1998
__________________________________
Special Situations Annual
Fund III, L.P. Report
SPECIAL SITUATIONS FUND III, L.P.
----------------------------------
INDEX TO ANNUAL REPORT
DECEMBER 31, 1998
____________________________________________________________________
<TABLE>
<C> <S>
PAGE
----
Independent auditors' report 1
Statement of financial condition 2
Portfolio of investments 3
Statement of operations 10
Statement of changes in partners' capital 11
Notes to the financial statements 12
</TABLE>
INDEPENDENT AUDITORS' REPORT
-----------------------------
TO THE PARTNERS OF
SPECIAL SITUATIONS FUND III, L.P.:
We have audited the accompanying statement of financial condition of
Special Situations Fund III, L.P., including the portfolio of investments, as
of December 31, 1998, the related statement of operations for the year then
ended and the statement of changes in partners' capital for each of the two
years in the period then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Special Situations
Fund III, L.P. at December 31, 1998, the results of its operations for the year
then ended and the changes in its partners' capital for each of the two years
in the period then ended, in conformity with generally accepted accounting
principles.
ANCHIN, BLOCK & ANCHIN LLP
New York, New York
February 9, 1998
1
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
<TABLE>
<C> <S>
ASSETS - NOTE 2
Investments, at fair value (cost $113,072,112) $ 131,753,608
Cash and cash equivalents 13,651,178
Receivable for investments sold 2,227,218
Other assets 75,140
----------------
Total Assets $ 147,707,144
----------------
----------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Payable for Units repurchased - Note 4 $ 7,600,334
Securities sold short, at fair value 3,239,460
(proceeds $4,522,398) Note 10
Payable forinvestments purchased - Note 2 1,699,810
Administrator's fee payable - Note 7 244,230
Accrued expenses 79,013
----------------
Total Liabilities $ 12,862,847
----------------
Partners' Capital- Notes 1,3 and 4
Limited partners $ 122,658,907
Corporate general partner 6,473,686
,ndividual general partners 5,711,704
----------------
Total Partners' Capital 134,844,297
----------------
Total Liabilities and Partners' Capital $ 147,707,144
----------------
----------------
</TABLE>
_____________________________________________________________________________
See the accompanying Notes to the Financial Statements.
2
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<C> <S> <S>
Shares Common Stocks Value
- -------------------------------------------------------------------------------
Aerospace 3.27%
171,500 Aviation General Inc. $ 514,500
371,500 SPACEHAB, Incorporated 3,900,750
---------
4,415,250
---------
Automotive 0.01%
289,000 Steel City Products, Inc. 14,450
---------
Biotechnology 2.63%
375,200 Anika Therapeutics, Inc. 2,016,700
40,300 ArQule, Inc. 198,981
266,800 Cell Therapeutics, Inc. 800,400
70,500 Tripos, Inc. 537,562
---------
3,553,643
---------
Broadcasting 0.70%
421,900 Accom, Inc. 263,687
440,200 Film Roman, Inc. (a) 687,812
---------
951,499
---------
Building Materials 0.02%
162,000 Lincoln Logs, Ltd. (a) 22,680
---------
Communications Products 0.94%
449,800 MicroFrame, Inc. (a) 1,265,062
---------
Component Equipment 0.28%
60,800 SeaChange International, Inc. 372,400
---------
Computer Equipment 3.86%
3,000 Artecon, Inc. 3,562
233,000 Blue Wave Systems, Inc. 815,500
380,600 Check Technology Corporation (a) 1,112,066
277,600 Media 100, Inc. 1,630,900
461,700 Netrix Corporation 1,096,537
189,000 Tridex Corporation (a) 543,375
---------
5,201,940
---------
_____________________________________________________________________________
See the accompanying Notes to the Financial Statements
3
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
Shares Common Stocks (Continued) Value
- -------------------------------------------------------------------------------
Computer Training 0.14%
56,899 Mentortech, Inc. $ 184,921
---------
Electronic Componets 6.36%
233,200 AMX Corporation 1,865,600
153,200 AstroPower, Inc. 1,474,550
393,579 Barringer Technologies, Inc.(a) 3,394,615
80,700 Frequency Electronics, Inc. 807,000
81,100 Energy Conversion Devices, Inc. 587,975
376,000 Stocker & Yale, Inc. (a) 446,500
---------
8,576,240
---------
Energy Services 0.04%
53,833 TGC Industries, Inc. (a) 53,833
---------
Gold Mining 0.91%
2,182,000 MK Gold Company (a) 1,227,375
---------
Healthcare Management 3.31%
373,900 Mednet International, Ltd. 459,897
495,000 Mednet International, Ltd. - Mercer 1,237,500
330,000 Physicians' Specialty Corp. 2,763,750
---------
4,461,147
---------
Healthcare-Specialized Products & Services 0.17%
223,529 Accuhealth, Inc. (a) 223,529
---------
Housewares 0.42%
22,200 Salton, Inc. 568,875
---------
Internet Services 0.90%
31,700 InfoSpace.com, Inc. 1,208,562
---------
Manufacturer-Consumer Products 1.40%
262,800 Zindart Limited 1,888,875
---------
Medical - Drugs 1.57%
556,267 Cubist Pharmaceuticals, Inc. 2,120,768
---------
______________________________________________________________________________
See the accompanying Notes to the Financial Statements.
4
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Shares Common Stocks (Continued) Value
- -------------------------------------------------------------------------------
Medical Devices & Equipment 14.91%
412,500 Aksys, Ltd. $ 1,778,906
934,200 Applied Imaging Corporation 1,985,175
156,325 Cardiac Control Systems, Inc. 46,897
324,100 EndoSonics Corporation 3,220,744
435,100 EP MedSystems, Inc. 1,686,012
490,200 Hemagen Diagnostics, Inc. (a) 390,628
425,700 Image Guided Technologies, Inc. (a) 53,212
697,700 IRIDEX Corporation 2,965,225
1,211,700 Laserscope, Inc. (a) 2,120,475
272,727 Medical Graphics Corporation (Restricted) 323,863
442,700 Optical Sensors Incorporated 608,712
273,200 Precision Optics Corporation 239,050
22,080 Schick Technologies, Inc. 223,560
367,300 Thoratec Laboratories Corporation 2,617,012
208,200 Zoll Medical Corporation 1,847,775
----------
20,107,246
----------
Medical Information Systems 2.48%
325,000 BioReliance Corporation 2,600,000
285,500 CIMA Labs Inc. 749,437
---------
3,349,437
---------
Medical-Drugs 1.55%
224,300 EPIX Medical, Inc. 2,088,794
---------
Paper-Packaging 0.03%
593,749 Chase Packaging Corporation 35,625
---------
Retail 14.88%
263,000 1-800 CONTACTS, INC. 4,734,000
127,700 CyberShop International, Inc. 1,452,587
194,700 EZCORP, Inc. 1,630,612
763,000 Jos.A Bank Clothiers, Inc. (a) 6,104,000
610,400 One Price Clothing Stores, Inc. 3,052,000
151,200 Travis Boats & Motors, Inc. 3,099,600
----------
20,072,799
----------
______________________________________________________________________________
See the accompanying Notes to the Financial Statements.
5
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Shares Common Stocks (Continued) Value
- -------------------------------------------------------------------------------
Savings & Loan 0.64%
323,300 Meritor Savings Bank $ 858,766
-------
Software 21.79%
304,800 ANSYS, Inc. 3,352,800
186,500 C*ATS Software, Inc. 1,398,750
90,588 Connect, Inc. 249,117
39,400 Emultek Ltd. 128,050
311,900 Enlighten Software Solutions, Inc. (a) 721,269
261,225 Enterprise Software, Inc. 1,306,125
768,800 Expert Software, Inc. (a) 1,561,625
393,240 Fourth Shift Corporation 1,769,580
311,300 Gensym Corporation 972,812
252,500 Mechanical Dynamics, Inc. 2,083,125
312,700 OrCad, Inc. 2,657,950
300,500 Rogue Wave Software, Inc. 2,629,375
810,000 Silicon Valley Research, Inc. 251,100
862,069 Silicon Valley Research, Inc. (Restricted) 267,241
71,800 Telescan, Inc. 655,175
257,800 Template Software, Inc. 1,152,044
59,400 TSR, Inc. 616,275
130,600 TSR, Inc. (Restricted) 1,354,975
528,900 ULTRADATA Corporation (a) 2,842,837
188,003 Versant Corporation (a) 411,257
472,500 Versant Corporation (Restricted) (a) 945,000
842,200 White Pine Software, Inc. (a) 2,060,500
---------
29,386.982
----------
Specialty Financial 4.30%
221,000 Medallion Financial Corporation 3,163,062
288,900 MFC Bancorp Ltd. 2,636,220
---------
5,799,282
---------
Technology CAD/CAM/CAE 1.90%
719,300 Spatial Technology, Inc. (a) 2,562,506
----------
_______________________________________________________________________________
See the accompanying Notes to the Financial Statements.
6
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Shares Common Stocks (Continued) Value
- -------------------------------------------------------------------------------
Telecommunication 0.80%
215,400 Corsair Communications, Inc. 1,077,000
---------
Transportation 2.24%
152,400 Aramex International Limited 1,752,600
845,000 Country Wide Transport Services, Inc. 1,267,500
---------
3,020,100
---------
Total Common Stocks 92.45% 124,669,586
-----------
Shares Preferred Stocks Value
_______________________________________________________________________________
Energy Services 0.28%
150,000 TGC Industrices, Inc. (a) $ 375,000
Healthcare-Specialized Products & Services 0.63%
425,000 Accuhealth, Inc. convertible preferred (a) 850,000
Medical Devices 0.99%
23,437 KeraVision, Inc. convertible preferred 1,341,768
---------
Total Preferred Stocks 1.90% 2,566,768
---------
Principal Corporate Bonds Value
_______________________________________________________________________________
Building Materials 0.11%
150,000 Lincoln Logs, Ltd., convertible subordinated, $ 150,000
debentures, due 6/30/98 (a)
Savings & Loan 0.83%
1,315,000 Westfed Holdings, Inc., convertible subordinated, 1,111,175
debentures, due 9/15/99 ---------
Total Corporate Bonds 0.94% 1,261,175
_______________________________________________________________________________
See the accompanying Notes to the Financial Statements.
7
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Warrants Warrants Value
- -------------------------------------------------------------------------------
Biotechnology 0.09%
226,900 Diacrin, Inc. 12/31/00 $ 113,450
----------
Broadcasting 0.00%
43,125 Children's Broadcasting Corporation 1/8/01 -
---------
Electronic Components 1.24%
229,167 Barringer Technologies, Inc. 5/9/00 1,527,396
200,000 Energy Conversion Devices, Inc. 7/31/01 143,760
---------
1,671,156
---------
Medical Devices & Equipment 0.02%
27,731 Cardiac Control Systems, Inc. 3/31/99 (Restricted) -
200,000 Hemagen Diagnostics, Inc. 2/28/01 28,125
-------
28,125
-------
Medical Information Systems 0.00%
1,100,000 LifeRate Systems, Inc. 11/14/07 -
1,100,000 LifeRate Systems, Inc. 11/14/07 (Restricted) -
-------
-
-------
Medical-Drugs 0.27%
233,334 Cubist Pharmaceuticals, Inc. 9/23/03 364,584
--------
Retail 0.04%
95,000 PawnMart, Inc. A 3/11/03 29,687
90,000 PawnMart, Inc. B 3/11/04 23,906
--------
53,593
--------
Software 0.02%
75,000 Prologic Management Systems, Inc. 3/14/99 -
862,069 Silicon Valley Research, Inc. 4/15/99 -
236,250 Versant Corporation 12/28/01 (a) 29,531
---------
29,531
---------
Total Warrants 1.68% 2,260,439
_____________________________________________________________________________
See the accompanying Notes to the Financial Statements
8
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
Units Units Value
_______________________________________________________________________________
Communications Products 0.49%
133,621 MicroFrame, Inc.(a) $ 659,754
-----------
Housing-Construction 0.10%
281,600 Boulevard Investment Group 140,800
-----------
Software 0.15%
629,310 Silicon Valley Research, Inc. (Restricted) 195,086
-----------
Total Units 0.74% 995,640
-----------
TOTAL INVESTMENTS 97.71% $ 131,753,608
-----------
Securities Sold Short
Shares Common Stock Value
- -------------------------------------------------------------------------------
Computer Network 0.03%
5,100 Telescape International, Inc. $ 36,975
---------
Electronic Componets 0.22%
18,100 Exide Corporation 294,125
----------
Healthcare-Drugs 1.08%
15,000 Shared Medical Systems Corporation 748,073
36,900 Zonagen, Inc. 705,712
----------
1,453,785
----------
Medical Devices & Equipment 0.56%
112,100 Possis Medical, Inc. 756,675
----------
_____________________________________________________________________________
See the accompanying Notes to the Financial Statments
9
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
Securities Sold Short
Shares Common Stocks (Continued) Value
- -------------------------------------------------------------------------------
Software 0.51%
15,500 ModaCAD, Inc. 263,500
54,300 TRO Learning, Inc. 434,400
----------
697,900
----------
TOTAL SECURITIES SOLD SHORT 2.40% $ 3,239,460
----------
(a) Affiliated issuer under the Investment Company Act of 1940,
inasmuch as the Fund owns more than 5% of the voting securities of
the issuer.
All percentages are relative to Partners' Capital.
</TABLE>
_____________________________________________________________________________
See the accompanying Notes to the Financial Statements.
10
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
_____________________________________________________________________________
<TABLE>
<C> <S>
INCOME
Net realized loss on investments $ (505,252)
Net unrealized loss on investments (18,533,382)
------------
Net loss on investment portfolio (19,038,634)
Interest 565,536
Dividends 330,614
-----------
Total (18,142,484)
-----------
-----------
EXPENSES
Administrator's fee - Note 7 $ 1,150,846
Professional fees 277,465
Independent General Partners' fees 30,000
Other 118,933
------------
Total 1,577,244
------------
Net Loss $(19,719,728)
------------
------------
</TABLE>
______________________________________________________________________________
See the accompanying Notes to the Financial Statements.
11
SPECIAL SITUATIONS FUND III,L.P.
(A Limited Partnership)
STATEMENT OF CHANGES IN PARTNERS' CAPTIAL
______________________________________________________________________________
<TABLE>
<C> <S> <S> <S> <S> <S>
Per Limited Corporate Individual
Partners' Limited General General
Unit Partners Partner Partners Total
---------- --------- ---------- ----------- ----------
YEAR ENDED
DECEMBER 31, 1997:
BALANCE,
DECEMBER 31, 1996 $ 134,152,825 $ 5,279,461 $4,035,214$143,467,500
Capital contributions 4,743,293 - - 4,743,293
Transfers - (50,000) 50,000 -
Allocation of net income:
Corporate General
Partner (20%) - 7,007,988 - 7,007,988
Partners (80%) 26,003,482 1,252,423 776,048 28,031,953
Repurchases (9,244,023) (3,500,000)(1,000,000)(13,744,023)
----------- ----------- --------- ------------
BALANCE,
DECEMBER 31, 1997 $25,000 155,655,577 9,989,872 3,861,262 169,506,711
-------
SIX MONTHS ENDED
JUNE 30, 1998:
Capital contributions 2,417,500 - - 2,417,500
Transfers - (1,484,482) 1,484,482 -
Allocation of net loss (618) (3,909,999) (210,384) (132,229) (4,252,612)
-------
Repurchases (11,492,351) - - (11,492,351)
----------- ----------- ---------- -----------
BALANCE,
JUNE 30, 1998 $25,000 142,670,727 8,295,006 5,213,515 156,179,248
-------
SIX MONTHS ENDED
DECEMBER 31, 1998:
Capital contributions 1,732,500 - - 1,732,500
Transfers - (1,118,385) 1,118,385 -
Allocation of net loss(2,449) (14,143,985) (702,935) (620,196)(15,467,116)
-------
Repurchases (7,600,335) (7,600,335)
----------- ----------- --------- -----------
BALANCE,
DECEMBER 31, 1998 $25,000 $122,658,907 $6,473,686 $5,711,704 134,844,297
------- ------------ ---------- ---------- -----------
</TABLE>
See Note 4 for changes in Units outstanding.
_____________________________________________________________________________
See the accompanying Notes to the Financial Statements.
12
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
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. 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 reported sales price on the last business day of the
reporting period. Securities for which no sale occurred on such day
are valued at the average of the highest bid and lowest 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.
13
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2- ACCOUNTING POLICIES (CONTINUED):
Cash and cash equivalents include cash held in money market funds.
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.
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 the close 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.
14
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4- PARTNER CAPITAL ACCOUNT TRANSACTIONS (CONTINUED):
In May 1998, the Fund offered to repurchase up to 687.6969 Units (10%
of its outstanding Units at June 30, 1998). 459.6940 Units were
tendered for repurchase.
In November 1998, the Fund offered to repurchase up to 631.6470 Units
(10% of its outstanding Units at December 31, 1998). 304.0134 Units
were tendered for repurchase.
The Fund also has the right to sell additional Units at the beginning
of each fiscal period.
Changes in Units outstanding are as follows:
<TABLE>
<C> <S> <S> <S> <S>
Corporate Individual
Limited General General
Partners Partner Partners Total
__________ __________ __________ __________
Balance, December 31, 1998 5,366.1129 211.1784 161.4086 5,738.6999
Additional units sold 189.7317 - - 189.7317
Transfers - (2.0000) 2.0000 -
Semi-annual adjustment of Units 1,040.1393 330.4164 31.0419 1,401.5976
Repurchases (369.7609) (140.0000) (40.0000) (549.7609)
----------- ---------- --------- ---------
Balance, December 31, 1997 6,226.2230 399.5948 154.4505 6,780.2683
Additional units sold 96.7000 - - 96.7000
Transfers - (59.3793) 59.3793 -
Semi-annual adjustment of Units (156.4000) (8.4154) (5.2892) (170.1046)
Repurchases (459.6940) - - (459.6940)
----------- ---------- --------- ----------
Balance, June 30, 1998 5,706.8290 331.8001 208.5406 6,247.1697
Additional units sold 69.3000 - - 69.3000
Transfers - (44.7354) 44.7354 -
Semi-annual adjustment of Units (565.7594) (28.1174) (24.8078) (618.6846)
Repurchases (304.0134) - - (304.0134)
----------- --------- --------- ----------
4,906.3562 258.9473 228.4682 5,393.7717
----------- --------- --------- ----------
</TABLE>
15
SPECIAL SITUATIONS FUND III,L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5- PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities for the year ended December 31, 1998
aggregated $167,713,435 and $172,993,834, 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>
<C> <S> <S> <S> <S> <S>
Years Ended
December 31,
-----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ----- ----
Ratio of total expenses 1.02% .98% 1.00% 1.18% 1.19%
to average net assets
Ratio of net income (12.73%) 21.84% 39.58% 38.09% 11.18%
(loss) to average net assets
Portfolio turnover rate (114.61%) 139.7% 228.0% 245.2% 233.4%
</TABLE>
16
SPECIAL SITUATIONS FUND III, L.P.
(A Limited Partnership)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9- RETURN ON PARTNER INVESTMENT:
At December 31, 1998, the value of a $25,000 investment made at each
respective subscription date is as follows:
<TABLE>
<C> <S>
Subscription Date Value
----------------- -----
January 1, 1994 $54,263
January 1, 1995 49,607
July 1, 1995 43,925
January 1, 1996 36,631
July 1, 1996 27,653
January 1, 1997 26,172
July 1, 1997 24,790
January 1, 1998 21,994
July 1, 1998 22,551
</TABLE>
NOTE 10- SECURITIES SOLD SHORT:
The Fund is subject to certain inherent risks arising from its
activities of selling securities short. The ultimate cost to the
Fund to acquire these securities may exceed the liability
reflected in the financial statements. In addition, the Fund is
required to maintain collateral with the broker to secure these short
positions.
17
