CUNDILL VALUE & CUNDILL SECURITY FUND'S
PETER CUNDILL & TIM MCELVAINE
(continued from preceding page)

OID: Why so cheap? Is it a dog?
   McElvaine: Quite the contrary. Here are Chateau's sales, earnings and returns since 1991:

Fiscal		Earnings	Earnings	Book	Return
Year1	Revenues	Pretax	After tax	Value2	on Equity3
1991	147.5	7.8	4.0	21.3	18.8%
1992	150.8	(6.5)	(5.5)	25.3	(21.7)
1993	156.9	8.6	4.5	20.1	22.4
1994	150.3	11.8	7.0	24.9	28.1
1995	159.8	7.8	4.6	31.8	14.5
1996	142.0	3.0	1.5	35.8	4.2
Avg.					11.0%
Avg. excluding 1992					17.6%

¹Fiscal year ending January 31st.
²Beginning of year book value.
³Return on beginning of year book value.

OID: So, in effect, it was the lousy 1996 results and the overall pessimism about retailers in general that made their stock crater?
   McElvaine: That's the way it looks to us. As you see, last year was a difficult one for Chateau. As I mentioned, it was difficult for retailers generally in North America -- particularly in women's apparel. And Canadian retailers suffered even more than those in the U.S. However, even though Chateau had a terrible year, notice that they still managed to make money.

OID: Unlike 1992 where they lost over 20% on equity.
   McElvaine: That's right. But that was only because they went into the U.S. and lost a ton of money. And they took the write-downs related to that misadventure in 1992. However, those are definitely discontinued operations.
   Actually, the fact that they wrote their assets down and renewed their focus on Canada is, if anything, a virtue in our book. In any event, it wasn't their core business.

OID: We noticed.
   McElvaine: One reason is that cash is a little like a spring because it goes up and down depending on your inventory position throughout the year. So it's difficult to really know what your net invested assets are.
   But aside from the years of their misadventures in the U.S. and last year, they've historically earned an ROE in the teens. And they've even earned that return while they were carrying around much more capital than they needed. So we don't think they're dogs by any means.

OID: Even if they do seem to have a recent history, at least, of nonrecurring problems that recur...
   McElvaine: That may be. But, again, net of cash, we're only paying about C$3.50 per share -- or about C$16 million -- for a business that could earn as much as C$7 million. And that's fine with us. In that case, we don't mind if it's cyclical. We'll just wait it out -- or at least we will if we think that the company has staying power.
   And because their book value is up around $7.80, if they earn a 15% return on equity, then Chateau would have earnings north of $1.

OID: Actually more like $1.17, but who's counting...
   McElvaine: And they'll pay dividends of 30¢ this year. So we're picking up a 6% dividend while we wait.

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