February 17, 2004

Cannell Returns 15% of Capital across All Funds

SAN FRANCISCO, Calif. (HedgeWorld.com)-Cannell Capital LLC, investment adviser for a stable of long/short hedge funds with a record of corporate activism, is distributing 15% of the capital of all of its funds to investors.

This month's distribution marks the third time that the 14-year-old fund has returned money. The first such occasion took place in 2001, when Cannell returned US$18 million, or 10%, to investors in the Cuttyhunk Fund Ltd.

The second distribution occurred in 2002, when Cannell implemented stricter redemption policies in order to encourage US$132 million in redemptions from certain foreign investors. It also redeemed another US$55 million in regular redemptions at that time.

According to managing member J. Carlo Cannell, this third distribution will be pro rata, except for certain employees and members of the board of advisers. The advisers keep their money in as a benefit for their assistance and at their option. Each member of that board has availed himself of that option.

He is returning the capital because "the mortality rate of hedge funds with more than a billion dollars of assets under management is very high," and he wants to keep his own at a size appropriate to his strategy.

"I think about that every time we rise to that level through retained earnings. I would like to think that we practice prudence over greed," he added.

He said that his strategy involves a "low analyst ratio." The firm likes to buy companies followed by few sell-side analysts in order to trade in areas of imperfect information dissemination. "If there are 25 brokerage firms publishing reports on a company, my eyes glaze over. What is the edge?"

According to Mr. Cannell only 226 companies enjoy coverage from 20 or more sell-side analysts. Prices for such firms with high analyst ratios are more likely to move in advance of unexpected earnings reports than companies with low analyst ratios. At the end of 2003, 57% of the positions held long were covered by fewer than three analysts.

Investment in Analytical Surveys Inc.

In April 2002, one Cannell fund purchased US$2 million in senior secured convertible debentures issued by Analytical Surveys Inc., San Antonio, Texas. This was, or recently had become, an example of a company that didn't excite analysts. Although there had been a brief flurry of interest in ASI by some analysts in late 1999 and early 2000, it hadn't lasted.

ASI is a provider of customized data conversion and digital mapping services. It used Cannell's 2002 investment for working capital and to extinguish bank debt.

In November 2003, Cannell's fund took another step and converted US$300,000 of its debenture position into ASI common stock at a price of US$1.24 a share, giving it approximately 24% of the issuer's common stock. The company prevailed in an important arbitration ruling in December, and ASI's common stock reached US$3.72 a share by early February 2004.

CFaille@HedgeWorld.com

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