PacifiCare
Holding Preferred........................................ $ 105 318,801 318,906
Cancellation of FHP Capital Stock.......................... (2,039) (1,052) (938,478) (941,569)
--------- --------- ------------ ------------
Pro forma adjustment....................................... $ (1,931) $ (947) $ 171,676 $ 168,798
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>

(m) RATIO OF EARNINGS TO FIXED CHARGES. For purposes of computing the ratio of
earnings to fixed charges, earnings include income before fixed charges,
provision for Federal and state income taxes and minority interests. Fixed
charges consist of interest expense, including amortization of deferred
financing costs and the interest component of capitalized leases, and the
portion of operating lease expense which management believes is
representative of the interest component of rental expenses.

(n) RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS. For
purposes of computing the ratio of earnings to fixed charges and preferred
stock dividends, earnings include income before fixed charges, provision for
Federal and state income taxes and minority interests. Fixed charges and
preferred stock dividends consist of preferred stock dividends, interest
expense, including amortization of deferred financing costs and the interest
component of capitalized leases, and the portion of operating lease expense
which management believes is representative of the interest component of
rental expenses.

(o) PRO FORMA EFFECT OF TALBERT RIGHTS OFFERING. FHP has negotiated a written
agreement with Talbert, under which all Talbert-contracted medical providers
or sites agree to provide professional services to members of HMOs and
enrollees in insurance products of PacifiCare Holding and its subsidiaries
in exchange for a negotiated Capitation Fee (the "Capitated Talbert
Contract"). In addition, FHP shall enter into an agreement for FHP to render
certain administrative services (primarily related to certain information
systems) for a period not to exceed one year following the Effective Time at
a rate and on other terms approved by PacifiCare Holding. Following the
execution of the Capitated Talbert Contract, FHP will capitalize Talbert to
increase its net worth to approximately $60 million.

FHP will distribute, as soon as practicable and legally permissible after
the Effective Time, to holders of FHP Common Stock and FHP Preferred Stock
as of immediately prior to the Effective Time, one Talbert Right for each
21.41174 shares of FHP Common Stock and one Talbert Right for each 26.54897
shares of FHP Preferred Stock held on the Talbert Rights Record Date,
subject to adjustment to reflect any additional shares of FHP Capital Stock
issued prior to the Effective Time. Pursuant to the Talbert Rights Offering,
holders of Talbert Rights may purchase one share of Talbert Common Stock for
each Talbert Right held for the subscription price of $21.50 per share.
Holders of Talbert Rights will be entitled to subscribe for all, or any
portion of, the shares of Talbert Common Stock underlying their Talbert
Rights.

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<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Proceeds from the exercise of the Talbert Rights, to the extent subscribed,
will be used to repay the note payable to FHP. There can be no assurance
that the Talbert Rights Offering will be partially or fully subscribed. The
unaudited pro forma financial information does not include the pro forma
effect of the Talbert Rights Offering and the Capitated Talbert Contract.
See "The Mergers and Related Transactions -- Talbert Rights Offering."

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<PAGE>
DESCRIPTION OF PACIFICARE HOLDING CAPITAL STOCK

THE FOLLOWING DESCRIPTION OF THE PACIFICARE HOLDING CAPITAL STOCK IS
QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF THE RESTATED CERTIFICATE,
WHICH IS INCORPORATED BY REFERENCE HEREIN AND A COPY OF WHICH IS ANNEXED TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AS EXHIBIT 1.4 TO APPENDIX A.

The authorized capital stock of PacifiCare Holding immediately prior to the
Effective Time will consist of 100,000,000 shares of PacifiCare Holding Class A
Common, par value $0.01 per share, 100,000,000 shares of PacifiCare Holding
Class B Common, par value $0.01 per share, and 40,000,000 shares of PacifiCare
Holding Preferred, par value $0.01 per share.

PACIFICARE HOLDING CLASS A COMMON AND CLASS B COMMON

DIVIDENDS. Subject to the rights of any outstanding preferred stock, each
holder of PacifiCare Holding Common shall be entitled to share equally, on a per
share basis, in dividends, when, as and if declared by the Board of Directors of
PacifiCare Holding, out of funds legally available therefor, except that
dividends or other distributions payable on the PacifiCare Holding Common in
PacifiCare Holding Common shall be made to all holders of PacifiCare Holding
Common and may be made: (i) in PacifiCare Holding Class B Common to the record
holders of PacifiCare Holding Class A Common and to the record holders of
PacifiCare Holding Class B Common; (ii) in PacifiCare Holding Class A Common to
the record holders of PacifiCare Holding Class A Common and in PacifiCare
Holding Class B Common to the record holders of PacifiCare Holding Class B
Common; or (iii) in any other authorized class or series of capital stock to the
holders of both classes of PacifiCare Holding Common.

LIQUIDATION. In the event of any liquidation, dissolution or winding up of
PacifiCare Holding, the holders of PacifiCare Holding Common shall, subject to
the rights of any outstanding shares of preferred stock, share equally and
ratably in all assets available for distribution to PacifiCare Holding
stockholders.

VOTING RIGHTS. Each holder of PacifiCare Holding Class A Common shall be
entitled to one vote for each share of PacifiCare Holding Class A Common
standing in such holder's name on the stock transfer records of PacifiCare
Holding in connection with the election of directors and all other actions
submitted to a vote of stockholders. The holders of PacifiCare Holding Class B
Common shall not vote on any matters except as otherwise provided by the
Restated Certificate and the DGCL.

The holders of PacifiCare Holding Class B Common shall be entitled to vote
separately as a group only with respect to: (i) proposals to change the par
value of the PacifiCare Holding Class B Common; (ii) amendments to the Restated
Certificate that alter or change the powers, preferences or special rights of
the holders of PacifiCare Holding Class B Common so as to affect them adversely;
and (iii) such other matters as may require separate group voting under the
Restated Certificate or the DGCL. The number of shares of authorized PacifiCare
Holding Class B Common may be increased or decreased (but not below the number
of shares then outstanding) by the affirmative vote of the holders of a majority
of the PacifiCare Holding Class A Common.

Under the Restated Certificate, certain transactions known as Business
Transactions (as defined below) involving a Control Person (as defined below)
must be approved by the affirmative vote of the holders of 66 2/3% of the total
votes entitled to be cast in an election of directors; provided, however, that
the foregoing shall not apply if (i) the Business Transaction was approved by a
two-thirds vote of the Board of Directors of PacifiCare Holding prior to the
acquisition by the Control Person, together with its affiliates and associates,
of stock of PacifiCare Holding, which, in the aggregate, bears the rights to 10%
or more of the total votes entitled to be cast in an election of directors; or
(ii) the Business Transaction was approved by a two-thirds vote of the Board of
Directors of PacifiCare Holding after the acquisition by the Control Person,
together with its affiliates and associates, of stock of PacifiCare Holding,
which, in the aggregate, bears the rights to 10% or more of the total votes
entitled to be cast in an election of directors, and such acquisition by such
Control Person and its affiliates and associates was unanimously approved by the
Board of Directors of PacifiCare Holding; or (iii) the Business Transaction is
solely between PacifiCare Holding and another corporation, 50% or more of the
voting

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<PAGE>
stock of which is owned by PacifiCare Holding and none of which is owned by a
Control Person, and each holder of stock of PacifiCare Holding receives the same
type of consideration in proportion to such holder's holdings; or (iv) both of
the following are satisfied: (a) the cash or fair market value of the property,
securities or other consideration to be received per share in the Business
Transaction by holders of stock of PacifiCare Holding is not less than the
higher of (1) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other expenses,
including, but not limited to, newspaper advertisements, printing and attorney's
fees) paid by such Control Person in acquiring any of its holdings of PacifiCare
Holding's stock, or (2) the highest per share market price of the stock of
PacifiCare during the 3-month period immediately preceding the date of the proxy
statement described in the following clause (b); and (b) a proxy statement
responsive to the requirements of the Exchange Act shall be mailed to public
stockholders of PacifiCare Holding for the purpose of soliciting stockholder
approval of such Business Transaction and shall contain at the front thereof, in
a prominent place, any recommendations as to the advisability (or
inadvisability) of the Business Transaction which the continuing directors of
PacifiCare Holding, or any of them, may choose to state, and, if deemed
advisable by a majority of the continuing directors of PacifiCare Holding, an
opinion of a reputable investment banking firm as to the fairness (or
unfairness) of the terms of such Business Transaction, from the point of view of
the remaining public stockholders of PacifiCare Holding (such investment banking
firm to be selected by a majority of the continuing directors of PacifiCare
Holding and to be paid a reasonable fee for their services by PacifiCare Holding
upon receipt of such opinion). A "Control Person" is generally defined as a
person or entity, or group of persons or entities, who owns or has the right to
control 10% of the total votes entitled to be cast in an election of directors.
A "Business Transaction" is generally defined as a transaction involving the
merger with, the sale or lease of assets to or from, the issuance of securities
to or purchase of securities from, or plan of dissolution of PacifiCare Holding
by, any Control Person.

CONVERSION. All outstanding PacifiCare Holding Class B Common shall be
converted into PacifiCare Holding Class A Common on a share-for-share basis by
the Board of Directors if, as a result of the existence of the PacifiCare
Holding Class B Common, either the PacifiCare Holding Class A Common or
PacifiCare Holding Class B Common or both are excluded from trading on the NYSE,
the American Stock Exchange and all other principal national securities
exchanges then in use and also is excluded from quotation on the Nasdaq National
Market and other comparable national quotation systems then in use. In making
such determination, the PacifiCare Holding Board of Directors may conclusively
rely on any information or documentation available to it, including filings,
made with the Commission, any stock exchange, the National Association of
Securities Dealers, Inc. or any other governmental or regulatory agency or any
written instrument purporting to be authentic. All outstanding PacifiCare
Holding Class B Common shall be converted into PacifiCare Holding Class A Common
on a share-for-share basis if at any time the number of shares of outstanding
PacifiCare Holding Class A Common, as reflected on the stock transfer records of
PacifiCare Holding, falls below 10% of the aggregate number of outstanding
PacifiCare Holding Class A Common and of PacifiCare Holding Class B Common. In
the event of any conversion of the PacifiCare Holding Class B Common as
described in this paragraph, certificates which formerly represented outstanding
shares of PacifiCare Holding Class B Common will thereafter be deemed to
represent a like number of shares of PacifiCare Holding Class A Common and all
authorized PacifiCare Holding Common shall consist of only PacifiCare Holding
Class A Common.

CLASS B COMMON SHARE PROTECTION PROVISION. The PacifiCare Holding
Certificate of Incorporation suspends the voting rights of any person or group
that acquires a beneficial interest of 10% or more of the then outstanding
PacifiCare Holding Class A Common (excluding shares acquired at the Effective
Time and upon issuance or sale by the Company, by operation of law, by will or
the laws of descent or distribution, by gift or by foreclosure of a bona fide
loan), unless such person or group (a "Significant Stockholder") then
beneficially owns an equal or greater percentage of the outstanding PacifiCare
Holding Class B Common acquired after the Effective Time, or such Significant
Stockholder makes a tender offer for sufficient PacifiCare Holding Class B
Common to reach such a level of

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<PAGE>
ownership. This provision also applies when a Significant Stockholder acquires
the next higher integral multiple of 5% (e.g. 15%, 20%, 25%, etc.) of the
outstanding PacifiCare Holding Class A Common.

MERGER. In the event of a merger or consolidation of PacifiCare Holding
with or into another entity (whether or not PacifiCare Holding is the surviving
entity), the holders of PacifiCare Holding Class B Common shall be entitled to
receive the same per share consideration as the per share consideration, if any,
received by any holder of the PacifiCare Holding Class A Common in such merger
or consolidation; provided, however, that this restriction shall not apply to
the PacifiCare Merger.

PACIFICARE HOLDING PREFERRED

If the Series A Amendment is approved, a class of PacifiCare Holding
Preferred shall be designated "Series A Cumulative Convertible Preferred
Shares," with 11,000,000 shares authorized and the following rights,
preferences, privileges and powers:

RANK. The PacifiCare Holding Preferred shall rank, with respect to dividend
rights and rights on liquidation, winding-up and dissolution of PacifiCare
Holding: (i) senior to all classes of common stock of PacifiCare Holding, as
they exist on the date the Restated Certificate is filed or as such stock may be
constituted from time to time, and each other class or series of capital stock
or preferred stock established by the PacifiCare Holding Board of Directors to
the extent the terms of such stock do not expressly provide that it ranks senior
to or on a parity with the PacifiCare Holding Preferred as to dividend rights
and rights on liquidation, winding-up and dissolution (collectively, together
with the PacifiCare Holding Common, the "Junior Securities"); (ii) on a parity
with each other class or series of capital stock or of preferred stock issued by
PacifiCare Holding established by the PacifiCare Holding Board of Directors to
the extent the terms of such stock expressly provide that it will rank on a
parity with the PacifiCare Holding Preferred as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Parity Securities");
and (iii) junior to each other class of capital stock or series of preferred
stock established by the Board to the extent the terms of such stock expressly
provide that it will rank senior to the PacifiCare Holding Preferred as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Senior Securities"). Each share of the PacifiCare Holding
Preferred shall rank equally in all respects with each other share of the
PacifiCare Holding Preferred.

DIVIDENDS. Holders of PacifiCare Holding Preferred will be entitled to
receive, when, as and if declared by the PacifiCare Holding Board of Directors
out of funds of PacifiCare Holding legally available therefor, cash dividends at
an annual rate of $1.00 per share of PacifiCare Holding Preferred, payable
quarterly in arrears on March 15, June 15, September 15, and December 15, of
each year, commencing with the first dividend date following the Mergers;
provided that the dividend payable on the first dividend date following the
Mergers shall be in an amount determined by assuming that the PacifiCare Holding
Preferred (i) had been outstanding on the date immediately following the last
dividend payment date on the FHP Preferred Stock (the "Transition Period
Commencement Date"); and (ii) had been entitled to receive, when, as and if
declared by the Board of Directors out of funds of PacifiCare Holding legally
available therefor, cash dividends at an annual rate of (a)$2.50 per share from
such date through the date of consummation of the Mergers and (b)$1.00 per share
from the date immediately following the date of the Mergers through the first
dividend date following the Mergers. Each dividend will be payable to holders of
record as they appear on the books of PacifiCare Holding at the close of
business on a record date, not more than 60 nor less than 15 days before the
payment date, fixed by the PacifiCare Holding Board of Directors. Dividends will
be cumulative from the date of consummation of the Mergers (the Transition
Period Commencement Date for the first dividend). Dividends for each full
dividend period will be computed by dividing the annual dividend rate by four
and dividends payable for any period less than a full dividend period will be
computed on the basis of a 360-day year consisting of twelve 30-day months. The
PacifiCare Holding Preferred will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends. No
interest, or sum of money in lieu of interest, will be payable in respect of any
accrued and unpaid dividends. No dividends may be paid or set apart for such
payment, or other distributions

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made on Junior Securities (except dividends on Junior Securities paid in
additional shares of Junior Securities), and no PacifiCare Holding Preferred,
Parity Securities or Junior Securities may be repurchased, redeemed or otherwise
retired directly or indirectly by PacifiCare Holding, if full cumulative
dividends to be paid hereunder prior to the date thereof have not been paid on
the PacifiCare Holding Preferred. Notwithstanding the foregoing, PacifiCare
Holding may: (i) make redemptions, purchases or other acquisitions of PacifiCare
Holding Preferred, Parity Securities or Junior Securities payable in Junior
Securities or repurchases of PacifiCare Holding Preferred, Parity Securities or
Junior Securities in the ordinary course of business pursuant to the terms of
any current or future employee stock incentive plan or similar plan adopted by
the PacifiCare Holding Board of Directors; and (ii) make redemptions of Rights
(as defined below in "-- Conversion") distributed pursuant to a Rights Agreement
(as defined in "-- Conversion").

LIQUIDATION RIGHTS. The "Stated Value" of each share of PacifiCare Holding
Preferred shall be $25.00. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of PacifiCare Holding, after satisfaction
of the claims of creditors and any holders of Senior Securities and before any
payment or distribution of assets is made on any Junior Securities, including,
without limitation, the PacifiCare Holding Common, the holders of PacifiCare
Holding Preferred shall receive a liquidation preference equal to the Stated
Value of their shares, and shall be entitled to receive an amount equal to all
accrued and unpaid dividends through the date of distribution (whether or not
declared). After payment of any such liquidation preference and accrued but
unpaid dividends, the PacifiCare Holding Preferred will not be entitled to any
further participation in any distribution of assets by PacifiCare Holding.
Neither the sale or transfer of all or any part of the assets of PacifiCare
Holding for cash, securities or other property, nor the merger or consolidation
of PacifiCare Holding into or with any other corporation or a merger of any
other corporation with or into PacifiCare Holding, will be deemed to be a
liquidation, dissolution or winding-up of PacifiCare Holding.

VOTING RIGHTS. Except as provided below or as may be required by the DGCL
or provided by the resolution creating any other series of PacifiCare Holding
Preferred, the holders of PacifiCare Holding Preferred will not be entitled to
vote. So long as any shares of PacifiCare Holding Preferred are outstanding, the
vote or consent of the holders of 66 2/3% of the outstanding shares of
PacifiCare Holding Preferred, voting together as a single class, shall be
necessary to: (i) increase or decrease the par value of the shares of PacifiCare
Holding Preferred; (ii) alter or change the powers, preferences or special
rights of the shares of PacifiCare Holding Preferred so as to affect them
adversely; or (iii) authorize or issue any class or series of Parity Securities
or Senior Securities, or any security convertible into Parity Securities or
Senior Securities.

In the event that any accrued dividends (whether or not declared) on the
PacifiCare Holding Preferred shall not have been paid in an aggregate amount
equal to or greater than six quarterly dividends, the maximum authorized number
of directors of PacifiCare Holding will be automatically increased by two, and
holders of PacifiCare Holding Preferred shall be entitled to vote their shares
of PacifiCare Holding Preferred, to elect, as a class, an additional two
directors. So long as any shares of PacifiCare Holding Preferred shall be
outstanding, the holders of shares of PacifiCare Holding Preferred shall retain
the right to vote and elect, with the holders of Parity Securities upon which
like voting rights have been conferred and are exercisable (the "Voting Parity
Securities"), as a class, two directors until all accrued but unpaid dividends
on the PacifiCare Holding Preferred are paid in full or declared and set aside
for payment.

Unless and until the holders of PacifiCare Holding Preferred and Voting
Parity Securities shall have exercised their right to elect two directors voting
as a class, the holders of PacifiCare Holding Class A Common, and other classes
of stock of PacifiCare Holding, if applicable, shall continue to be entitled to
elect all of the directors.

CONVERSION. Each share of PacifiCare Holding Preferred will be convertible
(the rights to convert described in this section are referred to as the
"Conversion Rights") at the option of the holder thereof, into such number of
fully paid and non-assessable shares of PacifiCare Holding Class B

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Common (together with any Rights (as defined below) associated therewith) as is
equal to (i) the sum of (a) twice the Stated Value of the PacifiCare Holding
Preferred plus (b) accrued but unpaid dividends in arrears thereon to which the
holder converting such shares is entitled, divided by (ii) the Conversion Price
then in effect. The initial "Conversion Price" for the PacifiCare Holding
Preferred shall be a price equal to $31.00 multiplied by a fraction, the
numerator of which is 1.00 and the denominator of which is the Final Exchange
Ratio and shall be subject to adjustment as described below (the "PacifiCare
Holding Conversion Price"). Shares of PacifiCare Holding Preferred called for
redemption will not be convertible after the close of business on the day
preceding the date fixed for redemption, unless PacifiCare Holding defaults in
payment of the redemption price.

The Conversion Price is subject to adjustment after the issuance of the
PacifiCare Holding Preferred from time to time as follows: (i) in case
PacifiCare Holding shall (a) pay a dividend or make a distribution on PacifiCare
Holding Common in shares of PacifiCare Holding Common, (b) subdivide its
outstanding shares of PacifiCare Holding Common into a greater number of shares
or (c) combine its outstanding shares of any class of PacifiCare Holding Common
into a smaller number of shares, the Conversion Price in effect immediately
prior to such action shall be adjusted (and any other appropriate action taken
by PacifiCare Holding) so that the holder of any PacifiCare Holding Preferred
thereafter surrendered for conversion shall be entitled to receive the number of
shares of PacifiCare Holding Common which such holder would have been entitled
to receive immediately following such action had the holder's PacifiCare Holding
Preferred been converted immediately prior thereto; (ii) in case PacifiCare
Holding shall issue rights, options or warrants to all holders of its
outstanding shares of PacifiCare Holding Common, or of its outstanding shares of
any class or series of PacifiCare Holding Common, entitling them, for a period
expiring within 45 days after the record date mentioned below, to subscribe for
or purchase shares of PacifiCare Holding Common at a price per share less than
the Current Market Price per share (as defined in the Restated Certificate) of
such offered PacifiCare Holding Common on the record date mentioned below, then
the Conversion Price in effect immediately prior thereto shall be adjusted as
provided in the Restated Certificate.

Notwithstanding the immediately preceding paragraph, any adjustments to the
Conversion Price to account for the issuance of rights ("Rights") under a
stockholder rights plan or agreement, "poison pill" or similar arrangement (a
"Rights Agreement") adopted subsequent to the date hereof shall be made when
such Rights become exercisable or exchangeable by the holder thereof for
PacifiCare Holding Common (PacifiCare Holding Common issued pursuant to the
exercise of, or exchange by PacifiCare Holding for, such Rights are referred to
as "Rights Stock") pursuant to a Rights Agreement at a price per share less than
the Current Market Price per share of such PacifiCare Holding Common on the date
of such exercise or exchange. In such event, the Conversion Price in effect
immediately prior to such exercise or exchange shall be adjusted as provided in
the Restated Certificate.

In case PacifiCare Holding shall distribute to substantially all holders of
PacifiCare Holding Common, or to substantially all holders of its outstanding
shares of any class or series of PacifiCare Holding Common, evidences of
indebtedness, equity securities (including equity interests in PacifiCare
Holding's subsidiaries) other than PacifiCare Holding Common or other assets
(other than cash dividends paid out of earned surplus of PacifiCare Holding or,
if there shall be no earned surplus, out of net profits for the fiscal year in
which the dividend is made and/or the preceding fiscal year), or shall
distribute to substantially all holders of PacifiCare Holding Common or to
substantially all holders of any class or series of PacifiCare Holding Common,
rights, options or warrants to subscribe to securities (other than any rights,
options or warrants referred to above or Rights referred to above), then in each
such case the Conversion Price shall be adjusted as provided in the Restated
Certificate.

No adjustment in the Conversion Price shall be required if the holders of
PacifiCare Holding Preferred are to participate in the transaction on a basis
and with notice that the PacifiCare Holding Board of Directors determines in
good faith to be fair and appropriate in light of the basis and notice on which
holders of PacifiCare Holding Common participate in the transaction.

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<PAGE>
To the extent permitted by law, PacifiCare Holding from time to time may
reduce the Conversion Price by any amount for any period of at least 20 days (or
such other period as may then be required by applicable law) if the PacifiCare
Holding Board of Directors has made a determination in good faith that such
reduction would be in the best interests of PacifiCare Holding, which
determination shall be conclusive. No reduction in the Conversion Price pursuant
to this paragraph shall become effective unless PacifiCare Holding shall have
mailed a notice, at least 15 days prior to the date on which such reduction is
scheduled to become effective, to each holder of PacifiCare Holding Preferred.
At its option, PacifiCare Holding may make such reduction in the Conversion
Price, in addition to those otherwise required by this section, as the
PacifiCare Holding Board of Directors deems advisable to avoid or diminish any
income tax to holders of PacifiCare Holding Common resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes; provided that any such reduction shall not be
effective until written evidence of the action of the PacifiCare Holding Board
of Directors authorizing such reduction shall be filed with the Secretary of
PacifiCare Holding and notice thereof shall have been given by first-class mail,
postage prepaid, to each holder of PacifiCare Holding Preferred at such holder's
address as it appears on the books of PacifiCare Holding.

If any transaction shall occur, including without limitation: (i) any
recapitalization or reclassification of shares of PacifiCare Holding Common or
any class or series of PacifiCare Holding Common (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination of the PacifiCare Holding Common);
(ii) any consolidation or merger of PacifiCare Holding with or into another
person or any merger of another person into PacifiCare Holding (other than a
merger in which PacifiCare Holding is the surviving corporation and that does
not result in a reclassification, conversion, exchange or cancellation of
PacifiCare Holding Common, or any class or series of PacifiCare Holding Common);
(iii) any sale, lease or transfer of all or substantially all of the assets of
PacifiCare Holding; (iv) any compulsory share exchange; or (v) any conversion of
all of the outstanding PacifiCare Holding Class B Common into PacifiCare Holding
Class A Common, pursuant to any of which holders of PacifiCare Holding Class B
Common shall be entitled to receive other securities, cash or other property,
then appropriate provision shall be made so that the holder of each share of
PacifiCare Holding Preferred then outstanding shall have the right thereafter to
receive on account of such share only the kind and amount of the securities,
cash or other property that would have been receivable upon such
recapitalization, reclassification, consolidation, merger, sale, lease,
transfer, share exchange or conversion by a holder of the number of shares of
PacifiCare Holding Class B Common issuable upon conversion of such share of
PacifiCare Holding Preferred immediately prior to such recapitalization,
reclassification, consolidation, merger, sale, lease, transfer or share
exchange, and PacifiCare Holding shall not enter into any such merger,
consolidation, sale, lease, transfer or share exchange unless the company formed
by such consolidation or resulting from such merger or that acquires such assets
or that acquires PacifiCare Holding's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other constituent
document or certificate of merger or other document effecting any such merger,
consolidation, sale, lease, transfer or share exchange to establish such right.
Upon the occurrence of any transaction described in the preceding sentence
(except clause (i) thereof), the PacifiCare Holding Preferred then outstanding
shall be deemed converted, subject nevertheless to the provisions discussed in
"-- Change in Control" below, to the extent applicable.

ADOPTION OF RIGHTS AGREEMENT. PacifiCare Holding shall not adopt a Rights
Agreement unless such Rights Agreement shall provide that: (i) each holder of a
share of PacifiCare Holding Preferred shall be entitled to receive thereunder,
upon conversion of such share of PacifiCare Holding Preferred (in accordance
with the terms hereof), prior to the earlier to occur of (a) the date of
redemption of Rights issued under such Rights Agreement, (b) the date of
expiration of the Rights issued under such Rights Agreement or (c) the date the
Conversion Price of the PacifiCare Holding Preferred is adjusted to account for
the issuance of Rights, Rights in an amount equal to the amount of Rights issued
with respect to the number of shares of PacifiCare Holding Common to be received
upon such conversion; and (ii) if such Rights are redeemed prior to the
conversion of any share of PacifiCare Holding

98
<PAGE>
Preferred into PacifiCare Holding Common, then, upon conversion of such share of
PacifiCare Holding Preferred, the holder thereof shall receive an amount in cash
equal to the amount in cash that such holder would have received had he
converted such share of PacifiCare Holding Preferred prior to such redemption.

OPTIONAL REDEMPTION. On or after June 17, 1998, PacifiCare Holding may, at
its option, redeem all or from time to time any part of the shares of PacifiCare
Holding Preferred, out of funds legally available therefor, upon giving a notice
of redemption as set forth below, at the following redemption prices per share
(expressed as percentages of the Stated Value), plus an amount equal to accrued
and unpaid dividends, if any (whether or not declared), up to but excluding the
date fixed for redemption, if redeemed during the twelve-month period commencing
on June 17 of the years indicated below:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -------------
<S> <C>
1998............................................................................. 103.0%
1999............................................................................. 102.5%
2000............................................................................. 102.0%
2001............................................................................. 101.5%
2002............................................................................. 101.0%
2003............................................................................. 100.5%
2004............................................................................. 100.0%
</TABLE>

If fewer than all of the outstanding shares of the PacifiCare Holding
Preferred are to be redeemed, the number of shares to be redeemed shall be
determined by the PacifiCare Holding Board of Directors in good faith and the
shares to be redeemed will be determined PRO RATA as nearly as practicable, or
by such other method as the PacifiCare Holding Board of Directors may determine
to be fair and appropriate. PacifiCare Holding Preferred may not be redeemed
unless full cumulative dividends have been paid on the PacifiCare Holding
Preferred for all past dividend periods.

CHANGE IN CONTROL. If there occurs a Change in Control (as defined below)
with respect to PacifiCare Holding, then each share of PacifiCare Holding
Preferred may be converted (the rights to convert described in this Section
referred to as the "Special Conversion Rights"), at the option of the holder
thereof at any time from the date of such Change in Control until the expiration
of 55 days after the date of the Conversion Notice (as defined below) by
PacifiCare Holding to all holders of the PacifiCare Holding Preferred, into, at
its option, either: (i) such number of fully paid and non-assessable shares of
PacifiCare Holding Class B Common as is equal to the Stated Value of the
PacifiCare Holding Preferred divided by the Special Conversion Price (as defined
below); or (ii) an amount in cash equal to the Stated Value of the PacifiCare
Holding Preferred plus an amount equal to any accrued but unpaid dividends
thereon. The "Special Conversion Price" shall be the closing price of the
PacifiCare Holding Class B Common on the last trading day prior to the date
PacifiCare Holding gives the Conversion Notice to the holders of PacifiCare
Holding Preferred. Within five days after the occurrence of a Change in Control,
PacifiCare Holding shall give notice of the occurrence of the Change in Control
and of the Special Conversion Rights set forth herein in accordance with the
procedures set forth below to each holder of PacifiCare Holding Preferred.

Exercise of the Special Conversion Rights by a holder of PacifiCare Holding
Preferred will be irrevocable. PacifiCare Holding shall not enter into any
consolidation, merger or sale of assets, unless in connection therewith, the
holders of PacifiCare Holding Preferred exercising Special Conversion Rights
will be entitled to receive the same consideration as received for the number of
shares of PacifiCare Holding Class B Common into which their shares of
PacifiCare Holding Preferred would have been converted pursuant to the Special
Conversion Rights. The Special Conversion Rights are in addition to the regular
Conversion Rights that apply to the PacifiCare Holding Preferred. PacifiCare
Holding may, at its option, elect to pay holders of PacifiCare Holding Preferred
exercising Special Conversion Rights an amount in cash equal to the Stated Value
of the PacifiCare Holding Preferred plus an amount equal to any accrued but
unpaid dividends thereon.

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<PAGE>
"Change in Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of PacifiCare
Holding's assets as an entirety or substantially as an entirety to any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) in one or a
series of transactions, provided that a transaction where the holders of
PacifiCare Holding Common immediately prior to such transaction own, directly or
indirectly, 50% or more of the common stock of such person or group immediately
after such transactions shall not be a Change in Control; (ii) the acquisition
by PacifiCare Holding and/or any of its subsidiaries of 50% or more of the
aggregate voting power of the PacifiCare Holding Common in one transaction or a
series of related transactions; (iii) the liquidation or dissolution of
PacifiCare Holding, provided that a liquidation or dissolution of PacifiCare
Holding which is part of a transaction or series of related transactions that
does not constitute a Change in Control under the "provided"' clause of clause
(i) above shall not constitute a Change in Control under this clause (iii); or
(iv) any transaction or series of transactions (as a result of a tender offer,
merger, consolidation or otherwise) that results in, or that is in connection
with, (a) any person, including a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) that includes such person, acquiring "beneficial
ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% or more of the aggregate voting power of the PacifiCare
Holding Common or any person that possesses "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), directly, of 50% or more of the aggregate
voting power of the PacifiCare Holding Common, or (b) less than 50% (measured by
the aggregate voting power of all classes) of PacifiCare Holding Common being
registered under Section 12(b) or 12(g) of the Exchange Act.

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<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS

COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO PACIFICARE HOLDING AND
PACIFICARE

The rights of PacifiCare's stockholders are governed by the PacifiCare
Certificate, PacifiCare's bylaws and the DGCL. After the Effective Time, the
rights of PacifiCare stockholders who become PacifiCare Holding stockholders
will be governed by the Restated Certificate, PacifiCare Holding's bylaws and
the DGCL. The following is a summary comparison of certain differences between
the rights of PacifiCare stockholders under the PacifiCare Certificate and the
rights of PacifiCare Holding stockholders under the Restated Certificate. Except
as described in the next sentence, PacifiCare Holding has adopted bylaws
substantially identical to those of PacifiCare and, consequently, no differences
arise in the rights of a stockholder under PacifiCare's bylaws as compared to
the rights of a stockholder under PacifiCare Holding's bylaws. Unlike the bylaws
of PacifiCare, PacifiCare Holding, under its bylaws, is required to reimburse
the expenses of a director incurred in connection with certain litigation or
other disputes relating to his or her status as a director, subject to repayment
to PacifiCare Holding in the event the director is determined not to be entitled
to indemnification by PacifiCare Holding. This summary does not purport to be
complete and is qualified in its entirety by reference to the Restated
Certificate, the PacifiCare Holding Bylaws and the PacifiCare Certificate.

COMPARISON OF THE RIGHTS OF THE HOLDERS OF PACIFICARE COMMON STOCK AND THE
HOLDERS OF
PACIFICARE HOLDING COMMON

REMOVAL OF DIRECTORS. A director of PacifiCare can be removed prior to the
expiration of his or her term by either: (i) the affirmative vote or written
consent of the holders of at least 66 2/3% of the total number of votes entitled
to vote in an election of directors; or (ii) unanimous vote of the remaining
directors if such director has been declared of unsound mind by a court of law
or convicted of a felony. The Restated Certificate does not provide for removal
by unanimous vote of the remaining directors but does provide for the removal by
the affirmative vote or written consent of the holders of 66 2/3% of the total
number of votes entitled to vote in an election of directors.

EXISTENCE OF SENIOR PREFERRED STOCK. Under the PacifiCare Certificate,
there is no series of capital stock issued or outstanding with rights,
preferences or privileges senior to the PacifiCare Common Stock. If the Series A
Amendment is approved, 11,000,000 shares of PacifiCare Holding Preferred will be
authorized under the Restated Certificate and it is anticipated that almost all
of these shares could be issued in the FHP Merger (the exact number of shares to
be issued being dependent upon whether the Series A Amendment is approved, the
number of shares of FHP Preferred Stock, if any, converted into FHP Common Stock
prior to the Effective Time, the number of shares, if any, of FHP Preferred
Stock whose holders exercise appraisal rights and the number of shares of FHP
Preferred Stock for which proper Irrevocable Elections are made). The holders of
the PacifiCare Holding Preferred will have rights, preferences and privileges
which are senior to the holders of PacifiCare Holding Common, including, without
limitation, a preferential cumulative dividend of $1.00 per share and a
liquidation preference of $25.00 per share. The material rights, preferences and
privileges of the PacifiCare Holding Preferred are described under "Description
of PacifiCare Holding Capital Stock -- PacifiCare Holding Preferred."

With the exception of the differences summarized above with respect to the
PacifiCare Common Stock and PacifiCare Holding Common, there are no material
differences between: (i) the rights of the holder of PacifiCare Class A Common
Stock and the holders of the PacifiCare Holding Class A Common Stock; and (ii)
the rights of the holders of PacifiCare Class B Common Stock and the holders of
PacifiCare Holding Class B Common.

COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO PACIFICARE HOLDING AND FHP

The rights of FHP's stockholders are governed by the FHP Certificate, FHP's
bylaws and the DGCL. After the Effective Time, the rights of FHP stockholders
who become PacifiCare Holding stockholders will be governed by the Restated
Certificate, PacifiCare Holding's bylaws and the DGCL. The following is a
summary comparison of certain differences between the rights of FHP stockholders
under the FHP Certificate and the FHP bylaws and the rights of PacifiCare
Holding stockholders

101
<PAGE>
under the Restated Certificate, and PacifiCare Holding's bylaws. This summary
does not purport to be complete and is qualified in its entirety by reference to
the Restated Certificate, the FHP Certificate and the bylaws of PacifiCare
Holding and FHP.

COMPARISON OF THE RIGHTS OF THE HOLDERS OF FHP COMMON STOCK AND THE HOLDERS
OF
PACIFICARE HOLDING CLASS A COMMON

GENERAL. In accordance with the terms of the FHP Merger, each share of FHP
Common Stock shall be converted into the right to receive a fraction of a share
of PacifiCare Holding Class A Common and a fraction of a share of PacifiCare
Holding Class B Common. With the exception of the differences set forth below
under the captions "Approval of Certain Transactions" and "Ability to Call
Special Stockholder Meetings" there are no material differences between the
rights of the FHP Common stockholders and the PacifiCare Holding Class A Common
stockholders.

APPROVAL OF CERTAIN TRANSACTIONS. Under the FHP Certificate, the
affirmative vote of the holders of 66 2/3% of the outstanding voting capital
stock of FHP is required for the approval or authorization of any: (i) merger or
consolidation of FHP with or into any other corporation; or (ii) sale, lease,
exchange or disposition of all or substantially all of the assets of FHP to or
with any other corporation, person or entity, unless such transaction is
approved by a resolution adopted by 80% of the FHP Board of Directors. Under the
Restated Certificate, certain transactions known as Business Transactions
involving a Control Person must be approved by the affirmative vote of the
holders of 66 2/3% of the total votes entitled to be cast in an election of
directors. A "Control Person" is generally defined as a person or entity, or
group of persons or entities, who owns or has the right to control 10% of the
total votes entitled to be cast in an election of directors. A "Business
Transaction" is generally defined as a transaction involving the merger with,
the sale or lease of assets to or from, the issuance of securities to or
purchase of securities from, or plan of dissolution of PacifiCare Holdings by,
any Control Person.

ABILITY TO CALL SPECIAL STOCKHOLDER MEETINGS. Under FHP's bylaws, a special
meeting of the stockholders may be called by (i) the Chairman of the Board or
(ii) by resolution adopted by a majority of the total number of authorized
directors. The stockholders of FHP do not have a right to call a special meeting
of stockholders. Under the PacifiCare Holding bylaws, a special meeting of
stockholders may be called by: (i) the President, (ii) the President and
Secretary upon the written request of a majority of the Board of Directors, or
(iii) the written request of stockholders holding a majority of the capital
stock of PacifiCare Holding issued and outstanding and entitled to vote.

COMPARISON OF THE RIGHTS OF THE HOLDERS OF FHP COMMON STOCK AND HOLDERS OF
PACIFICARE HOLDING CLASS B COMMON

VOTING RIGHTS. The holders of FHP Common Stock have the right to one vote
per share of FHP Common Stock on each matter presented to the stockholders,
including the election of directors. The holders of PacifiCare Holding Class B
Common are not entitled to vote their shares of PacifiCare Holding Class B
Common, except with respect to: (i) proposals to change the par value of the
PacifiCare Holding Class B Common; (ii) amendments to the Restated Certificate
that alter or change the powers, preferences or special rights of the holders of
PacifiCare Holding Class B Common so as to affect them adversely; and (iii) such
other matters that may require group voting under the Restated Certificate and
under the DGCL.

CONVERSION RIGHTS. The FHP Common Stock is not convertible. The PacifiCare
Holding Class B Common converts into PacifiCare Class A Common only in the
following circumstances: (i) the Board of Directors of PacifiCare Holding
determines that either the PacifiCare Holding Class A Common or the PacifiCare
Holding Class B Common, or both, are excluded from trading on all national stock
exchanges and national quotation system as a result of the existence of the
PacifiCare Holding Class B Common; or (ii) the number of shares at PacifiCare
Holding Class A Common, as reflected on PacifiCare Holding's stock transfer
records, falls below 10% of the aggregate of PacifiCare Holding Class A and
Class B outstanding.

102
<PAGE>
CLASS B COMMON SHARE PROTECTION PROVISION. The Restated Certificate
provides that, if a person, entity or group acquires 10% or more of the
PacifiCare Holding Class A Common and does not own an equal or greater
percentage of PacifiCare Holding Class B Common, then such person, entity or
group must also purchase an equivalent percentage of PacifiCare Holding Class B
Common (based on the outstanding PacifiCare Holding Class B Common less any
PacifiCare Holding Class B Common held by such person entity or group) or lose
the right to vote such shares. See "Description of PacifiCare Holding Capital
Stock -- PacifiCare Holding Class A Common and Class B Common -- Class B Common
Share Protection Provision."

COMPARISON OF THE RIGHTS OF FHP PREFERRED STOCKHOLDERS AND PACIFICARE
HOLDING PREFERRED STOCKHOLDERS

EXCHANGE RATIO. A holder of the FHP Preferred will be entitled to receive
0.50 shares of PacifiCare Holding Preferred for each share of FHP Preferred
Stock, if the required vote for the Series A Amendment is received or if such
holder makes a proper Irrevocable Election with respect to such share.

DIVIDEND RIGHTS. Under the FHP Certificate, the holders of FHP Preferred
Stock are entitled to receive, when, as and if declared by the Board of
Directors of FHP out of funds of FHP legally available therefore, cash dividends
at the annual rate of $1.25 per share, payable quarterly in arrears on March 15,
June 15, September 15 and December 15. Under the Restated Certificate, the
holders of PacifiCare Holding Preferred are entitled to receive, when, as and if
declared by the PacifiCare Holding Board of Directors out of funds of PacifiCare
Holding legally available therefore, cash dividends at the annual rate of $1.00
per share payable quarterly in arrears on March 15, June 15, September 15 and
December 15. The dividend for the period commencing on the date immediately
after the last dividend payment date on the FHP Preferred Stock before the
Effective Time through the first dividend payment date for the PacifiCare
Holding Preferred is set at a special rate.

CONVERSION. The FHP Preferred Stock is convertible, at the option of the
holder thereof, into such number of shares of FHP Common Stock (together with
any rights associated with such common stock) as is equal to (A) the sum of
$25.00 plus (ii) accrued but unpaid dividends, divided by (B) the conversion
price for the FHP Preferred Stock (the "FHP Conversion Price"). The initial FHP
Conversion Price is $31.00 and is subject to antidilution provisions in the FHP
Certificate. Accordingly, at the present time, each share of FHP Preferred Stock
is convertible at the option of the holder thereof (assuming no accrued but
unpaid dividends) into approximately 0.80645 shares of FHP Common Stock.

The PacifiCare Holding Preferred is convertible, at the option of the holder
thereof, into such number of shares of PacifiCare Holding Class B Common
(together with any rights associated with such common stock) as is equal to (i)
the sum of (a) $50.00 plus (b) accrued but unpaid dividends, divided by (ii) the
PacifiCare Holding Conversion Price. The initial PacifiCare Holding Conversion
Price is equal to the product of (1) $31.00 multiplied by (2) a fraction, the
numerator of which is $1.00 and the denominator of which is the Final Exchange
Ratio. See "The Merger and Related Transactions -- Merger Consideration" for the
calculation of the Final Exchange Ratio.

The following examples illustrate the calculation of the PacifiCare Holding
Conversion Price and the conversion of the PacifiCare Holding Preferred. These
examples are for illustration only and do not represent a prediction as to the
probable PacifiCare Holding Conversion Price at the Effective Time. The examples
assume no accrued but unpaid dividends.

If the Average Closing Price of PacifiCare Holding Class B Common were to be
$70.00, the Final Exchange Ratio will be 0.258, the PacifiCare Holding
Conversion Price will be approximately $120.155 and each PacifiCare Holding
Preferred stockholder will be entitled to convert one share of PacifiCare
Holding Preferred into approximately 0.416 shares of PacifiCare Holding Class B
Common.

103
<PAGE>
If the Average Closing Price of PacifiCare Holding Class B Common were to be
$55.00, the Final Exchange Ratio will be 0.273, the PacifiCare Holding
Conversion Price will be approximately $113.553 and each PacifiCare Holding
Preferred stockholder will be entitled to convert one share of PacifiCare
Preferred into approximately 0.440 shares of PacifiCare Holding Class B Common.

If the Average Closing Price of Class B Common were to be $80.00, the Final
Exchange Ratio will be .245, the PacifiCare Holding Conversion Price will be
approximately $126.531 and each PacifiCare Holding Preferred stockholder will be
entitled to convert one share of PacifiCare Holding Preferred into approximately
0.395 shares of PacifiCare Holding Class B Common.

The PacifiCare Holding Conversion Price is subject to antidilution
provisions in the Restated Certificate.

The FHP Preferred Stock is convertible into FHP Common Stock, a voting
stock, whereas, the PacifiCare Holding Preferred is convertible into PacifiCare
Holding Class B Common, a non-voting class of stock. See "-- Comparison of
Rights of the Holders of FHP Common Stock and Holders of PacifiCare Holding
Class B Common."

104
<PAGE>
MANAGEMENT OF PACIFICARE HOLDING

DIRECTORS

Upon consummation of the Mergers or within 60 days thereafter, the
PacifiCare Holding Board of Directors will consist of the members of the
PacifiCare Board of Directors immediately prior to the Effective Time and Jack
R. Anderson and Joseph F. Prevratil, current directors of FHP designated by the
FHP Board of Directors, and Craig T. Beam and Bradley C. Call, designated by the
PacifiCare Board of Directors. Current members of the PacifiCare Board of
Directors are indicated as such in the table below. The table below lists
individuals currently expected to become members of the PacifiCare Holding Board
of Directors.

CURRENT DIRECTORS OF PACIFICARE

<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Terry O. Hartshorn.................. 1985 51 Mr. Hartshorn has been Chairman of the PacifiCare Board of
Directors and President and Chief Executive Officer of
UniHealth since April 1993. Mr. Hartshorn served as
President and Chief Executive Officer of PacifiCare from
1976 to April 1993, and as Secretary and a director of
PacifiCare from 1977 to 1981. Mr. Hartshorn has served as a
Director of Apria HealthCare Group Inc., a provider of home
health care products and services, since 1991, and also as
a Director of Emcare Holdings Inc., a provider of emergency
department services, since November 1994. Mr. Hartshorn is
a member of the Executive and Nominating Committees of
PacifiCare.
Alan R. Hoops....................... 1994 49 Mr. Hoops has been President and Chief Executive Officer of
PacifiCare since April 1993. Mr. Hoops served as Executive
Vice President and Chief Operating Officer of PacifiCare
from 1986 to April 1993, as Secretary of PacifiCare from
1982 to April 1993, as Senior Vice President of PacifiCare
from 1985 to 1986 and as Vice President, Marketing and
Planning of PacifiCare from 1977 to 1985. Mr. Hoops is a
member of the Executive and Nominating Committees of
PacifiCare.
David R. Carpenter.................. 1989 57 Mr. Carpenter has been President of the Darcy Company, an
actuarial and insurance consulting company, since 1995. Mr.
Carpenter served as Executive Vice President of
Transamerica Corporation from 1993 through 1995, Group Vice
President of Transamerica Corporation from 1990 through
1993, Chairman from 1985 through 1995 and Chief Executive
Officer from 1984 through 1995 of Transamerica Occidental
Life Insurance Company. Mr. Carpenter has also been
Chairman of the UniHealth Board of Directors since 1994, an
Ex-Officio Member of the Compensation Committee of
UniHealth since 1994 and serves as Chairman of its
Executive and Nominating Committees and Governance
Subcommittee. Mr. Carpenter is
</TABLE>

105
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
Chairman of PacifiCare's Compensation and Nominating
Committees and is a member of its Executive Committee. Mr.
Carpenter has served as a Director of H.F. Ahmanson &
Company, parent of Home Savings of America, since 1995.
<S> <C> <C> <C>
Gary L. Leary....................... 1989 61 Mr. Leary has been Executive Vice President of UniHealth
since April 1992, General Counsel of UniHealth since 1988,
Director and member of the Executive Committee of UniHealth
since 1988, and Secretary of the UniHealth Board of
Directors since November 1994. Mr. Leary has served as
Corporate Counsel to UniHealth and its predecessor since
1977.
Warren E. Pinckert II............... 1985 52 Mr. Pinckert has been President, Chief Executive Officer
and a Director of Cholestech Corporation, a medical device
manufacturing firm, since June 1993. At Cholestech
Corporation Mr. Pinckert served as Executive Vice
President, Operations from 1991 to June 1993, Vice
President of Finance and Business Development from 1989 to
1991, and Secretary from 1989 to June 1993. Mr. Pinckert is
a member of the Compensation, Executive and Special
Committees of PacifiCare and is Chairman of its
Audit/Finance Committee. Mr. Pinckert is a certified public
accountant.
David A. Reed....................... 1992 63 Mr. Reed currently is the President of DAR Consulting Group
and serves as a special advisor to the Health Care Practice
Group of Deloitte & Touche LLP. Mr. Reed served as
President and Chief Executive Officer of St. Joseph Health
System, a nonprofit public benefit corporation, owning and
operating hospitals and other health care service entities,
from 1990 through December 1994. Mr. Reed is a former
chairman and speaker of the House of Delegates of the
American Hospital Association. Mr. Reed is a member of the
Audit and Special Committees of PacifiCare. Mr. Reed
recently has been elected to the Board of Directors of
Invitro International, a developer and distributor of in
vitro bioassay systems.
Lloyd E. Ross....................... 1985 55 Mr. Ross has been President and Chief Executive Officer of
SMI Construction, Inc., a commercial and industrial
building company, since 1976 and has been Vice President,
Division Manager of ARB, Inc., a construction company,
since February 1996. Mr. Ross is a member of the
Audit/Finance, Compensation and Special Committees of
PacifiCare.
</TABLE>

106
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Jean Bixby Smith.................... 1995 58 Ms. Smith has been President of Bixby Land Company since
January 1984 and President of Alamitos Land Company since
March 1991, both of which are engaged in the development
and management of commercial and industrial real estate.
Ms. Smith has also been a Director of UniHealth since 1988.

PROPOSED DIRECTORS OF PACIFICARE HOLDING

Jack R. Anderson.................... 71 Mr. Anderson joined the FHP Board of Directors in June
1994. He was elected Chairman of the FHP Board of Directors
in June 1995 and is a member of the FHP Executive
Committee. Mr. Anderson is also Chairman of the TMMC Board
of Directors. Mr. Anderson was Chairman of the Board of
Directors of TakeCare from 1988 to June of 1994. He has
been President of Calver Corporation, a health care
consulting and investing firm, and a private investor since
1982. Mr. Anderson currently serves on the Boards of
Directors of Horizon Mental Health Management, Inc. and
United Dental Care, Inc.
Craig T. Beam....................... 41 Mr. Beam has been President of Beam & Associates, a real
estate development and management company, including health
care project management, since 1981. Mr. Beam has served as
a director of UniHealth since 1993, is a fellow of the
National Health Foundation, past chairman and a member of
board of directors of Martin Luther Hospital since 1982 and
is past Chairman of the American Heart Association,
California affiliate.
Bradley C. Call..................... 53 Mr. Call has been President and Chief Executive Officer of
Klienhart Industries, Inc., the parent of aerospace
manufacturing, analysis and inspection entities since 1988
and a member of the board of directors of Klienhart
Industries, Inc. since 1988. Mr. Call has also served as a
member of the board of directors of UniHealth since 1995
and Northridge Hospital Medical Center since 1991.
</TABLE>

107
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Joseph F. Prevratil................. 58 Mr. Prevratil has been a member of the FHP Board of
Directors since 1991 and is Chairman of the FHP Executive
Committee and a member of the FHP Audit and Compensation
Committees. Mr. Prevratil also serves as a director and
Chief Executive Officer of FHP Foundation and as a director
of TMMC. From 1982 to 1988, Mr. Prevratil served as
President of Wrather Port Properties, Inc., an
entertainment and hotel complex that included the Queen
Mary oceanliner in Long Beach, California. In 1988 and 1989
he served as Executive Director of the Port of Long Beach.
From 1989 to 1993, Mr. Prevratil was President of his own
business, providing contracted consulting and management
services to the leisure-time industry and the Redevelopment
Agency of the City of Long Beach. In 1993, Mr. Prevratil
became President of the RMS Foundation, Inc., a nonprofit
corporation operating the Queen Mary oceanliner attraction.
</TABLE>

COMMITTEES OF THE PACIFICARE HOLDING BOARD OF DIRECTORS

Following the Mergers, the PacifiCare Holding Board of Directors will
establish such committees and designate members of such committees as it deems
appropriate; such committees may include, among others: (i) an executive
committee; (ii) an audit/finance committee; (iii) a compensation committee; and
(iv) a governance/nominating committee.

COMPENSATION OF DIRECTORS

It is anticipated that non-employee directors of PacifiCare Holding will be
compensated in a similar manner as the non-employee directors of PacifiCare are
compensated at the Effective Time. PacifiCare has a compensation package
consisting of cash compensation and stock options, which enhances its ability to
attract and retain the services of qualified and experienced non-employee
directors. Accordingly, PacifiCare Holding will adopt a compensation plan
similar to PacifiCare's at the Effective Time (the "PacifiCare Compensation
Plan"). Pursuant to the PacifiCare Compensation Plan, directors who are not
full-time employees of PacifiCare Holding or UniHealth receive, as compensation
for their services, an annual retainer of $25,000, $1,200 for each PacifiCare
Board of Directors meeting attended or each PacifiCare Board of Directors
committee meeting attended and a telephone meeting fee equal to one-half the fee
paid for a PacifiCare Board of Directors meeting or PacifiCare Board committee
meeting, as the case may be. The Chairman of the Board and Chairmen of
committees receive an additional 200% of the amount paid for attendance at
meetings for each PacifiCare Board of Directors committee meeting attended.

In addition, it is anticipated that non-employee directors of PacifiCare
Holding, who are not eligible to receive grants under an officer and employee
stock option plan of PacifiCare Holding, would be eligible to receive
non-qualified stock options to purchase shares of PacifiCare Holding Class B
Common under a plan to be adopted by PacifiCare Holding that will be similar in
all material respects to the PacifiCare Directors Stock Option Plan. See "Second
Amended PacifiCare Directors Plan."

108
<PAGE>
EXECUTIVE OFFICERS

Set forth below are the names and titles of the persons who are expected to
serve as executive officers of PacifiCare Holding following the Mergers:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Terry Hartshorn..................... 51 Chairman of the Board
Alan Hoops.......................... 49 President and Chief Executive Officer
Jeffrey Folick...................... 49 Executive Vice President and Chief Operating Officer
Wayne Lowell........................ 41 Executive Vice President, Chief Administrative Officer and Chief
Financial Officer
Joseph Konowiecki................... 43 General Counsel and Secretary
Patrick Feyen....................... 40 Regional Vice President of the Southwest, President, PacifiCare of
Oklahoma, Inc. and President, PacifiCare of Texas, Inc.
Jon Wampler......................... 45 Regional Vice President of the West and President, PacifiCare of
California
Ronald Davis........................ 37 Senior Vice President, Operations
Mitchell Goodstein.................. 44 Senior Vice President, Health Care Economics
Wanda Lee........................... 55 Senior Vice President, Corporate Human Resources
Linda Lyons, M.D.................... 47 Senior Vice President, Health Services
Craig Schub......................... 41 Senior Vice President, Marketing and President, Secure Horizons USA,
Inc.
James Williams...................... 49 Senior Vice President and Chief Information Officer
William Young....................... 50 Senior Vice President, Corporate Marketing
Mary Langsdorf...................... 36 Vice President and Corporate Controller
</TABLE>

COMPENSATION OF EXECUTIVE OFFICERS

PacifiCare Holding has not yet paid any compensation to its Chief Executive
Officer or any of its other executive officers. The PacifiCare Holding Board of
Directors may rely on a compensation committee composed of non-employee members
of the PacifiCare Holding Board of Directors (the "PacifiCare Holding
Compensation Committee") to recommend the form and amount of compensation to be
paid to the executive officers of PacifiCare Holding. It is anticipated that
when the PacifiCare Holding Compensation Committee meets or determines such
compensation, the PacifiCare Holding Compensation Committee will generally
adhere to the PacifiCare compensation policies and philosophy that compensation
should reflect the value created for stockholders while supporting the business
strategies and long-range plans of PacifiCare Holding and the markets PacifiCare
Holding will serve. Accordingly, it is expected that a compensation program will
be developed with the following themes: (i) a compensation program that stresses
PacifiCare Holding's financial performance and individual performance; (ii) a
portion of compensation would be based on the achievement of specific
performance goals, with compensation being competitive with companies of similar
business structure, size, and marketplace orientation; and (iii) a program
designed to reward and retain executive officers over the long-term. On an
ongoing basis, subject to any existing employment agreements, the type and
amount of compensation to be paid by PacifiCare Holding to its officers will be
entirely discretionary and within the subjective judgment of the PacifiCare
Holding Compensation Committee.

For information concerning the compensation paid to the Chief Executive
Officer and the other four most highly compensated executive officers of
PacifiCare for the fiscal year ended September 30, 1995, see the 1996 Proxy
Statement for PacifiCare, the relevant portions of which are incorporated by
reference into PacifiCare's Form 10-K and Form 10-K/A for the fiscal year ended
September 30, 1995.

109
<PAGE>
OWNERSHIP OF PACIFICARE, FHP AND PACIFICARE HOLDING

PACIFICARE

The following table sets forth certain information as of October 31, 1996
regarding beneficial ownership of PacifiCare Class A Common Stock and PacifiCare
Class B Common Stock: (i) by each person known by PacifiCare to own beneficially
more than 5% of the outstanding shares of PacifiCare Class A Common Stock or
PacifiCare Class B Common Stock; (ii) by each of the current directors and named
executive officers (as defined in Item 402(a)(3) of Regulation S-K) of
PacifiCare; and (iii) by all of the PacifiCare's directors and executive
officers as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
CLASS A BENEFICIAL HOLDERS OWNED (1) BENEFICIALLY OWNED
- -------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
UniHealth .................................................... 5,910,000 47.7%
3400 Riverside Drive
Burbank, CA 91505
The Capital Group Companies, Inc. ............................ 1,272,100(2) 10.3
333 South Hope Street
Los Angeles, CA 90071
Massachusetts Financial Services ............................. 762,075(3) 6.2
500 Boylston Street
Boston, MA 02115
Terry Hartshorn............................................... 212,000(4)(5) 1.7
Alan Hoops.................................................... 190,000(4)(5) 1.5
David Carpenter............................................... 6,900(4)(5) *
Gary Leary.................................................... 6,900(4)(5) *
Warren Pinckert............................................... 10,500(4)(5) *
David Reed.................................................... 300(4)(5) *
Lloyd Ross.................................................... 1,500(4)(5) *
Jean Smith.................................................... 230(4) *
Jeffrey Folick................................................ 4,000(4)(5) *
Wayne Lowell.................................................. 18,800(4)(5) *
Craig Schub................................................... -- *
Roger Taylor, M.D. (6)........................................ -- *
Jon Wampler................................................... 7,250(4)(5) *
All Executive Officers and Directors as a group (22
persons)..................................................... 488,880 3.9
</TABLE>

- ------------------------
* Indicates beneficial ownership of less than 1.0%.

110
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
CLASS B BENEFICIAL HOLDERS OWNED (1) BENEFICIALLY OWNED
- -------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
The Capital Group Companies, Inc. ............................ 2,801,900(2) 14.8%
333 South Hope Street
Los Angeles, CA 90071
FMR Corp. .................................................... 2,401,900(8) 12.7
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services ............................. 2,203,199(3) 11.7
500 Boylston Street
Boston, MA 02115
American Express Financial Advisor ........................... 1,065,000(7) 5.6
IDS Tower 10
Minneapolis, MN 55440
Terry Hartshorn............................................... 160,683(4)(5) *
Alan Hoops.................................................... 193,947(4)(5) 1.0
David Carpenter............................................... 9,900(4)(5) *
Gary Leary.................................................... 9,900(4)(5) *
Warren Pinckert............................................... 5,216(4)(5) *
David Reed.................................................... 1,700(4)(5) *
Lloyd Ross.................................................... 3,900(4)(5) *
Jean Smith.................................................... 425(4) *
Jeffrey Folick................................................ 76,500(4)(5) *
Wayne Lowell.................................................. 36,602(4)(5) *
Roger Taylor, M.D. (6)........................................ 1,431 *
Craig Schub................................................... 27,428(4)(5) *
Jon Wampler................................................... 31,794(4)(5) *
All Executive Officers and Directors as a group (22
persons)..................................................... 665,452 3.4
</TABLE>

- ------------------------
* Indicates beneficial ownership of less than 1.0%.
(1) Information with respect to beneficial ownership is based on information
furnished to PacifiCare by each person in this table and is reported in
accordance with the beneficial ownership rules of the Commission.

(2) Number of shares beneficially owned by The Capital Group Companies, Inc., a
registered investment advisor ("Capital Groups"), as of June 30, 1996,
according to a Schedule 13F filed with the Commission. Capital Groups may be
deemed a beneficial owner of shares of the PacifiCare Class A and Class B
Common Stock under Rule 13d-3 of the Exchange Act as a result of its
discretionary authority to dispose of the shares on behalf of its clients.

(3) Number of shares beneficially owned by Massachusetts Financial Services, a
registered investment advisor, as of June 30, 1996 according to a Schedule
13F filed with the Commission. Massachusetts Financial Services may be
deemed a beneficial owner of shares of the PacifiCare Class A and Class B
Common Stock under Rule 13d-3 of the Exchange Act as a result of its
discretionary authority to dispose of the shares on behalf of its clients.

(4) The stockholder has sole voting and dispositive power with respect to the
shares of PacifiCare Common Stock shown to be beneficially owned by the
stockholder. Individuals included in this table reside in states having
community property laws under which the spouse of the stockholder in whose
name the securities are registered, may be entitled to share in the
management of their community property, which may include the right to vote
or dispose of the shares of PacifiCare Common Stock.

(5) Shares reported include options exercisable 60 days after September 1, 1996,
which are reported pursuant to Rule 13d-3(d)(1) under the Exchange Act.

111
<PAGE>
(6) Dr. Taylor resigned as Executive Vice President and Chief Medical Officer of
PacifiCare effective as of June 28, 1996.

(7) Number of shares beneficially owned by American Express Financial Services,
a registered investment advisor ("American Express"), as of June 30, 1996
according to a Schedule 13F filed with the Commission. American Express may
be deemed a beneficial owner of shares of PacifiCare Class B Common Stock
under Rule 13d-3 of the Exchange Act as a result of its discretionary
authority to dispose of the shares on behalf of its clients.

(8) Number of shares beneficially owned by FMR Corp., the parent of Fidelity
Management & Research Company, a registered investment advisor ("Fidelity"),
as of October 9, 1996, according to a Schedule 13G filed with the
Commission. FMR Corp. may be deemed a beneficial owner of shares of
PacifiCare Class B Common Stock under Rule 13d-3 of the Exchange Act as a
result of Fidelity's discretionary authority to dispose of the shares on
behalf of its clients.

112
<PAGE>
FHP

The following tables set forth certain information regarding beneficial
ownership of FHP Common Stock and FHP Preferred Stock: (i) by each person known
by FHP to own beneficially more than 5% of the outstanding shares of FHP Common
Stock and FHP Preferred Stock; (ii) by each of the current directors and named
executive officers (as defined in Item 402(a)(3) of Regulation S-K) of FHP; and
(iii) by all of FHP's directors and executive officers as a group. The
information with respect to the directors and named executive officers is as of
October 31, 1996. The information with respect to 5% stockholders is as of June
30, 1996.

<TABLE>
<CAPTION>
PERCENT OF
CLASS NUMBER OF SHARES CLASS
OF BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER (1) SECURITIES OWNED (2) OWNED
- ---------------------------------------------------------------- ----------- --------------------- -------------
<S> <C> <C> <C>
Heine Securities Corporation.................................... Common 5,694,266(8) 13.8%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Neuberger & Berman L.P. ........................................ Common 4,001,346(8) 9.7
605 Third Avenue
New York, NY 10158
FHP International Corporation
Employee Stock Ownership Plan ................................ Common 3,206,629(9) 7.8
3120 Lake Center Drive
Santa Ana, CA 92704
The Capital Group Companies, Inc. .............................. Common 3,238,300(8) 7.9
333 South Hope Street
Los Angeles, CA 90071
Invista Capital Management, Inc. ............................... Common 2,199,416(8) 5.3
1500 Hub Tower
699 Walnut Street
Des Moines, IA 50309
Jack R. Anderson................................................ Common 829,518(3) 2.0
Preferred 2,771,794(3) 13.2
Richard M. Burdge, Sr. ......................................... Common 287,631(5)(7) *
Preferred 742,104(7) 3.5
Westcott W. Price III........................................... Common 531,297(4)(5)(6) 1.3
Burke F. Gumbiner............................................... Common 184,353(4)(5)(6) *
Warner Heineman................................................. Common 24,900(5) *
Robert W. Jamplis, M.D.......................................... Common 5,000(5) *
Joseph F. Prevratil............................................. Common 39,000(5) *
Van B. Honeycutt................................................ Common 0 *
Robert C. Maxson, Ed.D.......................................... Common 0 *
Jack D. Massimino............................................... Common 132,041(4)(5) *
Gloria L. Austin................................................ Common 29,358(4)(5) *
Michael J. Weinstock............................................ Common 61,306(4)(5) *
Jeffrey H. Margolis............................................. Common 52,526(4)(5) *
Directors and executive officers
as a group (19 persons) ....................................... Common 2,441,965 5.9
Preferred 3,658,306 17.4
</TABLE>

- ------------------------
* Less than 1.0%

(1) c/o FHP International Corporation, P.O. Box 25186, Santa Ana, California
92799-5186 unless otherwise indicated.

113
<PAGE>
(2) Reported in accordance with the beneficial ownership rules of the
Commission. Subject to community property laws, where applicable, voting
power or investment power with respect to shares reflected in the table is
not shared with others.

(3) Includes 137,202 shares of FHP Common Stock held by Mr. Anderson's wife and
271,200 shares of FHP Common Stock held by trusts of which Mr. Anderson's
relatives are beneficiaries. Includes 457,340 shares of FHP Preferred Stock
held by Mr. Anderson's wife and 904,000 shares of FHP Preferred Stock held
by trusts of which Mr. Anderson's relatives are beneficiaries. Mr. Anderson
disclaims beneficial ownership of these shares.

(4) Includes shares held by the trustee under the ESOP. As of December 31, 1995,
the approximate number of shares of FHP Common Stock allocated to the ESOP
accounts of the officers and directors named above were as follows: Westcott
W. Price III -- 5,297 shares; Burke F. Gumbiner -- 3,853 shares; Jack D.
Massimino -- 3,291 shares; Gloria L. Austin -- 2,108 shares; Michael J.
Weinstock -- 2,806 shares; Jeffrey H. Margolis -- 191 shares.

(5) Shares reported include stock options exercisable 60 days after October 31,
1996, which are reported pursuant to Rule 13d-3(d)(1) under the Exchange
Act.

(6) Includes shares held under a revocable trust controlled by the named
individual.

(7) Includes 25,030 shares of FHP Common Stock held by Mr. Burdge's wife and
48,000 shares of FHP Common Stock held by a trust of which Mr. Burdge's
relatives are beneficiaries. Includes 83,435 shares of FHP Preferred Stock
held by Mr. Burdge's wife. Mr. Burdge disclaims beneficial ownership of
these shares.

(8) Based upon a Schedule 13F for the quarter ended June 30, 1996, filed with
the Commission.

(9) Share ownership reported as of September 30, 1996.

114
<PAGE>
PACIFICARE HOLDING

All of the outstanding capital stock of PacifiCare Holding is now owned (and
will be owned through the Effective Time) by PacifiCare.

The following table sets forth certain information regarding the number of
shares of PacifiCare Holding Class A Common and PacifiCare Holding Class B
Common to be held, assuming consummation of the Mergers, by each person expected
to be a beneficial owner of 5% or more of the PacifiCare Holding Class A Common
or the PacifiCare Holding Class B Common or a director of PacifiCare Holding and
by the expected directors and executive officers of PacifiCare Holding as a
group. The table assumes that: (i) the Average Closing Price of PacifiCare
Holding Class B Common is $80.00, so that the Final Exchange Ratio is 0.256;
(ii) the Series A Amendment is approved; (iii) the number of outstanding shares
of FHP Common Stock is 41,214,595 and the number of outstanding shares of FHP
Preferred Stock is 21,035,804; (iv) none of the holders listed above in the
tables acquire or dispose of any PacifiCare Common Stock or FHP Capital Stock
between the dates of the information in such tables and the Effective Time; and
(v) all of PacifiCare's executive officers agree to waive the acceleration of
their existing options.

<TABLE>
<CAPTION>
PACIFICARE HOLDING PACIFICARE HOLDING
CLASS A COMMON CLASS B COMMON
---------------------- ----------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES CLASS SHARES CLASS
- -------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
UniHealth......................................... 5,910,000 40.1% 285,000 1.1%
3400 Riverside Drive
Burbank, CA 91505
The Capital Group Companies, Inc. ................ 1,456,666 9.9 3,446,262 12.7
333 South Hope Street
Los Angeles, CA 90071
Massachusetts Financial Services.................. 762,075 5.2 2,203,199 8.1
500 Boylston Street
Boston, MA 02115
FMR Corp. ........................................ -- * 2,401,900 8.9
82 Devonshire Street
Boston, MA 02109
Terry Hartshorn................................... 212,000 1.4 160,683 *
Alan Hoops........................................ 190,000 1.3 193,947 *
Jack Anderson (1)................................. 47,283 * 165,074 *
Craig Beam........................................ -- * -- *
Bradley Call...................................... -- * -- *
David Carpenter................................... 6,900 * 14,900 *
Gary Leary........................................ 6,900 * 14,900 *
Warren Pinckert................................... 10,500 * 10,216 *
Joseph Prevratil.................................. 2,109 * 7,363 *
David Reed........................................ 300 * 6,200 *
Lloyd Ross........................................ 1,500 * 8,900 *
Jean Smith........................................ 230 * 2,425 *
All Executive Officers and Directors as a Group
(26 persons).................................... 538,272 3.6 864,389 3.1
</TABLE>

- ------------------------
(1) Mr. Anderson also will own 1,385,897 shares of PacifiCare Holding Preferred
upon consummation of the Mergers.

115
<PAGE>
SECOND AMENDED PACIFICARE
DIRECTORS PLAN

The PacifiCare Board of Directors has approved the Second Amended PacifiCare
Directors Plan. The full text of the Second Amended PacifiCare Directors Plan is
attached hereto as Appendix E and is incorporated herein by reference. The
summary of the Second Amended PacifiCare Directors Plan is qualified in its
entirety by reference to the full text of the Second Amended PacifiCare
Directors Plan.

DESCRIPTION OF THE PACIFICARE DIRECTORS STOCK OPTION PLAN

Under the PacifiCare Directors Stock Option Plan, which was approved by
PacifiCare stockholders at the 1996 Annual Meeting of PacifiCare, non-officer
directors of PacifiCare who are not eligible to receive awards under the Second
Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of
PacifiCare Health Systems, Inc., as amended (the "PacifiCare Employee Stock
Option Plan"), are automatically granted NQSOs to purchase 2,000 shares of
PacifiCare Class B Common Stock on December 31 of each year; provided that,
during the 12 preceding months, the director served on the PacifiCare Board of
Directors and was not eligible to receive awards under the PacifiCare Employee
Stock Option Plan. As of the date hereof, six directors are eligible to
participate in the PacifiCare Directors Stock Option Plan. Currently, no more
than 140,000 shares of PacifiCare Class B Common Stock are available for NQSOs
under the PacifiCare Directors Stock Option Plan.

The per share exercise price of the shares of PacifiCare Class B Common
Stock subject to any NQSO granted under the PacifiCare Directors Stock Option
Plan is 100% of the fair market value of the shares on the date of grant. NQSOs
granted under the PacifiCare Directors Stock Option Plan vest in four cumulative
installments of 25% of the shares of PacifiCare Class B Common Stock covered by
each NQSO beginning on the first anniversary of the date of the grant.

NQSOs granted under the PacifiCare Directors Stock Option Plan may not be
exercised after the earlier of: (i) the expiration of 10 years and one day from
the date the NQSO was granted; (ii) the expiration of eight months from the time
the optionee voluntarily or involuntarily ceases to serve as a director of
PacifiCare; and (iii) the expiration of one year from the date an optionee
ceases to serve as a director of PacifiCare by reason of disability or death. In
addition, the PacifiCare Directors Stock Option Plan provides for an automatic
and immediate acceleration of the vesting of all NQSOs granted under the
PacifiCare Directors Stock Option Plan that had been held for at least six
months upon the occurrence of a change of control of PacifiCare (as defined in
the PacifiCare Directors Stock Option Plan) or upon the liquidation or
dissolution of PacifiCare.

During fiscal 1996, Messrs. Carpenter, Leary, Pinckert, Reed and Ross and
Ms. Smith were each granted NQSOs to purchase 2,000 shares of PacifiCare Class B
Common Stock. The aggregate market value of the PacifiCare Class B Common Stock
underlying NQSOs outstanding under the PacifiCare Directors Stock Option Plan is
$2,439,500.

REASON FOR PROPOSAL

The PacifiCare Board of Directors has approved the Second Amended PacifiCare
Directors Plan. Among other changes to the PacifiCare Directors Stock Option
Plan, the Second Amended PacifiCare Directors Plan would provide that: (i) each
eligible director of PacifiCare, upon being elected to the PacifiCare Board of
Directors, will be automatically granted options to purchase 10,000 shares of
PacifiCare Class B Common Stock; (ii) the number of shares available for option
grants under the Second Amended PacifiCare Directors Plan would be increased
from 140,000 to 390,000; and (iii) the number of shares underlying the NQSOs
automatically granted to eligible directors of PacifiCare each December 31 would
increase from 2,000 shares of PacifiCare Class B Common Stock to 5,000 shares of
PacifiCare Class B Common Stock. In order to enhance PacifiCare's ability to
attract and retain the services of experienced and knowledgeable non-officer
directors, the PacifiCare Board of Directors believed it was necessary to
increase the compensation paid to non-officer directors and link such
compensation to the long-term stock performance of PacifiCare. The Second
Amended PacifiCare Directors Plan is being submitted to the holders of
PacifiCare Class A Common Stock for approval at

116
<PAGE>
the PacifiCare Meeting in order to retain its exemption from Section 16(b) of
the Exchange Act. Any NQSOs granted under the Second Amended PacifiCare
Directors Plan, prior to approval of the Second Amended PacifiCare Directors
Plan by the holders of the PacifiCare Class A Common Stock, will be subject to
approval of the Second Amended PacifiCare Directors Plan by the holders of the
PacifiCare Class A Common Stock. If approval is not obtained from the holders of
the PacifiCare Class A Common Stock, any NQSOs granted under the Second Amended
PacifiCare Directors Plan in excess of those permitted by the PacifiCare
Directors Stock Option Plan will be void and the remaining options will be
governed by the terms of the PacifiCare Directors Stock Option Plan.

DESCRIPTION OF THE SECOND AMENDED PACIFICARE DIRECTORS PLAN

The Second Amended PacifiCare Directors Plan amends Section 2 of the
PacifiCare Directors Stock Option Plan to increase the number of shares
available under the PacifiCare Directors Stock Option Plan from 140,000 shares
of PacifiCare Class B Common Stock to 390,000 shares of PacifiCare Class B
Common Stock and amends Section 4 of the PacifiCare Directors Stock Option Plan
to: (i) provide for the automatic grant of NQSOs to purchase 10,000 shares of
PacifiCare Class B Common Stock to each eligible director of PacifiCare, upon
being elected to the PacifiCare Board of Directors; and (ii) increase the number
of shares underlying the NQSOs automatically granted to eligible directors of
PacifiCare each December 31 from 2,000 shares of PacifiCare Class B Common Stock
to 5,000 shares of PacifiCare Class B Common Stock. Except as described in this
paragraph, the Second Amended PacifiCare Directors Plan is substantially the
same as the PacifiCare Directors Stock Option Plan.

FEDERAL INCOME TAX CONSEQUENCES

There will be no federal income tax consequences to either a director of
PacifiCare or PacifiCare on the grant of a NQSO. On the exercise of a NQSO, the
director will have taxable ordinary income equal to the excess of the fair
market value of the shares of PacifiCare Class B Common Stock received on the
exercise date over the option price of the shares. PacifiCare will be entitled
to a tax deduction in an amount equal to such excess, provided PacifiCare
complies with applicable reporting rules. Any ordinary income realized by the
directors upon exercise of a NQSO will increase his tax basis in the PacifiCare
Class B Common Stock thereby acquired. Upon the sale of the PacifiCare Class B
Common Stock acquired by exercise of a NQSO, a director will realize long-term
or short-term capital gain or loss depending upon his holding period for such
stock.

A director who surrenders shares of PacifiCare Common Stock in payment of
the exercise price of a NQSO will not recognize gain or loss on his surrender of
such shares, but will recognize ordinary income on the exercise of the NQSO as
described above. Of the shares received in such an exchange, that number of
shares equal to the number of shares surrendered will have the same tax basis
and capital gains holding period as the shares surrendered. The balance of the
shares received will have a tax basis equal to their fair market value on the
date of exercise and the capital gains holding period will begin on the date of
exercise.

If PacifiCare delivers cash (in lieu of fractional shares) or shares of
PacifiCare Class B Common Stock to a director pursuant to a cashless exercise
program, the director will recognize ordinary income equal to the cash paid and
the fair market value as of the date of exercise of any shares delivered to him.
An amount equal to any such ordinary income will be deductible by PacifiCare,
provided it complies with applicable reporting requirements.

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<PAGE>
OTHER INFORMATION FOR THE FHP MEETING

ELECTION OF DIRECTORS

The Bylaws of FHP provide that the FHP Board of Directors shall be
classified into three classes as nearly equal in number as possible, such that
approximately one-third of the members of the FHP Board of Directors shall be
elected at each Annual Meeting of Stockholders and each director shall serve for
a three-year term. In November 1995, the FHP Board of Directors was expanded
from eight to nine members and Van B. Honeycutt was appointed as a director with
a term expiring at the 1997 Annual Meeting.

There are three director positions in the class whose term of office expires
at the FHP Meeting. The FHP Board of Directors has designated Jack R. Anderson,
Burke F. Gumbiner and Warner Heineman as nominees for election to three-year
terms expiring in 1999, and until their successors are elected and qualified.
Each nominee has consented to being named in this Joint Proxy Statement/
Prospectus and to serve as a director if elected. All nominees presently serve
on the FHP Board of Directors.

Management proxies will be voted FOR the election of the above named
nominees, unless the holders of FHP Common Stock indicate that their proxies
shall not be voted for them. If for any reason any nominee should decline or be
unable to serve as a director, an event not now anticipated, the named proxies
will vote for such substitute nominee, if any, as may be recommended by the
existing FHP Board of Directors.

Biographical information follows for each person nominated and each person
whose term of office as a director of FHP will continue after the FHP Meeting.
The ages of each member of the FHP Board of Directors are as of November 15,
1996.

NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 1999 ANNUAL
MEETING

JACK R. ANDERSON, age 71, joined the FHP Board of Directors in June, 1994,
pursuant to the terms of an Agreement and Plan of Merger (the "TakeCare Merger
Agreement") whereby FHP acquired ownership of TakeCare, Inc. and agreed to add
Mr. Anderson to the FHP Board of Directors and to renominate him at the Annual
Meeting of Stockholders in November 1996. He was elected Chairman of the FHP
Board of Directors in June 1995 and is a member of the FHP Executive Committee.
Mr. Anderson is also Chairman of the TMMC Board of Directors and an FHP designee
for election to the PacifiCare Holding Board of Directors. Mr. Anderson was
Chairman of the Board of Directors of TakeCare from 1988 to June of 1994. He has
been President of Calver Corporation, a health care consulting and investing
firm and a private investor since 1982. Mr. Anderson currently serves on the
Boards of Directors of Horizon Mental Health Management, Inc. and United Dental
Care, Inc.

BURKE F. GUMBINER, age 46, has been a director of FHP since 1984. Mr.
Gumbiner is also a member of the Quality Assessment Committee of the Board. He
was a Vice President of FHP from 1984 to 1989, and in 1989 he became a Senior
Vice President. Mr. Gumbiner joined FHP's largest HMO subsidiary, FHP, Inc. in
1972 and has served in several executive capacities. In August 1995, Mr.
Gumbiner was appointed President of FHP's Insurance Group.

WARNER HEINEMAN, age 74, has been a member of the FHP Board of Directors
since 1990 and is the Chairman of the FHP Audit Committee and a member of the
FHP Compensation and Quality Assessment Committees. He is also a member of the
TMMC and FHP Financial Corporation Boards of Directors. Mr. Heineman has served
as a Senior Advisor to First Business Bank since 1992. From 1989 to 1992, he
served as Senior Vice President of the Bank of Los Angeles. He also served as a
Senior Vice President of City National Bank from 1981 to 1988. In 1981 he
retired as Vice Chairman and Director of Union Bank after 38 years of service
with that organization. Mr. Heineman is a trustee of Southwestern University
School of Law, a member of the Board of Advisors of UCLA Medical Center, a
member of the Board of Visitors of the UCLA School of Medicine, a member of the
Board of Directors of FHP Foundation and a director of Alexander Haagen
Properties, Inc. and The Countrybaskets Index Funds, Inc.

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<PAGE>
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1997 ANNUAL MEETING

WESTCOTT W. PRICE III, age 57, has been Vice Chairman of the FHP Board of
Directors since 1986, a member of the FHP Board of Directors since 1984 and is a
member of the FHP Executive Committee. Mr. Price is also a member of the TMMC
Board of Directors. Mr. Price became President of FHP in 1989 and Chief
Executive Officer in 1990. He also serves as President of two of FHP's HMO
subsidiaries. Mr. Price joined FHP in 1981 as a Senior Vice President. Mr. Price
has been a member of the Board of Directors of FHP Foundation since 1985.

VAN B. HONEYCUTT, age 51, joined the FHP Board of Directors in November
1995, when the FHP Board of Directors was expanded from eight to nine members.
He also serves as a member of the Audit Committee of the Board and as a member
of the TMMC Board of Directors. Mr. Honeycutt has been President and Chief
Executive Officer of Computer Sciences Corporation since April 1995. Computer
Sciences Corporation is a publicly-traded company listed on the NYSE which
provides information technology consulting, systems integration and outsourcing
services to industry and government. From 1993 to 1995, Mr. Honeycutt served as
President and Chief Operating Officer of Computer Sciences Corporation. From
1987 to 1993, he served as Corporate Vice President and President of Computer
Sciences Corporation's Industry Services Group.

JOSEPH F. PREVRATIL, age 58, has been a member of the FHP Board of Directors
since 1991 and is Chairman of the FHP Executive Committee and a member of the
FHP Audit and Compensation Committees. Mr. Prevratil is also a member of the
TMMC Board of Directors and an FHP designee for election to the PacifiCare
Holding Board of Directors. Mr. Prevratil also serves as a director and Chief
Executive Officer of FHP Foundation. From 1982 to 1988, Mr. Prevratil served as
President of Wrather Port Properties, Inc., an entertainment and hotel complex
that included the Queen Mary oceanliner in Long Beach, California. In 1988 and
1989 he served as Executive Director of the Port of Long Beach. From 1989 to
1993, Mr. Prevratil was President of his own business, providing contracted
consulting and management services to the leisure-time industry and the
Redevelopment Agency of the City of Long Beach. In 1993, Mr. Prevratil became
President of the RMS Foundation, Inc., a nonprofit corporation operating the
Queen Mary oceanliner attraction.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING

RICHARD M. BURDGE, SR., age 69, joined the FHP Board of Directors in July
1994 pursuant to the terms of the TakeCare Merger Agreement whereby FHP agreed
to add Mr. Burdge to the FHP Board of Directors and to renominate him at the
Annual Meeting of Stockholders in November, 1995. Mr. Burdge currently serves as
Chairman of the FHP Compensation Committee and as a member of the FHP Audit
Committee. Mr. Burdge is also a member of the TMMC Board of Directors. Mr.
Burdge retired in 1984 as Executive Vice President of CIGNA Corporation, a
position he held from 1982 to 1984. He served as Senior Executive Vice President
of INA Corporation from 1980 to 1982 and as Executive Vice President of INA
Corporation from 1975 to 1980. He also served as President and Chief Operating
Officer of the American Stock Exchange from 1972 to 1975.

ROBERT C. MAXSON, ED.D., age 60, joined the FHP Board of Directors in August
1995, when he filled a vacancy caused by the resignation of another director. He
currently serves on the FHP Compensation Committee. Dr. Maxson also serves on
the Board of Directors of FHP Foundation and on the TMMC Board of Directors. Dr.
Maxson has been President of California State University, Long Beach since 1994.
Dr. Maxson served as the President of the University of Nevada, Las Vegas, from
1984 to 1994. He has also served on other corporate boards such as Bank of
America Nevada and Houston Security Bank.

ROBERT W. JAMPLIS, M.D., age 76, joined the FHP Board of Directors in August
1995, when he filled a vacancy caused by the resignation of another director. He
serves as Chairman of the Quality Assessment Committee. Dr. Jamplis is also a
member of the TMMC Board of Directors. He served on the Boards of Directors of
TakeCare and two of its HMO subsidiaries prior to FHP's acquisition of TakeCare
in 1994. Dr. Jamplis has been President and Chief Executive Officer of Palo Alto
Medical Foundation since 1981, was named Executive Director of the Palo Alto
Clinic in 1966, and joined the

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<PAGE>
Clinic in 1954. Dr. Jamplis has written extensively and held leadership
positions with numerous medical, academic and business organizations. He
presently serves on the Boards of Directors of Children's Hospital at Stanford,
Santa Barbara Medical Foundation Clinic and the American Cancer
Society-California Division.

COMMITTEES OF THE FHP BOARD OF DIRECTORS AND BOARD ATTENDANCE

COMMITTEES OF THE FHP BOARD OF DIRECTORS. To assist in the discharge of its
responsibilities, the FHP Board of Directors has established four committees,
the Executive, Audit, Compensation and Quality Assessment Committees. The
members of these standing committees are elected by the FHP Board of Directors
and serve at its pleasure. The committees of the FHP Board of Directors were
reconstituted in June 1995. At that time, the FHP Board of Directors combined
the functions of the Nominating Committee into the Executive Committee.

The FHP Executive Committee is comprised of Joseph F. Prevratil (Chairman),
Jack R. Anderson and Westcott W. Price III. During the year ended June 30, 1996,
the FHP Executive Committee met six times. In performing its nominating
function, the FHP Executive Committee identifies and recommends director
candidates to serve on the FHP Board of Directors and its committees;
establishes and periodically reviews criteria for membership on the FHP Board of
Directors; develops policies on the optimum size and compensation of the FHP
Board of Directors and its committees; and establishes procedures for the
director nomination process. The FHP Executive Committee does not plan to
consider nominees recommended by stockholders.

The FHP Audit Committee is comprised of Warner Heineman (Chairman), Richard
M. Burdge, Sr., Van B. Honeycutt and Joseph F. Prevratil. Messrs. Heineman,
Burdge and Prevratil served on the FHP Audit Committee for the entire year ended
June 30, 1996. Mr. Honeycutt was appointed as an additional member of the FHP
Audit Committee in January 1996. The FHP Audit Committee met four times during
the fiscal year ended June 30, 1996. The FHP Audit Committee recommends to the
FHP Board of Directors the retention or discharge of FHP's independent auditors;
reviews the engagement of the independent auditors including the scope, extent
and procedures of the audit and the fees to be paid therefor; reviews, in
consultation with the independent auditors, the audit results and their opinion
letter or proposed report of audit and related management letter, if any;
reviews the independence of the independent auditors and, in this connection,
reviews and approves the engagement of the independent auditors for services of
a non-audit nature; reviews and approves the audited financial statements;
consults with the independent auditors, FHP's internal auditors and FHP's
management (together or separately) on the adequacy of internal accounting
controls and reviews the results thereof; directs and supervises investigations
into matters within the scope of the FHP Audit Committee's duties; and performs
such other functions as may be necessary in the efficient discharge of its
duties.

The FHP Compensation Committee is comprised of Richard M. Burdge, Sr.
(Chairman), Warner Heineman, Robert C. Maxson and Joseph F. Prevratil. Messrs.
Burdge, Heineman and Prevratil served on the FHP Compensation Committee for the
entire year ended June 30, 1996. Mr. Maxson was appointed as an additional
member of the FHP Compensation Committee in September 1995. The FHP Compensation
Committee held seven meetings during the year ended June 30, 1996. See
"Compensation Committee Report on Executive Compensation" below. The FHP
Compensation Committee administers the granting of stock options to employees
under FHP's Executive Incentive Plan; reviews and approves all compensation,
including incentive compensation for the Chief Executive Officer and most highly
paid executives of FHP; reviews and submits to the full FHP Board of Directors
recommendations concerning new executive compensation and stock plans; and
establishes and periodically reviews FHP's policies regarding benefits.

ATTENDANCE AT MEETINGS. The FHP Board of Directors held six meetings during
the year ended June 30, 1996. Each director attended 75% or more of the meetings
of the FHP Board of Directors and committees of the FHP Board of Directors on
which the director served at any time during the year.

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<PAGE>
NONEMPLOYEE DIRECTOR COMPENSATION

DIRECTORS' FEES. In June 1995, the FHP Board of Directors restructured the
fees paid to its non-employee directors so as to reduce the initial amount paid
to new non-employee directors, to encourage long-term participation by
non-employee directors and to encourage consistent participation by committee
members. As of June 15, 1996, the initial fee paid to non-employee directors
first elected to the FHP Board of Directors after June 15, 1996 was reduced to
$5,000 per quarter (from $10,000 per quarter) and such fee will be increased at
the end of each year of service as a non-employee director by the sum of $1,250
per quarter up to a maximum per quarter compensation rate of $10,000. The
restructured fee schedule was made applicable to Jack R. Anderson and Richard M.
Burdge based upon the date of commencement of their service as non-employee
directors in 1994. In addition, each non-employee director who serves as a
member of a committee of the Board (other than the Chairmen of the Executive,
Audit, Compensation and Quality Assessment Committees) is to receive a fee of
$1,000 each for each committee meeting attended. The Chairman of the Executive
Committee is paid an annual sum of $50,000 for service in such capacity, the
Chairman of the Audit Committee is paid an annual sum of $25,000 for service in
such capacity, the Chairman of the Compensation Committee is paid an annual sum
of $10,000 for service in such capacity, and the Chairman of the Quality
Assessment Committee is paid an annual sum of $10,000 for service in such
capacity. Warner Heineman also received $10,000 for serving on the Board of
Directors of one of FHP's subsidiaries. Employee directors receive no fees for
service as member of the FHP Board of Directors or its committees.

DEFERRED COMPENSATION. FHP adopted a Deferred Compensation Plan for
Nonemployee Directors which was terminated as of December 31, 1995. From July 1
through December 31, 1995, an amount equal to 8% of the non-employee directors'
annual director fees was credited to their benefit on FHP's books. Such funds
were credited at the same interest rate that FHP earns on its cash and cash
equivalent investments. Effective January 1, 1996, the non-employee Directors'
account balances were transferred into FHP's Deferred Compensation Plan. The
non-employee Directors may voluntarily elect to defer all or a portion of their
fees into FHP's Deferred Compensation Plan.

Set forth below are the fees received during the fiscal year ended June 30,
1996 by the non-employee directors of FHP for service as directors of FHP and
certain of its subsidiaries and the deferral amounts (including earnings) which
were accrued on FHP's books for non-employee directors during the six months
ended December 31, 1995:

<TABLE>
<CAPTION>
FEES DEFERRAL AMOUNTS
--------- -----------------
<S> <C> <C>
Jack R. Anderson..................................... $ 25,000 $ 1,170
Richard M. Burdge, Sr................................ 38,000 1,696
Warner Heineman...................................... 83,000 3,642
Van B. Honeycutt..................................... 12,000 0
Robert W. Jamplis.................................... 22,500 680
Robert C. Maxson..................................... 18,000 400
Joseph F. Prevratil.................................. 95,000 4,584
</TABLE>

STOCK OPTIONS. FHP's Executive Incentive Plan provides for the automatic
award of NQSOs to non-employee directors according to the formula set forth
below. Each person who first becomes a non-employee director of FHP is awarded a
NQSO to purchase 10,000 shares of FHP Common Stock at an option exercise price
equal to the market value of FHP Common Stock on the date that person becomes a
director. This NQSO becomes exercisable in full only after the optionee has
completed two years of continuous service as a non-employee director. Based on
the foregoing formula, NQSOs were granted each to Robert W. Jamplis and Robert
C. Maxson on August 7, 1995 to purchase 10,000 shares of FHP Common Stock at an
exercise price of $23.8125 per share. Similarly, based on the foregoing formula,
NQSOs were granted to Van B. Honeycutt on November 16, 1995, to purchase 10,000
shares of FHP Common Stock at an exercise price of $25.00 per share.

The FHP Executive Incentive Plan further provides that a person who has
continuously served as a non-employee director of FHP for two years and has not
received an option award during that

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<PAGE>
period, is awarded NQSOs to purchase 10,000 additional shares of FHP Common
Stock. This option becomes exercisable at the rate of 20% of the shares covered
thereby for each year thereafter that the optionee completes as a non-employee
director. Based on the foregoing formula, NQSOs were granted to Jack R. Anderson
on June 17, 1996, to purchase 10,000 shares of FHP Common Stock at an exercise
price of $27.40625 per share.

The FHP Executive Incentive Plan also provides that a person who
continuously serves as a non-employee director of FHP for a period of two years
after receiving the award described in the preceding paragraph, receives NQSOs
to purchase 2,000 additional shares of FHP Common Stock annually for each year
that the director continues to serve in that capacity. Each of these NQSOs
becomes exercisable at the rate of 20% of the shares covered thereby for each
year thereafter that the optionee completes as a non-employee director. Based on
the foregoing formula, NQSOs were granted to Warner Heineman on October 2, 1995,
to purchase 2,000 shares of FHP Common Stock at an exercise price of $24.25 per
share.

In addition, the FHP Executive Incentive Plan provides that each
non-employee director who serves as Chairman of the FHP Executive Committee will
be awarded NQSOs to purchase 50,000 shares, each non-employee director who
serves as Chairman of the FHP Audit Committee will be awarded NQSOs to purchase
25,000 shares, and each non-employee director who serves as Chairman of the FHP
Compensation Committee and each non-employee director who serves as Chairman of
the FHP Quality Assessment Committee will receive NQSOs to purchase 10,000
shares.

In each case, the award is granted on the date the director is first elected
to a committee chairmanship. The exercise price of such NQSOs is equal to the
market value per share on the date of award. The NQSOs are exercisable 25% as of
the date of grant and 25% on the first three anniversaries thereof on which such
Chairman has continuously served as a non-employee director of FHP. Based on the
foregoing formula, NQSOs were granted to Robert Jamplis upon his election as
Chairman of the FHP Quality Assessment Committee on September 7, 1995, to
purchase 10,000 shares of FHP Common Stock at an option exercise price of $23.00
per share.

CONSULTING FEES. No consulting fees were paid to any director during the
year ended June 30, 1996.

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EXECUTIVE COMPENSATION

The following table provides information concerning the annual and long-term
compensation for services in all capacities to FHP and its subsidiaries for the
fiscal years shown of those persons ("Named Executive Officers") who were,
during the latest fiscal year (i) the chief executive officer and (ii) the other
four most highly compensated executive officers of FHP.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION OPTION
------------------------------- RESTRICTED AWARDS ALL OTHER
FISCAL SALARY(1) BONUS(2) OTHER(3) STOCK (NUMBER OF COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS SHARES) ($)
- ---------------------------------------- ------ --------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
WESTCOTT W. PRICE III 1996 499,990 355,020 -- --(5) 25,000 15,093
Vice Chairman of the Board; President 1995 499,990 -0- -- -0- 275,000 9,582
and CEO 1994 428,922 95,514 -- -0- 50,000 28,301
JACK D. MASSIMINO 1996 361,924 591,700 -- --(5) 25,000 13,683
President and Chief Executive Officer, 1995 450,008 -0- -- -0- 25,000 10,492
Talbert Medical Management Corporation 1994 345,483 151,226 -0- 225,000 29,277
GLORIA L. AUSTIN 1996 209,996 645,280(6) -- --(5) 10,000 12,331
Senior Vice President, California, 1995 184,966 20,000 -- -0- 10,000 9,143
Talbert Medical Management Corporation 1994 151,548 35,266 -- -0- 10,000 23,239
MICHAEL J. WEINSTOCK 1996 249,995 207,020 -- --(5) 10,000 14,282
Senior Vice President, General Counsel 1995 249,995 -0- -- -0- 10,000 10,030
and Secretary 1994 227,288 103,897 -- -0- 60,000 28,301
JEFFREY H. MARGOLIS 1996 244,627 146,874 -- -0- -0- 12,176
Senior Vice President and Chief 1995 227,307 -0- -- -0- -0- 6,878(9)
Information Officer 1994 4,821(7) --(8) -- -0- 25,000 --
</TABLE>

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

(1) Includes the base salary earned by the Named Executive Officer during the
fiscal year covered and any voluntary salary reduction resulting from
contributions for the fiscal year by the Named Executive Officer to (a)
FHP's ESOP, and (b) FHP's Deferred Compensation Plan.

(2) Includes the cash value of bonus earned by the Named Executive Officer
during the fiscal year covered and the cash value of voluntary bonus
reductions resulting in contributions to (a) FHP's ESOP and (b) FHP's
Deferred Compensation Plan.

(3) Excludes perquisites and other personal benefits if the value did not exceed
the lesser of $50,000 or 10% of both salary and bonus.

(4) Includes the dollar value of taxable income from group term life insurance
coverage in excess of $50,000 purchased by FHP as follows: Westcott W. Price
III--$1,632; Jack D. Massimino--$1,650; Gloria L. Austin--$331, Michael J.
Weinstock--$2,244; and Jeffrey H. Margolis--$176. Amount also includes
interest credited on deferred compensation in excess of 120% of the
applicable federal long-term rate as follows: Westcott W. Price III--$1,461;
Jack D. Massimino--$33; and Michael J. Weinstock--$38. Also includes FHP
contributions under the FHP Money Purchase Pension Plan as follows: Westcott
W. Price III--$9,000; Jack D. Massimino--$9,000; Gloria L. Austin--$9,000;
Michael J. Weinstock--$9,000; and Jeffrey H. Margolis--$9,000. Also includes
FHP contributions under FHP's ESOP as follows: Westcott W. Price
III--$3,000; Jack D. Massimino--$3,000; Gloria L. Austin--$3,000; Michael J.
Weinstock--$3,000; and Jeffrey H. Margolis--$3,000. The foregoing retirement
plan contributions are through December 31, 1995. Contributions are made
annually on December 31st; therefore, no contributions were made for the
six-month period ended June 30, 1996. Jeffrey H. Margolis became a
participant in the retirement plans on January 1, 1995.

(5) Pursuant to a Stock Purchase Agreement dated as of March 15, 1996, as
amended (the "Stock Purchase Agreement"), by and between FHP, TMMC, THSC and
certain management investors, Westcott W. Price III, Jack D. Massimino,
Gloria L. Austin and Michael J. Weinstock purchased 67,500, 500,000, 50,000
and 10,000 shares, respectively, of TMMC Common Stock for $0.01 per share,
the same per share price at which FHP purchased its 9,100,000 shares of TMMC
Common

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<PAGE>
Stock. In addition, pursuant to the Stock Purchase Agreement, Westcott W.
Price III, Jack D. Massimino, Gloria L. Austin and Michael J. Weinstock
purchased four, 27, three and one shares, respectively, of THSC Common Stock
for $2.00 per share, the same per share price at which FHP purchased its 500
shares of THSC Common Stock. On July 1, 1996, 1997, 1998 and 1999, 25% of
the stock issued to each Named Executive Officer vests. The shares of TMMC
and THSC Common Stock are also subject to numerous other restrictions which
lapse on specified dates. FHP, however, has a performance purchase option to
purchase 80% of the shares of stock that vests on July 1, 1996, 1997 and
1998 for the original purchase prices of $0.01 and $2.00, respectively, if
it is determined by FHP's Audit Committee that TMMC did not meet its planned
financial goals for the previous fiscal year. FHP's Audit Committee has
determined that TMMC met its planned financial goals for the fiscal year
ended June 30, 1996.

The Stock Purchase Agreement provides that FHP has an option to repurchase
from the Named Executive Officers for the original purchase prices of $0.01
and $2.00, respectively, any portion of their TMMC and THSC Common Stock
which remains unvested when and if these Named Executive Officers cease to
be an employee of FHP, an affiliate of FHP or TMMC. FHP also has an
unrestricted option to purchase from the Named Executive Officers at any
time prior to October 1, 1999 any portion of their TMMC and THSC Common
Stock (whether or not vested or otherwise restricted) for $30 per share. FHP
proposes to amend the Stock Purchase Agreement to provide that upon the
termination of the employment of Westcott W. Price III or Michael J.
Weinstock with FHP, all of such Named Executive Officer's Common Stock will
vest; however, such common stock would remain subject to both FHP's
performance purchase option and FHP's $30-per-share purchase option. The
amendment also would provide that upon a change in control (as defined) of
Talbert which occurs after the consummation of the transactions contemplated
by the Merger Agreement, the options of FHP to purchase the TMMC and THSC
Common Stock at $.01 and $2.00, respectively, per share will expire. The
restricted shares of stock are held in escrow by the Assistant Secretary of
FHP in the capacity of escrow agent under the Stock Purchase Agreement. The
Named Executive Officers have all rights of a shareholder with respect to
the stock including the right to vote, to receive dividends and to
participate in stock splits or other recapitalizations, and to exchange such
shares in a merger, consolidation or other reorganization. The number of
shares and repurchase prices are subject to adjustment for a 1-for-3.33
reverse stock split declared by the TMMC Board of Directors on September 17,
1996.

(6) Includes total bonus amount awarded and accrued during fiscal year 1996 but
subject to payment in the two following fiscal years.

(7) Following the acquisition of TakeCare, Inc., Mr. Margolis became an employee
of FHP and served as such during the last 13 days during the fiscal year
ended June 30, 1994. On an annualized basis, his salary would have been
approximately $139,400.

(8) Mr. Margolis received a bonus of $90,278 under the TakeCare Incentive
Program for the period of January 1, 1994 through June 17, 1994.

(9) Includes $6,833 paid to Mr. Margolis in lieu of certain welfare benefits
which he was otherwise entitled to as an employee of TakeCare.

OPTION GRANTS IN LAST FISCAL YEAR. The following table provides details
regarding stock options granted under the FHP Executive Incentive Plan to the
Named Executive Officers during the fiscal year ended June 30, 1996. In
addition, in accordance with Commission's rules, there are shown the
hypothetical gains or "option spreads" that would exist for the respective
options if they were exercised. These gains are based on assumed rates of
compound stock price appreciation of 5% and 10% from the date the options were
granted over the full option term. In assessing these values it

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<PAGE>
should be kept in mind that no matter what theoretical value is placed on a
stock option, its ultimate value will depend on the market value of the FHP
Common Stock at a future date. The FHP Executive Incentive Plan does not provide
for the grant of stock appreciation rights.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
% OF TOTAL OPTIONS OPTION TERM (2)
NUMBER OF SHARES GRANTED EXERCISE ----------------------
UNDERLYING OPTIONS TO EMPLOYEES PRICE PER EXPIRATION 5% 10%
NAME GRANTED (1) IN FISCAL YEAR SHARE (1) DATE ($37.6682) ($59.9803)
- --------------------------- ------------------- --------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Westcott W. Price III...... 25,000(3) 6.3% $ 23.125 07/03/05 $ 363,580 $ 921,383
Jack D. Massimino.......... 25,000(3) 6.3% 23.125 07/03/05 363,580 921,383
Gloria L. Austin........... 10,000(3) 2.5% 23.125 07/03/05 145,432 368,553
Michael J. Weinstock....... 10,000(3) 2.5% 23.125 07/03/05 145,432 368,553
Jeffrey H. Margolis........ -- n/a n/a n/a n/a n/a
</TABLE>

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

(1) All options were granted at an exercise price equal to the fair market value
of FHP's Common Stock on the option grant date. In accordance with the terms
of FHP's Executive Incentive Plan, options become fully exercisable on the
occurrence of a change of control unless such acceleration is nullified by
FHP's Board of Directors within 10 business days after the Board of
Directors becomes aware of a change in control. In connection with the
acquisition of FHP by PacifiCare, the Board of Directors made the
determination to nullify the provisions in the Executive Incentive Plan
providing for automatic acceleration and has reinstated the existing vesting
and forfeiture provisions subject to the terms and conditions of the
Reorganization Agreement.

(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and FHP Common Stock holdings are
dependent on the future performance of the FHP Common Stock and overall
stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.

(3) Exercisable July 3, 2002, but subject to accelerated incremental vesting as
to 10%, 15%, 20%, 25% and 30% of the total number of option shares granted,
respectively, each year subsequent to the date of the grant (i) if the
consolidated EPS of FHP for the fiscal year ending on the June 30
immediately preceding such accelerated vesting date exceed both EPS for the
preceding fiscal year, and the average EPS for the two preceding fiscal
years and (ii) if the optionee shall have been in the continuous employ of
FHP or any subsidiary from the date of grant of this option through such
accelerated vesting date. If accelerated vesting does not occur the
percentage will be carried forward and added to the percentage which becomes
eligible for accelerated vesting with respect to the next anniversary date.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table provides information concerning the exercise of options
during the last fiscal year and unexercised options held as of the end of the
last fiscal year by the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTION SHARES AT FY-END IN-THE-MONEY OPTION
ACQUIRED ON VALUE (#) SHARES AT FY-END ($)
EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Westcott W. Price III........... -- -- 30,000 420,000 255,625 1,894,375
Jack D. Massimino............... -- -- 76,250 270,000 208,359 1,236,563
Gloria L. Austin................ 5,250 30,844 9,000 47,750 65,547 272,703
Michael J. Weinstock............ 10,000 137,500 19,000 96,000 39,375 480,000
Jeffrey H. Margolis............. 24,813 724,506 7,500 52,125 40,781 1,005,145
</TABLE>

125
<PAGE>
CHANGE IN CONTROL EMPLOYMENT AGREEMENTS

FHP has entered into employment agreements with certain key executive
officers, including the Named Executive Officers, providing for benefits in the
event of a "Change of Control" of FHP. See "The Merger and Related Transactions
- -- Interest of Certain Persons in the Mergers."

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Exchange Act and the rules thereunder require FHP's officers and directors
and persons who own more than 10% of FHP Common Stock to file reports of
ownership and changes in ownership with the Commission and to furnish FHP with
copies.

Based upon its review of the copies of such forms received by it, or written
representation from certain reporting persons, FHP believes that, during the
last fiscal year, all filing requirements applicable to its officers, directors,
and greater than 10% beneficial owners were complied with on a timely basis.

CERTAIN TRANSACTIONS. Robert W. Jamplis, a member of the FHP Board of
Directors, serves as President and Chief Executive Officer of the Palo Alto
Medical Foundation. During the fiscal year ended June 30, 1996, FHP's HMO
subsidiaries made capitation payments totaling approximately $14.8 million to
the Palo Alto Medical Foundation for the provision of health care services to
approximately 20,000 of FHP's HMO members.

In 1995, Robert Franklin, a Senior Vice President of FHP, borrowed $100,000
from FHP for the purpose of purchasing a new residence. The loan, which bears
interest at the rate of 7.96% per annum, is payable in five annual installments
of $20,000 each commencing on December 1, 1995. At June 30, 1996, the principal
outstanding balance on this loan was $80,000. In the interim, the loan is
secured by a recorded second lien on Mr. Franklin's residence.

In 1994, Kenneth S. Ord, Senior Vice President and Chief Financial Officer
of FHP, borrowed $100,000 for the purpose of purchasing a residence in
California following his relocation from Michigan. The loan, which bears
interest at a rate of 8.5% per annum, may be forgiven in installments of $20,000
a year if Mr. Ord remains employed with FHP through February 14, 1999. In the
interim, the loan is secured by a recorded second lien on Mr. Ord's residence.
At June 30, 1996, the loan had been forgiven, in part, by $40,000 plus accrued
interest, and the outstanding principal balance was $60,000.

In 1994, Jeffrey H. Margolis, Senior Vice President and Chief Information
Officer of FHP, borrowed $150,000 from FHP for the purpose of purchasing a
residence in California following his relocation from Colorado. $100,000 of the
principal amount of the loan, which bears interest at a rate of 8.5% per annum,
may be forgiven in installments of $20,000 per year if Mr. Margolis remains
employed with FHP through August 1, 1999. The remaining $50,000 of principal,
together with interest thereon, is due and payable on August 1, 1997. At June
30, 1996, the loan had been forgiven, in part, by $20,000 plus accrued interest,
and the outstanding principal balance was $130,000. In the interim, the loan is
secured by a recorded second lien on Mr. Margolis' residence.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION FOR THE FISCAL YEAR
ENDED JUNE 30, 1996

INTRODUCTION. The FHP Compensation Committee consists of Richard M. Burdge,
Sr. (Chairman), Warner Heineman, Robert C. Maxson and Joseph F. Prevratil. Mr.
Maxson was appointed a member of the FHP Compensation Committee on September 7,
1995. All members of the FHP Compensation Committee are non-employee directors
who are not eligible to participate in any of the executive compensation
programs. The FHP Compensation Committee has responsibility for administration
of FHP's executive compensation programs, including the Management Compensation
Program (the "Salary Program"), under which salaries of senior management
personnel are determined; the Management Incentive Plan (the "Bonus Program"),
which provides for cash bonuses to salaried employees; and the Executive
Incentive Plan, which authorizes grants of stock options, restricted stock and
performance units.

126
<PAGE>
COMPENSATION PHILOSOPHY. FHP's executive compensation policies are designed
to (i) provide competitive levels of overall compensation in order to attract
and retain qualified executives in the industry; (ii) motivate executive
officers to achieve FHP's business objectives; and (iii) reward executive
officers for their achievements on behalf of FHP. To achieve these goals, the
FHP Compensation Committee and the FHP Board of Directors have followed an
executive compensation program primarily consisting of three integrated
components -- base salaries, executive incentives and stock options.

BASE SALARIES. It is the policy of the FHP Compensation Committee to
establish and maintain executive salary levels that reflect position
responsibilities, are competitive with salary structures for health care
executive groups having similar operating responsibilities and are capable of
attracting, retaining and motivating executives. Historically, increases in base
salaries have been dependent on the executives' and FHP's performance for the
previous year.

The base salaries of the Named Executive Officers did not increase in any
material respect for fiscal year 1996 from fiscal year 1995 because FHP's
financial performance for fiscal year 1995 was judged less than satisfactory by
the FHP Compensation Committee. In connection with the Restructuring Plan of FHP
into three distinct business segments, FHP instituted changes in the operational
and functional responsibilities of certain of the Named Executive Officers
including Mr. Massimino. Effective July 1, 1995, the FHP Compensation Committee
established or maintained base salaries for the Named Executive Officers as
follows: Mr. Price, $500,000; Mr. Massimino, $350,000; Ms. Austin, $210,000; Mr.
Weinstock, $250,000; and Mr. Margolis, $240,000. No changes were made to the
foregoing base salaries of the Named Executive Officers during the course of
fiscal year 1996.

ANNUAL INCENTIVES. FHP has for many years utilized its Bonus Program to
provide annual incentives to executive personnel of FHP and its subsidiaries.
For fiscal year 1996, the Bonus Program provided for potential cash bonuses to
eligible participants based upon established financial and operational goals.

Under the Bonus Program, the FHP Compensation Committee established
financial and operational goals for each division of FHP (HMO, TMMC and
Insurance) and for each major corporate function (finance; human resources;
information systems; legal; etc.) within FHP. For fiscal year 1996, the
Divisional financial goals included items such as pre-tax income and membership
growth. The operational goals included items such as quality and service
improvements. The functional goals included pre-tax income, quality and service
improvements and attainment of functional budgets. Each participant's final
bonus is determined by weighing his or her performance against the pre-
established financial and operational objectives.

In fiscal year 1996, certain divisions and corporate functions achieved
their financial and operational objectives. Accordingly, bonuses were paid
totaling approximately $6.3 million, of which the Named Executive Officers
received an aggregate of approximately $1.9 million. Mr. Price received a bonus
of $355,020 under the Bonus Program for 1996 based on his supervision of, and
the performance of, the three divisions. The bonuses of the other Named
Executive Officers ranged from approximately 37.5% to 75.4% of their total cash
compensation. The FHP Compensation Committee believes that the cash compensation
of the Named Executive Officers should be subject to significant annual
variation depending on whether or not the performance targets under the Bonus
Program have been achieved.

LONG-TERM INCENTIVE PROGRAM. In 1992, the FHP Compensation Committee
approved a program providing for a series of grants of NQSOs spaced over four
successive years (beginning July 1, 1992 and ending July 1, 1995) in which the
vesting schedule of each option is tied directly to growth in EPS. The optionees
are presented under each option with five annual opportunities for accelerated
vesting, which will be realized in a particular year only if EPS exceeds both
EPS of the previous year and average EPS for the two previous years. Because of
the four-year schedule for the granting of

127
<PAGE>
options, this challenge is presented to the optionees each year for eight
continuous years from 1993 to the year 2000. This provides incentives for
continued service with FHP while establishing a new option price for each grant
that should reflect FHP's recent performance.

EPS increased in 1993 and 1994, resulting in the partial acceleration of
vesting of options previously granted under the four-year program described
above. During 1995 FHP's EPS did not increase and no additional acceleration of
vesting of such options occurred during fiscal year 1995. During fiscal year
1996, the FHP Compensation Committee determined that EPS goals for fiscal year
1996 were met, resulting in the partial acceleration of vesting of options
previously granted under the four-year program.

Other than option grants under the four-year program described above, no
additional options have been awarded to any of the Named Executive Officers
during fiscal year 1996.

PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER. In setting the base salary of
the Chief Executive Officer, the FHP Compensation Committee has taken note of
the Chief Executive Officer's progress toward the Board's objectives of
increasing the HMO membership base and revenue, broadening the range of services
offered to individuals and employer groups, and achieving better control over
costs while maintaining the quality of health care services. Consistent with the
results for fiscal year 1995, Mr. Price's salary throughout the fiscal year
continued at the level set during fiscal year 1994 in connection with the
TakeCare merger. In addition, other than option awards previously approved under
the four-year program described above, Mr. Price did not receive any new option
awards during fiscal year 1996.

Respectfully submitted,
Richard M. Burdge, Sr.
Warner Heineman
Robert C. Maxson
Joseph F. Prevratil

FHP COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The FHP Compensation Committee members serving during the entire year were
Richard M. Burdge, Sr. (Chairman), Warner Heineman and Joseph F. Prevratil.
Robert C. Maxson was appointed as an additional member of the Compensation
Committee in September 1995. Each of the members of the Compensation Committee
are non-employee directors of FHP.

Mr. Prevratil is the President of the RMS Foundation, Inc. (the
"Foundation") which manages the day-to-day operations of the Queen Mary
oceanliner tourist attraction located in Long Beach harbor in California. During
the fiscal year ended June 30, 1994, and a portion of fiscal year ended June 30,
1995, FHP's HMO and insurance subsidiaries provided health care coverage to the
Foundation's employees. During the fiscal year ended June 30, 1996 the
Foundation's largest outstanding account balance was $105,109. As of October 6,
1995, the Foundation had paid the account balance, including interest at the
rate of 8.5% per annum, in full. Since 1990, Mr. Prevratil has been President of
J&P Riverside Hotel Corp., the general partner in Riverside Hotel Partners,
Ltd., which owned and operated the Sheraton Riverside Hotel. In February, 1996,
Riverside Hotel Partners, Ltd., a limited partnership, filed a petition under
Chapter 11 of the Federal bankruptcy laws.

No executive officer of FHP during the last fiscal year served as a member
of a compensation committee or director of another for-profit entity in a
situation in which an executive officer of such other entity served as a member
of the FHP Compensation Committee.

128
<PAGE>
PERFORMANCE GRAPH OF FHP

The following graph demonstrates the performance of the cumulative total
return to the stockholders of FHP Common Stock during the previous five fiscal
years in comparison to the cumulative total return of the Standard & Poor's
(S&P) Health Care Composite Index and the S&P 500 Stock Index.

PERFORMANCE VS. S&P INDICES

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
FHP S&P HEALTH S&P 500
<S> <C> <C> <C>
1991 100.0 100.0 100.0
1992 76.1 112.9 113.3
1993 118.5 103.0 128.7
1994 104.4 105.9 130.6
1995 100.0 152.2 164.5
1996 119.0 212.3 207.2
</TABLE>

INDEXED RETURNS (1991=100)

<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FHP............................ $ 100.0 $ 76.1 $ 118.5 $ 104.3 $ 100.0 $ 119.0
S&P Health..................... 100.0 112.9 103.0 105.9 152.2 212.3
S&P 500........................ 100.0 113.3 128.7 130.6 164.5 207.2
</TABLE>

Assumes $100 invested on June 30, 1991 in FHP Common Stock, S&P Health Care
Composite Index, and S&P 500 Index.

APPOINTMENT OF INDEPENDENT AUDITORS

The FHP Board of Directors has reappointed the firm of Deloitte & Touche LLP
to serve as independent auditors for FHP for the fiscal year ending June 30,
1997, such appointment to continue at the pleasure of the FHP Board of Directors
and be subject to the approval of FHP's stockholders. Deloitte & Touche LLP
(including the predecessor firm Deloitte Haskins & Sells) has served as
independent auditors for FHP since 1986. If the FHP Merger is consummated,
Deloitte & Touche LLP will no longer serve as independent auditors for FHP as
FHP will become a subsidiary of PacifiCare Holding.

A proposal to ratify this appointment will be presented to the stockholders
at the FHP Meeting. A representative of Deloitte & Touche LLP is expected to be
present at the FHP Meeting and available to respond to appropriate questions
and, although that firm has indicated that no statement will be made, an
opportunity for a statement will be provided.

THE FHP BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL
OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP.

129
<PAGE>
ADDITIONAL INFORMATION

FHP does not intend to present any other business for action at the FHP
Meeting and does not know of any other business intended to be presented by
others.

FHP's Bylaws require that, for nominations of persons for election to the
FHP Board of Directors or for other business to be properly brought before an
annual meeting by a stockholder, the Secretary of FHP must have received written
notice thereof not later than the 60th day nor earlier than the 90th day prior
to the first anniversary of the preceding year's annual meeting. The notice must
set forth (i) as to each person whom the stockholder proposes to nominate for
election as a director all information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to Regulation
14A under the Exchange Act, as amended and Rule 14a-11 thereunder (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (a) the name
and address of such stockholder, as they appear on FHP's books, and of such
beneficial owner and (b) the class and number of shares of FHP which are owned
beneficially and of record by such stockholder and such beneficial owner.

A copy of FHP's Annual Report on Form 10-K to the Commission for the fiscal
year ended June 30, 1996, excluding certain of the exhibits thereto, may be
obtained without charge, by writing to FHP International Corporation, Investor
Relations Department, P.O. Box 25186, Santa Ana, California 92799-5186.

EXPERTS

The consolidated financial statements and schedule of PacifiCare Health
Systems, Inc. as of September 30, 1995 and for each of the three years in the
period ended September 30, 1995, which appear in PacifiCare's Annual Report on
Form 10-K, as amended, incorporated herein by reference and which are referred
to and made a part of this Joint Proxy Statement/Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon and incorporated herein by reference and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

The consolidated balance sheet of N-T Holdings, Inc. and subsidiaries as of
August 31, 1996, appearing in this Joint Proxy Statement/Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

The consolidated financial statements of FHP incorporated in this Joint
Proxy Statement/Prospectus by reference from FHP's Annual Report on Form 10-K
for the year ended June 30, 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein by
reference and have been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.

LEGAL MATTERS

The validity of the shares of PacifiCare Holding Class A and Class B Common
and PacifiCare Holding Preferred offered hereby will be passed upon for
PacifiCare Holding by Cooley Godward LLP, Palo Alto, California. Certain legal
matters in connection with the Mergers will be passed upon for FHP by Sheppard,
Mullin, Richter & Hampton LLP, Los Angeles, California.

130
<PAGE>
FUTURE STOCKHOLDER PROPOSALS

If the Mergers are consummated, an annual meeting of the stockholders of
PacifiCare Holding is expected to be held in 1998. If the Mergers are not
consummated, the 1997 Annual Meeting of Stockholders of PacifiCare is expected
to be held on or about March 5, 1997.

Subject to the foregoing, if any PacifiCare Holding stockholder intends to
present a proposal at the 1998 PacifiCare Holding Annual Meeting and wishes to
have such proposal considered for inclusion in the proxy materials for such
meeting, such holder must submit the proposal to the Secretary of PacifiCare
Holding in writing so as to be received at the executive offices of PacifiCare
Holding by 120 days prior to the anticipated mailing date of proxy materials for
such meeting. The PacifiCare Holding Bylaws require that notice of nominations
of persons for election to the PacifiCare Holding Board of Directors, other than
those made by or at the direction of the PacifiCare Holding Board of Directors,
must be received no later than 90 days before an Annual Meeting. The notice must
present certain information concerning the nominee and the stockholder making
the nomination. The notice also must include the nominee's written consent to
being a nominee and to serving if elected. Notices should be sent to the
Corporate Secretary, PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress,
California 90630-5028. Such proposals must also meet the other requirements of
the rules of the Commission relating to stockholders' proposals. In the event
the Mergers are not consummated, the only stockholder proposals eligible to be
considered for inclusion in the proxy materials for the 1997 Annual Meeting of
PacifiCare or FHP, as the case may be, will be those which were duly submitted
to the Corporate Secretary of PacifiCare by September 30, 1996, (which is 120
days prior to the anticipated mailing date of proxy materials for such meeting)
or the Corporate Secretary of FHP by June 20, 1997 (which is 120 days prior to
the anticipated mailing date of proxy materials for such meeting), as the case
may be.

131
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Shareholders and Board of Directors
N-T Holdings, Inc.

We have audited the accompanying consolidated balance sheet of N-T Holdings,
Inc. and subsidiaries as of August 31, 1996. This consolidated balance sheet is
the responsibility of N-T Holdings, Inc.'s management. Our responsibility is to
express an opinion on this consolidated balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the consolidated balance sheet provides a reasonable
basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of N-T Holdings, Inc. and
subsidiaries as of August 31, 1996, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

Los Angeles, California
September 9, 1996

F-1
<PAGE>
N-T HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

AUGUST 31, 1996

<TABLE>
<S> <C>
Assets
Cash............................................................................... $ 1,200
---------
Total assets................................................................. $ 1,200
---------
---------
Shareholder's equity
Common stock, par value $.001 per share; 1,000 shares authorized; 200 shares
issued............................................................................ $ --
Additional paid-in capital......................................................... 1,200
---------
Total shareholder's equity................................................... $ 1,200
---------
---------
</TABLE>

See accompanying notes.

F-2
<PAGE>
N-T HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET

AUGUST 31, 1996

1. BACKGROUND OF ORGANIZATION
N-T Holdings, Inc. ("PacifiCare Holding") was incorporated on August 2,
1996, for the purpose of effectuating the combination of PacifiCare Health
Systems, Inc. ("PacifiCare") and FHP International Corporation ("FHP"), in
accordance with the terms of the Agreement and Plan of Reorganization dated as
of August 4, 1996, as amended as of September 17, 1996 (the "Reorganization
Agreement"). PacifiCare Holding has organized two wholly owned subsidiaries in
accordance with the Reorganization Agreement and has not conducted business or
activity other than in connection with the Reorganization Agreement (related
expenses are the responsibility of PacifiCare and FHP).

2. SHAREHOLDER'S EQUITY
The initial authorized capital stock of PacifiCare Holding consists of 1,000
shares of Common Stock, par value $.001 per share. Two hundred shares have been
issued and are outstanding. Immediately prior to the Effective Time, PacifiCare
Holding's Certificate of Incorporation will be amended to increase the total
number of authorized shares of capital stock to 100,000,000 shares of PacifiCare
Holding Class A Common Stock, par value $0.01, 100,000,000 shares of PacifiCare
Holding Class B Common Stock, par value $0.01, and 40,000,000 shares of
PacifiCare Holding Preferred Stock, par value $0.01.

3. REORGANIZATION AGREEMENT
The Reorganization Agreement, which has been approved by the board of
directors of each company, calls for holders of FHP Common Stock to receive
$17.50 in cash and a mix of PacifiCare Holding Class A Common Stock and
PacifiCare Holding Class B Common Stock determined by a formula set forth in the
Reorganization Agreement. Holders of FHP Preferred Stock will receive either (i)
the right to receive 0.50 shares of PacifiCare Holding Series A Preferred Stock
and $14.113 in cash (the "Series A Merger Consideration"), if the holders of FHP
Preferred Stock approve an amendment to the FHP Certificate of Incorporation
(the "Series A Amendment"), or (ii) $25.00 in cash or a mix of cash, PacifiCare
Holding Class A Common Stock and PacifiCare Holding Class B Common Stock as
determined by a formula set forth in the Reorganization Agreement, if the
holders of FHP Preferred Stock do not approve such amendment (and no Irrevocable
Elections are made). If the Series A Amendment is not approved, such shares of
FHP Preferred Stock as to which an Irrevocable Election is made would be
exchanged for the Series A Merger Consideration. Each outstanding share of
PacifiCare Class A Common Stock and PacifiCare Class B Common Stock will be
converted into the right to receive one share of PacifiCare Holding Class A
Common Stock and PacifiCare Holding Class B Common Stock, respectively. All
issued shares of the capital stock of PacifiCare Holding immediately prior to
the Effective Time will be canceled upon completion of the mergers.

PacifiCare Holding expects to finance the Cash Consideration (expected to
approximate $1.0 billion) and related fees and expenses (expected to approximate
$105 million) through a $1.5 billion credit facility to be provided by Bank of
America and BA Securities pursuant to a commitment letter issued by them.

The Reorganization Agreement is subject to approval by PacifiCare and FHP
stockholders, various Federal and state regulatory approvals, and other
customary closing conditions. The transaction is expected to close in January
1997.

F-3
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT
AND PLAN OF REORGANIZATION
AMONG
PACIFICARE HEALTH SYSTEMS, INC.
N-T HOLDINGS, INC.
NEPTUNE MERGER CORP.
TREE ACQUISITION CORP.
AND
FHP INTERNATIONAL CORPORATION

---------------------
AS OF NOVEMBER 11, 1996
---------------------
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE 1 DESCRIPTION OF TRANSACTION............................................................. 1
1.1 Mergers................................................................................ 1
1.2 Effect of the Mergers.................................................................. 2
1.3 Closing; Effective Time................................................................ 2
1.4 Certificates of Incorporation and Bylaws; Directors and Officers....................... 2
1.5 Conversion of Shares................................................................... 3
1.6 Closing of the Transfer Books of the Company and PacifiCare............................ 6
1.7 Exchange of Certificates............................................................... 6
1.8 Appraisal Rights....................................................................... 8
1.9 Stock Subject to Conditions............................................................ 8
1.10 Tax Consequences....................................................................... 8
1.11 Accounting Consequences................................................................ 9
1.12 Further Action......................................................................... 9

ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................... 9
2.1 Organization; Subsidiaries; Capitalization............................................. 9
2.2 SEC Filings; Financial Statements...................................................... 10
2.3 Absence of Certain Changes or Events................................................... 11
2.4 Tax Matters............................................................................ 11
2.5 Contracts.............................................................................. 12
2.6 Employees.............................................................................. 13
2.7 Litigation and Claims; Compliance with Law............................................. 15
2.8 Properties............................................................................. 15
2.9 Disclosure............................................................................. 15
2.10 Transactions with Affiliates........................................................... 16
2.11 Vote Required.......................................................................... 16
2.12 Takeover Provisions Inapplicable....................................................... 16
2.13 Company Action......................................................................... 16
2.14 Fairness Opinion....................................................................... 16
2.15 Financial Advisor...................................................................... 16
2.16 Enforceability......................................................................... 16
2.17 Governmental Consents; No Conflicts.................................................... 17
2.18 Reserves............................................................................... 17
2.19 Audits or Investigations by Governmental Entities...................................... 18
2.20 Environmental Provisions............................................................... 18
2.21 Intellectual Property.................................................................. 19

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING............................... 19
3.1 Organization; Subsidiaries; Capitalization............................................. 19
3.2 SEC Filings; Financial Statements...................................................... 21
3.3 Absence of Certain Changes or Events................................................... 21
3.4 Tax Matters............................................................................ 21
3.5 Contracts.............................................................................. 22
3.6 Employees.............................................................................. 23
3.7 Litigation and Claims; Compliance with Law............................................. 24
3.8 Properties............................................................................. 24
3.9 Disclosure............................................................................. 24
3.10 Transactions with Affiliates........................................................... 25
3.11 Vote Required.......................................................................... 25
3.12 Takeover Provisions Inapplicable....................................................... 25
</TABLE>

i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
3.13 PacifiCare Action...................................................................... 25
<C> <S> <C>
3.14 Actions by Holding, Neptune Sub and Company Sub........................................ 25
3.15 Fairness Opinion....................................................................... 25
3.16 Financial Advisor...................................................................... 25
3.17 Enforceability......................................................................... 26
3.18 Governmental Consents; No Conflicts.................................................... 26
3.19 Common and Preferred Stock To Be Issued................................................ 26
3.20 Reserves............................................................................... 26
3.21 Audits or Investigations by Governmental Entities...................................... 27
3.22 Environmental Provisions............................................................... 27
3.23 Intellectual Property.................................................................. 28
3.24 Formation of Holding................................................................... 28

ARTICLE 4 CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; 28
ADDITIONAL AGREEMENTS.................................................................
4.1 Information and Access................................................................. 28
4.2 Conduct of Business of the Company..................................................... 29
4.3 Conduct of Business of PacifiCare...................................................... 31
4.4 Negotiation With Others................................................................ 32
4.5 Registration Statement; Prospectus/Proxy Statement..................................... 32
4.6 Stockholders' Meetings................................................................. 33
4.7 Regulatory Approvals................................................................... 34
4.8 Employee Benefits Plans................................................................ 34
4.9 Indemnification........................................................................ 37
4.10 Additional Agreements.................................................................. 38
4.11 Disclosure............................................................................. 39
4.12 Affiliate Agreements................................................................... 39
4.13 Tax Qualification and Opinion Back-Up Certificates..................................... 39
4.14 Financing.............................................................................. 39
4.15 Talbert................................................................................ 39
4.16 7% Senior Notes Due 2003............................................................... 40
4.17 Notices of Certain Events.............................................................. 40
4.18 Certain Corporate Matters with Respect to PacifiCare................................... 40
4.19 Compliance with Regulations............................................................ 40
4.20 Assumption by Successor................................................................ 41
4.21 No Activity by Holding................................................................. 41

ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING.......................... 41
5.1 Representations and Warranties Accurate................................................ 41
5.2 Compliance With Covenants.............................................................. 41
5.3 No Material Adverse Effect............................................................. 41
5.4 Certificate............................................................................ 41
5.5 Effectiveness of Registration Statement................................................ 41
5.6 Stockholder Approval................................................................... 41
5.7 Affiliates Agreements.................................................................. 41
5.8 Legal Opinion.......................................................................... 42
5.9 Tax Opinion............................................................................ 42
5.10 Absence of Restraint................................................................... 42
5.11 No Governmental Litigation............................................................. 42
5.12 No Other Litigation.................................................................... 42
5.13 HSR Act................................................................................ 42
5.14 Quotation on Nasdaq National Market or New York Stock Exchange......................... 42
</TABLE>

ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
5.15 Other Required Consents and Approvals.................................................. 42
<C> <S> <C>
5.16 TakeCare Board Representation.......................................................... 42
5.17 Restated Rights Plan................................................................... 43
5.18 Talbert................................................................................ 43

ARTICLE 6 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS...................................... 43
6.1 Representations and Warranties Accurate................................................ 43
6.2 Compliance With Covenants.............................................................. 43
6.3 No Material Adverse Effect............................................................. 43
6.4 Certificate............................................................................ 43
6.5 Effectiveness of Registration Statement................................................ 43
6.6 Stockholder Approval................................................................... 43
6.7 Legal Opinion.......................................................................... 43
6.8 Tax Opinion............................................................................ 43
6.9 Absence of Restraint................................................................... 44
6.10 No Governmental Litigation............................................................. 44
6.11 HSR Act................................................................................ 44
6.12 Quotation on Nasdaq National Market or New York Stock Exchange......................... 44

ARTICLE 7 TERMINATION OF AGREEMENT............................................................... 44
7.1 Termination............................................................................ 44
7.2 Effect of Termination.................................................................. 45
7.3 Fees and Expenses...................................................................... 45

ARTICLE 8 MISCELLANEOUS.......................................................................... 46
8.1 Amendment.............................................................................. 46
8.2 Waiver................................................................................. 47
8.3 No Survival of Representations and Warranties.......................................... 47
8.4 Entire Agreement; Counterparts; Applicable Law......................................... 47
8.5 Attorneys' Fees........................................................................ 47
8.6 Assignability.......................................................................... 47
8.7 Notices................................................................................ 47
8.8 Cooperation............................................................................ 50
8.9 Certain Terms.......................................................................... 50
8.10 Titles................................................................................. 50
8.11 Articles, Sections and Exhibits........................................................ 50
8.12 Jurisdiction........................................................................... 50
8.13 Counterparts; Effectiveness............................................................ 50
8.14 Schedules.............................................................................. 50
</TABLE>

EXHIBITS

<TABLE>
<S> <C>
Exhibit 1.4 Holding Restated Certificate of Incorporation
Exhibit 4.12 Affiliate Agreements*
</TABLE>

- ------------------------
* Not included as part of this Appendix A.

iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION

THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement") is made and entered into as of November 11, 1996, by and among: N-T
HOLDINGS, INC., a Delaware corporation ("Holding"), PACIFICARE HEALTH SYSTEMS,
INC., a Delaware corporation ("PacifiCare"); NEPTUNE MERGER CORP., a Delaware
corporation and a wholly-owned subsidiary of Holding ("Neptune Sub"); FHP
INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and TREE
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
Holding ("Company Sub") who hereby amend and entirely restate the Agreement and
Plan of Reorganization among the same parties dated as of August 4, 1996 (the
"Original Agreement") as amended and restated on September 17, 1996 (the "First
Amended Reorganization Agreement").

RECITALS

A. The parties intend concurrently to effect a merger of Neptune Sub into
PacifiCare (the "PacifiCare Merger") and a merger of Company Sub into Company
(the "Company Merger"), each such merger to be carried out in accordance with
this Agreement and the laws of the State of Delaware (the "Mergers"), such that
PacifiCare and Company become wholly-owned subsidiaries of Holding and the
shareholders of PacifiCare and Company become shareholders of Holding. After the
Closing, Holding will act as a holding company for PacifiCare and the Company.

B. This Agreement has been approved by the respective Boards of Directors
of Holding, PacifiCare, Neptune Sub, Company and Company Sub.

C. For United States federal income tax purposes, it is intended that the
transactions contemplated by this Agreement qualify as transfers subject to
Section 351(a) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder (the "Code") and that the shareholders of
the Company be treated as if they transferred their stock in Company to Holding
in exchange for the Company merger consideration and that the shareholders of
PacifiCare be treated as if they transferred their stock in PacifiCare to
Holding in exchange for the PacifiCare merger consideration.

D. On August 4, 1996 PacifiCare had issued and outstanding approximately
12,370,758 shares of Class A Common Stock, $0.01 par value ("PacifiCare Class A
Common Stock") and 18,812,799 shares of Class B Common Stock, $0.01 par value
("PacifiCare Class B Common Stock"). On August 4, 1996 the Company had issued
and outstanding approximately 40,806,165 shares of Common Stock, $0.05 par value
("Company Common Stock") and approximately 21,030,345 shares of Series A
Cumulative Convertible Preferred Stock, $0.05 par value ("Company Series A
Preferred Stock").

E. Contemporaneously with the execution and delivery of the Original
Agreement, certain stockholders of PacifiCare and of the Company executed Voting
and Non-Disposition Agreements.

AGREEMENT

Holding, PacifiCare, Neptune Sub, the Company, and Company Sub hereby agree
as follows:

ARTICLE 1
DESCRIPTION OF TRANSACTION

1.1 MERGERS. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3), Company Sub
shall be merged into the Company and the separate existence of the Company Sub
shall cease. The Company will be the surviving corporation in the Company Merger
(the "Company Surviving Corporation") and its separate corporate existence, with
all its purposes, objects, rights, privileges, powers and franchises shall
continue unaffected by

1
<PAGE>
such merger. Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Neptune Sub shall be merged into PacifiCare
and the separate existence of Neptune Sub shall cease. PacifiCare shall be the
surviving corporation in PacifiCare Merger ("PacifiCare Surviving Corporation")
and its separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises shall continue unaffected by such merger.
Company Sub and Neptune Sub have been formed solely for the purpose of effecting
the Company Merger and the PacifiCare Merger, respectively, and there will be no
other activity in Company Sub and Neptune Sub.

1.2 EFFECT OF THE MERGERS. The Mergers shall have the effects set forth in
this Agreement and in Section 259 of the Delaware General Corporation Law (the
"DGCL").

1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of PacifiCare on the second business day following the date as of which each of
the conditions set forth in Articles 5 and 6 has been fulfilled or waived or on
such other date or at such other place as may be jointly designated by
PacifiCare and the Company (the "Closing Date"). As soon as practicable after
the Closing, properly executed certificates of merger for each Merger conforming
to the requirements of the DGCL and changing the name of Holding to "PacifiCare
Health Systems, Inc." and the name of PacifiCare to "PacifiCare Operations,
Inc." or some other name chosen by PacifiCare, shall be filed with the Delaware
Secretary of State. The Mergers shall become effective at the time said
certificates of merger are filed with the Delaware Secretary of State or at such
later time as may be specified in said certificates of merger (the "Effective
Time").

1.4 CERTIFICATES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.

(a) The Certificates of Incorporation of PacifiCare and Company shall be
the Certificates of Incorporation of PacifiCare Surviving Corporation and the
Company Surviving Corporation, respectively, as of the Effective Time.

(b) The Bylaws of PacifiCare and the Company, as in effect immediately
prior to the Effective Time, shall become the Bylaws of PacifiCare Surviving
Corporation and the Company Surviving Corporation, respectively, at the
Effective Time.

(d) PacifiCare shall cause Holding to take all necessary corporate action
to amend the Certificate of Incorporation and Bylaws of Holding prior to the
Effective Time to be in substantially the form of the Amended and Restated
Certificate of Incorporation attached hereto as Exhibit 1.4 (the "Holding
Restated Certificate of Incorporation") and the Bylaws of PacifiCare in effect
on the date hereof; PROVIDED, HOWEVER, that if the Series A Required Vote (as
defined in Section 2.11) is not received for the Series A Amendment (as defined
in Section 2.11), PacifiCare shall cause Holding to take all necessary corporate
action to file a Certificate of Designation creating a Series A-1 Preferred
Stock with rights, preferences, privileges and restrictions identical in all
substantial respects to those of the Company Series A Preferred Stock; and,
PROVIDED FURTHER, that the indemnification provisions of the Bylaws of Holding
may be amended to provide additional indemnification rights to the Directors
and/or Officers of Holding. PacifiCare shall cause the Board of Directors of
Holding after the Effective Time to consist of at least ten persons, of which
two individuals shall be designated by the Board of Directors of the Company and
be reasonably satisfactory to the Board of Directors of PacifiCare. The
designation of such new directors by the Board of Directors of the Company, and
the approval of such new directors by the Board of Directors of PacifiCare shall
each occur prior to the Effective Time. Such new directors shall be appointed to
different classes, and they shall commence to serve within 60 days of the
Effective Time and remain as directors until their successors have been duly
elected or until their earlier death, removal or resignation, provided that they
shall be renominated as required to be able to serve a minimum of three years.
If, prior to the end of such period, either of such directors becomes

2
<PAGE>
unable to serve as director, or is no longer qualified to serve as a director,
the remaining director (or his successor) shall select a replacement nominee
(which nominee shall be satisfactory to the Board of Directors of Holding) to be
appointed to serve the remaining term.

1.5 CONVERSION OF SHARES.

(a) At the Effective Time, by virtue of the Company Merger (and without any
action on the part of any stockholder of the Company):

(i) any shares of Company Common Stock or Company Series A Preferred
Stock then held by the Company or any subsidiary of the Company (or held in
the Company's treasury) shall be canceled;

(ii) any shares of Company Common Stock or Company Series A Preferred
Stock then held by PacifiCare, Neptune Sub or any other subsidiary of
PacifiCare shall be canceled;

(iii) except as provided in clauses (i) and (ii) above or as provided in
Section 1.8 with respect to shares as to which appraisal rights have been
exercised and subject to Section 1.5(c) below, each share of Company Common
Stock outstanding immediately prior to the Effective Time shall be converted
into the right to receive:

(A) an amount of Cash equal to $17.50 (the "Common Cash
Consideration"), plus

(B) the Final Class A/Common Share Ratio (as defined in Section
1.5(a)(vi)(D) below) of a share of Holding's Class A Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class A Common Stock"), plus

(C) the Final Class B/Common Share Ratio (as defined in Section
1.5(a)(vi)(E) below) of a share of Holding's Class B Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class B Common Stock");

(D) Talbert Rights as specified in Section 1.5(a)(v) below.

(iv) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c), each share of Company Series A Preferred Stock outstanding
immediately prior to the Effective Time shall be converted into Talbert
Rights as specified in Section 1.5(a)(v) below and the other consideration
specified in this clause (iv).

If the Series A Required Vote is received for the Series A Amendment, each
share of Series A Preferred Stock shall, in addition to the consideration
described in the first sentence of this Section 1.5(a)(iv), be converted
into (A) an amount of cash equal to $14.113 (the "Series A Cash
Consideration"); and (B) and one-half ( 1/2) share of Holding Series A (as
defined in Section 1.7(a)).

If the Series A Required Vote is not received for the Series A Amendment,
then, in accordance with the Company's Certificate of Incorporation, the
Company shall, on the date of the Effective Time (or as soon thereafter as
practicable and in any event within 5 days thereof), give notice (the
"Conversion Notice") in accordance with the Company's Certificate of
Designation with respect to the Company Series A Preferred Stock (the
"Certificate of Designation") to all holders of Company Series A Preferred
Stock (other than holders making an Irrevocable Election with respect to all
of their Company Series A Preferred Stock as described in the next
paragraph) that a "Change of Control" (as defined in the Certificate of
Designation) has occurred on the date of the Effective Time and that such
holders may exercise certain "Special Conversion Rights," as defined in the
Certificate of Designation, by delivery of written notice of exercise of
such rights, together with certificates representing the Company Series A
Preferred Stock with respect to which such rights are being exercised, duly
endorsed for transfer, until the expiration of 55 days from the date of the
Conversion Notice. Such Conversion Notice shall also include such other
information as may be required by the Certificate of Designation. In
accordance with the Certificate of Designation, each holder of Company
Series A Preferred Stock receiving the Conversion Notice shall be entitled,
upon exercise of such Special Conversion Rights, to convert each share of

3
<PAGE>
Company Series A Preferred Stock as to which an Irrevocable Election has not
validly been made into either (A) the consideration to be received by a
holder of a single share of Company Common Stock pursuant to Section
1.5(a)(iii) times a fraction, the numerator of which is $25.00 and the
denominator of which is equal to the closing price of the Company Common
Stock on the last business day prior to the date the Company gives the
Conversion Notice to the holders of the Company Series A Preferred Stock or
(B) $25.00 cash plus any accrued but unpaid dividends on such share;
PROVIDED, HOWEVER, that if any holder elects the option specified in clause
(A) above, Holding (directly or through the Company Surviving Corporation)
may, at its option, elect to pay such holder $25.00 cash plus any accrued
but unpaid dividends on such share instead of the consideration set forth in
said clause (A). The Conversion Notice shall also provide that the holders
of Company Series A Preferred Stock may elect to waive their Special
Conversion Rights and elect to receive the same consideration in the Company
Merger that such holder would have received if such holder had converted
such holder's shares of Company Series A Preferred Stock into Company Common
Stock pursuant to such holder's regular conversion rights immediately prior
to the Effective Time ("As-If-Converted Company Merger Consideration"). If
any holder of Company Series A Preferred Stock entitled to receive a
Conversion Notice fails to exercise such holder's Special Conversion Rights
or to waive such rights and elect to receive As-If-Converted Company Merger
Consideration within the time period specified in this Section 1.5(a)(iv)
and the Certificate of Designation, such holder shall thereafter with
respect to all shares of Company Series A Preferred Stock as to which a
valid Irrevocable Election has not been made have only the right to
surrender such shares in accordance with the provisions of Section 1.7 and
to receive for each share the As-If-Converted Company Merger Consideration.

Each holder of Company Series A Preferred Stock shall be given the right,
exercisable prior to the date of the Company Stockholder Meeting, to make an
irrevocable election (the "Irrevocable Election") to waive such holder's
Special Conversion Rights and such holder's right to receive As-If-Converted
Company Merger Consideration in accordance with the foregoing paragraph and
the Certificate of Designation and to instead receive, in lieu thereof, for
each share of Company Series A Preferred Stock as to which the Irrevocable
Election is made (A) the Series A Cash Consideration and (B) one-half ( 1/2)
share of Holding Series A (as defined in Section 1.7(a)). The Irrevocable
Election shall be effected by returning a Form of Irrevocable Election,
properly executed, together with stock certificates representing the Company
Series A Preferred held by the holder as to which the Irrevocable Election
is made (or a properly completed guarantee of delivery) to the Company's
transfer agent prior to the date of the Company Meeting. By making an
Irrevocable Election, the holder will irrevocably waive such holder's right
with respect to all shares as to which the Irrevocable Election is made to
(A) exercise Special Conversion Rights (as provided in the Certificate of
Designation); (B) exercise such holder's right to receive As-If-Converted
Company Merger Consideration; (C) exercise such holder's right to convert
such Company Series A Preferred Stock to Company Common Stock or; (D) gift,
sell, hypothecate or in any other manner transfer such Company Series A
Preferred Stock to any person who does not expressly accept such stock
subject to such Irrevocable Election and agree to be bound thereby; PROVIDED
that the restrictions imposed by such Irrevocable Election shall lapse if
this Agreement shall terminate in accordance with its terms prior to the
Effective Time.

If the Series A Required Vote is not received for the Series A Amendment,
then each share of Series A Preferred Stock as to which a valid Irrevocable
Election has been made shall, in addition to the consideration described in
the first sentence of this Section 1.5(a)(iv), be converted into the Series
A Cash Consideration and one-half ( 1/2) share of Holding Series A.

(v) Subject to Section 1.8 and subject to completion of the transactions
contemplated by Section 4.15, at the Effective Time, by virtue of the
Company Merger (and without any action on the part of any stockholder of the
Company) each share of Company Common Stock and Company Series A Preferred
Stock outstanding immediately prior to the Effective Time shall be converted
in part into rights to purchase directly or indirectly through one or more
other corporations

4
<PAGE>
formed to facilitate such purchase, all of the Company's interest in Talbert
Medical Management Corporation and Talbert Health Services Corporation
(collectively, "Talbert") pro rata based on the number of then outstanding
shares of Company Common Stock and the number of shares of Company Common
Stock into which outstanding shares of Company Series A Preferred Stock are
convertible immediately prior to the Effective Time.

(vi) for purposes of this Agreement:

(A) the "Average Pre-Vote Closing Share Price" for the PacifiCare
Class B Common Stock shall be the average closing price as quoted in the
Wall Street Journal of PacifiCare's Class B Common Stock ("PacifiCare
Class B Common Stock") during the twenty trading days ending on the
trading date immediately prior to the date of the stockholder meeting at
which the Company's stockholders vote on whether to approve the Company
Merger,

(B) the "Initial Exchange Ratio" shall be .258,

(C) the "Closing Price/Signing Price Ratio" shall be the Average
Pre-Vote Closing Share Price for PacifiCare Class B Common Stock divided
by $68.00,

(D) the "Final Class A/Common Share Ratio" shall be 2,350,000
divided by the Common Outstanding Number (as defined in Section
1.5(a)(vi)(G)), calculated to the nearest .001,

(E) the "Final Class B/Common Share Ratio" shall be the Final
Exchange Ratio minus the Final Class A/Common Share Ratio,

(F) the "Final Exchange Ratio" shall be the product of the Initial
Exchange Ratio times the following multiplier, calculated to the nearest
.001:

<TABLE>
<CAPTION>
CLOSING PRICE/SIGNING PRICE
MULTIPLIER RATIO
- ------------------------------------------------- ------------------------------
<S> <C>
0.8875 above 1.30
One minus ( 1/2 times (the Closing
Price/Signing Price Ratio less 1.075)) 1.075- 1.30
1 .925- 1.075
One plus ( 1/2 times (0.925 less the Closing
Price/Signing Price Ratio)) .70- .925
1.1125 less than .70
</TABLE>

(G) The "Common Outstanding Number" shall be the number of shares of
Company Common Stock issued and outstanding immediately before the
Effective Time plus the number of shares of Company Common Stock subject
to Company Options (as defined below), if any, which at the Effective
Time have the right to receive, upon exercise, the consideration set
forth in Section 1.5(a)(iii) after the Effective Time; PROVIDED, HOWEVER,
that if the Series A Required Vote is not received for the Series A
Amendment, then the "Common Outstanding Number" shall also include the
number of shares of Company Common Stock into which the Company Series A
Preferred Stock outstanding immediately prior to the Effective Time could
be converted, excluding those shares as to which a valid Irrevocable
Election has been made.

(vii) each share of the Common Stock, par value $.01 per share, of
Company Sub outstanding shall be converted into an equal number of shares of
Company Common Stock.

(b) At the Effective Time, by virtue of the PacifiCare Merger (and without
any action on the part of any stockholder of PacifiCare):

(i) any shares of PacifiCare Class A Common Stock or PacifiCare Class B
Common Stock (PacifiCare Class A Common Stock and PacifiCare Class B Common
Stock being sometimes

5
<PAGE>
collectively referred to herein as "PacifiCare Common Stock") then held by
PacifiCare or any subsidiary of PacifiCare (or held in PacifiCare's
treasury) shall be canceled and no payment shall be made with respect
thereto;

(ii) any shares of PacifiCare Common Stock then held by the Company,
Company Sub or any other subsidiary of the Company shall be canceled;

(iii) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c) below, each share of PacifiCare Class A Common Stock then
outstanding shall be converted into the right to receive one share of
Holding Class A Common Stock and each share of PacifiCare Class B Common
Stock then outstanding shall be converted into the right to receive one
share of Holding Class B Common Stock (Holding Class A Common Stock and
Holding Class B Common Stock being sometimes collectively referred to herein
as "Holding Common Stock");

(iv) each share of Common Stock, par value $.001 per share, of Neptune
Sub then outstanding shall be converted into one share of PacifiCare Class A
Common Stock; and

(v) each share of the capital stock of Holding existing immediately
prior to the Effective Time shall be canceled.

(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock or Company Series A Preferred Stock
or PacifiCare Class A Common Stock or PacifiCare Class B Common Stock are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up, combination
or similar transaction, the exchange ratio applicable thereto shall be
appropriately adjusted.

1.6 CLOSING OF THE TRANSFER BOOKS OF THE COMPANY AND PACIFICARE. At the
Effective Time, holders of certificates representing shares of Company Common
Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock shall cease to have any rights as stockholders
of the Company or PacifiCare, respectively, and the stock transfer books of the
Company and PacifiCare shall be closed with respect to all shares of Company
Common Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Company Common Stock,
Company Series A Preferred Stock, PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock shall thereafter be made on such stock transfer books. If,
after the Effective Time, a valid certificate previously representing any of
such shares of Company Common Stock, Company Series A Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent (as defined in Section
1.7) or to the Company or PacifiCare, as applicable, such Old Stock Certificate
shall be canceled and exchanged as provided in Section 1.7.

1.7 EXCHANGE OF CERTIFICATES.

(a) If the Series A Required Vote is received for the Series A Amendment or
if any holder makes an Irrevocable Election, the Holding Restated Certificate of
Incorporation shall establish the terms of Holding's preferred stock, including
the Series A Preferred Stock (the "Holding Series A"). Such Holding Restated
Certificate of Incorporation shall be substantially in the form of Exhibit 1.4
hereto and shall be filed with the Secretary of State of the State of Delaware
prior to the Effective Time. The Holding Series A shall be convertible into
Holding Class B Common Stock upon the terms and conditions, and shall have the
rights, preferences and privileges, set forth in Exhibit 1.4.

(b) Prior to the Closing Date, PacifiCare shall select a reputable bank or
trust company to act as exchange agent in the Merger (the "Exchange Agent").
Promptly after the Effective Time, (i) Holding shall deposit with the Exchange
Agent certificates representing the shares of Holding Class A Common Stock,
Holding Class B Common Stock and Holding Series A, if any, issuable pursuant to
Section 1.5 and (ii) Holding shall deposit cash sufficient to make the payments
called for in Section 1.5 and payments in lieu of fractional shares in
accordance with Section 1.7(e). The shares of Holding Class A

6
<PAGE>
Common Stock, Holding Class B Common Stock and Holding Series A, if any, and
cash amounts so deposited with the Exchange Agent, together with any dividends
or distributions received by the Exchange Agent with respect to such shares, are
referred to collectively as the "Exchange Fund."

(c) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the holders of Old Stock Certificates (i) a letter of transmittal
in customary form and containing such provisions as Holding or PacifiCare may
reasonably specify and (ii) instructions for use in effecting the surrender of
Old Stock Certificates in exchange for the consideration set forth in Section
1.5. If the Series A Required Vote is not received for the Series A Amendment,
the Exchange Agent may (i) delay mailing the letter of transmittal for holders
of Company Series A Preferred Stock who have not made a valid Irrevocable
Election until after expiration of the period during which Special Conversion
Rights may be exercised or (ii) include the letter of transmittal with the
Conversion Notice. Upon surrender of an Old Stock Certificate to the Exchange
Agent for exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by the Exchange Agent, the holder
of such Old Stock Certificate shall be entitled to receive in exchange therefor
(i) in the case of holders of Company Common Stock, (A) a check in the amount
calculated pursuant to this Article 1 (subject to required tax withholding) and
(B) certificates representing the number of whole shares of Holding Class A
Common Stock and Holding Class B Common Stock that such holder has the right to
receive pursuant to the provisions of this Article 1; (ii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote is
received for the Series A Amendment and as to holders who have made a valid
Irrevocable Election with respect to the shares represented by such Old Stock
Certificate. (A) a check in the amount calculated pursuant to this Article 1
(subject to required tax withholding), and (B) a certificate representing the
whole number of shares of Holding Series A that such holder has the right to
receive pursuant to the provisions of this Article 1; (iii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote for
the Series A Amendment is not received and a valid Irrevocable Election has not
been made with respect to such Company Series A Preferred Stock, (A) if Special
Conversion Rights are exercised, the consideration which such holder is entitled
to receive upon exercise thereof (subject to required tax withholding) or (B)
the As-If-Converted Company Merger Consideration (subject to required tax
withholding); and (iv) in the case of holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock, certificates representing the number of
whole shares of Holding Series A and Holding Series B Common Stock that such
holder has the right to receive pursuant to the provisions of Section 1.5. In
each case, the Old Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.7 or by Section 1.5(a)(iv), each
Old Stock Certificate shall be deemed, from and after the Effective Time to
represent only the right to receive upon such surrender the consideration
contemplated by Section 1.5.

(d) No dividends or other distributions declared or made with respect to
Holding Class A Common Stock, Holding Class B Common Stock or, if applicable,
Holding Series A, with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Old Stock Certificate with respect to the shares
of Holding Class A Common Stock, Holding Class B Common Stock and Holding Series
A represented thereby, and no cash payment shall be paid to any such holder,
until such holder surrenders such Old Stock Certificate in accordance with this
Section 1.7 (at which time such holder shall be entitled to receive all such
dividends and distributions and such cash payment).

(e) No certificates or scrip for fractional shares of Holding Class A
Common Stock, Holding Class B Common Stock or, if applicable, Holding Series A
shall be issued, but in lieu thereof, each holder of shares of Company Common
Stock or Company Series A Preferred Stock who would otherwise be entitled to
receive a certificate or scrip for a fraction of a share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A shall receive
from Holding a cash amount equal to the market value of one share of Holding
Class A Common Stock, Holding Class B Common Stock or Holding Series A, as the
case may be, (based on the closing sales price of one share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A as quoted on the
Nasdaq National Market or the New York Stock Exchange ("NYSE"), as the case may
be, on the first

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trading day after the Mergers become effective) multiplied by the fraction of a
share of Holding Class A Common Stock, Holding Class B Common Stock or Holding
Series A to which such holder would otherwise be entitled.

(f) Any portion of the Exchange Fund that remains undistributed to former
stockholders of the Company or PacifiCare as of the date 365 days after the date
on which the Mergers become effective shall be delivered to Holding upon demand,
and any former stockholders of the Company or PacifiCare who have not
theretofore surrendered their Old Stock Certificates in accordance with this
Section 1.7 shall thereafter look only to Holding for payment of their claims
for cash, Holding Class A Common Stock, Holding Class B Common Stock, Holding
Series A and any dividends or distributions with respect thereto.

(g) Neither PacifiCare nor the Company shall be liable to any holder or
former holder of shares of Company Common Stock, PacifiCare Common Stock or
Company Series A Preferred Stock with respect to any shares (or dividends or
distributions with respect thereto) or cash amounts from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.

1.8 APPRAISAL RIGHTS. Notwithstanding Section 1.5 above, shares of stock
of the Company or PacifiCare outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Company Merger or the
PacifiCare Merger, as applicable, and who has exercised appraisal rights in
respect of such shares of the Company or PacifiCare in accordance with the DGCL,
shall not be converted into a right to receive shares or cash or other
consideration otherwise available to such holder (including without limitation
the Talbert Rights) unless such holder fails to perfect or withdraws or
otherwise loses his appraisal rights prior to the Effective Time. Shares of
Company's and PacifiCare's stock in respect of which appraisal rights have been
exercised shall be treated in accordance with Section 262 of the DGCL. If after
the Effective Time such holder fails to perfect or withdraws or otherwise loses
his right to demand payment of the fair value of his shares under the DGCL, such
shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the shares and consideration such holder would have
received if such holder had not exercised his appraisal rights; provided,
however, that, such shares shall not be entitled to a distribution of any
Talbert Rights as provided in Section 4.15, but shall be entitled to receive in
cash the amount equal to the average closing price at which such rights trade on
their first five trading days. The Company shall give PacifiCare prompt notice
of any demands received by the Company for the exercise of appraisal rights with
respect to shares of the Company's Common Stock or the Company's Series A
Preferred Stock and PacifiCare shall have the right to participate in all
negotiation and proceedings with respect to such demands. The Company shall not,
except with the prior written consent of PacifiCare, make any payment with
respect to, or settle or offer to settle, any such demands.

1.9 STOCK SUBJECT TO CONDITIONS. If any shares of Company Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with the Company or PacifiCare, then (unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement) the shares of Holding Common Stock issued in exchange for such
shares of Company Common Stock or PacifiCare Common Stock, as the case may be,
will also be unvested or subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates evidencing such shares of
Holding Common Stock may accordingly be marked with appropriate legends.

1.10 TAX CONSEQUENCES. For federal income tax purposes, the Mergers are
intended to constitute contributions of property in exchange for stock within
the meaning of Section 351(a) of the Code. Neither the Company nor PacifiCare
shall take a position inconsistent with this Section 1.10 on any tax return.

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1.11 ACCOUNTING CONSEQUENCES. For accounting purposes, the Company Merger
is intended to be treated as a "purchase."

1.12 FURTHER ACTION. If at any time after the Effective Time any further
action is determined by Holding to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Company Surviving Corporation or
PacifiCare Surviving Corporation with the full right, title and possession of
and to all assets, property, rights, privileges, immunities, powers and
franchises of Company Sub and the Company or of Neptune Sub and PacifiCare,
respectively, the officers and directors of the applicable Surviving Corporation
shall be fully authorized (in the name of Company Sub, in the name of the
Company, in the name of Neptune Sub, or in the name of PacifiCare and otherwise)
to take such action.

ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set forth in the disclosure schedule delivered to PacifiCare on
the date of the Original Agreement and signed by the President of the Company
(the "Company Disclosure Schedule"), the Company represents and warrants to
PacifiCare and Holding, as of the date of the Original Agreement (except to the
extent set forth in Section 5.1(b)) as follows:

2.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.

(a) The Company is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. The Company has all necessary
power and authority under applicable corporate law and its organizational
documents to own or lease its properties and to carry on its business as
presently conducted. As of the date of the Original Agreement, the Company
Disclosure Schedule sets forth a list of all of the Company's subsidiaries. For
purposes of this Agreement, a company's "subsidiaries" shall include all
corporations, limited partnerships, joint ventures and other entities in which
such company, directly or indirectly, owns a majority interest.

(b) Each of the Company and its subsidiaries, to the extent conducting
business as a health maintenance organization ("HMO"), insurance company,
third-party administrator or otherwise requiring any form of governmental
licensure, qualification or authorization, is duly licensed, qualified or
authorized and in good standing under the applicable laws and regulations,
respectively, of each state or territory in which the conduct of such business
requires such licensure, qualification or authorization, except where failure
would not have a material adverse effect on the Company or its material
subsidiaries as set forth in Schedule 2.1(b) (the "Company's Material
Subsidiaries"). The conduct of the Company's and its subsidiaries' respective
business is in conformity with all applicable foreign, federal, state or
territorial, local and other governmental and regulatory requirements and the
forms, procedures and practices of the Company and its subsidiaries in the
conduct of their respective business are also in compliance with all such
requirements, to the extent applicable, except where nonconformity or
noncompliance would not constitute a Material Adverse Effect on the Company. For
purposes of this Agreement, "Material Adverse Effect," as it applies to the
Company, means a material adverse effect on the business, operations, financial
condition or assets of the Company and its subsidiaries, taken as a whole, other
than as a result of the performance by the Company of its obligations, or the
exercise by Holding, PacifiCare and Neptune Sub of their rights, under this
Agreement.

(c) As of the date of the Original Agreement, the authorized capital stock
of the Company consisted of: 100,000,000 shares of Company Common Stock, par
value $0.05 per share, of which, as of the date of the Original Agreement,
40,806,165 shares were issued and outstanding; and 40,000,000 shares of
preferred stock, par value $0.05 per share, of which, as of the date of the
Original Agreement, 21,030,345 shares of Company Series A Preferred Stock were
issued and outstanding. All the issued and outstanding shares of Company Common
Stock and Company Series A Preferred Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. As of the date of the Original
Agreement, the Company had issued outstanding options to purchase a total of
3,917,259 shares of

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<PAGE>
Company Common Stock (the "Company Options") pursuant to Company's stock option
plans and agreements. The Company has provided PacifiCare a schedule (the
"Option and Restricted Stock Schedule") which sets forth (i) with respect to the
Company Options, the name of each optionee, the number of shares of Company
Common Stock subject to each Company Option, the date of grant and exercise
price and the vesting schedule of each Company Option, (ii) each option plan and
agreement under which the Company Options have been granted, and the Company has
delivered to PacifiCare complete and accurate copies of all such plans, and
(iii) the name of each holder of restricted stock, the date of sale and issuance
of such restricted stock to each such holder, and the applicable restrictions on
such restricted stock. The Company has an Amended and Restated Rights Agreement
dated as of March 28,1994 between Company and American Stock Transfer & Trust
Co., as agent (the "Restated Rights Agreement") under which certain shareholder
rights have been granted. The execution of Voting and Non-Disposition Agreements
by certain stockholders of the Company has not and will not give rise to any
rights or benefits under the Restated Rights Plan. Except as set forth above or
on the Company Disclosure Schedule, as of the date of the Original Agreement,
(i) there were no shares of capital stock of the Company authorized, issued or
outstanding, (ii) there were no outstanding subscriptions, options, warrants,
stock appreciation right plans, calls, rights, convertible securities,
stockholder rights plans (or similar plans commonly referred to as "poison
pills") or other agreements or commitments of any character relating to issued
or unissued capital stock or other securities of the Company or any of its
subsidiaries, or obligating the Company or any other party to issue, transfer or
sell any shares of the capital stock or other securities of the Company or any
of its subsidiaries, and (iii) there were no other outstanding securities
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of the capital stock or other securities of the Company or any of its
subsidiaries or any successor corporation or controlling person of such
successor corporation. The Company is not under any obligation to register under
the Securities Act any of its presently outstanding securities or any securities
that may be subsequently issued.

(d) Each subsidiary of the Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by the Company or another subsidiary of the
Company, free and clear of any liens, claims or encumbrances.

(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
the Company and each of its subsidiaries are filed as exhibits to the Company
SEC Reports or have been delivered to PacifiCare.

2.2 SEC FILINGS; FINANCIAL STATEMENTS.

(a) The Company has made available to PacifiCare a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by the Company with the Securities and Exchange Commission
("SEC") on or after July 1, 1995 (the "Company SEC Reports"), which are all the
forms, reports and documents required to be filed by the Company with the SEC
since July 1, 1995. The Company SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act (as
such terms are defined in Section 2.17), as the case may be, at and as of the
times they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) and (ii) did not at and
as of the time they were filed (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.

(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the Company SEC Reports and the Company's
estimated balance sheet as of May 31, 1996 (the "May 31, 1996 Balance Sheet"),
as well as the Company's preliminary interim income statement for the fiscal
year ended June 30, 1996 (the "June 30 Statement") that have been delivered

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to PacifiCare (collectively, the "Past Financial Statements") were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto) and fairly presents the consolidated financial position of
the Company and its subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the May 31, 1996 Balance Sheet and the June 30 Statement included in
the Past Financial Statements (i) were or are subject to normal year-end audit
adjustments which were not or are not expected to be material in amount and (ii)
do not contain footnotes.

(c) The Company and its subsidiaries have no Liabilities, except for (i)
any Liability which is accrued or fully reserved against in the May 31, 1996
Balance Sheet or disclosed in the notes included in the Past Financial
Statements, (ii) any Liability which was incurred after May 31, 1996 in the
ordinary course of business, (iii) other Liabilities which, individually or in
the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company or (iv) any Liability under or disclosed
in this Agreement. As used herein, "Liabilities" shall mean any liability or
obligation of any kind or nature, secured or unsecured (whether absolute,
accrued, contingent or otherwise, and whether due or to become due).

2.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on the Company, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on the Company or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.2(b)(i), (ii), (v), (vi),
(vii), (ix), (xiv), and (xvi) if it were to occur or be effected between the
date of the Original Agreement and the Effective Time.

2.4 TAX MATTERS.

(a) The Company (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all material returns, declaration, reports, estimates,
information returns and statements, including information returns and reports
("Returns"), required to be filed under federal, state or territorial, local or
any foreign laws regarding Taxes (as defined below) by the Company and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.

(b) The Company (or, if applicable, one of its subsidiaries) has, within
the time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.

(c) The Company and its subsidiaries have not filed (and will not file
prior to the Closing Date) any consent agreement under Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of
any subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by the Company or such subsidiaries.

(d) No outstanding debt obligation of the Company is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.

(e) There are no claims or assessments in excess of $5,000,000, pending or
threatened, by any taxing authority against the Company or any of its
subsidiaries. The Company Disclosure Schedule lists all pending tax audits by
the IRS, all agreements with the IRS to delay the applicable statute of
limitations and all settlements of any tax audits or claims by the IRS since
July 1, 1993.

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(f) For purposes of this Article 2, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by the Company or any of its subsidiaries.

2.5 CONTRACTS.

(a) COMPANY MATERIAL CONTRACTS. For purposes of this Agreement, "Company
Material Contracts" shall mean (i) each contract, agreement or other arrangement
of or involving the Company or any of its subsidiaries with respect to
indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of the Company or any of its subsidiaries to compete or otherwise
conduct its business in any manner or place which materially affects the Company
or any material subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of the Company or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to the
Company and its subsidiaries or their businesses or prospects taken as a whole;
and (iv) for each state in which the Company or its subsidiary conducts business
as an HMO, insurance company, third-party administrator or otherwise requiring
licensure as set forth in Section 2.1(b), (A) the material contracts (based on
gross revenues generated thereunder) with government agencies or employer or
other groups, (B) the material contracts (based on payments made thereunder)
with physician providers of health care services, (C) the material contracts
(based on payments made thereunder) with providers of hospital services, and (D)
the material contracts (based on payments made thereunder) with providers of
non-hospital, non-physician medical services, all as specified in the next
sentence. In California, material contracts are the twenty-five largest
government agency or employer or other group contracts, the twenty-five largest
physician provider contracts, the ten largest hospital contracts and the ten
largest non-physician, non-hospital contracts. In Colorado, material contracts
are the five largest hospital contracts and the ten largest physician provider
contracts. In Arizona, material contracts are the five largest hospital
contracts and five largest physician provider contracts. In Utah, material
contracts are the six largest hospital contracts and nine largest physician
provider contracts. In all other states or territories in which the Company or a
subsidiary conducts business, material contracts are the five largest government
agency or employer or other group contracts, the five largest physician provider
contracts and the five largest hospital contracts. The Company will use its best
efforts to provide a true and complete copy of each Company Material Contract to
PacifiCare within 30 days of the date of the Original Agreement.

All Company Material Contracts, are in full force and effect and are binding
upon Company or its subsidiary, as the case may be, and, to the Company's
knowledge, are binding on the other parties thereto, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws, both state and federal, affecting the enforcement of
creditors' rights or remedies in general from time to time in effect and the
exercise by courts of equity powers. To the Company's knowledge, no material
default by the Company or any of its subsidiaries has occurred under any of the
Company Material Contracts and (A) no material default by any of the other
contracting parties has occurred under any of the Company Material Contracts,
(B) no event has occurred which with the giving of notice or the lapse of time,
or both, would constitute a material default by the Company or any of its
subsidiaries or any of the other contracting parties and (C) there is no other
reason, including without limitation any pending or threatened termination, that
any Company Material Contract will terminate (other than expiration in
accordance with its terms).

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(b) The Company Disclosure Schedule sets forth a list of all claims other
than invoices in the ordinary course of business, or claims made under risk
programs in the ordinary course of business made or, to the Company's knowledge,
threatened against the Company or any of its subsidiaries under each Company
Material Contract presently or heretofore in effect (including claims for back
charges, rebates, price reductions, breaches of product or service warranties or
for product or service liability for products manufactured or sold), to the
extent such claims have had or would reasonably be expected to have (i) for
provider contracts, a cost to the Company or its Material Subsidiaries in excess
of $5,000,000 or (ii) for other Company Material Contracts, a material adverse
effect on the Company or any of its Material Subsidiaries.

(c) Except as listed on the Company Disclosure Schedule, there are no
contracts, agreements or understandings, oral or written, between the Company or
any of its subsidiaries and Talbert that would interfere or conflict with the
transactions contemplated by Section 4.15 hereof.

2.6 EMPLOYEES.

(a) The Company has made available to PacifiCare a list of the top 100 paid
employees of the Company and its subsidiaries and, to the Company's knowledge,
the information relating to each person on such list is correct. The Company
Disclosure Schedule identifies each "employee benefit plan," as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), currently or previously maintained, contributed to or entered into by
the Company or any ERISA Affiliate (as defined below) under which the Company or
any ERISA Affiliate thereof has any present or future obligation or liability
(collectively, the "Company Employee Plans"). For purposes of this Section 2.6,
"ERISA Affiliate" shall mean any entity which is a member of (A) a "controlled
group of corporations," as defined in Section 414(b) of the Code, (B) a group of
entities under "common control," as defined in Section 414(c) of the Code, or
(C) an "affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes Company. Copies of all Company Employee Plans (and, if applicable,
related trust agreements) and all amendments thereto and written interpretations
thereof (including summary plan descriptions) have been made available to
PacifiCare or its counsel, together with the most recent annual report (Form
5500, including, if applicable, Schedule B thereto) prepared in connection with
any such Company Employee Plan. All Company Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as defined in
Section 3(2) of ERISA (collectively, the "Company Pension Plans"), are
identified as such in the Company Disclosure Schedule. All material
contributions due from the Company with respect to any of the Company Employee
Plans have been made as required under ERISA or have been accrued on the
Company's financial statements as of March 31, 1996. Each Company Employee Plan
has been maintained substantially in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including, without limitation, ERISA and the Code, which are applicable to such
Company Employee Plans, except as would not have a Material Adverse Effect on
the Company.

(b) No Company Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No Company Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any Company Employee Plan which is covered by Title
I of ERISA which would have a Material Adverse Effect on the Company, excluding
transactions effected pursuant to a statutory or administrative exemption.
Nothing done or omitted to be done by the Company and no transaction or holding
of any asset under or in connection with any Company Employee Plan has or will
make the Company or any officer or director of the Company subject to any
material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.

(c) With respect to each Company Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "Company 401(a) Plan"), either (A)
a favorable determination letter has been received from the Internal Revenue
Service ("IRS") as to such qualification under the Code as in effect immediately
after the Tax Reform Act of 1986, (B) an application for a favorable
determination

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letter is pending that was duly filed with the IRS prior to the expiration of
the time within which retroactive amendment relating back to the effective date
of such plan may be made under Section 401(b) of the Code and regulations or IRS
pronouncements thereunder, or (C) the time provided under Section 401(b) of the
Code and regulations or IRS pronouncements thereunder for making retroactive
amendments relating back to the effective date of such plan will not expire
before the date that is sixty (60) days after the date of the Original
Agreement, and there is no reason to believe that any favorable determination
letter will not be received.

(d) No Company Employee Plan provides or ever has provided death, medical
or health benefits (whether or not insured) with respect to current or former
employees after any such employee's retirement or other termination of service
(other than (A) benefit coverage mandated by applicable law, including, without
limitation, coverage provided pursuant to Section 4980B of the Code, (B) death
benefits or retirement benefits under any Company Pension Plan, (C) deferred
compensation benefits accrued as liabilities on the books of the Company, or (D)
benefits the full cost of which is borne by the current or former employee (or
the employee's beneficiary)).

(e) The Company Disclosure Schedule lists each material employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors which (A) is not a Company Employee
Plan, (B) is entered into, maintained or contributed to, as the case may be, by
the Company or any subsidiary and (C) covers any employee or former employee of
the Company. Such contracts, plans and arrangements as are described in this
Section 2.6(e) are herein referred to collectively as the "Company Benefit
Arrangements." Each Company Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Company Benefit Arrangement. The Company has delivered to PacifiCare or its
counsel a complete and correct copy or description of each contract, plan or
arrangement that constitutes a Company Benefit Arrangement.

(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by the Company relating to, or change in employee
participation or coverage under, any Company Employee Plan or Company Benefit
Arrangement that would increase materially the expense of maintaining such
Company Employee Plan or Company Benefit Arrangement above the level of the
expense incurred in respect thereof for the year ended June 30, 1996.

(g) The Company has provided, or will have provided prior to the Closing to
individuals entitled thereto all required notices and coverage pursuant to
Section 4980B of the Code and the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended ("COBRA"), with respect to any "qualifying event" (as
defined in Section 4980B(f)(3) of the Code) occurring prior to and including the
Closing, and no material tax payable on account of Section 4980B of the Code has
been incurred with respect to any current or former employees (or their
beneficiaries) of the Company.

(h) Neither the Company nor any of its subsidiaries is subject to any
collective bargaining agreement with respect to any of its employees, has any
material current labor problems or disputes, and, to its knowledge, has been
subject to any effort to organize any employees during the last 24 months. The
Company has good labor relations and has no knowledge of any facts indicating
that the consummation of the transactions contemplated hereby will have a
material adverse effect on labor relations.

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2.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.

(a) Except as set forth in the Company Disclosure Schedule, there is, to
the Company's knowledge, no examination, audit, review, investigation,
arbitration, suit, litigation or other proceeding (a "Proceeding") pending or
threatened by or before any court or Governmental Authority (as defined in
Section 2.17) to which the Company or any of its subsidiaries is a party or
otherwise involved or to which any of the business or assets of the Company or
any of its subsidiaries is subject which has or would reasonably be expected to
have (i) a potential liability in excess of $5,000,000 or (ii) a material
adverse effect on Company, or any Company Material Subsidiary, whether or not
covered by insurance.

(b) Neither the Company nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost in excess
of $5,000,000, or (ii) to affect materially the operations of the Company or any
Company Material Subsidiary.

(c) Except as set forth on the Company Disclosure Schedule or in Company
SEC Reports or other public filings with the SEC, neither the Company nor any of
its subsidiaries is or has at any time since July 1, 1993 (July 1, 1990 in the
case of any violation involving any Governmental Authority) been in violation
of, or delinquent in respect to, any decree, order or arbitration award or law,
statute or regulation of, or agreement with, or any license or permit from, any
Governmental Authority to which any of its properties, assets, personnel or
business activities are subject or to which any of them is subject, including
laws, rules and regulations relating to the environment, insurance companies,
HMOs, third-party administrators or other businesses required to be licensed
under Section 2.1(b), occupational health and safety, employee benefits, wages,
workplace safety, equal employment opportunity and race, religious, sex and age
discrimination which has had or would reasonably be expected have a Material
Adverse Effect on the Company.

2.8 PROPERTIES.

(a) The Company and its subsidiaries have insurance policies, commercially
adequate to protect against the risks so insured. The Company has made available
copies of all such policies to PacifiCare or its counsel. Neither the Company
nor any of its subsidiaries has done anything by way of action or inaction which
might invalidate any of such policies in whole or in part, except in the
ordinary course of business.

(b) The Company and its subsidiaries own and hold title to all real and
other property reflected in the Company SEC Reports as owned by the Company or
any of its subsidiaries, as the case may be.

2.9 DISCLOSURE.

(a) The copies of all documents furnished by the Company pursuant to the
terms of this Agreement are complete and accurate copies of the originals.

(b) During the past 12 months, the Company has timely filed all required
forms, reports and documents required to be filed with the SEC and the National
Association of Securities Dealers (the "NASD").

(c) None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the registration statement on Form
S-4 to be filed with the SEC by Holding in connection with the issuance of the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
in the Mergers and the votes of the Company's and PacifiCare's stockholders (the
"S-4 Registration Statement") will, at the time the S-4 Registration Statement
is filed with the SEC or at the time the S-4 Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. None of the information supplied or
to be supplied by the Company for inclusion or incorporation by reference in the
Prospectus/Proxy Statement filed as a part of the S-4

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Registration Statement (the "Prospectus/Proxy Statement"), will, at the time
mailed to the stockholders of the Company, at the time of the Company
Stockholders' Meeting (as defined in Section 4.6) and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.

2.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between Company and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since July 1, 1995, and for
which disclosure is required under Item 404 of Regulation S-K promulgated by the
SEC is set forth in the Company SEC Reports or in the Company Disclosure
Schedule.

2.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding Company Common Stock is necessary to adopt and approve this
Agreement and the Company Merger (the "Company Required Vote"). The affirmative
vote of the holders of a majority of the outstanding Common Stock and of 66 2/3%
of the outstanding Company Series A Preferred Stock (the "Series A Required
Vote") is necessary to adopt and approve an amendment (the "Series A Amendment")
to the Company's Restated and Amended Certificate of Incorporation (the "Company
Restated Certificate of Incorporation") providing for the payments in the first
sentence of Section 1.5(a)(iv) in lieu of those currently required by the
Certificate of Designation.

2.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the Company Merger.

2.13 COMPANY ACTION. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Company Merger and
the Series A Amendment are advisable and fair and in the best interests of the
Company and its stockholders, (b) unanimously approved this Agreement, the
Series A Amendment and the Company Merger in accordance with the provisions of
Sections 242 and 251 of the DGCL, (c) unanimously recommended the adoption and
approval of this Agreement and the Company Merger by the holders of Company
Common Stock and directed that the Company Merger be submitted for consideration
by the Company's stockholders at the Company Stockholders' Meeting, (d) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
Company Merger, (e) unanimously recommended the adoption and approval of the
Series A Amendment by the holders of Company Common Stock and of Company Series
A Preferred Stock and directed that the Series A Amendment be submitted for
consideration by the Company's stockholders at the Company Stockholders'
Meeting, and (f) taken all necessary steps to ensure that the Company Merger and
related transactions, including, without limitation, the execution of any of the
Voting and Non-Distribution Agreements, will not result in the distribution or
exercisability of any rights under the Restated Rights Agreement.

2.14 FAIRNESS OPINION. The Company has received the written opinion of
Merrill Lynch & Co., financial advisor to the Company, dated August 4, 1996, to
the effect that the consideration to be received by the holders of the Company's
Common Stock is fair to such holders from a financial point of view.

2.15 FINANCIAL ADVISOR. The Company represents and warrants that except
for Merrill Lynch & Co., no broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission payable by the Company or its
subsidiaries in connection with the Company Merger, except a fee not to exceed
$400,000 payable with respect to the proposed Talbert separation described in
Section 4.15 below.

2.16 ENFORCEABILITY. The Company has full corporate power and authority to
execute, deliver and perform each of the Transactional Agreements to which it is
or will become a party. The execution

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and delivery of said Transactional Agreements have been duly and validly
authorized by the Board of Directors of the Company, and no other corporate
proceedings on the part of the Company are necessary for the Company to
authorize any of the Transactional Agreements, and no such proceedings (other
than the approval of the Company's stockholders) are necessary to enable the
Company to perform or consummate any of the transactions contemplated by this
Agreement. Said Transactional Agreements (a) have been (or will be) duly
executed and delivered by duly authorized officers of the Company and (b)
constitute (or, when executed by the Company, will constitute) legal, valid and
binding obligations of the Company enforceable against it in accordance with
their terms (except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers). For
purposes of this Article 2, "Transactional Agreements" means this Agreement and
the related Agreement of Merger for the Company Merger.

2.17 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act of 1933, as amended (the "Securities Act"), state securities or blue sky
laws, the DGCL, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, and third-party administrators or other businesses operated by the Company
or its subsidiaries requiring licensure, qualification or authorization, there
is no requirement applicable to the Company or any of its subsidiaries to make
any filing with, or to obtain any permit, authorization, consent or approval of,
any federal, state or territorial, local or foreign governmental or regulatory
agency, department, commission or other authority (a "Governmental Authority"),
except for such filings, permits, authorizations, consents or approvals which,
if not made or obtained, would not have a Material Adverse Effect on the
Company. Neither the execution and delivery of this Agreement by the Company nor
the consummation by the Company of any of the transactions contemplated by this
Agreement will (a) conflict with, violate or result in any breach of any
provision of the Certificate of Incorporation or Bylaws (or comparable charter
documents) of the Company or Talbert, (b) result in a material default (or with
notice or lapse of time or both would result in a default) under, or materially
impair the rights of the Company or any of its subsidiaries or materially alter
the rights or obligations of any third party under, or require the Company or
any of its subsidiaries to make any material payment or become subject to any
material liability to any third party under, or give rise to any right of
termination, amendment, cancellation, acceleration, repurchase, put or call
under, any of the terms, conditions or provisions of any Company Material
Contract, (c) result in the creation of any material (individually or in the
aggregate) liens, charges or encumbrances on any of the material assets of the
Company or any of its subsidiaries or (d) conflict with or violate any law,
statute, rule, regulation, judgment, order, writ, injunction, decree or
arbitration award applicable to the Company or any of its subsidiaries or any of
their material assets, which conflict or violation has had or would reasonably
be expected to have a Material Adverse Effect on the Company.

2.18 RESERVES. The reserves established by the Company and its
subsidiaries in the Company SEC Reports, or in any financial statement or
balance sheet contained in any document filed with the SEC after the date of the
Original Agreement, for statutorily required reserves and for incurred but not
yet paid claims for, or relating to, medical treatment or similar claims (i) are
computed in accordance with presently accepted industry standards consistently
applied, (ii) meet the requirements of any law, rule or regulation applicable to
such reserves, (iii) are computed on the basis of assumptions consistent with
those used in computing the corresponding reserves in the prior fiscal year, and
(iv) include provision for all actuarial reserves and related items which ought
to be established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither the
Company nor its senior management was aware of any fact or circumstance which
would necessitate, in the good faith application of prudent reserving practices
and policies, any material adverse change in statutorily required reserves or
reserves for such incurred but

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not yet paid claims above that reflected in the most recent balance sheet
included in the Company SEC Reports (other than increases consistent with past
experience resulting from increases in enrollment with respect to the Company's
subsidiaries' services).

2.19 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the Company Disclosure
Schedule, no audit or investigation of the Company or any of its subsidiaries
which may be expected to have a Material Adverse Effect on the Company was
pending before, or to the Company's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the
Internal Revenue Service), the several States or territories (other than state
taxing authorities) or any foreign jurisdiction. There are no pending or
anticipated proceedings which may be expected to have a Material Adverse Effect
on the Company by or on behalf or in the name of the state or federal government
or any governmental agency relating to the imposition of civil monetary
penalties, exclusion or debarment from governmental programs or other
administrative sanctions.

2.20 ENVIRONMENTAL PROVISIONS.

(a) For the purposes of this Section 2.20, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by the Company or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.

(b) The Company and its subsidiaries are in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof,
except where the costs of any failure to comply will not exceed, in the
aggregate, $5,000,000. The Company and its subsidiaries have not received any
written communication, whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that they are not in such full compliance in
all material respects, and, to the knowledge of the Company, there are no
circumstances that may prevent or interfere with such full compliance in all
material respects in the future. To the knowledge of the Company, no current or
prior owner of any property owned or leased by the Company and its subsidiaries
has received any written communication, whether from a Governmental Authority,
citizens group, employee or otherwise, that alleges that the Company and its
subsidiaries is not in such compliance in all material respects.

(c) There is no material Environmental Claim pending or, to the knowledge
of the Company, threatened against the Company or a subsidiary or against any
person or entity whose liability for any Environmental Claim the Company and its
subsidiaries have or may have retained or assumed either contractually or by
operation of law, which Environmental Claim would reasonably be expected to have
a Material Adverse Effect on the Company.

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(d) To the knowledge of the Company, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
material Environmental Claim against the Company or its subsidiaries or, to the
knowledge of the Company, against any person or entity whose liability for any
Environmental Claim the Company or a subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on the Company.

2.21 INTELLECTUAL PROPERTY.

(a) To the knowledge of the Company, all patents, registered trademarks and
registered copyrights of the Company are valid and enforceable. There are no
interference, opposition or cancellation proceedings or infringement suits
pending or, to the knowledge of the Company or its subsidiaries, threatened,
with respect to any of the patents, registered trademarks or copyrights. The
Company or its subsidiaries have not been advised, nor has either any reason to
believe that the Company or a subsidiary is infringing a patent, trademark or
copyright held by another person.

(b) The Company and its subsidiaries own or have in their possession
certain information of the sort typically considered as trade secrets in the
healthcare industry (the "Trade Secrets"). The Company and its subsidiaries have
taken commercially reasonable precautions to maintain Trade Secrets in
confidence and to prevent their disclosure to unauthorized persons. To the
knowledge of the Company, the Company and its subsidiaries have good title and
an absolute (though not necessarily exclusive) right to use all Trade Secrets
and the use of the Trade Secrets does not infringe the rights of any third
party.

(c) Except as set forth in the Company Disclosure Schedule, to the
knowledge of the Company and its subsidiaries, no person is infringing upon any
patent, trademark or any copyright or is misappropriating any Trade Secret owned
by the Company or a subsidiary. To the best of the Company or its subsidiaries'
knowledge, none of the processes or know-how used by the Company or its
subsidiaries infringes any patent, trademark or copyright of any third party. To
the best of the Company or its subsidiaries' knowledge, there is no intellectual
property, in any form, necessary for the operation of the Company and its
subsidiaries' business as currently conducted which the Company or a subsidiary
does not currently own or license on commercially reasonable terms.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING

Except as set forth in the disclosure schedule delivered to Company on the
date of the Original Agreement and signed by the Presidents of PacifiCare and
Holding, respectively (collectively, the "PacifiCare Disclosure Schedule"),
PacifiCare and Holding represent and warrant to the Company, as of the date of
the Original Agreement (except to the extent set forth in Section 6.1(b)) as
follows:

3.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.

(a) PacifiCare is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. Holding is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware. Neptune Sub and Company Sub are corporations duly organized, existing
and in good standing under the laws of the State of Delaware. Each of
PacifiCare, Holding, Neptune Sub and Company Sub has all necessary power and
authority under applicable corporate law and its organizational documents to own
or lease its properties and to carry on its business as presently conducted. As
of the date of the Original Agreement, the PacifiCare Disclosure Schedule set
forth a list of all of PacifiCare's subsidiaries. As of the date of the Original
Agreement, other than PacifiCare's subsidiaries, neither PacifiCare nor any of
its subsidiaries owned or held, directly or indirectly, any debt or equity
securities of, or had any other interest in, any corporation, partnership,

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joint venture or other entity, except publicly traded debt or equity which in
any event represented less than 1% of such outstanding securities, and neither
PacifiCare nor any of its subsidiaries had entered into any agreement to acquire
any such interest.

(b) Each of PacifiCare and its subsidiaries, to the extent conducting
business as an HMO, insurance company, third-party administrator or other entity
requiring any form of governmental licensure, qualification or authorization is
duly licensed, qualified or authorized and in good standing under the applicable
laws and regulations, respectively, of each state or territory in which the
conduct of such business requires such licensure, qualification or
authorization, except where failure would not have a material adverse effect on
PacifiCare or on any of its material subsidiaries as set forth in the PacifiCare
Disclosure Schedule ("PacifiCare Material Subsidiaries"). The conduct of
PacifiCare's and its subsidiaries' respective business is in conformity with all
applicable foreign, federal, state or territorial, local and other governmental
and regulatory requirements and the forms, procedures and practices of
PacifiCare and its subsidiaries in the conduct of their respective businesses
are also in compliance with all such requirements, to the extent applicable,
except where nonconformity or noncompliance would not constitute a Material
Adverse Effect on PacifiCare. For purposes of this Agreement, "Material Adverse
Effect," as it applies to PacifiCare, means a material adverse effect on the
business, operations, financial condition or assets of PacifiCare and its
subsidiaries, taken as a whole, other than as a result of the performance by
PacifiCare or Holding of their obligations, or the exercise by the Company of
its rights, under this Agreement.

(c) As of the date of the Original Agreement, the authorized capital stock
of PacifiCare consisted of: 100,000,000 shares of PacifiCare Class A Common
Stock and 100,000,000 shares of PacifiCare Class B Common Stock of which, as of
the date of the Original Agreement, 12,370,758 shares of PacifiCare Class A
Common Stock and 18,812,799 of PacifiCare Class B Common Stock were issued and
outstanding; and 20,000,000 shares of preferred stock, par value $1.00 per
share, of which, as of the date of the Original Agreement, no shares of were
issued and outstanding. All the issued and outstanding shares of PacifiCare
Class A Common Stock and PacifiCare Class B Common Stock are validly issued,
fully paid and nonassessable and free of preemptive rights. As of the date of
the Original Agreement, PacifiCare had issued outstanding options to purchase a
total of 317,734 shares of PacifiCare Class A Common Stock and 1,742,939 shares
of PacifiCare Class B Common Stock (the "PacifiCare Options") pursuant to
PacifiCare's stock option plans and agreements. Except as set forth above, as of
the date of the Original Agreement, (i) there were no shares of capital stock of
PacifiCare authorized, issued or outstanding, (ii) there were no outstanding
subscriptions, options, warrants, stock appreciation right plans, calls, rights,
convertible securities, stockholder rights plans (or similar plans commonly
referred to as "poison pills") or other agreements or commitments of any
character relating to issued or unissued capital stock or other securities of
PacifiCare or any of its subsidiaries, or obligating PacifiCare or any other
party to issue, transfer or sell any shares of the capital stock or other
securities of PacifiCare or any of its subsidiaries, and (iii) there were no
other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of PacifiCare or any of its subsidiaries or any successor corporation or
controlling person of such successor corporation. The authorized capital of
Holding, Neptune Sub and Company Sub each consists of 1,000 shares of Common
Stock, par value $.001 per share, of which; in the case of Holding, 200 shares
are issued and outstanding and are held beneficially and of record by
PacifiCare, while in the case of Neptune Sub and Company Sub, 100 shares of
which are issued and outstanding are held beneficially and of record by Holding.

(d) Each subsidiary of PacifiCare is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by PacifiCare or another subsidiary of
PacifiCare, free and clear of any liens, claims or encumbrances.

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(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
PacifiCare and each of its subsidiaries are filed as exhibits to PacifiCare SEC
Reports or have been made available to the Company.

3.2 SEC FILINGS; FINANCIAL STATEMENTS.

(a) PacifiCare has made available to the Company a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by PacifiCare with the SEC on or after July 1, 1995 (the
"PacifiCare SEC Reports"), which are all the forms, reports and documents
required to be filed by PacifiCare with the SEC since July 1, 1995. The
PacifiCare SEC Reports (i) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, at
and as of the times they were filed (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) and (ii)
did not at and as of the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the PacifiCare SEC Reports and the set of
PacifiCare's unaudited interim financial statements as of and for the nine-month
period ended June 30, 1996 including PacifiCare's unaudited consolidated balance
sheet as of June 30, 1996 (the "PacifiCare June 30, 1996 Balance Sheet") that
are attached to the PacifiCare Disclosure Schedule (collectively, the
"PacifiCare Past Financial Statements") were prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of PacifiCare and its subsidiaries as at the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that (i) the quarterly unaudited interim financial statements
included in the PacifiCare Past Financial Statements were or are subject to
normal year-end audit adjustments and (ii) the unaudited interim financial
statements as of and for the nine-month period ended June 30, 1996 included in
the PacifiCare Past Financial Statements are subject to normal year-end audit
adjustments and do not contain footnotes.

(c) PacifiCare and its subsidiaries have no Liabilities, except for (i) any
Liability which is accrued or fully reserved against in the PacifiCare June 30,
1996 Balance Sheet or disclosed in the notes included in the PacifiCare Past
Financial Statements, (ii) any Liability which was incurred after June 30, 1996
in the ordinary course of business, (iii) other Liabilities which, individually
or in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on PacifiCare or (iv) any Liability under or disclosed
in this Agreement.

3.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on PacifiCare, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.3(a), 4.3(b), 4.3(c),
4.3(d), 4.3(e), 4.3(f), 4.3(g) or 4.3(h), if it were to occur or be effected
between the date of the Original Agreement and the Effective Time.

3.4 TAX MATTERS.

(a) PacifiCare (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all Returns, required to be filed under federal,
state, local or any foreign laws regarding Taxes by PacifiCare and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.

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(b) PacifiCare (or, if applicable, one of its subsidiaries) has, within the
time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable,
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.

(c) PacifiCare and its subsidiaries have not filed (and will not file prior
to the Closing Date) any consent agreement under Section 341(f) of the Code or
agreed to have Section 341(f)(2) of the Code apply to any disposition of the
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by PacifiCare or any of its subsidiaries.

(d) No outstanding debt obligation of PacifiCare is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.

(e) For purposes of this Article 3, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by PacifiCare or any of its subsidiaries.

3.5 CONTRACTS.

(a) PACIFICARE MATERIAL CONTRACTS. For purposes of this Agreement,
"PacifiCare Material Contracts" shall mean (i) each contract, agreement or other
arrangement of or involving PacifiCare or any of its subsidiaries with respect
to indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of PacifiCare or any of its subsidiaries to compete or otherwise conduct
its business in any manner or place which materially affects PacifiCare or any
PacifiCare Material Subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of PacifiCare or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to
PacifiCare and its subsidiaries or their businesses or prospects taken as a
whole; and (iv) for each state in which PacifiCare or its subsidiaries conducts
business as an HMO, insurance company, third-party administrator or otherwise
requiring licensure as set forth in Section 3.1(b), (A) the contracts with
employer or other groups or government agencies, (B) the contracts with
physician providers of health care services, (C) the contracts with providers of
hospital services and (D) the contracts with providers of non-hospital,
non-physician medical services, which are material to PacifiCare and its
subsidiaries or their businesses or prospects taken as a whole.

All PacifiCare Material Contracts are in full force and effect and are
binding upon PacifiCare and, to PacifiCare's knowledge, are binding on the other
parties thereto, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers. To
PacifiCare's knowledge, no material default by PacifiCare or any of its
subsidiaries has occurred under any of the PacifiCare Material Contracts and (A)
no material default by any of the other contracting parties has occurred under
any of the PacifiCare Material Contracts and (B) no event has occurred which
with the giving of notice or the lapse of time, or both, would constitute a
material default by PacifiCare or any of its subsidiaries or any of the other
contracting parties.

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(b) The PacifiCare Disclosure Schedule sets forth a list of all claims,
other than invoices in the ordinary course of business, and claims made under
risk programs in the ordinary course of business made or, to PacifiCare's
knowledge, threatened against PacifiCare or any of its subsidiaries under each
PacifiCare Material Contract presently or heretofore in effect (including claims
for back charges, rebates, price reductions, breaches of product or service
warranties or for product or service liability for products manufactured or
sold), to the extent such claims have had or would reasonably be expected to
have a cost to PacifiCare or its subsidiaries in excess of $5,000,000 or have a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiaries.

3.6 EMPLOYEES.

(a) "PacifiCare Employee Plan" means each "employee benefit plan," as
defined in Section 3(3) of ERISA, currently or previously maintained,
contributed to or entered into by PacifiCare or any ERISA Affiliate (as defined
below) under which PacifiCare or any ERISA Affiliate thereof has any present or
future obligation or liability. For purposes of this Section 3.6, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations," as defined in Section 414(b) of the Code, (B) a group of entities
under "common control," as defined in Section 414(c) of the Code, or (C) an
"affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes PacifiCare. All material contributions due from PacifiCare with respect
to any of the PacifiCare Employee Plans have been made as required under ERISA
or have been accrued on PacifiCare's financial statements as of June 30, 1996.
Each PacifiCare Employee Plan has been maintained substantially in compliance
with its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations, including, without limitation, ERISA and the
Code, which are applicable to such PacifiCare Employee Plans, except as would
not have a Material Adverse Effect on PacifiCare.

(b) No PacifiCare Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No PacifiCare Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any PacifiCare Employee Plan which is covered by
Title I of ERISA which would have a Material Adverse Effect on PacifiCare,
excluding transactions effected pursuant to a statutory or administrative
exemption. Nothing done or omitted to be done by PacifiCare and no transaction
or holding of any asset under or in connection with any PacifiCare Employee Plan
has or will make PacifiCare or any officer or director of PacifiCare subject to
any material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.

(c) With respect to each PacifiCare Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "PacifiCare 401(a) Plan"), either
(A) a favorable determination letter has been received from the IRS as to such
qualification under the Code as in effect immediately after the Tax Reform Act
of 1986, (B) an application for a favorable determination letter is pending that
was duly filed with the IRS prior to the expiration of the time within which
retroactive amendment relating back to the effective date of such plan may be
made under Section 401(b) of the Code and regulations or IRS pronouncements
thereunder, or (C) the time provided under Section 401(b) of the Code and
regulations or IRS pronouncements thereunder for making retroactive amendments
relating back to the effective date of such plan will not expire before the date
that is sixty (60) days after the date hereof, and there is no reason to believe
that any favorable determination letter will not be received.

(d) PacifiCare has provided, or will have provided prior to the Closing (as
defined in Section 1.3), to individuals entitled thereto all required notices
and coverage pursuant to Section 4980B of the Code and COBRA, with respect to
any "qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring
prior to and including the Closing, and no material tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of PacifiCare.

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3.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.

(a) Except as set forth in the PacifiCare Disclosure Schedule, there is, to
PacifiCare's knowledge, no Proceeding pending or threatened by or before any
court or Governmental Authority in which PacifiCare or any of its subsidiaries
is a party or otherwise involved or to which any of the business or assets of
PacifiCare or any of its subsidiaries is subject, which has or would reasonably
be expected to have (i) a potential liability in excess of $5,000,000 or (ii) a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiary.

(b) Neither PacifiCare nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost to
PacifiCare or its subsidiaries in excess of $5,000,000 or (ii) to affect
materially the operations of PacifiCare or any PacifiCare Material Subsidiary.

(c) Except as set forth on the PacifiCare Disclosure Schedule or in
PacifiCare SEC Reports or other public filings with the SEC, neither PacifiCare
nor any of its subsidiaries is or has at any time since October 1, 1993, been in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute or regulation of, or agreement with, or any license or
permit from, any Governmental Authority to which any of its properties, assets,
personnel or business activities are subject or to which any of them is subject,
including laws, rules and regulations relating to the environment, insurance
companies, HMOs, third-party administrators or other businesses required to be
licensed under Section 3.1(b), occupational health and safety, employee
benefits, wages, workplace safety, equal employment opportunity and race,
religious, sex and age discrimination which has had or would reasonably be
expected (i) to have a potential cost to PacifiCare or its subsidiaries in
excess of $5,000,000 or (ii) to affect materially the operations of PacifiCare
or any PacifiCare Material Subsidiary.

3.8 PROPERTIES.

(a) PacifiCare and its subsidiaries have insurance policies adequate to
protect them against the risks so insured. Neither PacifiCare nor any of its
subsidiaries has done anything by way of action or inaction which might
invalidate any of such policies in whole or in part.

(b) PacifiCare and its subsidiaries own and hold title to all real and
other property reflected in the PacifiCare SEC Reports as owned by PacifiCare or
any of its subsidiaries, as the case may be.

3.9 DISCLOSURE.

(a) The copies of all documents furnished by PacifiCare pursuant to the
terms of this Agreement are complete and accurate copies of the originals.

(b) During the past 12 months, PacifiCare has timely filed all required
forms, reports and documents required to be filed with the SEC and the NASD.

(c) None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the S-4 Registration Statement will,
at the time the S-4 Registration Statement is filed with the SEC or at the time
the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the Prospectus/Proxy Statement, will,
at the time mailed to the stockholders of PacifiCare, at the time of the
PacifiCare Stockholders' Meeting (as defined in Section 4.6) and as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.

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3.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between PacifiCare and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since October 1, 1995, and for
which disclosure is required by Item 404 of Regulation S-K promulgated by the
SEC, is set forth in the PacifiCare SEC Reports or the PacifiCare Disclosure
Schedule.

3.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding PacifiCare Class A Common Stock is the only vote of the holders
of any class or series of PacifiCare's capital stock necessary to adopt and
approve this Agreement and the PacifiCare Merger, while the affirmative vote of
the holders of a majority of the outstanding PacifiCare Class A Common Stock and
of the holders of a majority of the outstanding PacifiCare Class B Common Stock,
each voting as a separate class, is necessary to adopt and approve an amendment
to the Certificate of Incorporation of PacifiCare to exempt the PacifiCare
Merger from a requirement of PacifiCare's Certificate of Incorporation that, in
the event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the per
share consideration for the PacifiCare Class A Common Stock in such merger or
consolidation (the "PacifiCare Amendment") (such votes together being referred
to herein as the "Required PacifiCare Vote").

3.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the PacifiCare Merger.

3.13 PACIFICARE ACTION. The Board of Directors of PacifiCare (at a meeting
duly called and held) has (a) determined that the PacifiCare Merger is advisable
and fair and in the best interests of PacifiCare and its stockholders, (b)
approved this Agreement, the PacifiCare Amendment and the PacifiCare Merger in
accordance with the provisions of Sections 242 and 251 of the DGCL, (c)
recommended the adoption and approval of this Agreement and the PacifiCare
Merger by the holders of PacifiCare Class A Common Stock and directed that the
PacifiCare Merger be submitted for consideration by PacifiCare's stockholders at
the PacifiCare Stockholders' Meeting, (d) recommended the adoption and approval
of the PacifiCare Amendment by the holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock and directed that the PacifiCare Amendment
be submitted for consideration by PacifiCare's stockholders at the PacifiCare
Stockholders' meeting, (e) taken all necessary steps to render Section 203 of
the DGCL inapplicable to the PacifiCare Merger and (f) as sole stockholder of
Holding, Neptune Sub and Company Sub, approved this Agreement and the Merger in
accordance with Section 251 of the DGCL.

3.14 ACTIONS BY HOLDING, NEPTUNE SUB AND COMPANY SUB. The Boards of
Directors of Holding, Neptune Sub and Company Sub (at meetings duly called and
held or by unanimous written consents) have respectively (a) determined that the
Mergers are advisable and fair and in the best interests of Holding, Neptune Sub
and Company Sub, (b) unanimously approved this Agreement and the Mergers in
accordance with the provisions of Section 251 of the DGCL, (c) taken all
necessary steps to render Section 203 of the DGCL inapplicable to the Mergers
and the other transaction contemplated herein. Holding, as the sole stockholder
of Neptune Sub and Company Sub, has also approved or will also approve this
Agreement and the Mergers.

3.15 FAIRNESS OPINION. PacifiCare and its Board of Directors has received
from Dillon, Read & Co., financial advisors to PacifiCare, an opinion dated
August 4, 1996, to the effect that the consideration to be paid to the
stockholders of PacifiCare in the PacifiCare Merger is fair, from a financial
point of view, to PacifiCare and its stockholders.

3.16 FINANCIAL ADVISOR. PacifiCare represents and warrants that except for
Dillon, Read & Co., no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the PacifiCare
Merger or any of the other transactions contemplated in this Agreement based
upon arrangements made by or on behalf of PacifiCare or any of its subsidiaries.

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3.17 ENFORCEABILITY. Each of PacifiCare and Holding has full corporate
power and authority to execute, deliver and perform each of the Transactional
Agreements to which it is or will become a party. The execution and delivery of
said Transactional Agreements have been duly and validly authorized by the
Boards of Directors of PacifiCare and Holding, and no other corporate
proceedings on the part of PacifiCare and Holding are necessary for PacifiCare
and Holding to authorize any of the Transactional Agreements, and no such
proceedings (other than the approval of PacifiCare's and Holding stockholders)
are necessary to enable PacifiCare and Holding to perform or consummate any of
the transactions contemplated by this Agreement. Said Transactional Agreements
(a) have been (or will be) duly executed and delivered by duly authorized
officers of PacifiCare and Holding and (b) constitute (or, when executed by
PacifiCare and Holding, will constitute) legal, valid and binding obligations of
PacifiCare and Holding enforceable against it in accordance with their terms
(except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general from time
to time in effect and the exercise by courts of equity powers). For purposes of
this Article 3, "Transactional Agreements" means this Agreement and the related
Agreement of Merger for the PacifiCare Merger.

3.18 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Exchange Act, the Securities Act, state securities or blue sky laws, the DGCL,
the HSR Act, the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, third-party administrators or other businesses operated by PacifiCare or
its subsidiaries requiring licensure, qualification or authorization, there is
no requirement applicable to PacifiCare or any of its subsidiaries to make any
filing with, or to obtain any permit, authorization, consent or approval of any
Governmental Authority as a condition to the lawful consummation of any of the
transactions contemplated by this Agreement, except for such filings, permits,
authorizations, consents or approvals which, if not made or obtained, would not
have a Material Adverse Effect on PacifiCare. Except as set forth in the
PacifiCare Disclosure Schedule, neither the execution and delivery of this
Agreement by PacifiCare nor the consummation by PacifiCare will (a) conflict
with, violate or result in any breach of any provision of the Certificate of
Incorporation or Bylaws (or comparable charter documents) of PacifiCare or any
of its subsidiaries, (b) result in a material default (or with notice or lapse
of time or both would result in a default) under, or materially impair the
rights of PacifiCare or any of its subsidiaries or materially alter the rights
or obligations of any third party under, or require PacifiCare or any of its
subsidiaries to make any material payment or become subject to any material
liability to any third party under, or give rise to any right of termination,
amendment, cancellation, acceleration, repurchase, put or call under, any of the
terms, conditions or provisions of any PacifiCare Material Contract, (c) result
in the creation of any material (individually or in the aggregate) liens,
charges or encumbrances on any of the material assets of PacifiCare or any of
its subsidiaries or (d) conflict with or violate any law, statute, rule,
regulation, judgment, order, writ, injunction, decree or arbitration award
applicable to PacifiCare or any of its subsidiaries or any of their material
assets, which violation has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare.

3.19 COMMON AND PREFERRED STOCK TO BE ISSUED. The Holding Class A Common
Stock, Holding Class B Common Stock and Holding Series A to be issued to the
Company's stockholders in the Company Merger, when issued by Holding pursuant to
the terms of this Agreement, will be duly authorized, validly issued, fully paid
and non-assessable, will be issued in compliance with applicable federal and
state securities laws and will be clear of all liens, encumbrances and adverse
claims and may be resold by Company Affiliates (as defined in Section 4.12) in
accordance with paragraph (d) of Rule 145 of the Securities Act.

3.20 RESERVES. The reserves established by PacifiCare and its subsidiaries
in the PacifiCare SEC Reports, or in any financial statement or balance sheet
contained in any document filed with the SEC after the date of the Original
Agreement, for statutorily required reserves and for incurred but not yet paid
claims for, or relating to, medical treatment or similar claims (i) are computed
in

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accordance with presently accepted industry standards consistently applied, (ii)
meet the requirements of any law, rule or regulation applicable to such
reserves, (iii) are computed on the basis of assumptions consistent with those
used in computing the corresponding reserve in the prior fiscal year, and (iv)
include provision for all actuarial reserves and related items which ought to be
established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither PacifiCare
nor its senior management was aware of any fact or circumstance which would
necessitate, in the good faith application of prudent reserving practices and
policies, any material adverse change in statutorily required reserves or
reserves for such incurred but not yet paid claims above that reflected in the
most recent balance sheet included in the PacifiCare SEC Reports (other than
increases consistent with past experience resulting from increases in enrollment
with respect to PacifiCare's subsidiaries' services).

3.21 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the PacifiCare Disclosure
Schedule, no audit or investigation of PacifiCare or any of its subsidiaries
which may be expected to have a Material Adverse Effect on PacifiCare was
pending before, or to PacifiCare's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the IRS),
the several States or territories (other than state taxing authorities) or any
foreign jurisdiction. There are no pending or anticipated proceedings which may
be expected to have a Material Adverse Effect on PacifiCare by or on behalf or
in the name of the state or federal government or any governmental agency
relating to the imposition of civil monetary penalties, exclusion or debarment
from governmental programs or other administrative sanctions.

3.22 ENVIRONMENTAL PROVISIONS.

(a) For the purposes of this Section 3.22, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by PacifiCare or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.

(b) PacifiCare and each subsidiary is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof except
where the costs of any failure to comply will not exceed $5,000,000. PacifiCare
and its subsidiaries have not received any written communication, whether from a
Governmental Authority, citizens group, employee or otherwise, that alleges that
they are not in such full compliance in all material respects, and, to the
knowledge of PacifiCare, there are no circumstances that may prevent or
interfere with such full compliance in all material respects in the future. To
the knowledge of PacifiCare, no current or prior owner of any property owned or
leased by PacifiCare or any subsidiary has received any written communication,
whether from a Governmental Authority, citizens group, employee or otherwise,
that alleges that any of them is not in such compliance.

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(c) There is no material Environmental Claim pending or, to the knowledge
of PacifiCare, threatened against PacifiCare or any subsidiary or against any
person or entity whose liability for any Environmental Claim PacifiCare has or
may have retained or assumed either contractually or by operation of law.

(d) To the knowledge of PacifiCare, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
Environmental Claim against PacifiCare, any subsidiary or, to the knowledge of
PacifiCare, against any person or entity whose liability for any material
Environmental Claim PacifiCare or any subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on PacifiCare.

3.23 INTELLECTUAL PROPERTY.

(a) To the knowledge of PacifiCare, PacifiCare and its subsidiaries own or
have in their possession certain information of the sort typically considered as
trade secrets in the healthcare industry (the "Trade Secrets"). PacifiCare and
its subsidiaries have good title and an absolute (though not necessarily
exclusive) right to use all Trade Secrets, and, to the knowledge of PacifiCare,
the use of the Trade Secrets does not infringe the rights of any third party.

(b) To the knowledge of PacifiCare, none of the processes or know-how used
by PacifiCare infringes any patent, trademark or copyright of any third party.
To the best of PacifiCare's knowledge, there is no intellectual property, in any
form, necessary for the operation of PacifiCare's or its subsidiaries' business
as currently conducted which PacifiCare or its subsidiaries do not currently own
or license on commercially reasonable terms.

3.24 FORMATION OF HOLDING. PacifiCare has caused Holding, Neptune Sub and
Company Sub to be formed and organized in anticipation of execution of this
Agreement and solely for the purposes of carrying out the Mergers and the
transactions contemplated hereby, and solely for such purposes (i) Holding has
issued 200 shares of Common Stock to PacifiCare in exchange for $1.00 per share;
(ii) Neptune Sub has issued 100 shares of Common Stock to Holding in exchange
for $1.00 per share, and (iii) Company Sub has issued 100 shares of Common Stock
to Holding in exchange for $1.00 per share. No other shares of stock or
securities have been issued by Holding, Neptune Sub or Company Sub. The
directors and officers of Holding, Neptune Sub and Company Sub consist solely of
officers of PacifiCare and no other persons. Neither Holding, Neptune Sub nor
Company Sub has acquired any property, incurred any liabilities, or engaged in
any business or activity whatsoever other than (i) its organization as described
above, (ii) the adoption of stockholder and director resolutions in connection
therewith and to authorize execution and delivery of this Agreement, adoption of
the Holding Restated Certificate of Incorporation, consummation of the Mergers
and the transactions contemplated hereby, and performance of its obligations
hereunder, and (iii) the execution and delivery of this Agreement.

ARTICLE 4
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; ADDITIONAL AGREEMENTS

4.1 INFORMATION AND ACCESS.

(a) During the period from the date of this Agreement through the Effective
Time, the Company shall afford, and shall cause the independent auditors,
counsel, financial and other advisors and representatives (collectively,
"Representatives") of the Company and its subsidiaries to afford, to PacifiCare
and to PacifiCare's Representatives, reasonable access to the properties, books,
records, financial and operating data (including audit work papers and other
such information) and other

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information and personnel of the Company and its subsidiaries in order that
PacifiCare and PacifiCare's Representatives may have a full opportunity to make
such investigation as PacifiCare reasonably desires to make of the Company and
its subsidiaries.

(b) Without limiting the generality of Section 4.1(a), during the period
from the date of this Agreement through the Effective Time, the Company shall
promptly provide PacifiCare with copies of any notice, report or other document
filed with or sent to any Governmental Authority in connection with any of the
transactions contemplated by this Agreement.

(c) No investigation by PacifiCare or any of its Representatives pursuant
to this Section 4.1 shall limit or otherwise affect any representations or
warranties of the Company or any condition to any obligation of PacifiCare.

(d) During the period from the date of this Agreement through the Effective
Time, the Company shall promptly advise PacifiCare in writing of (A) any
Material Adverse Effect on the Company and (B) the occurrence of any event which
causes the representations and warranties made by the Company in this Agreement
or the information included in the Company Disclosure Schedule to be incomplete
or inaccurate in any material respect.

(e) The rights and obligations of PacifiCare and the Company in this
Section 4.1 shall apply, MUTATIS MUTANDIS, to the Company and PacifiCare.

4.2 CONDUCT OF BUSINESS OF THE COMPANY.

(a) Except as provided in Section 4.2(b), during the period from the date
of this Agreement through the Effective Time, (i) the Company shall conduct its
business, and shall cause each of its subsidiaries to conduct its business, in
the ordinary and usual course consistent with past practice and (ii) the Company
shall use, and shall cause each of its subsidiaries to use, all commercially
reasonable efforts to maintain and preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relations with lessors, suppliers, contractors, distributors,
customers and others having business relationships with the Company or any of
its subsidiaries (it being recognized, however, that nothing in this Agreement
shall be construed to hold the Company liable for any adverse effect that the
announcement of the transactions contemplated by this Agreement may have on such
business organizations and relationships, including on decisions of officers and
employees whether to continue to provide services to the Company or its
subsidiaries).

(b) Except as expressly contemplated by this Agreement, during the period
from the date of this Agreement through the Effective Time, the Company shall
not do, and shall not permit any of its subsidiaries to do, any of the
following, without PacifiCare's prior written consent:

(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, except (A) regular dividends
on the Company Series A Preferred Stock and (B) dividends from the
subsidiaries of the Company to the Company sufficient to allow the Company
to make the dividends referred to in clause (A);

(ii) split, combine or reclassify any capital stock of the Company or
repurchase, redeem or otherwise acquire any capital stock of the Company or
any of its subsidiaries, except pursuant to contractual rights in existence
on the date of the Original Agreement;

(iii) except for (x) the issuance of up to 900,000 Talbert stock options
to be granted to Talbert employed or managed physicians in connection with
the separation of Talbert from the Company, (y) the issuance of up to 10,000
Company Options per individual and the issuance of up to 75,000 Company
Options in the aggregate to be granted in connection with the Company's new
hires, outstanding performances or promotions, or (z) previously authorized
automatic grants of Company Options to the Company's or its subsidiaries'
directors, issue, deliver, pledge, encumber, sell or transfer, or authorize
or propose the issuance, delivery, pledge, encumbrance, sale or transfer of,
any shares of capital stock of the Company or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any
such shares of capital stock or other

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convertible securities (except that the Company may issue Company Common
Stock upon the exercise of Company Options issued and outstanding or upon
the conversion of Company Series A Preferred Stock into Company Common
Stock), or, except as expressly contemplated herein, make any change in its
equity capitalization or to the terms of any option, warrant or other equity
security of the Company or any of its subsidiaries that is currently
outstanding;

(iv) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of the
Company or any of its subsidiaries, or amend its Restated Rights Plan;

(v) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means)
any business or any corporation, partnership, association or other business
organization or division thereof;

(vi) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with
past practice or consistent with written disclosure made to PacifiCare prior
to the date of the Original Agreement;

(vii) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness
for borrowed money, or issue or sell any debt securities or guarantee,
endorse or otherwise become responsible for any obligation of any other
person, provided that this Section 4.2(b)(vii) shall not apply to
indebtedness for borrowed money, debt securities or guaranties that
aggregate up to $20,000,000 or the proceeds of which are used to capitalize
Talbert in accordance with Section 4.15;

(viii) except as specifically contemplated by Section 4.8, adopt or amend
in any material respect any collective bargaining agreement or Company
Employee Plan, or enter into or amend any employment agreement, severance
agreement, special pay arrangement with respect to termination of employment
or other similar arrangement or agreement with any director or officer, or
enter into or amend any severance or termination arrangement with any
director or officer;

(ix) change in any material respect the accounting methods or practices
followed by the Company (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;

(x) except in the ordinary course of business consistent with past
practice or as permitted in Section 4.4(a), enter into any material contract
or agreement involving payments in excess of market rates;

(xi) except as specifically contemplated by Section 4.8, change any
compensation payable or to become payable to any of its officers or
employees (other than any adjustment to the salary of any employee that is
made in the ordinary course of business consistent with past practice and
that does not exceed the higher of 6% of such employee's previous salary or
$10,000 or that is made in accordance with a budget approved in writing by
PacifiCare);

(xii) make any capital expenditures in excess of $2,500,000 in the
aggregate, except those set forth in a budget to be reviewed and approved by
PacifiCare and the Company within two weeks following the date of the
Original Agreement;

(xiii) make any loan to or engage in any transaction with any director or
officer;

(xiv) settle or compromise any lawsuit or other Proceeding against the
Company or any of its subsidiaries for an amount in excess of $5,000,000;
provided, however, that in no event shall the Company or its subsidiaries
settle or compromise any matter in a manner which would have a material
non-financial adverse impact on the Company or its Material Subsidiaries;

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(xv) cause or permit any material amendment, modification or premature
termination to any Company Material Contract as defined Section 2.5(a)
without the prior approval of PacifiCare, such approval not to be
unreasonably withheld and to be given or not given on a timely basis;

(xvi) cause or agree to the termination or material modification of any
material licensure, qualification, or authorization of the Company or any
Material Subsidiary;

(xvii) enter into any new contract or amend or modify any existing
contract between the Company or any subsidiary and Talbert or to cause any
capital transfer to or from the Company or any subsidiary and from or to
Talbert, except as contemplated by Section 4.15; or

(xviii) enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.

4.3 CONDUCT OF BUSINESS OF PACIFICARE. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement through the
Effective Time, PacifiCare shall not, without the Company's prior written
consent:

(a) declare, set aside or pay any dividend or make any other distribution
in respect of any capital stock;

(b) split, combine or reclassify any capital stock of PacifiCare or
repurchase, redeem or otherwise acquire any capital stock of PacifiCare, except
pursuant to contractual rights presently in existence;

(c) issue, deliver, pledge, encumber, sell or transfer, or authorize or
propose the issuance, delivery, pledge, encumbrance, sale or transfer of, any
shares of capital stock of PacifiCare or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any such
shares of capital stock or other convertible securities (except that PacifiCare
may issue PacifiCare Class A Common Stock or PacifiCare Class B Common Stock
upon the exercise of PacifiCare Options issued and outstanding on the date of
the Original Agreement in accordance with their present terms), or, except as
expressly contemplated herein, make any change in its equity capitalization or
to the terms of any option, warrant or other equity security of the Company or
any of its subsidiaries that is currently outstanding;

(d) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of PacifiCare
or any of its subsidiaries;

(e) acquire (by merging or consolidating with, by purchasing any material
portion of the capital stock or assets of or by any other means) any business or
any corporation, partnership, association or other business organization or
division thereof;

(f) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with past
practice or consistent with written disclosure made to Company prior to the date
of the Original Agreement;

(g) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness for
borrowed money, or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for any obligation of any other person, provided
that this Section 4.2(g) shall not apply to indebtedness for borrowed money,
debt securities or guaranties that aggregate up to $20,000,000 or to financing
the purpose of which is to consummate the Mergers;

(h) change in any material respect the accounting methods or practices
followed by PacifiCare (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;

(i) or enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.

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4.4 NEGOTIATION WITH OTHERS.

(a) The Company shall not, and it shall not authorize or permit any of its
subsidiaries, officers, directors or employees or any of its or its
subsidiaries' Representatives, directly or indirectly, to (i) solicit, initiate
or knowingly encourage or induce the making of any Acquisition Proposal (as
defined in Section 7.1), (ii) furnish non-public information regarding the
Company or any of its subsidiaries in connection with an Acquisition Proposal or
potential Acquisition Proposal, (iii) negotiate or engage in discussions with
any third party with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants). Notwithstanding the
foregoing, nothing in this Section 4.4 shall be construed to prohibit the
Company or its Board of Directors from taking any actions or permitting any
actions described above (other than any action described in clause (i) above)
with respect to any Acquisition Proposal to the extent that the Board of
Directors of the Company shall conclude in good faith, based upon the advice of
its outside counsel, that such action is required in order for the Board of
Directors of the Company to act in a manner that is consistent with its
fiduciary obligations under applicable law (PROVIDED that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
this Agreement and the payment of any fee due under Article 7 hereof).

(b) The Company shall immediately advise PacifiCare orally and in writing
of the receipt of any Acquisition Proposal or any inquiry relating to an
Acquisition Proposal prior to the Effective Time, including a full description
of the terms of such Acquisition Proposal.

(c) Notwithstanding anything to the contrary contained herein, the Company
shall not furnish any information to any third party pursuant to clause (ii) of
the first sentence of Section 4.4(a) unless such third party has executed and
delivered to the Company a nondisclosure agreement that is not substantially
less restrictive than the nondisclosure agreement then in effect between the
Company and PacifiCare.

(d) The Company shall immediately cease and cause to be terminated any
discussions or negotiations with any parties existing as of the date of this
Agreement and that relate to any Acquisition Proposal and shall request the
return or destruction of all information previously disclosed to such parties in
accordance with the terms of any confidentiality agreements with such parties,
and shall use commercially reasonable efforts to ensure that such information is
returned or destroyed.

4.5 REGISTRATION STATEMENT; PROSPECTUS/PROXY STATEMENT.

(a) As promptly as practicable after the date of this Agreement, Holding
and PacifiCare shall prepare, with the assistance of the Company, and cause to
be filed with the SEC the S-4 Registration Statement, together with the
Prospectus/Proxy Statement and any other documents required by the Securities
Act or the Exchange Act in connection with the Mergers. Each of Holding,
PacifiCare and the Company shall use all commercially reasonable efforts to
cause the S-4 Registration Statement to comply with the rules and regulations
promulgated by the SEC, to respond promptly to any comments of the SEC or its
staff and to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The Company shall
promptly furnish to Holding and PacifiCare all information concerning the
Company, its subsidiaries and its stockholders as may be required or reasonably
requested in connection with any action contemplated by this Section 4.5. Each
of Holding, PacifiCare and the Company shall (i) notify the other promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the S-4 Registration Statement
or the Prospectus/Proxy Statement or for additional information and (ii) shall
supply the other with copies of all correspondence with the SEC or its staff
with respect to the S-4 Registration Statement or the Prospectus/Proxy
Statement.

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Neither Holding, PacifiCare nor the Company shall file any amendment or
supplement to the S-4 Registration Statement or the Prospectus/Proxy Statement
to which the other shall have reasonably objected. Whenever any event occurs
that should be set forth in an amendment or supplement to the S-4 Registration
Statement or the Prospectus/Proxy Statement, Holding, PacifiCare or the Company,
as the case may be, shall promptly inform the other of such occurrence and shall
cooperate in filing with the SEC or its staff, and, if appropriate, mailing to
stockholders of the Company and PacifiCare, such amendment or supplement.

(b) Prior to the Effective Time, Holding shall make all required filings
with state regulatory authorities and the NASD and shall use all commercially
reasonable efforts to obtain all regulatory approvals needed to ensure that the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
to be issued in the Mergers (i) will be qualified under the securities or "blue
sky" law of every jurisdiction of the United States in which any registered
stockholder of the Company or PacifiCare has an address of record on the record
date for determining the stockholders entitled to notice of and to vote on the
Mergers and (ii) will be approved for quotation at the Effective Time on the
Nasdaq National Market or the NYSE.

(c) Prior to the Effective Time, Holding shall file either the Holding
Restated Certificate of Incorporation or the Holding Restated Certificate of
Incorporation without Series A, as the case may be, with the Secretary of State
of the State of Delaware.

4.6 STOCKHOLDERS' MEETINGS.

(a) The Company shall take all action necessary in accordance with
applicable law to call and convene a meeting of the holders of Company Common
Stock and Company Series A Preferred Stock (the "Company Stockholders' Meeting")
to consider, act upon and vote upon the adoption and approval of this Agreement,
the Company Merger and the Series A Amendment. The Company Stockholders' Meeting
will be held within 60 days after the S-4 Registration Statement is declared
effective by the SEC. The Company shall ensure that the Company Stockholders'
Meeting is called, held and conducted, and that all proxies solicited in
connection with the Company Stockholders' Meeting are solicited, in compliance
with applicable law.

(b) The Board of Directors of the Company has unanimously recommended (and
the Prospectus/ Proxy Statement shall include a statement to the effect that the
Board of Directors of the Company has unanimously recommended) that the holders
of Company Common Stock and Company Series A Preferred vote in favor of and
adopt and approve this Agreement, the Company Merger and the Series A Amendment
at the Company Stockholders' Meeting and any related amendment to the Company's
Certificate of Incorporation, which unanimous recommendation shall not be
withdrawn, amended or modified in a manner adverse to PacifiCare. For purposes
of this Agreement, it shall constitute a modification adverse to PacifiCare if
such recommendation shall no longer be unanimous.

(c) PacifiCare shall take all action necessary in accordance with
applicable law to call or convene a meeting of the holders of PacifiCare Class A
Common Stock and the PacifiCare Class B Common Stock (the "PacifiCare
Stockholders' Meeting") to consider, act upon and vote upon the approval of this
Agreement, the PacifiCare Merger, the PacifiCare Amendment and any related
matters. The PacifiCare Stockholders' Meeting will be held as close to the date
of the Company Stockholders' meeting as is practicable. PacifiCare shall ensure
that the PacifiCare Stockholder's Meeting is called, held and conducted, and
that all proxies solicited in connection with such meeting are solicited, in
compliance with applicable law.

(d) The Board of Directors of PacifiCare has recommended, with no
dissenting votes (and the Prospectus/Proxy Statement shall include a statement
to the effect that the Board of Directors has so recommended) that the holders
of PacifiCare Class A Common Stock vote in favor of this Agreement, the
PacifiCare Merger, and related matters and that the holders of PacifiCare Class
A Common Stock and PacifiCare Class B Common Stock vote in favor of the
PacifiCare Amendment.

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(e) Notwithstanding the foregoing, nothing in Section 4.5 or in this
Section 4.6 shall prevent the Board of Directors of the Company or PacifiCare
from withdrawing, amending or modifying its recommendation in favor of the
respective Mergers and approval and adoption of this Agreement and related
matters (and the Prospectus/Proxy Statement may reflect such withdrawal,
amendment or modification) to the extent that such Board of Directors of the
Company or PacifiCare shall conclude in good faith, based upon the advice of its
outside counsel, that such withdrawal, amendment or modification is required in
order for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law. Nothing contained in this Section
4.6(e) shall limit the Company's or PacifiCare's obligation to convene the
Company Stockholders' Meeting and the PacifiCare Stockholders' Meeting
(regardless of whether the recommendation of the Board of Directors of the
Company or PacifiCare, as the case may be, shall have been withdrawn, amended or
modified).

4.7 REGULATORY APPROVALS.

(a) Holding, the Company and PacifiCare shall use all reasonable efforts to
file and to cause any stockholders of the Company or PacifiCare, as the case may
be, to file as soon as practicable after the date of this Agreement all notices,
reports and other documents required by law to be filed with any Governmental
Authority with respect to the Mergers and the other transactions contemplated by
this Agreement and to submit promptly any additional information requested by
any such Governmental Authority. Without limiting the generality of the
foregoing, Holding, the Company and PacifiCare shall within fifteen (15)
business days from the date of the Original Agreement prepare and file the
notifications required under the HSR Act in connection with the Mergers.
Holding, the Company and PacifiCare shall respond as promptly as practicable to
(i) any inquiries or requests received from the Federal Trade Commission or the
Antitrust Division of the Department of Justice for additional information or
documentation and (ii) any inquiries or requests received from any state
attorney general or other Governmental Authority in connection with antitrust or
related matters.

(b) Holding, the Company and PacifiCare shall (i) give each other prompt
notice of the commencement of any Proceeding by or before any court or
Governmental Authority with respect to the Mergers or any of the other
transactions contemplated by this Agreement, (ii) keep each other informed as to
the status of any such Proceeding and (iii) except as may be prohibited by any
Governmental Authority or by any law or court order or decree, permit the other
party to be present at each meeting or conference relating to any such
Proceeding and to have access to and be consulted in advance in connection with
any document filed or provided to any Governmental Authority in connection with
any such Proceeding.

4.8 EMPLOYEE BENEFITS PLANS.

(a) At least twenty (20) days before the date of the Company Stockholders'
Meeting, PacifiCare shall notify the Company if it wishes to provide a mechanism
to cash out either vested or all outstanding Company Options. If PacifiCare
wishes to provide such a mechanism, PacifiCare shall offer (in a form reasonably
acceptable to the Company) to each holder of applicable Company Options, the
right to receive on the Effective Date, in return for the cancellation of such
option, an amount equal to (i) the product of the value of the consideration to
be received for each share of Company Common Stock covered by the cash out (with
stock values of Holding Common Stock measured by the average closing price as
quoted in the Wall Street Journal of PacifiCare's Class A Common Stock during
the twenty trading days ending the date immediately prior to the date of the
Company's Stockholder Meeting for Holding Class A Common Stock and by the
Average Pre-Vote Closing Share Price for Holding Class B Common Stock) times the
number of shares of Company Common Stock with respect to which such option is
exercisable, less (ii) the aggregate exercise price of such shares. The amount
paid to any holder of Company Options following such payment and cancellation
shall be net of applicable withholding taxes.

(b) On the Closing Date, and subject to any required approval of the
holders of Company Options, which the Company hereby covenants to exercise its
best efforts to obtain, Holding and PacifiCare will cause each Company Option to
be replaced effective as of the Effective Time, by a

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substitute option of Holding (an "Exchange Option") issued under a Holding stock
option plan that complies in all respects with the applicable requirements of
Rule 16b-3 promulgated under the Exchange Act. The per share exercise price of
an Exchange Option shall equal the quotient, rounding up to the nearest cent, of
(i) the per share exercise price of the corresponding Company Option, less the
average closing price at which the rights to acquire Talbert stock trade on
their first five trading days after issuance, as quoted in the Wall Street
Journal ("rights to acquire Talbert stock" for this purpose means the portion of
such a right into which one share of Company Common Stock is converted in part),
divided by (ii) the fraction of a share of Holding Class B Common Stock that the
holder of such Company Option is entitled to purchase for each share of Company
Common Stock subject to such Company Option, as determined in the next sentence.
For each share of Company Common Stock subject to such Company Option, the
Exchange Option shall entitle the holder thereof to purchase a fraction of a
share of Holding Class B Common Stock equal to the sum of (i) the fraction of a
share of Holding Class B Common Stock into which one (1) share of Company Common
Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, plus (ii) the fraction of a share of Holding Class B Common Stock
that could be purchased at the Average Pre-Vote Closing Share Price for the
value of the PacifiCare Class A Common Stock into which one (1) share of Company
Common Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, which value shall be the average closing price as quoted in the Wall
Street Journal of the PacifiCare Class A Common Stock during the same trading
days that the Average Pre-Vote Closing Share Price is determined, plus (iii) the
fraction of a share of Holding Class B Common Stock that could be purchased at
the Average Pre-Vote Closing Share Price for $17.50. Any restriction on the
exercise of any Company Option shall apply to the Exchange Option and the term,
exercisability, vesting schedule and other provisions of such Company Option
shall similarly apply to the Exchange Option; provided, however, that each such
Exchange Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction subsequent to the Effective Time;
provided, further, that in the case of an Exchange Option of a person who is an
employee of the Company or one of its subsidiaries, such Exchange Option shall
provide that (i) any unvested shares, the vesting of which depends on
achievement by the Company of earnings or financial performance of the Company
for a fiscal year beginning on or after July 1, 1996, shall instead vest no
later than 25% per year over a four year period, with the first 25% vesting on
July 1, 1997 and (ii) if the holder of such Exchange Option is terminated
without cause after the Closing Date and before the date as of which, determined
as of execution of this Agreement and assuming no termination of any employee
and the application of the vesting schedule set forth in clause (i) above, there
would remain no more than 100,000 of such Exchange Options in the aggregate that
are not vested, such option shall thereupon become fully vested; provided
further that in the case of an Exchange Option of a person who is an employee of
Talbert, if the rights offering described in Section 4.15(c) is consummated in
such a manner that Talbert would no longer be considered a subsidiary of FHP for
purposes of such Exchange Option, the employment of such person by FHP or one of
its subsidiaries shall be deemed terminated for the convenience of the Company
and the accelerated vesting rights set forth in the foregoing proviso shall not
apply; further provided, that, in the case of a holder of an Exchange Option who
is a director of the Company or one of its subsidiaries and who is not an
employee of the Company or any of its subsidiaries, the Exchange Option shall
vest immediately when such holder no longer is serving as a director of Holding
or Company or one of their subsidiaries. The Company, Holding and PacifiCare
shall take such reasonable actions, and cooperate with each other in all action,
that may be necessary and permissible to effectuate the provisions of this
Section 4.8(b), including without limitation, timely sending notice of the
Company's Board of Director's determination to suspend acceleration of vesting
of Company Options issues under the Company's Executive Incentive Plan. The
provisions of this Section 4.8(b) shall not limit in any manner PacifiCare's
right to cash out the vested portion of outstanding Company options under
Section 4.8(a). To the extent required under applicable law, the terms of the
applicable Company Option plans or under any agreement thereunder, the Company
shall obtain stockholder approval of the transactions contemplated by this
Section 4.8(b) and shall use its best efforts to obtain the consent of any
optionee whose consent may be required. As soon as practicable

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after the Effective Time, Holding shall file with the SEC a registration
statement on Form S-8 with respect to the shares of Holding Class B Common Stock
underlying the Exchange Options and use its reasonable best efforts to have such
registration statement declared effective under the Securities Act. The Company
may amend the employment agreements described in Schedule 2.6 of the Company
Disclosure Schedule to adjust the terms and conditions for vesting of Company
Options held by employees party to such agreements, provided the adjusted
vesting is no more favorable than acceleration upon a "Change of Control" as
defined in such agreements and does not render nondeductible to the Company any
amounts under Section 280G of the Code, and further provided any such adjustment
shall neither increase other benefits or amounts payable by the Company nor
increase the number of shares or decrease the exercise price under any Company
Option now outstanding.

(c) Either (i) the Company shall cause the Company's Employee Stock
Purchase Plan to be terminated immediately prior to the Effective Time, and such
termination shall have the effects set forth in such Plan, or (ii) prior to the
Effective Time, Holding, Company and PacifiCare shall cause each right to
purchase Company Common Stock to be replaced, effective as of the Effective
Time, by a substitute right to purchase shares of Holding Class B Common Stock
("Exchange Purchase Right") issued under a Holding Employee Stock Purchase Plan
("Holding Purchase Plan") that is intended to comply with Section 423 of the
Code. The purchase price of shares of Holding Class B Common Stock under an
Exchange Purchase Right shall be equal to 85% of the fair market value of
Holding Class B Common Stock on the first date on which shares of Holding Class
B Common Stock are purchased under the terms of the Holding Purchase Plan. The
terms and conditions of each Exchange Purchase Right shall satisfy the
requirements of Section 424(a) of the Code.

(d) As of the Effective Time and for a period of not less than one year
thereafter, except to the extent required to satisfy applicable, governing law,
Holding shall, or shall cause the Company Surviving Corporation and its
subsidiaries, to provide employee benefits other than those addressed in Section
4.8(a), 4.8(b) or 4.8(c) which are either (i) no less favorable on an aggregate
basis to the benefits provided by the Company or its subsidiaries prior to the
Effective Time or (ii) as provided to similarly situated employees of PacifiCare
and its subsidiaries. Thereafter, to the extent that employees of the Company
Surviving Corporation or its subsidiaries participate in benefit plans of
Holding, for purposes of eligibility of such employees for such employee
benefits, Holding agrees to credit such employee's service with the Company or
its subsidiaries for such purposes as vesting, calculation of benefits, and
eligibility to participate and, if applicable, to waive any pre-existing
condition limitations related thereto to the extent permitted by such plans as
currently in effect and applicable law. Holding and PacifiCare shall cause the
Company's and its subsidiaries' employees to be offered the right to participate
in Holding's and its subsidiaries' stock option plans and arrangements upon
substantially consistent terms.

(e) STOCK OPTIONS OF PACIFICARE. At the Effective Time, each outstanding
option to purchase shares of PacifiCare Class B Common Stock (a "PacifiCare
Class B Option") under any of PacifiCare's stock options plans, shall be
canceled and Holding shall issue in substitution therefor an option to purchase
Holding Class B Common Stock (a "Holding Class B Substitute Option") issued
under a Holding stock option plan to be adopted by Holding prior to the
Effective Time. The exercise price and the number of shares of Holding Class B
Common Stock subject to each Holding Class B Substitute Option shall be
identical to the exercise price and the number of shares of PacifiCare Class B
Common Stock subject to the PacifiCare Class B Option that such Holding Class B
Substitute Option replaces. In compliance with Section 424(a) of the Code, each
such Holding Class B Substitute Option shall be subject to substantially all of
the other terms and conditions of PacifiCare stock option it replaces. At the
Effective Time, each outstanding option to purchase shares of PacifiCare Class A
Common Stock (a "PacifiCare Class A Option") shall be converted into an option
to purchase shares of Holding Class A Common Stock (a "Holding Class A
Substitute Option") MUTATIS MUTANDIS. The exercise price and the number of
shares of Holding Class A Common Stock subject to each Holding Class A
Substitute Option shall be identical to the exercise price and the number of
shares of PacifiCare Class A Common Stock subject to the PacifiCare Class A
Option that such Holding Class A Substitute

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Option replaces. In compliance with Section 424(a) of the Code, each such
Holding Class A Substitute Option shall be subject to substantially all of the
other terms and conditions of the PacifiCare stock option it replaces.

4.9 INDEMNIFICATION.

(a) With respect to actions, omissions and events occurring through the
Effective Time, all rights to indemnification existing in favor of the current
directors and officers of the Company and PacifiCare as provided in their
respective Certificates of Incorporation and indemnification agreements, each as
in effect as of the date of the Original Agreement, shall survive the Mergers
and shall be observed by Holding, PacifiCare Surviving Corporation and Company
Surviving Corporation.

(b) In addition to and without limiting Section 4.9(a), Holding shall, from
and after the Closing, to the fullest extent permitted under applicable laws,
indemnify, defend and hold harmless the current officers and directors of
PacifiCare and the Company (collectively, the "Indemnified Parties") against all
losses, expenses, claims, damages, liabilities or amounts that are paid in
settlement of (subject to Section 4.9(c)), or otherwise incurred in connection
with, any claim, action, suit, proceeding or investigation by reason of the fact
that such Indemnified Party was a director or officer of PacifiCare or the
Company prior to the Effective Time and arising out of actions, omissions and
events occurring at or prior to the Effective Time or in connection with the
Mergers and the actions taken in connection therewith (a "Claim") and shall pay
expenses in advance of the final disposition of any such Claim to each
Indemnified Party upon receipt from the Indemnified Party to whom expenses are
advanced of an undertaking reasonably satisfactory to Holding to repay such
advances if legally required to do so PROVIDED, HOWEVER, that Holding will not
be liable under this Section 4.9(b) to any Indemnified Party for any action
found by a court of competent jurisdiction to constitute a violation of law, a
breach of fiduciary duty to the Company (or any subsidiary) or wilful
misconduct.

(c) For purposes of Section 4.9(b), in the event any Claim is brought
against any Indemnified Party, Holding will be entitled to participate therein
at its own expense. In such event, the Indemnified Parties shall cooperate with
and provide all information reasonably requested by Holding. Except as otherwise
provided below, Holding may, at its option, assume the defense of any Claim,
with counsel reasonably satisfactory to the Indemnified Party. After notice from
Holding to the Indemnified Party of the election by PacifiCare to assume the
defense thereof, Holding will not be liable to the Indemnified Party under
Section 4.9(b) for any legal or other expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. The Indemnified Party
shall have the right to employ separate counsel in connection with such Claim,
but the fees and expenses of such counsel incurred after notice from Holding of
its assumption of the defense thereof shall be at the expense of the Indemnified
Party unless (i) the employment of counsel by the Indemnified Party has been
authorized by Holding, (ii) the Indemnified Party shall have reasonably
concluded that there is, under applicable standards of professional conduct, an
actual conflict between the interests of Holding and the Indemnified Party in
the conduct of the defense of such action or (iii) Holding shall not have
employed counsel to assume the defense of such action, in each of which cases
the reasonable fees and expenses of the Indemnified Party's separate counsel
shall be at the expense of Holding. In any case where the expense of defending a
Claim is to be borne by Holding, the Indemnified Parties as a group shall be
entitled to no more than one law firm (in addition to local counsel) to
represent them with respect to such Claim unless there is, under applicable
standards of professional conduct (as reasonably determined by counsel to the
Indemnified Parties), an actual conflict between the interests of any two or
more Indemnified Parties, in which event such additional counsel as may be
required by reason of such conflict may be retained by the Indemnified Parties.

Holding shall not be liable to indemnify the Indemnified Party under Section
4.9(b) for any amounts paid in any settlement of any Claim if such settlement is
effected without Holding's written consent. Holding shall be permitted to settle
any Claim, except that Holding shall not settle any Claim

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in any manner which would impose any non-monetary penalty or material limitation
(or any monetary penalty with respect to which the Indemnified Party is not
entitled to indemnification pursuant to Section 4.9(b)) on the Indemnified Party
without the Indemnified Party's consent.

Any Indemnified Party wishing to claim indemnification under Section 4.9
upon learning of any such Claim shall promptly notify Holding (although the
failure so to notify Holding shall not relieve Holding from any liability that
Holding may have under Section 4.9, except to the extent such failure materially
prejudices Holding's position with respect to such Claim), and shall deliver to
Holding the undertaking specified in Section 4.9(b) above.

(d) Holding shall maintain in effect for a period of not less than five
years from the Effective Time the current policy of directors' and officers'
liability insurance maintained by PacifiCare and the Company, as the case may
be, with respect to matters occurring prior to the Effective Time; PROVIDED,
HOWEVER, that (i) Holding may substitute therefor policies of comparable
coverage (with carriers comparable to PacifiCare's and the Company's existing
carriers) and (ii) Holding shall not be required to pay an annual premium for
such insurance in excess of two hundred percent (200%) of the last annual
premium paid by PacifiCare or the Company, as the case may be, for such
insurance prior to the date of this Agreement (the "200% Amount"). In the event
the annual premium for such insurance exceeds the 200% Amount, Holding shall be
entitled to reduce the amount of coverage of such insurance to the amount of
coverage that can be obtained for a premium equal to the 200% Amount.

(e) In the event Holding or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any Person, then, and in each such case, to the extent necessary to
effectuate the purposes of this Section 4.9, proper provision shall be made so
that the successors and assigns of Holding assume the obligations set forth in
this Section 4.9 and none of the actions described in clause (i) or (ii) shall
be taken until such provision is made.

4.10 ADDITIONAL AGREEMENTS.

(a) Subject to Section 4.10(b), Holding, PacifiCare and the Company agree
to use all commercially reasonable efforts to take, or cause to be taken, all
actions necessary to consummate the Mergers and make effective the other
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, but subject to Section 4.10(b), Holding, PacifiCare and the
Company shall use all commercially reasonable efforts to (i) obtain the consent
and approval of each Governmental Authority, lessor or other person whose
consent or approval is required (by virtue of any contractual provision or legal
requirement or otherwise) in order to permit the consummation of the Merger or
any of the other transactions contemplated by this Agreement or in order to
enable Holding, PacifiCare Surviving Corporation and Company Surviving
Corporation to conduct their respective businesses in the manner in which such
business is currently being conducted or is proposed to be conducted, (ii)
effect all registrations and filings necessary to consummate the Mergers and
(iii) lift any restraint, injunction or other legal bar to the Mergers.

(b) Notwithstanding anything to the contrary contained in Section 4.10(a)
or elsewhere in this Agreement, (i) Holding shall not have any obligation under
this Agreement to dispose or cause any of its subsidiaries to dispose of any
material assets, (ii) Holding shall not have any obligation to make any changes
to its operations or proposed operations or to the operations or proposed
operations of any of its subsidiaries and (iii) Holding shall not have any
obligation to make any commitment (to any Governmental Authority or otherwise)
regarding its future operations, or the future operations of any of its
subsidiaries, or the future operations of PacifiCare Surviving Corporation or
the Company Surviving Corporation or any of their respective Material
Subsidiaries which would, in each of case (ii) and (iii) above, have a material
adverse effect thereon (even though the disposition of such assets or the making
of such change or commitment might facilitate the obtaining of a required
approval from a Governmental Authority or might otherwise facilitate the
consummation of the Mergers).

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4.11 DISCLOSURE. PacifiCare and the Company will (i) mutually agree on the
text of any press release and (ii) consult with each other before making any
other public statement with respect to this Agreement and the transactions
contemplated by this Agreement, except, in each such case, as may be required by
applicable law (including disclosure requirements) or any listing or similar
agreement with any national securities exchange or the Nasdaq National Market.

4.12 AFFILIATE AGREEMENTS. The Company shall deliver to PacifiCare, within
ten days after the date of this Agreement, a letter from the Company identifying
all persons who may be "affiliates" of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act ("Company
Affiliates"). The Company shall use all commercially reasonable efforts to cause
each person who is or becomes a Company Affiliate to execute and deliver to
PacifiCare, on or prior to the date of the mailing of the Prospectus/Proxy
Statement, an Affiliate Agreement in the form attached hereto as Exhibit 4.12.
PacifiCare shall use all commercially reasonable efforts to cause each person
who is or becomes an affiliate of PacifiCare to execute and deliver a similar
agreement on or prior to such date.

4.13 TAX QUALIFICATION AND OPINION BACK-UP CERTIFICATES. Each of Holding,
the Company and PacifiCare will use its reasonable best efforts to cause the
transactions contemplated by this Agreement, other than the transactions with
respect to Talbert contemplated by Section 4.15 hereof, to qualify as transfers
subject to the provisions of Section 351(a) of the Code and to deliver, in
connection with the tax opinions referred to in Sections 5.9 and 6.8,
certificates of representation reasonable under the circumstances ("Tax
Certificates").

4.14 FINANCING. PacifiCare has received from Bank of America NT&SA a
commitment letter dated August 2, 1996 (the "Commitment Letter") containing its
commitment, subject to the terms and conditions thereof, to provide sufficient
financing to permit PacifiCare and Holding to consummate the transactions
contemplated hereby. A true and accurate copy of the Commitment Letter has been
provided to the Company. PacifiCare and Holding shall enter into the definitive
credit agreements contemplated by the Commitment Letter (or any revised
commitment letter more favorable to PacifiCare and Holding) prior to the date on
which the Proxy/Prospectus is mailed to the Company's Stockholders.

4.15 TALBERT.

(a) The Company shall negotiate a written agreement with Talbert under
which all Talbert contracted medical providers or sites agree to provide
professional services to members of HMOs and enrollees in insurance products of
the Company and Company Surviving Corporation and their subsidiaries in exchange
for a current market rate capitation payment ("Capitated Contract"). The
Capitated Contract shall be subject to the review and approval of PacifiCare
prior to execution. In addition to the Capitated Contract, the Company and
Talbert shall enter into an agreement for the Company to render administrative
services (information systems, payroll, accounts payable, employee benefits
administration and the like) for a period not to exceed one year following the
Effective Date at a rate and on other terms approved by PacifiCare. PacifiCare
shall negotiate in good faith with the Company and Talbert in determining
whether to give its approval.

(b) Following execution of the Capitated Contract, the Company shall
capitalize Talbert to increase its net worth to approximately $60,000,000
("Capital Contribution"); provided, however, that in all events the net worth of
Talbert shall be equal to the proceeds of the rights offering referred to in
Section 4.15(c) below, assuming all such rights are exercised.

(c) Following the Capital Contribution, simultaneous with consummation of
the Mergers or as soon thereafter as legally permissible, Holding shall cause
the issuance of rights to all holders of Company Common Stock and Company Series
A Preferred Stock outstanding immediately prior to the Effective Time (other
than holders who have perfected appraisal rights in accordance with Section 1.8)
and allocated among them on a Company common share equivalent basis, exercisable
until the first business day on or after the thirtieth day after the date of the
Effective Time and expiring thereafter, to purchase, directly or indirectly
through one or more other corporations formed to

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facilitate such purchase all of Company's interest in Talbert. In connection
with the purchase, Holding, PacifiCare, the Company and Talbert shall discuss
the possibility of a Code section 338(h)(10) election in connection with such
purchase; provided however, that no such election shall be made without the
prior written consent of PacifiCare, which consent shall not be withheld unless
there is an adverse impact to PacifiCare.

(d) Before the Effective Time and with the prior consent of PacifiCare as
to significant actions, the Company and Talbert shall take such steps as are
reasonably required to consummate the separation of Talbert from the Company.
The Company and Talbert shall have the right to continue to prosecute the
application now pending before the California Department of Corporations for the
issuance of stock options to employees of Talbert and to carry out transactions
consistent with such application as permitted by Section 4.2(b) if and when a
permit is granted pursuant thereto.

(e) The Company will not assign any of its rights under that certain Stock
Purchase Agreement dated as of March 15, 1996 by and between the Company,
Talbert Medical Management Corporation, Talbert Health Services Corporation and
certain management investors, as amended (the "Talbert Stock Purchase
Agreement"). From and after the Effective Time, Holding will cause the committee
of the Company that makes the determinations required by Section 5.3 of the
Talbert Stock Purchase Agreement to consist of the members of the Compensation
Committee of Holding and one member of the Board of Directors of Talbert,
designated by the Board of Directors of Talbert and reasonably acceptable to the
Board of Directors of Holding.

4.16 7% SENIOR NOTES DUE 2003. Holding shall, if required by applicable
law or the terms of the Company's 7% Senior Notes Due 2003 (the "Senior Notes"),
assume the Senior Notes.

4.17 NOTICES OF CERTAIN EVENTS. Each of Holding, the Company and
PacifiCare shall promptly notify the other of:

(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;

(b) any notice or other communication from any governmental body, agency,
official or authority in connection with the transactions contemplated by this
Agreement that indicates such body, agency, official or authority intends to
take action that would prevent or materially interfere with the transactions
contemplated by this Agreement; and

(c) any actions, suits, claims, investigations, proceedings or health or
insurance related proceedings or market conduct examinations or audits commenced
or, to the best of Company's or PacifiCare's knowledge (as the case may be)
threatened against, relating to or involving or otherwise affecting the Company
or PacifiCare or any of their subsidiaries which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
2.7 or 3.7 or which relate to the consummation of the transactions contemplated
by this Agreement.

4.18 CERTAIN CORPORATE MATTERS WITH RESPECT TO PACIFICARE.

(a) PacifiCare shall cause Holding to take all necessary corporate action
for the establishment of the Holding stock option plans contemplated by Section
4.8 hereof and agrees to vote the shares of capital stock of Holding owned by it
in favor of the adoption of such plans as required under the laws of the State
of Delaware.

(b) From the date hereof until the Effective Time, PacifiCare shall cause
Holding (x) not to take any action inconsistent with the provisions of this
Agreement and (y) not to conduct business or activity other than in connection
with this Agreement.

4.19 COMPLIANCE WITH REGULATIONS. PacifiCare and the Company will each use
reasonable commercial efforts, and will cause their subsidiaries to use
reasonable commercial efforts, to comply with applicable rules and regulations
of the Health Care Financing Administration relating to so-called physician
incentive plans.

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4.20 ASSUMPTION BY SUCCESSOR. Holding, effective as of the Effective Time,
assumes expressly and agrees to perform the employment agreements described in
Schedule 2.6 of the Company Disclosure Schedule in the same manner and to the
same extent that the Company would be required to perform them.

4.21 NO ACTIVITY BY HOLDING. From the date of the Original Agreement until
the Effective Time, PacifiCare shall not cause or permit Holding, Neptune Sub or
Company Sub to (i) issue any stock or securities or (ii) acquire any property,
incur any liabilities or engage in any business or activity whatsoever, other
than to consummate the Mergers and transactions contemplated hereby (including
the financing thereof) and to carry out its obligations hereunder.

ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING

The obligations of PacifiCare and Holding to effect the Mergers and
otherwise consummate the transactions contemplated by this Agreement are subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions:

5.1 REPRESENTATIONS AND WARRANTIES ACCURATE.

(a) The representations and warranties of the Company contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.

(b) The representations and warranties of the Company contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on the Company (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
Material Adverse Effect qualifications shall be disregarded and (ii) any update
of or modification to the Company Disclosure Schedule made or purported to have
been made after the date of the Original Agreement shall be disregarded).

5.2 COMPLIANCE WITH COVENANTS. The Company shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by the Company on or prior to the date of the
Closing.

5.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on the Company and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on the Company.

5.4 CERTIFICATE. The Company shall have delivered to PacifiCare a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 5.1, 5.2 and 5.3.

5.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.

5.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.

5.7 AFFILIATES AGREEMENTS. The Affiliates Agreements described in Section
4.12 shall have been executed by each party therein described and delivered to
PacifiCare.

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5.8 LEGAL OPINION. PacifiCare shall have received an opinion of Sheppard,
Mullin, Richter & Hampton LLP, counsel to the Company, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to PacifiCare and
its counsel.

5.9 TAX OPINION. Subject to receipt by PacifiCare's counsel of the Tax
Certificates, PacifiCare shall have received a written opinion from PacifiCare's
counsel, dated as of the date of the Closing (reasonably satisfactory in form
and substance to PacifiCare), to the effect that neither PacifiCare nor any of
its stockholders will recognize gain or loss for United States federal income
tax purposes as a result of the PacifiCare merger. For purposes of rendering
such opinion, PacifiCare's counsel shall be entitled to rely upon the Tax
Certificates.

5.10 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.

5.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from Holding or PacifiCare or any of their subsidiaries any damages that
may be material to Holding or PacifiCare; (c) seeking to prohibit or limit in
any material respect Holding's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of
PacifiCare Surviving Corporation or Company Surviving Corporation (PacifiCare
Surviving Corporation and Company Surviving Corporation being sometimes referred
to below as "Surviving Corporations"); or (d) which would materially and
adversely affect the right of Holding, the Surviving Corporations or any
subsidiary thereof to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.

5.12 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Holding, PacifiCare or the Company: (a) challenging or seeking
to restrain or prohibit the consummation of either of the Mergers; (b) relating
to either of the Mergers and seeking to obtain from Holding or PacifiCare or any
of its subsidiaries any damages that may be material to Holding or PacifiCare;
(c) seeking to prohibit or limit in any material respect Holding's ability to
vote, receive dividends with respect to or otherwise exercise ownership rights
with respect to the stock of the Surviving Corporations; or (d) which would
affect adversely the right of Holding, the Surviving Corporations or any of
their subsidiaries to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.

5.13 HSR ACT. The waiting periods applicable to the consummation of the
Mergers, and the acquisitions of voting securities of Holding by the
stockholders of Company and PacifiCare, if any, under the HSR Act shall have
expired or been terminated.

5.14 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.

5.15 OTHER REQUIRED CONSENTS AND APPROVALS. Holding, PacifiCare and the
Company shall have received all material approvals, licenses, consents,
assignments and authorizations of Governmental Authorities and other persons,
including those set forth on the Company Disclosure Schedule, as may be required
(a) to permit the performance by Holding, PacifiCare and the Company of their
respective obligations under this Agreement and the consummation of the Mergers
and (b) to permit Holding and the Surviving Corporations and their respective
subsidiaries to conduct their business and operations in the manner currently
conducted.

5.16 TAKECARE BOARD REPRESENTATION. The rights of certain former
stockholders of TakeCare to board representation on the Board of Directors of
the Company shall have been terminated.

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5.17 RESTATED RIGHTS PLAN. The Restated Rights Plan shall have been
amended to provide that the transactions contemplated by this Agreement do not
give rise to any rights or benefits under the Restated Rights Plan.

5.18 TALBERT. The net worth of Talbert shall not exceed $60,000,000.

ARTICLE 6
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS

The obligations of the Company to effect the Company Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of the following conditions:

6.1 REPRESENTATIONS AND WARRANTIES ACCURATE.

(a) The representations and warranties of PacifiCare contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.

(b) The representations and warranties of PacifiCare contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on PacifiCare (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the date
of the Closing, (i) all Material Adverse Effect qualifications shall be
disregarded and (ii) any update of or modification to the PacifiCare Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded).

6.2 COMPLIANCE WITH COVENANTS. PacifiCare shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by PacifiCare on or prior to the date of the
Closing.

6.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on PacifiCare, and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on PacifiCare.

6.4 CERTIFICATE. PacifiCare shall have delivered to the Company a
certificate of an executive officer of PacifiCare evidencing compliance with the
conditions set forth in Sections 6.1, 6.2 and 6.3.

6.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.

6.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.

6.7 LEGAL OPINION. The Company shall have received an opinion of Cooley
Godward Castro Huddleson & Tatum, counsel to PacifiCare, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to the Company and
its counsel.

6.8 TAX OPINION. Subject to receipt by the Company's counsel of the Tax
Certificates, the Company shall have received a written opinion from the
Company's counsel dated as of the date of the Closing to the effect that the
Company Merger will constitute a contribution of Company Common Stock and
Company Series A Preferred Stock to Holding in exchange for Holding capital
stock as part of a transaction governed by Section 351 of the Code. For purposes
of rendering such opinion, the Company's counsel shall be entitled to rely upon
the Tax Certificates.

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6.9 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.

6.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from the Company or any of its subsidiaries any damages that may be
material to the Company (c) seeking to prohibit or limit in any material respect
Holding's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) which would materially and adversely affect the right of
Holding, the Surviving Corporations or any subsidiary thereof to own the assets
or operate the business of PacifiCare or the Company or any of their
subsidiaries.

6.11 HSR ACT. The waiting period applicable to the consummation of the
Mergers under the HSR Act shall have expired or been terminated.

6.12 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.

ARTICLE 7
TERMINATION OF AGREEMENT

7.1 TERMINATION. This Agreement may be terminated prior to the Closing
Date, whether before or after approval of the Mergers by the stockholders of the
Company and PacifiCare:

(a) by mutual written consent of the respective Boards of Directors of
PacifiCare and the Company;

(b) by either PacifiCare or the Company if either of the Mergers shall not
have been consummated by April 30, 1997 (unless the failure to consummate such
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);

(c) by either PacifiCare or the Company if a court of competent
jurisdiction or Governmental Authority shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
either of the Mergers;

(d) by either PacifiCare or the Company if (i) the Company Stockholders'
Meeting shall have been held and (ii) this Agreement and the Company Merger
shall not have been adopted and approved at such meeting by the Company Required
Vote;

(e) by PacifiCare (at any time prior to the adoption and approval of this
Agreement and the Company Merger by stockholders of the Company by the Company
Required Vote) if a Triggering Event (as defined below) shall have occurred;

(f) by either PacifiCare or the Company if (i) the PacifiCare Stockholders'
Meeting shall have been held and (ii) this Agreement, the PacifiCare Merger and
any related matters shall not have been adopted and approved at such meeting by
the Required PacifiCare Vote;

(g) by PacifiCare if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially inaccurate
as of the date of the Original Agreement, or if any of the Company's covenants
contained in this Agreement shall have been breached in any material respect;
PROVIDED, HOWEVER, that if an inaccuracy in the Company's representations and
warranties or a breach of a covenant by the Company is curable by the Company
and the Company is

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continuing to exercise all commercially reasonable efforts to cure such
inaccuracy or breach, then PacifiCare may not terminate this Agreement under
this Section 7.1(g) on account of such inaccuracy or breach; or

(h) by the Company if any of PacifiCare's or Holding's representations and
warranties contained in this Agreement shall be or shall have become materially
inaccurate as of the date of the Original Agreement, or if any of PacifiCare's
or Holding's covenants contained in this Agreement shall have been breached in
any material respect; PROVIDED, HOWEVER, that if an inaccuracy in PacifiCare's
or Holding's representations and warranties or a breach of a covenant by
PacifiCare or Holding is curable by PacifiCare or Holding and PacifiCare or
Holding is continuing to exercise all commercially reasonable efforts to cure
such inaccuracy or breach, then the Company may not terminate this Agreement
under this Section 7.1(h) on account of such inaccuracy or breach.

A "Triggering Event" shall be deemed to have occurred if (i) the Board of
Directors of the Company shall have failed to recommend, shall for any reason
have withdrawn or shall have amended or modified in a manner adverse to
PacifiCare its unanimous recommendation in favor of the Company Merger or
approval or adoption of this Agreement, or the Company shall have failed to
include in the Prospectus/Proxy Statement the unanimous recommendation of the
Board of Directors of the Company in favor of the Company Merger and approval
and adoption of this Agreement and related matters; (ii) the Board of Directors
of the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (iii) the Company shall have entered into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants); or (iv) the Company
shall have failed to hold the Company Stockholders' Meeting within 60 days after
the S-4 Registration Statement is declared effective and any Acquisition
Proposal shall have been made during such 60-day period.

"Acquisition Proposal" shall mean any proposal (other than any proposal by
PacifiCare or Neptune Sub or in connection with the transactions contemplated in
Section 4.15 regarding Talbert) regarding (i) any merger, consolidation, share
exchange, business combination or other similar transaction or series of related
transactions involving the Company; (ii) any sale, lease, exchange, transfer or
other disposition of the assets of the Company or any subsidiary of the Company
constituting more than 50% of the consolidated assets of the Company or
accounting for more than 50% of the consolidated revenues of the Company in any
one transaction or in a series of related transactions; and (iii) any offer to
purchase, tender offer, exchange offer or any similar transaction or series of
related transactions made by any Person involving more than 50% of the
outstanding shares of the capital stock of the Company or the filing of any
Statement on Schedule 14D-1 with the SEC in connection therewith.

7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect; PROVIDED, HOWEVER, that (i) this Section 7.2, Section 7.3 and
Article 8 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) such termination shall have no effect on the
Confidentiality Agreement dated July 22, 1996 between PacifiCare and the Company
which shall remain in full force and effect and, (iii) subject to Section 7.3(b)
and 7.3(c) below, the termination of this Agreement shall not relieve any party
from any liability for any breach of this Agreement.

7.3 FEES AND EXPENSES.

(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Mergers are consummated.

(b) In consideration of the substantial time, expense and forgoing of other
opportunities that PacifiCare and Holding have invested in the transactions
contemplated hereby:

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(i) If this Agreement is terminated pursuant to Section 7.1(d) at any
time after the occurrence of a Triggering Event or if this Agreement is
terminated by PacifiCare pursuant to Section 7.1(e), then the Company shall
pay to PacifiCare a fee, in immediately available funds, of $50,000,000 (the
"Termination Amount"). In the case of termination of this Agreement by the
Company pursuant to Section 7.1(d), the Termination Amount shall be paid
prior to such termination, and in the case of termination of this Agreement
pursuant to Section 7.1(e) or by PacifiCare pursuant to Section 7.1(d), the
Termination Amount shall be paid within one business day of such
termination. If the Company fails to pay such fee by the date provided
herein, in addition to any other remedies that may be available to
PacifiCare for such breach by the Company, said fee shall bear interest at
the lower of 10% per annum and the maximum rate allowable by law from the
date such payment was due until the date such fee is actually paid.

(ii) If this Agreement is terminated pursuant to Section 7.1(d) (and
Section 7.3(b)(i) is not applicable) and within 12 months of the date of the
Company Stockholders' Meeting the Company enters into an agreement relating
to an Acquisition Proposal, the Company shall pay to PacifiCare, within one
business day of entering into such agreement, a fee in immediately available
funds, of the Termination Amount. If the Company fails to pay such fee by
the date provided herein, in addition to any other remedies that may be
available to PacifiCare for such breach by the Company, said fee shall bear
interest at the lower of 10% per annum and the maximum rate allowable by law
from the date such payment was due until the date such fee is actually paid.

(c) In consideration of the substantial time, expense and forgoing of other
opportunities that the Company has invested in the transactions contemplated
hereby if this Agreement is terminated pursuant to Section 7.1(f) or if the
Mergers are not consummated solely by reason of a breach by PacifiCare caused by
its failure to enter into definitive agreements related to the financing
contemplated by the Commitment Letter, or the termination of such agreements or
the failure of PacifiCare to receive the funding contemplated by the Commitment
Letter, and after diligent efforts to find commercially reasonable alternative
financing (a "Financing Breach"), then PacifiCare shall pay the Company a fee,
in immediately available funds, of $50,000,000, in the case of a termination
pursuant to Section 7.1(f) or $100,000,000 in the case of a Financing Breach. In
the case of a termination by PacifiCare pursuant to Section 7.1(f), the
Termination Amount shall be paid upon termination. In the case of a termination
by the Company pursuant to Section 7.1(f) or the failure to consummate the
transactions contemplated hereby solely because of a Financing Breach,
PacifiCare shall pay the Termination Amount promptly following such event.

If PacifiCare fails to pay such fee by the date provided, in addition to
such other remedies as may be available to the Company for such breach by
PacifiCare, said fee shall bear interest on such fee at the lower of 10% per
annum and the maximum rate allowable by law from the date such fee was due until
the date it was actually paid.

(d) Each of PacifiCare and the Company acknowledge that the fees payable
pursuant to Sections 7.3(b) and 7.3(c) (and, if applicable, any interest thereon
and attorneys' fees and costs related to any suit to enforce such provisions)
are the sole remedies of such parties for termination or failure to consummate
the Mergers under the circumstances described in such sections (other than any
willful breach of any agreement or covenant set forth in this Agreement).

ARTICLE 8
MISCELLANEOUS

8.1 AMENDMENT. This Agreement may be amended with the approval of the
respective Boards of Directors of Holding, the Company and PacifiCare at any
time before or after approval of this Agreement by the stockholders of the
Company and the stockholders of PacifiCare; PROVIDED, HOWEVER, that after any
such stockholder approval, no amendment shall be made which would have a
material

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adverse effect on the stockholders of the Company or the stockholders of
PacifiCare without the further approval of such stockholders. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.

8.2 WAIVER.

(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.

(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.

8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Mergers.

8.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
other agreements referred to herein and the Confidentiality Agreement dated as
of July 22, 1996 between PacifiCare and the Company constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and the same
instrument, and shall be governed in all respects by the laws of the State of
Delaware without regard to its conflicts of laws principles.

8.5 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.

8.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors; PROVIDED, HOWEVER, that this Agreement may not be
assigned by any party without the prior written consent of the other parties,
and any attempted assignment without such consent shall be void and of no
effect. Nothing in this Agreement, express or implied, is intended to or shall
confer upon any person except the parties hereto and their respective successors
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.

8.7 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

To PacifiCare:

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

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with a copy to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

To Holding:

N-T Holdings, Inc.
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

with a copy to:

Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

and:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

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To the Company:

FHP International Corporation
3120 West Lake Center Drive
Santa Ana, CA 92704
Attention: President
Telephone: (714) 825-6600
Fax: (714)

with a copy to:

Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: John D. Hussey, Esq.
Telephone: (213) 620-1780
Fax: (213) 620-1398

To the Company Sub or Neptune Sub:

Tree Acquisition Corp. or Neptune Merger Corp. (as the case may be)
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

with a copy to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (c) in the case of delivery by
nationally-recognized, overnight courier, on the business day following dispatch
and (d) in the case of mailing, on the fifth business day following such
mailing.

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<PAGE>
8.8 COOPERATION. Each of the Company and PacifiCare agrees to cooperate
fully with the other and to execute and deliver such further documents,
certificates, agreements and instruments and to take such other actions as may
be reasonably requested by the other to evidence or reflect the Mergers and to
carry out the intent and purposes of this Agreement.

8.9 CERTAIN TERMS. As used in this Agreement:

(a) the word "person" refers to any (i) individual, (ii) corporation,
partnership, limited liability company or other entity, or (iii) Governmental
Authority; and

(b) the words "include" and "including," and variations thereof, shall not
be deemed to be terms of limitation, but rather shall be deemed to be followed
by the words "without limitation."

(c) representations or warranties made to the "knowledge of" or to the
"knowledge of the Company" or "knowledge of PacifiCare" shall include only
matters that are known or should have been known by the officers of those
corporations.

8.10 TITLES. The titles and captions of the Articles and Sections of this
Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.

8.11 ARTICLES, SECTIONS AND EXHIBITS. Except as otherwise indicated, all
references in this Agreement to "Articles," "Sections" and "Exhibits" are
intended to refer to Articles and Sections of this Agreement and Exhibits to
this Agreement.

8.12 JURISDICTION. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated by this Agreement may be brought
against any of the parties in the United States District Court for the Central
District of California or any state court sitting in Orange County, California,
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts) in any such suit, action
or proceeding and waives any objection to venue laid therein. Process in any
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the State of California. Without limiting the
generality of the foregoing, each party hereto agrees that service of process
upon such party at the address referred to in Section 8.7, together with written
notice of such service to such party, shall be deemed effective service of
process upon such party.

8.13 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.

8.14 SCHEDULES. Any disclosure on a PacifiCare Disclosure Schedule or
Company Disclosure Schedule made with respect to an identified Section shall be
deemed to be a disclosure for the purpose of other sections of the applicable
Disclosure Schedule to which such disclosure is applicable on its face.

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<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Amended and
Restated Agreement and Plan of Reorganization as of the date first above
written.

PACIFICARE HEALTH SYSTEMS, INC.

By: /s/ Alan R. Hoops

--------------------------------------
Its: President

N-T HOLDINGS, INC.

By: /s/ Alan R. Hoops

--------------------------------------
Its: President

NEPTUNE MERGER CORP.

By: /s/ Alan R. Hoops

--------------------------------------
Its: President

TREE ACQUISITION CORP.

By: /s/ Alan R. Hoops

--------------------------------------
Its: President

FHP INTERNATIONAL CORPORATION

By: /s/ Westcott W. Price III

--------------------------------------
Its: President

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<PAGE>
EXHIBIT 1.4
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
N-T HOLDINGS, INC.

The name of this Corporation is: N-T Holdings, Inc.

The address of its registered office in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware. The name of its registered agent at such address is
The Prentice-Hall Corporation System, Inc.

III

The nature of business or purposes to be conducted or promoted is to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.

A. N-T Holdings, Inc. ("Corporation") is authorized to issue three classes
of shares of stock to be designated, respectively, "Class A Common Shares,"
"Class B Common Shares," and "Preferred Shares." The total number of shares of
stock which the Corporation shall have authority to issue is two hundred forty
million (240,000,000). The total number of Class A Common Shares which the
Corporation shall have authority to issue is one hundred million (100,000,000),
and the par value of each such Class A Common Share shall be one cent ($0.01).
The total number of Class B Common Shares which the Corporation shall have
authority to issue is one hundred million (100,000,000), and the par value of
each such Class B Common Share shall be one cent ($0.01). The total number of
Preferred Shares which the Corporation shall have the authority to issue is
forty million (40,000,000), and the par value of each such Preferred Share shall
be one cent ($0.01).

B. The powers, preferences and rights of the holders of Class A Common
Shares and Class B Common Shares (collectively, the "Common Shares"), and the
qualifications, limitations or restrictions thereof, shall be in all respects
identical, except as otherwise required by law or expressly provided in this
Certificate of Incorporation, as amended, and subject to the powers, preferences
and rights of the holders of Preferred Shares, as provided in or as otherwise
determined by the Board of Directors pursuant to paragraph C of this Article IV.

1. DIVIDENDS. Dividends may be declared and paid to the holders of the
Class A Common Shares and the Class B Common Shares in cash, property, or other
securities of the Corporation out of any funds legally available therefore. If
and when dividends on the Class A Common Shares and the Class B Common Shares
are declared payable from time to time by the Board of Directors, whether
payable in cash, in property or in securities of the Corporation, the holders of
the Class A Common Shares and the holders of the Class B Common Shares shall be
entitled to share equally, on a per share basis, in such dividends, except that,
dividends or other distributions payable on the Common Shares in Common Shares
shall be made to all holders of Common Shares and may be made (i) in Class B
Common Shares to the record holders of Class A Common Shares and to the record
holders of Class B Common Shares, (ii) in Class A Common Shares to the record
holders of Class A Common Shares and in Class B Common Shares to the record
holders of Class B Common Shares, or (iii) in any other authorized class or
series of capital stock to the holders of both classes of Common Shares.

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2. DISTRIBUTION ON DISSOLUTION, ETC. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the remaining
net assets of the Corporation shall, after payment in full of the liquidation
preference, if any, of any outstanding Preferred Shares, be distributed pro rata
to the holders of the Class A Common Shares and the Class B Common Shares in
accordance with their respective rights and interests.

3. VOTING RIGHTS.

(a) At each annual or special meeting of the shareholders, each holder of
Class A Common Shares shall be entitled to one (1) vote in person or by proxy
for each Class A Common Share standing in his name on the stock transfer records
of the corporation in connection with the election of directors and all other
actions submitted to a vote of shareholders; holders of Class B Common Shares
shall not vote on any matters except as otherwise provided by this Certificate
of Incorporation, as amended, and the Delaware General Corporation Law.

(b) The holders of Class B Common Shares shall be entitled to vote
separately as a group only with respect to (i) proposals to change the par value
of the Class B Common Shares, (ii) amendments to this Certificate of
Incorporation that alter or change the powers, preference or special rights of
the holders of Class B Common Shares so as to affect them adversely, and (iii)
such other matters as may require separate group voting under this Certificate
of Incorporation, as amended, and the Delaware General Corporation Law.

(c) The number of authorized Class B Common Shares may be increased or
decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of the Class A Common Shares.

4. CONVERSION.

(a) All outstanding Class B Common Shares may be converted into Class A
Common Shares on a share-for-share basis by the Board of Directors if, as a
result of the existence of the Class B Common Shares, either the Class A Common
Shares or Class B Common Shares is or both are excluded from trading on the New
York Stock Exchange, the American Stock Exchange and all other principal
national securities exchanges then in use and also is excluded from quotation on
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market and other comparable national quotation systems then in use. In
making such determination, the Board of Directors may conclusively rely on any
information or documentation available to it, including filings made with the
Securities and Exchange Commission, any stock exchange, the National Association
of Securities Dealers, Inc. or any other governmental or regulatory agency or
any written instrument purporting to be authentic.

(b) All outstanding Class B Common Shares shall be converted into Class A
Common Shares on a share-for-share basis if at any time the number of
outstanding Class A Common Shares, as reflected on the stock transfer records of
the Corporation, falls below ten percent (10%) of the aggregate number of
outstanding Class A Common Shares and of Class B Common Shares. For purposes of
the immediately preceding sentence, any Common Shares repurchased and held as
treasury shares or canceled by the Corporation shall no longer be deemed
"outstanding" from and after the date of repurchase.

(c) In the event of any conversion of the Class B Common Shares pursuant to
subparagraph 4(a) or 4(b), certificates which formerly represented outstanding
shares of Class B Common Shares will thereafter be deemed to represent a like
number of shares of Class A Common shares and all authorized Common Shares shall
consist of only Class A Common Shares.

5. CLASS B COMMON SHARE PROTECTION PROVISION.

(a) If, after the effective time (the "Effective Time") of the PacifiCare
Merger (the "PacifiCare Merger"), as that term is defined in the Amended and
Restated Agreement and Plan of Reorganization dated as of November 11, 1996,
among PacifiCare Health Systems, Inc., N-T Holdings, Inc., Neptune Merger Corp.,
Tree Acquisition Corp. and FHP International Corporation, as amended (the

2
<PAGE>
"Reorganization Agreement"), any person or group acting in concert acquires
beneficial ownership of shares representing 10% or more of the then issued and
outstanding Class A Common Shares (excluding the number of shares beneficially
owned by such person or group at or before the Effective Time and other than
upon the issuance or sale by the Corporation, by operation of law, including a
merger, consolidation or reorganization of a beneficial owner, by will or the
laws of descent and distribution, by gift or by foreclosure of a bona fide
loan), and such person or group (a "Significant Shareholder") does not own an
equal or greater percentage of the Class B Common Shares acquired after the
Effective Time, such Significant Shareholder must, within a ninety (90) day
period beginning the day after becoming a Significant Shareholder, make a public
cash tender offer in compliance with all applicable laws and regulations to
acquire additional Class B Common Shares as provided in this subparagraph B (5)
of Article IV (a "Class B Protection Transaction").

(b) In each Class B Protection Transaction, the Significant Shareholder must
make a public tender offer to acquire that number of Class B Common Shares
determined by (i) multiplying the percentage of outstanding Class A Common
Shares beneficially owned by such Significant Shareholder and acquired after the
Effective Time by such Significant Shareholder by the total number of shares of
Class B Common Shares outstanding on the date such person or group became a
Significant Shareholder, and (ii) subtracting therefrom the total number of
shares of Class B Common Shares beneficially owned on such date and acquired
after the Effective Time by such Significant Shareholder (including shares
acquired on such date at or prior to the time such person or group became a
Significant Shareholder). The Significant Shareholder must acquire all of such
shares validly tendered; provided, however, that if the number of Class B Common
Shares tendered to the Significant Shareholder exceeds the number of shares
required to be acquired pursuant to the formula set forth in this subparagraph
5(b), the number of Class B Common Shares acquired from each tendering holder
shall be pro rata in proportion to the total number of Class B Common Shares
tendered by all tendering holders.

(c) The offer price for any Class B Common Shares required to be purchased
by the Significant Shareholder pursuant to this subparagraph B(5) shall be the
greater of (i) the highest price per share paid by the Significant Shareholder
for any Class A Common Share in the six month period ending on the date such
person or group became a Significant Shareholder or (ii) the highest bid price
of a Class A Common Share or Class B Common Share on the Nasdaq National Market
(or such other exchange or quotation system as is then the principal trading
market for such shares) on the date such person or group became a Significant
Shareholder or (iii) the highest bid price of a Class A Common Share or Class B
Common Share on the Nasdaq National Market (or such other exchange or quotation
system as is then the principal trading market for such shares) on the date
preceding the date the Significant Shareholder makes the tender offer required
by this subparagraph B(5). For purposes of subparagraph B(5)(d) below, the
applicable date for the calculations required by clauses (i) and (ii) of the
preceding sentence shall be the date on which the Significant Shareholder
becomes required to engage in a Class B Protection Transaction. In the event
that the Significant Shareholder has acquired Class A Common Shares in the six
month period ending on the date such person or group becomes a Significant
Shareholder for consideration other than cash, the value of such consideration
per Class A Common Share shall be as determined in good faith by the Board of
Directors.

(d) A Class B Protection Transaction shall also be required to be effected
by any Significant Shareholder each time that the Significant Shareholder
acquires beneficial ownership of the next higher integral multiple of 5% (e.g.,
15%, 20%, 25%, etc.) of the outstanding Class A Common Shares after the
Effective Time (other than upon the issuance or sale by the Corporation, by
operation of law, including a merger, consolidation or reorganization of a
beneficial owner, by will or the laws of descent and distribution, by gift, or
by foreclosure of a bona fide loan) if such Significant Shareholder does not
then own an equal or greater percentage of the Class B Common Shares acquired
after the Effective Time. Such Significant Shareholder shall be required to make
a public tender offer to acquire that

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<PAGE>
number of Class B Common Shares prescribed by the formula set forth in
subparagraph B(5)(b) above, and must acquire all shares validly tendered or a
pro rata portion thereof, as specified in subparagraph B(5)(b), at the price
determined pursuant to subparagraph B(5)(c) above.

(e) If any Significant Shareholder fails to make an offer required by this
subparagraph B(5) of Article IV, or to purchase shares validly tendered and not
withdrawn (after proration, if any), such Significant Shareholder shall not be
entitled to vote any Class A Common Shares beneficially owned by such
Significant Shareholder unless and until such requirements are complied with or
unless and until all Class A Common Shares causing such offer requirement to be
effective are no longer beneficially owned by such Significant Shareholder.

(f) The Class B Protection Transaction requirement shall not apply to any
increase in percentage ownership of Class A Common Shares resulting solely from
a change in the total amount of Class A Common Shares outstanding, provided that
any acquisition after such change which resulted in any person or group owning
10% or more of the Class A Common Shares (excluding in the case of the numerator
but not the denominator of the calculation of such percentage, Class A Common
Shares held by such Significant Shareholder immediately after the Effective
Time) shall be subject to any Class B Protection Transaction requirement that
would be imposed with respect to a Significant Shareholder pursuant to this
subparagraph B(5) of Article IV.

(g) All calculations with respect to percentage ownership of issued and
outstanding shares of either class of Common Shares will be based upon the
numbers of issued and outstanding shares reported by the Corporation on the last
to be filed of (i) the Corporation's most recent annual report on Form 10-K,
(ii) its most recent Quarterly Report on Form 10-Q, or (iii) its most recent
Current Report on Form 8-K.

(h) For purposes of this subparagraph B(5) of this Article IV, the term
"person means a natural person, corporation, partnership, trust, association,
government, or political subdivision, agency or instrumentality of a government,
or other entity. "Beneficial ownership" shall be determined pursuant to Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or any successor regulation. The formation or existence of a
"group" shall be determined pursuant to Rule 13d-5(b) under the 1934 Act or any
successor regulation.

6. MERGER OR CONSOLIDATION. In the event of a merger or consolidation of
the Corporation with or into another entity (whether or not the Corporation is
the surviving entity), the holders of Class B Common Shares shall be entitled to
receive the same per share consideration as the per share consideration, if any,
received by any holder of the Class A Common Shares in such merger or
consolidation; provided, however, that this restriction shall not apply to the
PacifiCare Merger.

7. SPLITS, SUBDIVISIONS, ETC. If the Corporation shall in any manner
split, subdivide or combine the outstanding Class A Common Shares or Class B
Common Shares, the outstanding shares of the other such class of Common Shares
shall be proportionally subdivided or combined in the same manner and on the
same basis as the outstanding shares of the other class of Common Shares have
been split, subdivided or combined.

8. NO PREEMPTIVE RIGHTS. No holder of Class A Common Shares or Class B
Common Shares shall, by reason of such holding, have any preemptive right to
subscribe to any additional issue of stock of any class or series of the
Corporation or to any security of the Corporation convertible into such stock.

9. CONSIDERATION FOR SALE FOR SHARES. The Board of Directors shall have
the power to issue and sell all or any part of any class of stock herein or
hereafter authorized to such persons, firms, associations or corporations, and
for such consideration as the Board of Directors shall from time to time, in its
discretion, determine, whether or not greater consideration could be received
upon the issue or sale of the same number of shares of another class, and as
otherwise permitted by law.

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10. CONSIDERATION FOR PURCHASE OF SHARES. The Board of Directors shall
have the power to purchase any class of stock herein or hereafter authorized
from such persons, firms, associations or corporations, and for such
consideration as the Board of Directors shall from time to time, in its
discretion, determine, whether or not less consideration could be paid upon the
purchase of the same number of shares of another class, and as otherwise
permitted by law.

C. The Preferred Shares may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Shares Designation") pursuant to the Delaware General Corporation
Law, to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restriction of any wholly unissued series of Preferred Shares, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. The Board of Directors shall designate each series
to distinguish it from other series and classes of stock of the Corporation,
shall specify the number of shares to be included in the series, and shall fix
the terms, rights, restrictions and qualifications of the shares of the series,
including any preferences, voting powers, dividend rights and redemption,
sinking fund and conversion rights. Subject to the express terms of any other
series of Preferred Shares outstanding at the time, the Board of Directors may
increase or decrease the number of shares or alter the designation or classify
or reclassify any unissued shares of a particular series of Preferred Stock by
fixing or altering in any one or more respects from time to time before issuing
the shares, any terms, rights, restrictions and qualifications of the shares. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series. The Board of Directors shall have the power
to purchase any of the Preferred Shares herein or hereafter authorized from such
persons, firms, or corporations, and for such consideration as the Board of
Directors shall from time to time, in its discretion, determine, whether or not
less consideration could be paid upon the purchase of the same number of shares
of another class, and as otherwise permitted by law.

There shall be a series of Preferred Stock designated "Series A Cumulative
Convertible Preferred Shares" (the "Convertible Preferred Shares") which shall
have the powers, preferences and rights as follows:

1. RANK. The Convertible Preferred Shares shall have a par value of $1.00
per share. The Convertible Preferred Shares will rank, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, (i) senior to all
classes of common stock of the Corporation, as they exist on the date hereof or
as such stock may be constituted from time to time, and each other class or
series of capital stock or preferred stock established by the Board of Directors
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on a parity with the Convertible Preferred Shares as to dividend
rights and rights on liquidation, winding-up and dissolution (collectively,
together with the Common Shares, the "Junior Securities"), (ii) on a parity with
each other class or series of capital stock or of preferred stock issued by the
Corporation established by the Board of Directors to the extent the terms of
such stock expressly provide that it will rank on a parity with the Convertible
Preferred Shares as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively, the "Parity Securities"), and (iii) junior to each
other class of capital stock or series of preferred stock established by the
Board to the extent the terms of such stock expressly provide that it will rank
senior to the Convertible Preferred Shares as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Senior Securities").
Each share of the Convertible Preferred Shares shall rank equally in all respect
with each other share of the Convertible Preferred Shares.

2. AUTHORIZED NUMBER. The authorized number of shares constituting the
Convertible Preferred Shares shall be 11,000,000 shares.

5
<PAGE>
3. DIVIDENDS. Holders of Convertible Preferred Shares will be entitled to
receive, when, as and if declared by the Board of Directors out of funds of the
Corporation legally available therefor, cash dividends at an annual rate of 4%
of the Stated Value per share of Convertible Preferred Shares, payable quarterly
in arrears on March 15, June 15, September 15, and December 15, of each year,
commencing , 199 [first dividend date following the Mergers], provided that the
dividend payable on , 199 [first dividend date following the Mergers]
shall be in an amount determined by assuming that the Convertible Preferred
Shares (a) had been outstanding on , 199 [the date immediately following
the last dividend payment date on the FHP Series A Cumulative Convertible
Preferred Stock] (the "Transition Period Commencement Date"), and (b) had been
entitled to receive, when, as and if declared by the Board of Directors out of
funds of the Corporation legally available therefor, cash dividends at an annual
rate of (i) 5% of an amount equal to twice the Stated Value per share from such
date through , 199 [the date of the Merger] (the "Effective Date") and
(ii) 4% of the Stated Value per share from , 199 [the date immediately
following the date of the Merger] through , 199 [the first dividend date
following the Merger]. Each dividend will be payable to holders of record as
they appear on the books of the Corporation at the close of business on a record
date, not more than 60 nor less than 15 days before the payment date, fixed by
the Board of Directors. Dividends will be cumulative from the date of original
issuance of the Convertible Preferred Shares, which will be the Effective Date,
provided that, for purposes of dividends payable on , 199 [the first
dividend payment date following the Mergers] in respect of the period from the
Transition Period Commencement Date through the Effective Date (the "Transition
Period"), the Transition Period Commencement Date will be treated as the
issuance date for the Convertible Preferred Shares. Except as otherwise provided
in this subparagraph 3, dividends for each full dividend period will be computed
by dividing the annual dividend rate by four and dividends payable for any
period less than a full dividend period, which may include, without limitation,
dividends payable with respect to the Transition Period, will be computed on the
basis of a 360-day year consisting of twelve 30-day months. The Convertible
Preferred Shares will not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends. No interest, or sum
of money in lieu of interest, will be payable in respect of any accrued and
unpaid dividends. No full dividends may be declared or paid or funds set apart
for the payment of dividends on any Parity Securities (except dividends on
Parity Securities paid in shares of Junior Securities) for any period unless
full cumulative dividends to be paid hereunder prior to the date thereof shall
have been paid, or contemporaneously are declared and paid, or declared and a
sum sufficient for payment thereof is set apart for such payment on the
Convertible Preferred Shares in accordance with the terms hereof. If full
dividends are not so paid, the Convertible Preferred Shares shall share
dividends PRO RATA with the Parity Securities according to the amount of
dividends due and payable with respect to each. No dividends may be paid or set
apart for such payment, or other distributions made on Junior Securities (except
dividends on Junior Securities paid in additional shares of Junior Securities),
and no Convertible Preferred Shares, Parity Securities or Junior Securities may
be repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, nor shall the Corporation permit any corporation
or entity directly or indirectly controlled by the Corporation to purchase any
Convertible Preferred Shares, Parity Securities or Junior Securities, if full
cumulative dividends to be paid hereunder prior to the date thereof have not
been paid on the Convertible Preferred Shares. Notwithstanding the foregoing,
the Corporation may (i) make redemptions, purchases or other acquisitions of
Convertible Preferred Shares, Parity Securities or Junior Securities payable in
Junior Securities or repurchases of Convertible Preferred Shares, Parity
Securities or Junior Securities in the ordinary course of business pursuant to
the terms of any current or future employee stock incentive plan or similar plan
adopted by the Board and (ii) make redemptions of Rights (as defined in Section
6 below) distributed pursuant to a Rights Agreement (as defined in Section 6
below).

4. LIQUIDATION RIGHTS. The Stated Value of each share of Convertible
Preferred Shares shall be $25.00. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, after satisfaction of
the claims of creditors and any holders of Senior Securities and

6
<PAGE>
before any payment or distribution of assets is made on any Junior Securities,
including, without limitation, the Common Shares, (i) the holders of Convertible
Preferred Shares shall receive a liquidation preference equal to the Stated
Value of their shares, and shall be entitled to receive an amount equal to all
accrued and unpaid dividends through the date of distribution (whether or not
declared), and (ii) the holders of any Parity Securities shall be entitled to
receive an amount equal to the full respective liquidation preferences
(including any premium) to which they are entitled and shall receive an amount
equal to all accrued and unpaid dividends with respect to their respective
shares through and including the date of distribution (whether or not declared).
If, upon such a voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation, the assets of the Corporation are insufficient to pay in
full the amounts described above as payable with respect to the Convertible
Preferred Shares and any Parity Securities, the holders of the Convertible
Preferred Shares and such Parity Securities will share ratably in any
distribution of assets of the Corporation, first in proportion to their
respective liquidation preferences until such preferences are paid in full, and
then in proportion to their respective amounts of accrued but unpaid dividends.
After payment of any such liquidation preference and accrued but unpaid
dividends, the Convertible Preferred Shares will not be entitled to any further
participation in any distribution of assets by the Corporation. Neither the sale
or transfer of all or any part of the assets of the Corporation for cash,
securities or other property, nor the merger or consolidation of the Corporation
into or with any other corporation or a merger of any other corporation with or
into the Corporation, will be deemed to be a liquidation, dissolution or
winding-up of the Corporation.

5. VOTING RIGHTS.

(a) Except as provided below or as may be required by Delaware law or
provided by the resolution creating any other series of Preferred Shares, the
holders of Convertible Preferred Shares will not be entitled to vote. So long as
any shares of Convertible Preferred Shares are outstanding, the vote or consent
of the holders of 66 2/3% of the outstanding shares of Convertible Preferred
Shares, voting together as a single class, shall be necessary to (i) increase or
decrease the par value of the shares of Convertible Preferred Shares or (ii)
alter or change the powers, preferences, or special rights of the shares of
Convertible Preferred Shares so as to affect them adversely or (iii) authorize
or issue any additional class or series of Parity Securities or Senior
Securities, or any security convertible into Parity Securities or Senior
Securities.

(b) (i) In the event that any accrued dividends (whether or not declared)
on the Convertible Preferred Shares shall not have been paid in an aggregate
amount equal to or greater than six quarterly dividends, the maximum authorized
number of directors of the Corporation will be automatically increased by two,
and holders of Convertible Preferred Shares shall be entitled to vote their
shares of Convertible Preferred Shares, together with the holders of any Parity
Securities upon which like voting rights have been conferred and are exercisable
(the "Voting Parity Securities"), in accordance with the procedures set forth
below, to elect, as a class, an additional two directors. So long as any shares
of Convertible Preferred Shares shall be outstanding, the holders of shares of
Convertible Preferred Shares shall retain the right to vote and elect, with the
holders of such Voting Parity Securities, as a class, two directors until all
accrued but unpaid dividends on the Convertible Preferred Shares are paid in
full or declared and set aside for payment. The period during which holders of
Convertible Preferred Shares retain such right is referred to as a "Default
Period".

(ii) So long as any shares of Convertible Preferred Shares shall be
outstanding, during any Default Period, the voting right described in
subsection (i) above may be exercised initially at a special meeting called
pursuant to subsection (iii) below or at any annual meeting of stockholders.
The absence of a quorum of holders of Common Shares (or any class thereof)
shall not affect the exercise of such voting rights by the holders of
Convertible Preferred Shares and Voting Parity Securities. Holders of
Convertible Preferred Shares and Voting Parity Securities shall be entitled,
as among the class of holders of Convertible Preferred Shares and Voting
Parity Securities, to one vote for each $25.00 of liquidation preference
represented by the shares so held.

7
<PAGE>
(iii) Unless the holders of Convertible Preferred Shares and Voting
Parity Securities, if any are then outstanding, have, during an existing
Default Period, previously exercised their right to elect directors, the
Board may, and upon the request of the holders of record of not less than
10% of the aggregate liquidation preference of Convertible Preferred Shares
and Voting Parity Securities, the Board shall, order the calling of a
special meeting of holders of Convertible Preferred Shares and Voting Parity
Securities, if any are then outstanding, which meeting shall thereupon be
called by the Chairman of the Board, the President, a Vice President or the
Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Convertible Preferred Shares and Voting Parity
Securities are entitled to vote pursuant to this subsection (iii) shall be
given to each holder of record of Convertible Preferred Shares by mailing a
copy of such notice to such holder at such holder's last address as it
appears on the books of the Corporation. Such meeting shall be called for a
date not later than 90 days after such order or request, or, in default of
the calling of such meeting within 90 days after such order or request, such
meeting may be called on similar notice by any stockholder or stockholders
owning in the aggregate not less than 10% of the aggregate liquidation
preference of the Convertible Preferred Shares and Voting Parity Securities.
Notwithstanding the provisions of this subsection (iii), the Corporation
shall not be required to call such a special meeting if such request is
received less then 120 days before the date fixed for the next ensuing
annual meeting of stockholders of the Corporation, at which meeting such
newly created directorships shall be filled by vote of the holders of
Convertible Preferred Shares and Voting Parity Securities.

(iv) During any Default Period, the holders of Class A Common Shares, and
other classes of stock of the Corporation, if applicable, shall continue to
be entitled to elect all of the Directors unless and until the holders of
Convertible Preferred Shares and Voting Parity Securities shall have
exercised their right to elect two Directors voting as a class. After the
exercise of this right (x) the Directors so elected by the holders of
Convertible Preferred Shares and Voting Parity Securities shall continue in
office until the earlier of (A) such time as their successors shall have
been elected by such holders and (B) the expiration of the Default Period,
and (y) any vacancy in the Board of Directors with respect to a Directorship
to be elected pursuant to this subparagraph (b) by the holders of
Convertible Preferred Shares and Voting Parity Securities may be filled by
vote of the remaining Director previously elected by such holders.
References in this subsection (b) to Directors elected by the holders of a
particular class of stock shall include Directors elected by such Directors
to fill vacancies as provided in clause (y) of the foregoing sentence.

(v) Immediately upon the expiration of a Default Period, (x) the right
of the holders of Convertible Preferred Shares to elect Directors pursuant
to this subparagraph (b) shall cease, subject to continuing application of
subparagraph (b)(i) upon each and every subsequent reoccurrence of the event
described therein, (y) the term of any Directors elected by the holders of
Convertible Preferred Shares and Voting Parity Securities pursuant to this
subparagraph (b) shall terminate, and (z) the number of Directors shall be
such number as may be provided for in the Certificate of Incorporation or
bylaws irrespective of any increase made pursuant to subsection (i) of this
subparagraph (b) (such number being subject, however, to subsequent change
in any manner provided by law or in the Certificate of Incorporation or
bylaws).

6. CONVERSION.

(a) RIGHT TO CONVERT. Each share of Convertible Preferred Shares will be
convertible (the rights to convert described in this subsection (a) are referred
to as the "Conversion Rights") at the option of the holder thereof, into such
number of fully paid and non-assessable shares of Class B Common Shares
(together with any Rights (as defined in subsection (b)(iii) below) associated
therewith) as is equal to (A) the sum of (i) twice the Stated Value of the
Convertible Preferred Shares plus (ii) accrued but unpaid dividends in arrears
thereon to which the holder converting such shares is entitled, divided

8
<PAGE>
by (B) the Conversion Price then in effect. The initial "Conversion Price" for
the Convertible Preferred Shares shall be $[ (1)] and shall be subject to
adjustment as described below. The holders of Convertible Preferred Shares at
the close of business on a dividend payment record date shall be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date notwithstanding the conversion of such Convertible Preferred Shares
or the Corporation's default on payment of the dividend due on such dividend
payment date. However, shares of Convertible Preferred Shares surrendered for
conversion during the period from the close of business on any record date for
the payment of dividends on such shares to the opening of business on the
corresponding dividend payment date (except shares called for redemption to
occur during the period from the record date to the close of business on the
payment date pursuant to Section 7 below) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such dividend payment
date. A holder of Convertible Preferred Shares on a dividend payment record date
who (or whose transferee) tenders shares of Convertible Preferred Shares on a
dividend payment date will be entitled to receive the dividend payable on such
shares by the Corporation on such date, and such converting holder need not
include payment in the amount of such dividend upon surrender of shares of
Convertible Preferred Shares for conversion. Except as provided above, no
payment or adjustment will be made on account of accrued or unpaid dividends
upon the conversion of shares of Convertible Preferred Shares. Shares of
Convertible Preferred Shares called for redemption will not be convertible after
the close of business on the day preceding the date fixed for redemption, unless
the Corporation defaults in payment of the redemption price.

(b) ANTI-DILUTION PROVISIONS. The Conversion Price is subject to
adjustment after the issuance of the Convertible Preferred Shares from time to
time as follows:

(i) In case the Corporation shall (1) pay a dividend or make a
distribution on Common Shares in shares of Common Shares, (2) subdivide its
outstanding shares of Common Shares into a greater number of shares or (3)
combine its outstanding shares of any class of Common Shares into a smaller
number of shares, the Conversion Price in effect immediately prior to such
action shall be adjusted (and any other appropriate action taken by the
Corporation) so that the holder of any Convertible Preferred Shares
thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Shares which such holder would have been entitled
to receive immediately following such action had the holder's Convertible
Preferred Shares been converted immediately prior thereto. An adjustment
made pursuant to this subsection (i) shall become effective immediately
(except as provided in subsection (vi) below) after the record date in the
case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination.

(ii) In case the Corporation shall issue rights, options or warrants to
all holders of its outstanding shares of Common Shares, or of its
outstanding shares of any class or series of Common Shares, entitling them,
for a period expiring within 45 days after the record date mentioned below,
to subscribe for or purchase shares of Common Shares at a price per share
less than the Current Market Price per share (as defined in subsection (v)
below) of such offered Common Shares on the record date mentioned below,
then the Conversion Price in effect immediately prior thereto shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the date of issuance of such
rights, options or warrants by a fraction of which

(1) the numerator shall be the sum of (A) the number of shares of
Common Shares outstanding on the date of issuance of such rights, options
or warrants immediately prior to such issuance plus (B) the number of
shares of such offered Common Shares which the aggregate offering price
of the total number of shares so offered would purchase at such

- ------------------------
(1) A price equal to the FHP existing conversion price of $31 per share times a
fraction, the numerator of which is $1.00 and the denominator of which is
the Final Exchange Ratio as defined in the Reorganization Agreement.

9
<PAGE>
Current Market Price (determined by multiplying such total number of
shares offered for subscription or purchase by the sum of the exercise
price of such rights, options or warrants plus the value of any
consideration per share paid to the Corporation for such rights, options
or warrants and dividing the product so obtained by such Current Market
Price), and

(2) the denominator shall be the sum of (A) the number of shares of
Common Shares outstanding on the date of issuance of such rights, options
or warrants immediately prior to such issuance plus (B) the number of
additional shares of Common Shares which are so offered for subscription
or purchase.

Such adjustment shall be made successively whenever any rights, options
or warrants are issued, and shall become effective immediately (except as
provided in subsection (vi) below) after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants; provided, however, in the event that all the shares of Common
Shares offered for subscription or purchase are not delivered upon the
exercise of such rights, options or warrants, upon the expiration of such
rights, options or warrants the Conversion Price shall be readjusted to the
Conversion Price which would have been in effect had the numerator and the
denominator of the foregoing fraction and the resulting adjustment been made
based upon the number of shares of Common Shares actually delivered upon the
exercise of such rights, options or warrants rather than upon the number of
shares of Common Shares offered for subscription or purchase. In determining
the value of any consideration received by the Corporation for such rights,
options or warrants, the determination of the Board of Directors in good
faith shall be conclusive and shall be described in a Board resolution.

(iii) Notwithstanding subsection (ii) above, any adjustments to the
Conversion Price to account for the issuance of rights ("Rights") under a
shareholder rights plan or agreement, "poison pill" or similar arrangement
(a "Rights Agreement") adopted subsequent to the date hereof shall be made
when such Rights become exercisable or exchangeable by the holder thereof
for Common Shares (Common Shares issued pursuant to the exercise of, or
exchange by the Corporation for, such Rights are referred to as "Rights
Stock") pursuant to a Rights Agreement at a price per share less than the
Current Market Price per share of such Common Shares on the date of such
exercise or exchange. The Conversion Price in effect immediately prior to
such exercise or exchange shall be adjusted so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
to the date of such exercise or exchange by a fraction of which

(1) the numerator shall be the sum of (A) the number of shares of
Common Shares of the type issued pursuant to the exercise of, or exchange
by the Corporation for, such Rights outstanding on the date of issuance
of such Rights Stock immediately prior to such issuance plus (B) the
number of shares of Common Shares of the type issued pursuant to the
exercise of, or exchange by the Corporation for, such Rights which the
aggregate consideration received for the total number of shares of Rights
Stock so issued would purchase at such Current Market Price (determined
by multiplying such total number of shares of Rights Stock by the
consideration received per share of such Rights Stock and dividing the
product so obtained by such Current Market Price), and

(2) the denominator shall be the sum of (A) the number of shares of
Common Shares of the type issued pursuant to the exercise of, or exchange
by the Corporation for, such Rights outstanding on the date of issuance
of such Rights Stock immediately prior to such issuance plus (B) the
number of additional shares of Rights Stock which are so issued.

Such adjustment shall be made successively whenever any Rights Stock is
issued, and shall become effective immediately (except as provided in
subsection (vi) below) after the issuance of Rights Stock. If after the
applicable "Distribution Date" or a similar date (as defined in a Rights
Agreement) holders converting shares of Convertible Preferred Shares are,
for any reason, not entitled to receive the Rights or similar rights,
options or warrants which would otherwise be attributable (but for the date
of conversion) to the shares of Common Shares received upon such

10
<PAGE>
conversion), then a reducing adjustment shall be made in the Conversion
Price to reflect the fair market value of the Rights or similar rights,
options or warrants. If such an adjustment is made and the Rights or similar
rights, options or warrants are later exchanged, redeemed, invalidated or
terminated, then a corresponding reversing adjustment shall be made to the
Conversion Price, on an equitable basis, to take account of such event.
However, the Corporation may elect to provide that such shares of Common
Shares issuable upon conversion of the Convertible Preferred Shares, whether
or not issued after the Distribution Date or such similar date for such
Rights, will be accompanied by the Rights which would otherwise be
attributable (but for the date of conversion to such shares of Common
Shares, in which event the preceding two sentences shall not apply).

(iv) In case the Corporation shall distribute to substantially all
holders of Common Shares, or to substantially all holders of its outstanding
shares of any class or series of Common Shares, evidences of indebtedness,
equity securities (including equity interests in the Corporation's
subsidiaries) other than Common Shares or other assets (other than cash
dividends paid out of earned surplus of the Corporation or, if there shall
be no earned surplus, out of net profits for the fiscal year in which the
dividend is made and/or the preceding fiscal year), or shall distribute to
substantially all holders of Common Shares or to substantially all holders
of any class or series of Common Shares, rights, options or warrants to
subscribe to securities (other than any rights, options or warrants referred
to in subsection (ii) above or Rights referred to in subparagraph (iii)
above), then in each such case the Conversion Price shall be adjusted so
that it shall equal the price determined by multiplying the Conversion Price
in effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the Current Market Price per share of the
Common Shares (as determined below) on the record date mentioned below less
the quotient of the then fair market value of the assets, evidences of
indebtedness and equity securities so distributed, or of such subscription
rights, warrants or options, divided by the number of shares of Common
Shares outstanding on such record date, and of which the denominator shall
be such Current Market Price of the Common Shares. For the purposes of this
subsection (iv), in the event of a distribution of shares of capital stock
or other securities of any subsidiary of the Corporation as a dividend on
shares of Common Shares, the "then fair market value" of the shares or other
securities so distributed shall be the value of such shares or other
securities on the record date mentioned below as determined by the Board of
Directors, whose good faith determination shall be conclusive evidence of
such value, and shall be described in a Board resolution. Such adjustment
shall become effective immediately (except as provided in subsection (vi)
below) after the record date for the determination of stockholders entitled
to receive such distribution.

(v) For the purpose of any computation under subsection (ii), (iii) or
(iv) above, the "Current Market Price" per share of stock on any date shall
be (A) deemed to be the average of the last sale prices of a share of such
shares for the fifteen consecutive trading days commencing 20 trading days
before the earliest of the date in question and the date before the "ex
date" with respect to the issuance or distribution requiring such
computation, or (B) in each case where the Current Market Price per share is
to be determined with respect to the two classes or series of Common Shares
considered together, deemed to equal the quotient of (i) the sum of (a) AvgA
multiplied by Na and (b) AvgB multiplied by Nb, divided by (ii) Nt, where

<TABLE>
<S> <C> <C>
AvgA = the average of the last sale prices of a share of Class A Common
Shares for the fifteen consecutive trading days commencing 20
trading days before the earliest of the date in question and the
date before the "ex date" with respect to the issuance or
distribution requiring such computation,

AvgB = the average of the last sale prices of a share of Class B Common
Shares for the fifteen consecutive trading days commencing 20
trading days before the earliest of the date in question and the
date before the "ex date" with respect to the issuance or
distribution requiring such computation,
</TABLE>

11
<PAGE>
<TABLE>
<S> <C> <C>
Na = the average number of shares of Class A Common Shares outstanding
during the fifteen consecutive trading days commencing 20 trading
days before the earliest of the date in question and the date before
the "ex date" with respect to the issuance or distribution requiring
such computation,

Nb = the average number of shares of Class B Common Shares outstanding
during the fifteen consecutive trading days commencing 20 trading
days before the earliest of the date in question and the date before
the "ex date" with respect to the issuance or distribution requiring
such computation, and

Nt = the sum of Na and Nb.
</TABLE>

For purposes of this subsection (v), the term "ex date," when used with
respect to any issuance or distribution, means the first date on which the
stock trades regular way on the principal national securities exchange on
which the stock is listed or admitted to trading (or if not so listed or
admitted, on Nasdaq, or a similar organization if Nasdaq is no longer
reporting trading information) without the right to receive such issuance or
distribution.

(vi) In any case in which this Section shall require that an adjustment
be made immediately following a record date or immediately following the
exercise of, or exchange of a right, option or warrant, the Corporation may
elect to defer the effectiveness of such adjustment (but in no event until a
date later then the later of the "ex date" as defined above and the
effective date of the event giving rise to such adjustment), in which case
the Corporation shall, with respect to any Convertible Preferred Shares
converted after the date of such exercise or exchange or such record date,
as the case may be, and before such adjustment shall have become effective
(1) defer making any cash payment or issuing to the holder of such
Convertible Preferred Shares the number of shares of Common Shares and other
capital stock of the Corporation issuable upon such conversion in excess of
the number of shares of Common Shares and other capital stock of the
Corporation issuable thereupon only on the basis of the Conversion Price
prior to adjustment, and (2) not later than five business days after such
adjustment shall have become effective, pay to such holder the appropriate
cash payment and issue to such holder the additional shares of Common Shares
and other capital stock of the Corporation issuable on such conversion.

(vii) No adjustment in the Conversion Price shall be required if the
holders of Convertible Preferred Shares are to participate in the
transaction on a basis and with notice that the Board of Directors
determines in good faith to be fair and appropriate in light of the basis
and notice on which holders of Common Shares participate in the transaction.
In addition, no adjustment in the Conversion Price shall be required unless
such adjustment (plus any adjustments not previously made by reason of this
subsection (vii)) would require an increase or decrease of at least 1% in
the Conversion Price; provided, that any adjustments which by reason of this
subsection (vii) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section shall be made to the nearest cent or to the nearest one-hundredth of
a share, as the case may be.

(viii) Whenever the Conversion Price is adjusted as provided above:

(1) the Corporation shall compute the adjusted Conversion Price and
shall promptly file with the stock transfer or conversion agent, as
appropriate, for the Convertible Preferred Shares, a certificate signed
by a principal financial officer of the Corporation setting forth the
adjusted Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based and the computation thereof; and

(2) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall, as soon as
practicable, be sent by first-class mail to the holders of record of the
Convertible Preferred Shares.

12
<PAGE>
In case:

(A) the Corporation shall take any action which would require an
adjustment to the Conversion Price pursuant to subsection (iv) above;

(B) the Corporation shall authorize the granting to the holders
of its Common Shares of rights, options or warrants entitling them to
subscribe for or purchase any shares of capital stock of any class or
of any other rights;

(C) of any reorganization or reclassification of the Common
Shares or any class or series of Common Shares (other than a
subdivision or combination of its outstanding Common Shares), or of
any consolidation or merger to which the Corporation is a party and
for which approval of any stockholders of the Corporation is
required, or of the sale, lease or transfer of all or substantially
all the assets of the Corporation; or

(D) of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation;

then the Corporation shall cause to be mailed to the stock transfer or
conversion agent, as appropriate, for the Convertible Preferred Shares
and to the holders of record of Convertible Preferred Shares, at least 20
days (for 10 days in any case described in subsections (A) or (B) above)
prior to the applicable record date or effective date specified below, a
notice stating (x) the date as of which the holders of record of Common
Shares to be entitled in such dividend, distribution, rights, options or
warrants are to be determined, or (y) the date on which such
reorganization, reclassification, consolidation, merger, sale, lease,
transfer, liquidation, dissolution or winding-up is expected to become
effective, and the date or dates as of which it is expected that holders
of record of Common Shares shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such
reorganization, reclassification, consolidation, merger, sale, lease,
transfer, liquidation, dissolution or winding-up. Neither the failure to
give the notice required by this subsection (viii), nor any defect
therein, to any particular holder shall affect the sufficiency of the
notice or the legality or validity of any such dividend, distribution,
right, option, warrant, reorganization, reclassification, consolidation,
merger, sale, lease, transfer, liquidation, dissolution or winding-up, or
the vote authorizing any such action with respect to the other holders.

(ix) To the extent permitted by law, the Corporation from time to time
may reduce the Conversion Price by any amount for any period of at least 20
days (or such other period as may then be required by applicable law) if the
Board of Directors has made a determination in good faith that such
reduction would be in the best interests of the Corporation, which
determination shall be conclusive. No reduction in the Conversion Price
pursuant to this subsection (ix) shall become effective unless the
Corporation shall have mailed a notice, at least 15 days prior to the date
on which such reduction is scheduled to become effective, to each holder of
Convertible Preferred Shares. Such notice shall be given by first-class
mail, postage prepaid, at such holder's address as it appears on the books
of the Corporation. Such notice shall state the amount per share by which
the Conversion Price will be reduced and the period for which such reduction
will be in effect.

(x) At its option, the Corporation may make such reduction in the
Conversion Price, in addition to those otherwise required by this Section 6,
as the Board deems advisable to avoid or diminish any income tax to holders
of Common Shares resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes; provided that any such reduction shall not be effective until
written evidence of the action of the Board of Directors authorizing such
reduction shall be filed with the Secretary of the Corporation and notice
thereof shall have been given by first-class mail, postage prepaid, to each
holder of Convertible Preferred Shares at such holder's address as it
appears on the books of the Corporation.

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<PAGE>
(c) CONSOLIDATION, MERGER OR SALE OF ASSETS. If any transaction shall
occur, including without limitation (i) any recapitalization or reclassification
of shares of Common Shares or any class or series of Common Shares (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination of the Common Shares),
(ii) any consolidation or merger of the Corporation with or into another person
or any merger of another person into the Corporation (other than a merger in
which the Corporation is the surviving corporation and that does not result in a
reclassification, conversion, exchange or cancellation of Common Shares, or any
class or series of Common Shares), (iii) any sale, lease or transfer of all or
substantially all of the assets of the Corporation, (iv) any compulsory share
exchange, or (v) any conversion of all of the outstanding Class B Common Shares
into Class A Common Shares, pursuant to any of which holders of Class B Common
Shares shall be entitled to receive other securities, cash or other property,
then appropriate provision shall be made so that the holder of each share of
Convertible Preferred Shares then outstanding shall have the right thereafter to
receive on account of such share only the kind and amount of the securities,
cash or other property that would have been receivable upon such
recapitalization, reclassification, consolidation, merger, sale, lease,
transfer, share exchange or conversion by a holder of the number of shares of
Class B Common Shares issuable upon conversion of such share of Convertible
Preferred Shares immediately prior to such recapitalization, reclassification,
consolidation, merger, sale, lease, transfer or share exchange, and the
Corporation shall not enter into any such merger, consolidation, sale, lease,
transfer or share exchange unless the company formed by such consolidation or
resulting from such merger or that acquires such assets or that acquires the
Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document or
certificate of merger or other document effecting any such merger,
consolidation, sale, lease, transfer or share exchange to establish such right.
Upon the occurrence of any transaction described in the preceding sentence
(except clause (i) thereof), the Convertible Preferred Shares then outstanding
shall be deemed converted, subject nevertheless to the provisions of Section 8
to the extent applicable.

(d) ACCRUED DIVIDENDS AND FRACTIONAL SHARES. Dividends shall cease to
accrue on shares of the Convertible Preferred Shares surrendered for conversion
into Class B Common Shares pursuant to this Section or Section 8 below. No
fractional shares of Class B Common Shares shall be issued upon conversion of
the Convertible Preferred Shares, and any portion of Convertible Preferred
Shares surrendered for conversion which would otherwise result in a fractional
share of Class B Common Shares shall be redeemed for cash in an amount equal to
the product of such fraction multiplied by the closing price of the Class B
Common Shares on the last business day prior to conversion.

(e) MECHANICS OF CONVERSION. Before any holder of Convertible Preferred
Shares shall be entitled to convert such stock into shares of Class B Common
Shares and to receive certificates therefor, such holder shall surrender the
certificate or certificates for the Convertible Preferred Shares to be
converted, duly endorsed, at the office of the Corporation or of any transfer
agent for the Convertible Preferred Shares, and shall give written notice to the
Corporation at such office that such holder elects to convert the same. The
Corporation shall, within 10 days after such delivery, issue and deliver at such
office to such holder of the Convertible Preferred Shares (or to any other
person specified in the notice delivered by such holder) a certificate or
certificates for the number of shares of Class B Common Shares to which such
holder shall be entitled as aforesaid and a check payable to the holder for any
cash amounts payable as the result of a conversion into fractional shares of
Class B Common Shares. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Convertible Preferred Shares to be converted, and the Person or
persons entitled to receive the shares of Class B Common Shares issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Class B Common Shares on such date. In case any
certificate for shares of the Convertible Preferred Shares shall be surrendered
for conversion of only a part of the shares represented thereby, the Corporation
shall deliver within 10 days at such office to or upon the written order of the
holder thereof, a certificate or certificates for the number of shares of
Convertible Preferred Shares represented by such surrendered certificate which
are not being converted. Notwithstanding the foregoing, the

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<PAGE>
Corporation shall not be obligated to issue certificates evidencing the shares
of Class B Common Shares issuable upon such conversion unless the certificates
evidencing the Convertible Preferred Shares are either delivered to the
Corporation or its transfer agent or the Corporation or its transfer agent shall
have received evidence satisfactory to it evidencing that such certificates have
been lost, stolen or destroyed and the holder of such Convertible Preferred
Shares executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The issuance of certificates of shares of Class B Common Shares issuable upon
conversion of shares of Convertible Preferred Shares shall be made without
charge to the converting holder for any tax imposed in respect of the issuance
thereof; provided that the Corporation shall not be required to pay any tax
which may be payable with respect to any transfer involved in the issue and
delivery of any certificate in a name other than that of the holder of the
shares of Convertible Preferred Shares being converted.

(f) ADOPTION OF RIGHTS AGREEMENT. The Corporation shall not adopt a Rights
Agreement unless such Rights Agreement shall provide that (i) each holder of a
share of Convertible Preferred Shares shall be entitled to receive thereunder,
upon conversion of such share of Convertible Preferred Shares (in accordance
with the terms hereof), prior to the earlier to occur of the date of redemption
of Rights issued under such Rights Agreement, the date of expiration of the
Rights issued under such Rights Agreement, or the date the Conversion Price of
the Convertible Preferred Shares is adjusted pursuant to subsection 6(b)(iii)
above rights for each share of Common Shares issued upon conversion of such
share of Convertible Preferred Shares in an amount equal to the amount of Rights
issued with respect to each outstanding share of Common Shares issued rights
pursuant to such Rights Agreement and (ii) if such Rights are redeemed prior to
the conversion of any share of Convertible Preferred Shares into Common Shares,
then, upon conversion of such share of Convertible Preferred Shares, the holder
thereof shall receive an amount in cash equal to the amount in cash that such
holder would have received had he converted such share of Convertible Preferred
Shares prior to such redemption.

7. OPTIONAL REDEMPTION. On or after June 17, 1998, the Corporation may, at
its option, redeem all or from time to time any part of the shares of
Convertible Preferred Shares, out of funds legally available therefor, upon
giving a notice of redemption as set forth below, at the following redemption
prices per share (expressed as percentages of the Stated Value thereof), plus an
amount equal to accrued and unpaid dividends, if any (whether or not declared),
up to but excluding the date fixed for redemption, if redeemed during the
twelve-month period commencing on June 17, 1998 of the years indicated below:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -------------
<S> <C>
1998................................................................... 103.0%
1999................................................................... 102.5%
2000................................................................... 102.0%
2001................................................................... 101.5%
2002................................................................... 101.0%
2003................................................................... 100.5%
2004................................................................... 100.0%
</TABLE>

If fewer than all of the outstanding shares of the Convertible Preferred
Shares are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors in good faith and the shares to be redeemed
will be determined pro rata as nearly as practicable, or by such other method as
the Board of Directors may determine to be fair and appropriate. Convertible
Preferred Shares may not be redeemed unless full cumulative dividends have been
paid on the Convertible Preferred Shares for all past dividend periods.

Notice of redemption of Convertible Preferred Shares will be given by (i)
first-class mail, not less than 30 nor more than 60 days prior to the date fixed
for redemption thereof, to each record holder of shares of Convertible Preferred
Shares to be redeemed at the address of such holder in the books of the
Corporation and (ii) publication in THE WALL STREET JOURNAL. On the date such
notices are

15
<PAGE>
mailed, the Corporation shall issue a press release announcing the redemption.
The mailed and published notice shall state, as appropriate: (1) the redemption
date and record date for purposes of such redemption; (2) the number of shares
of Convertible Preferred Shares to be redeemed and, if fewer than all
outstanding shares of Convertible Preferred Shares held by any holder are to be
redeemed, the number of shares to be redeemed from such holder; (3) the place or
places at which certificates for such shares are to be surrendered; (4) the then
current redemption price; and (5) that dividends on the Convertible Preferred
Shares to be redeemed shall cease to accrue on such Redemption Date, except as
otherwise provided herein. If such notice of redemption has been given, from and
after the specified redemption date (unless the Corporation defaults in making
payment of the redemption price), dividends on the Convertible Preferred Shares
so called for redemption will cease to accrue, such shares will no longer be
deemed to be outstanding, and all rights of the holders thereof as stockholders
of the Corporation (except the right to receive the redemption price and any
dividends due on a dividend payment date after the redemption date relating to a
dividend record date prior to such redemption date) will cease.

8. CHANGE IN CONTROL. If there occurs a Change in Control (as defined
below) with respect to the Corporation, then each share of Convertible Preferred
Shares may be converted (the rights to convert described in this Section
referred to as the "Special Conversion Rights"), at the option of the holder
thereof at any time from the date of such Change in Control until the expiration
of 60 days after the date of the Conversion Notice (as defined below) by the
Corporation to all holders of the Convertible Preferred Shares, into, at its
option, either (A) such number of fully paid and non-assessable shares of Class
B Common Shares as is equal to the Stated Value of the Convertible Preferred
Shares divided by the Special Conversion Price (as defined below) or (B) an
amount in cash equal to the Stated Value of the Convertible Preferred Shares
plus an amount equal to any accrued but unpaid dividends thereon. The "Special
Conversion Price" shall be the closing price of the Class B Common Shares on the
last trading day prior to the date the Corporation gives the Conversion Notice
(as defined below) to the holders of Convertible Preferred Shares.

Within five days after the occurrence of a Change in Control, the
Corporation shall give notice of the occurrence of the Change in Control and of
the Special Conversion Rights set forth herein in accordance with the procedures
set forth below to each holder of Convertible Preferred Shares (the "Conversion
Notice").

Each Conversion Notice shall state:

(a) that a Change in Control has occurred (and shall specify the date of
occurrence), and that the holder's Special Conversion Rights may be exercised in
accordance with this Section;

(b) the expiration date of the Special Conversion Rights;

(c) that a holder of Convertible Preferred Shares, in order to exercise
Special Conversion Rights, must deliver on or before the fifth day prior to the
expiration date of the Special Conversion Rights written notice to the
Corporation of the holder's exercise of those rights, together with the
certificate evidencing such holder's shares with respect to which the rights are
being exercised, duly endorsed for transfer;

(d) the Special Conversion Price and the Conversion Price which would
otherwise be applicable;

(e) a description of the procedure which a holder must follow to exercise
its Special Conversion Rights; and

(f) that holders of Convertible Preferred Shares electing to have such
shares converted will be required to surrender the certificates evidencing such
shares for delivery of shares of Class B Common Shares.

The Conversion Notice shall be given by first-class mail, postage paid, to
the holders of record of Convertible Preferred Shares at their respective
addresses as they appear on the books of the Corporation.

16
<PAGE>
No failure of the Corporation to give the Conversion Notice shall limit any
holder's right to exercise its Special Conversion Rights.

Exercise of the Special Conversion Rights by a holder of Convertible
Preferred Shares will be irrevocable. The Corporation shall not enter into any
consolidation, merger or sale of assets, unless in connection therewith the
holders of Convertible Preferred Shares exercising Special Conversion Rights
will be entitled to receive the same consideration as received for the number of
shares of Class B Common Shares into which their shares of Convertible Preferred
Shares would have been converted pursuant to the Special Conversion Rights. The
Special Conversion Rights are in addition to the regular Conversion Rights that
apply to the Convertible Preferred Shares.

The Corporation may, at its option, elect to pay holders of Convertible
Preferred Shares exercising Special Conversion Rights an amount in cash equal to
the Stated Value of the Convertible Preferred Shares plus an amount equal to any
accrued but unpaid dividends thereon.

"Change in Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of the Corporation's
assets as an entirety or substantially as an entirety to any person or "group"
(within the meaning of Section 13(d)(3) of the 1934 Act) in one or a series of
transactions, provided that a transaction where the holders of Common Shares
immediately prior to such transaction own, directly or indirectly, 50% or more
of the common stock of such person or group immediately after such transactions
shall not be a Change in Control; (ii) the acquisition by the Corporation and/or
any of its subsidiaries of 50% or more of the aggregate voting power of the
Common Shares in one transaction or a series of related transactions; (iii) the
liquidation or dissolution of the Corporation, provided that a liquidation or
dissolution of the Corporation which is part of a transaction or series of
related transactions that does not constitute a Change in Control under the
"provided" clause of clause (i) above shall not constitute a Change in Control
under this clause (iii); or (iv) any transaction or series of transactions (as a
result of a tender offer, merger, consolidation or otherwise) that results in,
or that is in connection with, (a) any person, including a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) that includes such person,
acquiring "beneficial ownership" (as defined in Rule 13d-3 under the 1934 Act),
directly or indirectly, of 50% or more of the aggregate voting power of the
Common Shares of the Corporation or any person that possesses "beneficial
ownership" (as defined in Rule 13d-3 under the 1934 Act), directly, of 50% or
more of the aggregate voting Power of the Common Shares, or (b) less than 50%
(measured by the aggregate voting power of all classes) of the Corporation's
Common Shares being registered under Section 12(b) or 12(g) of the 1934 Act.

9. STATUS OF REACQUIRED SHARES. If shares of Convertible Preferred Shares
are converted pursuant to Section 6 hereof or redeemed pursuant to Section 7
hereof, the shares so converted or redeemed shall, upon compliance with any
statutory requirements, assume the status of authorized but unissued shares of
preferred stock of the Corporation, but may not be reissued as Convertible
Preferred Shares.

10. RESERVED SHARES. So long as any shares of Convertible Preferred Shares
remain outstanding, the Corporation agrees to keep reserved for issuance in
connection with the conversion of the Convertible Preferred Shares at all times
a number of authorized but unissued shares of Class B Common Shares at least
equal to 150% of the number of shares of Class B Common Shares issuable upon
conversion at the Conversion Price of all of the Convertible Preferred Shares
outstanding at such time. The Corporation shall take all action necessary so
that Class B Common Shares so issued will be validly issued, fully paid and
non-assessable. The Corporation shall use its best efforts to list the Class B
Common Shares required to be delivered upon conversion of the shares of
Convertible Preferred Shares, prior to such conversion, upon each national
securities exchange, if any, upon which the outstanding Common Shares are listed
at the time of such delivery.

11. PREEMPTIVE RIGHTS. The Convertible Preferred Shares are not entitled
to any preemptive or subscription rights in respect of any securities of the
Corporation.

17
<PAGE>
12. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered by and when sent by telex or
telecopier (with receipt confirmed), provided a copy is also sent by express
(overnight, if possible) courier, addressed (i) in the case of a holder of
Convertible Preferred Shares, to such holder's address as it appears on the
books of the Corporation, and (ii) in the case of the Corporation, to the
Corporation's principal executive offices to the attention of the Corporation's
President,

13. SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this
paragraph C shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.

The number of Directors of the Corporation shall be twelve. The number of
Directors may hereafter be fixed from time to time by bylaw or amendment duly
adopted by the Board of Directors, provided, however, that the number of
Directors shall not be more than twelve nor less than five, except as otherwise
may be required to implement the provisions of paragraph C.5(b) of Article IV
hereof.

A. The Board of Directors shall be and is divided in to three classes,
Class I, Class II and Class III. The number of Directors in each class shall be
the whole number contained in the quotient arrived at by dividing the authorized
number of Directors by three, and if a fraction is also contained in such
quotient then if such fraction is one-third (1/3) the extra Director shall be a
member of Class I and if the fraction is two-thirds (2/3) one of the extra
Directors shall be a member of Class I and the other shall be a member of Class
II. Each Director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such Director was elected,
provided, however, that the Directors initially appointed to Class I shall serve
for a term ending on the date of the third annual meeting next following the
date hereof, the Directors initially appointed to Class II shall serve for a
term ending on the date of the second annual meeting next following the date
hereof, and the Directors initially appointed to Class III shall serve for a
term ending on the date of the first annual meeting next following the date
hereof.

B. In the event of any increase or decrease in the authorized number of
Directors, (1) each Director then serving as such shall nevertheless continue as
a Director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal, and (2) the newly
created or eliminated Directorships resulting from such increase shall be
apportioned by the Board of Directors to such class or classes as shall, so far
as possible, bring the number of Directors in the respective classes into
conformity with the formula in this Article, as applied to the new authorized
number of Directors.

C. Notwithstanding any of the foregoing provisions of this Article, each
Director shall serve until his successor is elected and qualified or until his
death, resignation or removal. A Director shall not be removed from office prior
to the expiration of his term except by the affirmative vote or written consent
of not less than sixty-six and two-thirds percent (66 2/3%) of the total votes
entitled to be cast in an election of Directors. Should a vacancy occur or be
created, the remaining Directors (even though less than a quorum) may fill the
vacancy for the full term of the class in which the vacancy occurs or is
created.

18
<PAGE>
VII

A. In addition to requirements of any applicable statute, the affirmative
vote or written consent of not less than 66 2/3% of the total votes entitled to
be cast in an election of Directors, considered for purposes of this Article as
one class, shall be required for approval or authorization of any Business
Transaction (as hereinafter defined) between the Corporation and any Control
Person (as hereinafter defined); provided, however, that such additional voting
requirement shall not be applicable if:

(1) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation prior to the acquisition by the
Control Person, together with its Affiliates and Associates (as hereinafter
defined), of stock of the Corporation, which, in the aggregate, bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors; or

(2) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation after the acquisition by the Control
Person, together with its Affiliates and Associates, of stock of the
Corporation, which, in the aggregate, bears the rights to 10% or more of the
total votes entitled to be cast in an election of Directors, and such
acquisition by such Control Person and its Affiliates and Associates was
unanimously approved by the Board of Directors of the Corporation; or

(3) The Business Transaction is solely between the Corporation and
another corporation, 50% or more of the voting stock of which is owned by
the Corporation and none of which is owned by a Control Person, and each
holder of stock of the Corporation receives the same type of consideration
in proportion to his holdings; or

(4) Both of the following are satisfied:

(a) the cash or fair market value of the property, securities or
other consideration to be received per share in the Business Transaction
by holders of the stock of the Corporation is not less than the higher of
(i) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other
expenses, including, but not limited to, newspaper advertisements,
printing and attorney's fees) paid by such Control Person in acquiring
any of its holdings of the Corporation's stock, or (ii) the highest per
share market price of the stock of the Corporation during the 3-month
period immediately preceding the date of the proxy statement described in
(c) below; and

(b) a proxy statement responsive to the requirements of the 1934 Act
shall be mailed to public stockholders of the Corporation for the purpose
of soliciting stockholder approval of such Business Transaction and shall
contain at the front thereof, in a prominent place, any recommendations
as to the advisability (or inadvisability) of the Business Transaction
which the Continuing Directors, or any of them, may choose to state, and,
if deemed advisable by a majority of the Continuing Directors, an opinion
of a reputable investment banking firm as to the fairness (or unfairness)
of the terms of such Business Transaction, from the point of view of the
remaining public stockholders of the Corporation (such investment banking
firm to be selected by a majority of the Continuing Directors and to be
paid a reasonable fee for their services by the Corporation upon receipt
of such opinion).

B. For the purposes of this Article:

(1) The term "Control Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
Affiliates and Associates, "beneficially owns" (as this term is defined on
the date on which this Article becomes effective in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the aggregate, stock of
the Corporation, which bears the rights to 10% or more of the total votes
entitled to be cast in an election of Directors, and any Affiliate or
Associate (as those terms are defined on the date of which this Article is
adopted in Rule 12b-2 of the General Rules and Regulations under the 1934
Act) of any such individual, corporation, partnership or other person or
entity;

19
<PAGE>
(2) The term "Business Transaction" shall mean (a) any merger or
consolidation of the Corporation with or into a Control Person, (b) any
sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any
Substantial Part (as hereinafter defined) of the assets of the Corporation
(including, without limitation, any voting securities of a subsidiary) or of
a subsidiary, to a Control Person, (c) any merger of consolidation of a
Control Person with or into the Corporation or a subsidiary of the
Corporation, (d) any sale, lease, exchange, transfer or other disposition of
all or any Substantial Part (as hereinafter defined) of the assets of a
Control Person to the Corporation or a subsidiary of the Corporation, (e)
the issuance of any securities of the Corporation or a subsidiary of the
Corporation to a Control Person, (f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Control Person, (g) any
reclassification or recapitalization (including any reverse stock split)
involving stock of the Corporation, consummated within five (5) years after
a Control Person becomes a Control Person, (h) any plan or proposal by a
Control Person for the dissolution or liquidation of the Corporation, and
(i) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Transaction;

(3) The term "Continuing Director" shall mean any Director who was
elected by the public stockholders of the Corporation prior to the
acquisition by the Control Person, together with its Affiliates and
Associates, in the aggregate, of stock of the Corporation, which bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors, or a person recommended by succeed a Continuing Director by a
majority of Continuing Directors;

(4) The term "Substantial Part" shall mean more than 10% of the total
assets of the Corporation in question as of the end of its most recent
fiscal year ending prior to the time that the termination is being made;

(5) Without limitation, any stock of the Corporation which any Control
Person has the right to acquire at any time pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise, shall
be deemed outstanding and beneficially owned by such Control Person for
purposes of this Article only;

(6) For the purpose of subparagraph 4 of paragraph A of this Article,
the phrase, "other consideration to be received" shall include, without
limitation, stock of the Corporation retained by its existing public
stockholders in the event of a Business Transaction with such Control Person
in which the Corporation is the surviving corporation.

C. The provisions set forth in this Article shall not be repealed or
amended in any respect or in any manner, including any merger of consolidation
of the Corporation with any corporation, unless the surviving corporation's
Certificate of Incorporation contains an Article to the same effect as this
Article, except by the affirmative vote or written consent of not less than
66 2/3% of the total votes entitled to be cast in an election of Directors
attributable to stock owned by persons other than a Control Person.

D. A majority of the Continuing Directors shall have the power and duty to
determine for purposes of this Article on the basis of information known to
them:

(1) Whether any proposed transaction is a Business Transaction and
within the scope of this Article;

(2) Whether a stockholder is a Control Person; and

(3) For the purposes of subparagraph 4 of paragraph A, the per share
market value to be paid to stockholders in the Business Transaction and the
highest per share price paid by the Control Person in acquiring any of its
holdings of the Corporation's stock.

20
<PAGE>
VIII

In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, alter or repeal the By-Laws
of the Corporation.

No Director shall be personally liable to the corporation or any stockholder
for monetary damages for breach of fiduciary duty as a director, except for any
matter in respect of which such director shall be liable under Section 174 of
Title 8 of the Delaware Code (relating to the Delaware General Corporation Law)
or any amendment thereto or successor provision thereto or shall be liable by
reason that, in addition to any and all other requirements for such liability,
he (i) shall have breached his duty of loyalty to the corporation or its
stockholders, (ii) shall not have acted in good faith, (iii) shall have acted in
a matter involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct or
a knowing violation of law or, (iv) shall have derived an improper personal
benefit. Neither the amendment nor repeal of this Article Nine, nor the adoption
of any provision of the Certificate of Incorporation inconsistent with this
Article Nine, shall eliminate or reduce the effect of this Article Nine in
respect of any matter occurring or any cause of action, suit or claim that, but
for this Article Nine would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.

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APPENDIX B

DILLON, READ & CO. INC.

535 Madison Avenue
New York, New York
10022
212-906-7000

August 30, 1996
The Board of Directors
PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, CA 90630

Gentlemen and Madame:

You have requested our opinion as to the fairness, from a financial point of
view, to PacifiCare Health Systems, Inc. ("PacifiCare") and the holders (the
"PacifiCare Stockholders") of Class A Common Stock and Class B Common Stock of
PacifiCare of the consideration to be paid to the holders (the "Company
Stockholders") of Common Stock and Series A Cumulative Convertible Preferred
Stock of FHP International Corporation (the "Company") in connection with the
proposed merger of Tree Acquisition Corp., a wholly-owned subsidiary of N-T
Holdings, Inc. ("Holdings"), into the Company (the "Company Merger") and the
merger of Neptune Merger Corp., a wholly-owned subsidiary of Holdings, into
PacifiCare (the "PacifiCare Merger" and, together with the Company Merger, the
"Mergers") as fully described in the draft, dated August 30, 1996, of the
Amended and Restated Agreement and Plan of Reorganization (the "Merger
Agreement") delivered to us by you.

The terms of the Mergers are set forth in the Merger Agreement and provide
that (a) in the Company Merger, (i) each share of Common Stock of the Company
outstanding at the effective time of the Merger (the "Effective Time") will be
converted into the right to receive (x) an amount of cash equal to $17.50, (y)
0.058 shares (subject to adjustment in accordance with the Merger Agreement) of
Class A Common Stock of Holdings and (z) 0.201 shares (subject to adjustment in
accordance with the Merger Agreement) of Class B Common Stock of Holdings, (ii)
in the event that the holders of a majority of the outstanding Common Stock of
the Company and the holders of 66 2/3% of the outstanding Series A Cumulative
Convertible Preferred Stock of the Company adopt and approve an amendment to the
Company's Restated and Amended Certificate of Incorporation as provided in the
Merger Agreement (the "Required Vote"), each share of Series A Cumulative
Convertible Preferred Stock of the Company outstanding at the Effective Time
will be converted into (y) an amount of cash equal to $14.113 and (z) one-half
of a share of a series of cumulative convertible preferred stock of Holdings and
(iii) in the event the Required Vote is not received, each share of Series A
Cumulative Convertible Preferred Stock of the Company shall have the "Special
Conversion Rights" described in the Company's Certificate of Designation with
respect to the Series A Cumulative Convertible Preferred Stock and the other
rights described in the Merger Agreement and (b) in the PacifiCare Merger, (i)
each share of Class A Common Stock of PacifiCare outstanding at the Effective
Time will be converted into the right to receive one share of Class A Common
Stock of Holdings and (ii) each share of Class B Common Stock of PacifiCare
outstanding at the Effective Time will be converted into the right to receive
one share of Class B Common Stock of Holdings.

Dillon, Read & Co. Inc. has acted as financial advisor to the Board of
Directors of PacifiCare in connection with the Mergers. In the ordinary course
of business, we have traded the debt and equity securities of PacifiCare and the
Company for our own account and the accounts of our customers and, accordingly,
may at any time hold a long or short position in such securities.

In arriving at our opinion, we have (i) reviewed the Amended and Restated
Agreement and Plan of Reorganization and the Amended and Restated Certificate of
Incorporation, (ii) reviewed certain business and historical financial
information relating to PacifiCare and the Company, (iii) reviewed certain
financial forecasts and other data provided to us by PacifiCare and the Company
relating to
<PAGE>
the business and prospects of PacifiCare and the Company, (iv) conducted
discussion with members of senior management of PacifiCare and the Company with
respect to, among other things, the business and prospects of PacifiCare and the
Company, (v) reviewed the historical market trading prices and volumes of the
Common Stock of the Company, (vi) reviewed publicly available financial and
stock market data with respect to certain other companies in lines of business
that we believe to be generally comparable to those of the Company, (vii)
compared the proposed financial terms of the Mergers with the financial terms of
certain other merger and acquisitions which we believe to be generally
comparable to the Mergers, (viii) considered the pro forma financial effects of
the Mergers on Holdings and (ix) conducted such other financial studies,
analyses and investigations, and considered such other information, as we deemed
relevant.

In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have, with your
consent, relied on its being complete and accurate in all material aspects. In
addition, we have not made any independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of PacifiCare or the Company or
any of their subsidiaries, nor have we been furnished with any such evaluation
or appraisal. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective management of
PacifiCare and the Company as to the future financial performance of their
respective companies. Further, our opinion is based on economic, monetary and
market conditions existing on the date hereof.

Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the consideration to be paid to the Company Stockholders in
the Mergers is fair to PacifiCare and the PacifiCare Stockholders from a
financial point of view.

Very truly yours,
DILLON, READ & CO. INC.
<PAGE>
APPENDIX C

As of August 4, 1996

Board of Directors
FHP International Corporation
9900 Talbert Avenue
P.O. Box 8000
Fountain Valley, CA 92728-8000

Gentlemen:

FHP International Corporation ("FHP"), PacifiCare Health Systems, Inc.
("PacifiCare"), N-T Holdings, Inc. ("Holding"), a newly formed corporation, and
two wholly owned subsidiaries of Holding ("FHP Sub" and "Neptune Sub",
respectively) have entered into an Agreement and Plan of Reorganization, dated
as of August 4, 1996 (the "Reorganization Agreement"), pursuant to which FHP Sub
will be merged into FHP and Neptune Sub will be merged into PacifiCare
(collectively, the "Mergers") with the result that FHP and PacifiCare will
become wholly owned subsidiaries of Holding. In the Mergers, (i) each
outstanding share of Class A Common Stock, par value $.01 per share, of
PacifiCare not owned directly or indirectly by PacifiCare or FHP will be
converted into the right to receive one share of Class A Common Stock of Holding
("Holding Class A Common Stock") and each outstanding share of Class B Common
Stock, par value $.01 per share, of PacifiCare not owned directly or indirectly
by PacifiCare or FHP will be converted into the right to receive one share of
Class B Common Stock of Holding ("Holding Class B Common Stock") and (ii) each
outstanding share of FHP's common stock, par value $0.05 per share (the "FHP
Common Stock"), not owned directly or indirectly by PacifiCare or FHP will be
converted into the right to receive (A) $17.50 in cash, (B) a portion of the
2.35 million newly issued shares of Holding Class A Common Stock to be issued on
a pro rata basis to holders of the FHP Common Stock, (C) such portion of a share
of Holding Class B Common Stock as is necessary to represent, together with the
value of Holding Class A Common Stock received under clause (B) above (assuming
per share values of $67 for the Holding Class A Common Stock and $68 for the
Holding Class B Common Stock), $17.50 in value, subject to adjustment based on
subsequent trading prices as provided in the Reorganization Agreement and (D) a
portion of the rights (the "Talbert Rights") to acquire the common stock of
Talbert Medical Management Corp. held by FHP to be issued pro rata to holders of
the FHP Common Stock and to holders of FHP's Series A Cumulative Convertible
Preferred Stock, par value $0.05 per share (the "FHP Preferred Stock"), based on
the number of FHP Common Stock into which such FHP Preferred Stock are
convertible.

In the Mergers, each outstanding share of FHP Preferred Stock not owned
directly or indirectly by PacifiCare or FHP and not converted pursuant to
conversion rights described in the certificate of designation with respect to
the FHP Preferred Stock will be converted into (in addition to the right to
receive the Rights allocable to such FHP Preferred Stock) the right to receive
(i) $14.113 in cash and (ii) one-half share of a new class of cumulative
convertible preferred stock of Holding (the "Holding Preferred Stock") having
the terms set forth in Article IV.C of the Amended and Restated Certificate of
Incorporation of Holding, which is included as Exhibit 1.4A to the
Reorganization Agreement (the "Amended and Restated Holding Certificate of
Incorporation").

You have asked us whether, in our opinion, the proposed consideration to be
received by the holders of the FHP Common Stock and the FHP Preferred Stock
(other than, in each case, PacifiCare and its subsidiaries) in the Mergers is
fair to such shareholders from a financial point of view.

1
<PAGE>
In arriving at the opinion set forth below, we have, among other things:

(1) Reviewed FHP's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended June 30, 1995 and FHP's Forms
10-Q and the related unaudited financial information for the quarterly
periods ending September 30, 1995, December 31, 1995 and March 31, 1996;

(2) Reviewed PacifiCare's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended September 30, 1995 and
PacifiCare's Forms 10-Q and the related unaudited financial information
for the quarterly periods ending December 31, 1995 and March 31, 1996;

(3) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of FHP and
PacifiCare, furnished to us by FHP and PacifiCare;

(4) Conducted discussions with members of senior management of FHP and
PacifiCare concerning their respective businesses and prospects and
estimated synergies resulting from the Mergers;

(5) Reviewed the historical market prices and trading activity for the FHP
Common Stock and the shares of Common Stock of PacifiCare and compared
them with that of certain publicly traded companies which we deemed to be
reasonably similar to FHP and PacifiCare, respectively;

(6) Compared the results of operations of FHP and PacifiCare with that of
certain companies which we deemed to be reasonably similar to FHP and
PacifiCare, respectively;

(7) Compared the proposed financial terms of the transactions contemplated
by the Reorganization Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;

(8) Reviewed the Reorganization Agreement;

(9) Reviewed a draft (dated July 31, 1996) of Article IV.C of the proposed
Amended and Restated Holding Certificate of Incorporation;

(10) Considered certain pro forma financial effects of the Mergers; and

(11) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary including our assessment of general economic, market and
monetary conditions.

In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by FHP and
PacifiCare, and we have not independently verified such information or
undertaken an independent appraisal of the assets or liabilities of FHP or
PacifiCare. We have evaluated FHP on a consolidated basis and have not performed
a separate valuation analysis of Talbert Medical Management Corp. on a
stand-alone basis or attributed any value to the Rights. With respect to the
financial forecasts furnished by FHP and PacifiCare, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of FHP's or PacifiCare's management as to the expected future
financial performance of FHP or PacifiCare, as the case may be. We have, with
your approval, assumed that the Mergers will qualify as transactions under
Section 351(a) of the Internal Revenue Code of 1986, as amended. Our opinion is
necessarily based on market, economic and other conditions as they exist on the
date hereof. In addition, we express no opinion as to prices at which Holding
Class A Common Stock, Holding Class B Common Stock or Holding Preferred Stock
will trade following consummation of the Mergers.

We have acted as financial advisor to FHP in connection with the Mergers and
will receive a fee for our services, payment of a significant portion of which
is contingent upon consummation of the

2
<PAGE>
Mergers. We have, in the past, provided financial advisory and financing
services to FHP and have received fees for the rendering of such services. In
addition, in the ordinary course of our business, we may actively trade
securities of FHP, PacifiCare and Holding for our own account and for the
accounts of our customers and, accordingly, we may from time to time hold long
or short positions in such securities.

It is understood that this letter is for the information of the Board of
Directors of FHP and may not be relied upon or used for any other purpose
without our prior written consent; provided, however, that this letter may be
reproduced in full in the proxy statement/prospectus to be mailed to FHP's
shareholders in connection with the Mergers. This letter does not constitute a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Mergers.

On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be received by the holders of the FHP Common Stock
and FHP Preferred Stock other than PacifiCare and its subsidiaries pursuant to
the Mergers is fair to such shareholders from a financial point of view.

Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By __/s/__Douglas Braunstein__________
Managing Director
Investment Banking Group

3
<PAGE>
APPENDIX D
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS

262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section251 (other than a merger effected pursuant to
subsection (g) of Section251), Section252, Section254, Section257,
Section258, Section263 or Section264 of this title:

(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in SUBSECTION (F) of Section251 of
this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to SectionSection251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:

a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;

b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or

1
<PAGE>
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.

(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under 253 of this title is not
owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or
consolidation has become effective; or

(2) If the merger or consolidation was approved pursuant to
Section228 or Section253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or within
ten days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in
such notice a copy of this section; provided that, if the notice is given
on or after the effective date of the merger or consolidation, such
notice shall be given by the surviving or resulting corporation to all
such holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of
such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger
or

2
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consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent
more than 20 days following the sending of the first notice, such second
notice need only to be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares
in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
such notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be the
effective date. If no record date is fixed and the notice is given prior
to the effective date, the record date shall be the close of business on
the next day preceding the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after his written request for such
a statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.

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(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate
fully in all proceedings until it is finally determined that he is not
entitled to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.

(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to
any stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.

(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.

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APPENDIX E
SECOND AMENDED
1992 NON-OFFICER DIRECTORS
STOCK OPTION PLAN
OF
PACIFICARE HEALTH SYSTEMS, INC.

1. PURPOSE.

This Second Amended 1992 Non-Officer Directors Stock Option Plan (the
"Plan") of PacifiCare Health Systems, Inc., a Delaware corporation (the
"Company"), is intended to promote the best interests of the Company and its
stockholders by strengthening the Company's ability to attract and retain the
services of experienced and knowledgeable non-officer directors and to provide
additional incentive for such directors to continue to work for the best
interests of the Company and its stockholders. The options granted hereunder are
not intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), as incentive stock options.

2. AMOUNT AND SOURCE OF STOCK.

The shares of stock subject to options shall be shares of the Company's
Class B Common Stock, par value $0.01 per share (the "Class B Common Stock").
The total number of shares of Class B Common Stock which may be the subject of
options granted pursuant to this Plan shall be limited so that the total number
of shares of Class B Common Stock issued upon the exercise of options granted
under this Plan shall not exceed 390,000, subject to adjustment as provided in
Section 10 of this Plan. In the event that any option granted hereunder expires
or is terminated or canceled prior to its exercise in full for any reason, the
shares subject to such option shall be added to the shares of Class B Common
Stock otherwise available for issuance pursuant to the exercise of options under
this Plan.

3. ADMINISTRATION OF THE PLAN.

(a) DUTIES AND POWERS OF THE COMMITTEE. This Plan shall be administered by
a committee of the Board of Directors of the Company (the "Board") comprised of
two or more members of the Board, selected by the Board (the "Committee"). It
shall be the duty of the Committee to conduct the general administration of this
Plan in accordance with its provisions. The Committee shall have the power to
interpret this Plan and the respective option agreements and to adopt such rules
for the administration, interpretation and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules. The
Committee shall have no authority with respect to the selection from among the
eligible individuals to whom options are to be granted (any such individual
being hereinafter referred to as the "optionee" or the "holder") or the number
or maximum number of shares of Class B Common Stock subject to any option that
is granted to an eligible individual. The selection of optionees and the number
of shares subject to each option shall be determined in accordance with Section
4 of this Plan.

(b) MAJORITY RULE. The Committee shall act by a majority of its members in
office. The Committee may act either by vote at a meeting or by a memorandum or
other written instrument signed by a majority of the Committee.

(c) COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of
the Committee shall not receive compensation for their services as members but
all expenses and liabilities they incur in connection with the administration of
this Plan shall be borne by the Company. The Committee may, with the approval of
the Board, employ attorneys, consultants, accountants, appraisers, brokers or
other persons. The Committee, the Company and its officers and directors shall
be entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all optionees, the
Company and all other interested persons. No member of the Committee shall be
personally liable

1
<PAGE>
for any action, determination or interpretation made in good faith with respect
to this Plan or the options and all members of the Committee shall be fully
protected by the Company in respect to any such action, determination or
interpretation.

4. GRANT OF STOCK OPTIONS.

(a) ELIGIBILITY. All non-officer directors of the Company, who are not
eligible to receive options under the Second Amended and Restated 1989 Stock
Option Plan for Officers and Key Employees of the Company, as amended (the "1989
Plan"), shall be eligible to receive options hereunder (the "Eligible
Directors").

(b) STOCK OPTION GRANTS.

(i) The Committee shall, subject to the applicable limits of this Plan,
automatically grant each Eligible Director, upon being elected to the Board,
options to purchase 10,000 shares of Class B Common Stock.

(ii) The Committee shall, subject to the applicable limits of this Plan,
automatically grant each Eligible Director annually options to purchase
5,000 shares of Class B Common Stock on the 31st day of December in each
calendar year commencing December 31, 1996; provided that the optionee shall
not have been eligible to receive options under the 1989 Plan for all or any
part of the preceding 12-month period and shall have served on the Board the
entire preceding 12-month period. If additional Eligible Directors are
hereafter appointed to the Board, the Committee shall, subject to the
applicable limits of this Plan, automatically grant annually each such
person options to purchase 5,000 shares of Class B Common Stock on the 31st
day of December in each calendar year commencing with the first December
31st following the date on which such director was appointed; so long as the
director is then eligible for the granting of options pursuant to this Plan
and has not been eligible to receive options under the 1989 Plan for all of
the preceding 12-month period, and, such director shall have served on the
Board the entire preceding 12-month period. If the number of shares of Class
B Common Stock which may be the subject of options under this Plan is not
sufficient to make all automatic grants required to be made pursuant to this
Plan on the applicable date, the number of shares of Class B Common Stock
subject to the options granted to each director shall be reduced on a pro
rata basis.

(c) OPTION PRICE. The exercise price for the shares of Class B Common
Stock purchasable under any option granted hereunder shall be an amount equal to
100 percent of the Fair Market Value of the Class B Common Stock on the date of
grant. For purposes of this Plan, the "Fair Market Value" of the Class B Common
Stock on a given date shall be based upon: (i) the closing price per share of
the Class B Common Stock on the principal exchange on which the Class B Common
Stock is then trading, if any, on such date, or, if the Class B Common Stock was
not traded on such date, then on the next preceding trading day during which a
sale occurred; or (ii) if the Class B Common Stock was not traded on an exchange
but is quoted on the National Association of Securities Dealers Automatic
Quotation System ("Nasdaq") or a successor quotation system, (1) the last sales
price (if the Class B Common Stock is then listed as a National Market Issue
under the Nasdaq National Market System), or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Class B Common
Stock on such date as reported by Nasdaq or such successor quotation system; or
(iii) if the Class B Common Stock is not publicly traded on an exchange and not
quoted on Nasdaq or a successor quotation system, the mean between the closing
bid and asked prices for the Class B Common Stock on such date as determined in
good faith by the Committee; or (iv) if the Class B Common Stock is not publicly
traded, the fair market value established by the Committee acting in good faith.

2
<PAGE>
5. TERMS AND CONDITIONS OF OPTIONS; VESTING.

(a) COMMENCEMENT OF EXERCISABILITY. Subject to Sections 5(b) and (c), and
Sections 7, 8 and 14, each option granted under this Plan shall become
exercisable in four cumulative installments as follows:

(i) The first installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the first anniversary of the date of grant;

(ii) The second installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the second anniversary of the date of grant;

(iii) The third installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the third anniversary of the date of grant; and

(iv) The fourth installment shall consist of all remaining shares of
Class B Common Stock covered by the option and shall become exercisable on
the fourth anniversary of the date of grant.

(b) VESTING CUMULATIVE. The installments provided for in this Section 5
are cumulative. Each such installment which becomes exercisable pursuant to
Section 5(a) shall remain exercisable until such installment becomes
unexercisable under Section 7. No portion of an option which is unexercisable at
Termination of Directorship (as defined in Section 7) shall thereafter be
exercisable.

(c) STOCK OPTION AGREEMENT. Subject to Section 14, the grant of options by
the Committee shall be effective as of the date of grant; provided, however,
that no option granted hereunder shall be exercisable unless and until the
holder shall enter into an individual option agreement with the Company that
shall set forth the terms and conditions of such option. Each such agreement
shall expressly incorporate by reference the provisions of this Plan (a copy of
which shall be made available for inspection by the optionee during normal
business hours at the principal office of the Company) and shall state that in
the event of any inconsistency between the provisions hereof and the provisions
of such agreement, the provisions of this Plan shall govern.

6. EXERCISE OF OPTIONS.

(a) PERSON ELIGIBLE TO EXERCISE. During the lifetime of the optionee, only
he, his guardian or legal representative may exercise an option granted to him,
or any portion thereof. After the death of the optionee, any exercisable portion
of an option may, prior to the time when such option becomes unexercisable under
Section 7, be exercised by his personal representative or by any person
empowered to do so under the deceased optionee's will or under the applicable
laws of descent and distribution.

(b) PARTIAL EXERCISE. At any time and from time to time prior to when any
exercisable option or exercisable portion thereof becomes unexercisable under
Section 7, such option or portion thereof may be exercised in whole or in part;
provided, however, that the Company shall not be required to issue fractional
shares and the number of shares for which an option may be partially exercised
shall be not less than 100 shares.

(c) MANNER OF EXERCISE. An exercisable option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or Chief Financial
Officer of the Company or their respective offices of all of the following prior
to the time when such option or such portion becomes unexercisable under this
Plan:

(i) Notice in writing signed by the optionee or other person then
entitled to exercise such option or portion, stating that such option or
portion is exercised, such notice complying with all applicable rules
established by the Committee;

(ii) (A) Full payment (in cash or by check) for the shares with respect
to which such option or portion is hereby exercised;

3
<PAGE>
(B) With the consent of the Committee, shares of any class of the
Company's stock owned by the optionee duly endorsed for transfer to the
Company with a Fair Market Value (as determinable under Section 4(c)) on
the date of delivery equal to the aggregate option price of the shares of
Class B Common Stock with respect to which such option or portion is
thereby exercised (which shares shall be owned by the optionee for more
than six months at the time they are delivered);

(D) Any combination of the consideration provided in the foregoing
subsections (A), (B) and (C);

(iii) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act of 1933, as amended, and any
other federal or state securities laws or regulations. The Committee may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop transfer orders to transfer
agents and registrars; and

(iv) In the event that the option, or portion thereof, shall be exercised
by any person or persons other than the optionee, appropriate proof of the
right of such person or persons to exercise the option or portion thereof.

(d) CASHLESS EXERCISE. The Company, in its sole discretion, may establish
procedures whereby an optionee, to the extent permitted by and subject to the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), Regulation T issued by the Board of Governors of the Federal
Reserve System pursuant to the Exchange Act, federal income tax laws, and other
federal, state and local tax and securities laws, can exercise an option or a
portion thereof without making a direct payment of the option price to the
Company. If the Company so elects to establish a cashless exercise program, the
Company shall determine, in its sole discretion and from time to time, such
administrative procedures and policies as it deems appropriate provided such
procedures and policies are consistent with those of any cashless exercise
program established pursuant to the 1989 Plan. Such procedures and policies
shall be binding on any optionee wishing to utilize the cashless exercise
program.

7. EXPIRATION OF OPTIONS.

No option may be exercised to any extent by anyone after the first to occur
of the following events:

(i) The expiration of 10 years and one day from the date the option was
granted; or

(ii) The expiration of eight months from the time the optionee shall
voluntarily or involuntarily cease to continue to serve as a director of the
Company (a "Termination of Directorship"), unless such Termination of
Directorship results from his death or disability; or

(iii) The expiration of one year from the date of the optionee's
Termination of Directorship by reason of his disability; or

(iv) The expiration of one year from the date of optionee's death.

For purposes of this Section 7, "disability" shall mean a medically
determinable physical or mental impairment which has lasted or can be expected
to last for a continuous period of not less than 12 months and which renders a
director substantially unable to function as a director of the Company. Nothing
contained herein or in any option agreement shall be construed to confer on any
optionee any right to continue as a director of the Company.

4
<PAGE>
8. ACCELERATION OF VESTING UPON A CHANGE OF CONTROL.

Notwithstanding anything to the contrary in Section 7 and/or any vesting
provisions of any option, any option which has been held for at least six months
shall become exercisable immediately upon the effective date of a "Change of
Control." As used in this Section 8, the term "Change of Control" shall mean 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; (iv)
any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the
Exchange Act) other than UniHealth, a California nonprofit 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 and acceleration of exercisability. All such determinations and
interpretations by the Committee shall be conclusive. Each optionee shall
receive at least 10 days' notice prior to the effective date of the Change of
Control that their options will be exercisable upon the effective date of the
Change of Control and the officers of the Company shall make adequate provisions
to permit all optionees to exercise their options as of the effective date of
the Change of Control.

9. NON-TRANSFERABILITY OF OPTIONS.

No option or interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law or judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy) and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that nothing in this Section 9 shall
prevent transfers by will or by the applicable laws of descent and distribution.

10. ADJUSTMENTS UPON CERTAIN EVENTS.

(a) CHANGES IN COMPANY'S SHARES. In the event that the outstanding shares
of Class B Common Stock of the Company are hereafter changed into or exchanged
for a different number or kind of shares or other securities of the Company, or
of another corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend or combination
of shares, or in the event of extraordinary cash or non-cash dividends being
declared with respect to the outstanding shares of Class B Common Stock or other
similar transactions, proportionate adjustments shall be made by the Committee
in the number and kind of shares for the purchase of which

5
<PAGE>
options may be granted (including adjustments of the limitation on the maximum
number and kind of shares which may be issued on exercise of options), which
adjustments shall be consistent with comparable adjustments made pursuant to the
corresponding provision in the 1989 Plan.

(b) ADJUSTMENTS IN OUTSTANDING AWARDS. In the event that the outstanding
shares of Class B Common Stock of the Company are hereafter changed into or
exchanged for a different number or kind of shares or other securities of the
Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or combination of shares, or in the event of extraordinary cash or non-cash
dividends being declared with respect to the outstanding shares of Class B
Common Stock or other similar transactions, the Committee shall make
proportionate adjustments in the number and kind of shares as to which all
outstanding options, or portions thereof then unexercised, shall be exercisable,
to the end that after such event the optionee's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustments shall be
consistent with comparable adjustments made pursuant to the corresponding
provision in the 1989 Plan. Such adjustment in an outstanding option shall be
made without change in the total price applicable to the option or the
unexercised portion of the option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in option price per share. Any such
adjustment made by the Committee shall be final and binding upon all optionees,
the Company and all other interested persons.

11. GENERAL RESTRICTIONS.

(a) CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The shares of Class B
Common Stock issuable and deliverable upon the exercise of any option, or any
portion thereof, may be either previously authorized but unissued shares of
Class B Common Stock or issued shares of Class B Common Stock which have then
been reacquired by the Company. The Company shall not be required to issue or
deliver any certificate or certificates for shares of Class B Common Stock
purchased upon the exercise of any option or portion thereof prior to
fulfillment of all of the following conditions:

(i) The admission of such shares of Class B Common Stock to listing on
all stock exchanges on which such class of stock is then listed;

(ii) The completion of any registration or other qualification of such
shares of Class B Common Stock under any state or federal law or under the
rulings or regulations of the Securities and Exchange Commission or any
other governmental regulatory body, which the Committee shall, in its
absolute discretion, deem necessary or advisable;

(iii) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;

(iv) The payment to the Company of all amounts which it is required to
withhold under federal, state or local law in connection with the exercise
of the option; and

(v) The lapse of such reasonable period of time following the exercise
of the option as the Committee may establish from time to time for reasons
of administrative convenience.

(b) RIGHTS AS STOCKHOLDERS. The holders of options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect of
any shares of Class B Common Stock receivable upon the exercise of any part of
an option unless and until certificates representing the shares of Class B
Common Stock have been issued by the Company to such holders.

12. WITHHOLDING TAX LIABILITY.

(a) A holder of an option granted hereunder may elect to deliver shares of
Class B Common Stock to the Company or have the Company withhold shares
otherwise issuable upon the exercise of an option in order to satisfy federal,
state and local withholding tax liability (a "share withholding election"),
provided: (i) the Board or, if so designated, the Committee, shall not have
revoked its

6
<PAGE>
advance approval of the holder's share withholding election; and (ii) the share
withholding election is made on or prior to the date on which the amount of
withholding tax liability is determined (the "Tax Date"). Notwithstanding the
foregoing, a holder whose transactions in the Company's equity securities are
subject to Section 16(b) of the Exchange Act may make a share withholding
election only if the following additional conditions are met: (i) the
withholding is made at least six months after the date of the grant of the
option; and (ii) either (x) the share withholding election is irrevocably made
at least six months in advance of the withholding, or (y) the share withholding
election and the share withholding take place during the period beginning on the
third business day following the date of release of the Company's quarterly or
annual financial results and ending on the twelfth business day following such
date.

(b) A share withholding election shall be deemed made when written notice of
such election, signed by the holder, has been delivered or transmitted by
registered or certified mail to the Secretary or Chief Financial Officer of the
Company at its then principal office. Delivery of said notice shall constitute
an irrevocable election to have shares withheld.

(c) Upon exercise of an option by a holder, the Company shall transfer the
total number of shares of Class B Common Stock subject to the option to the
holder on the date of exercise, less any shares of Class B Common Stock the
holder elects to withhold.

13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.

This Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board; provided
that: (i) the Board may not amend or modify this Plan more than once in any six
month period other than to comport with changes in the Code, the Employee
Retirement Income Security Act, or the rules promulgated thereunder; and (ii) no
amendment without the approval of the stockholders of the Company shall be made
if stockholder approval would be required under Section 422 of the Code, Rule
16b-3 under the Exchange Act or any other law or rule of any governmental
authority, stock exchange or other self-regulatory organization to which the
Company is subject. Neither the amendment, suspension nor termination of this
Plan shall, without the consent of the holder of the option, alter or impair any
rights or obligations under any option theretofore granted. No option may be
granted during any period of suspension nor after termination of this Plan, and
in no event may any option be granted under this Plan after the expiration of 10
years from the date this Plan is approved by the Company's stockholders under
Section 14.

14. APPROVAL OF PLAN BY STOCKHOLDERS.

This Plan will be submitted for the approval of the Company's stockholders
within 12 months after the date of the Board's initial adoption of this Plan.
Options may be granted prior to such stockholder approval; provided, however,
that such options shall not be exercisable prior to the time when this Plan is
approved by the stockholders; provided, further, that if such approval has not
been obtained at the end of said 12-month period, all options previously granted
under this Plan shall thereupon be canceled and become null and void.

15. EFFECTIVE DATE OF PLAN.

Subject to Section 14, the effective date of this Plan shall be December 1,
1996.

7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws provide
that the Registrant will indemnify its directors, officers, employees or agents
in a manner consistent with the provisions of the Delaware General Corporation
Law.

In addition, the Registrant's Certificate of Incorporation provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Registrant and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.

The Registrant maintains a policy providing directors' and officers'
liability insurance, which insures directors and officers of the Registrant in
certain circumstances.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.01 Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of November 11,
1996, among PacifiCare Health Systems, Inc. ("PacifiCare"), Registrant, Neptune Merger Corp., Tree
Acquisition Corp. and FHP International Corporation ("FHP"). (See Appendix A to the Joint Proxy
Statement/Prospectus).
3.01 Certificate of Incorporation of Registrant. The proposed form of Amended and Restated Certificate
of Incorporation is included as Exhibit 1.4 of Appendix A to the Joint Proxy Statement/Prospectus.
3.02 Bylaws of Registrant.
4.01 Form of Specimen Certificate for Registrant's Class A Common Stock.
4.02 Form of Specimen Certificate for Registrant's Class B Common Stock.
4.03 Form of Specimen Certificate for Registrant's Series A Cumulative Convertible Preferred Stock.
5.01 Legal Opinion of Cooley Godward LLP.
8.01 Tax Opinion of Cooley Godward LLP.
8.02 Tax Opinion of Sheppard, Mullin, Richter & Hampton LLP.
</TABLE>

II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ---------------------------------------------------------------------------------------------------
10.01 Credit Agreement, dated as of October 31, 1996, among the Registrant, the several financial
institutions from time to time party to the Credit Agreement, The Bank of New York, The Bank of
Nova Scotia, Banque Nationale de Paris, Dai-Ichi Kangyo Bank, Ltd., The Industrial Bank of Japan
Limited, RaboBank Nederland, Sanwa Bank California, The Sumitomo Bank, Limited, and Wells Fargo
Bank, N.A., as co-agents, The Chase Manhattan Bank and Citicorp USA, Inc., as managing agents, and
Bank of America National Trust and Savings Association, as agent for the Banks.
<C> <S>
10.02 Form of contract for the period January 1, 1993 through December 31, 1993 between PacifiCare of
California and the Department of Health and Human Services (incorporated by reference to Exhibit
10.3 to the Registration Statement of PacifiCare on Form S-3 (File No. 33-72012)).
12.01 Statement re Computation of Ratios
21.01 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche LLP.
23.03 Consent of Counsel (included in Exhibits 5.01, 8.01 and 8.02).
24.01 Power of Attorney (included on page II-4).
99.01 Forms of Proxy Cards for Annual Meeting of FHP Stockholders.
99.02 Forms of Proxy Cards for Special Meeting of PacifiCare Stockholders.
99.03 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between FHP and UniHealth.
99.04 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Jack R.
Anderson.
99.05 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Richard M.
Burdge, Sr.
99.06 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Westcott
W. Price III.
99.07 Form of Irrevocable Election.
99.08 Second Amended 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc. (See
Appendix E to the Joint Proxy Statement/Prospectus.)
</TABLE>

(B) FINANCIAL STATEMENT SCHEDULES

All other schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the consolidated financial statements or notes thereto.

See Appendices B and C to the Joint Proxy Statement/Prospectus.

ITEM 22. UNDERTAKINGS

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE>
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes all information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.

The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cypress,
County of Orange, State of California, on the 15th day of November, 1996.

N-T HOLDINGS, INC.

By: /s/ WAYNE B. LOWELL
-----------------------------------------
Wayne B. Lowell
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan R. Hoops and Wayne B. Lowell, and each or
any one of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>

President, Chief Executive
/s/ ALAN R. HOOPS Officer and Director
- ------------------------------ (Principal Executive November 15, 1996
Alan R. Hoops Officer)

Vice President, Chief
/s/ WAYNE B. LOWELL Financial Officer and
- ------------------------------ Director November 15, 1996
Wayne B. Lowell (Principal Financial
Officer)

/s/ JOSEPH S. KONOWIECKI
- ------------------------------ Director November 15, 1996
Joseph S. Konowiecki

/s/ MARY C. LANGSDORF
- ------------------------------ Principal Accounting November 15, 1996
Mary C. Langsdorf Officer
</TABLE>

II-4
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.01 Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of November 11, 1996,
among PacifiCare Health Systems, Inc. ("PacifiCare"), Registrant, Neptune Merger Corp., Tree
Acquisition Corp. and FHP International Corporation ("FHP"). (See Appendix A to the Joint Proxy
Statement/Prospectus).
3.01 Certificate of Incorporation of Registrant. The proposed form of Amended and Restated Certificate of
Incorporation is included as Exhibit 1.4 of Appendix A to the Joint Proxy Statement/Prospectus.
3.02 Bylaws of Registrant.
4.01 Form of Specimen Certificate for Registrant's Class A Common Stock.
4.02 Form of Specimen Certificate for Registrant's Class B Common Stock.
4.03 Form of Specimen Certificate for Registrant's Series A Cumulative Convertible Preferred Stock.
5.01 Legal Opinion of Cooley Godward LLP.
8.01 Tax Opinion of Cooley Godward LLP.
8.02 Tax Opinion of Sheppard, Mullin, Richter & Hampton LLP.
10.01 Credit Agreement, dated as of October 31, 1996, among the Registrant, the several financial institutions
from time to time party to the Credit Agreement, The Bank of New York, The Bank of Nova Scotia, Banque
Nationale de Paris, Dai-Ichi Kangyo Bank, Ltd., The Industrial Bank of Japan, Limited, RaboBank
Nederland, Sanwa Bank California, The Sumitomo Bank, Limited, and Wells Fargo Bank, N.A., as co-agents,
The Chase Manhattan Bank and Citicorp USA, Inc., as managing agents, and Bank of America National Trust
and Savings Association, as agent for the Banks.
10.02 Form of contract for the period January 1, 1993 through December 31, 1993 between PacifiCare of
California and the Department of Health and Human Services (incorporated by reference to Exhibit 10.3
to the Registration Statement of PacifiCare on Form S-3 (File No. 33-72012)).
12.01 Statement re Computation of Ratios.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche LLP.
23.03 Consent of Counsel (included in Exhibits 5.01, 8.01 and 8.02).
24.01 Power of Attorney (included on page II-4).
99.01 Forms of Proxy Cards for Annual Meeting of FHP Stockholders.
99.02 Forms of Proxy Cards for Special Meeting of PacifiCare Stockholders.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
99.03 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between FHP and UniHealth.
<C> <S>
99.04 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Jack R.
Anderson.
99.05 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Richard M.
Burdge, Sr.
99.06 Voting and Non-Disposition Agreement, dated as of August 4, 1996, between PacifiCare and Westcott W.
Price III.
99.07 Form of Irrevocable Election.
99.08 Second Amended 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc. (See
Appendix E to the Joint Proxy Statement/Prospectus.)
</TABLE>

<PAGE>

Exhibit 3.02

BY-LAWS

N-T HOLDINGS, INC.

<PAGE>

TABLE OF CONTENTS

Section PAGE
- -------------------------------- -----
Article I
OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . 1

Article II
MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meeting of Stockholders. . . . . . . . . . . . . . . 1
Section 3. Quorum; Adjourned Meetings and Notice Thereof . . . . . . . 1
Section 4. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 2
Section 7. Notice of Stockholders' Meetings. . . . . . . . . . . . . . 2
Section 8. Maintenance and Inspection of Stockholder List. . . . . . . 3
Section 9. Stockholder Action by Written Consent Without a Meeting . . 3

Article III
DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1. Number and Qualification of Directors . . . . . . . . . . . 3
Section 2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4. Place of Directors' Meetings. . . . . . . . . . . . . . . . 4
Section 5. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Section 6. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Section 7. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 8. Action Without Meeting. . . . . . . . . . . . . . . . . . . 5
Section 9. Telephonic Meetings . . . . . . . . . . . . . . . . . . . . 5
Section 10. Committees of Directors. . . . . . . . . . . . . . . . . . 5
Section 11. Minutes of Committee Meetings. . . . . . . . . . . . . . . 6
Section 12. Compensation of Directors. . . . . . . . . . . . . . . . . 6
Section 13. Indemnification. . . . . . . . . . . . . . . . . . . . . . 6

Article IV
OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 1. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2. Election of Officers. . . . . . . . . . . . . . . . . . . . 9
Section 3. Subordinate Officers. . . . . . . . . . . . . . . . . . . . 9
Section 4. Compensation of Officers. . . . . . . . . . . . . . . . . . 9
Section 5. Term of Office; Removal and Vacancies . . . . . . . . . . . 9
Section 6. Chairman of the Board . . . . . . . . . . . . . . . . . . . 10

<PAGE>

Section 7. President . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. Vice President. . . . . . . . . . . . . . . . . . . . . . . 10
Section 9. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 10. Assistant Secretary. . . . . . . . . . . . . . . . . . . . 11
Section 11. Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 12. Assistant Treasurer. . . . . . . . . . . . . . . . . . . . 11

Article V
CERTIFICATES OF STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. Certificates. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. Signatures on Certificates. . . . . . . . . . . . . . . . . 12
Section 3. Statement of Stock Rights, Preferences and Privileges . . . 12
Section 4. Lost Certificates . . . . . . . . . . . . . . . . . . . . . 12
Section 5. Transfers of Stock. . . . . . . . . . . . . . . . . . . . . 13
Section 6. Fixing the Record Date. . . . . . . . . . . . . . . . . . . 13
Section 7. Registered Stockholders . . . . . . . . . . . . . . . . . . 13

Article VI
GENERAL PROVISIONS; DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . 13
Section 1. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2. Payment of Dividends; Directors' Duties . . . . . . . . . . 13
Section 3. Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . 14
Section 6. Manner of Giving Notice . . . . . . . . . . . . . . . . . . 14
Section 7. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . 14
Section 8. Annual Statement. . . . . . . . . . . . . . . . . . . . . . 14

Article VII
AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Section 1. Amendment by Directors or Stockholders. . . . . . . . . . . 14

<PAGE>

BY-LAWS
OF
N-T HOLDINGS, INC.

ARTICLE I
OFFICES

Section 1. REGISTERED OFFICE. The registered office shall be in the City
of Wilmington, County of New Castle, State of Delaware.

Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.

ARTICLE II
MEETINGS OF STOCKHOLDERS

Section 1. PLACE OF MEETINGS. All meetings of the stockholders shall be
held in the City of Cypress, State of California, at such place as may be fixed
from time to time by the Board of Directors, or at such other place either
within or without the State of Delaware as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting.

Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of
stockholders shall be held each year on the first Wednesday in March, if not a
legal holiday, and if a legal holiday, then on the next secular day following,
at 10:00 a.m. or at such other date and time as may be determined from time to
time by resolution adopted by the Board of Directors, when they shall elect by a
plurality vote of the Board of Directors, and transact such other business as
may properly be brought before the meeting. At each annual meeting Directors
shall be electd and any other proper business transacted.

Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority of
the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these By-
Laws. A quorum, once established, shall not be broken by the withdrawal of
enough votes to leave less than a quorum and the votes present may continue to
transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
voting stock represented in person or by proxy may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote thereat.

<PAGE>

Section 4. VOTING. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these By-Laws, a different vote is required
in which case such express provision shall govern and control the decision of
such question.

Section 5. PROXIES. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than three years prior to said
meeting, unless said instrument provides for a longer period. All proxies must
be filed with the Secretary of the Corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. Each stockholder shall have
one vote for each share of stock having voting power, registered in his name on
the books of the Corporation on the record date set by the Board of Directors as
provided in Article V, Section 6 hereof. All elections shall be had and all
questions decided by a plurality vote.

Section 6. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or the Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the Corporation issued and
outstanding, and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.

Section 7. NOTICE OF STOCKHOLDERS' MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given which notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting. If mailed, notice is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation.

Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The officer
who has charge of the stock ledger of the Corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

<PAGE>

Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise provided in the Certificate of Incorporation, any action
required to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.

ARTICLE III
DIRECTORS

Section 1. NUMBER AND QUALIFICATION OF DIRECTORS. The number of
Directors which shall constitute the whole Board shall be not less than five
(5) nor more than twelve (12). The Board shall initially consist of twelve
(12) members. The Directors need not be stockholders. The Directors shall
be elected at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each Director elected shall hold office until
his successor is elected and qualified; provided, however, that unless
otherwise restricted by the Certificate of Incorporation or By-Law, any
Director or the entire Board of Directors may be removed, either with or
without cause, from the Board of Directors at any meeting of stockholders by
a majority of the stock represented and entitled to vote thereat.

Section 2. VACANCIES. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created Directorships resulting from any increase in the
authorized number of Directors may be filled by a majority of the Directors then
in office, although less than a quorum, or by a sole remaining Director. The
Directors so chosen shall hold office until the next annual election of
Directors and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no Directors in office, then an election of
Directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created Directorship, the Directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such Directors, summarily order an election to be held to fill any such
vacancies or newly created Directorships, or to replace the Directors chosen by
the Directors then in office.

Section 3. POWERS. The property and business of the Corporation shall be
managed by or under the direction of its Board of Directors. In addition to the
power and authorities by these By-Laws expressly conferred upon them, the Board
may exercise all such powers of the Corporation and do all lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.

<PAGE>

Section 4. PLACE OF DIRECTORS' MEETINGS. The Directors may hold their
meetings and have one or more offices, and keep the books of the Corporation
outside of the State of Delaware.

Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board.

Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President on forty-eight hours' notice to each Director,
either personally or by mail or by telegram; special meetings shall be called by
the President or the Secretary in like manner and on like notice on the written
request of two Directors unless the Board consists of only one Director; in
which case special meetings shall be called by the President or Secretary in
like manner or on like notice on the written request of the sole Director.

Section 7. QUORUM. At all meetings of the Board of Directors a majority
of the authorized number of Directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the Directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these By-Laws. If a
quorum shall not be present at any meeting of the Board of Directors the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
If only one Director is authorized, such sole Director shall constitute a
quorum.

Section 8. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any Committee thereof
may be taken without a meeting, if all members of the Board or Committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or Committee.

Section 9. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, members of the Board of
Directors, or any Committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any Committee, by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meetings can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.

Section 10. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
Committees, each such Committee to consist of one or more of the Directors of
the Corporation. The Board may designate one or more Director(s) as alternate
members of any Committee, who may replace any absent or disqualified member at
any meeting of the Committee. In the absence or disqualification of a member of
a Committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
Committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of

<PAGE>

Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such Committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the By-Laws of the Corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
Committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.

Section 11. MINUTES OF COMMITTEE MEETINGS. Each Committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.

Section 12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, the Board of Directors shall have
the authority to fix the compensation of Directors. The Directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as Director. No such payment shall preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing Committees may be allowed
like compensation for attending Committee meetings.

Section 13. INDEMNIFICATION.

(a) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a Director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another Corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonable
incurred by him in connection with such action, suit or proceedings if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.

(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a Director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a Director, officer, employee or agent of another Corporation,
partnership,

<PAGE>

joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no such indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the Corporation unless and only to the extent that
the Court of Chancery of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such
Court of Chancery or such other court shall deem proper.

(c) To the extent that a Director, officer, employee or agent of the
Corporation, shall be successful on the merits or otherwise in defense, of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.

(d) Any indemnification under paragraphs (a) and (b) (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the Director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set` forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of Directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested Directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.

(e) The corporation shall advance to any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
prior to the final disposition of the proceeding, promptly following request
therefor, all expenses incurred by any director, officer, employee or agent
in connection with such proceeding upon receipt of an undertaking by or on
behalf of such person to repay said amounts if it should be determined
ultimately that such person is not entitled to be indemnified under this
Bylaw or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 13(e), no advance shall be made by the corporation to an officer,
employee or agent of the corporation (except by reason of the fact that such
person is or was a director of the corporation in which event this paragraph
shall not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if
such quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the time such
determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in
or not opposed to the best interests of the corporation.

(f) The indemnification provided by this Section 13 shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any By-Law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.

(g) The Board of Directors may authorize, by a vote of a majority of
a quorum of the Board of Directors, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a Director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such,

<PAGE>

whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Section 13.

(h) Without the necessity of entering into an express contract, all
rights to indemnification and advances to directors, officers, employees or
agents under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director, officer, employee or agent. Any right to
indemnification or advances granted by this Bylaw to a director, officer,
employee or agent shall be enforceable by or on behalf of the person holding
such right in any court of competent jurisdiction if (i) the claim for
indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole or
in part, shall be entitled to be paid also the expense of prosecuting his
claim. In connection with any claim for indemnification, the corporation
shall be entitled to raise as a defense to any such action that the claimant
has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed. In connection with any claim by an officer,
employee or agent of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such executive officer is or was a director of the
corporation) for advances, the corporation shall be entitled to raise a
defense as to any such action clear and convincing evidence that such person
acted in bad faith or in a manner that such person did not believe to be in
or not opposed to the best interests of the corporation, or with respect to
any criminal action or proceeding that such person acted without reasonable
cause to believe that his conduct was lawful. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel or
its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he has met the applicable standard of conduct set forth
in the Delaware General Corporation Law, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that
claimant has not met the applicable standard of conduct. In any suit brought
by any person to enforce a right to indemnification or to an advancement of
expenses hereunder, the burden of proving that such person is not entitled to
be indemnified, or to such advancement of expenses, under this Section 13 or
otherwise shall be on the corporation.

(i) For the purposes of this Section 13, references to "the
Corporation" shall include, in addition to the resulting Corporation, any
constituent Corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its Directors, officers, and employees
or agents, so that any person who is or was a Director, officer, employee or
agent of such constituent Corporation, or is or was serving at the request of
such constituent Corporation as a Director, officer, employee or agent of
another Corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section with
respect to the resulting or surviving Corporation as he would have with respect
to such constituent Corporation if its separate existence had continued.

(j) For purposes of this Section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include service
as a Director, officer, employee or agent of the Corporation which imposes
duties on, or involves services by, such Director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Section.

ARTICLE IV
OFFICERS

Section 1. OFFICERS. The officers of this Corporation shall be chosen by
the Board of Directors and shall include a President, a Secretary, and a
Treasurer. The Corporation may also have at the discretion of the Board of
Directors such other officers as are desired, including a Chairman of the Board,
one or more Vice Presidents, one or more Assistant Secretaries and Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 3 hereof. In the event there are two or more Vice
Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the Directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these By-Laws otherwise provide.

Section 2. ELECTION OF OFFICERS. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the Corporation.

Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint such
other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.

<PAGE>

Section 4. COMPENSATION OF OFFICERS. The salaries of all officers and
agents of the Corporation shall be fixed by the Board of Directors.

Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the
Corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by these
By-Laws. If there is no President, the Chairman of the Board shall in addition
be the Chief Executive Officer of the Corporation and shall have the powers and
duties prescribed in Section 7 of this Article IV.

Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the Chief Executive Officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all Committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of Corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these By-Laws.

Section 8. VICE PRESIDENT. In the absence or disability of the President,
the Vice Presidents in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
Presidents shall have such other duties as from time to time may be prescribed
for them, respectively, by the Board of Directors.

Section 9. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing Committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these By-Laws. He shall keep
in safe custody the seal of the Corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by his signature.

<PAGE>

Section 10. ASSISTANT SECRETARY. The Assistant Secretary or, if there be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors or, if there be no such determination, the Assistant Secretary
designated by the Board of Directors shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.

Section 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the Corporation. If required by the Board of
Directors, he shall give the Corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.

Section 12. ASSISTANT TREASURER. The Assistant Treasurer or, if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors or, if there be no such determination, the Assistant
Treasurer designated by the Board of Directors shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.

ARTICLE V
CERTIFICATES OF STOCK

Section 1. CERTIFICATES. Every holder of stock of the Corporation shall
be entitled to have a certificate signed by, or signed in the name of the
Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer of the Corporation, certifying the
number of shares represented by the certificate owned by such stockholder in the
Corporation.

Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.

Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES AND PRIVILEGES. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the

<PAGE>

powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualification, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the
certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided in Section 202
of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth in the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock,
a statement that the Corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.

Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 5. TRANSFERS OF STOCK. Upon surrender to the Corporation, or the
transfer agent of the Corporation, of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.

Section 6. FIXING THE RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.

Section 7. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim or interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, save as expressly provided by the
laws of the State of Delaware.

<PAGE>

ARTICLE VI
GENERAL PROVISIONS; DIVIDENDS

Section 1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.

Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before payment of any
dividend there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the Directors from time to time, in their
absolute discretion, think proper as a reserve fund to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Directors shall think conducive to
the interests of the Corporation, and the Directors may abolish any such
reserve.

Section 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.

Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.

Section 5. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.

Section 6. MANNER OF GIVING NOTICE. Whenever, under the provisions of the
statutes or of the Certificate of Incorporation or of these By-Laws, notice is
required to be given to any Director or stockholder, it shall not be construed
to mean personal notice, but such notice may be given in writing, by mail,
addressed to such Director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to Directors may also be given by telegram.

Section 7. WAIVER OF NOTICE. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation or
of these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.

Section 8. ANNUAL STATEMENT. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.

ARTICLE VII
AMENDMENTS

<PAGE>

Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS. These By-Laws may be
altered, amended or repealed or new By-Laws may be adopted by the stockholders
or by the Board of Directors, when such power is conferred upon the Board of
Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new By-Laws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal By-Laws is conferred
upon the Board of Directors by the Certificate of Incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal By-Laws.

<PAGE>

CLASS A COMMON STOCK CLASS A COMMON STOCK
NUMBER SHARES

[PacifiCare Health Systems, Inc. Logo]
Incorporated under the Laws of
the State of Delaware

THIS CERTIFICATE IS SEE REVERSE FOR
TRANSFERABLE IN THE CERTAIN DEFINITIONS
CITIES OF LOS ANGELES,
RIDGEFIELD PARK OR
NEW YORK, NEW YORK

This Certifies that CUSIP 629406 10 9

is the record holder of

FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK,
$.01 PAR VALUE OF

PacifiCare Health Systems, Inc.

transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated

/s/ Joseph S. Konowiecki /s/ Alan Hoops
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER

PACIFICARE HEALTH SYSTEMS, INC.
CORPORATE
SEAL
AUGUST 2, 1996
DELAWARE

COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES L.L.C.
TRANSFER AGENT AND REGISTRAR

BY AUTHORIZED SIGNATURE

<PAGE>

The Corporation shall furnish without charge to each shareholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made
to the Corporation's Secretary at the principal office of the Corporation.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:

TEN COM -- as tenants in common UNIF GIFT MIN ACT--....Custodian......
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act..........................
tenants in common (State)
UNIF TRF MIN ACT--.Custodian(until age..)

.......under Uniform Transfers
(Minor)

to Minors Act................
(State)

Additional abbreviations may also be used though not in the above list.

<PAGE>

FOR VALUE RECEIVED, hereby sell, assign and transfer unto
---------------------

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

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

- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

Shares
- ------------------------------------------------------------------------

of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ----------------------------------------------------------------------
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated
-----------------

X
--------------------------------------------------------------
X
--------------------------------------------------------------

NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.

Signature(s) Guaranteed

By:
----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

<PAGE>

CLASS B COMMON STOCK CLASS B COMMON STOCK
NUMBER SHARES

[PacifiCare Health Systems, Inc. Logo]
Incorporated under the Laws of
the State of Delaware

THIS CERTIFICATE IS SEE REVERSE FOR
TRANSFERABLE IN THE CERTAIN DEFINITIONS
CITIES OF LOS ANGELES,
RIDGEFIELD PARK OR
NEW YORK, NEW YORK

This Certifies that CUSIP 629406 20 8

is the record holder of

FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS B COMMON STOCK,
$.01 PAR VALUE OF

PacifiCare Health Systems, Inc.

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated

/s/ Joseph S. Konowiecki /s/ Alan Hoops
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER

PACIFICARE HEALTH SYSTEMS, INC.
CORPORATE
SEAL
AUGUST 2, 1996
DELAWARE

COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES L.L.C.
TRANSFER AGENT AND REGISTRAR

BY AUTHORIZED SIGNATURE

<PAGE>

The Corporation shall furnish without charge to each shareholder who
so requests a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock of the Corporation or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Such requests
shall be made to the Corporation's Secretary at the principal office of the
Corporation.

The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:

TEN COM -- as tenants in common UNIF GIFT MIN ACT --........Custodian........
TEN ENT -- as tenants by the
entireties (Cust) (Minor)
JT TEN -- as joint tenants with under Uniform Gifts to Minors
right of survivorship and
not as tenants in common Act..........................
(State)
UNIF TRF MIN ACT -- .......Custodian (until age......)

..............under Uniform Transfers
(Minor)

to Minors Act....................
(State)
Additional abbreviations may also be used though not in the above list.

<PAGE>

FOR VALUE RECEIVED, hereby sell, assign and transfer unto
----------------------

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

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

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------

X
--------------------------------------------------------------
X
--------------------------------------------------------------

Signature(s) Guaranteed

By:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

<PAGE>

EXHIBIT 4.03

PREFERRED STOCK PREFERRED STOCK
NUMBER SHARES

[PacifiCare Health Systems, Inc. Logo]
Incorporated under the Laws of
the State of Delaware

THIS CERTIFICATE IS SEE REVERSE FOR
TRANSFERABLE IN THE CERTAIN DEFINITIONS
CITIES OF LOS ANGELES,
RIDGEFIELD PARK OR
NEW YORK, NEW YORK

This Certifies that CUSIP 629406 30 7

is the record holder of

FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE OF

PacifiCare Health Systems, Inc.

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.

Dated

/s/ Joseph S. Konowiecki /s/ Alan Hoops
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER

PACIFICARE HEALTH SYSTEMS, INC.
CORPORATE
SEAL
AUGUST 2, 1996
DELAWARE

COUNTERSIGNED AND REGISTERED:
CHASE MELLON SHAREHOLDER SERVICES L.L.C.
TRANSFER AGENT AND REGISTRAR

BY AUTHORIZED SIGNATURE

<PAGE>

The Corporation will furnish to any shareholder upon request and without
charge a statement of the powers, designations, preferences, limitations and
relative, participating, optional or other special rights of the shares of each
class of stock or series thereof authorized to be issued and the qualifications,
limitations or restrictions of such preferences and rights, and with respect to
the preferred stock, the variations in the relative powers, rights and
preferences, and the qualifications, limitations or restrictions thereof,
between the shares of each series of the preferred stock so far as the same have
been fixed and determined pursuant to the authority of the Board of Directors.

CONVERSION NOTICE
To convert all of the shares represented by this Certificate check
FOR the box: / /
CONVERSION To convert only a part of the shares represented by this
USE Certificate state the shares to be converted: _______
ONLY The undersigned hereby irrevocable elects to convert the shares
indicated above of the Series A Cumulative Convertible Preferred
Stock represented by this Certificate into shares of the Class B
Common Stock of the corporation (as such shares may be constitute
on the conversion date) in accordance with the provisions of the
Certificate of Incorporation, and direct that the shares
deliverable upon the conversion be registered in the statutes of
the undersigned and delivered together with a check as payment
for any fractional share and a certificate representing any shares
of Series A Cumulative Convertible Preferred Stock not converted
to the undersigned unless a different name(s) has been indicated
in the assignment form on this Certificate or in an assignment on
any other permitted form which accompanies this Conversion Note.
Dated:

FILL IN FOR REGISTRATION OF SHARES ______________________________
Signature

___________________________ Signature Guaranteed By:
Name
___________________________ ______________________________
Address NOTICE: The signature in this
___________________________ Conversion Notice must
Please print name and address correspond with the same as
(including zip code number) written upon the face of
this Certificate in every
particular without alteration
by enlargements, or any change
whatever.
Please Insert Social Security
or Other Identifying Number

<PAGE>

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:

TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
----------------
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act ___________________
tenants in common (State)
UNIF TRF MIN ACT -- Custodian (until age...)
-------------------------

under Uniform Transfers
--------------------------
(Minor)

to Minors Act____________________
(State)
Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

______________________________________
______________________________________

_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the Preferred Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________________________Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________

X _______________________________________________________________
X _______________________________________________________________

Signature(s) Guaranteed

By:_____________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

<PAGE>

EXHIBIT 5.01

[LETTERHEAD OF COOLEY GODWARD LLP]

November 15, 1996

N-T Holdings, Inc.
5995 Plaza Drive
Cypress, California 90630-5028 MICHAEL R. JACOBSON
415 843-5031
Ladies and Gentlemen: [email protected]

You have requested our opinion with respect to certain matters in connection
with the filing on or about November 15, 1996 by N-T Holdings, Inc. (the
"Company") of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission, with respect to the
offering of shares of the Company's Class A Common Stock, $.01 par value (the
"Class A Common Stock"), Class B Common Stock, $.01 par value (the "Class B
Common Stock") and Series A Cumulative Convertible Preferred Stock, $.01 par
value (the "Series A Preferred").

In connection with this opinion, we have examined and relied upon the
Registration Statement, the Company's Certificate of Incorporation, as
amended, and Bylaws, as amended, and such other documents, records,
certificates, memoranda and other instruments as we deem necessary as a basis
for this opinion. We have assumed the genuineness and authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as copies thereof, and the due execution and
delivery of all documents where due execution and delivery are a prerequisite
to the effectiveness thereof. We have also assumed that prior to the
issuance of the Class A Common Stock, Class B Common Stock and Series A
Preferred, a Certificate of Incorporation of the Company, with authorized
stock as set forth in, and otherwise in substantially the form of, Exhibit
3.01 to the Registration Statement, will have been filed with the Secretary
of State of the State of Delaware and will be in effect.

On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the shares of Class A Common Stock, Class B Common Stock and Series A
Preferred, when issued in accordance with the Registration Statement and
related prospectus, will be validly issued, fully paid and nonassessable.

We consent to the filing of this opinion as an exhibit to the Registration
Statement.

Very truly yours,

Cooley Godward LLP

By /s/ MICHAEL R. JACOBSON
_______________________________
Michael R. Jacobson

<PAGE>

EXHIBIT 8.01

[LETTERHEAD OF COOLEY GODWARD LLP]

November 15, 1996

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, CA 90630

Ladies and Gentlemen:

This opinion is being delivered to you in accordance with Section 5.9 of the
Amended and Restated Agreement and Plan of Reorganization dated as of
November 11, 1996 (the "Reorganization Agreement") by and among N-T Holdings,
Inc., a Delaware corporation ("Holding"), Neptune Merger Corp., a Delaware
corporation and wholly-owned subsidiary of Holding ("Neptune Sub"), PacifiCare
Health Systems, Inc., a Delaware corporation ("PacifiCare"); FHP International
Corporation, a Delaware corporation (the "Company") and Tree Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Holding
("Company Sub") (the Reorganization Agreement). Pursuant to the terms of the
Reorganization Agreement, Neptune Sub is merging into PacifiCare, Company Sub
is merging into the Company and PacifiCare and the Company will each become a
wholly-owned subsidiary of Holding.

Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement.

We have acted as counsel to PacifiCare in connection with the Mergers. As
such, and for the purpose of rendering this opinion, we have examined, and
are relying upon (without any independent investigation or review thereof)
the truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in, the following documents
(including all exhibits and schedules attached thereto):

(a) the Reorganization Agreement;

(b) those certain tax representation letters dated November 15, 1996
delivered to us by PacifiCare and Holding containing certain representations
of PacifiCare and Holding (the "Tax Representation Letters"); and

(c) such other instruments and documents related to the formation,
organization and operation of Holding, PacifiCare, Neptune Sub, the Company
and Company Sub and related to the consummation of the Mergers and the other
transactions contemplated by the Reorganization Agreement as we have deemed
necessary or appropriate.

<PAGE>

PacifiCare Health Systems, Inc.
November 15, 1996
Page 2

In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:

1. Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Date) duly and validly executed and delivered where due execution and
delivery are a prerequisite to the effectiveness thereof;

2. All representations, warranties and statements set forth in the
Reorganization Agreement (including the exhibits thereto) and the Tax
Representation Letters are true and accurate at all relevant times;

3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) are performed without waiver or breach of any material
provision thereof;

4. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification; and

5. The opinion, dated November 15, 1996, from Sheppard, Mullin,
Richter & Hampton LLP in satisfaction of Section 6.8 of the Reorganization
Agreement has been delivered and has not been withdrawn.

Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are
of the opinion that, for federal income tax purposes, neither PacifiCare nor
any of its stockholders will recognize gain or loss as a result of the
PacifiCare Merger.

In addition, we have reviewed the discussion contained in the Proxy
Statement-Prospectus pursuant to a Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (the "Registration Statement")
under "The Mergers and Related Transactions -- Certain Federal Income Tax
Consequences" (the "Tax Discussion"), and we believe that, subject to the
qualifications and limitations contained in the Tax Discussion, the matters
stated in the Tax Discussion relating to the PacifiCare Merger, to the extent
that they represent matters of law or legal conclusions, are fairly presented.

This opinion does not address the various state, local or foreign tax
consequences that may result from the Mergers or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Mergers or

<PAGE>

PacifiCare Health Systems, Inc.
November 15, 1996
Page 3

the other transactions contemplated by the Reorganization Agreement except as
specifically set forth herein, and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein.

No opinion is expressed as to any transaction other than the PacifiCare
Merger as described in the Reorganization Agreement, or as to any other
transaction whatsoever, including the Mergers, if all of the transactions
described in the Reorganization Agreement are not consummated in accordance
with the terms of the Reorganization Agreement and without waiver of any
material provision thereof. To the extent that any of the representations,
warranties, statements and assumptions material to our opinion and upon which
we have relied are not accurate and complete in all material respects at all
relevant times, our opinion would be adversely affected and should not be
relied upon.

This opinion only represents our best judgment as to the federal income tax
consequences of the PacifiCare Merger and is not binding on the Internal
Revenue Service or any court of law, tribunal, administrative agency or other
Governmental Body. The conclusions are based on the Code, existing judicial
decisions, administration regulations and published rulings. No assurance
can be given that future legislative, judicial or administrative changes or
interpretations would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, by rendering this opinion, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.

<PAGE>

PacifiCare Health Systems, Inc.
November 15, 1996
Page 4

This opinion has been delivered to you solely for the purposes set forth in
Section 5.9 of the Reorganization Agreement and may not be relied upon or
utilized for any other purpose or by any other Person and may not be
distributed or otherwise made available to any other Person without our prior
written consent. However, we consent to the inclusion of this opinion as an
Exhibit to the Registration Statement, and to the reference to this firm in
the Tax Discussion.

Sincerely,

Cooley Godward LLP

/s/ WEBB B. MORROW III
- -------------------------
Webb B. Morrow III

WBM:ekh

21185262

<PAGE>
EXHIBIT 8.02

[LETTERHEAD OF SHEPPARD, MULLIN, RICHTER & HAMPTON LLP]

November 15, 1996

FHP International Corporation
3120 West Lake Center Drive
Santa Ana, CA 92704

Ladies and Gentlemen:

This opinion is furnished pursuant to Item 601(b)(8) of Regulation
S-K in connection with the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission by N-T Holdings, Inc., and FHP
International Corporation (the "Registration Statement") pursuant to the
Amended and Restated Agreement and Plan of Reorganization made and
entered into as of November 11, 1996, by and among N-T Holdings, Inc., a
Delaware corporation, Neptune Merger Corp., a Delaware corporation and
wholly-owned subsidiary of PacifiCare Holding, PacifiCare Health Systems,
Inc., a Delaware corporation, FHP International Corporation, a Delaware
corporation, and Tree Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of PacifiCare Holding (the "Reorganization
Agreement").

Except as otherwise provided, capitalized terms used but not
defined herein shall have the meanings set forth in the glossary contained in
the Joint Proxy Statement/Prospectus forming a part of the Registration
Statement.

Pursuant to the terms of the Reorganization Agreement, PacifiCare
Merger Sub is merging into PacifiCare, FHP Merger Sub is merging into FHP, and
PacifiCare and FHP will each become a wholly-owned subsidiary of PacifiCare
Holding.

We have acted as counsel to FHP in connection with the Mergers. As
such, and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy,

<PAGE>

FHP International Corporation
November 15, 1996
Page 2

at all relevant times, of the statements, covenants, representations and
warranties contained in the following documents (including all exhibits and
schedules attached thereto):

(a) the Reorganization Agreement;

(b) the Registration Statement (except to the extent we express our
belief in respect of the "Tax Discussion" therein as defined and set forth
below); and

(c) such other instruments and documents related to the consummation
of the Mergers and the other transactions contemplated by the Reorganization
Agreement as we have deemed necessary or appropriate.

In connection with rendering this opinion, we have assumed (without
any independent investigation or review thereof):

1. Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;

2. All representations, warranties and statements made or agreed to
by PacifiCare Holding, PacifiCare, FHP, PacifiCare Merger Sub and FHP Merger
Sub, their managements, employees, officers, directors and stockholders in
connection with the Mergers, including, but not limited to, those set forth in
the Reorganization Agreement (including the exhibits thereto) are true and
accurate at all relevant times;

3. The truth and accuracy of those matters set forth on EXHIBIT A
hereto;

4. All covenants contained in the Reorganization Agreement
(including exhibits thereto) are performed without waiver or breach of any
material provision thereof, and the parties do not in the future take any
discretionary action or fail to act in a manner inconsistent with their
representations, warranties, statements and assumptions upon which we have
relied as described herein;

<PAGE>

FHP International Corporation
November 15, 1996
Page 3

5. Any representation or statement made "to the best of knowledge"
or similarly qualified is correct without such qualification; and

6. The opinion of Cooley Godward LLP furnished pursuant to Item
601(b)(8) of Regulation S-K in connection with the Registration Statement shall
have been delivered and shall not have been withdrawn.

Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, and
based upon our review of the discussion contained in the Joint Proxy
Statement/Prospectus forming a part of the Registration Statement under "The
Mergers and Related Transactions -- Certain Federal Income Tax Consequences"
(the "Tax Discussion"), we believe that, subject to the qualifications and
limitations contained in the Tax Discussion, the matters stated in the Tax
Discussion relating to the FHP Merger, to the extent that they represent
matters of law or legal conclusions, are fairly presented.

This opinion does not address the various state, local or foregoing
tax consequences that may result form the Mergers or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Mergers or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein.

No opinion is expressed as to any transaction other than the FHP
Merger as described in the Reorganization Agreement, or as to any other
transaction whatsoever, including the Mergers, if all of the transactions
described in the Reorganization Agreement are not consummated in accordance with
the terms of the Reorganization Agreement and without waiver or breach of any
material provision thereof, or if the parties in the future take any
discretionary action or fail to act in a manner inconsistent with their
representations, warranties, statements and assumptions upon which we have
relied as described above. To the extent that any of the representations,
warranties, statements and assumptions material to our opinion and upon which we
have relied are not accurate and complete in all material respects at all
relevant times, our opinion would be adversely affected and should not be relied
upon.

<PAGE>

FHP International Corporation
November 15, 1996
Page 4

This opinion only represents our best judgment as to the federal
income tax consequences of the FHP Merger and is not binding on the Internal
Revenue Service or any court of law, tribunal, administrative agency or other
Governmental Body. The conclusions are based on the Code, existing judicial
decisions, administration regulations and published rulings. No assurance can
be given that future legislative, judicial or administrative changes or
interpretations would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, by rendering this opinion, we undertake no
responsibility to advise you or any new developments in the application or
interpretation of the federal income tax laws.

This opinion has been delivered to you solely for the purposes of
compliance with Item 601(b)(8) of Regulation S-K in connection with the
Registration Statement and may not be relied upon or utilized for any other
purpose or by any other Person and may not be distributed or otherwise made
available to any other Person without our prior written consent. However, we
consent to the inclusion of this opinion as an Exhibit to the Registration
Statement, and to the reference to this firm in the Tax Discussion. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.

Very truly yours,

/s/ SHEPPARD, MULLIN, RICHTER & HAMPTON LLP

<PAGE>

EXHIBIT A
CERTAIN FACTUAL ASSUMPTIONS

1. The principal reasons of FHP, PacifiCare Holding and PacifiCare for
participating in the Mergers are BONA FIDE business purposes not related to
taxes.

2. At the Effective Time, by virtue of the PacifiCare Merger each share of the
capital stock of PacifiCare Holding, consisting solely of two hundred
shares of Common Stock held by PacifiCare, will be contributed to the
capital of PacifiCare Holding by PacifiCare and canceled in accordance with
Section 1.5(b)(v) of the Reorganization Agreement. The representations and
warranties of PacifiCare Holding and PacifiCare set forth in Sections 1.10
and 3.24 of the Reorganization Agreement are true and correct.

3. In the Mergers, shares of PacifiCare Holding Capital Stock representing
control (within the meaning of Section 368(c) of the Code) of PacifiCare
Holding immediately after the Mergers will be issued to the stockholders of
PacifiCare and the stockholders of FHP (together, the "Exchanging
Holders"). Immediately after the Effective Time, there will exist no
rights to acquire PacifiCare Holding Capital Stock or to vote (or to
restrict or otherwise control the voting of) shares of PacifiCare Holding
Capital Stock which, if exercised, would affect the Exchanging Holders'
acquisition and retention of such control of PacifiCare Holding.

4. PacifiCare Holding has no plan or intention to issue additional shares of
capital stock or other securities after the Mergers, or to take any other
action, that would result in the Exchanging Holders not being in control of
PacifiCare Holding after the Mergers.

5. There is no plan or intention on the part of PacifiCare Holding to redeem
or otherwise reacquire (or to cause PacifiCare or FHP or any person or
entity controlled by PacifiCare Holding to redeem or otherwise reacquire)
any PacifiCare Holding Capital Stock issued in the Mergers.

6. Except for any disposition pursuant to exercise of the Talbert Rights,
there is no plan or intention of PacifiCare Holding or its affiliates (a)
to liquidate PacifiCare Holding, FHP or PacifiCare or to merge FHP or
PacifiCare into another corporation, (b) to merge, to liquidate or to
consolidate PacifiCare Holding, PacifiCare or FHP, with or into any other
corporation (including, without limitation, any affiliated corporation),
(c) to sell, transfer, distribute, or otherwise dispose of the stock of
PacifiCare, FHP or their respective

<PAGE>

subsidiaries, or (d) to sell, transfer, distribute, or otherwise dispose of
any of the assets of PacifiCare or FHP or their subsidiaries (other than in
the normal course of business operations).

7. By virtue of the Mergers, all FHP Capital Stock and PacifiCare Common Stock
will be exchanged solely for the consideration set forth in Section 1.5 of
the Reorganization Agreement. PacifiCare Holding and PacifiCare intend
that no consideration be paid or received (directly or indirectly, actually
or constructively) for shares of FHP Capital Stock or PacifiCare Common
Stock other than in accordance with Section 1.5 of the Reorganization
Agreement. The payment of cash in lieu of fractional shares of FHP Capital
Stock is solely for the purpose of avoiding the expense and inconvenience
to PacifiCare Holding of issuing fractional shares and does not represent
separately bargained-for consideration. The stockholders of FHP Capital
Stock and PacifiCare Common Stock will not retain any right or continuing
interest therein following the Mergers.

8. The managements of FHP, PacifiCare Holding and PacifiCare have no knowledge
of, and believe that there does not exist, any plan or intention on the
part of the Exchanging Holders (or any of the Exchanging Holders) to engage
in a sale, exchange, transfer, distribution, pledge, disposition or any
other transaction which would result in a reduction in the risk of
ownership or a direct or indirect disposition (a "Sale") of shares of
PacifiCare Holding Capital Stock to be received in the Mergers that would
reduce the Exchanging Holders' ownership of such PacifiCare Holding Capital
Stock that would result in the Exchanging Holders not having control of
PacifiCare Holding (within the meaning of Section 368(c) of the Code).

9. The fair market value of the shares of PacifiCare Holding Capital Stock
received by each stockholder PacifiCare will be approximately equal to the
fair market value of the shares of PacifiCare Common Stock surrendered in
exchange therefor. The fair market value of the shares of PacifiCare
Holding Capital Stock and other consideration received by each stockholder
of FHP pursuant to Section 1.5(a) of the Reorganization Agreement will be
approximately equal to the fair market value of the shares of FHP Capital
Stock surrendered in exchange therefor.

10. PacifiCare Holding will assume no liabilities of any stockholder of FHP or
PacifiCare in connection with the Mergers. There is no indebtedness
between PacifiCare Holding and the stockholders of FHP or the stockholders
of

<PAGE>

PacifiCare, and there will be no indebtedness created in favor of such
stockholders as a result of the Mergers.

11. The terms of the Reorganization Agreement and of the other agreements
relating thereto are the product of arm's length negotiations.

12. None of the compensation received or to be received by any
stockholder-employee of FHP or PacifiCare will be separate consideration
for, or allocable to, any of such stockholder-employee's shares of FHP
Capital Stock or PacifiCare Common Stock; none of the shares of PacifiCare
Holding Capital Stock to be received by any stockholder-employee of FHP or
PacifiCare in the Mergers will be separate consideration for, or allocable
to, any employment agreement or any covenant not to compete; the
compensation paid or to be paid to any stockholder-employee of FHP or
PacifiCare will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arm's length for similar
services; and no stock or securities will be issued by PacifiCare Holding
for services rendered to or for the benefit of PacifiCare Holding in
connection with the Mergers.

13. Neither FHP, PacifiCare Holding nor PacifiCare is an "investment company"
within the meaning of Section 368(a)(2)(F)(iii) of the Code.

14. None of FHP, PacifiCare Holding, PacifiCare, FHP Merger Sub or PacifiCare
Merger Sub is under the jurisdiction of a court in a title 11 or similar
case.

15. As of the Effective Time, (i) there will not have occurred any "Class B
Protection Transaction" or any event which with notice or lapse of time
would give rise to the issuance of securities or other consideration
pursuant to any "Rights Agreement," as those terms are defined in Exhibits
1.4A and 1.4B to the Reorganization Agreement, (ii) any rights of holders
of PacifiCare Holding Capital Stock relating to any such transaction or
event that may thereafter occur shall not be separately tradable nor
represented by any certificate other than the certificate for the
PacifiCare Holding Capital Stock itself, and (iii) the likelihood that such
rights will, at any time, be exercised is both remote and speculative (and,
as of the time PacifiCare Holding's board of directors adopted the
provisions for such rights, the likelihood that such rights would, at any
time, be exercised was both remote and speculative). The principal purpose
of the issuance of such rights is to establish a mechanism by which
PacifiCare Holding could, in the future, provide its stockholders with a
means of responding to unsolicited offers to acquire PacifiCare Holding.

<PAGE>
Exhibit 10-01

CREDIT AGREEMENT

DATED AS OF OCTOBER 31, 1996

AMONG

N-T HOLDINGS, INC.,

THE BANK OF NEW YORK,
THE BANK OF NOVA SCOTIA,
BANQUE NATIONALE DE PARIS,
THE DAI-ICHI KANGYO BANK, LTD.,
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
RABOBANK NEDERLAND,
SANWA BANK CALIFORNIA,
THE SUMITOMO BANK, LIMITED,
AND
WELLS FARGO BANK, N.A.,

AS CO-AGENTS,

THE CHASE MANHATTAN BANK
AND
CITICORP USA, INC.

AS MANAGING AGENTS,

BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,

AS AGENT,

AND

THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO

ARRANGED BY

BA SECURITIES, INC.

<PAGE>
TABLE OF CONTENTS

Page

ARTICLE I

DEFINITIONS . . . . . . . . . . . . . . . -1-
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . -1-
1.2 Other Interpretive Provisions . . . . . . . . . . . . . .-25-
1.3 Accounting Principles . . . . . . . . . . . . . . . . . .-26-

ARTICLE II

THE CREDITS . . . . . . . . . . . . . . .-27-
2.1 Amounts and Terms of Commitments. . . . . . . . . . . . .-27-
2.2 Loan Accounts . . . . . . . . . . . . . . . . . . . . . .-27-
2.3 Procedure for Committed Borrowing . . . . . . . . . . . .-28-
2.4 Conversion and Continuation Elections for
Committed Borrowings . . . . . . . . . . . . . . . . . .-29-
2.5 Bid Borrowings. . . . . . . . . . . . . . . . . . . . . .-31-
2.6 Procedure for Bid Borrowings. . . . . . . . . . . . . . .-31-
2.7 Voluntary Termination or Reduction of Commitments . . . .-35-
2.8 Optional Prepayments. . . . . . . . . . . . . . . . . . .-36-
2.9 Mandatory Commitment Reductions . . . . . . . . . . . . .-36-
2.10 Repayment . . . . . . . . . . . . . . . . . . . . . . . .-36-
2.11 Interest. . . . . . . . . . . . . . . . . . . . . . . . .-37-
2.12 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . .-38-
(a) Arrangement, Agency Fees . . . . . . . . . . . . . .-38-
(b) Commitment Fees. . . . . . . . . . . . . . . . . . .-38-
(c) Facility Fees. . . . . . . . . . . . . . . . . . . .-38-
2.13 Computation of Fees and Interest. . . . . . . . . . . . .-38-
2.14 Payments by the Company . . . . . . . . . . . . . . . . .-39-
2.15 Payments by the Banks to the Agent; Advances to the
Company. . . . . . . . . . . . . . . . . . . . . . . . .-40-
2.16 Sharing of Payments, Etc. . . . . . . . . . . . . . . . .-41-

ARTICLE III

TAXES, YIELD PROTECTION AND ILLEGALITY. . . . . . . . .-41-
3.1 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . .-41-
3.2 Illegality. . . . . . . . . . . . . . . . . . . . . . . .-43-
3.3 Increased Costs and Reduction of Return . . . . . . . . .-44-
3.4 Funding Losses. . . . . . . . . . . . . . . . . . . . . .-45-
3.5 Inability to Determine Rates. . . . . . . . . . . . . . .-45-
3.6 Certificates of Banks . . . . . . . . . . . . . . . . . .-46-
3.7 Substitution of Banks . . . . . . . . . . . . . . . . . .-46-
3.8 Presentation of Claims; Survival. . . . . . . . . . . . .-46-

ARTICLE IV

-i-
<PAGE>

CONDITIONS PRECEDENT . . . . . . . . . . . . .-46-
4.1 Conditions of Initial Loans . . . . . . . . . . . . . . .-46-
(a) Credit Agreement and Notes . . . . . . . . . . . . .-47-
(b) Resolutions; Incumbency. . . . . . . . . . . . . . .-47-
(c) Organization Documents; Good Standing. . . . . . . .-47-
(d) Legal Opinion. . . . . . . . . . . . . . . . . . . .-47-
(e) Payment of Fees. . . . . . . . . . . . . . . . . . .-48-
(f) Certificate. . . . . . . . . . . . . . . . . . . . .-48-
(g) Financial Statements and Projections . . . . . . . .-48-
(h) FHP Acquisition and FHP Acquisition Documents. . . .-48-
(i) Litigation . . . . . . . . . . . . . . . . . . . . .-49-
(j) Termination of Existing Credit Facilities. . . . . .-49-
(k) Guarantees . . . . . . . . . . . . . . . . . . . . .-49-
(l) Other Documents. . . . . . . . . . . . . . . . . . .-49-
4.2 Conditions to All Borrowings. . . . . . . . . . . . . . .-49-
(a) Notice of Borrowing. . . . . . . . . . . . . . . . .-50-
(b) Continuation of Representations and Warranties . . .-50-
(c) No Existing Default. . . . . . . . . . . . . . . . .-50-

ARTICLE V

REPRESENTATIONS AND WARRANTIES. . . . . . . . . . .-50-
5.1 Corporate Existence and Power . . . . . . . . . . . . . .-50-
5.2 Corporate Authorization; No Contravention . . . . . . . .-51-
5.3 Governmental Authorization. . . . . . . . . . . . . . . .-51-
5.4 Binding Effect. . . . . . . . . . . . . . . . . . . . . .-51-
5.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . .-52-
5.6 No Default. . . . . . . . . . . . . . . . . . . . . . . .-52-
5.7 ERISA Compliance. . . . . . . . . . . . . . . . . . . . .-52-
5.8 Use of Proceeds; Margin Regulations . . . . . . . . . . .-53-
5.9 Title to Properties . . . . . . . . . . . . . . . . . . .-53-
5.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . .-53-
5.11 Financial Condition . . . . . . . . . . . . . . . . . . .-54-
5.12 Environmental Matters . . . . . . . . . . . . . . . . . .-55-
5.13 Regulated Entities. . . . . . . . . . . . . . . . . . . .-55-
5.14 No Burdensome Restrictions. . . . . . . . . . . . . . . .-55-
5.15 Copyrights, Patents, Trademarks and Licenses, etc.. . . .-55-
5.16 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . .-55-
5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . .-56-
5.18 Swap Obligations. . . . . . . . . . . . . . . . . . . . .-56-
5.19 Full Disclosure . . . . . . . . . . . . . . . . . . . . .-56-
5.20 FHP Acquisition and FHP Acquisition Documents . . . . . .-56-

ARTICLE VI

AFFIRMATIVE COVENANTS. . . . . . . . . . . . .-57-
6.1 Financial Statements, Notices, Etc. . . . . . . . . . . .-57-
6.2 Litigation. . . . . . . . . . . . . . . . . . . . . . . .-61-
6.3 Existence, Etc. . . . . . . . . . . . . . . . . . . . . .-61-
6.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . .-62-
6.5 Compliance with ERISA . . . . . . . . . . . . . . . . . .-62-

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<PAGE>

6.6 Environmental Laws. . . . . . . . . . . . . . . . . . . .-62-
6.7 Use of Proceeds . . . . . . . . . . . . . . . . . . . . .-62-
6.8 Certain Obligations Respecting Subsidiaries . . . . . . .-62-

ARTICLE VII

NEGATIVE COVENANTS. . . . . . . . . . . . . .-63-
7.1 Consolidation, Merger or Sale . . . . . . . . . . . . . .-63-
7.2 Limitation on Liens . . . . . . . . . . . . . . . . . . .-65-
7.3 Indebtedness. . . . . . . . . . . . . . . . . . . . . . .-67-
7.4 Investments . . . . . . . . . . . . . . . . . . . . . . .-68-
7.5 Transactions with Affiliates. . . . . . . . . . . . . . .-68-
7.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . .-69-
7.7 Restricted Payments . . . . . . . . . . . . . . . . . . .-69-
7.8 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . .-70-
7.9 Accounting Changes. . . . . . . . . . . . . . . . . . . .-70-
7.10 Financial Covenants . . . . . . . . . . . . . . . . . . .-70-
7.11 Limitation on Payment Restrictions Affecting Material
Subsidiaries . . . . . . . . . . . . . . . . . . . . . .-71-
7.12 Prepayments of Indebtedness . . . . . . . . . . . . . . .-71-
7.13 Lines of Business . . . . . . . . . . . . . . . . . . . .-72-

ARTICLE VIII

EVENTS OF DEFAULT. . . . . . . . . . . . . .-72-
8.1 Event of Default. . . . . . . . . . . . . . . . . . . . .-72-
(a) Non-Payment. . . . . . . . . . . . . . . . . . . . .-72-
(b) Representation or Warranty . . . . . . . . . . . . .-72-
(c) Specific Defaults. . . . . . . . . . . . . . . . . .-72-
(d) Other Defaults . . . . . . . . . . . . . . . . . . .-72-
(e) Cross-Default. . . . . . . . . . . . . . . . . . . .-72-
(f) Insolvency; Voluntary Proceedings. . . . . . . . . .-73-
(g) Involuntary Proceedings. . . . . . . . . . . . . . .-73-
(h) ERISA. . . . . . . . . . . . . . . . . . . . . . . .-74-
(i) Monetary Judgments . . . . . . . . . . . . . . . . .-74-
(j) Change of Control. . . . . . . . . . . . . . . . . .-74-
(k) Loss of Licenses . . . . . . . . . . . . . . . . . .-74-
(l) HMO Event. . . . . . . . . . . . . . . . . . . . . .-74-
(m) Guarantor Defaults . . . . . . . . . . . . . . . . .-74-
8.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . .-75-
8.3 Rights Not Exclusive. . . . . . . . . . . . . . . . . . .-75-

ARTICLE IX

THE AGENT. . . . . . . . . . . . . . . .-75-
9.1 Appointment and Authorization . . . . . . . . . . . . . .-75-
9.2 Delegation of Duties. . . . . . . . . . . . . . . . . . .-76-
9.3 Liability of Agent. . . . . . . . . . . . . . . . . . . .-76-
9.4 Reliance by Agent . . . . . . . . . . . . . . . . . . . .-76-
9.5 Notice of Default . . . . . . . . . . . . . . . . . . . .-77-
9.6 Credit Decision . . . . . . . . . . . . . . . . . . . . .-77-

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<PAGE>

9.7 Indemnification of Agent. . . . . . . . . . . . . . . . .-78-
9.8 Agent in Individual Capacity. . . . . . . . . . . . . . .-78-
9.9 Successor Agent . . . . . . . . . . . . . . . . . . . . .-79-
9.10 Withholding Tax . . . . . . . . . . . . . . . . . . . . .-79-
9.11 Co-Agents; Lead Managers. . . . . . . . . . . . . . . . .-81-

ARTICLE X

MISCELLANEOUS. . . . . . . . . . . . . . .-81-
10.1 Amendments and Waivers. . . . . . . . . . . . . . . . . .-81-
10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . .-82-
10.3 No Waiver; Cumulative Remedies. . . . . . . . . . . . . .-83-
10.4 Costs and Expenses. . . . . . . . . . . . . . . . . . . .-83-
10.5 Company Indemnification . . . . . . . . . . . . . . . . .-84-
10.6 Payments Set Aside. . . . . . . . . . . . . . . . . . . .-84-
10.7 Successors and Assigns. . . . . . . . . . . . . . . . . .-85-
10.8 Assignments, Participations, etc. . . . . . . . . . . . .-85-
10.9 Confidentiality . . . . . . . . . . . . . . . . . . . . .-86-
10.10 Set-off . . . . . . . . . . . . . . . . . . . . . . . . .-87-
10.11 Notification of Addresses, Lending Offices, Etc. . . . .-87-
10.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . .-87-
10.13 Severability. . . . . . . . . . . . . . . . . . . . . . .-87-
10.14 No Third Parties Benefited. . . . . . . . . . . . . . . .-88-
10.15 Governing Law and Jurisdiction. . . . . . . . . . . . . .-88-
10.17 Entire Agreement. . . . . . . . . . . . . . . . . . . . .-89-

SCHEDULES*

Schedule 2.1 Commitments
Schedule 5.5 Litigation
Schedule 5.12 Environmental Matters
Schedule 5.16 Subsidiaries and Minority Interests
Schedule 5.17 Insurance Matters
Schedule 7.1 Permitted Liens
Schedule 7.3 Permitted Indebtedness
Schedule 7.4 Permitted Investments
Schedule 10.2 Lending Offices, Addresses for Notices

EXHIBITS*

Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F Form of Invitation for Competitive Bids
Exhibit G Form of Competitive Bid Request
Exhibit H Form of Competitive Bid
Exhibit I Form of Committed Loan Note

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<PAGE>

Exhibit J Form of Bid Loan Note
Exhibit K Form of Guarantees
Exhibit L Form of Confidentiality Agreement

* All Schedules and certain Exhibits have been omitted.

-v-
<PAGE>

CREDIT AGREEMENT

This CREDIT AGREEMENT is entered into as of October 31, 1996, among N-
T Holdings, Inc., a Delaware corporation (the "Company"), the several financial
institutions from time to time party to this Agreement (collectively, the
"Banks"; individually, a "Bank"), The Bank of New York, The Bank of Nova Scotia,
Banque Nationale de Paris, The Dai-Ichi Kangyo Bank, Ltd., The Industrial Bank
of Japan, Limited, RaboBank Nederland, Sanwa Bank California, The Sumitomo Bank,
Limited, and Wells Fargo Bank, N.A., as co-agents (collectively, the "Co-
Agents"), The Chase Manhattan Bank and Citicorp USA, Inc., as managing agents
(collectively, the "Managing Agents") and Bank of America National Trust and
Savings Association, as agent for the Banks.

WHEREAS, the Banks have agreed to make available to the Company a
revolving credit facility upon the terms and conditions set forth in this
Agreement;

NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:

ARTICLE I

DEFINITIONS

1.1 CERTAIN DEFINED TERMS. The following terms have the following
meanings:

"Absolute Rate" has the meaning specified in subsection 2.6(c).

"Absolute Rate Auction" means a solicitation of Competitive Bids
setting forth Absolute Rates pursuant to Section 2.6.

"Absolute Rate Bid Loan" means a Bid Loan that bears interest at
a rate determined with reference to the Absolute Rate.

"Acquisition" shall mean any transaction, or any series of
related transactions, by which any Person, in the transaction or as of
the most recent transaction in a series of transactions, directly or
indirectly: (a) acquires any going concern or all or a substantial
part of the assets of any corporation, partnership or other entity or
any division of any such entity; or (b) any such entity or any
division of such an entity becomes a Subsidiary of such Person.

<PAGE>

"Adjusted EBITDA" means, for any period of four consecutive
fiscal quarters, the sum of the Company's and its Subsidiaries'
(i) earnings before Interest Expense, taxes, depreciation,
amortization and the Specified Charges for such period PLUS
(ii), without duplication, interest income during such period.
Adjusted EBITDA shall be calculated on a Combined Basis for the
quarters ending before the FHP Acquisition and on a consolidated basis
after the FHP Acquisition.

"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person. A Person shall be deemed to
control another Person if the controlling Person possesses, directly
or indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, membership interests, by contract, or
otherwise.

"Agent" means BofA in its capacity as agent for the Banks
hereunder, and any successor agent arising under Section 9.9.

"Agent-Related Persons" means BofA and any successor agent
arising under Section 9.9, together with their respective Affiliates
(including, in the case of BofA, the Arranger), and the officers,
directors, employees, agents and attorneys-in-fact of such Persons and
Affiliates.

"Agent's Payment Office" means the address for payments set forth
on Schedule 10.2 or such other address as the Agent may from time to
time specify.

"Agreement" means this Credit Agreement.

"Applicable Margin" means, in the case of Facility Fees or LIBOR
Committed Loans, a rate per annum determined by reference to the
Senior Unsecured Debt Rating or Leverage Ratio as follows:

Senior Unsecured
Debt Rating Applicable LIBOR Facility
LEVEL S&P/Moody's Leverage Ratio Rate Margin Fee
- ----- ---------------- ----------------------------------------------- ---------------- --------

Level 1 A-/A-3 or better Less than 1.00 +0.165% 0.085%

Level 2 BBB+/Baa1 Greater than or equal to 1.00 but less than 1.25 +0.200% 0.100%

Level 3 BBB/Baa2 Greater than or equal to 1.25 but less than 1.50 +0.225% 0.125%

Level 4 BBB-/Baa3 Greater than or equal to 1.50 but less than 2.00 +0.250% 0.150%

Level 5 BB+/Ba1 Greater than or equal to 2.00 but less than 2.50 +0.425% 0.200%

Level 6 BB/Ba2 or lower Greater than or equal to 2.50 +0.525% 0.225%

</TABLE>

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<PAGE>

From the Closing Date until the delivery of the first Compliance
Certificate after the first full fiscal quarter following consummation of
the FHP Acquisition, the applicable Level shall be set on the Closing Date
based on either the combined balance sheet delivered pursuant to subsection
4.1(g) or the Senior Unsecured Debt Rating, as designated by the Company.
Thereafter, the Company in each Compliance Certificate, may designate
whether the Applicable Margin shall be based on its Leverage Ratio or on
the Senior Unsecured Debt Rating. Such Applicable Margin shall be
effective from and including the date on which the Agent receives such
Compliance Certificate to but excluding the date on which the Agent
receives the next Compliance Certificate; PROVIDED, HOWEVER, that if the
Agent does not receive a Compliance Certificate by the date required by
Section 6.1, the Applicable Margin shall, effective as of such date, be
Level 6 to but excluding the date the Agent receives such Compliance
Certificate.

"Approved Acquisition" shall mean an Acquisition, consummated or to be
consummated by the Company or any Subsidiary of the Company: (a) which
does not or would not result in the Company or any of its Subsidiaries
being engaged to any substantial extent in any line or lines of business
activity other than the Healthcare Business; (b) immediately after which,
each of the Company's Material HMO Subsidiaries shall be in compliance with
all applicable Regulatory Tangible Net Equity Requirements and shall be in
substantial compliance in all other respects with any HMO Regulation
relevant to such requirement; (c) the terms of which have been accepted by
the board of directors or other managing body of the target Person (which,
if such Person is the debtor in any proceeding under the Bankruptcy Code,
shall be the court having jurisdiction in such case); and (d) immediately
before which and after giving effect to which (i) the representations and
warranties of the Company in Article V of this Agreement shall be true in
all material respects (except to the extent they specifically refer to a
particular date, then as of such date) and (ii) no Default or Event of
Default shall have occurred and be continuing.

"Approved Merger" shall mean a merger or consolidation consummated or
to be consummated by the Company or any Subsidiary of the Company:
(a) wherein the Company or such Subsidiary shall be the continuing or
surviving corporation; (b) the Company and its Subsidiaries do not incur or
assume interest-bearing Indebtedness (other than Indebtedness, which the
non-surviving entity had on its balance sheet prior to such merger or
consolidation and Indebtedness otherwise permitted under this Agreement);
(c) which does not or would not result in the Company or any of its

-3-
<PAGE>

Subsidiaries being engaged to any substantial extent in any line or lines
of business activity other than the Healthcare Business; (d) immediately
after which, each of the Company's Material HMO Subsidiaries shall be in
compliance with all applicable Regulatory Tangible Net Equity Requirements
and shall be in substantial compliance in all other respects with any HMO
Regulation relevant to such requirement; (e) the terms of which have been
accepted by the board of directors or other managing body of the target
Person (which, if such Person is the debtor in any proceeding under the
Bankruptcy Code, shall be the court having jurisdiction in such case), and
(f) immediately before which and after giving effect to which (i) the
representations and warranties of the Company in Article V of this
Agreement shall be true in all material respects (except to the extent they
specifically refer to a particular date, then as of such date) and (ii) no
Default or Event of Default shall have occurred and be continuing.

"Arranger" means BA Securities, Inc., a Delaware corporation.

"Assignee" has the meaning specified in subsection 10.8(a).

"Attorney Costs" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the allocated cost
of internal legal services and all disbursements of internal counsel.

"Bank" has the meaning specified in the introductory clause hereto.

"Bank Default" means (i) the failure which has not been cured of any
Bank to make available the portion of any Borrowing that it is obligated to
make available under the terms of this Agreement, or (ii) the appointment
of a receiver or conservator with respect to such Bank at the direction or
request of any regulatory agency or authority.

"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11
U.S.C. Section 101, et seq.).

"Base Rate" means, for any day, the higher of: (a) 0.50% per annum
above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by BofA in San
Francisco, California, as its "reference rate." (The "reference rate" is a
rate set by BofA based upon various factors including BofA's costs and
desired return, general economic conditions and other factors, and is used
as a reference point for

-4-

<PAGE>

pricing some loans, which may be priced at, above, or below such
announced rate.) Any change in the reference rate announced by BofA
shall take effect at the opening of business on the day specified in the
public announcement of such change.

"Base Rate Committed Loan" means a Committed Loan that bears interest
based on the Base Rate.

"Bid Borrowing" means a Borrowing hereunder consisting of one or
more Bid Loans made to the Company on the same day by one or more
Banks.

"Bid Loan" means a Loan by a Bank to the Company under Section 2.5,
which may be a LIBOR Bid Loan or an Absolute Rate Bid Loan.

"Bid Loan Lender" means, in respect of any Bid Loan, the Bank making
such Bid Loan to the Company.

"Bid Loan Note" means a promissory note substantially in the form of
Exhibit J issued pursuant to Section 2.2.

"BofA" means Bank of America National Trust and Savings Association, a
national banking association.

"Borrowing" means a borrowing hereunder consisting of Loans of the
same Type made to the Company on the same day by the Banks under Article
II, and may be a Committed Borrowing or a Bid Borrowing and, other than in
the case of Base Rate Committed Loans, having the same Interest Period.

"Borrowing Date" means any date on which a Borrowing occurs under
Section 2.3.

"Business Day" means any day other than a Saturday, Sunday or other
day on which commercial banks in New York City or San Francisco are
authorized or required by law to close and, if the applicable Business Day
relates to any LIBOR Loan, means such a day on which dealings are carried
on in the applicable offshore dollar interbank market.

"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other
law, rule or regulation, whether or not having the force of law, in each
case, regarding capital adequacy of any bank or of any corporation
controlling a bank.

-5-
<PAGE>

"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of
(or other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital
lease on a balance sheet of such Person under GAAP (including Statement of
Financial Accounting Standards No. 13 of the Financial Accounting Standards
Board), and, for purposes of this Agreement, the amount of such obligations
shall be the capitalized amount of such obligation, determined in
accordance with GAAP (including such Statement No. 13).

"Combined Basis" means the method of preparation of combined financial
statements generally consistent with the American Institute of Certified
Public Accountant's Research Bulletin 51.

"Change of Control" means the acquisition by any Person other than
UniHealth or by two or more Persons acting in concert of beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of 20% or
more of the outstanding shares of voting stock of the Company.

"Closing Date" means the date on which all conditions precedent set
forth in Section 4.1 are satisfied or waived by all Banks (or, in the case
of subsection 4.1(e), waived by the Person entitled to receive such payment
or, in the case of subsection 4.1(h), waived by the Managing Agents).

"Co-Agents" is defined in the preamble.

"Code" means the Internal Revenue Code of 1986, and regulations
promulgated thereunder.

"Commitment", as to each Bank, has the meaning specified in Section
2.1.

"Committed Borrowing" means a Borrowing hereunder consisting of
Committed Loans made on the same day by the Banks ratably according to
their respective Pro Rata Shares and, in the case of LIBOR Committed Loans,
having the same Interest Periods.

"Committed Loan" means a Loan by a Bank to the Company under
Section 2.1, and may be a LIBOR Committed Loan or a Base Rate Committed
Loan (each, a "Type" of Committed Loan).

"Committed Loan Note" means a promissory note substantially in the
form of Exhibit I issued pursuant Section 2.2.

-6-
<PAGE>

"Competitive Bid" means an offer by a Bank to make a Bid Loan in
accordance with subsection 2.6(b).

"Competitive Bid Request" has the meaning specified in
subsection 2.6(a).

"Compliance Certificate" means a certificate substantially in the form
of Exhibit C.

"Consolidated Subsidiary" shall mean, for any Person, each Subsidiary
of such Person (whether now existing or hereafter created or acquired) the
financial statements of which shall be (or should have been) consolidated
with the financial statements of such Person in accordance with GAAP.

"Contingent Obligation" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any Indebtedness, lease, dividend,
letter of credit or other obligation (the "primary obligations") of another
Person (the "primary obligor"), including any obligation of that Person (i)
to purchase, repurchase or otherwise acquire such primary obligations or
any security therefor, (ii) to advance or provide funds for the payment or
discharge of any such primary obligation, or to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net
worth or solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such
primary obligation of the ability of the primary obligor to make payment of
such primary obligation, or (iv) otherwise to assure or hold harmless the
holder of any such primary obligation against loss in respect thereof
(each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument
issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; (c) to purchase
any materials, supplies or other property from, or to obtain the services
of, another Person if the relevant contract or other related document or
obligation requires that payment for such materials, supplies or other
property, or for such services, shall be made regardless of whether
delivery of such materials, supplies or other property is ever made or
tendered, or such services are ever performed or tendered, or (d) in
respect of any Swap Contract. The amount of any Contingent Obligation
shall, in the case of Guaranty Obligations, be deemed equal to the stated
or determinable amount of the primary obligation in respect of which such
Guaranty Obligation is made or, if not stated or if

-7-
<PAGE>

indeterminable, the maximum reasonably anticipated liability in respect
thereof, and in the case of other Contingent Obligations other than in
respect of Swap Contracts, shall be equal to the maximum reasonably
anticipated liability in respect thereof and, in the case of Contingent
Obligations in respect of Swap Contracts shall be equal to the amount
that would be determined if such Swap Contract were terminated on such
date of determination, taking into account any legally enforceable
netting arrangement relating to such Swap Contract (such amount, "Swap
Termination Value").

"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or
agreement to which such Person is a party or by which it or any of its
property is bound.

"Conversion/Continuation Date" means any date on which, under Section
2.4, the Company (a) converts Committed Loans of one Type to another Type,
or (b) continues as Committed Loans of the same Type, but with a new
Interest Period, Committed Loans having Interest Periods expiring on such
date.

"Default" means any event or circumstance which, with the giving of
notice, the lapse of time, or both, would (if not cured or otherwise
remedied during such time) constitute an Event of Default.

"Defaulting Banks" means at any time any Bank with respect to which a
Bank Default is in effect at such time.

"Designated Deposit Account" shall mean Account No. 4159361740 at
Wells Fargo Bank, N.A. or such other account at such other financial
institution as shall be designated by two Responsible Officers in writing.

"Dividend Payment" shall mean dividends (in cash, Property or
obligations) on, or other payments or distributions on account of, or the
setting apart of money for a sinking or other analogous fund for, or the
purchase, redemption, retirement or other acquisition of, any shares of any
class of stock of the Company or any of the Company's Subsidiaries or of
any warrants, options or other rights to acquire the same (or to make any
payments to any Person, such as "phantom stock" payments, where the amount
is calculated with reference to the fair market or equity value of the
Company or any of its Subsidiaries), but excluding

-8-
<PAGE>

dividends payable solely in shares of common stock of the Company or any
of the Company's Subsidiaries.

"Dollars", "dollars" and "$" each mean lawful money of the United
States.

"Eligible Assignee" means (a) a commercial bank organized under the
laws of the United States, or any state thereof, and having a combined
capital and surplus of at least $300,000,000; (b) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development (the "OECD"), or a
political subdivision of any such country, and having a combined capital
and surplus of at least $300,000,000, provided that such bank is acting
through a branch or agency located in the United States; and (c) a Person
that is primarily engaged in the business of commercial banking and that is
(i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank
is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary.

"Environmental Claims" means all claims, however asserted, by any
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law, or for release or
injury to the environment.

"Environmental Laws" means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with
all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any Governmental
Authorities, in each case relating to environmental, health, safety and
land use matters.

"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.

"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Company or any Guarantor within
the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and
(o) of the Code for purposes of provisions relating to Section 412 of the
Code).

"ERISA Event" means (a) a Reportable Event with respect to a Pension
Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a

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<PAGE>

cessation of operations which is treated as such a withdrawal under Section
4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or
any ERISA Affiliate from a Multiemployer Plan or notification that a
Multiemployer Plan is in reorganization; (d) the filing of a notice of
intent to terminate a Pension Plan, the treatment of a Pension Plan
amendment as a termination under Section 4041 or 4041A of ERISA, or the
commencement of proceedings by the PBGC to terminate a Pension Plan; (e) an
event or condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan; or (f) the imposition of any
liability under Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Company or any ERISA
Affiliate.

"Event of Default" means any of the events or circumstances specified
in Section 8.1.

"Exchange Act" means the Securities and Exchange Act of 1934, and
regulations promulgated thereunder.

"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor, "H.15(519)") on the preceding Business Day opposite the
caption "Federal Funds (Effective)"; or, if for any relevant day such rate
is not so published on any such preceding Business Day, the rate for such
day will be the arithmetic mean as determined by the Agent of the rates for
the last transaction in overnight Federal funds arranged prior to 9:00 a.m.
(New York City time) on that day by each of three leading brokers of
Federal funds transactions in New York City selected by the Agent.

"Fee Letter" has the meaning specified in Section 2.12.

"FHP" means FHP International Corporation, a Delaware corporation.

"FHP Acquisition" means the acquisition of FHP pursuant to the FHP
Acquisition Documents.

"FHP Acquisition Documents" means the Amended and Restated Agreement
and Plan of Reorganization dated as of September 17, 1996 by and among the
Company, PacifiCare, Neptune Merger Corp., FHP, and Tree Acquisition Corp.,
as the same may be amended from time to time with the approval

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<PAGE>

of the Agent and the Managing Agents (which consent shall not be
unreasonably withheld), and any documents delivered or entered into in
connection therewith.

"Fixed Charges" shall mean, for any period, the sum, for the Company
and its Consolidated Subsidiaries (determined on a consolidated basis
without duplication in accordance with GAAP), of the following: (a) all
payments of principal of Indebtedness scheduled or required to be made
during such period PLUS (b) all Interest Expense for such period PLUS
(c) all Dividend Payments for such period.

"Fixed Charges Coverage Ratio" means, at any date, for the period of
four consecutive fiscal quarters ending on or most recently ended prior to
such date, the ratio of (i) Net Cash Flow for such period to (ii) Fixed
Charges for such period.

"FRB" means the Board of Governors of the Federal Reserve System, and
any Governmental Authority succeeding to any of its principal functions.

"GAAP" shall mean generally accepted accounting principles applied on
a basis consistent with those which, in accordance with Section 1.3, are to
be used in making the calculations for purposes of determining compliance
with this Agreement.

"Governmental Approvals" shall mean any authorization, consent,
approval, license, lease, ruling, permit, waiver, exemption, filing,
registration or notice by or with any Governmental Authority.

"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary
or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.

"Governmental Rules" shall mean any law, rule, regulation, ordinance,
order, code, judgement, decree, directive, guideline, policy, or any
similar form of decision of, or any interpretation or administration of any
of the foregoing by, any Governmental Authority.

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<PAGE>

"Guarantees" means the guarantees substantially in the form of Exhibit
K.

"Guarantors" means PacifiCare and FHP.

"Guaranty Obligation" has the meaning specified in the definition of
"Contingent Obligation."

"Healthcare Business" shall mean the provision or arrangement of
health care services, related ancillary products or both through an HMO, a
regulated healthcare service contractor or any other business which in the
ordinary course provides or arranges for such services, products,or both,
the provision of health insurance, the management of health care services,
and business activities related and incidental to the same.

"HMO" shall mean any Person which operates as a health maintenance
organization.

"HMO Event" shall mean the failure by the Company or any of its HMO
Subsidiaries to comply in any material respect with any of the terms and
provisions of any applicable HMO Regulation pertaining to the fiscal
soundness, solvency or financial condition of the Company or any of its HMO
Subsidiaries; or the assertion after the Closing Date, by an HMO Regulator
that it is taking or has taken administrative action against the Company or
any of its HMO Subsidiaries to revoke or modify any Governmental Approval
of, or to enforce the fiscal soundness, solvency or financial provisions or
requirements of such HMO Regulations against, the Company or any of its HMO
Subsidiaries, if such failure, action, modification or enforcement is
reasonably likely to have a Material Adverse Effect.

"HMO Regulations" shall mean all Governmental Rules applicable to any
HMO Subsidiary under federal or state law and any regulations, orders and
directives promulgated or issued pursuant to the foregoing.

"HMO Regulator" means any Person charged with the administration,
oversight or enforcement of an HMO Regulation, whether primarily,
secondarily,or jointly.

"HMO Subsidiary" shall mean any current or future Subsidiary of the
Company that is either an HMO or a regulated healthcare service contractor.

"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b)

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<PAGE>

all obligations issued, undertaken or assumed as the deferred purchase
price of property or services (other than trade payables entered into in
the ordinary course of business on ordinary terms); (c) all
non-contingent reimbursement or payment obligations with respect to
Surety Instruments; (d) all obligations evidenced by notes, bonds,
debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or
businesses; (e) all indebtedness created or arising under any
conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to property acquired by the
Person (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or
sale of such property); (f) all Capital Lease Obligations; (g) all
indebtedness referred to in clauses (a) through (f) above secured by (or
for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property
(including accounts and contracts rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of
such Indebtedness; and (h) all Guaranty Obligations in respect of
obligations of others of the kinds referred to in clauses (a) through
(g) above (other than Guaranty Obligations in respect of obligations of
such Person's Subsidiaries of the kind described in one of the preceding
clauses).

"Indemnified Liabilities" has the meaning specified in Section 10.5.

"Indemnified Person" has the meaning specified in Section 10.5.

"Insolvency Proceeding" means (a) any case, action or proceeding
before any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for creditors, or
other, similar arrangement in respect of its creditors generally or any
substantial portion of its creditors; undertaken under U.S. Federal, state
or foreign law, including the Bankruptcy Code.

"Interest Expense" shall mean, for any period, the sum, for the
Company and its Consolidated Subsidiaries (determined on a consolidated
basis without duplication in accordance with GAAP), of the following:
(a) all interest in respect of Indebtedness accrued or capitalized during

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<PAGE>

such period (whether or not actually paid during such period) PLUS (b) the
net amounts payable (or MINUS the net amounts receivable) under Swap
Contracts accrued during such period (whether or not actually paid or
received during such period) PLUS (c) all discounts in respect of any
accounts receivable or general intangibles associated therewith that are
the subject of any sale or transfer.

"Interest Payment Date" means, as to any Loan other than a Base Rate
Committed Loan, the last day of each Interest Period applicable to such
Loan and, as to any Base Rate Committed Loan, the last Business Day of each
calendar quarter and each date such Committed Loan is converted into
another Type of Committed Loan, provided, however, that (a) if any Interest
Period for a LIBOR Committed Loan exceeds three months, the date that falls
three months after the beginning of such Interest Period and after each
Interest Payment Date thereafter is also an Interest Payment Date, and (b)
as to any Bid Loan, such intervening dates prior to the maturity thereof as
may be specified by the Company and agreed to by the applicable Bid Loan
Lender in the applicable Competitive Bid shall also be Interest Payment
Dates.

"Interest Period" means, (a) as to any LIBOR Loan, the period
commencing on the Borrowing Date of such Loan, or (in the case of any LIBOR
Committed Loan) on the Conversion/Continuation Date on which the Loan is
converted into or continued as a LIBOR Committed Loan, and ending on the
date one, two, three or six months thereafter (and any other period that is
12 months or less and is available to all of the Banks) as selected by the
Company in its Notice of Borrowing, Notice of Conversion/Continuation or
Competitive Bid Request, as the case may be; and (b) as to any Absolute
Rate Bid Loan, a period of not less than 7 days and not more than 365 days
as selected by the Company in the applicable Competitive Bid Request;

provided that:

(i) if any Interest Period would otherwise end on a day that is
not a Business Day, that Interest Period shall be extended to the
following Business Day unless, in the case of a LIBOR Loan, the result
of such extension would be to carry such Interest Period into another
calendar month, in which event such Interest Period shall end on the
preceding Business Day;

(ii) any Interest Period pertaining to a LIBOR Loan that begins
on the last Business Day of a calendar

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<PAGE>

month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall end on
the last Business Day of the calendar month at the end of such
Interest Period;

(iii) no Interest Period for any Loan shall extend beyond
January 1, 2002; and

(iv) no Interest Period applicable to a Loan or portion thereof
shall extend beyond any date upon which is due any scheduled principal
payment in respect of such Loan unless the aggregate principal amount
of Loans represented by Base Rate Committed Loans, or by LIBOR
Committed Loans having Interest Periods that will expire on or before
such date, equals or exceeds the amount of such principal payment.

"Invitation for Competitive Bids" means a solicitation for Competitive
Bids, substantially in the form of Exhibit F.

"IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions under the Code.

"Investment" shall mean, for any Person: (a) the acquisition
(whether for cash, Property, services or securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of any other Person or any agreement to make
any such acquisition (including any 'short sale' or any sale of any
securities at a time when such securities are not owned by the Person
entering into such short sale); (b) the making of any deposit with, or
advance, loan or other extension of credit to, any other Person (including
the purchase of Property or services from another Person subject to an
understanding or agreement, contingent or otherwise, to resell such
Property to such Person, but excluding any such advance, loan or extension
of credit representing the purchase price of Property or services sold by
such Person in the ordinary course of business); or (c) the entering into
of any Guaranty Obligation of, or other contingent obligation with respect
to, any liability (not constituting Indebtedness) of any other Person and
(without duplication) any amount committed to be advanced, lent or extended
to such Person.

"Joint Venture" means a single-purpose corporation, partnership,
limited liability company, joint venture or

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<PAGE>

other similar legal arrangement (whether created by contract or
conducted through a separate legal entity) now or hereafter formed by
the Company or any of its Subsidiaries with another Person in order to
conduct a common venture or enterprise with such Person.

"Lending Office" means, as to any Bank, the office or offices of such
Bank specified as its "Lending Office" or "Domestic Lending Office" or
"Offshore Lending Office", as the case may be, on Schedule 10.2, or such
other office or offices as such Bank may from time to time notify the
Company and the Agent.

"Leverage Ratio" means, as of the last day of any fiscal quarter of
the Company, the ratio of (i) the sum of (x) the aggregate principal amount
of Indebtedness (including the principal portion of rentals under capital
leases) of the Company and its Subsidiaries which matures more than one
year from the date of determination PLUS (y) the aggregate principal amount
of all Indebtedness (including the principal portion of rentals under
capital leases) which is scheduled to be paid by the Company and its
Subsidiaries within one year from the date of determination to (ii)
Adjusted EBITDA for the period of four consecutive fiscal quarters ending
on such date.

"LIBOR Auction" means a solicitation of Competitive Bids setting forth
a LIBOR Bid Margin pursuant to Section 2.6.

"LIBOR Base Rate" means, for any Interest Period with respect to any
LIBOR Committed Loan or LIBOR Bid Loan, the rate of interest per annum
determined by the Agent to be the arithmetic mean (rounded upward, if
necessary, to the nearest 1/16th of 1%) of the rates of interest per annum
notified to the Agent by the Reference Banks as the rate of interest at
which dollar deposits in the approximate amount of, in the case of LIBOR
Bid Loans, the LIBOR Bid Loans to be borrowed in such Bid Borrowing, and,
in the case of LIBOR Committed Loans, the LIBOR Committed Loan to be made
by such Reference Bank, and having a maturity comparable to such Interest
Period, would be offered to major banks in the London interbank market at
their request at approximately 11:00 a.m. (London time) two Business Days
prior to the commencement of such Interest Period.

"LIBOR Bid Loan" means any Bid Loan that bears interest at a rate
based upon the LIBOR Base Rate.

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<PAGE>

"LIBOR Bid Margin" has the meaning specified in subsection
2.6(c)(ii)(C).

"LIBOR Committed Loans" shall mean Committed Loans the interest rates
on which are determined on the basis of rates referred to in the definition
of "LIBOR Rate" in this Section 1.1.

"LIBOR Loans" shall mean LIBOR Committed Loans or LIBOR Bid Loans.

"LIBOR Rate" shall mean, for any LIBOR Committed Loan for any Interest
Period for such Loan, a rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1 percent) determined by the Agent to be equal to the
LIBOR Base Rate for such Loan for such Interest Period divided by 1 MINUS
the Reserve Requirement for such Loan for such Interest Period.

"Lien" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement of any kind or nature
whatsoever in respect of any property (including those created by, arising
under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease, any financing
lease having substantially the same economic effect as any of the
foregoing, or the filing of any financing statement (other than those
related to leases permitted under this Agreement) naming the owner of the
asset to which such lien relates as debtor, under the Uniform Commercial
Code or any comparable law) and any contingent or other agreement to
provide any of the foregoing, but not including the interest of a lessor or
sublessor under an operating lease.

"Loan" means an extension of credit by a Bank to the Company under
Article II, and may be a Committed Loan or a Bid Loan.

"Loan Documents" means this Agreement, any Notes, the Guarantees, the
Fee Letter and all other documents delivered to the Agent or any Bank in
connection herewith.

"Majority Agents" means any combination of the Agent, the Managing
Agents and the Co-Agents that collectively hold more than 50% of the
aggregate amount of the Commitments of all of the Agent, the Managing
Agents and the Co-Agents, or, if the Commitments shall have terminated, any
combination of the Agent, the Managing Agents and the Co-Agents that

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<PAGE>

collectively hold more than 50% of the aggregate unpaid principal amount of
the Loans of all of the Agent, the Managing Agents and the Co-Agents.

"Majority Banks" means Banks holding more than 50% of the aggregate
amount of the Commitments, or, if the Commitments shall have terminated,
Banks holding more than 50% of the aggregate unpaid principal amount of the
Loans.

"Managing Agents" is defined in the preamble.

"Margin Stock" means "margin stock" as such term is defined in
Regulation G, T, U or X of the FRB.

"Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties or
condition (financial or otherwise) of the Company and its Subsidiaries
taken as a whole; (b) a material impairment of the ability of the Company
and the Obligors taken as a whole to perform under any Loan Document and to
avoid any Event of Default; or (c) a material adverse effect upon the
legality, validity, binding effect or enforceability against the Company or
any other Obligor of any material Loan Document.

"Material HMO Subsidiary" means any HMO Subsidiary that is also a
Material Subsidiary.

"Material Subsidiary" means, at any time, each Guarantor and any
Subsidiary having at such time either (i) total (gross) revenues for the
preceding four fiscal quarter period in excess of 5% of the consolidated
total (gross) revenues of the Company and its Subsidiaries or (ii) total
assets, as of the last day of the preceding fiscal quarter, in excess of 5%
of the consolidated total assets of the Company and its Subsidiaries, in
each case, based upon the Company's most recent annual or quarterly
financial statements delivered to the Agent under Section 6.1.

"Moody's" means Moody's Investor Services, Inc.

"Multiemployer Plan" means a "multiemployer plan", within the meaning
of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate
makes, is making, or is obligated to make contributions or, during the
preceding three calendar years, has made, or been obligated to make,
contributions.

"Net Cash Flow" shall mean, for any period, the sum, for the Company
and its Consolidated Subsidiaries

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<PAGE>

(determined on a consolidated basis without duplication in accordance
with GAAP), of the following: (a) consolidated net income (it being
understood that such amount shall be calculated before the Specified
Charges and other extraordinary items and income or loss attributable to
equity in Affiliates) for such period PLUS (b) amortization (to the
extent deducted in determining net income) for such period PLUS (c) the
Netted Provision for Taxes for such period PLUS (d) Interest Expense.

"Net Equity Proceeds" means, with respect to any issuance by the
Company of any equity securities (other than Series A Cumulative
Convertible Preferred Shares), the gross consideration received by or for
the account of the issuer minus underwriting and brokerage commissions,
discounts and fees and other professional fees and expenses relating to
such issuance that are payable by the issuer and, with respect to any
conversion of Series A Cumulative Convertible Preferred Shares, the
aggregate conversion price of the shares so converted.

"Netted Provision for Taxes" shall mean, for any period of
determination, the positive or negative difference of the provision for
taxes deducted in determining net income for such period MINUS the amount
of taxes actually paid during such period.

"Net Worth" of the Company on any date of determination means an
amount equal to the Company's common equity.

"Notes" means the Committed Loan Notes and the Bid Loan Notes.

"Notice of Borrowing" means a notice in substantially the form of
Exhibit A.

"Notice of Conversion/Continuation" means a notice in substantially
the form of Exhibit B.

"Obligations" means all advances, debts, liabilities, obligations,
covenants and duties arising under any Loan Document, owing by the Company
or any other Obligor to any Bank, the Agent, or any Indemnified Person,
whether direct or indirect (including those acquired by assignment),
absolute or contingent, due or to become due, now existing or hereafter
arising.

"Obligor" means the Company, each Guarantor or any other Person (other
than the Agent, the Arranger or any

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<PAGE>

Bank) which becomes obligated on behalf of the Company under any Loan
Document.

"Organization Documents" means, for any corporation, the certificate
or articles of incorporation, the bylaws, any certificate of determination
or instrument relating to the rights of preferred shareholders of such
corporation and any shareholder rights agreement.

"Other Taxes" means any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any other
Loan Documents.

"PacifiCare" means PacifiCare Health Systems, Inc., a Delaware
corporation or any successor thereto.

"Participant" has the meaning specified in subsection 10.8(d).

"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions under
ERISA.

"Pension Plan" means a pension plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA, other than a Multiemployer Plan, to
which the Company may have any liability.

"Permitted Liens" has the meaning specified in Section 7.2.

"Permitted Market Investments" shall mean any security that (a) is of
a type traded or quoted on any exchange or recognized financial market,
(b) can be readily liquidated or disposed of on such exchanges or markets,
(c) other than in the case of an equity security, is rated by, and has no
lower than an, "investment grade," rating from any nationally recognized
rating agency and (d) satisfies the Company's investment guidelines as
approved by the Board of Directors of the Company and in effect on the date
hereof, as the same may be amended from time to time by such Board.

"Permitted Swap Obligations" means all obligations (contingent or
otherwise) of the Company or any Subsidiary existing or arising under Swap
Contracts, provided that each of the following criteria is satisfied: such
obligations are (or were) entered into by such Person in the ordinary

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course of business for the purpose of directly mitigating risks associated
with liabilities, commitments or assets held by such Person, or changes in
the value of securities issued by such Person in conjunction with a
securities repurchase program not otherwise prohibited hereunder, and not
for purposes of speculation or taking a "market view".

"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, Joint Venture or Governmental Authority.

"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA), other than a "Multiemployer Plan" as defined in Section 3(37) or
4001(a)(3) of ERISA, to which the Company may have any liability.

"Pre-Closing Material Adverse Effect" means (a) a material adverse
change in, or a material adverse effect upon, the operations, business,
properties or condition (financial or otherwise) of (i) the Company,
(ii) PacifiCare and its Subsidiaries taken as a whole since September 30,
1995, or (iii) FHP and its Subsidiaries taken as a whole since June 30,
1996; or (b) a material impairment of the ability of the Company or
PacifiCare to pay or perform under any Loan Document.

"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.

"Pro Rata Share" means, as to any Bank at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at
such time of such Bank's Commitment divided by the combined Commitments of
all Banks.

"Redeemable Preferred" shall mean any preferred or similar stock
(a) that, by its terms or at the option of the holders, is under any
circumstance redeemable or may be required to be repurchased, or is
convertible into Indebtedness, that requires payments to a sinking fund, on
or prior to the payment in full of the Obligations or (b) that, by reason
of the option of the issuer to take or cause any such action and its other
terms, should, in accordance with GAAP, be treated as debt.

"Reference Banks" means BofA, The Chase Manhattan Bank and Citibank,
N.A.

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<PAGE>

"Regulatory Tangible Net Equity" shall mean, for any HMO, "tangible
net equity," "net worth" or such similar financial concept as defined by
any HMO Regulation promulgated by any HMO Regulator as shall be applicable
to HMOs or as specified by any HMO Regulator as the "tangible net equity"
or "net worth" appropriate for such HMO Subsidiary.

"Regulatory Tangible Net Equity Requirement" shall mean, as to any
HMO, the minimum level at which an HMO is required by any applicable HMO
Regulation or HMO Regulator to maintain its Regulatory Tangible Net Equity.

"Reportable Event" means, any of the events set forth in Section
4043(c) of ERISA or the regulations thereunder.

"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of
a Governmental Authority, in each case applicable to or binding upon the
Person or any of its property or to which the Person or any of its property
is subject.

"Reserve Requirement" shall mean, for any Interest Period for any
LIBOR Committed Loan, the average maximum rate at which reserves (including
any marginal, supplemental or emergency reserves) are required to be
maintained during such Interest Period under Regulation D by member banks
of the Federal Reserve System in New York City with deposits exceeding one
billion Dollars against "Eurocurrency liabilities" (as such term is used in
Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement shall include any other reserves required to be maintained by
such member banks by reason of any Regulatory Change with respect to
(i) any category of liabilities that includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of
"LIBOR Rate" in this Section 1.1 or (ii) any category of extensions of
credit or other assets that includes LIBOR Loans.

"Responsible Officer" means the chief executive officer, the
president, an executive vice president, the chief financial officer or the
treasurer of the Company, or any other officer having substantially the
same authority and responsibility; or, with respect to compliance with
financial covenants, the chief financial officer or the treasurer of the
Company, or any other officer having substantially the same authority and
responsibility.

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<PAGE>

"Revolving Termination Date" means the earliest to occur of:

(a) April 30, 1997, unless on or before such date the FHP
Acquisition shall have been consummated;

(b) January 1, 2002; and

"S&P" means Standard & Poor's Ratings Group.

"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.

"Senior Unsecured Debt Rating" means, as of any date, the highest
rating that has been most recently announced by either S&P or Moody's, as
the case may be, for any class of long-term senior unsecured debt issued by
any of the Obligors; PROVIDED, HOWEVER, that if the rating by S&P shall be
below BBB- or if the rating by Moody's shall be below Baa3, the lower
rating shall apply unless the ratings established by S&P and Moody's shall
be more than one Level apart in the definition of "Applicable Margin", in
which case the applicable Level shall be one Level higher than the lower of
such Levels. For purposes of the foregoing, (a) if no Senior Unsecured
Debt Rating shall be available from at least one of S&P and Moody's, the
Applicable Margin will be set by reference to the Leverage Ratio so long as
the Agent shall have received the financial statements and Compliance
Certificate to be delivered by the Company pursuant to Section 6.1 (or, in
the case of the Applicable Margin established on the Closing Date,
subsection 4.1(g)), and if the Agent shall not have received such financial
statements and Compliance Certificate, in accordance with Level 6 under the
definition of "Applicable Margin"; (b) if only one of S&P and Moody's shall
have in effect a Senior Unsecured Debt Rating, the Applicable Margin shall
be determined by reference to the available rating; (c) if any rating
established by S&P or Moody's shall be changed, such change shall be
effective as of the date on which such change is first announced publicly
by the rating agency making such change; and (d) if S&P or Moody's shall
change the basis on which ratings are established, each reference to the
Senior Unsecured Debt Rating announced by S&P or Moody's, as the case may
be, shall refer to the then equivalent rating by S&P or Moody's, as the
case may be.

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<PAGE>

"Series A Cumulative Convertible Preferred Shares" means the
11,000,000 shares of Series A Cumulative Convertible Preferred Shares of
the Company which may be authorized pursuant to the Company's certificate
of incorporation.

"Specified Charges" means the $54.7 million of write-offs and charges
taken by FHP during the nine months ended March 31, 1996, the $42.1 million
of write-offs and charges taken by PacifiCare during the nine months ended
June 30, 1996 and up to $250 million of charges and write-offs which may be
taken by the Company and its Subsidiaries during the twelve month period
following the FHP Acquisition of which not more than $100 million may be
cash charges.

"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, Joint Venture or other business
entity of which more than 50% of the voting stock, membership interests or
other equity interests (in the case of Persons other than corporations), is
owned or controlled directly or indirectly by the Person, or one or more of
the Subsidiaries of the Person, or a combination thereof. Unless the
context otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Company.

"Surety Instruments" means all letters of credit (including standby
and commercial), bankers acceptances, bank guaranties, shipside bonds,
surety bonds and similar instruments.

"Swap Contract" means any agreement, whether or not in writing,
relating to any transaction that is a rate swap, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap
or option, bond option, note option or bill option, interest rate option,
forward foreign exchange transaction, cap, collar or floor transaction,
currency swap, cross-currency rate swap, swaption, currency option or any
other, similar transaction (including any option to enter into any of the
foregoing) or any combination of the foregoing, and, unless the context
otherwise clearly requires, any master agreement relating to or governing
any or all of the foregoing.

"Swap Termination Value" has the meaning specified in the definition
of "Contingent Obligation."

"Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case

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of each Bank and the Agent, such taxes (including income taxes or
franchise taxes) as are imposed on or measured by each Bank's net income
by the jurisdiction (or any political subdivision thereof) under the
laws of which such Bank or the Agent, as the case may be, is organized
or maintains a lending office.

"Total Assets" of the Company means all property, whether real,
personal, tangible, intangible or otherwise, that, in accordance with GAAP,
should be included in determining total assets as shown on the assets
portion of a balance sheet.

"Total Liabilities" of the Company means all obligations that, in
accordance with GAAP, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet of the Company.

"Type" has the meaning specified in the definition of "Committed
Loan."

"Unfunded Pension Liability" means the excess of a Pension Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the current
value of that Pension Plan's assets, determined in accordance with the
assumptions used for funding the Pension Plan pursuant to Section 412 of
the Code for the applicable plan year.

"United States" and "U.S." each means the United States of America.

"Wholly-Owned Subsidiary" means any corporation in which (other than
directors' qualifying shares required by law) 100% of the capital stock of
each class having ordinary voting power, and 100% of the capital stock of
every other class, in each case, at the time as of which any determination
is being made, is owned, beneficially and of record, by the Company, or by
one or more of the other Wholly-Owned Subsidiaries, or both.

1.2 OTHER INTERPRETIVE PROVISIONS.

(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.

(b) The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.

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(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.

(ii) The term "including" is not limiting and means "including
without limitation."

(iii) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and including";
the words "to" and "until" each mean "to but excluding", and the word
"through" means "to and including."

(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto, but
only to the extent such amendments and other modifications are not prohibited by
the terms of any Loan Document, and (ii) references to any statute or regulation
are to be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.

(e) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.

(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms. Unless otherwise expressly provided,
any reference to any action of the Agent or the Banks by way of consent,
approval or waiver shall be deemed modified by the phrase "in its/their sole
discretion."

(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Agent, the Company
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Banks or the Agent merely because of the
Agent's or Banks' involvement in their preparation.

1.3 ACCOUNTING PRINCIPLES.

(a) Unless the context otherwise clearly requires, all accounting
terms not expressly defined herein shall be construed, and all financial
computations required under this Agreement shall be made, in accordance with
GAAP, applied on a basis

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consistent (except for changes concurred in by the Company's independent
public accountants), with the most recent audited consolidated financial
statements of PacifiCare and its Consolidated Subsidiaries (or on and after
the date of delivery to the Banks of audited consolidated financial
statements of the Company covering or including any period subsequent to the
Closing Date, the most recent audited consolidated financial statements of
the Company and its Consolidated Subsidiaries) delivered to the Banks. If
GAAP changes during the term of this Agreement such that any covenants
contained herein would then be calculated in a different manner or with
different components, the Company, the Banks and Agent agree to negotiate in
good faith to amend this Agreement in such respects as are necessary to
conform those covenants as criteria for evaluating the Company's financial
condition to substantially the same criteria as were effective prior to such
change in GAAP; provided, however, that, until this Agreement is so amended,
all such covenants shall be calculated in accordance with GAAP as in effect
immediately prior to the change.

(b) References herein to "fiscal year" and "fiscal quarter" refer to
such fiscal periods of the Company.

ARTICLE II

THE CREDITS

2.1 AMOUNTS AND TERMS OF COMMITMENTS. Each Bank severally agrees, on the
terms and conditions set forth herein, to make loans to the Company from time to
time on any Business Day during the period from the Closing Date to the
Revolving Termination Date, in an aggregate amount not to exceed at any time
outstanding the amount set forth on Schedule 2.1 opposite the name of such Bank
(such amount, as the same may be reduced under Section 2.7 or 2.9 or as a result
of one or more assignments permitted under Section 10.8, the Bank's
"Commitment"); PROVIDED, HOWEVER, that, after giving effect to any Committed
Borrowing, the aggregate principal amount of all outstanding Loans, shall not at
any time exceed the combined Commitments. Within the limits of each Bank's
Commitment, and subject to the other terms and conditions hereof, the Company
may borrow under this Section 2.1, prepay under Section 2.8 and reborrow under
this Section 2.1.

2.2 LOAN ACCOUNTS.

(a) The Loans made by each Bank shall be evidenced by one or more
loan accounts or records maintained by such Bank in the ordinary course of
business. The loan accounts or records

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maintained by the Agent and each Bank shall be presumptive evidence of the
amount of the Loans made by the Banks to the Company and the interest and
payments thereon. Any failure so to record or any error in doing so shall
not, however, limit or otherwise affect the obligation of the Company
hereunder to pay any amount owing with respect to the Loans.

(b) Upon the request of any Bank made through the Agent, the Loans
made by such Bank may be evidenced by one or more Notes, instead of or in
addition to loan accounts. Each such Bank shall endorse on the schedules
annexed to its Note(s) the date, amount and maturity of each Loan made by it and
the amount of each payment of principal made by the Company with respect
thereto. Each such Bank is irrevocably authorized by the Company to endorse its
Note(s) and each Bank's record shall be presumptive evidence of the same;
provided, however, that the failure of a Bank to make, or an error in making, a
notation thereon with respect to any Loan shall not limit or otherwise affect
the obligations of the Company hereunder or under any such Note to such Bank.

2.3 PROCEDURE FOR COMMITTED BORROWING.

(a) Each Committed Borrowing shall be made upon the Company's
irrevocable written notice delivered to the Agent in the form of a Notice of
Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San
Francisco time) (i) three Business Days prior to the requested Borrowing Date,
in the case of LIBOR Loans; and (ii) on the requested Borrowing Date, in the
case of Base Rate Loans, specifying:

(A) the amount of the Committed Borrowing, which shall be, in
the case of LIBOR Committed Loans, in an aggregate minimum amount of
$5,000,000 or any multiple of $1,000,000 in excess thereof and, in the
case of Base Rate Loans, in an aggregate minimum amount of $1,000,000
or any multiple of $1,000,000 in excess thereof;

(B) the requested Borrowing Date, which shall be a Business Day;

(D) the duration of the Interest Period applicable to such
Committed Loans included in such notice. If the Notice of Borrowing
fails to specify the duration of the Interest Period for any Committed

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Borrowing comprised of LIBOR Loans, such Interest Period shall be
three months.

(b) The Agent will promptly notify each Bank of its receipt of any
Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that
Committed Borrowing.

(c) Each Bank will make the amount of its Pro Rata Share of each
Committed Borrowing available to the Agent for the account of the Company at the
Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date
requested by the Company in funds immediately available to the Agent. The
proceeds of all such Committed Loans will then be made available to the Company
by the Agent at such office by crediting the account of the Company on the books
of BofA with the aggregate of the amounts made available to the Agent by the
Banks and in like funds as received by the Agent.

(d) After giving effect to any Committed Borrowing, unless the Agent
shall otherwise consent, there may not be more than five different Interest
Periods in effect in respect of all Committed Loans together then outstanding.

2.4 CONVERSION AND CONTINUATION ELECTIONS FOR COMMITTED BORROWINGS.

(a) The Company may, upon irrevocable written notice to the Agent in
accordance with subsection 2.4(b):

(i) elect, as of any Business Day, in the case of Base Rate
Committed Loans, or as of the last day of the applicable Interest Period,
in the case of LIBOR Committed Loans, to convert any such Committed Loans
(or any part thereof in an amount not less than $5,000,000, or that is in
an integral multiple of $1,000,000 in excess thereof) into Committed Loans
of any other Type; or

(ii) elect, as of the last day of the applicable Interest
Period, to continue any Committed Loans having Interest Periods expiring on
such day (or any part thereof in an amount not less than $5,000,000, or
that is in an integral multiple of $1,000,000 in excess thereof);

provided, that if at any time the aggregate amount of LIBOR Committed Loans in
respect of any Committed Borrowing is reduced, by payment, prepayment, or
conversion of part thereof to be less than $5,000,000, such LIBOR Committed
Loans shall automatically convert into Base Rate Committed Loans, and on and
after such date the right of the Company to continue such Committed Loans

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as, and convert such Committed Loans into, LIBOR Committed Loans shall
terminate.

(b) The Company shall deliver a Notice of Conversion/Continuation to
be received by the Agent not later than 9:00 a.m. (San Francisco time) at least
(i) three Business Days in advance of the Conversion/Continuation Date, if the
Committed Loans are to be converted into or continued as LIBOR Committed Loans;
and (iii) on the Conversion/Continuation Date, if the Loans are to be converted
into Base Rate Committed Loans, specifying:

(A) the proposed Conversion/Continuation Date;

(B) the aggregate amount of Committed Loans to be converted or
continued;

(D) other than in the case of conversions into Base Rate
Committed Loans, the duration of the requested Interest Period.

(c) If upon the expiration of any Interest Period applicable to LIBOR
Committed Loans, the Company has failed to select timely a new Interest Period
to be applicable to such LIBOR Committed Loans, as the case may be, or if any
Default or Event of Default then exists, the Company shall be deemed to have
elected to convert such LIBOR Committed Loans into Base Rate Committed Loans
effective as of the expiration date of such Interest Period.

(d) The Agent will promptly notify each Bank of its receipt of a
Notice of Conversion/Continuation, or, if no timely notice is provided by the
Company, the Agent will promptly notify each Bank of the details of any
automatic conversion. All conversions and continuations shall be made ratably
according to the respective outstanding principal amounts of the Committed Loans
held by each Bank with respect to which the notice was given.

(e) Unless the Majority Banks otherwise consent, during the existence
of a Default or Event of Default, the Company may not elect to have a Committed
Loan converted into or continued as a LIBOR Committed Loan.

(f) After giving effect to any conversion or continuation of
Committed Loans, unless the Agent shall otherwise consent, there may not be more
than eight different Interest

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Periods in effect in respect of all Committed Loans and Bid Loans together
then outstanding.

2.5 BID BORROWINGS. In addition to Committed Borrowings pursuant to
Section 2.3, each Bank severally agrees that the Company may, as set forth in
Section 2.6, from time to time request the Banks prior to the Revolving
Termination Date to submit offers to make Bid Loans to the Company; provided,
however, that the Banks may, but shall have no obligation to, submit such offers
and the Company may, but shall have no obligation to, accept any such offers;
and PROVIDED, FURTHER, that at no time shall (a) the outstanding aggregate
principal amount of all Bid Loans made by all Banks, plus the outstanding
aggregate principal amount of all Committed Loans made by all Banks exceed the
combined Commitments; or (b) the number of Interest Periods for Bid Loans then
outstanding plus the number of Interest Periods for Committed Loans then
outstanding exceed eight. Any Bid Loan made by any Bank shall not reduce such
Bank's Commitment hereunder except to the extent of such Bank's Pro Rata Share
of such Bid Loan.

2.6 PROCEDURE FOR BID BORROWINGS.

(a) When the Company wishes to request the Banks to submit offers to
make Bid Loans hereunder, it shall transmit to the Agent by telephone call
followed promptly by facsimile transmission a notice in substantially the form
of Exhibit G (a "Competitive Bid Request") so as to be received no later than
9:00 a.m. (San Francisco time) (x) four Business Days prior to the date of a
proposed Bid Borrowing in the case of a LIBOR Auction, or (y) one Business Day
prior to the date of a proposed Bid Borrowing in the case of an Absolute Rate
Auction, specifying:

(i) the date of such Bid Borrowing, which shall be a Business
Day;

(ii) the aggregate amount of such Bid Borrowing, which shall be
a minimum amount of $10,000,000 or in multiples of $1,000,000 in excess
thereof;

(iii) whether the Competitive Bids requested are to be for LIBOR
Bid Loans or Absolute Rate Bid Loans or both; and

(iv) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of "Interest Period" herein.

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Subject to subsection 2.6(c), the Company may not request Competitive Bids for
more than three Interest Periods in a single Competitive Bid Request and may not
request Competitive Bids more than once in any period of five Business Days.

(b) Upon receipt of a Competitive Bid Request, the Agent will
promptly send to the Banks by facsimile transmission an Invitation for
Competitive Bids, which shall constitute an invitation by the Company to each
Bank to submit Competitive Bids offering to make the Bid Loans to which such
Competitive Bid Request relates in accordance with this Section 2.6.

(c) (i) Each Bank may at its discretion submit a Competitive Bid
containing an offer or offers to make Bid Loans in response to any Invitation
for Competitive Bids. Each Competitive Bid must comply with the requirements of
this subsection 2.6(c) and must be submitted to the Agent by facsimile
transmission at the Agent's office for notices set forth on the signature pages
hereto not later than (1) 6:30 a.m. (San Francisco time) three Business Days
prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (2)
6:30 a.m. (San Francisco time) on the proposed date of Borrowing, in the case of
an Absolute Rate Auction; provided that Competitive Bids submitted by the Agent
(or any Affiliate of the Agent) in the capacity of a Bank may be submitted, and
may only be submitted, if the Agent or such Affiliate notifies the Company of
the terms of the offer or offers contained therein not later than (A) 6:15 a.m.
(San Francisco time) three Business Days prior to the proposed date of
Borrowing, in the case of a LIBOR Auction or (B) 6:15 a.m. (San Francisco time)
on the proposed date of Borrowing, in the case of an Absolute Rate Auction.

(ii) Each Competitive Bid shall be in substantially the form of
Exhibit H, specifying therein:

(A) the proposed date of Borrowing;

(B) the principal amount of each Bid Loan for which such
Competitive Bid is being made, which principal amount (x) may be equal
to, greater than or less than the Commitment of the quoting Bank, (y)
must be $10,000,000 or in multiples of $1,000,000 in excess thereof,
and (z) may not exceed the principal amount of Bid Loans for which
Competitive Bids were requested;

(C) in case the Company elects a LIBOR Auction, the margin above
or below LIBOR (the "LIBOR Bid Margin") offered for each such Bid
Loan, expressed in multiples of 1/1000th of one basis point to be
added to

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or subtracted from the applicable LIBOR and the Interest Period
applicable thereto;

(D) in case the Company elects an Absolute Rate Auction, the
rate of interest per annum expressed in multiples of 1/1000th of one
basis point (the "Absolute Rate") offered for each such Bid Loan; and

(E) the identity of the quoting Bank.

A Competitive Bid may contain up to three separate offers by the quoting Bank
with respect to each Interest Period specified in the related Invitation for
Competitive Bids.

(iii) Any Competitive Bid shall be disregarded if it:

(A) is not substantially in conformity with Exhibit H or does
not specify all of the information required by subsection (c)(ii) of
this Section;

(B) contains qualifying, conditional or similar language;

(D) arrives after the time set forth in subsection (c)(i).

(d) Promptly on receipt and not later than 7:00 a.m. (San Francisco
time) three Business Days prior to the proposed date of Borrowing in the case of
a LIBOR Auction, or 7:00 a.m. (San Francisco time) on the proposed date of
Borrowing, in the case of an Absolute Rate Auction, the Agent will notify the
Company of the terms (i) of any Competitive Bid submitted by a Bank that is in
accordance with subsection 2.6(c), and (ii) of any Competitive Bid that amends,
modifies or is otherwise inconsistent with a previous Competitive Bid submitted
by such Bank with respect to the same Competitive Bid Request. Any such
subsequent Competitive Bid shall be disregarded by the Agent unless such
subsequent Competitive Bid is submitted solely to correct a manifest error in
such former Competitive Bid and only if received within the times set forth in
subsection 2.6(c). The Agent's notice to the Company shall specify (1) the
aggregate principal amount of Bid Loans for which offers have been received for
each Interest Period specified in the related Competitive Bid Request; and (2)
the respective principal amounts and LIBOR Bid Margins or Absolute Rates, as the
case may be, so offered.

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Subject only to the provisions of Sections 3.2, 3.5 and 4.2 hereof and the
provisions of this subsection (d), any Competitive Bid shall be irrevocable
except with the written consent of the Agent given on the written
instructions of the Company.

(e) Not later than 7:30 a.m. (San Francisco time) three Business Days
prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or 7:30
a.m. (San Francisco time) on the proposed date of Borrowing, in the case of an
Absolute Rate Auction, the Company shall notify the Agent of its acceptance or
non-acceptance of the offers so notified to it pursuant to subsection 2.6(d).
The Company shall be under no obligation to accept any offer and may choose to
reject all offers. In the case of acceptance, such notice shall specify the
aggregate principal amount of offers for each Interest Period that is accepted.
The Company may accept any Competitive Bid in whole or in part; provided that:

(i) the aggregate principal amount of each Bid Borrowing may not
exceed the applicable amount set forth in the related Competitive Bid
Request;

(ii) the principal amount of each Bid Borrowing must be
$10,000,000 or in any multiple of $1,000,000 in excess thereof;

(iii) acceptance of offers may only be made on the basis of
ascending LIBOR Bid Margins or Absolute Rates within each Interest Period,
as the case may be; and

(iv) the Company may not accept any offer that is described in
subsection 2.6(c)(iii) or that otherwise fails to comply with the
requirements of this Agreement.

(f) If offers are made by two or more Banks with the same LIBOR Bid
Margins or Absolute Rates, as the case may be, for a greater aggregate principal
amount than the amount in respect of which such offers are accepted for the
related Interest Period, the principal amount of Bid Loans in respect of which
such offers are accepted shall be allocated by the Agent among such Banks as
nearly as possible (in such multiples, not less than $1,000,000, as the Agent
may deem appropriate) in proportion to the aggregate principal amounts of such
offers. Determination by the Agent of the amounts of Bid Loans shall be
conclusive in the absence of manifest error.

(g) (i) The Agent will promptly notify each Bank having submitted a
Competitive Bid if its offer has been accepted and, if its offer has been
accepted, of the amount of the Bid

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Loan or Bid Loans to be made by it on the date of the Bid Borrowing.

(ii) Each Bank, which has received notice pursuant to subsection
2.6(g)(i) that its Competitive Bid has been accepted, shall make the
amounts of such Bid Loans available to the Agent for the account of the
Company at the Agent's Payment Office, by 11:00 a.m. (San Francisco time)
in the case of Absolute Rate Bid Loans, and by 11:00 a.m. (San Francisco
time) in the case of LIBOR Bid Loans, on such date of Bid Borrowing, in
funds immediately available to the Agent for the account of the Company at
the Agent's Payment Office.

(iii) Promptly following each Bid Borrowing, the Agent shall
notify each Bank of the ranges of bids submitted and the highest and lowest
Bids accepted for each Interest Period requested by the Company and the
aggregate amount borrowed pursuant to such Bid Borrowing.

(iv) From time to time, the Company and the Banks shall furnish
such information to the Agent as the Agent may request relating to the
making of Bid Loans, including the amounts, interest rates, dates of
borrowings and maturities thereof, for purposes of the allocation of
amounts received from the Company for payment of all amounts owing
hereunder.

(h) If, on or prior to the proposed date of Borrowing, the
Commitments have not been terminated and if, on such proposed date of Borrowing
all applicable conditions to funding referenced in Sections 3.2, 3.5 and 4.2
hereof are satisfied, the Banks whose offers the Company has accepted will fund
each Bid Loan so accepted. Nothing in this Section 2.6 shall be construed as a
right of first offer in favor of the Banks or to otherwise limit the ability of
the Company to request and accept credit facilities from any Person (including
any of the Banks).

2.7 VOLUNTARY TERMINATION OR REDUCTION OF COMMITMENTS. The Company may,
upon not less than four Business Days' prior notice to the Agent, terminate the
Commitments, or permanently reduce the Commitments by an aggregate minimum
amount of $10,000,000 or any multiple of $1,000,000 in excess thereof; unless,
after giving effect thereto and to any prepayments of Committed Loans made on
the effective date thereof, the then-outstanding principal amount of the Loans
would exceed the amount of the combined Commitments then in effect. Once
reduced in accordance with this Section, the Commitments may not be increased.
Any reduction of the Commitments shall be applied to each Bank according to its
Pro Rata Share. All accrued commitment fees to, but not including the effective
date of any reduction or

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termination of Commitments, shall be paid on the effective date of such
reduction or termination.

2.8 OPTIONAL PREPAYMENTS.

(a) Subject to Section 3.4, the Company may, at any time or from time
to time, upon not less than (i) three Business Days' irrevocable notice to the
Agent, ratably prepay LIBOR Committed Loans in whole or in part, in minimum
amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof, and (ii)
one Business Days' irrevocable notice to the Agent, ratably prepay Base Rate
Committed Loans in whole or in part, in minimum amounts of $1,000,000 or any
multiple of $1,000,000 in excess thereof. Such notice of prepayment shall
specify the date and amount of such prepayment and the Type(s) of Committed
Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of
any such notice, and of such Bank's Pro Rata Share of such prepayment. If such
notice is given by the Company, the Company shall make such prepayment and the
payment amount specified in such notice shall be due and payable on the date
specified therein, together with accrued interest to each such date on the
amount prepaid and any amounts required pursuant to Section 3.4.

(b) Bid Loans may not be voluntarily prepaid other than with the
prior written consent of the applicable Bid Loan Lender.

2.9 MANDATORY COMMITMENT REDUCTIONS. On each date set forth below, the
aggregate Commitments shall, without any further action, automatically and
permanently be reduced to the amount set forth opposite such date:

Date Amount
---- ------

January 1, 1999 $1,400,000,000
July 1, 1999 $1,300,000,000
January 1, 2000 $1,200,000,000
July 1, 2000 $1,100,000,000
January 1, 2001 $ 950,000,000
July 1, 2001 $ 800,000,000
January 1, 2002 $ -0-

provided, however, that on the Revolving Termination Date, the Commitment Amount
shall be zero.

2.10 REPAYMENT. The Company shall repay to the Banks on the Revolving
Termination Date the aggregate principal amount of Loans outstanding on such
date. In addition, (i) the Company

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shall, on each date when any reduction in the aggregate amount of the
Commitments shall become effective, make a mandatory payment to the Banks of
all Loans equal to the excess, if any, of the aggregate outstanding principal
amount of all Loans over the aggregate amount of the Commitments as so
reduced, and (ii) the Company shall repay each Bid Loan on the last day of
the relevant Interest Period.

2.11 INTEREST.

(a) Each Committed Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the LIBOR Rate or the Base Rate, as the case may be (and subject to the
Company's right to convert to other Types of Loans under Section 2.4), plus (in
the case of LIBOR Loans) the Applicable Margin. Each Bid Loan shall bear
interest on the outstanding principal amount thereof from the relevant Borrowing
Date at a rate per annum equal to the LIBOR Base Rate plus (or minus) the LIBOR
Bid Margin, or at the Absolute Rate, as the case may be.

(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment or
repayment of Committed Loans under Section 2.8 or 2.10 for the portion of the
Loans so prepaid or repaid and upon payment (including prepayment) in full
thereof and, during the existence of any Event of Default, interest shall be
paid on demand of the Agent at the request or with the consent of the Majority
Banks.

(c) Notwithstanding subsection (a) of this Section, if any amount of
principal of or interest on any Loan, or any fees payable hereunder is not paid
in full when due (whether at stated maturity, by acceleration, demand or
otherwise), the Company agrees to pay interest on such unpaid principal or other
amount, from the date such amount becomes due until the date such amount is paid
in full, and after as well as before any entry of judgment thereon to the extent
permitted by law, payable on demand, at a fluctuating rate per annum equal to
the Base Rate plus 2%.

(d) Anything herein to the contrary notwithstanding, the obligations
of the Company to any Bank hereunder shall be subject to the limitation that
payments of interest shall not be required for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Bank would be contrary to the provisions of
any law applicable to such Bank limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Bank, and in such event
the Company

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shall pay such Bank interest at the highest rate permitted by applicable law.

2.12 FEES.

(a) ARRANGEMENT, AGENCY FEES. The Company shall pay an arrangement
fee to the Arranger for the Arranger's own account, and shall pay an agency fee
to the Agent for the Agent's own account, as required by the letter agreement
("Fee Letter") between the Company and the Arranger and Agent, dated August 2,
1996.

(b) COMMITMENT FEES. Commencing October 31, 1996 (provided that the
Closing Date has not then occurred), the Company shall pay to the Agent for the
account of each Bank a commitment fee on the full amount of such Bank's
Commitment, as such may be reduced or terminated from time to time, computed on
a quarterly basis in arrears on the last Business Day of each calendar quarter,
equal to (i) 0.125% percent per annum from October 31, 1996 through the earlier
of January 3, 1997 or the Closing Date and (ii) 0.25% percent per annum from
January 4, 1997 through the Closing Date. The commitment fees provided in this
subsection shall accrue at all times after October 31, 1996, including at any
time during which one or more conditions in Article IV are not met.

(c) FACILITY FEES. The Company shall pay to the Agent for the
account of each Bank a facility fee on the amount of such Bank's Commitment
(whether used or unused, as such may be reduced or terminated from time to time)
for the period from and including the Closing Date to but not including the
Revolving Termination Date at a rate per annum equal to the applicable amount
set forth in the definition of "Applicable Margin" for the facility fee.
Accrued facility fees shall be payable in arrears on the last Business Day of
each calendar quarter and on the Revolving Termination Date.

2.13 COMPUTATION OF FEES AND INTEREST.

(a) All computations of interest for Base Rate Committed Loans when
the Base Rate is determined by BofA's "reference rate" shall be made on the
basis of a year of 365 or 366 days, as the case may be, and actual days elapsed.
All other computations of fees and interest shall be made on the basis of a
360-day year and actual days elapsed (which results in more interest being paid
than if computed on the basis of a 365-day year). Interest and fees shall
accrue during each period during which interest or such fees are computed from
the first day thereof to the last day thereof.

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(b) Each determination of an interest rate by the Agent shall be
presumptive evidence thereof. The Agent will, at the request of the Company or
any Bank, deliver to the Company or the Bank, as the case may be, a statement
showing the quotations used by the Agent in determining any interest rate.

(c) If any Reference Bank's Commitment terminates (other than on
termination of all the Commitments) or becomes a Defaulting Bank, or for any
reason whatsoever the Reference Bank ceases to be a Bank hereunder, that
Reference Bank shall thereupon cease to be a Reference Bank, and the LIBOR Base
Rate shall be determined on the basis of the rates as notified by the remaining
Reference Banks.

(d) Each Reference Bank shall use its best efforts to furnish
quotations of rates to the Agent as contemplated hereby. If any of the Reference
Banks fails to supply such rates to the Agent upon its request, the rate of
interest shall be determined on the basis of the quotations of the remaining
Reference Bank(s).

2.14 PAYMENTS BY THE COMPANY.

(a) All payments to be made by the Company shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Company shall be made to the Agent for the account
of the Banks at the Agent's Payment Office, and shall be made in dollars and in
immediately available funds, no later than 11:00 a.m. (San Francisco time) on
the date specified herein. The Agent will promptly distribute to each Bank its
Pro Rata Share (or other applicable share as expressly provided herein) of such
payment in like funds as received. Any payment received by the Agent later than
11:00 a.m. (San Francisco time) shall be deemed to have been received on the
following Business Day and any applicable interest or fee shall continue to
accrue.

(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.

(c) Unless the Agent receives notice from the Company prior to the
date on which any payment is due to the Banks that the Company will not make
such payment in full as and when required, the Agent may assume that the Company
has made such payment in full to the Agent on such date in immediately available
funds and the Agent may (but shall not be so required),

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in reliance upon such assumption, distribute to each Bank on such due date an
amount equal to the amount then due such Bank. If and to the extent the
Company has not made such payment in full to the Agent, each Bank shall repay
to the Agent on demand such amount distributed to such Bank, together with
interest thereon at the Federal Funds Rate for each day from the date such
amount is distributed to such Bank until the date repaid.

2.15 PAYMENTS BY THE BANKS TO THE AGENT; ADVANCES TO THE COMPANY.

(a) Unless the Agent receives notice from a Bank on or prior to the
Closing Date or, with respect to any Borrowing after the Closing Date, at least
one Business Day prior to the date of such Committed Borrowing for LIBOR Loans
and prior to the time of such Borrowing for Base Rate Loans, that such Bank will
not make available as and when required hereunder to the Agent for the account
of the Company the amount of that Bank's Pro Rata Share of the Committed
Borrowing, the Agent may assume that each Bank has made such amount available to
the Agent in immediately available funds on the Borrowing Date and the Agent may
(but shall not be so required), in reliance upon such assumption, make available
to the Company on such date a corresponding amount. If and to the extent any
Bank shall not have made its full amount available to the Agent in immediately
available funds and the Agent in such circumstances has made available to the
Company such amount, that Bank shall on the Business Day following such
Borrowing Date make such amount available to the Agent, together with interest
at the Federal Funds Rate for each day during such period. A notice of the
Agent submitted to any Bank with respect to amounts owing under this subsection
(a) shall be conclusive, absent manifest error. If such amount is so made
available, such payment to the Agent shall constitute such Bank's Loan on the
date of Borrowing for all purposes of this Agreement. If such amount is not
made available to the Agent on the Business Day following the Borrowing Date,
the Agent will notify the Company of such failure to fund and, upon demand by
the Agent, the Company shall pay such amount to the Agent for the Agent's
account, together with interest thereon for each day elapsed since the date of
such Committed Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Committed Loans comprising such Committed
Borrowing.

(b) The failure of any Bank to make any Committed Loan on any
Borrowing Date shall not relieve any other Bank of any obligation hereunder to
make a Committed Loan on such Borrowing Date, but no Bank shall be responsible
for the failure of any other Bank to make the Committed Loan to be made by such
other Bank on any Borrowing Date.

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<PAGE>

(c) All advances to the Company made by the Agent or the Banks shall
be made to the Company's Designated Deposit Account.

2.16 SHARING OF PAYMENTS, ETC. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Committed Loans made
by it any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact, and (b) purchase from the other
Banks such participations in the Committed Loans made by them as shall be
necessary to cause such purchasing Bank to share the excess payment pro rata
with each of them; provided, however, that if all or any portion of such excess
payment is thereafter recovered from the purchasing Bank, such purchase shall to
that extent be rescinded and each other Bank shall repay to the purchasing Bank
the purchase price paid therefor, together with an amount equal to such paying
Bank's ratable share (according to the proportion of (i) the amount of such
paying Bank's required repayment to (ii) the total amount so recovered from the
purchasing Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Company agrees
that any Bank so purchasing a participation from another Bank may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off, but subject to Section 10.11) with respect to such
participation as fully as if such Bank were the direct creditor of the Company
in the amount of such participation. The Agent will keep records (which shall
be conclusive and binding in the absence of manifest error) of participations
purchased under this Section and will in each case notify the Banks following
any such purchases or repayments. Any Bank having outstanding both Committed
Loans and Bid Loans at any time a right of set-off is exercised by such Bank and
applying such setoff to the Loans shall apply the proceeds of such set-off first
to such Bank's Committed Loans, until its Committed Loans are reduced to zero,
and thereafter to its Bid Loans.

ARTICLE III

TAXES, YIELD PROTECTION AND ILLEGALITY

3.1 TAXES.

(a) Subject to subsection 3.1(e), any and all payments by the Company
to each Bank or the Agent under this Agreement and any other Loan Document shall
be made free and clear of, and without deduction or withholding for any Taxes.
In addition, the Company shall pay all Other Taxes.

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(b) Subject to subsection 3.1(e), the Company agrees to indemnify and
hold harmless each Bank and the Agent for the full amount of Taxes or Other
Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section) paid by the Bank or the Agent and any liability
(including penalties, interest, additions to tax and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted. Payment under this indemnification shall be made within 30
days after the date the Bank or the Agent makes written demand therefor.

(c) If the Company shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank
or the Agent, then:

(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including deductions
and withholdings applicable to additional sums payable under this Section)
such Bank or the Agent, as the case may be, receives an amount equal to the
sum it would have received had no such deductions or withholdings been
made;

(ii) the Company shall make such deductions and withholdings;
and

(iii) the Company shall pay the full amount deducted or withheld
to the relevant taxing authority or other authority in accordance with
applicable law;

provided, that the foregoing obligation of the Company to pay such additional
amounts shall not apply

(A) to any payment to any Bank that is subject to deduction for
or withholding for taxes pursuant to the Code, unless, as of the
Closing Date or the date it becomes a Bank pursuant to Section 10.8,
such Bank is entitled to submit a Form 1001 (relating to such Bank and
entitling it to a complete exemption from withholding on all interest
to be received by it under this Agreement) or a Form 4224 (relating to
all interest to be received by such Bank under this Agreement in
respect of the Loans) (and, in that regard, each such Bank shall
deliver to the Agent and the Company the documentation required by
Section 9.10), or

(B) to any taxes imposed solely by reason of the failure of such
Bank to comply with applicable certification, information,
documentation or other

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reporting requirements concerning the nationality, residence, identity
or connections with the United States of such Bank if such compliance
is required by statute or regulation of the United States as a
precondition to relief or exemption from such Taxes.

(d) Within 30 days after the date of any payment by the Company of
Taxes or Other Taxes, the Company shall furnish the Agent the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment satisfactory to the Agent.

(e) If the Company is required to pay additional amounts to any Bank
or the Agent pursuant to subsection (c) of this Section, then such Bank shall
use reasonable efforts (consistent with legal and regulatory restrictions) to
change the jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Company which may thereafter accrue, if such change in
the judgment of such Bank is not otherwise disadvantageous to such Bank.

3.2 ILLEGALITY.

(a) If any Bank determines that the introduction of any Requirement
of Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for any Bank or its applicable Lending Office, to make LIBOR Loans, then, on
notice thereof by the Bank to the Company through the Agent, any obligation of
that Bank to make LIBOR Loans (including in respect of any LIBOR Bid Loan as to
which the Company has accepted such Bank's Competitive Bid, but as to which the
Borrowing Date has not arrived) shall be suspended until the Bank notifies the
Agent and the Company that the circumstances giving rise to such determination
no longer exist.

(b) If a Bank determines that it is unlawful to maintain any LIBOR
Loan, the Company shall, upon its receipt of notice of such fact and demand from
such Bank (with a copy to the Agent), prepay in full such LIBOR Loans of that
Bank then outstanding, together with interest accrued thereon and amounts
required under Section 3.4, either on the last day of the Interest Period
thereof, if the Bank may lawfully continue to maintain such LIBOR Loans to such
day, or immediately, if the Bank may not lawfully continue to maintain such
LIBOR Loan. If the Company is required to so prepay any LIBOR Committed Loan,
then concurrently with such prepayment, the Company shall borrow from the
affected Bank, in the amount of such repayment, a Base Rate Committed Loan.

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<PAGE>

(c) If the obligation of any Bank to make or maintain LIBOR Committed
Loans has been so terminated or suspended, the Company may elect, by giving
notice to the Bank through the Agent, that all Loans which would otherwise be
made by the Bank as LIBOR Committed Loans shall be instead Base Rate Committed
Loans.

(d) Before giving any notice to the Agent under this Section, the
affected Bank shall designate a different Lending Office with respect to its
LIBOR Loans if such designation will avoid the need for giving such notice or
making such demand and will not, in the judgment of the Bank, be illegal or
otherwise disadvantageous to the Bank.

3.3 INCREASED COSTS AND REDUCTION OF RETURN.

(a) If any Bank determines that, due to either (i) the introduction
of or any change in or in the interpretation of any law or regulation (other
than any change by way of imposition of an increase in reserve requirements for
which a Bank is entitled to reserve compensation under the definition of the
term "LIBOR Rate") or (ii) the compliance by that Bank with any guideline or
request from any central bank or other Governmental Authority (whether or not
having the force of law), there shall be any increase in the cost to such Bank
of agreeing to make or making, funding or maintaining any LIBOR Committed Loans,
then the Company shall be liable for, and shall from time to time, upon demand
(with a copy of such demand to be sent to the Agent), pay to the Agent for the
account of such Bank, additional amounts as are sufficient to compensate such
Bank for such increased costs.

(b) If any Bank shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its Lending Office) or any corporation controlling the Bank with
any Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and (taking into consideration such Bank's or such corporation's
policies with respect to capital adequacy and such Bank's desired return on
capital) determines that the amount of such capital is increased as a
consequence of its Commitment[s], loans, credits or obligations under this
Agreement, then, upon demand of such Bank to the Company through the Agent, the
Company shall pay to the Bank, from time to time as specified by the Bank,
additional amounts sufficient to compensate the Bank for such increase.

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<PAGE>

3.4 FUNDING LOSSES. The Company shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:

(a) the failure of the Company to make on a timely basis any payment
of principal of any LIBOR Loan;

(b) (i) the failure of the Company to borrow, continue or convert a
Committed Loan after the Company has given (or is deemed to have given) a Notice
of Borrowing or a Notice of Conversion/Continuation; or (ii) the failure of the
Company to borrow a LIBOR Bid Loan after it has accepted a Competitive Bid with
respect thereto pursuant to subsection 2.6(e);

(c) the failure of the Company to make any prepayment of any
Committed Loan in accordance with any notice delivered under Section 2.8;

(d) the prepayment or repayment (including pursuant to Section 2.8 or
2.10) or other payment (including after acceleration thereof) of any LIBOR Loan
or Absolute Rate Bid Loan on a day that is not the last day of the relevant
Interest Period; or

(e) the automatic conversion under Section 2.4 of any LIBOR Committed
Loan to a Base Rate Committed Loan on a day that is not the last day of the
relevant Interest Period;

including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its LIBOR Loans or from fees payable to
terminate the deposits from which such funds were obtained. For purposes of any
determination under Section 3.2 or calculating amounts payable by the Company to
the Banks under this Section and under subsection 3.3(a), each LIBOR Loan made
by a Bank (and each related reserve, special deposit or similar requirement)
shall be conclusively deemed to have been funded at the LIBOR Base Rate used in
determining the LIBOR Base Rate for such LIBOR Loan by a matching deposit or
other borrowing in the interbank eurodollar market for a comparable amount and
for a comparable period, whether or not such LIBOR Loan is in fact so funded.

3.5 INABILITY TO DETERMINE RATES. If any Reference Bank determines that
for any reason adequate and reasonable means do not exist for determining the
LIBOR Base Rate for any requested Interest Period with respect to a proposed
LIBOR Loan, or that the LIBOR Base Rate applicable pursuant to subsection
2.11(a) for any requested Interest Period with respect to a proposed LIBOR Loan
does not adequately and fairly reflect the cost to such Bank of funding such
Loan, the Agent will promptly so notify the

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Company and each Bank. Thereafter, the obligation of the Banks to make or
maintain LIBOR Loans hereunder shall be suspended until the Agent upon the
instruction of the Majority Banks revokes such notice in writing. Upon
receipt of such notice, the Company may revoke any Notice of Borrowing or
Notice of Conversion/Continuation then submitted by it. If the Company does
not revoke such Notice, the Banks shall make, convert or continue the
Committed Loans, as proposed by the Company, in the amount specified in the
applicable notice submitted by the Company, but such Committed Loans shall be
made, converted or continued as Base Rate Committed Loans instead of LIBOR
Committed Loans, as the case may be.

3.6 CERTIFICATES OF BANKS. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Company (with a copy to
the Agent) a certificate setting forth in reasonable detail the amount payable
to the Bank hereunder and such certificate shall be presumptive evidence
thereof.

3.7 SUBSTITUTION OF BANKS. If (i) the obligation of any Bank to make or
maintain LIBOR Loans has been suspended pursuant to Section 3.2, (ii) any Bank
has demanded compensation under Section 3.1 or 3.3, or (iii) any Bank shall be a
Defaulting Bank, the Company shall have the right to replace such Bank (the
"Replaced Bank") with one or more other Eligible Assignee(s) (collectively, the
"Replacement Bank") reasonably acceptable to the Agent by execution of an
Assignment and Acceptance as provided in Section 10.8(a), subject to the payment
to the Replaced Bank of all amounts then owing to it hereunder.

3.8 PRESENTATION OF CLAIMS; SURVIVAL. Each Bank will promptly notify the
Company and the Agent of any event of which it has knowledge, occurring after
the date hereof, which will entitle such Bank to compensation pursuant to this
Article III (each, a "Trigger Event"). Notwithstanding any other provision of
this Article III, no Bank shall be entitled to any compensation pursuant to this
Article in respect of any Trigger Event (i) for any period of time in excess of
6 months prior to such notice or (ii) for any period of time prior to such
notice if such Bank shall not have given such notice within 6 months of the date
on which such Trigger Event shall have been enacted, promulgated, adopted or
issued in definitive or final form unless such Trigger Event is retroactive.

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ARTICLE IV

CONDITIONS PRECEDENT

4.1 CONDITIONS OF INITIAL LOANS. The obligation of each Bank to make its
initial Committed Loan hereunder, and to receive through the Agent the initial
Competitive Bid Request, is subject to the condition that the Agent has received
on or before the initial borrowing date all of the following, in form and
substance satisfactory to the Agent and each Bank, and in sufficient copies for
each Bank:

(a) CREDIT AGREEMENT AND NOTES. This Agreement and the Notes
executed by each party thereto;

(b) RESOLUTIONS; INCUMBENCY.

(i) Copies of the resolutions of the board of directors of the
Company and each other Obligor that may become party to a Loan Document
authorizing the transactions contemplated hereby, certified as of the
Closing Date by the Secretary or an Assistant Secretary of such Person; and

(ii) A certificate of the Secretary or Assistant Secretary of
the Company, and each other Obligor that may become party to a Loan
Document, certifying the names and true signatures of the officers of the
Company or such Obligor authorized to execute, deliver and perform, as
applicable, this Agreement, and all other Loan Documents to be delivered by
it hereunder;

(i) the articles or certificate of incorporation and the bylaws
of the Company and each other Obligor party to any Loan Document as in
effect on the Closing Date, certified by the Secretary or Assistant
Secretary of the Company or such Obligor as of the Closing Date; and

(ii) a good standing and tax good standing certificate for the
Company and each other Obligor party to any Loan Document from the
Secretary of State (or similar, applicable Governmental Authority) of its
state of incorporation and each state where the Company or such other
Obligor is qualified to do business as a foreign corporation, as of a
recent date, together with a bring-down certificate by facsimile, dated the
Closing Date;

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(d) LEGAL OPINION. Opinions of Konowiecki & Rank, Cooley Godward LLP
and/or other counsel of the Company, PacifiCare and FHP reasonably acceptable to
the Agent, addressed to the Agent and the Banks, substantially in the form of
Exhibit D;

(e) PAYMENT OF FEES. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the Closing Date, together with Attorney Costs of BofA to the extent invoiced
prior to or on the Closing Date, plus such additional amounts of Attorney Costs
as shall constitute BofA's reasonable estimate of Attorney Costs incurred or to
be incurred by it through the closing proceedings (provided that such estimate
shall not thereafter preclude final settling of accounts between the Company and
BofA); including any such costs, fees and expenses arising under or referenced
in Sections 2.12 and 10.4;

(f) CERTIFICATE. A certificate signed by a Responsible Officer,
dated as of the Closing Date, stating that:

(i) the representations and warranties contained in Article V
are true and correct on and as of such date, both before and after giving
effect to the FHP Acquisition, as though made on and as of such date,
except to the extent such representations expressly refer to an earlier
date, in which case they shall be true and correct as of such earlier date;

(ii) no Default or Event of Default exists or would result from
the initial Borrowing; and

(iii) there has occurred no event or circumstance that has
resulted or is reasonably likely to result in a Pre-Closing Material
Adverse Effect;

(g) FINANCIAL STATEMENTS AND PROJECTIONS. Audited financial
statements of FHP and its Subsidiaries dated as of June 30, 1996; unaudited
financial statements of PacifiCare and its Subsidiaries as of June 30, 1996;
unaudited financial statements of the Company and its Subsidiaries prepared on a
Combined Basis as of the Closing Date; and projections of the Company (including
projected financial statements giving effect to the FHP Acquisition on a
Combined Basis for years 1996 through 2001);

(h) FHP ACQUISITION AND FHP ACQUISITION DOCUMENTS. A certificate
signed by a Responsible Officer, dated as of the Closing Date, stating that:
(i) the conditions precedent to the FHP Acquisition have been satisfied without
waiver or

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forbearance; (ii) the representations and warranties of the Company and
PacifiCare set forth in the FHP Acquisition Documents are true and correct in
all material respects as of the date made; (iii) FHP has certified to
PacifiCare and the Company that its representations and warranties set forth
in the FHP Acquisition Documents are true and correct in all material
respects as of August 4, 1996; (iv) the FHP Acquisition Documents have not
been amended in any material respect; (v) attached thereto are true and
complete copies of the definitive FHP Acquisition Documents; and (vi) the
Company has given irrevocable instructions to its counsel to file all
necessary merger certificates in order to consummate the FHP Acquisition.

(i) LITIGATION. Such evidence as the Agent shall require that (i)
there exists no material litigation in which any Governmental Authority is a
party challenging or seeking to restrain or prohibit the consummation of the FHP
Acquisition and other transactions contemplated by the FHP Acquisition
Documents, the making of the Loans by the Banks or the performance of the
Obligations, (ii) there exists no judgment, order, injunction, or other
restraint of a Governmental Authority prohibiting the consummation of the FHP
Acquisition and other transactions contemplated by the FHP Acquisition
Documents, the making of the Loans by the Banks or the performance of the
Obligations, and (iii) there exists no other litigation that is reasonably
likely to result in a Pre-Closing Material Adverse Effect (A) challenging or
seeking to restrain or prohibit the consummation of the FHP Acquisition, (B)
relating to the FHP Acquisition and seeking to obtain from the Company,
PacifiCare or any of PacifiCare's Subsidiaries any damages that may be material
to the Company or PacifiCare, (C) seeking to prohibit or limit in any material
respect the Company's ability to vote or receive dividends with respect to the
stock of the Obligors, or (D) which would affect adversely the right of the
Company, any Obligor or any of their Subsidiaries to own the assets or operate
the business of the Obligors or any of their Subsidiaries;

(j) TERMINATION OF EXISTING CREDIT FACILITIES. Such evidence as the
Agent shall require that PacifiCare's and FHP's existing revolving credit
facilities have been terminated and all Indebtedness outstanding thereunder has
been paid in full (including, to the extent necessary, from proceeds of the
initial Borrowing); and all Liens securing payment of any such Indebtedness have
been released and the Agent shall have received all Uniform Commercial Code
termination statements or other instruments as may be suitable or appropriate in
connection therewith;

(k) GUARANTEES. The Guarantees, executed by each of the Guarantors;
and

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<PAGE>

(l) OTHER DOCUMENTS. Such other approvals, opinions, documents or
materials as the Agent may reasonably request.

4.2 CONDITIONS TO ALL BORROWINGS. The obligation of each Bank to make any
Committed Loan to be made by it, and the obligation of any Bank to make any Bid
Loan as to which the Company has accepted the relevant Competitive Bid
(including its initial Loan), is subject to the satisfaction of the following
conditions precedent on the relevant Borrowing Date:

(a) NOTICE OF BORROWING. As to any Committed Loan, the Agent shall
have received (with, in the case of the initial Loan only, a copy for each Bank)
a Notice of Borrowing;

(b) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date); and

Each Notice of Borrowing and Competitive Bid Request submitted by the Company
hereunder shall constitute a representation and warranty by the Company
hereunder, as of the date of each such notice or request and as of each
Borrowing Date, that the conditions in Section 4.2 are satisfied.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to the Agent and each Bank that:

5.1 CORPORATE EXISTENCE AND POWER. Each of the Company and its Material
Subsidiaries (including the Guarantors):

(a) is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation;

(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its

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assets, carry on its business and to execute, deliver, and perform its
obligations under the Loan Documents;

(c) is duly qualified as a foreign entity and is licensed and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such qualification
or license; and

(d) is in compliance with all Requirements of Law; except, in each
case referred to in clause (c) or clause (d), to the extent that the failure to
do so could not reasonably be expected to have a Material Adverse Effect.

5.2 CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Company and each other Obligor of this Agreement and each
other Loan Document to which such Person is party, have been duly authorized by
all necessary corporate action, and do not and will not:

(a) contravene the terms of any of that Person's Organization
Documents;

(b) conflict with in any material respect or result in any material
breach or contravention of, or the creation of any Lien under, any document
evidencing any material Contractual Obligation to which such Person is a party
or any order, injunction, writ or decree of any Governmental Authority to which
such Person or its property is subject; or

5.3 GOVERNMENTAL AUTHORIZATION. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, (i) the Company
of this Agreement or any other Loan Document other than that which has been
obtained and (ii) from and after the Closing Date, any other Obligor of this
Agreement or any other Loan Document, other than that which has been obtained.
As of the Closing Date, no material approval, consent, exemption, authorization,
or other action by, or notice to, or filing with, any Governmental Authority is
necessary or required for the consummation of the FHP Acquisition, other than
that which has been obtained.

5.4 BINDING EFFECT. This Agreement and each other Loan Document to which
the Company or any other Obligor is a party constitute the legal, valid and
binding obligations of such Person, enforceable against such Person in
accordance with their

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respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of
creditors' rights generally or by equitable principles relating to
enforceability.

5.5 LITIGATION. Except as specifically disclosed in Schedule 5.5, there
are no actions, suits, proceedings, claims or disputes pending, or to the best
knowledge of the Company, threatened or contemplated, at law, in equity, in
arbitration or before any Governmental Authority, against the Company or its
Subsidiaries or any of their respective properties which:

(a) purport to affect this Agreement or any other Loan Document, or
any of the transactions contemplated hereby or thereby in any material respect;
or

(b) if determined adversely to the Company or its Subsidiaries, is
reasonably likely to have a Material Adverse Effect. No injunction, writ,
temporary restraining order or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.

5.6 NO DEFAULT. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company or any other Obligor. As
of the Closing Date, neither the Company nor any Subsidiary is in default under
or with respect to any Contractual Obligation in any respect which, individually
or together with all such defaults, is reasonably likely to have a Material
Adverse Effect, or that would, if such default had occurred after the Closing
Date, create an Event of Default under subsection 8.1(e).

5.7 ERISA COMPLIANCE.

(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law, except
where such noncompliance is not reasonably likely to result in a material
liability. Each Plan which is intended to qualify under Section 401(a) of the
Code has received a favorable determination letter from the IRS (or a timely
filing for such a letter has been or will be submitted to the IRS) and to the
best knowledge of the Company, nothing has occurred which is reasonably likely
to cause the loss of such qualification. No application for a funding waiver or
an extension of any amortization period pursuant to Section 412 of the Code has
been made with respect to any Plan.

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(b) There are no pending or, to the best knowledge of Company,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or is reasonably likely to result in
a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Plan which
has resulted or is reasonably likely to result in a Material Adverse Effect.

(c) (i) No ERISA Event has occurred which is reasonably likely to
result in material liability; (ii) no Pension Plan has any Unfunded Pension
Liability in excess of $5,000,000; (iii) neither the Company nor any ERISA
Affiliate has incurred, or is reasonably likely to incur, any liability under
Title IV of ERISA with respect to any Pension Plan (other than premiums due and
not delinquent under Section 4007 of ERISA) and no contribution failure has
occurred with respect to any Pension Plan sufficient to give rise to a Lien
under Section 302(f) of ERISA; (iv) neither the Company nor any ERISA Affiliate
has incurred any material liability (and no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such liability)
under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and
(v) neither the Company nor any ERISA Affiliate has engaged in a transaction
within the meaning of Section 4069 or 4212(c) of ERISA.

5.8 USE OF PROCEEDS; MARGIN REGULATIONS. The proceeds of the Loans are to
be used solely for the purposes set forth in and permitted by Section 6.7 and
Section 7.6. Neither the Company nor any Subsidiary is generally engaged in the
business of purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock.

5.9 TITLE TO PROPERTIES. The Company and each Subsidiary have good record
and marketable title in fee simple to, or valid leasehold interests in, all real
Property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing Date, the
property of the Company and its Subsidiaries is subject to no Liens, other than
Permitted Liens.

5.10 TAXES. The Company and its Subsidiaries have filed all Federal and
other material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP. There is no proposed

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tax assessment against the Company or any Subsidiary that would, if made,
have a Material Adverse Effect.

5.11 FINANCIAL CONDITION.

(a) Each of the (1) audited consolidated financial statements of
PacifiCare and its Subsidiaries dated September 30, 1995, and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for the fiscal year ended on that date; (2) audited consolidated financial
statements of FHP and its Subsidiaries dated June 30, 1996, and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for the fiscal year ended on that date; (3) unaudited consolidated
financial statements of PacifiCare and its Subsidiaries dated June 30, 1996, and
the related consolidated statements of income or operations, shareholders'
equity and cash flows for the fiscal quarter and nine months on that date; (4)
unaudited pro forma condensed consolidated financial statements of the Company
and its Subsidiaries for the nine months ended June 30, 1996, and the related
consolidated statements of income for the nine months ended on that date; and
(5) unaudited pro forma condensed consolidated financial statements of the
Company and its Subsidiaries for the fiscal year ended September 30, 1995 and
the related consolidated statements of income for the fiscal year ended on that
date:

(i) were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly noted
therein, subject, in the case of (3), (4) and (5) above, to normal year end
audit adjustments;

(ii) fairly present the financial condition of FHP and its
Subsidiaries, PacifiCare and its Subsidiaries and the Company and its
Subsidiaries as of the dates thereof and results of operations for the
period covered thereby; and

(iii) except as specifically disclosed in their Form 10-Ks and
10-Qs filed with the Securities and Exchange Commission, show all material
indebtedness and other liabilities, direct or contingent, to the extent
required by GAAP, of FHP and its Subsidiaries and the Company and its
Consolidated Subsidiaries as of the date thereof, including liabilities for
taxes, material commitments and Contingent Obligations to the extent
required by GAAP.

(b) As of the date hereof and as of the Closing Date, there has been
no Pre-Closing Material Adverse Effect.

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(c) Since the date of the most recent audited financial statements
delivered to the Agent prior to the Closing Date, no Material Adverse Effect has
occurred.

5.12 ENVIRONMENTAL MATTERS. The Company conducts in the ordinary course
of business a review of the effect of existing Environmental Laws and existing
Environmental Claims on its business, operations and properties, and as a result
thereof the Company has reasonably concluded that, except as specifically
disclosed in Schedule 5.12, such Environmental Laws and Environmental Claims
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

5.13 REGULATED ENTITIES. None of the Company, any Person controlling the
Company, or any Material Subsidiary (including the Guarantors), is an
"Investment Company" within the meaning of the Investment Company Act of 1940.
Neither the Company nor any Subsidiary (including the Guarantors) is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act, any state public utilities code, or any
other Federal or state statute or regulation limiting its ability to incur
Indebtedness.

5.14 NO BURDENSOME RESTRICTIONS. Neither the Company nor any Material
Subsidiary is a party to or bound by any Contractual Obligation, or subject to
any restriction in any Organization Document, or any Requirement of Law, which
is reasonably likely to have a Material Adverse Effect.

5.15 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. The Company or
its Subsidiaries own or are licensed or otherwise have the right to use all of
the patents, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other rights that are reasonably necessary for
the operation of their respective businesses, without conflict with the rights
of any other Person.

5.16 SUBSIDIARIES. As of the date hereof, PacifiCare has no Material
Subsidiaries other than those disclosed in part (a) of Schedule 5.16 hereto and
has no equity investments in excess of $5,000,000 in any other corporation or
entity other than those specifically disclosed in part (b) of Schedule 5.16. As
of the Closing Date, the Company will have no Material Subsidiaries other than
those disclosed in part (a) of an updated Schedule 5.16 and will have no equity
investment in excess of $5,000,000 in any other corporation or entity other than
those specifically disclosed in part (b) of an updated Schedule 5.16, which
updated Schedule 5.16 shall be delivered to the Agent, and approved by the
Agent, prior to the Closing Date.

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5.17 INSURANCE. Except as specifically disclosed in Schedule 5.17, the
properties of the Company and its Subsidiaries are insured with financially
sound and reputable insurance companies not Affiliates of the Company, in such
amounts, with such deductibles and covering such risks as are customarily
carried by companies engaged in similar businesses and owning similar properties
in localities where the Company or such Subsidiary operates.

5.18 SWAP OBLIGATIONS. Neither the Company nor any of its Subsidiaries
has incurred any outstanding obligations under any Swap Contracts, other than
Permitted Swap Obligations.

5.19 FULL DISCLOSURE. Notwithstanding the penultimate paragraph of
Exhibit L, none of the representations or warranties made by the Company or any
other Obligor in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company or PacifiCare in connection with the Loan Documents (including the
offering and disclosure materials delivered by or on behalf of the Company or
PacifiCare to the Banks prior to the Closing Date), contains any untrue
statement of a material fact or omits any material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading as of the time when made
or delivered; PROVIDED that although any projections and forecasts delivered by
the Company and its Subsidiaries reflect the Company's good faith projections
based upon methods and data the Company believes to be reasonable and accurate,
no representations or warranties are made with respect to the accuracy thereof.

5.20 FHP ACQUISITION AND FHP ACQUISITION DOCUMENTS.

(a) As of the Closing Date, consummation of the FHP Acquisition by
the Company, PacifiCare and FHP has not and will not:

(i) contravene the terms of any of that Person's Organization
Documents;

(ii) conflict with in any material respect or result in any
material breach or contravention of, or the creation of any Lien under, any
document evidencing any material Contractual Obligation to which such
Person is a party or any order, injunction, writ or decree of any
Governmental Authority to which such Person or its property is subject; or

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(iii) violate any material Requirement of Law.

(b) The FHP Acquisition Documents constitute the legal, valid and
binding obligations of the Company and PacifiCare, and, to the best of the
Company's knowledge as of the Closing Date, FHP, enforceable against such Person
in accordance with their respective terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable principles relating
to enforceability.

ARTICLE VI

AFFIRMATIVE COVENANTS

So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:

6.1 FINANCIAL STATEMENTS, NOTICES, ETC. The Company shall deliver to the
Agent, in form and detail satisfactory to the Agent and the Majority Banks:

(a) as soon as available and in any event within 50 days after the
end of each fiscal quarter of the Company, (i) consolidated statements of income
and retained earnings of the Company and its Consolidated Subsidiaries for such
period and for the period from the beginning of the respective fiscal year to
the end of such period, (ii) consolidated cash flow statement from the beginning
of the respective fiscal year to the end of such period and (iii) the related
consolidated balance sheet of the Company and its Consolidated Subsidiaries as
at the end of such period, setting forth in comparative form the corresponding
figures for the corresponding period in the preceding fiscal year, accompanied
by a certificate of a Responsible Officer of the Company, which certificate
shall state that those financial statements fairly present the consolidated
financial condition and results of operations of the Company and its
Consolidated Subsidiaries in accordance with generally accepted accounting
principles then in effect, consistently applied, as at the end of, and for, such
period (subject to normal year-end audit adjustments);

(b) as soon as available and in any event within 95 days after the
end of each fiscal year of the Company, consolidated statements of income,
retained earnings and cash flow of the Company and its Consolidated Subsidiaries
for such fiscal year and the related consolidated balance sheet of the Company
and its Consolidated Subsidiaries as at the end of such

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fiscal year, setting forth in comparative form the corresponding figures for
the preceding fiscal year, and accompanied by an opinion of independent
certified public accountants of recognized national standing, which opinion
shall state that those financial statements fairly present the consolidated
financial condition and results of operations of the Company and its
Consolidated Subsidiaries as at the end of, and for, such fiscal year in
accordance with generally accepted accounting principles then in effect,
consistently applied, and a certificate of such accountants stating that, in
making the examination necessary for their opinion, they obtained no
knowledge, except as specifically stated, of any Default;

(c) prior to the Closing Date, as soon as available and in any event
within 95 days after the end of the 1996 fiscal year of PacifiCare, consolidated
statements of income, retained earnings and cash flow of PacifiCare and its
Consolidated Subsidiaries for such fiscal year and the related consolidated
balance sheet of PacifiCare and its Consolidated Subsidiaries as at the end of
such fiscal year, setting forth in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by an opinion of independent
certified public accountants of recognized national standing, which opinion
shall state that those financial statements fairly present the consolidated
financial condition and results of operations of PacifiCare and its Consolidated
Subsidiaries as at the end of, and for, such fiscal year in accordance with
GAAP, consistently applied;

(d) as soon as received, and in any event within 30 days of receipt
of the same by the Company or any of its Subsidiaries, a copy of the annual
management letter and any other final comment letter submitted by such
accountants to the management of the Company or any Subsidiary in connection
with such audit;

(e) promptly upon their becoming available, but in no case more than
five Business Days after their filing, copies of all registration statements,
regular periodic reports, and any other material filing (other than preliminary
materials filed on a confidential basis) if any, which the Company or any
Subsidiary shall have filed with the SEC or any national securities exchange;

(f) promptly upon (but in no case more than five Business Days after)
their being mailed or provided to the shareholders of the Company, copies of all
financial statements, reports, notices and proxy statements so mailed or
provided;

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(g) as soon as possible, and in any event within ten days after
the Company knows or has reason to know of the same, a certificate signed by
a Responsible Officer of the Company setting forth details respecting any of
the following:

(i) the occurrence of any Reportable Event with respect to any
Pension Plan (PROVIDED that a failure to meet the minimum funding standard
of Section 412 of the Code or Section 302 of ERISA, including the failure
to make on or before its due date a required installment under Section
412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event
regardless of the issuance of any waivers in accordance with Section 412(d)
of the Code) and in addition to such event, deliver to the Agent a
certificate of an executive officer setting forth details as to such
Reportable Event of the action that the Company or ERISA Affiliate proposes
to take with respect thereto, together, with a copy of any notice of such
Reportable Event that may be required to be filed with the PBGC; and any
request for a waiver under Section 412(d) of the Code for any Plan;

(ii) the institution of proceedings or the taking of other
action by the PBGC or the Company or an ERISA Affiliate to terminate,
withdraw or partially withdraw from any Pension Plan or Multi-Employer Plan
and with respect to a Multi-Employer Plan, the reorganization or insolvency
of the Plan and in addition to such notice, deliver to the Agent: any
notice delivered by the PBGC evidencing its intent to institute such
proceedings or any notice filed with or given to the PBGC that such Plan is
to be terminated, as the case may be;

(iii) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30 days; and

(iv) the adoption of an amendment to any Pension Plan that,
pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would
result in the loss of tax-exempt status of the trust of which such Plan is
a part if the Company or an ERISA Affiliate fails to timely provide
security to the Pension Plan in accordance with the provisions of those
Sections;

(h) promptly (but in no case more than five Business Days) following
the receipt of the same, a copy of each notice relating to the loss or
threatened loss by the Company or any Material HMO Subsidiary of any operating
permit, license or certification by any HMO Regulator;

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(i) promptly (but in no case more than five Business Days) following
the receipt of the same, all correspondence received by the Company or any
Subsidiary from an HMO Regulator which asserts that the Company or any Material
HMO Subsidiary is not in substantial compliance with any HMO Regulation or which
threatens the taking of any material action against the Company or any Material
Subsidiary under any HMO Regulation;

(j) promptly after the Company knows or has reason to believe that
any Default has occurred, a notice of such Default describing the same in
reasonable detail and, together with such notice or as soon thereafter as
possible, a description of the action that the Company has taken or proposes to
take with respect to such Default;

(k) promptly (but in no case more than five Business Days) after the
Company receives unsecured long-term debt ratings by S&P and Moody's, a notice
of such ratings, and thereafter, promptly (but in no case more than five
Business Days) after any change in such ratings, a notice of such change;

(l) from time to time upon receipt of a reasonable request by the
Agent or any Bank specifying in reasonable detail the types of documents to be
provided, copies of any and all statements, audits, studies or reports submitted
by or on behalf of the Company or any Material HMO Subsidiary to any HMO
Regulator and other information regarding the financial condition, operations,
business or prospects of the Company or any of its Material Subsidiaries
(including with respect to any Plan or Multiemployer Plan and any reports or
other information required to be filed under ERISA);

(m) promptly, such additional information regarding the business,
financial or corporate affairs of the Company or any Material Subsidiary as the
Agent, at the request of any Bank, may from time to time request; and

(n) promptly, a notice of any matter that has resulted or is
reasonably likely to result in a Material Adverse Effect, including breach or
non-performance of, or any default under, a Contractual Obligation of the
Company or any Subsidiary that has resulted or is reasonably likely to result in
a Material Adverse Effect.

The Company will furnish to the Agent and each Bank, at the time it furnishes
each set of financial statements pursuant to paragraph (a) or (b) above, a
Compliance Certificate executed by a Responsible Officer of the Company.

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6.2 LITIGATION. The Company will promptly give to each Bank notice of all
legal, arbitral or investigatory proceedings, and of all proceedings by or
before any Governmental Authority, and any material development in respect of
any such proceedings, affecting the Company or any of its Subsidiaries, except
proceedings which, if adversely determined, would not be reasonably likely to
have a Material Adverse Effect.

6.3 EXISTENCE, ETC. The Company will, and will cause each of its Material
Subsidiaries to:

(a) preserve and maintain its legal existence and all of its material
rights, privileges, licenses and franchises, including all licenses and
certifications required pursuant to any HMO Regulation, all certification and
authorization necessary to ensure that each of the Material Subsidiaries is
eligible for all reimbursements available under the HMO Regulations to the
extent applicable to HMOs of their type (except where the failure to maintain
the same would not have a Material Adverse Effect), and all material licenses,
permits, authorization and qualifications required under the HMO Regulations in
connection with the ownership or operation of HMOs (PROVIDED that nothing in
this Section 6.3 shall prohibit any transaction expressly permitted under
Section 7.1);

(b) comply with the requirements of all applicable Requirements of
Law including all HMO Regulations, if failure to comply with such requirements
is reasonably likely to have a Material Adverse Effect;

(c) pay and discharge all taxes, assessments and, governmental
charges or levies imposed on it or on its income or profits or on any of its
Properties prior to the date on which penalties attach except for any such tax,
assessment, charge or levy the payment of which is being contested in good faith
and by proper proceedings and against which adequate reserves are being
maintained;

(d) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP, consistently applied;

(e) upon reasonable notice permit representatives of any Bank or the
Agent, and their accountants, during normal business hours, to examine, copy and
make extracts from its books and records, to inspect any of its Properties, and
to discuss its business and affairs with its officers, all to the extent
reasonably requested by such Bank or the Agent (as the case may be); and

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(f) complete, and provide within 95 days after the end of each fiscal
year of the Company to representatives of the Agent and each Bank the
opportunity to discuss, a projected annual budget prepared by the Company and
adopted by its Board of Directors for the current fiscal year.

6.4 INSURANCE. The Company will, and will cause each of its Subsidiaries
to, keep insured by financially sound and reputable insurers all Property of a
character usually insured by corporations engaged in the same or similar
business similarly situated against loss or damage of the kinds and in the
amounts customarily insured against by such corporations and carry such other
insurance as is usually carried by such corporations, including general
liability and malpractice insurance and reinsurance for medical claims.

6.5 COMPLIANCE WITH ERISA. The Company shall, and shall cause each of its
ERISA Affiliates to: (a) maintain each Pension Plan in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law; (b) cause each Pension Plan which is qualified under
Section 401(a) of the Code to maintain such qualification; and (c) make all
required contributions to any Pension Plan subject to Section 412 of the Code,
except where failure to make such contributions is not reasonably likely to
result in a material liability.

6.6 ENVIRONMENTAL LAWS. The Company shall, and shall cause each
Subsidiary to, conduct its operations and keep and maintain its property in
compliance with all Environmental Laws.

6.7 USE OF PROCEEDS. The Company shall use the proceeds of the Loans (i)
first, to consummate the FHP Acquisition and thereafter (ii) to refinance the
existing credit facilities of Pacificare and FHP, (iii) for working capital
purposes not in contravention of any Requirement of Law or of any Loan Document
and (iv) for other general corporate purposes.

6.8 CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES.

(a) Except as otherwise provided in this Agreement, the Company will,
and will cause each of its Subsidiaries to, take such action from time to time
as shall be necessary to ensure that the Company or one of its Material
Subsidiaries at all times owns free and clear of any lien, charge, or
encumbrance at least the same percentage of the issued and outstanding shares of
each class of stock of, and enjoys the same degree of voting control over, each
of its Material Subsidiaries as it owned or enjoyed on the Closing Date or as
was acquired in any Acquisition or merger.

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(b) Except as otherwise permitted by this Agreement, the Company will
not nor permit any of its Subsidiaries to, enter into, after the Closing Date,
any indenture, agreement, instrument or other arrangement (other than pursuant
to any Loan Document) that, directly or indirectly, prohibits or restrains, or
has the effect of prohibiting or restraining, or imposes materially adverse
conditions upon, the incurrence or payment of Indebtedness, the granting of
Liens or the sale, assignment, transfer or other disposition of Property.

ARTICLE VII

NEGATIVE COVENANTS

From and after the Closing Date, so long as any Bank shall have any
Commitment hereunder, or any Loan or other Obligation shall remain unpaid or
unsatisfied, unless the Majority Banks waive compliance in writing:

7.1 CONSOLIDATION, MERGER OR SALE. The Company will not, nor will it
permit any of its Subsidiaries to, consolidate with, or merge into, any other
corporation or sell all or any substantial part of its assets or permit any
other corporation to merge into the Company or any of its Subsidiaries or make
any Acquisition; except:

(a) the Company or any of its Subsidiaries may make an Approved
Acquisition; PROVIDED that in the case of an Approved Acquisition wherein the
aggregate value of the cash, stock or other consideration (including
Indebtedness assumed by the Company or its Subsidiaries in connection therewith)
exceeds or is expected to exceed $150,000,000 (i) the Company shall deliver to
the Agent: (A) a written description of such Acquisition; and (B) if requested
by the Agent, copies of all agreements and Governmental Approvals relating to
such Acquisition and evidence, that such Acquisition is an Approved Acquisition;
and (ii) the Company shall calculate and deliver to the Agent prior to the
consummation of such Acquisition, the covenants set forth in Section 7.10
showing compliance therewith on a pro forma basis as though such Acquisition had
been consummated on the first day of the fourth fiscal quarter immediately prior
to the date of determination;

(b) the Company or any Subsidiary of the Company may merge or
consolidate with or into another Person in an Approved Merger; PROVIDED that in
the case of a merger or consolidation wherein the value of the cash, stock or
other consideration (including Indebtedness assumed by the Company or its

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Subsidiaries in connection therewith) exchanged exceeds or is expected to exceed
$150,000,000, (i) the Company shall deliver to the Agent: (A) a written
description of such merger or consolidation; and (B) if requested by the Agent,
copies of all agreements and Governmental Approvals relating to such merger or
consolidation and evidence that such merger or consolidation is an Approved
Merger; and (ii) the Company shall calculate and deliver to the Agent prior to
the consummation of such merger or consolidation, the covenants set forth in
Section 7.10 showing compliance therewith on a pro forma basis as though such
merger or consolidation had been consummated on the first day of the fourth
fiscal quarter immediately prior to the date of determination;

(c) any Subsidiary of the Company may be merged or consolidated with
or into or may sell all or any of its assets to: (i) the Company if the Company
shall be the continuing or surviving corporation or (ii) any Wholly Owned
Subsidiary of the Company; PROVIDED that if any such transaction shall be
between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary
shall be the continuing or surviving corporation;

(d) the Company may discontinue any operation which it believes to be
no longer in the best interest of the Company and its Subsidiaries taken as a
whole, PROVIDED that the Company shall not discontinue a Material Subsidiary;

(e) in addition to the dispositions identified on Schedule 7.1(e),
the Company or any of its Subsidiaries may sell upon usual financial terms the
assets of, the capital stock of, or an interest in any present or future
Subsidiary so long as the net proceeds of any one or series of transactions in
any four fiscal quarter period does not exceed five percent of the consolidated
total assets of the Company; and

(f) the Company and its Subsidiaries may consummate the mergers and
acquisitions contemplated in the FHP Acquisition Documents.

PROVIDED, HOWEVER, in actions consummated pursuant to clauses (c), (d), or (e),
(A) the representations and warranties made by the Company in Article V shall be
true and complete on and as of the date of such action after giving effect
thereto with the same force and effect as if made on and as of such date (or, if
any such representation or warranty is expressly stated to have been made as of
a specific date, as of such specific date) and (B) no Default or Event of
Default shall then be continuing or, after giving effect to such action, would
result from such action; PROVIDED, FURTHER, that this Agreement shall not be
deemed to restrict the Company, in attempting to make an Approved

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Acquisition or engage in an Approved Merger, from making one or more offers
for a target person and/or engaging in negotiations with a target person
prior to the acceptance of the final terms of such Approved Acquisition or
Approved Merger by the board of directors of such target Person.

7.2 LIMITATION ON LIENS. The Company will not, nor will it permit any of
its Material Subsidiaries to, create, incur, assume or suffer to exist any Lien
upon any of its Property, whether now owned or hereafter acquired, except
("Permitted Liens"):

(a) Liens in existence on the Closing Date and listed in SCHEDULE
7.2;

(b) Liens imposed by any Governmental Authority for taxes,
assessments or charges not yet due or which are being contested in good faith
and by appropriate proceedings if, unless the amount of such Lien is not
material with respect to it or its financial condition, adequate reserves with
respect to such Lien are maintained on the books of the Company or the affected
Subsidiaries, as the case may be, in accordance with GAAP;

(c) carriers', mechanics', warehousemen's, artisans', service,
suppliers', depositories', or other like Liens arising in the ordinary course of
business: (i) which are not overdue for a period of more than 45 days and which
are not in danger of imminent foreclosure, or (ii) which are being contested in
good faith and by appropriate proceedings and Liens securing judgments but only
to the extent, for an amount and for a period not resulting in an Event of
Default under subsections 8.1(i);

(d) pledges or deposits in respect of workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liabilities to insurance carriers under insurance or self-insurance
arrangements;

(e) deposits to secure the performance of bids, trade contracts
(other than for Indebtedness), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business;

(f) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on the use
of Property or minor imperfections in title which, in the aggregate, are not
material in amount, and which do not in any case materially detract from the
value of the Property subject to such Lien or interfere with

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the ordinary conduct of the business of the Company or any of its
Subsidiaries,

(g) Liens on Property of any corporation, partnership or other entity
which becomes a Subsidiary of the Company after the Closing Date, PROVIDED that
such Liens are in existence at the time such entity becomes a Subsidiary of the
Company and were not created in anticipation of such event;

(h) Liens (i) upon real or tangible personal Property acquired after
the Closing Date (by purchase, construction or otherwise) by the Company or any
of its Subsidiaries, each of which Liens existed on such Property before the
time of its acquisition and was not created in anticipation of such event and
(ii) upon real Property acquired after the Closing Date (by purchase,
construction or otherwise) by the Company or any of its Subsidiaries, each of
which Liens was created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
the cost of construction) of such Property; PROVIDED in each case that no such
Lien shall extend to or cover any Property of the Company or such Subsidiary
other than the Property so acquired and improvements on such Property; and
PROVIDED, FURTHER, in each case, that the principal amount of Indebtedness
secured by any such Lien shall at no time exceed 80 percent of the fair market
value (as determined in good faith by a senior financial officer of the Company)
of such Property at the time it was acquired (by purchase, construction or
otherwise);

(i) Capital Lease Obligations permitted under subsection 7.3(d);

(j) Liens on the Property of any Subsidiary of the Company in favor
of the Company or any Wholly Owned Subsidiary of the Company;

(k) Banker's Liens and similar Liens (including set-off rights) in
respect of bank deposits;

(l) Liens on insurance proceeds in favor of insurance companies with
respect to the financing of premiums;

(m) any Lien arising out of judgments or awards against the Company
or any Subsidiary securing an aggregate amount less than $20,000,000 with
respect to which the Company or such Subsidiary shall in good faith be
prosecuting an appeal or proceedings for review, Liens securing an aggregate
amount less than $20,000,000 which are discharged within 60 days of the entry of
judgment or Liens (including, without limitation, appellate bonds) securing an
aggregate amount less than $20,000,000

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incurred by the Company or a Subsidiary for the purpose of obtaining a stay
or discharge in the course of any ongoing legal proceeding to which the
Company or such Subsidiary is a party;

(n) any Lien (in addition to a Lien permitted under any of the
foregoing clauses of this Section 7.2) securing Indebtedness of the Company or
any Subsidiary which may be incurred under Section 7.3, provided that the total
outstanding Indebtedness that may be secured under this clause (n) may not
exceed $50,000,000; and

(o) any extension, renewal or replacement of the foregoing, PROVIDED,
HOWEVER, that the principal amount secured thereby is not increased and that the
Liens permitted under this subsection (o) shall not be spread to cover any
additional Indebtedness or Property (other than a substitution of like
Property).

7.3 INDEBTEDNESS. The Company will not, nor will it permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness
except:

(a) Indebtedness to the Banks under the Loan Documents;

(b) Indebtedness outstanding on the Closing Date, which items of
Indebtedness in excess of $1,000,000 are listed in SCHEDULE 7.3;

(c) Indebtedness of the Company to any Subsidiary, Indebtedness of
Wholly-Owned Subsidiaries of the Company to the Company, Indebtedness of
Subsidiaries of the Company to other Subsidiaries of the Company and subject to
subsection 7.4(g), Indebtedness of non Wholly-Owned Subsidiaries of the Company
to the Company; and

(d) Indebtedness in an amount not to exceed $200,000,000 of the
Company which is subordinate in time and right of payment to the Obligations,
PROVIDED that the term, amortization and subordination provisions are reasonably
acceptable to Majority Banks;

(e) Indebtedness arising from the endorsement of instruments in the
ordinary course of business;

(f) Indebtedness of the Company and its Subsidiaries under Swap
Contracts and similar arrangements not expressly prohibited hereunder;

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(g) Indebtedness of the Company and its Subsidiaries under initial or
successive refinancing of any Indebtedness permitted by clause (b) above,
provided that the principal amount of any such refinancing does not exceed the
principal amount of the Indebtedness being refinanced;

(h) Additional Indebtedness of the Company and its Subsidiaries up to
but not exceeding in an aggregate an amount at any time outstanding equal to 5
percent of the total assets of the Company and its Subsidiaries determined on a
consolidated basis in accordance with GAAP and with not more than 50% of such
amount being attributable to Indebtedness of the Company's Subsidiaries to
Persons other than the Company or any other Subsidiary of the Company.

7.4 INVESTMENTS. The Company will not, nor will it permit any of its
Subsidiaries to, make or permit to remain outstanding any Investments except
("Permitted Investments"):

(a) Investments outstanding on the Closing Date, which Investments in
excess of $1,000,000 are listed in SCHEDULE 7.4;

(b) operating deposit accounts with banks;

(c) Permitted Market Investments; PROVIDED, HOWEVER, that the
percentage amount of the aggregate fair market value of Permitted Market
Investments comprised of, as at any date, equity securities (and securities
convertible into equity securities) shall not exceed 15 percent of the aggregate
fair market value of all Permitted Market Investments held as of such date;

(d) Investments in Wholly Owned Subsidiaries not otherwise prohibited
hereunder;

(e) Investments constituting Approved Acquisitions or Approved
Mergers otherwise permitted hereunder;

(f) Swap Contracts so long as the aggregate notional amount under all
Swap Contracts does not exceed $750,000,000; and

(g) additional Investments up to but not exceeding an amount equal to
4% of the consolidated total assets of the Company and its Subsidiaries, based
upon the Company's most recent annual or quarterly financial statements
delivered to the Agent under Section 6.1.

7.5 TRANSACTIONS WITH AFFILIATES. Except as expressly permitted by this
Agreement, the Company will not nor will it permit any of its Subsidiaries to
enter into any material

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transaction with any Affiliate on any terms more favorable to such Affiliate
than those that would be obtained in an arm's length transaction, PROVIDED
that the Company may make cash payments to UniHealth for management or
administrative fees in amounts not exceeding $5,000,000 in any one fiscal
year.

7.6 USE OF PROCEEDS.

(a) The Company shall not, and shall not suffer or permit any
Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i)
to purchase or carry Margin Stock, (ii) to repay or otherwise refinance
indebtedness of the Company or others incurred to purchase or carry Margin
Stock, (iii) to extend credit for the purpose of purchasing or carrying any
Margin Stock, or (iv) except for Approved Acquisitions and Approved Mergers, to
acquire any security in any transaction that is subject to Section 13 or 14 of
the Exchange Act.

(b) The Company shall not, directly or indirectly, use any portion of
the Loan proceeds (i) knowingly to purchase Ineligible Securities from the
Arranger during any period in which the Arranger makes a market in such
Ineligible Securities, (ii) knowingly to purchase during the underwriting or
placement period Ineligible Securities being underwritten or privately placed by
the Arranger, or (iii) to make payments of principal or interest on Ineligible
Securities underwritten or privately placed by the Arranger and issued by or for
the benefit of the Company or any Affiliate of the Company. The Arranger is a
registered broker-dealer and permitted to underwrite and deal in certain
Ineligible Securities; and "Ineligible Securities" means securities which may
not be underwritten or dealt in by member banks of the Federal Reserve System
under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as
amended.

7.7 RESTRICTED PAYMENTS. The Company shall not, and shall not suffer or
permit any Subsidiary to, declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or securities on
account of any shares of any class of its capital stock, or purchase, redeem or
otherwise acquire for value any shares of its capital stock or any warrants,
rights or options to acquire such shares, now or hereafter outstanding; except
that

(a) the Company may declare and make dividend payments or other
distributions payable solely in its common stock;

(b) any Subsidiary may declare, pay dividends or make other
distributions to its shareholders so long as the same is done on a
nondiscriminatory basis.

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(c) the Company may purchase, redeem or otherwise acquire shares of
its common stock or options to acquire any such shares with the proceeds
received from the substantially concurrent issue of new shares of its common
stock;

(d) the Company may repurchase up to $80,000,000 of its Class A
capital stock, PROVIDED, that, immediately after giving effect to such proposed
action, there exists no Default or Event of Default;

(e) the Company may repurchase up to $100,000,000 of its Class A
capital stock or its Class B capital stock, PROVIDED, that, immediately after
giving effect to such proposed action, there exists no Default or Event of
Default; and

(f) the Company and its Subsidiaries may spend up to $25,000,000 from
the date hereof through January 1, 2001 to repurchase securities from employees
pursuant to valid stock repurchase arrangements approved by the Board of
Directors of the Company.

7.8 ERISA. The Company shall not, and shall not suffer or permit any of
its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Pension Plan, or
(b) engage in a transaction that could be subject to Section 4069 or 4212(c) of
ERISA, to the extent any transaction under clause (a) or (b) is reasonably
likely to result in liability to the Company in excess of $20,000,000.

7.9 ACCOUNTING CHANGES. The Company shall not, and shall not suffer or
permit any Subsidiary to, make any significant change in accounting treatment or
reporting practices, except as required by GAAP or as concurred in by its
independent public accountants to be consistent with GAAP, or change the fiscal
year of the Company or of any Subsidiary, except for a change to a fiscal year
ending on December 31.

7.10 FINANCIAL COVENANTS. The Company shall not permit:

(a) its Leverage Ratio, as of the end of any fiscal quarter, to
exceed (i) 3.0 to 1.00 at any time from completion of the FHP Acquisition
through December 31, 1997, (ii) 2.50 to 1.00 from January 1, 1998 through
December 31, 1998, and (iii) 2.25 to 1.00 at any time thereafter;

(b) its Fixed Charges Coverage Ratio, as of the end of any fiscal
quarter, to be less than (i) 2.00 to 1.00 at any time from completion of the FHP
Acquisition through December 31, 1997, and (ii) 3.00 to 1.00 at any time
thereafter; or

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(c) its Net Worth, as of the end of any fiscal quarter, to be less
than (i) 90% of its Net Worth immediately following completion of the FHP
Acquisition, PLUS (ii) 50% of the consolidated net income (without giving effect
to any consolidated net losses and after the payment of any dividends on any
preferred stock) of the Company and its Subsidiaries for each fiscal quarter
beginning after completion of the FHP Acquisition, PLUS (iii) 50% of the Net
Equity Proceeds from any equity offering by the Company or any conversion of
Series A Cumulative Convertible Preferred Shares after the date hereof.

The Fixed Charges Coverage Ratio and the Adjusted EBITDA component of the
Leverage Ratio shall be calculated on a Combined Basis for the quarters ending
before the FHP Acquisition and on a consolidated basis after the FHP
Acquisition.

7.11 LIMITATION ON PAYMENT RESTRICTIONS AFFECTING MATERIAL SUBSIDIARIES.
Except as set forth in this Agreement, the Company shall not, and shall not
permit any of its Material Subsidiaries, directly or indirectly, to create or
suffer to exist or allow to become effective any consensual encumbrance or
restriction on the ability of (i) any of the Material Subsidiaries of the
Company to (a) make dividend payments or pay any obligation, liability or any
Indebtedness owed to the Company or any of its other Material Subsidiaries,
(b) make loans or advances to the Company or its other Material Subsidiaries or
(c) transfer any of its properties or assets to the Company or any of its other
Material Subsidiaries, or (ii) the Company or any of its Material Subsidiaries
to receive or retain vis-a-vis the transferor any such amounts set forth in
clauses (i)(a), (i)(b) or (i)(c) above, except for encumbrances or restrictions
existing under or by reason of applicable law or Governmental Rules.

7.12 PREPAYMENTS OF INDEBTEDNESS. Neither the Company nor any of its
Subsidiaries shall purchase, redeem, retire or otherwise acquire for value, or
set apart any money for a sinking, defeasance or other analogous fund for, the
purchase, redemption, retirement or other acquisition of, or make any voluntary
payment or prepayment of the principal of or interest on, or any other amount
owing in respect of, any Indebtedness or exercise any option to redeem any
Redeemable Preferred other than Indebtedness existing under this Agreement,
except for (i) regularly scheduled payments of principal and interest in respect
of such Indebtedness required pursuant to the instruments evidencing such
Indebtedness; (ii) prepayment of the 8.80% senior notes of PacifiCare held by
the Massachusetts Mutual Life Insurance Company (as in effect on the Closing
Date); and (iii) defeasance of the FHP International Corporation 7% Senior Notes
Due 2003.

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7.13 LINES OF BUSINESS. Neither the Company nor any of its Subsidiaries
shall engage in any line or lines of business activity other than the Healthcare
Business.

ARTICLE VIII

EVENTS OF DEFAULT

8.1 EVENT OF DEFAULT. Any of the following shall constitute an "Event of
Default":

(a) NON-PAYMENT. The Company fails to pay, (i) when and as required
to be paid herein, any amount of principal of any Loan or any amount of interest
on any Bid Loan, or (ii) within 3 days after the same becomes due, any interest,
fee or any other amount payable hereunder or under any other Loan Document; or

(b) REPRESENTATION OR WARRANTY. Any representation or warranty by
the Company or any other Obligor made or deemed made herein, in any other Loan
Document, or which is contained in any certificate, document or financial or
other statement by the Company, any other Obligor, or any Responsible Officer,
furnished at any time under this Agreement, or in or under any other Loan
Document, is incorrect in any material respect on or as of the date made or
deemed made; or

(c) SPECIFIC DEFAULTS. The Company fails to perform or observe any
term, covenant or agreement contained in any of subsection 6.1(i) or Sections
6.7, 7.1, 7.10 or 7.12; or the Company fails to perform or observe any term,
covenant or agreement contained in any of Sections 7.2, 7.3, 7.4 or 7.5 and such
default shall continue unremedied for a period of 10 days; or

(d) OTHER DEFAULTS. The Company or any other Obligor fails to
perform or observe any other term or covenant contained in this Agreement or any
other Loan Document, and such default shall continue unremedied for a period of
30 days after the earlier of (i) the date upon which such Person's president,
chief executive officer, chief financial officer or treasurer had actual
knowledge of such failure or (ii) the date upon which written notice thereof is
given to the Company by the Agent or any Bank; or

(e) CROSS-DEFAULT. The Company or any Material Subsidiary (i) fails
to make any payment in respect of any Indebtedness or Contingent Obligation
having an aggregate principal amount (including undrawn committed or available
amounts and including amounts owing to all creditors under any

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combined or syndicated credit arrangement) of more than $20,000,000 when due
(whether by scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such
failure; or (ii) fails to perform or observe any other condition or covenant,
or any other event shall occur or condition exist, under any agreement or
instrument relating to any such Indebtedness or Contingent Obligation, and
such failure continues after the applicable grace or notice period, if any,
specified in the relevant document on the date of such failure if the effect
of such failure, event or condition is to cause, or to permit the holder or
holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be declared to be
due and payable prior to its stated maturity or the holder of such
Indebtedness shall, as a result of such failure, have the right to cause the
Obligor to repurchase such Indebtedness or to have the interest rate on such
Indebtedness reset to a level so that securities evidencing such Indebtedness
trade at a level specified in relation to its par value, or such Contingent
Obligation to become payable or cash collateral in respect thereof to be
demanded; or

(f) INSOLVENCY; VOLUNTARY PROCEEDINGS. The Company or any Material
Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or
admits in writing its inability to pay, its debts as they become due, subject to
applicable grace periods, if any, whether at stated maturity or otherwise; (ii)
voluntarily ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or (iv) takes any
action to effectuate or authorize any of the foregoing; or

(g) INVOLUNTARY PROCEEDINGS. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any Material Subsidiary,
or any writ, judgment, warrant of attachment, execution or similar process, is
issued or levied against a substantial part of the Company's or any Material
Subsidiary's properties, and any such proceeding or petition shall not be
dismissed, or such writ, judgment, warrant of attachment, execution or similar
process shall not be released, vacated or fully bonded within 60 days after
commencement, filing or levy; (ii) the Company or any Material Subsidiary admits
the material allegations of a petition against it in any Insolvency Proceeding,
or an order for relief (or similar order under non-U.S. law) is ordered in any
Insolvency Proceeding; or (iii) the Company or any Material Subsidiary
acquiesces in the appointment of a receiver, trustee, custodian, conservator,

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liquidator, mortgagee in possession (or agent therefor), or other similar Person
for itself or a substantial portion of its property or business; or

(h) ERISA. (i) The institution of any steps to terminate a Pension
Plan if, as a result of such termination, the Company or any Subsidiary could be
required to make a contribution to such Pension Plan or is reasonably likely to
incur a liability or obligation to such Pension Plan in excess of $5,000,000; or
(ii) a contribution failure occurs with respect to a Pension Plan sufficient to
give rise to a Lien under Section 302(f) of ERISA; or

(i) MONETARY JUDGMENTS. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company or any Subsidiary involving in the aggregate a liability (to the extent
not covered by independent third-party insurance as to which the insurer does
not dispute coverage) as to any single or related series of transactions,
incidents or conditions, of $20,000,000 or more, and the same shall remain
unsatisfied, unvacated and unstayed pending appeal for a period of 60 days after
the entry thereof; or

(j) CHANGE OF CONTROL. There occurs any Change of Control; or

(k) LOSS OF LICENSES. Any Governmental Authority revokes or fails to
renew any material license, permit or franchise of the Company or any
Subsidiary, or the Company or any Subsidiary for any reason loses any license,
permit or franchise, or the Company or any Subsidiary suffers the imposition of
any restraining order, escrow, suspension or impound of funds in connection with
any proceeding (judicial or administrative) with respect to any license, permit
or franchise, in each case which is reasonably expected to have a Material
Adverse Effect; or

(l) HMO EVENT. An HMO Event shall have occurred and remain
unremedied for the lesser of 90 days after the occurrence of such event or five
days after the duration of any cure period imposed for the cure of such HMO
Event by the HMO Regulator administering the pertinent HMO Regulations; or

(m) GUARANTOR DEFAULTS. Either Guarantor fails in any material
respect to perform or observe any term, covenant or agreement in its respective
Guaranty; or either Guaranty is for any reason partially (including with respect
to future advances) or wholly revoked or invalidated, or otherwise ceases to be
in full force and effect, or either Guarantor or any other Person contests in
any manner the validity or enforceability thereof or

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denies that it has any further liability or obligation thereunder; or any
event described at subsections (f) or (g) of this Section occurs with respect
to either Guarantor.

8.2 REMEDIES. If any Event of Default occurs, the Agent shall, at the
request of, or may, with the consent of, the Majority Banks,

(a) declare the commitment of each Bank to make Committed Loans to be
terminated, whereupon such commitments shall be terminated;

(b) declare the unpaid principal amount of all outstanding Loans, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Company; and

(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law; provided, however, that upon the occurrence of any event specified in
subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection
(g) upon the expiration of the 60-day period mentioned therein), the obligation
of each Bank to make Loans shall automatically terminate and the unpaid
principal amount of all outstanding Loans and all interest and other amounts as
aforesaid shall automatically become due and payable without further act of the
Agent or any Bank.

8.3 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement and
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.

ARTICLE IX

THE AGENT

9.1 APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably (subject
to Section 9.9) appoints, designates and authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary contained

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elsewhere in this Agreement or in any other Loan Document, the Agent shall
not have any duties or responsibilities, except those expressly set forth
herein, nor shall the Agent have or be deemed to have any fiduciary
relationship with any Bank, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the Agent.

9.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.

9.3 LIABILITY OF AGENT. None of the Agent-Related Persons shall (i) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Subsidiary or
Affiliate of the Company, or any officer thereof, contained in this Agreement or
in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Bank to ascertain or
to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any other Loan Document, or to
inspect the properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.

9.4 RELIANCE BY AGENT.

(a) The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, resolution, notice, consent, certificate,
affidavit, letter, telegram, facsimile, telex or telephone message, statement or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to the Company), independent
accountants and other experts selected by the Agent. The Agent shall be fully
justified in failing or

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refusing to take any action under this Agreement or any other Loan Document
unless it shall first receive such advice or concurrence of the Majority
Banks as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Banks against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. The Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement or any other Loan
Document in accordance with a request or consent of the Majority Banks and
such request and any action taken or failure to act pursuant thereto shall be
binding upon all of the Banks.

(b) For purposes of determining compliance with the conditions
specified in Section 4.1, each Bank that has executed this Agreement shall be
deemed to have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by the Agent to such Bank for consent,
approval, acceptance or satisfaction, or required thereunder to be consented to
or approved by or acceptable or satisfactory to the Bank.

9.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to the Agent for the account of the Banks, unless the Agent shall have received
written notice from a Bank or the Company referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". The Agent will notify the Banks of its receipt of any such
notice. The Agent shall take such action with respect to such Default or Event
of Default as may be requested by the Majority Banks in accordance with Article
VIII; provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Banks.

9.6 CREDIT DECISION. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Company and its Subsidiaries, shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Bank. Each Bank represents to
the Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations,

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property, financial and other condition and creditworthiness of the Company
and its Subsidiaries, and all applicable bank regulatory laws relating to the
transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement
and the other Loan Documents, and to make such investigations as it deems
necessary to inform itself as to the business, prospects, operations,
property, financial and other condition and creditworthiness of the Company.
Except for notices, reports and other documents expressly herein required to
be furnished to the Banks by the Agent, the Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of the Company which may come into the
possession of any of the Agent-Related Persons.

9.7 INDEMNIFICATION OF AGENT. Whether or not the transactions
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Company and without limiting the obligation of the Company to do so), pro rata,
from and against any and all Indemnified Liabilities; provided, however, that no
Bank shall be liable for the payment to the Agent-Related Persons of any portion
of such Indemnified Liabilities resulting from such Person's gross negligence or
willful misconduct. Without limitation of the foregoing, each Bank shall
reimburse the Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including Attorney Costs) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Company. The undertaking in
this Section shall survive the payment of all Obligations hereunder and the
resignation or replacement of the Agent.

9.8 AGENT IN INDIVIDUAL CAPACITY. BofA and its Affiliates may make loans
to, issue letters of credit for the account of, accept deposits from, acquire
equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though BofA were not the Agent

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hereunder and without notice to or consent of the Banks. The Banks
acknowledge that, pursuant to such activities, BofA or its Affiliates may
receive information regarding the Company or its Affiliates (including
information that may be subject to confidentiality obligations in favor of
the Company or such Subsidiary) and acknowledge that the Agent shall be under
no obligation to provide such information to them. With respect to its
Loans, BofA shall have the same rights and powers under this Agreement as any
other Bank and may exercise the same as though it were not the Agent, and the
terms "Bank" and "Banks" include BofA in its individual capacity.

9.9 SUCCESSOR AGENT. The Agent may, and at the request of the Majority
Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent
resigns under this Agreement, the Majority Banks shall appoint from among the
Banks a successor agent for the Banks which successor agent shall be approved by
the Company. If no successor agent is appointed prior to the effective date of
the resignation of the Agent, the Agent may appoint, after consulting with the
Banks and the Company, a successor agent from among the Banks. Upon the
acceptance of its appointment as successor agent hereunder, such successor agent
shall succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Article IX and
Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Agent under this Agreement. If no
successor agent has accepted appointment as Agent by the date which is 30 days
following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless thereupon become effective and the Banks shall
perform all of the duties of the Agent hereunder until such time, if any, as the
Majority Banks appoint a successor agent as provided for above.

9.10 WITHHOLDING TAX.

(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Bank agrees with and in favor of the Agent and the Company, to deliver to the
Agent:

(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed IRS
Forms 1001 and W-8 before the payment of any interest in the first calendar
year and before the payment of any interest in each third succeeding

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calendar year during which interest may be paid under this Agreement;

(ii) if such Bank claims that interest paid under this Agreement
is exempt from United States withholding tax because it is effectively
connected with a United States trade or business of such Bank, two properly
completed and executed copies of IRS Form 4224 before the payment of any
interest is due in the first taxable year of such Bank and in each
succeeding taxable year of such Bank during which interest may be paid
under this Agreement, and IRS Form W- 9; and

(iii) such other form or forms as may be required under the Code
or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.

Such Bank agrees to promptly notify the Agent and the Company of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.

(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Bank
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Company to such Bank, such Bank agrees to notify the
Agent and the Company of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Company to such Bank. To the extent of
such percentage amount, the Agent and the Company will treat such Bank's IRS
Form 1001 as no longer valid.

(c) If any Bank claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells, assigns, grants a participation
in, or otherwise transfers all or part of the Obligations of the Company to such
Bank, such Bank agrees to undertake sole responsibility for complying with the
withholding tax requirements imposed by Sections 1441 and 1442 of the Code.

(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Bank
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Bank not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.

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(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent or the Company did
not properly withhold tax from amounts paid to or for the account of any Bank
(because the appropriate form was not delivered, was not properly executed, or
because such Bank failed to notify the Agent or the Company of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Bank shall indemnify the Agent
and the Company fully for all amounts paid, directly or indirectly, by the Agent
as tax or otherwise, including penalties and interest, and including any taxes
imposed by any jurisdiction on the amounts payable to the Agent under this
Section, together with all costs and expenses (including Attorney Costs). The
obligation of the Banks under this subsection shall survive the payment of all
Obligations and the resignation or replacement of the Agent.

9.11 CO-AGENTS; LEAD MANAGERS. None of the Banks identified on the facing
page or signature pages of this Agreement as a "co-agent" or "managing agent"
shall have any right, power, obligation, liability, responsibility or duty under
this Agreement other than those applicable to all Banks as such; except as set
forth in the final proviso of Section 10.1. Without limiting the foregoing,
none of the Banks so identified as a "co-agent" or "lead manager" shall have or
be deemed to have any fiduciary relationship with any Bank. Each Bank
acknowledges that it has not relied, and will not rely, on any of the Banks so
identified in deciding to enter into this Agreement or in taking or not taking
action hereunder.

ARTICLE X

MISCELLANEOUS

10.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company or any other Obligor therefrom, shall be effective
unless the same shall be in writing and signed by the Majority Banks (or by the
Agent at the written request of the Majority Banks) and the Company and
acknowledged by the Agent, and then any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no such waiver, amendment, or consent shall,
unless in writing and signed by all the Banks other than any Defaulting Bank and
the Company and acknowledged by the Agent, do any of the following:

(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to Section 8.2);

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(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Banks (or any of them) hereunder or under any other Loan Document;

(c) reduce the principal of, or the rate of interest specified herein
on any Loan (except in connection with a waiver of applicability of any post-
default increase in interest rates), or (subject to clause (ii) below) any fees
or other amounts payable hereunder or under any other Loan Document;

(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Banks or any of
them to take any action hereunder;

(e) amend, terminate or release any Guarantee; or

(f) amend this Section or any provision herein providing for consent
or other action by all Banks;

provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Majority Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or
rights or privileges thereunder waived, in a writing executed by the parties
thereto; and, provided finally, that any amendment or waiver of the condition
precedent set forth in subsection 4.1(h) may be waived or modified by either
(i) the Majority Banks or (ii) the Majority Agents.

10.2 NOTICES.

(a) All notices, requests and other communications shall be in
writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on Schedule 10.2, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed or delivered,
to the address or facsimile number specified for notices on Schedule 10.2; or,
as directed to the Company or the Agent, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to any other party, at such other address as shall be designated by
such party in a written notice to the Company and the Agent.

(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or

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transmitted in legible form by facsimile machine, respectively, or if mailed,
upon the third Business Day after the date deposited into the U.S. mail, or
if delivered, upon delivery; except that notices pursuant to Article II or IX
shall not be effective until actually received by the Agent.

(c) Any agreement of the Agent and the Banks herein to receive
certain notices by telephone or facsimile is solely for the convenience and at
the request of the Company. The Agent and the Banks shall be entitled to rely
on the authority of any Person reasonably believed by them to be a Person
authorized by the Company to give such notice and the Agent and the Banks shall
not have any liability to the Company or other Person on account of any action
taken or not taken by the Agent or the Banks in reliance upon such telephonic or
facsimile notice. The obligation of the Company to repay the Loans shall not be
affected in any way or to any extent by any failure by the Agent and the Banks
to receive written confirmation of any telephonic or facsimile notice or the
receipt by the Agent and the Banks of a confirmation which is at variance with
the terms understood by the Agent and the Banks to be contained in the
telephonic or facsimile notice.

10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay
in exercising, on the part of the Agent or any Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.

10.4 COSTS AND EXPENSES. The Company shall:

(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse BofA (including in its capacity as Agent) within
five Business Days after demand (subject to subsection 4.1(e)) for all costs and
expenses incurred by BofA (including in its capacity as Agent) in connection
with the development, preparation, delivery, administration and execution of,
and any amendment, supplement, waiver or modification to (in each case, whether
or not consummated), this Agreement, any Loan Document and any other documents
prepared in connection herewith or therewith, and the consummation of the
transactions contemplated hereby and thereby, including reasonable Attorney
Costs incurred by BofA (including in its capacity as Agent) with respect
thereto; and

(b) pay or reimburse the Agent, the Arranger and each Bank within
five Business Days after demand (subject to subsection 4.1(e)) for all costs and
expenses (including Attorney

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Costs) incurred by them in connection with the enforcement, attempted
enforcement, or preservation of any rights or remedies under this Agreement
or any other Loan Document during the existence of an Event of Default or
after acceleration of the Loans (including in connection with any "workout"
or restructuring regarding the Loans, and including in any Insolvency
Proceeding or appellate proceeding).

10.5 COMPANY INDEMNIFICATION. Whether or not the transactions
contemplated hereby are consummated, the Company shall indemnify and hold the
Agent-Related Persons, and each Bank and each of its respective officers,
directors, employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including reasonable Attorney Costs) of any
kind or nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Agent or replacement of any Bank) be imposed on, incurred by or asserted against
any such Person in any way relating to or arising out of this Agreement or any
document contemplated by or referred to herein, or the transactions contemplated
hereby, or any action taken or omitted by any such Person under or in connection
with any of the foregoing, including with respect to any investigation,
litigation or proceeding (including any Insolvency Proceeding or appellate
proceeding) related to or arising out of this Agreement or the Loans or the use
of the proceeds thereof, whether or not any Indemnified Person is a party
thereto (all the foregoing, collectively, the "Indemnified Liabilities");
provided, that the Company shall have no obligation hereunder to any Indemnified
Person with respect to Indemnified Liabilities resulting solely from the gross
negligence or willful misconduct of such Indemnified Person. The agreements in
this Section shall survive payment of all other Obligations.

10.6 PAYMENTS SET ASIDE. To the extent that the Company makes a payment
to the Agent or the Banks, or the Agent or the Banks exercise their right of
set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required (including pursuant to any settlement entered into by the
Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any
other party, in connection with any Insolvency Proceeding or otherwise, then (a)
to the extent of such recovery the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such set-off had not occurred, and (b)
each Bank severally agrees to pay to the

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Agent upon demand its pro rata share of any amount so recovered from or
repaid by the Agent.

10.7 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.

10.8 ASSIGNMENTS, PARTICIPATIONS, ETC.

(a) Any Bank may, with the written consent of the Company at all
times (other than during the existence of an Event of Default) and the Agent,
which consents shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
the Company or the Agent shall be required in connection with any assignment and
delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank)
(each an "Assignee") all, or any ratable part of all, of the Loans, the
Commitments and the other rights and obligations of such Bank hereunder, in a
minimum amount of $10,000,000; provided, however, that after giving effect
thereto, such Bank shall either retain a Commitment in a minimum amount of
$10,000,000 or have no ongoing Commitment and provided further that the Company
and the Agent may continue to deal solely and directly with such Bank in
connection with the interest so assigned to an Assignee until (i) written notice
of such assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the Company
and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee
shall have delivered to the Company and the Agent an Assignment and Acceptance
in the form of Exhibit E ("Assignment and Acceptance") together with any Note or
Notes subject to such assignment and (iii) the assignor Bank or Assignee has
paid to the Agent a processing fee in the amount of $3,000.

(b) From and after the date that the Agent notifies the assignor Bank
that it has received (and provided its consent with respect to) an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights
and obligations hereunder and under the other Loan Documents have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its

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rights and be released from its obligations under the Loan Documents.

(c) Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be deemed to
be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.

(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Company (a "Participant") participating
interests in any Loans, the Commitment of that Bank and the other interests of
that Bank (the "Originator") hereunder and under the other Loan Documents;
provided, however, that (i) the Originator's obligations under this Agreement
shall remain unchanged, (ii) the Originator shall remain solely responsible for
the performance of such obligations, (iii) the Company and the Agent shall
continue to deal solely and directly with the Originator in connection with the
Originator's rights and obligations under this Agreement and the other Loan
Documents, and (iv) no Bank shall transfer or grant any participating interest
under which the Participant has rights to approve any amendment to, or any
consent or waiver with respect to, this Agreement or any other Loan Document,
except to the extent such amendment, consent or waiver would require unanimous
consent of the Banks as described in the first proviso to Section 10.1. In the
case of any such participation, the Participant shall not have any rights under
this Agreement, or any of the other Loan Documents, and all amounts payable by
the Company hereunder shall be determined as if such Originator had not sold
such participation; except that, if amounts outstanding under this Agreement are
due and unpaid, or shall have been declared or shall have become due and payable
upon the occurrence of an Event of Default, each Participant shall be deemed to
have the right of set-off in respect of its participating interest in amounts
owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Bank under this Agreement.

(e) Notwithstanding any other provision in this Agreement, any Bank
may at any time create a security interest in, or pledge, all or any portion of
its rights under and interest in this Agreement and the Note(s) held by it in
favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or
U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank
may enforce such pledge or security interest in any manner permitted under
applicable law.

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10.9 CONFIDENTIALITY. The Agent and each Bank hereby confirm that they
have delivered to the Company a duly authorized and executed confidentiality
agreement in substantially the form of Exhibit L hereto. The Agent and each
Bank agree to take and to cause their Affiliates to observe and perform all of
its undertakings pursuant to such confidentiality agreement between it and the
Company. Prior to its delivery of any information concerning the Company and
its Affiliates to any potential Participant or Assignee, each Bank shall have
confirmed that such Person has delivered to the Company a confidentiality
agreement in substantially the form of Exhibit L hereto executed by a duly
authorized representative of such Assignee or Participant.

10.10 SET-OFF. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Bank to or for the credit or
the account of the Company against any and all Obligations owing to such Bank,
now or hereafter existing, irrespective of whether or not the Agent or such Bank
shall have made demand under this Agreement or any Loan Document and although
such Obligations may be contingent or unmatured. Each Bank agrees promptly to
notify the Company and the Agent after any such set-off and application made by
such Bank; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.

10.11 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each Bank shall
notify the Agent in writing of any changes in the address to which notices to
the Bank should be directed, of addresses of any Lending Office, of payment
instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.

10.12 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument. This Agreement shall become
effective when (i) counterparts hereof executed on behalf of the Company and
each Bank (or notice thereof satisfactory to the Agent) shall have been received
by the Agent, (ii) the Agent shall have received the duly executed Guarantee of
PacifiCare and (iii) notice of the Agent's receipt of the documents specified in
clauses (i) and

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(ii) shall have been given by the Agent to the Company and each Bank.

10.13 SEVERABILITY. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.

10.14 NO THIRD PARTIES BENEFITED. This Agreement is made and entered into
for the sole protection and legal benefit of the Company, the Banks, the Agent
and the Agent-Related Persons, and their permitted successors and assigns, and
no other Person shall be a direct or indirect legal beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any of the other Loan Documents.

10.15 GOVERNING LAW AND JURISDICTION.

(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT
AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS
CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND
THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER
PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW.

10.16 WAIVER OF JURY TRIAL. THE COMPANY, THE BANKS AND THE AGENT EACH
WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE
BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE
TRIED

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BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES
FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY
OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR
THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

10.17 ENTIRE AGREEMENT. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Company,
the Banks and the Agent, and supersedes all prior or contemporaneous agreements
and understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Los Angeles, California by their proper and duly
authorized officers as of the day and year first above written.

N-T HOLDINGS, INC.

By: /S/ Wayne Lowell
-----------------------------------

Title: Executive Vice President
--------------------------------

<PAGE>

BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent

By: /s/ Wyatt R. Ritchie
-----------------------------------

Title: Managing Director
--------------------------------
<PAGE>

BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank

By: /s/ Wyatt R. Ritchie
-----------------------------------

Title: Managing Director
--------------------------------
<PAGE>
THE CHASE MANHATTAN BANK

By: /s/ Dawn Lee Lum
-----------------------------------

Title: Vice President
--------------------------------
<PAGE>

CITICORP USA, INC.

By: /s/ Margaret Brown
-----------------------------------

Title: Managing Director
--------------------------------

<PAGE>

THE BANK OF NEW YORK

By: /s/ Rebecca K. Levine
-----------------------------------

Title: Assistant Vice President
--------------------------------
<PAGE>

THE BANK OF NOVA SCOTIA

By: /s/ Alan Pendergast
-----------------------------------

Title: Relationship Manager
--------------------------------
<PAGE>

BANQUE NATIONALE DE PARIS

By: /s/ Clive Bettles
-----------------------------------

Title: Senior Vice President
--------------------------------

By: /s/ Margaret Mudd
-----------------------------------

Title: Vice President
--------------------------------

<PAGE>

THE DAI-ICHI KANGYO BANK, LTD.,
LOS ANGELES AGENCY

By: /s/ Teruhisa Yamaguchi
-----------------------------------

Title: Sr. VP & Joint General Mgr.
--------------------------------
<PAGE>

THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY

By: /s/ Toshinari Iyoda
-----------------------------------

Title: Senior Vice President
--------------------------------
<PAGE>

COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND" NEW YORK BRANCH

By: /s/ Richard J. Cerf
-----------------------------------

Title: Vice President
--------------------------------

By: /s/ Dana W. Hemenway
-----------------------------------

Title: Vice President
--------------------------------

By: /s/ W. Jeffrey Vollack
-----------------------------------

Title: Vice President, Manager
--------------------------------

<PAGE>

SANWA BANK CALIFORNIA

By: /s/ Daniel J. Wilson
-----------------------------------

Title: Vice President
--------------------------------
<PAGE>

THE SUMITOMO BANK, LIMITED,
LOS ANGELES BRANCH

By: /s/ Tatsuo Ueda
-----------------------------------

Title: General Manager
--------------------------------
<PAGE>

WELLS FARGO BANK, N.A.

By: /s/ Michael Cordas
-----------------------------------

Title: Vice President
--------------------------------

By: /s/ Edith R. Lim
-----------------------------------

Title: Vice President
--------------------------------
<PAGE>

BANCA COMMERCIALE ITALIANA
LOS ANGELES FOREIGN BRANCH

By: /s/ E. Bombieri
-----------------------------------

Title: Vice President & Manager
--------------------------------

By: /s/ J. Wityak
-----------------------------------

Title: Vice President
--------------------------------

<PAGE>

BANQUE PARIBAS

By: /s/ Don L. Unruh
-----------------------------------

Title: Asst. Vice President
--------------------------------

By: /s/ Stanley P. Berkman
-----------------------------------

Title: G.M., Western Region
--------------------------------
<PAGE>

CIBC INC.

By: /s/ Stephen D. Reynolds
-----------------------------------

Title: Director
--------------------------------
CIBC World Gundy Securities
Corp. as Agent for CIBC, Inc.

<PAGE>

COMMERZBANK AKTIENGESELLSCHAFT,
LOS ANGELES BRANCH

By: /s/ Christian Jagenberg
-----------------------------------

Title: Senior VP & Manager
--------------------------------

By: /s/ Steven F. Larsen
-----------------------------------

Title: Vice President
--------------------------------

<PAGE>

CREDIT LYONNAIS NEW YORK BRANCH

By: /s/ Farboud Tavanger
-----------------------------------

Title: Vice President
--------------------------------
<PAGE>

CREDIT SUISSE

By: /s/ Mark A. Sampson
-----------------------------------

Title: Associate
--------------------------------

By: /s/ Stephen M. Flynn
-----------------------------------

Title: Member of Sr. Management
--------------------------------
<PAGE>

THE FIRST NATIONAL BANK OF CHICAGO

By: /s/ Jay G. Sepanski
-----------------------------------

Title: Assistant Vice President
--------------------------------
<PAGE>

THE FUJI BANK, LIMITED

By: /s/ Nobuhiro Umemura
-----------------------------------

Title: Joint General Manager
--------------------------------
<PAGE>

THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., LOS ANGELES AGENCY

By: /s/ T. Morgan Edwards
-----------------------------------

Title: Deputy General Manager
--------------------------------
<PAGE>

MELLON BANK, N.A.

By: /s/ Robert T. Harkins
-----------------------------------

Title: Vice President
--------------------------------
<PAGE>

THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY

By: /s/ Hiroaki Koseki
-----------------------------------

Title: Deputy General Manager
--------------------------------
<PAGE>

PNC BANK, N.A.

By: /s/ Edward Weisto
-----------------------------------

Title: Assistant Vice President
--------------------------------

<PAGE>

THE SAKURA BANK, LTD.,
LOS ANGELES AGENCY

By: /s/ Ofusa Sato
-----------------------------------

Title: Sr. VP & Asst. Gnrl. Mgr.
--------------------------------

<PAGE>

SOCIETE GENERALE

By: /s/ J. Staley Stewart
-----------------------------------

Title: Vice President
--------------------------------

<PAGE>

THE TOKAI BANK, LIMITED,
LOS ANGELES AGENCY

By: /s/ Masahito Saito
-----------------------------------

Title: Assistant General Manager
--------------------------------
<PAGE>

UNION BANK OF CALIFORNIA, N.A.

By: /s/ Jennifer L. Banks
-----------------------------------

Title: Vice President
--------------------------------

<PAGE>
EXHIBIT I

[Form of Committed Loan Note]

COMMITTED LOAN NOTE

$______________________ October __, 1996
Los Angeles, California

FOR VALUE RECEIVED, N-T HOLDINGS, INC., a Delaware corporation (the
"COMPANY"), hereby promises to pay to the order of __________________________
(the "BANK"), for the account of its respective applicable Lending Offices
provided for by the Credit Agreement referred to below, at the Agent's
Payment Office the principal sum of [_________________________] Dollars (or
such lesser amount as shall equal the aggregate unpaid principal amount of
the Committed Loans made by the Bank to the Company under the Credit
Agreement), in lawful money of the United States of America and in
immediately available funds, on the dates and in the principal amounts
provided in the Credit Agreement, and to pay interest on the unpaid principal
amount of each such Committed Loan, at such office, in like money and funds,
for the period commencing on the date of such Committed Loan until such
Committed Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.

The date, amount, Type, interest rate and duration of Interest
Period (if applicable) of each Committed Loan made by the Bank to the
Company, and each payment made on account of the principal of such Loan,
shall be recorded by the Bank on its books and, prior to any transfer of this
Committed Loan Note, endorsed by the Bank on the schedule attached to this
Committed Loan Note or any continuation of such schedule, PROVIDED that the
failure of the Bank to make any such recordation or endorsement absent gross
negligence or willful misconduct shall not affect the obligations of the
Company to make a payment when due of any amount owing under the Credit
Agreement or under this Committed Loan Note in respect of the Committed Loans
made by the Bank.

This Committed Loan Note is one of the Committed Loan Notes referred to
in the Credit Agreement dated as of October 31, 1996 (as modified and
supplemented and in effect from time to time, the "CREDIT AGREEMENT") among
the Company, the banks (including this Bank), and Bank of America National
Trust and Savings Association, as Agent, and evidences Committed Loans made
by the Bank under the Credit Agreement. Capitalized terms used but not
defined in this Committed Loan Note have the respective meanings assigned to
them in the Credit Agreement.

I-1

<PAGE>

The Credit Agreement provides for the acceleration of the maturity of
this Committed Loan Note upon the occurrence of certain events and for
prepayments of Loans upon the terms and conditions specified in the Credit
Agreement.

Except as permitted by Section 10.8 of the Credit Agreement, this
Committed Loan Note may not be assigned by the Bank to any other Person.

THIS COMMITTED LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA.

N-T HOLDINGS, INC.

By:_____________________________
Title:__________________________

I-2

<PAGE>

SCHEDULE OF COMMITTED LOANS

This Committed Loan Note evidences Committed Loans made, continued or
converted under the Credit Agreement to the Company, on the dates, in the
principal amounts, of the Types, bearing interest at the rates and having
Interest Periods (if applicable) of the durations set forth below, subject to
the payments, continuations, conversions and prepayments of principal set
forth below:

- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
AMOUNT
PAID
DATE MADE, PREPAID,
CONTINUED PRINCIPAL DURATION OF CONTINUED UNPAID
OR AMOUNT OF TYPE OF INTEREST INTEREST OR PRINCIPAL NOTATION
CONVERTED LOAN LOAN RATE PERIOD CONVERTED AMOUNT MADE BY
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------

</TABLE>

I-3

<PAGE>

EXHIBIT J

[Form of Bid Loan Note]

BID LOAN NOTE

$__________________________ October __, 1996
Los Angeles, California

FOR VALUE RECEIVED, N-T HOLDINGS, INC., a Delaware corporation (the
"COMPANY"), hereby promises to pay to the order of
_______________________________ (the "BANK"), for the account of its
respective applicable Lending Offices provided for by the Credit Agreement
referred to below, at Agent's Payment Office the principal sum of
[____________________________] Dollars (or such lesser amount as shall equal
the aggregate unpaid principal amount of the Bid Loans made by the Bank to
the Company under the Credit Agreement), in lawful money of the United States
of America and in immediately available funds, on the dates and in the
principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such Bid Loan, at such office, in like
money and funds, for the period commencing on the date of such Bid Loan until
such Bid Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.

The date, amount, Type, interest rate and duration of Interest Period
(if applicable) of each Bid Loan made by the Bank to the Company, and each
payment made on account of the principal of such Loan, shall be recorded by
the Bank on its books and, prior to any transfer of this Bid Loan Note,
endorsed by the Bank on the schedule attached to this Bid Loan Note or any
continuation of such schedule, PROVIDED that the failure of the Bank to make
and such recordation or endorsement absent gross negligence or willful
misconduct shall not affect the obligations of the Company to make a payment
when due of any amount owing under the Credit Agreement or under this Bid
Loan in respect of the Bids Loans made by the Bank.

This Bid Loan Note is one of the Bid Loan Notes referred to in the
Credit Agreement dated as of October 31, 1996 (as modified and supplemented
and in effect from time to time, the "CREDIT AGREEMENT") among the Company,
the banks (including this Bank), and Bank of America National Trust and
Savings Association, as Agent, and evidences Bid Loans made by the Bank under
the Credit Agreement. Capitalized terms used but not defined in this Bid
Loan Note have the respective meanings assigned to them in the Credit
Agreement.

J-1

<PAGE>

The Credit Agreement provides for the acceleration of the maturity of
this Bid Loan Note upon the occurrence of certain events and for prepayments
of Bid Loans upon the terms and conditions specified in the Credit Agreement.

Except as permitted by Section 10.8 of the Credit Agreement, this Bid
Loan Note may not be assigned by the Bank to any other Person.

THIS BID LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND
PERFORMED WITHIN THE STATE OF CALIFORNIA.

N-T HOLDINGS, INC.

By:______________________________
Title:___________________________

J-2

<PAGE>

SCHEDULE OF BID LOANS

This Bid Loan Note evidences Bid Loans made on the dates, in the
principal amounts, of the Types, bearing interest at the rates and having
Interest Periods of the durations set forth below, subject to the payments
and prepayments of principal set forth below:

- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
PRINCIPAL DURATION OF AMOUNT UNPAID
AMOUNT OF TYPE OF INTEREST INTEREST PAID PRINCIPAL NOTATION
DATE MADE LOAN LOAN RATE PERIOD PREPAID AMOUNT MADE BY
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------

</TABLE>

J-3

<PAGE>
EXHIBIT 12.01

PACIFICARE HOLDING COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

<TABLE>
<CAPTION>
PRO FORMA
---------------------------
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
------------- ------------
<S> <C> <C>
Earnings
Net income..................................................................... $ 71,452 $ 45,463
Add:
Provision for income taxes................................................... 78,550 64,263
Fixed charges................................................................ 127,827 88,297
------------- ------------
Earnings as adjusted (A)......................................................... $ 277,829 $ 198,023
------------- ------------
------------- ------------
Preferred dividend requirements.................................................. $ 10,518 $ 7,889
Ratio of income before provision for income taxes to net income................ 210% 241%
------------- ------------
Preferred dividend factor pretax basis........................................... 22,088 19,012
------------- ------------
Fixed charges
Interest expense............................................................... 110,075 75,194
Interest component of operating leases......................................... 17,752 13,103
------------- ------------
Fixed charges as adjusted (B).................................................... 127,827 88,297
------------- ------------
Fixed charges and preferred stock dividends (C).................................. $ 149,915 $ 107,309
------------- ------------
------------- ------------
Ratio of earnings to fixed charges [(A) divided by (B)].......................... 2.2x 2.2x
------------- ------------
------------- ------------
Ratio of earnings to fixed charges and preferred stock dividends
[(A) divided by (C)]............................................................ 1.9x 1.8x
------------- ------------
------------- ------------
</TABLE>

<PAGE>

Exhibit 21.01

SUBSIDIARIES OF THE REGISTRANT

1) Neptune Merger Corp., a Delaware corporation.
2) Tree Acquisition Corp., a Delaware corporation.

<PAGE>
EXHIBIT 23.01

CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 9, 1996, included in this Joint Proxy
Statement/Prospectus of N-T Holdings, Inc. and subsidiaries that is made a part
of this Registration Statement (Form S-4) and Prospectus of N-T Holdings, Inc.
and subsidiaries.

We also consent to the incorporation by reference herein of our report dated
November 10, 1995, with respect to the consolidated financial statements and
schedule of PacifiCare Health Systems, Inc. included in its Annual Report (Form
10-K/A) for the year ended September 30, 1995, filed with the Securities and
Exchange Commission.

ERNST & YOUNG LLP

Los Angeles, California
November 12, 1996

<PAGE>
EXHIBIT 23.02

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement
of N-T Holdings, Inc. on Form S-4 of our report dated September 4, 1996,
appearing in the Annual Report on Form 10-K of FHP International Corporation for
the year ended June 30, 1996 and to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.

Deloitte & Touche LLP

Costa Mesa, California
November 15, 1996

<PAGE>

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

FHP INTERNATIONAL CORPORATION
P.O. BOX 25186
SANTA ANA, CA 92799-5816

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Kenneth S. Ord, Charles H. Eldredge and
Russell D. Phillips, Jr. as Proxies, each with the power to appoint his
substitute and authorizes them to represent and vote, as designated below,
the Common Stock of FHP International Corporation (the "Company") owned or
held by the undersigned on November 8, 1996, at the annual meeting of
stockholders of the Company to be held on December 31, 1996, or any
adjournment thereof.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)

- -------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^

<PAGE>

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

Please mark /X/
your votes as
this example

FOR all nominees listed WITHHOLD AUTHORITY
below (Except as marked to vote for all
to the contrary below.) nominees listed below

1. Election of Directors. / / / /

(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name indicated below.)

Jack R. Anderson
Burke F. Gumbiner
Warner Heineman

FOR AGAINST ABSTAIN

2. PROPOSAL TO APPROVE REORGANIZATION
AGREEMENT. / / / / / /

3. PROPOSAL TO APPROVE AN AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION / / / / / /

4. PROPOSAL TO RATIFY APPOINTMENT OF DELOITTE
& TOUCHE LLP AS INDEPENDENT AUDITORS FOR
THE COMPANY / / / / / /

5. IN THEIR DISCRETION THE PROXIES MAY VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY
COME BEFORE THE MEETING. / / / / / /

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION
IS MADE, THE PROXY WILL BE VOTED FOR PROPOSALS 1 THROUGH 4.
Please date and sign exactly as name appears at the left. When shares
are held by joint owners, both should sign. When signing as an
attorney, executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full corporate
name and give title of authorized officer. If a partnership, please
sign in partnership name by authorized person.

Dated,___________________________________________________________ 1996

______________________________________________________________________
Signature
______________________________________________________________________
Signature, if jointly held

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.

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

^ FOLD AND DETACH HERE ^

<PAGE>

FHP INTERNATIONAL CORPORATION
P.O. BOX 25186
SANTA ANA, CA 92799-5186

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Kenneth S. Ord, Charles H. Eldredge and
Russell D. Phillips, Jr. as Proxies, each with the power to appoint his
substitute and authorizes them to represent and vote, as designated below,
the Series A Cumulative Convertible Preferred Stock ("FHP Preferred Stock")
of FHP International Corporation (the "Company") owned or held by the
undersigned on November 8, 1996, at the annual meeting of stockholders of the
Company to be held on December 31, 1996, or any adjournment thereof.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)

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

TRIANGLE FOLD AND DETACH HERE TRIANGLE

<PAGE>

Please mark
your votes
as this example / X /

FOR AGAINST ABSTAIN
1. PROPOSAL TO APPROVE AN AMENDMENT TO THE / / / / / /
COMPANY'S CERTIFICATE OF INCORPORATION

2. IN THEIR DISCRETION THE PROXIES MAY VOTE UPON / / / / / /
SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING AND UPON WHICH THE FHP
PREFERRED STOCK IS ENTITLED TO VOTE.

THIS PROXY, WHEN PROPERLY EXECUTED,
WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS
MADE, THE PROXY WILL BE VOTED FOR
PROPOSAL 1. Please date and sign
exactly as name appears at the left.
When shares are held by joint
owners, both should sign. When
signing as an attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name and give title of
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.

Dated,_____________________________1996

_______________________________________
Signature

_______________________________________
PLEASE MARK, SIGN, DATE AND RETURN Signature, if jointly held
THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.

- ------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE

<PAGE>

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

VOTING INSTRUCTIONS TO TRUSTEE
FOR THE ANNUAL MEETING OF STOCKHOLDERS - DECEMBER 31, 1996

THE TRUSTEE SOLICITS THESE VOTING INSTRUCTIONS
FROM PARTICIPANTS IN THE FHP INTERNATIONAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

The undersigned Participant in the FHP International Corporation ESOP
(the "Plan") hereby instructs Wells Fargo Bank ("Trustee"), to vote all shares
of Common Stock of FHPInternational Corporation (the "Company") allocated to
the accounts of the undersigned under the Plan and a proportionate number of
shares not yet allocated to the Participant's accounts in accordance with the
instructions on this card, and to act in its discretion upon such other business
as may properly come before, and to represent the undersigned at, the Annual
Meeting of Stockholders of the Company to be held on December 31, 1996, or any
adjournment thereof.

PLEASE CAREFULLY REVIEW THE ENCLOSED NOTICE TO ESOP PARTICIPANTS
BEFORE COMPLETING AND MAILING THIS CARD.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)

- -------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --

<PAGE>

Please mark your votes as this example /X/

FOR all Nominees listed WITHHOLD AUTHORITY
below (Except as marked to vote for all
to the contrary below.) nominees listed below
1. Election of Directors. / / / /

(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name indicated below.)

Jack R. Anderson
Burke F. Gumbiner
Warner Heineman

FOR AGAINST ABSTAIN
2. PROPOSAL TO APPROVE REORGANIZATION
AGREEMENT. / / / / / /

3. PROPOSAL TO APPROVE AN AMENDMENT TO THE / / / / / /
COMPANY'S CERTIFICATE OF INCORPORATION

4. PROPOSAL TO RATIFY APPOINTMENT OF DELOITTE / / / / / /
& TOUCHE LLP AS INDEPENDENT AUDITORS FOR
THE COMPANY

5. IN THEIR DISCRETION THE PROXIES MAY VOTE / / / / / /
UPON SUCH OTHER MATTERS AS MAY PROPERLY
COME BEFORE THE MEETING.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION
IS MADE, THE PROXY WILL BE VOTED FOR PROPOSALS 1 THROUGH 4.

Please date and sign exactly as name appears at the left. When
shares are held by joint owners, both should sign. When signing
as an attorney, executor, administrator, trustee or guardian,
please give full title as such.

/ / ALLOCATED SHARES ONLY

Signature(s)__________________________________________ Dated,_____________ 1996

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

s FOLD AND DETACH HERE s

<PAGE>

PROXY

PACIFICARE HEALTH SYSTEMS, INC.

The undersigned holder of Class A Common Stock of PacifiCare Health Systems,
Inc. ("PacifiCare") acknowledges receipt of a copy of the Joint Proxy
Statement/Prospectus and, revoking any proxy heretofore given, hereby
constitutes and appoints Messrs. Terry Hartshorn and Alan Hoops, and each of
them, as proxies, each of them with the power to appoint his substitute, and
hereby authorizes each of them to represent and to vote, as designated below,
all the shares of Class A Common Stock held of record by the undersigned on
November 11, 1996, at the Special Meeting of Stockholders to be held on December
31, 1996 or any adjournment thereof (the "PacifiCare Meeting"). THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PACIFICARE. IF NO DESIGNATION
IS MADE BELOW, THE PROXYHOLDER(S) WILL VOTE THE SHARES REPRESENTED BY THIS PROXY
FOR APPROVAL AND ADOPTION OF THE AMENDED AND RESTATED REORGANIZATION AGREEMENT
DATED AS OF NOVEMBER 11, 1996, FOR APPROVAL AND ADOPTION OF THE AMENDMENT TO
PACIFICARE'S CERTIFICATE OF INCORPORATION AND FOR APPROVAL AND ADOPTION OF THE
SECOND AMENDED AND RESTATED 1992 NON-OFFICER DIRECTORS STOCK OPTION PLAN OF
PACIFICARE HEALTH SYSTEMS, INC. This proxy confers discretionary authority
upon the proxyholder(s) to vote on any matter incident to the conduct of the
meeting.

(CONTINUED AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)

- --------------------------------------------------------------------------------
FOLD AND DETACH HERE

<PAGE>

Please mark
your votes as /X/
indicated in
this example

THE PACIFICARE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.

Item 1: Approval and adoption of the Amended and FOR AGAINST ABSTAIN
Restated Reorganization Agreement dated as of / / / / / /
November 11, 1996

Item 2: Approval and adoption of the amendment FOR AGAINST ABSTAIN
of PacifiCare's Certificate of Incorporation / / / / / /

Item 3: Approval and adoption of The Second FOR AGAINST ABSTAIN
Amended and Restated 1992 Non-Officer Directors / / / / / /
Stock Option Plan of PacifiCare Health Systems,
Inc.
WILL ATTEND
MEETING / /

Signature(s) Date
------------------------------------------ -------------------

NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.

- --------------------------------------------------------------------------------
FOLD AND DETACH HERE

<PAGE>

PROXY

PACIFICARE HEALTH SYSTEMS, INC.

The undersigned holder of Class B Common Stock of PacifiCare Health Systems,
Inc. ("PacifiCare") acknowledges receipt of a copy of the Joint Proxy
Statement/Prospectus and, revoking any proxy heretofore given, hereby
constitutes and appoints Messrs. Terry Hartshorn and Alan Hoops, and each of
them, as proxies, each of them with the power to appoint his substitute, and
hereby authorizes each of them to represent and to vote, as designated below,
all the shares of Class B Common Stock held of record by the undersigned on
November 11, 1996, at the Special Meeting of Stockholders to be held on
December 31, 1996 or any adjournment thereof (the "PacifiCare Meeting"). This
proxy is solicited on behalf of the Board of Directors of PacifiCare. If no
designation is made below, the proxyholder(s) will vote the shares
represented by this proxy for approval and adoption of the amendment to
PacifiCare's Certificate of Incorporation. This proxy confers discretionary
authority upon the proxyholder(s) to vote on any matter incident to the
conduct of the meeting.

(CONTINUED AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)

- ------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE

<PAGE>

PLEASE MARK
YOUR VOTES AS
INDICATED IN
THIS EXAMPLE /X/

THE PACIFICARE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR APPROVAL AND ADOPTION OF THE AMENDMENT
OF PACIFICARE'S CERTIFICATE OF INCORPORATION.

APPROVAL AND ADOPTION OF THE FOR AGAINST ABSTAIN
AMENDMENT OF PACIFICARE'S / / / / / /
CERTIFICATE OF INCORPORATION

WILL ATTEND / /
MEETING

UNLESS OTHERWISE SPECIFIED, THE PROXIES ARE GRANTED THE AUTHORITY TO VOTE FOR
THE ELECTION OF ALL OR ANY OF THE NOMINEES FOR DIRECTOR AND FOR PROPOSALS 2,
3 AND 4. PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.

SIGNATURE(S)_____________________________________________ DATE________________

NOTE: PLEASE SIGN AS NAME APPEARS HEREON. JOINT OWNERS SHOULD EACH SIGN. WHEN
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE
GIVE FULL TITLE AS SUCH.

- ------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE

<PAGE>

VOTING AND NON-DISPOSITION AGREEMENT

THIS VOTING AND NON-DISPOSITION AGREEMENT, ("Agreement") is made and
entered into as of August 4, 1996, between FHP INTERNATIONAL CORP., a
Delaware corporation ("FHP"), and the undersigned stockholder ("Stockholder")
of PACIFICARE HEALTH SYSTEMS, INC., a Delaware Corporation ("PacifiCare").

RECITALS

A. Concurrently with the execution of this Agreement, PacifiCare, FHP,
N-T Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of
PacifiCare ("Holdings"), Tree Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Holdings ("FHP Sub"), and Neptune Merger Corp., a
Delaware corporation and wholly owned subsidiary of Holdings ("PacifiCare
Sub"), have entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") which provides for the mergers of FHP Sub into
FHP and PacifiCare Sub into PacifiCare (the "Merger"). Pursuant to the
Merger, shares of Common Stock and Series A Cumulative Convertible Preferred
Stock of FHP will be converted into cash and Class A and Class B common stock
and Series A Convertible Preferred stock of Holdings and shares of Pacificare
Class A and Class B common stock shall be converted into Class A and Class B
common stock of Holdings (collectively, "Holdings Stock") in each case in the
manner set forth in the Reorganization Agreement.

B. Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of such number of shares of the outstanding Class A Common
Stock of PacifiCare as is indicated on the final page of this Agreement (the
"Shares").

C. FHP desires Stockholder to agree, and in order to induce FHP to enter
into the Reorganization Agreement and agree to the Merger, Stockholder is
willing to agree, not to transfer or otherwise dispose of any of the Shares,
or any other shares of capital stock of PacifiCare acquired hereafter and
prior to the Expiration Date (as defined in Section 1.1 below) in accordance
with the terms hereof, and to vote the Shares and any other such shares of
capital stock of PacifiCare so as to facilitate consummation of the Merger.

NOW, THEREFORE, in consideration of the foregoing the parties agree as
follows:

1. AGREEMENT TO RETAIN SHARES.

1. TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer,
sell, exchange, or otherwise dispose of any of the Shares, or any New Shares
(as defined in Section 1.2 below), or to make any offer or agreement relating
thereto, at any time prior to the Expiration Date. As used herein the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time
as the Merger shall become effective in accordance with the terms and
provisions of the Reorganization Agreement or the Reorganization Agreement
shall earlier terminate and (ii) April 30, 1997.

<PAGE>

1.2 ADDITIONAL PURCHASES. Stockholder agrees that any shares of
Class A common stock of PacifiCare that Stockholder purchases of with respect
to which Stockholder otherwise acquires beneficial ownership after the date
of this Agreement and prior to the Expiration Date ("New Shares") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.

2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of
PacifiCare called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of
the stockholders of PacifiCare with respect to any of the following,
Stockholder shall vote the Shares and any New Shares in favor of the adoption
and approval of the Reorganization Agreement and the Merger and any matter
that could reasonably be expected to facilitate the consummation of the
Merger not inconsistent with the terms of Reorganization Agreement, PROVIDED
that the terms of the Reorganization Agreement in effect on the date hereof
have not been amended or modified without the prior written consent of the
undersigned, if the effect of such amendment or modification is to (i)
increase the consideration paid to any holder of the capital stock of FHP (or
any holder of an option or right to purchase any such capital stock)
(collectively, a "FHP Holder"), (ii) increase the maximum number of shares of
Class A Common Stock which can be issued to FHP stockholders pursuant to the
Reorganization Agreement; or (iii) change any other term thereof in a manner
that would materially and adversely affect Stockholder (the Reorganization
Agreement, as it may be amended in accordance with its terms and the
foregoing, the Merger and all related matters being the "Merger Proposal").
Notwithstanding the foregoing, the Stockholder shall not be required to
comply with this section if: (a) during the period ending on the date the
Hart-Scott-Rodino antitrust review period is terminated or expires, pursuant
to a pending or promulgated order, decree, ruling or other binding
determination of a court or regulatory agency (an "Order"), the Stockholder
would be required to take any action or be forbidden from taking any action
as a result of the Merger, the effect of which could reasonably be expected
to materially and adversely affect the business operations of the
Stockholders by changing its tax-exempt status as a non-profit corporation
(provided that, the Stockholder has first used reasonable efforts to oppose
such Order or to accommodate such order in a manner that could not reasonably
be expected to have such material and adverse effect on its tax status) or
(b) the Stockholder's voting of such Shares or New Shares or delivering of
such written consent is forbidden by an Order or other applicable law. The
Stockholder is not aware of any presently pending or threatened Orders.
Stockholder agrees not to take any actions contrary to Stockholder's
obligations under this Agreement.

3. IRREVOCABLE PROXY. Stockholder hereby irrevocably (to the extent
provided in Section 212 of the Delaware General Corporation Law) appoints the
President, Chief Operating Officer, Secretary and the Chief Financial Officer
of FHP, and each of them, the attorneys and proxies of the undersigned, with
full power of substitution and resubstitution, to the full extent of the
undersigned's voting rights with respect to the Shares and any New Shares.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares are hereby revoked and no subsequent proxies will be
given with respect to the Shares or the New Shares. This proxy is irrevocable
(to the extent provided in Section 212 of the Delaware General Corporation
Law) and is granted in consideration of FHP entering into the Reorganization
Agreement. The attorneys and proxies named above are empowered at any time
prior to the Expiration Date to exercise all voting and other related rights
(including, without

<PAGE>

limitation, the power to execute and deliver written consents with respect to
the Shares) of the undersigned at every annual, special or adjourned meeting
of PacifiCare's stockholders, and in every written consent in lieu of such a
meeting, or otherwise, in favor of approval of the Merger Proposal.
Stockholder retains the right to vote on all matters other than the Merger
Proposal.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER.
Stockholder hereby represents, warrants and covenants to FHP that Stockholder
(i) is the beneficial owner of the Shares, which at the date hereof and,
except as permitted under Section 1.1 at all times up until the Expiration
Date will be free and clear of any liens, claims, options, charges or other
encumbrances; (ii) does not beneficially own any shares of voting stock of
PacifiCare other than the Shares (excluding shares as to which Stockholder
currently disclaims beneficial ownership in accordance with applicable law);
and (iii) has full power and authority to make, enter into and carry out the
terms of this Agreement.

5. ADDITIONAL DOCUMENTS. Stockholder and FHP hereby covenant and agree
to execute and deliver any additional documents necessary or desirable, in
the reasonable opinion of FHP or Stockholder, as the case may be, to carry
out the intent of this Agreement.

6. TERMINATION. This Agreement shall terminate and shall have no
further force or effect as of the Expiration Date.

7. MISCELLANEOUS.

7.1 SEVERABILITY. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (i) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to
the fullest possible extent, (ii) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (iii)
such invalidity or enforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or
the validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable
from every other part of such provision.

7.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor
any of the rights, interests or obligations of the parties hereto may be
assigned by either of the parties without prior written consent of the other.

7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.

<PAGE>

7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that FHP will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreement
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to FHP upon any such violation, FHP
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to FHP at law
or in equity.

7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if
contained in a written instrument and shall be deemed given in delivered
personally, telecopied, sent by nationally-recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):

To PacifiCare:

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, CA 90630
Attention: President
Telephone (714) 952-1121
Fax: (714) 220-3725

with copies to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street
Los Angeles, CA 90071-2007
Attention: Joseph Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and

Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

<PAGE>

To Stockholder:

UniHealth
3400 Riverside Drive
Burbank, CA 91505
Attention: Craig Beam
Telephone: (818) 238-6301
Fax: (818) 238-7686

with a copy to:

O'Melveny & Meyers LLP
400 South Hope Street, Suite 1500
Los Angeles, CA 90071
Attention: Frederick B. McLane
Telephone: (213) 669-6000
Fax: (213) 669-6407

To FHP:

FHP International Corp.
9900 Talbert Avenue
Fountain Valley, CA 92708-8000
Attention: President
Telephone: (714) 963-7233
Fax: (714) 378-5663

All such notices and other communications shall be deemed to have been
received (i) in the case of personal delivery, on the date of such delivery,
(ii) in the case of a telecopy, when the party receiving such telecopy shall
have confirmed receipt of the communication, (iii) in the case of delivery by
nationally-recognized, overnight courier, on the business day following
dispatch and (iv) in the case of mailing, on the fifth business day following
such mailing.

7.6 APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
as applied to contracts entered into and to be performed entirely within
Delaware.

7.7 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.

7.8 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and all
of which shall constitute one and the same instrument.

<PAGE>

7.9 TITLES. The titles of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction of meaning of this Agreement.

7.10. ATTORNEYS' FEES. In any action at law or suit in equity to
enforce this Agreement or the rights of any of the parties hereunder, the
prevailing party in such action or suit shall be entitled to receive a
reasonable sum for its attorneys' fees and all other reasonable costs and
expenses incurred in such action or suit.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date and year first above written.

FHP INTERNATIONAL CORP.

By: /s/ Westcott W. Price
Name: Westcott W. Price, III
Its: President and Chief Executive Officer

STOCKHOLDER:

UNIHEALTH

By: /s/ Craig Beam
Craig Beam
Its: Chairman of the Special Committee

Shares beneficially owned:

5,909,500 shares of Class A Common Stock

<PAGE>

EXHIBIT 99.04
VOTING AND NON-DISPOSITION AGREEMENT

THIS VOTING AND NON-DISPOSITION AGREEMENT, ("Agreement") is made and
entered into as of August 4, 1996, between PACIFICARE HEALTH SYSTEMS, INC., a
Delaware corporation ("PacifiCare"), and the undersigned stockholder
("Stockholder") of FHP INTERNATIONAL CORP., a Delaware corporation ("FHP").

RECITALS

A. Concurrently with the execution of this Agreement, PacifiCare, FHP,
N-T Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of
PacifiCare ("Holdings"), Tree Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Holdings ("FHP Sub"), Neptune Merger Corp., a
Delaware corporation and wholly-owned subsidiary of Holdings ("Neptune Sub")
have entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement") which provides for the mergers of FHP Sub into FHP and Neptune Sub
into PacifiCare (the "Merger"). Pursuant to the Merger, shares of Common
Stock and Series A Cumulative Convertible Preferred Stock of FHP will be
converted into cash and Class A and Class B common stock and Series A
Convertible Preferred Stock of Holdings and shares of PacifiCare Class A and
Class B common stock shall be converted into Class A and Class B common stock
of Holdings in each case in the manner set forth in the Reorganization
Agreement. The shares of Class A and Class B Common Stock and Series A
Preferred Stock of Holdings are collectively referred to herein as "Holdings
Stock."

B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding common stock and Series A Cumulative
Convertible Preferred Stock of FHP as is indicated on the final page of this
Agreement. Such shares, together with shares listed on the final page of this
Agreement as to which beneficial ownership is disclaimed and voting and
investment control is exercised by others ("Others"), are herein referred to
as the "Shares".

C. PacifiCare desires Stockholder to agree, and in order to induce
PacifiCare to enter into the Reorganization Agreement and agree to the Merger,
Stockholder is willing to agree, not to (and to use his best efforts to cause
Others not to) transfer or otherwise dispose of any of the Shares, or any
other shares of capital stock of the FHP hereafter and prior to the Expiration
Date (as defined in Section 1.1 below) beneficially owned by Stockholder in
accordance with the terms hereof, and to vote (and to use his best efforts to
cause Others to vote) the Shares and any other such shares of capital stock of
FHP so as to facilitate consummation of the Merger.

NOW, THEREFORE, in consideration of the foregoing the parties agree as
follows:

1. AGREEMENT TO RETAIN SHARES.

1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to (and to
use his best efforts to cause Others not to) transfer, sell, exchange or
otherwise dispose of any of the

<PAGE>

Shares or any New Shares (as defined in Section 1.2 below), or to make any
offer or agreement relating thereto, at any time prior to the Expiration Date.
As used herein the term "Expiration Date" shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective in accordance with
the terms and provisions of the Reorganization Agreement or the Reorganization
Agreement shall earlier terminate and (ii) April 30, 1997.

1.2 ADDITIONAL PURCHASES. Stockholder agrees that any shares of
capital stock of FHP that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership after the date of this
Agreement and prior to the Expiration Date ("New Shares") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares.

2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of
FHP called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the
stockholders of FHP with respect to any of the following, Stockholder shall
vote (and use his best efforts to cause Other to vote) the Shares and any New
Shares: (i) in favor of the adoption and approval of the Reorganization
Agreement and the Merger and any matter that could reasonably be expected to
facilitate the consummation of the Merger not inconsistent with the terms of
the Reorganization Agreement, PROVIDED that the terms of the Reorganization
Agreement in effect on the date hereof have not been amended or modified
without the prior written consent of the undersigned, if the effect of such
amendment or modification is to (a) decrease the consideration paid to any
holder of the capital stock of FHP (or any holder of an option or right to
purchase any such capital stock) (collectively, a "FHP Holder"), (b) decrease
the number of shares of Class A Common Stock issuable to any FHP Holder, (c)
change the terms of Sections 1.4(d) of the Reorganization Agreement relating
to the composition of the post-Closing Board of Directors of Holdings; or (d)
change any other term thereof in a manner that would materially and adversely
affect Stockholder (the Reorganization Agreement, as it may be amended in
accordance with its terms and the foregoing, the Merger and all related
matters being the "Merger Proposal"); and (ii) against approval of any
proposal made in opposition to or competition with consummation of the Merger
and against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than with PacifiCare and its affiliates
and against any liquidation or winding up of FHP (each of the foregoing is
hereinafter referred to as an "Opposing Proposal"). Stockholder agrees not to
take any actions contrary to Stockholder's obligations under this Agreement.
Stockholder further agrees to use his best efforts to obtain proxies from all
Others within 30 days after the date hereof appointing PacifiCare's President,
Chief Operating Officer, Chief Financial Officer and Secretary proxies to vote
any shares held by such Other in accordance with the provisions of this
Agreement.

<PAGE>

hereby revoked and no subsequent proxies will be given with respect to the
Shares or the New Shares. This proxy is irrevocable (to the extent provided
in Section 212 of the Delaware General Corporation Law) and is granted in
consideration of PacifiCare entering into the Reorganization Agreement. The
attorneys and proxies named above are empowered at any time prior to the
Expiration Date to exercise all voting and other related rights (including,
without limitation, the power to execute and deliver written consents with
respect to the Shares) of the undersigned at every annual, special or
adjourned meeting of FHP's stockholders, and in every written consent in lieu
of such a meeting, or otherwise, in favor of approval of the Merger Proposal
and against any Opposing Proposal. Stockholder retains the right to vote on
all matters other than the Merger Proposal and any Opposing Proposal.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER.
Stockholder hereby represents, warrants and covenants to PacifiCare as follows:

4.1 OWNERSHIP OF SHARES. Stockholder (i) is the beneficial owner
of the shares listed on the final page of this Agreement, which at the date
hereof and at all times up until the Expiration Date will be free and clear of
any liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of FHP other than the shares
listed on the final page of this Agreement (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into
and carry out the terms of this Agreement.

4.2 NO PROXY SOLICITATIONS. Stockholder, in his capacity as a
stockholder of FHP and not as a director or officer of FHP will not, and will
not permit any entity under Stockholder's control to: (i) solicit proxies or
become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) with respect to an Opposing Proposal or
otherwise encourage or assist any party in taking or planning any action that
would compete with, restrain or otherwise serve to interfere with or inhibit
the timely consummation of the Merger in accordance with the terms of the
Reorganization Agreement and the Merger Agreement; (ii) initiate a
stockholders' vote or action by consent of FHP's stockholders with respect to
an Opposing Proposal; or (iii) become a member of a "group" (as such term is
used in Section 13(d) of the Exchange Act) with respect to any voting
securities of FHP with respect to an Opposing Proposal.

5. ADDITIONAL DOCUMENTS. Stockholder and PacifiCare hereby covenant
and agree to execute and deliver any additional documents necessary or
desirable, in the reasonable opinion of PacifiCare or Stockholder, as the case
may be, to carry out the intent of this Agreement.

6. TERMINATION. This Agreement shall terminate and shall have no
further force or effect as of the Expiration Date.

7. MISCELLANEOUS.

7.1 SEVERABILITY. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then

<PAGE>

(i) such provision or part thereof shall, with respect to such circumstances
and in such jurisdiction, be deemed amended to conform to applicable laws so
as to be valid and enforceable to the fullest possible extent, (ii) the
invalidity or unenforceability of such provision or part thereof under such
circumstances and in such jurisdiction shall not affect the validity or
enforceability of such provision or part thereof under any other circumstances
or in any other jurisdiction, and (iii) such invalidity or enforceability of
such provision or part thereof shall not affect the validity or enforceability
of the remainder of such provision or the validity or enforceability of any
other provision of this Agreement. Each provision of this Agreement is
separable from every other provision of this Agreement, and each part of each
provision of this Agreement is separable from every other part of such
provision.

7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.

7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that PacifiCare will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreement
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to PacifiCare upon any such
violation, PacifiCare shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to PacifiCare at law or in equity.

7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if
contained in a written instrument and shall be deemed given if delivered
personally, telecopied, sent by nationally-recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):

To PacifiCare:

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

<PAGE>

with copies to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street
Los Angeles, CA 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and

Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

To Stockholder: to the address set forth below the Stockholder's signature
at the last page hereof.

7.8 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and all
of which shall constitute one and the same instrument.

7.9 TITLES. The titles of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction or meaning of this Agreement.

<PAGE>

7.10 ATTORNEYS' FEES. In any action at law or suit in equity to
enforce this Agreement or the rights of any of the parties hereunder, the
prevailing party in such action or suit shall be entitled to receive a
reasonable sum for its attorneys' fees and all other reasonable costs and
expenses incurred in such action or suit.

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date and year first above written.

PACIFICARE

By /s/ Alan Hoops
-------------------------------------
President and Chief Executive Officer

STOCKHOLDER:

By /s/ Jack R. Anderson
-------------------------------------

Stockholder's Address for Notice:
14755 Preston Road, Suite 515
------------------------------------------
Dallas, Texas 75240
------------------------------------------
------------------------------------------
(Print Address)

(214) 386-7350
------------------------------------------
(Print Telephone Number)

(214) 386-7359
------------------------------------------
(Print Facsimile Number)

Shares beneficially owned:

SEE EXHIBIT A shares of Common Stock

Shares beneficially owned:

SEE EXHIBIT A shares of Series A
Cumulative Convertible Preferred Stock

<PAGE>

EXHIBIT A

JACK R. ANDERSON

Beneficial Ownership of FHP Shares

Class of Stock # Shares
- -------------- --------
Common Stock Beneficially Owned 411,116
Common Stock Beneficially Owned by Others 408,402

Series A Preferred Stock Beneficially Owned 1,410,454
Series A Preferred Stock Beneficially Owned by Others 1,361,340

<PAGE>

VOTING AND NON-DISPOSITION AGREEMENT

RECITALS

A. Concurrently with the execution of this Agreement, PacifiCare, FHP, N-
T Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of
PacifiCare ("Holdings"), Tree Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Holdings ("FHP Sub"), Neptune Merger Corp., a
Delaware corporation and wholly-owned subsidiary of Holdings ("Neptune Sub")
have entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement") which provides for the mergers of FHP Sub into FHP and Neptune Sub
into PacifiCare (the "Merger"). Pursuant to the Merger, shares of Common Stock
and Series A Cumulative Convertible Preferred Stock of FHP will be converted
into cash and Class A and Class B common stock and Series A Convertible
Preferred Stock of Holdings and shares of PacifiCare Class A and Class B common
stock shall be converted into Class A and Class B common stock of Holdings in
each case in the manner set forth in the Reorganization Agreement. The shares
of Class A and Class B Common Stock and Series A Preferred Stock of Holdings are
collectively referred to herein as "Holdings Stock."

C. PacifiCare desires Stockholder to agree, and in order to induce
PacifiCare to enter into the Reorganization Agreement and agree to the Merger,
Stockholder is willing to agree, not to (and to use his best efforts to cause
Others not to) transfer or otherwise dispose of any of the Shares, or any other
shares of capital stock of the FHP hereafter and prior to the Expiration Date
(as defined in Section 1.1 below) beneficially owned by Stockholder in
accordance with the terms hereof, and to vote (and to use his best efforts to
cause Others to vote) the Shares and any other such shares of capital stock of
FHP so as to facilitate consummation of the Merger.

NOW, THEREFORE, in consideration of the foregoing the parties agree as
follows:

1. AGREEMENT TO RETAIN SHARES.

1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to (and to use
his best efforts to cause Others not to) transfer, sell, exchange or otherwise
dispose of any of the

<PAGE>

2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of
FHP called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of FHP with respect to any of the following, Stockholder shall vote (and use
his best efforts to cause Other to vote) the Shares and any New Shares: (i) in
favor of the adoption and approval of the Reorganization Agreement and the
Merger and any matter that could reasonably be expected to facilitate the
consummation of the Merger not inconsistent with the terms of the
Reorganization Agreement, PROVIDED that the terms of the Reorganization
Agreement in effect on the date hereof have not been amended or modified
without the prior written consent of the undersigned, if the effect of such
amendment or modification is to (a) decrease the consideration paid to any
holder of the capital stock of FHP (or any holder of an option or right to
purchase any such capital stock) (collectively, a "FHP Holder"), (b) decrease
the number of shares of Class A Common Stock issuable to any FHP Holder, (c)
change the terms of Sections 1.4(d) of the Reorganization Agreement relating to
the composition of the post-Closing Board of Directors of Holdings; or (d)
change any other term thereof in a manner that would materially and adversely
affect Stockholder (the Reorganization Agreement, as it may be amended in
accordance with its terms and the foregoing, the Merger and all related matters
being the "Merger Proposal"); and (ii) against approval of any proposal made in
opposition to or competition with consummation of the Merger and against any
merger, consolidation, sale of assets, reorganization or recapitalization with
any party other than with PacifiCare and its affiliates and against any
liquidation or winding up of FHP (each of the foregoing is hereinafter referred
to as an "Opposing Proposal"). Stockholder agrees not to take any actions
contrary to Stockholder's obligations under this Agreement. Stockholder further
agrees to use his best efforts to obtain proxies from all Others within 30 days
after the date hereof appointing PacifiCare's President, Chief Operating
Officer, Chief Financial Officer and Secretary proxies to vote any shares held
by such Other in accordance with the provisions of this Agreement.

<PAGE>

hereby revoked and no subsequent proxies will be given with respect to the
Shares or the New Shares. This proxy is irrevocable (to the extent provided in
Section 212 of the Delaware General Corporation Law) and is granted in
consideration of PacifiCare entering into the Reorganization Agreement. The
attorneys and proxies named above are empowered at any time prior to the
Expiration Date to exercise all voting and other related rights (including,
without limitation, the power to execute and deliver written consents with
respect to the Shares) of the undersigned at every annual, special or adjourned
meeting of FHP's stockholders, and in every written consent in lieu of such a
meeting, or otherwise, in favor of approval of the Merger Proposal and against
any Opposing Proposal. Stockholder retains the right to vote on all matters
other than the Merger Proposal and any Opposing Proposal.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER.
Stockholder hereby represents, warrants and covenants to PacifiCare as follows:

4.1 OWNERSHIP OF SHARES. Stockholder (i) is the beneficial owner of
the shares listed on the final page of this Agreement, which at the date hereof
and at all times up until the Expiration Date will be free and clear of any
liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of FHP other than the shares
listed on the final page of this Agreement (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement.

5. ADDITIONAL DOCUMENTS. Stockholder and PacifiCare hereby covenant and
agree to execute and deliver any additional documents necessary or desirable,
in the reasonable opinion of PacifiCare or Stockholder, as the case may be, to
carry out the intent of this Agreement.

6. TERMINATION. This Agreement shall terminate and shall have no
further force or effect as of the Expiration Date.

7. MISCELLANEOUS.

7.1 SEVERABILITY. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then

<PAGE>

(i) such provision or part thereof shall, with respect to such circumstances
and in such jurisdiction, be deemed amended to conform to applicable laws so as
to be valid and enforceable to the fullest possible extent, (ii) the invalidity
or unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any other
jurisdiction, and (iii) such invalidity or enforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder
of such provision or the validity or enforceability of any other provision of
this Agreement. Each provision of this Agreement is separable from every other
provision of this Agreement, and each part of each provision of this Agreement
is separable from every other part of such provision.

7.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by
either of the parties without prior written consent of the other.

7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.

7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that PacifiCare will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreement
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to PacifiCare upon any such violation,
PacifiCare shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
PacifiCare at law or in equity.

7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if contained
in a written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

To PacifiCare:

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

<PAGE>

with copies to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street
Los Angeles, CA 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and

Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

To Stockholder: to the address set forth below the Stockholder's
signature at the last page hereof.

All such notices and other communications shall be deemed to have been received
(i) in the case of personal delivery, on the date of such delivery, (ii) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (iii) in the case of delivery by
nationally-recognized, overnight courier, on the business day following
dispatch and (iv) in the case of mailing, on the fifth business day following
such mailing.

7.6 APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts entered into and to be performed entirely within Delaware.

7.8 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.

7.9 TITLES. The titles of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction or meaning of this Agreement.

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date and year first above written.

PACIFICARE

By /s/ Alan Hoops
-------------------------------------
President and Chief Executive Officer

STOCKHOLDER:

By /s/ Richard M. Burdge
-------------------------------------

Stockholder's Address for Notice:
12 Clinton Avenue - Box 1094
-----------------------------------------
Shelter Island, New York 11965
-----------------------------------------
-----------------------------------------
(Print Address)

(516) 749-0730
-----------------------------------------
(Print Telephone Number)

516) 749-2128
-----------------------------------------
(Print Facsimile Number)

Shares beneficially owned:

SEE EXHIBIT A shares of Common Stock

Shares beneficially owned:

SEE EXHIBIT A shares of Series A
Cumulative Convertible Preferred Stock

<PAGE>

EXHIBIT A

RICHARD M. BURDGE, SR.

Beneficial Ownership of FHP Shares

CLASS OF STOCK

Common Stock Beneficially Owned 199,601
Common Stock Beneficially Owned by Others 73,030

Series A Preferred Stock Beneficially Owned 658,669
Series A Preferred Stock Beneficially Owned by Others 83,435

<PAGE>

VOTING AND NON-DISPOSITION AGREEMENT

RECITALS

A. Concurrently with the execution of this Agreement, PacifiCare, FHP,
N-T Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of
PacifiCare ("Holdings"), Tree Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Holdings ("FHP Sub"), Neptune Merger Corp., a
Delaware corporation and wholly-owned subsidiary of Holdings ("Neptune Sub")
have entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement") which provides for the mergers of FHP Sub into FHP and Neptune Sub
into PacifiCare (the "Merger"). Pursuant to the Merger, shares of Common Stock
and Series A Cumulative Convertible Preferred Stock of FHP will be converted
into cash and Class A and Class B common stock and Series A Convertible
Preferred Stock of Holdings and shares of PacifiCare Class A and Class B common
stock shall be converted into Class A and Class B common stock of Holdings in
each case in the manner set forth in the Reorganization Agreement. The shares
of Class A and Class B Common Stock and Series A Preferred Stock of Holdings
are collectively referred to herein as "Holdings Stock."

C. PacifiCare desires Stockholder to agree, and in order to induce
PacifiCare to enter into the Reorganization Agreement and agree to the Merger,
Stockholder is willing to agree, not to (and to use his best efforts to cause
Others not to) transfer or otherwise dispose of any of the Shares, or any other
shares of capital stock of the FHP hereafter and prior to the Expiration Date
(as defined in Section 1.1 below) beneficially owned by Stockholder in
accordance with the terms hereof, and to vote (and to use his best efforts to
cause Others to vote) the Shares and any other such shares of capital stock of
FHP so as to facilitate consummation of the Merger.

NOW, THEREFORE, in consideration of the foregoing the parties agree as
follows:

1. AGREEMENT TO RETAIN SHARES.

1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to (and to use
his best efforts to cause Others not to) transfer, sell, exchange or otherwise
dispose of any of the

<PAGE>

2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of
FHP called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of FHP with respect to any of the following, Stockholder shall vote (and use
his best efforts to cause Other to vote) the Shares and any New Shares: (i) in
favor of the adoption and approval of the Reorganization Agreement and the
Merger and any matter that could reasonably be expected to facilitate the
consummation of the Merger not inconsistent with the terms of the
Reorganization Agreement, PROVIDED that the terms of the Reorganization
Agreement in effect on the date hereof have not been amended or modified
without the prior written consent of the undersigned, if the effect of such
amendment or modification is to (a) decrease the consideration paid to any
holder of the capital stock of FHP (or any holder of an option or right to
purchase any such capital stock) (collectively, a "FHP Holder"), (b) decrease
the number of shares of Class A Common Stock issuable to any FHP Holder, (c)
change the terms of Sections 1.4(d) of the Reorganization Agreement relating to
the composition of the post-Closing Board of Directors of Holdings; or (d)
change any other term thereof in a manner that would materially and adversely
affect Stockholder (the Reorganization Agreement, as it may be amended in
accordance with its terms and the foregoing, the Merger and all related matters
being the "Merger Proposal"); and (ii) against approval of any proposal made in
opposition to or competition with consummation of the Merger and against any
merger, consolidation, sale of assets, reorganization or recapitalization with
any party other than with PacifiCare and its affiliates and against any
liquidation or winding up of FHP (each of the foregoing is hereinafter referred
to as an "Opposing Proposal"). Stockholder agrees not to take any actions
contrary to Stockholder's obligations under this Agreement. Stockholder further
agrees to use his best efforts to obtain proxies from all Others within 30 days
after the date hereof appointing PacifiCare's President, Chief Operating
Officer, Chief Financial Officer and Secretary proxies to vote any shares held
by such Other in accordance with the provisions of this Agreement.

<PAGE>

hereby revoked and no subsequent proxies will be given with respect to the
Shares or the New Shares. This proxy is irrevocable (to the extent provided in
Section 212 of the Delaware General Corporation Law) and is granted in
consideration of PacifiCare entering into the Reorganization Agreement. The
attorneys and proxies named above are empowered at any time prior to the
Expiration Date to exercise all voting and other related rights (including,
without limitation, the power to execute and deliver written consents with
respect to the Shares) of the undersigned at every annual, special or adjourned
meeting of FHP's stockholders, and in every written consent in lieu of such a
meeting, or otherwise, in favor of approval of the Merger Proposal and against
any Opposing Proposal. Stockholder retains the right to vote on all matters
other than the Merger Proposal and any Opposing Proposal.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER.
Stockholder hereby represents, warrants and covenants to PacifiCare as follows:

4.1 OWNERSHIP OF SHARES. Stockholder (i) is the beneficial owner of
the shares listed on the final page of this Agreement, which at the date hereof
and at all times up until the Expiration Date will be free and clear of any
liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of FHP other than the shares
listed on the final page of this Agreement (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement.

5. ADDITIONAL DOCUMENTS. Stockholder and PacifiCare hereby covenant and
agree to execute and deliver any additional documents necessary or desirable,
in the reasonable opinion of PacifiCare or Stockholder, as the case may be, to
carry out the intent of this Agreement.

6. TERMINATION. This Agreement shall terminate and shall have no
further force or effect as of the Expiration Date.

7. MISCELLANEOUS.

7.1 SEVERABILITY. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then

<PAGE>

(i) such provision or part thereof shall, with respect to such circumstances
and in such jurisdiction, be deemed amended to conform to applicable laws so as
to be valid and enforceable to the fullest possible extent, (ii) the invalidity
or unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any other
jurisdiction, and (iii) such invalidity or enforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder
of such provision or the validity or enforceability of any other provision of
this Agreement. Each provision of this Agreement is separable from every other
provision of this Agreement, and each part of each provision of this Agreement
is separable from every other part of such provision.

7.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by
either of the parties without prior written consent of the other.

7.3 AMENDMENTS AND MODIFICATION. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.

7.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that PacifiCare will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreement
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to PacifiCare upon any such violation,
PacifiCare shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
PacifiCare at law or in equity.

7.5 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if contained
in a written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

To PacifiCare:

PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725

<PAGE>

with copies to:

Konowiecki & Rank
First Interstate World Center
633 West 5th Street
Los Angeles, CA 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992

and

Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663

To Stockholder: to the address set forth below the Stockholder's
signature at the last page hereof.

All such notices and other communications shall be deemed to have been received
(i) in the case of personal delivery, on the date of such delivery, (ii) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (iii) in the case of delivery by
nationally-recognized, overnight courier, on the business day following
dispatch and (iv) in the case of mailing, on the fifth business day following
such mailing.

7.6 APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts entered into and to be performed entirely within Delaware.

7.8 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.

7.9 TITLES. The titles of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction or meaning of this Agreement.

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date and year first above written.

PACIFICARE

By /s/ Alan Hoops
------------------------------------
President and Chief Executive Officer

STOCKHOLDER:

By /s/ Westcott W. Price III
------------------------------------

Stockholder's Address for Notice:

1505 Emerald Bay
-----------------------------------------
Laguna Beach, California 92651
-----------------------------------------
(Print Address)

(714) 378-5588
-----------------------------------------
(Print Telephone Number)

(714) 378-5089
-----------------------------------------
(Print Facsimile Number)

Shares beneficially owned:

362,250* shares of Common Stock

Shares beneficially owned:

-0- shares of Series A
Cumulative Convertible Preferred Stock

*Does not include Options or ESOP shares.

<PAGE>
FORM OF IRREVOCABLE ELECTION

(TO ACCOMPANY CERTIFICATES FOR SHARES OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK)

FHP INTERNATIONAL CORPORATION

PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS SET FORTH BELOW

IMPORTANT: THIS FORM OF IRREVOCABLE ELECTION, PROPERLY COMPLETED AND EXECUTED IN
ACCORDANCE WITH THE INSTRUCTIONS SET FORTH BELOW, TOGETHER WITH YOUR
CERTIFICATE(S) FOR SHARES ("FHP PREFERRED SHARES") OF SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK ("FHP PREFERRED STOCK") OF FHP INTERNATIONAL
CORPORATION ("FHP"), MUST BE RECEIVED BY AMERICAN STOCK TRANSFER & TRUST COMPANY
(THE "IRREVOCABLE ELECTION AGENT") PRIOR TO 5:00 P.M., EASTERN STANDARD TIME ON
DECEMBER 27, 1996 ("THE ELECTION DEADLINE") (UNLESS DELIVERY IS GUARANTEED IN
BOX C BELOW IN ACCORDANCE WITH INSTRUCTION A). DELIVERIES MADE TO ADDRESSES
OTHER THAN THE ADDRESS FOR THE IRREVOCABLE ELECTION AGENT SET FORTH BELOW DO NOT
CONSTITUTE VALID DELIVERIES AND THE IRREVOCABLE ELECTION AGENT WILL NOT BE
RESPONSIBLE THEREFOR.

PLEASE READ AND FOLLOW CAREFULLY THE INSTRUCTIONS SET FORTH BELOW, WHICH SET
FORTH THE REQUIREMENTS THAT MUST BE COMPLIED WITH IN ORDER TO MAKE AN EFFECTIVE
ELECTION. NOMINEES, TRUSTEES, OR OTHER PERSONS WHO HOLD FHP PREFERRED SHARES IN
A REPRESENTATIVE CAPACITY ARE DIRECTED TO INSTRUCTION E(3).

THIS FORM OF IRREVOCABLE ELECTION IS TO BE EXECUTED AND RETURNED TO THE
IRREVOCABLE ELECTION AGENT AT THE FOLLOWING ADDRESS:

IRREVOCABLE ELECTION AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY

<TABLE>
<S> <C>
BY HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT COURIER: BY FACSIMILE:
AMERICAN STOCK TRANSFER & TRUST COMPANY (718) 921-8336
6201 FIFTEENTH AVENUE
BROOKLYN, NEW YORK 11219 FOR INFORMATION CALL:
(718) 921-8206
</TABLE>

DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE ACCOMPANYING INSTRUCTIONS SHOULD BE READ
CAREFULLY BEFORE THIS FORM OF IRREVOCABLE ELECTION IS COMPLETED.

1
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS

Ladies and Gentlemen:

1. Pursuant to the terms of an Amended and Restated Agreement and Plan of
Reorganization dated as of November 11, 1996 (as amended from time to time, the
"Reorganization Agreement") among N-T Holdings, Inc. ("PacifiCare Holding"),
PacifiCare Health Systems, Inc. ("PacifiCare"), Neptune Merger Corp., Tree
Acquisition Corp. ("FHP Merger Sub") and FHP, and in connection with the merger
of FHP and FHP Merger Sub (the "FHP Merger") as contemplated thereunder,
assuming approval of the Series A Amendment (as defined below), the undersigned,
as a holder of FHP Preferred Shares, would be entitled to receive for each FHP
Preferred Share, upon consummation of the FHP Merger, an amount of cash equal to
$14.113, one-half ( 1/2) share of Series A Cumulative Convertible Preferred
Stock of PacifiCare Holding and Talbert Rights (as defined in the Reorganization
Agreement) (collectively, the "Series A Merger Consideration"). Pursuant to the
Certificate of Designation of Powers, Preferences and Rights of FHP Preferred
Stock (the "Series A Certificate"), if an amendment to the Series A Certificate
(the "Series A Amendment") is not approved, the undersigned, upon consummation
of the FHP Merger, would be entitled to (i) exercise certain "Special Conversion
Rights" (as defined in the Series A Certificate), or (ii) waive such Special
Conversion Rights and elect to receive the same consideration in the FHP Merger
that such holder would have received if such holder had converted such holder's
FHP Preferred Shares into shares of common stock of FHP immediately prior to the
effective time ("Effective Time") of the FHP Merger (the "As-If-Converted Merger
Consideration"), as set forth in the Series A Certificate.

2. By completing this Form of Irrevocable Election, transmitting the
certificate(s) representing FHP Preferred Shares (or complying with the
procedures for guaranteed delivery set forth below) identified in Box A below as
to which an Irrevocable Election (as defined below) is made, and otherwise
complying with the instructions set forth herein, the undersigned, subject to
the terms and conditions set forth in this Form of Irrevocable Election,
including the documents incorporated herein by reference, hereby (a) surrenders
the certificate(s) (the "Certificates") representing the FHP Preferred Shares
listed in Box A (Certificate Information) and (b) irrevocably elects (an
"Irrevocable Election"), as indicated below, with respect to all FHP Preferred
Shares represented by the Certificate(s), to receive in the FHP Merger the
Series A Merger Consideration whether or not the Series A Amendment is approved
and waive such holder's rights to (1) exercise Special Conversion Rights; (2)
receive As-If-Converted Merger Consideration; and (3) convert FHP Preferred
Shares into shares of Common Stock of FHP. Further, the undersigned hereby
irrevocably agrees not to gift, sell, hypothecate or in any other manner
transfer such FHP Preferred Shares to any person who does not expressly accept
such stock subject to such Irrevocable Election and agree to be bound thereby.
Notwithstanding the foregoing, the restrictions imposed by this Irrevocable
Election shall lapse if the Reorganization Agreement shall terminate in
accordance with its terms prior to the Effective Time.

3. If the Irrevocable Election Agent has not received your properly
completed Form of Irrevocable Election, accompanied by your Certificates (unless
Box C (Guaranty of Delivery) has been properly completed and such Certificates
are received by the Irrevocable Election Agent by the Guaranteed Delivery
Deadline (as defined below)), by the Election Deadline of 5:00 p.m., Eastern
Standard Time, on December 27, 1996, in the event the Series A Amendment is not
approved, you will not receive the Series A Merger Consideration. See "The
Mergers and Related Transactions--Merger Consideration--FHP-- Irrevocable
Election by the FHP Preferred Stockholders" in the Joint Proxy
Statement/Prospectus (as defined below).

4. This Irrevocable Election is subject to the terms and conditions set
forth in the Reorganization Agreement and the Joint Proxy Statement/Prospectus
delivered in connection therewith (the "Joint Proxy Statement/Prospectus"),
furnished to stockholders of FHP in connection with the FHP Merger and
accompanying this Form of Irrevocable Election, all of which are incorporated
herein by reference.

2
<PAGE>
Receipt of the Joint Proxy Statement/Prospectus, including the Reorganization
Agreement attached thereto, is hereby acknowledged. Copies of the Joint Proxy
Statement/Prospectus are available upon request (see Instruction F(6)).

5. Holders of FHP Preferred Shares who make the Irrevocable Election are
still entitled to vote with respect to the Series A Amendment and other matters
to be considered by holders of FHP Preferred Shares at the FHP Meeting (as
defined in the Joint Proxy Statement/Prospectus) and are encouraged to vote FOR
the transactions contemplated by the Reorganization Agreement and FOR the Series
A Amendment in person or by proxy. See "The FHP Meeting" in the Joint Proxy
Statement/Prospectus.

6. The Irrevocable Election applies to all the FHP Preferred Shares
represented by the Certificates. The undersigned acknowledges that, following
consummation of the Mergers, he, she or it must complete and execute a letter of
transmittal in the form provided by PacifiCare Holding in order to receive the
Series A Merger Consideration.

7. The undersigned authorizes the Irrevocable Election Agent to deliver the
Certificates and this Form of Irrevocable Election to ChaseMellon Shareholder
Services L.L.C. (the "Exchange Agent"), if the FHP Merger is consummated.

3
<PAGE>
FORM OF IRREVOCABLE ELECTION
EXECUTION SECTION
BOX A: ELECTION AND DESCRIPTION OF SHARES SURRENDERED

<TABLE>
<S> <C> <C>
NAME(S) AND ADDRESS OF HOLDER OF RECORD AS SHOWN ON RECORDS OF FHP
(IF THE SPACE PROVIDED BELOW IS INADEQUATE, THE CERTIFICATE NUMBERS AND NUMBERS OF SHARES SHOULD BE LISTED
ON A SEPARATE SIGNED SCHEDULE AFFIXED HERETO.)
CERTIFICATE(S) SURRENDERED (ATTACH SEPARATE SCHEDULE IF NECESSARY)
COLUMN 1 COLUMN 2

NUMBER(S) OF CERTIFICATES
DELIVERED WITH NUMBER OF SHARES
PREVIOUS FORM OF REPRESENTED BY CERTIFICATES
DELIVERED HEREWITH ELECTION IN COLUMN 1

TOTALS
</TABLE>

ALL FHP PREFERRED SHARES REPRESENTED BY CERTIFICATES LISTED IN COLUMN 1 WILL BE
DEEMED TO HAVE BEEN SURRENDERED AND TO BE SUBJECT TO THE IRREVOCABLE ELECTION.

4
<PAGE>
BOX B

SIGN HERE

By signing below and complying with the other terms and conditions hereof, the
undersigned hereby represents and warrants that the undersigned has full power
and authority to complete and deliver this Form of Irrevocable Election and to
deliver for surrender and cancellation the above-described Certificate(s)
delivered herewith and that the rights represented by the Certificate(s) are
free and clear of all liens, restrictions, charges and encumbrances and are
not subject to any adverse claim. The undersigned will, upon request, execute
any additional documents necessary or desirable to complete the surrender of
the Certificate(s) surrendered herewith. All authority herein conferred shall
survive the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.

By signing below and complying with the other terms and conditions hereof, the
undersigned, subject to the terms and conditions set forth in this Form of
Irrevocable Election hereby (a) surrenders the Certificate(s) representing the
FHP Preferred Shares listed in Box A (Certificate Information), and (b)
irrevocably elects, with respect to all FHP Preferred Shares represented by
the Certificate(s), to receive in the FHP Merger the Series A Merger
Consideration whether or not the Series A Amendment is approved and waive such
holder's rights to (1) exercise Special Conversion Rights; (2) receive
As-If-Converted Merger Consideration; and (3) convert FHP Preferred Shares
into shares of Common Stock of FHP. Further, the undersigned hereby
irrevocably agrees not to gift, sell, hypothecate or in any other manner
transfer such FHP Preferred Shares to any person who does not expressly accept
such stock subject to such Irrevocable Election and agree to be bound thereby.
Notwithstanding the foregoing, the restrictions imposed by this Irrevocable
Election shall lapse if the Reorganization Agreement shall terminate in
accordance with its terms prior to the Effective Time.

To be completed by all person(s) surrendering certificates and executing this
Form of Irrevocable Election. Please sign exactly as indicated on the
Certificates.
Signature(s): ________________________________________________________________
_____________________________________________________________________
_______________________________________
Name(s) (Please Print)
_______________________________________
Title(s) (Please Print)
Date: ____________________ Telephone Number: ____________________
Address: ___________________________________________________________________
_____________________________________________________________________

5
<PAGE>
FORM OF IRREVOCABLE ELECTION
EXECUTION SECTION (CONTINUED)

BOX C

GUARANTY OF DELIVERY

To be used only if Certificates are not surrendered herewith. (See Instruction
A.) The undersigned (check appropriate boxes below) guarantees to deliver to
the Irrevocable Election Agent at the appropriate address set forth above the
Certificates for FHP Preferred Shares submitted with this Form of Irrevocable
Election no later than 5:00 p.m., Eastern Standard Time, on January 2, 1997.
Only persons falling within one of the categories specified in the boxes below
may guaranty delivery.

<TABLE>
<S> <C> <C>
/ / A member of a registered national Firm: ----------------------------------------------
securities exchange
Authorized Signature: ----------------------------------------------
/ / A member of the National Address: ----------------------------------------------
Association of Securities Dealers,
Inc.
----------------------------------------------
/ / A commercial bank or trust company Telephone Number: ----------------------------------------------
in the United States
</TABLE>

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<PAGE>
INSTRUCTIONS

The Execution Section of this Form of Irrevocable Election should be
properly filled in, dated, signed and delivered, together with the Certificates
(unless delivery is guaranteed in Box C in accordance with Instruction A) as to
which an Irrevocable Election is made, to the Irrevocable Election Agent at the
appropriate address set forth on the front of this Form of Irrevocable Election.
Please read and follow carefully the instructions regarding completion of this
Form of Irrevocable Election set forth below. If you have any questions
concerning this Form of Irrevocable Election or require any information or
assistance, see Instruction F(6).

A. TIME IN WHICH TO ELECT

In order for an Irrevocable Election to be effective, the Irrevocable
Election Agent must receive a properly completed Form of Irrevocable Election,
accompanied by the Certificates representing FHP Preferred Shares currently held
by you as to which an Irrevocable Election is made NO LATER THAN 5:00 P.M.,
EASTERN STANDARD TIME, ON DECEMBER 27, 1996. STOCKHOLDERS SEEKING TO MAKE THE
IRREVOCABLE ELECTION MUST DELIVER A PROPERLY COMPLETED FORM OF IRREVOCABLE
ELECTION, ACCOMPANIED BY STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY,
AS DESCRIBED BELOW), NO LATER THAN 5:00 P.M., EASTERN STANDARD TIME, ON DECEMBER
27, 1996, IN ORDER TO ASSURE THAT THEIR FORM OF IRREVOCABLE ELECTION WILL BE
RECEIVED BY THE ELECTION DEADLINE. Persons whose Certificates are not
immediately available may also make an Irrevocable Election by completing this
Form of Irrevocable Election and having Box C (Guaranty of Delivery) properly
completed and duly executed by a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States (subject to the condition that the Certificates, the delivery of which is
thereby guaranteed, are in fact delivered to the Irrevocable Election Agent no
later than 5:00 p.m., Eastern Standard Time, on January 2, 1997 (the "Guaranteed
Delivery Deadline").

IF THE IRREVOCABLE ELECTION AGENT HAS NOT RECEIVED YOUR PROPERLY COMPLETED
FORM OF IRREVOCABLE ELECTION, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE
ELECTION DEADLINE (UNLESS BOX C (GUARANTY OF DELIVERY) HAS BEEN PROPERLY
COMPLETED AND SUCH CERTIFICATES ARE RECEIVED BY THE IRREVOCABLE ELECTION AGENT
BY THE GUARANTEED DELIVERY DEADLINE), THIS IRREVOCABLE ELECTION WILL NOT BE
EFFECTIVE. SEE "THE MERGERS AND RELATED TRANSACTIONS--MERGER
CONSIDERATION--FHP--IRREVOCABLE ELECTION BY THE FHP PREFERRED STOCKHOLDERS" IN
THE JOINT PROXY STATEMENT/PROSPECTUS.

B. ELECTION

This Form of Irrevocable Election provides for your election, subject to the
terms and conditions set forth hereunder and in the documents incorporated
herein by reference, upon consummation of the FHP Merger to have each of the FHP
Preferred Shares represented by the Certificates converted into the right to
receive the Series A Merger Consideration.

You should understand that your Irrevocable Election is subject to certain
terms and conditions that are set forth in the Reorganization Agreement and
described in the Joint Proxy Statement/Prospectus. The Reorganization Agreement
is attached to the Joint Proxy Statement/Prospectus as Appendix A. Copies of the
Joint Proxy Statement/Prospectus may be requested from the Irrevocable Election
Agent as described in Instruction F(6) below. The delivery of this Form of
Irrevocable Election to the Irrevocable Election Agent constitutes
acknowledgment of the receipt of the Joint Proxy Statement/Prospectus. EACH
HOLDER OF FHP PREFERRED SHARES IS STRONGLY ENCOURAGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY AND TO DISCUSS THE CONTENTS

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<PAGE>
THEREOF AND THIS FORM OF IRREVOCABLE ELECTION WITH HIS OR HER PERSONAL FINANCIAL
AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO MAKE THIS IRREVOCABLE ELECTION.
THE TAX CONSEQUENCES TO A HOLDER OF FHP PREFERRED SHARES WILL VARY DEPENDING
UPON A NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME
TAX CONSEQUENCES OF AN IRREVOCABLE ELECTION, SEE "THE MERGERS AND RELATED
TRANSACTIONS--CERTAIN FEDERAL INCOME TAX CONSEQUENCES" IN THE JOINT PROXY
STATEMENT/PROSPECTUS.

C. IRREVOCABLE ELECTION

By completing and submitting the Form of Irrevocable Election, you are
irrevocably electing, subject to the terms and conditions set forth in this Form
of Irrevocable Election, with respect to all FHP Preferred Shares represented by
the Certificate(s), to receive in the FHP Merger the Series A Merger
Consideration whether or not the Series A Amendment is approved and waive your
rights to (1) exercise Special Conversion Rights; (2) receive As-If-Converted
Merger Consideration; and (3) convert FHP Preferred Shares into shares of Common
Stock of FHP. Further, you irrevocably agree not to gift, sell, hypothecate or
in any other manner transfer such FHP Preferred Shares to any person who does
not expressly accept such stock subject to such Irrevocable Election and agree
to be bound thereby. Notwithstanding the foregoing, the restrictions imposed by
this Irrevocable Election shall lapse if the Reorganization Agreement shall
terminate in accordance with its terms prior to the Effective Time.

D. FAILURE TO MAKE EFFECTIVE IRREVOCABLE ELECTION

If you fail to make an effective Irrevocable Election, or if your
Irrevocable Election is deemed by the Irrevocable Election Agent or FHP to be
defective in any way, or if your Form of Irrevocable Election is not accompanied
by your Certificates (unless Box C (Guaranty of Delivery) has been properly
completed and such Certificates are received by the Irrevocable Election Agent
by the Guaranteed Delivery Deadline), you will not receive the Series A Merger
Consideration unless the Series A Amendment is approved and the FHP Merger is
consummated. See "The Mergers and Related Transactions--Merger
Consideration--FHP--Irrevocable Election by the FHP Preferred Stockholders" in
the Joint Proxy Statement/Prospectus.

E. SPECIAL CONDITIONS

(1) ELECTION IRREVOCABLE. An Irrevocable Election may not be revoked by
the person or persons making such election, or any heir, successor or assign
thereof.

(2) NULLIFICATION OF ELECTION. All Forms of Irrevocable Election will be
void and of no effect if the FHP Merger is not consummated and the
Reorganization Agreement is terminated, and Certificates submitted therewith
shall be promptly returned to the persons submitting the same.

(3) SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of
record of FHP Preferred Shares who hold such shares as nominees, trustees or in
other representative or fiduciary capacities (a "Representative") may submit one
or more Forms of Irrevocable Election covering the FHP Preferred Shares held by
such Representative on behalf of the beneficial owners for whom the
Representative is making an Irrevocable Election, provided, that such
Representative certifies that each such Form of Irrevocable Election covers all
the FHP Preferred Shares held by such Representative for a particular beneficial
owner as to which such owner has made an Irrevocable Election. Any
Representative who makes an Irrevocable Election may be required to provide the
Irrevocable Election Agent with such documents and/or additional certifications,
if requested, in order to satisfy the Irrevocable Election Agent that such
Representative holds such FHP Preferred Shares for a particular beneficial owner
of such shares. If any shares held by a Representative are not covered by an
effective Form of Irrevocable Election, the beneficial owner of such shares will
not receive the Series A Merger Consideration unless the Series A

8
<PAGE>
Amendment is approved. See "The Mergers and Related Transactions--Merger
Consideration--FHP-- Irrevocable Election by the FHP Preferred Stockholders" in
the Joint Proxy Statement/Prospectus.

F. GENERAL

(1) EXECUTION AND DELIVERY. In order to make an effective Irrevocable
Election, you must correctly fill in the Execution Section of the Form of
Irrevocable Election. After dating and signing it, you are responsible for its
delivery, accompanied by all Certificates (or a proper Guaranty of Delivery of
such Certificates in Box C pursuant to Instruction A), to the Irrevocable
Election Agent at the address set forth on the front of this Form of Irrevocable
Election by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS
FORM OF IRREVOCABLE ELECTION. HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF
YOU CHOOSE TO USE THE MAIL, IT IS RECOMMENDED THAT YOU USE REGISTERED MAIL,
RETURN RECEIPT REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES.
DELIVERY OF STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH
RESPECT TO SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY
RECEIVED BY THE IRREVOCABLE ELECTION AGENT.

(2) SIGNATURES. Except as otherwise permitted below, you must sign this
Form of Irrevocable Election exactly the way your name appears on the face of
your Certificates. If the shares are owned by two or more persons, each must
sign exactly as his or her name appears on the face of the Certificates.

(3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. Neither FHP nor the
Irrevocable Election Agent will be under any obligation to notify you or anyone
else that the Irrevocable Election Agent has not received a properly completed
Form of Irrevocable Election or that any Form of Irrevocable Election submitted
is defective in any way.

Any and all disputes with respect to an Irrevocable Election (including but
not limited to matters relating to the Election Deadline, time limits, defects
or irregularities in the surrender of any Certificate, and effectiveness of any
Irrevocable Election) will be resolved by FHP and its decision will be
conclusive and binding on all concerned. FHP may delegate this function to the
Irrevocable Election Agent in whole or in part. Each of FHP or the Irrevocable
Election Agent shall have the absolute right in its sole discretion to reject
any and all Forms of Irrevocable Election and surrenders of Certificates which
are deemed by either of them to be not in proper form or to waive any immaterial
irregularities in any Form of Irrevocable Election or in the surrender of any
Certificates. Surrenders of Certificates will not be deemed to have been made
until all defects or irregularities that have not been waived have been cured.

(4) RECEIPT OF PAYMENT. After consummation of the FHP Merger, you will
receive a Letter of Transmittal from the Exchange Agent. Please fill out the
Letter of Transmittal in accordance with its instructions and return it to the
Exchange Agent. The Irrevocable Election Agent will transmit your Certificates
to the Exchange Agent on your behalf.

(5) LOST CERTIFICATES. If you are not able to locate your Certificate(s)
representing FHP Preferred Shares, you should contact American Stock Transfer &
Trust Company, FHP's transfer agent, at (718) 921-8206. In such event, the
transfer agent will forward additional documentation which the stockholder must
complete in order to effectively surrender such lost or destroyed
Certificate(s). There will be a cost to replace lost Certificates.

(6) QUESTIONS AND REQUESTS FOR INFORMATION OR ASSISTANCE. If you have any
questions or need assistance to complete this Form of Irrevocable Election, or
if you wish to obtain additional copies of the Form of Irrevocable Election or
the Joint Proxy Statement/Prospectus, please contact the Irrevocable Election
Agent at (718) 921-8206.