June 30, 1997
__________________________________
Special Situations Second
Fund III, L.P. Quarter
Report
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1997
(Unaudited)
<TABLE>
<S> <C>
ASSETS - NOTE 2
Investments, at value (cost $117,513,640) $ 146,482,417
Cash and cash equivalents 7,968,744
Receivable for investments sold 9,421,576
Other assets 44,542
--------------
Total Assets $ 163,917,279
--------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Payable for Units repurchased - Note 4 $ 2,020,703
Payable for investments purchased - Note 2 2,303,872
Securities sold short, at value 4,814,621
(proceeds $4,811,328)-Note 11
Accrued expenses 127,127
Administrator's fee payable - Note 7 266,471
------------
Total Liabilities $ 9,532,794
-------------
Partners' Capital - Note 1,3 and 4
Limited partners $ 142,513,911
Corporate general partner 7,557,729
Individual general partners 4,312,845
--------------
Total Partners' Capital $ 154,384,485
--------------
Total Liabilities and Partners' Capital $ 163,917,279
--------------
Net asset value per Limited Partners' Unit $ 25,000
--------------
</TABLE>
__________________________________________________________________________
See the accompanying Notes to the Financial Statements.
1
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
(Unaudited)
<S> <C> <C>
Shares Common Stocks Value
- --------------------------------------------------------------------------
75,000 AccelGraphics, Inc, $ 309,375
589,600 Accom, Inc.(a) 939,675
89,597 Accuhealth, Inc. (Restricted) (a) 179,194
122,800 Accuhealth, Inc.(a) 429,800
63,000 Acorn Products, Inc. 882,000
179,000 Alteon Inc. 755,165
137,300 AMES Department Stores, Inc. 1,330,094
233,200 AMX Corporation 1,340,900
80,000 Analytical Surveys, Inc. 1,100,000
126,300 Applied Imaging Corp. 789,375
326,500 Applix, Inc. 2,265,094
105,500 Aramex International Limited 1,028,625
63,500 Asahi/America, Inc. 396,875
210,900 Aviation Distributors, Inc. 1,502,662
220,400 Bally Total Fitness Holding Corporation 2,038,700
432,080 Barringer Technologies, Inc. (a) 6,481,088
163,850 Biocircuits Corporation (a) 133,128
255,000 Biocircuits Corporation (Restricted) (a) 207,187
160,200 BioTransplant Incorporated 1,081,350
148,000 Blonder Tongue Laboratories, Inc. 1,165,500
40,700 Brookstone, Inc. 345,950
98,200 Byron Preiss Multimedia Company, Inc.(a) 122,750
185,500 C*ATS Software, Inc. 834,750
50,300 Calypte Biomedical Corporation 226,350
285,714 Cardiac Control Systems, Inc. (a) 294,643
14,325 Cardiac Control Systems, Inc. (Restricted)(a) 14,773
186,000 Castelle 883,500
208,600 Catalyst International, Inc. 808,325
127,551 Celerity Systems, Inc. 250,000
175,500 Ceradyne, Inc. 811,687
593,749 Chase Packaging Corporation 44,531
455,000 Check Technology Corporation (a) 3,298,750
305,800 Chic By H.I.S., Inc. 1,987,700
84,000 Collaborative Clinical Research, Inc. 588,000
136,500 Colonial Downs Holdings, Inc. 887,250
26,200 Comdial Corporation 219,425
242,200 Commander Aircraft 484,400
303,950 Concentra Corporation 2,203,637
2,200,000 Contempri Homes, Inc. 68,750
800,000 Country Wide Transport Services, Inc. (Restricted) 400,000
_________________________________________________________________________
See the accompanying Notes to the Financial Statements.
2
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
(Unaudited)
Shares Common Stocks (Continued) Value
- ---------------------------------------------------------------------------
164,062 CPAC, Inc. 1,989,258
235,900 CytoTherapeutics, Inc. 1,267,962
108,650 Data Translation, Inc. 380,275
107,900 Donnelley Enterprise Solutions Incorporated 1,119,462
68,700 Edelbrock Corporation 1,477,050
333,100 Educational Insights, Inc. 582,925
211,800 Ellett Brothers, Inc. 1,059,000
110,700 Eltek Ltd., 269,831
400,500 EP MedSystems, Inc. 1,401,750
150,000 EPIX Medical, Inc. 1,200,000
164,500 EZCORP, Inc. 1,645,000
525,900 Film Roman, Inc. 920,325
117,500 First Sierra Financial, Inc. 1,321,875
327,240 Fourth Shift Corporation 1,554,390
79,500 Fusion Medical Technologies, Inc. 278,250
264,700 Gensym Corporation 1,191,150
321,300 Hemagen Diagnostics, Inc. 682,762
219,800 Image Guided Technologies, Inc. 1,236,375
293,000 Intelligent Medical Imaging, Inc. 1,941,125
226,500 Intensiva Healthcare Corporation 1,804,922
280,400 IRIDEX Corporation 2,558,650
763,000 Jos. A. Bank Clothiers, Inc. (a) 2,956,625
47,016 Lernout and Hauspie Speech Products N.V. 1,287,063
162,000 Lincoln Logs, Ltd.(a) 144,281
320,000 Logal Educational Software and Systems Ltd. 860,000
82,500 Mechanical Dynamics, Inc. 598,125
105,500 Medallion Financial Corporation 2,017,687
189,600 Media 100, Inc. 876,900
281,800 Medical Graphics Corporation (a) 1,056,750
375,000 Mednet International, Ltd. 1,627,500
207,700 MFC Bancorp Ltd. 1,788,167
455,000 MicroFrame, Inc.(a) 796,250
166,700 Mizar, Inc. 625,125
86,250 Movado Group, Inc. 2,199,375
13,000 NeoMedia Technologies, Inc. 98,312
125,000 Norland Medical Systems, Inc. 1,359,375
136,700 NovAtel Inc, 1,042,337
289,000 Oakhurst Capital, Inc.(a) 361,250
58,500 Optical Sensors, Inc. 277,875
69,200 OrCad, Inc. 761,200
235,600 Osteotech, Inc. 2,473,800
250,000 PC Etcetera, Inc.(a) 93,750
___________________________________________________________________________
See the accompanying Notes to the Financial Statements.
3
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
(Unaudited)
Shares Common Stocks (Continued) Value
- ---------------------------------------------------------------------------
205,195 PC Etcetera, Inc. (Restricted)(a) -
64,500 Penn Treaty American Corp. 1,975,312
125,000 Photon Dynamics, Inc. 812,500
221,900 Photran Corporation 887,600
205,000 Planning Sciences International plc 1,178,750
198,900 Platinum Entertainment, Inc. 1,342,575
17,800 Premenos Technology Corp. 151,300
359,000 PREMIS Corporation 729,219
163,600 Raytel Medical Corporation 1,881,400
156,500 Ringer Corporation 224,969
40,000 Robocom Systems Inc. 282,500
303 Royal International Optical Corporation 227,250
184,700 RSI Systems, Inc.(a) 369,400
758,500 Silicon Valley Research, Inc. 758,500
862,069 Silicon Valley Research, Inc. (Restricted) 663,793
129,500 SL Industries, Inc. 1,262,625
371,500 SPACEHAB, Incorporated 3,297,062
658,100 Specs Music (a) 544,989
187,500 STAR Telecommunications, Inc. 2,484,375
289,000 Steel City Products, Inc. 17,340
94,000 Steiner Leisure, Inc. 2,620,250
275,500 Storage Dimensions, Inc. 1,515,250
105,500 Strategia Corporation 1,463,812
168,300 Superconductor Technologies, Inc. 483,862
49,500 Telesoft Corp. 185,625
187,500 TGC Industries, Inc.(a) 210,937
150,000 T-HQ, Inc. 1,650,000
253,800 Trans World Entertainment Corp. 4,378,050
118,366 Transact Technologies Incorporated 1,671,920
257,500 Transcrypt International, Inc. 2,864,687
151,200 Travis Boats & Motors, 1,984,500
153,100 Tridex Corporation 516,712
92,100 U.S. Energy Systems, Inc. (a) 425,962
350,600 ULTRADATA Corporation 745,025
140,000 Unison Software, Inc. 980,000
400,603 Versant Object Technology 2,403,618
217,500 Virus Research Institute, Inc. 1,468,125
662,600 White Pine Software, Inc. 1,739,325
154,000 Zindart Limited 1,578,500
200,200 Zoll Medical Corporation 1,501,500
----------
137,794,161
___________________________________________________________________________
See the accompanying Notes to the Financial Statements.
4
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
(Unaudited)
Shares Preferred Stocks Value
__________________________________________________________________________
425,000 Accuhealth, Inc. convertible preferred (a) $ 1,487,500
160,764 Celerity Systems, Inc. Series A convertible preferred 250,792
79,296 Celerity Systems, Inc. Series B convertible preferred 155,420
57,500 Tescorp, Inc. convertible preferred 251,562
150,000 TGC Industries, Inc. (a) 1,237,500
----------
3,382,774
----------
Principal Corporate Bonds Value
___________________________________________________________________________
150,000 Lincoln Logs, Ltd. convertible subordinated, $ 667,995
debentures, due 6/30/98 (a)
Warrants Warrants Value
- ---------------------------------------------------------------------------
27,500 Barringer Technologies, Inc. 5/9/98 (a) $ 358,875
229,167 Barringer Technologies, Inc. 5/9/2000 (a) 2,990,626
153,125 Biocircuits Corporation 10/20/97 (a) 7,656
255,000 Biocircuits Corporation (Restricted) 1/2/99 25,500
153,500 Bryon Preiss Multimedia Company, Inc. 5/11/99 (a) 52,766
27,731 Cardiac Control Systems, Inc. (Restricted) 3/31/99 --
127,551 Celerity Systems, Inc. Series B 3/31/97 --
43,125 Children's Broadcasting Corporation 1/8/2000 431
733,334 Contempri Homes, Inc. 4/11/98 --
160,644 IBAH, Inc. 8/10/2000 197,592
25,500 Marine Management Systems, Inc. 4/8/02 14,344
162,200 NeoMedia Technologies, Inc. 11/25/2001 283,850
75,000 Prologic Management Systems, Inc. 3/14/99 14,062
862,069 Silicon Valley Research, Inc. 4/15/2000 86,207
70,000 Streicher Mobile Fueling, Inc. 12/11/2000 47,031
150,000 U.S. Energy Systems, Inc. 12/2/2000 187,500
---------
4,266,440
---------
___________________________________________________________________________
See the accompanying Notes to the Financial Statements.
5
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
(Unaudited)
Units Units Value
___________________________________________________________________________
133,621 MicroFrame, Inc. $ 300,647
140,800 Boulevard Investment Group 70,400
----------
371,047
Total Investments $ 146,482,417
------------
------------
Securities Sold Short
Shares Common Stock Value
- ---------------------------------------------------------------------------
20,000 ABR Information Services, Inc. $ 580,000
26,500 Circuit City Stores, Inc. 942,406
1,000 Comshare Incorporated 12,375
13,200 Cylink Corporation 150,150
42,500 HA-LO Industries, Inc. 1,004,066
7,000 Health Systems Design Corporation 46,375
17,000 Learning Company, Inc. 157,250
6,000 Morrow Snowboards, Inc. 28,125
20,500 National TechTeam, Inc. 438,187
18,500 Pegasystems, Inc. 580,437
10,500 Precision Response Corporation 173,250
27,000 Skyes Enterprises Incorporated 702,000
----------
Total Securities Sold Short 4,814,621
----------
----------
</TABLE>
___________________________________________________________________________
(a) Affiliated company under the Investment Company Act of 1940, inasmuch
as the Fund owns more than 5% of the voting securities of the issuer.
See the accompanying Notes to the Financial Statements.
6
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
___________________________________________________________________________
<TABLE>
<S> <C>
INCOME
Net realized gains on investments $ 14,047,288
Net unrealized loss on investments (3,511,565)
-----------
Net gains on investment portfolio 10,535,723
Interest 250,290
Dividends 115,235
----------
Total income $ 10,901,248
----------
----------
EXPENSES
Administrator's fee - Note 7 $ 534,907
Professional Fees 114,500
Independent general Partners' fees 15,000
Other 52,446
----------
Total expenses 716,853
------------
Net income $10,184,395
------------
------------
</TABLE>
___________________________________________________________________________
See the accompanying Notes to the Financial Statements.
7
SPECIAL SITUATIONS FUND III,L.P.
(A Limited Partnership)
STATEMENT OF CHANGES IN PARTNERS' CAPTIAL
(Information Subsequent to December 31, 1996 is Unaudited)
___________________________________________________________________________
<TABLE>
Per Limited Corporate Individual
Partners' Limited General General
Unit Partners Partner Partners Total
________________________________________________________
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1996:
BALANCE
DECEMBER 31, 1995 $ 93,588,614 5,966,439 5,670,653 105,225,706
Capital contributions 7,679,291 - 929 7,680,220
Transfers - (210,828) 210,828 -
Allocation of net income:
Corporate General
Partner (20%) - 10,686,440 - 10,686,440
Partners (80%) 38,255,548 2,337,410 2,152,804 42,745,762
Repurchases (5,370,628)(13,500,000)4,000,000)(22,870,628)
----------- ----------- -------- -----------
BALANCE,
DECEMBER 31, 1996 $25,000 134,152,825 5,279,461 4,035,214 143,467,500
-------
SIX MONTHS ENDED
JUNE 30, 1997
Capital contributions 2,753,293 - 2,753,293
Transfers - (50,000) 50,000 -
Allocation of net income:
Corporate General
Partner (20%) - 2,036,879 - 2,036,879
Partners (80%) $ 1,393 7,628,496 291,389 227,631 8,147,516
-------
Repurchases (2,020,703) - - (2,020,703)
----------- ----------- ---------- ----------
BALANCE,
JUNE 30, 1997 $25,000 142,513,911 7,557,729 4,312,845 154,384,485
-------
See Note 4 for changes in Units outstanding.
</TABLE>
___________________________________________________________________________
See the accompanying Notes to the Financial Statements.
8
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1996 is Unaudited)
NOTE 1- GENERAL:
Special Situations Fund III, L.P. (the "Fund") was organized under
the Delaware Revised Uniform Limited Partnership Act on October
18, 1993, and commenced investment operations on January 1, 1994.
The Fund is a closed-end interval fund registered under the
Investment company Act of 1940. Commencing December 31, 1994, the
Fund, as an interval fund, allows investors to semi-annually
redeem or acquire units of the Fund ("Units") (see Note 4). The
Fund will continue until December 31, 2010 unless further extended
or sooner terminated as provided for in the Agreement of Limited
Partnership (the "Agreement").
The Agreement provides for not less than three "Individual General
Partners" and a "Corporate General Partner". The General Partners,
as a group, must own not less than one percent (1%) of the Fund's
outstanding Units.
The Corporate General Partner and Investment Adviser is MGP
Advisers Limited Partnership ("MGP"), of which the General Partner
is AWM Investment Company, Inc. ("AWM"). Austin W. Marxe, an
Individual General Partner of the Fund and a limited partner of MGP
owns directly and indirectly a majority of MGP and AWM. Mr. Marxe
is primarily responsible for managing the Fund's investments and
performing certain administrative services on its behalf.
The Fund seeks long-term capital appreciation by investing
primarily in equity securities and securities with equity features
of publicly traded companies which possess a technological, market
or product niche, which may be, for various reasons, undervalued,
or with prospects of going private or being acquired.
NOTE 2- ACCOUNTING POLICIES:
Securities traded on a securities exchange or on the NASDAQ System
are valued at the last sales price. Other securities traded in the
over-the-counter market are valued at the average of the bid and
asked prices on the last trading day. Securities for which market
quotations are not available are valued at fair value as determined
in good faith by the Individual General Partners. Securities
transactions are recorded on trade date. Realized gains and losses
on sales of securities are determined using the specific
identification cost method. Dividend income is recorded on the ex-
dividend date, and interest income is recorded on the accrual
basis.
9
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1996 is Unaudited)
NOTE 2- ACCOUNTING POLICIES (CONTINUED):
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents include cash held in money market funds.
NOTE 3- ALLOCATION OF ACCOUNTING PROFITS AND LOSSES:
Profits are allocated; first, to MGP to the extent of any previous
net losses allocated to MGP in excess of the other Partners'
capital balances; next, to the Partners in proportion to the number
of Units held by each to the extent of net losses previously
allocated to them; and, thereafter, 80% to the Partners in
proportion to the number of Units held by each and 20% to MGP.
Losses are allocated to the Partners in proportion to the number of
Units Held by each, provided, however, that losses in excess of an
Individual General Partner's or a Limited Partner's capital balance
will be allocated to MGP.
NOTE 4- PARTNER CAPITAL ACCOUNT TRANSACTIONS:
All net income allocated to Partners will be reinvested. In order
to maintain a $25,000 price per Unit, the number of Units held by
each Partner at the close of each fiscal period (generally June 30
and December 31, commencing December 31, 1994), is adjusted to
equal the Partner's capital account divided by $25,000.
As of each fiscal period, the Fund will offer to repurchase at
least 10% and no more than 25% of the outstanding Units. The
repurchase request deadline will generally be June 16, and December
17, of each year.
10
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1996 is Unaudited)
NOTE 4- PARTNER CAPITAL ACCOUNT TRANSACTIONS (CONTINUED):
In May 1997, the Fund offered to repurchase up to 584.8832 Units
(10% of its outstanding Units at June 30, 1997) at $25,000 per
Unit. 80.8281 Units were tendered for repurchase.
The Fund also has the right to sell additional Units at each fiscal
period. As of July 1, 1997, the Fund sold 79.6 additional Units at
$25,000 each.
<TABLE>
<S> <C> <C> <C> <C>
Corporate Individual
Limited General General
Partners Partner Partner Total
__________ __________ ____________ _______
Balance, December 31, 1995 3,743.5445 238.6575 226.8262 4,209.0282
Additional Units sold 307.1716 - 0.0372 307.2088
Transfers - (8.4331) 8.4331 -
Allocation of additional Units 1,530.2219 520.9540 86.1121 2,137.2880
Repurchases (214.8251) (540.0000)(160.0000)(914.8251)
----------- --------- --------- ---------
Balance, December 31, 1996 5,366.1129 211.1784 161.4086 5,738.6999
Additional Units sold 110.1317 - - 110.1317
Transfer - (2.0000) 2.0000 -
Allocation of additional Units 305.1399 93.1307 9.1052 407.3758
Repurchases (80.8281) - - (80.8281)
----------- ---------- --------- --------
Balance, June 30, 1997 5,700.5564 302.3091 172.5138 6,175.3793
----------- --------- -------- ---------
</TABLE>
11
SPECIAL SITUATIONS FUND III,L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1996 is Unaudited)
NOTE 5- PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities for the six months ended June 30,
1997 aggregated $96,212,355 and $97,761,613, respectively.
NOTE 6- INCOME TAXES:
No provision for income taxes has been made in the accompanying
financial statements as each Partner is individually responsible
for reporting income or loss based upon the respective share of the
Fund's income and expenses reported for income tax purposes.
NOTE 7- RELATED PARTY TRANSACTIONS:
AWM is the administrator of the Fund. The administrator's fee is
computed monthly at an annual rate of .75% of the average net
assets.
The Fund pays each Independent General Partner an annual fee of
$10,000.
NOTE 8- SUPPLEMENTARY FINANCIAL INFORMATION:
<TABLE>
<S> <C> <C> <C> <C>
Six Months Years Ended
Ended June 30, December 31,
--------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Ratio of total expenses to average net .99% * 1.00% 1.18% 1.19%
assets
Ratio of net income to average net 14.12%* 39.58% 38.09% 11.18%
assets
Portfolio turnover rate 70.86% 228.0% 245.2% 233.4%
Average commission rate paid $.0378 $.0389 (a) (a)
*Annualized
(a) This disclosure is not required prior to 1996
12
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1996 is Unaudited)
NOTE 9- RETURN ON PARTNER INVESTMENT:
At June 30, 1997, the value of a $25,000 investment made at each
respective subscription date is as follows:
</TABLE>
<TABLE>
<S> <C>
Subscription Date Value
----------------- -----
January 1, 1994 $54,722
January 1, 1995 $50,027
July 1, 1995 $44,297
January 1, 1996 $36,941
July 1, 1996 $27,887
January 1, 1997 $26,393
</TABLE>
NOTE 10- CASH CREDIT RISK CONCENTRATION
The Fund maintains cash balances in a brokerage account with a
broker who is a member of the New York Stock Exchange.
NOTE 11- SECURITIES SOLD SHORT:
The Partnership is subject to certain inherent risks arising from
its activities of selling securities short. The ultimate cost to
the Partnership to acquire these securities may exceed the
liability reflected in the financial statements. In addition, the
Partnership is required to maintain collateral with the broker to
secure these short positions.
13
