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from Outstanding Investor Digest's December 31, 1996 edition


MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding page)


   Garea: What Foundation has done very successfully - and this is what most people couldn't comprehend or accept that it could happen - is to apply the concepts and techniques of managed care (which has been more of an acute care phenomenon) to the workers' comp business. So they've had a dramatic effect on the health care costs of workers' compensation - the claims costs, etc. And that's allowed them to maintain profit margins during a period when the workers' comp business was under pressure. And now when that premium pressure has sort of abated, they've also been able to grow that business dramatically because they have a much better cost structure.

OID: How much overlap is there geographically?
   Garea: The biggest overlap is in California. They're both California HMOs. Plus there's some overlap in Colorado and the Northwest. Also, Foundation has some CHAMPUS contracts - which are a government contract.

OID: And that stands for Civilian Health and Medical Program of the Uniform Service.
   Garea: That's right. That's the government healthcare program for the military. And Foundation's CHAMPUS program is already in Arizona, Texas and places like that. So that foothold will help Health Systems be more effective in their development of their HMO outside of that program in those places. So I think that's a plus.
   Other than that, there's the usual corporate overlap. You don't need two of everything. So margins will go up. And their SG&A as a percentage of sales should go down.


THERE WILL BE COMPETITION AMONG HMOS -
BUT PROBABLY RATIONAL AND MARKET-SPECIFIC.

OID: Health Systems' fundamentals - even before adding back goodwill amortization - are striking. The adjusted price-to-sales ratio, for example, is tiny - especially given that it's historically managed a 30%+ ROE.
   Garea: Absolutely.

OID: On the other hand, the price-to-book here prior to the acquisition must be up around 3-1/2 times.
   Garea: Book value in the case of HMOs is not a

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