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

OID: It sounds like you'd give Reitman's a high grade for capital allocation. What kind of grade would you give them as operating managers?
   McElvaine: Many people would correctly suggest that they're not the most dynamic retailer in Canada...

OID: Only one of their many virtues, I imagine.
   McElvaine: Exactly. You don't have to have a wonderful concept to have a neat little business. In fact, a retailer can be a very good business -- especially if they're not in the midst of rampant expansion.
   There are many segments within the retail industry. Most retail analysts may tend to have a little higher income than most retail customers. So they may be more inclined to like exciting concepts. In contrast, the typical customer might prefer a better price to a flashy store. Or, at least, I think that's true of Reitman's customers.
   And I know I certainly prefer it as a shareholder.

OID: Speaking of shareholders, what kind of returns has Reitman's earned on shareholder equity?
   McElvaine: Their returns within their retail segment are quite high. Here's a breakdown of their sales, earnings and returns in that segment for their last five fiscal years (ending January 31st):

Fiscal		Earnings	Earnings	Book	Return
Year1	Revenues	Pretax	After tax	Value2	on Equity3
1992	298.6	10.1	7.0	21.5	32.8%
1993	317.9	13.3	9.4	14.8	63.8
1994	339.5	14.0	9.7	20.7	47.0
1995	333.3	8.3	6.3	15.0	41.7
1996	349.9	(0.6)	(0.6)	28.6	(2.2)
Avg.					31.7%

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

   McElvaine: As you can see, for the last five years, that segment's return on beginning of year equity has averaged more than 30%.

OID: Wow.
   McElvaine: And that's even including 1996 -- which was anything but typical. Their retail segment nearly achieved break-even even then. It only lost $600,000 in a horrible year for the industry in general.

OID: Are those kinds of returns -- or anything approaching them -- sustainable?
   McElvaine: I have no idea. We look at it differently. As of January 31, 1996, Reitman's had working capital of C$34 million, payables of C$27 million and capital assets of C$30 million. So assets invested in that segment totaled about C$37 million. But, as I mentioned, netting out their cash and marketable securities and their stake in NetStar, we're effectively buying it for only C$27 or C$28 million. So we're not even paying book value for the business.

OID: Net of cash, you're paying about 75% of book.
   McElvaine: The stock market's appraisal of Reitman's business is less than the net assets it has in the business -- as you say, 25% less. Therefore, our returns are higher.
   In other words, even if they were only to earn 10% on equity going forward, we'd be fine -- because that would be equivalent to someone buying a company at book value that was earning 13.3% on equity.

OID: In the first year at least.
   McElvaine: That's right. However, my point is that even though Reitman's return on beginning equity in that segment has averaged more than 30% in the last five years, by no means are we counting on its continuation.

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