N-30D 1 n30djune01.txt June 30, 2001 -------------------------------- Special Situations Second Fund III, L.P. Quarter Report SPECIAL SITUATIONS FUND III, L.P. --------------------------------- INDEX TO SECOND QUARTER REPORT JUNE 30, 2001 --------------------------------------------------------------------------- PAGE ---- Statement of Financial Condition 1 Portfolio of Investments 2 Statement of Operations 9 Statements of Changes in Partners' Capital 10 Notes to the Financial Statements 11 SPECIAL SITUATIONS FUND III, L.P (A Limited Partnership) STATEMENT OF FINANCIAL CONDITION JUNE 30, 2001 ------------------------------------------------------------------------- ASSETS - NOTE 2 Investments, at fair value (cost $182,490,615) $ 244,824,036 Cash and cash equivalents 33,927,222 Receivable for investments sold 9,244,285 ------------- Total Assets $ 287,995,543 ------------- LIABILITIES AND PARTNERS' CAPITAL Liabilities Payable for Units repurchased - Note 4 $ 9,768,537 Securities sold short, at fair value 4,648,560 (proceeds $4,750,315) - Note 10 Payable for investments purchased - Note 2 962,686 Administrator's fee payable - Note 7 488,303 Accrued expenses 58,773 ------------- Total Liabilities 15,926,859 ------------- Partners' Capital - Notes 1,3 and 4 Limited Partners $ 247,045,848 Corporate General Partner 19,289,209 Individual General Partners 5,733,627 ------------- Total Partners' Capital 272,068,684 ------------- Total Liabilities and Partners' Capital $ 287,995,543 ------------- ------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 1 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Common Stocks Value --------------------------------------------------------------------------- Aerospace 0.68% 815,600 SPACEHAB, Incorporated (a) $ 1,835,100 ----------- Automotive 0.02% 183,300 Lund International Holdings, Inc. 45,825 289,000 Steel City Products, Inc. 10,115 ----------- 55,940 Beverages - Alcohol 2.67% ------------ 246,900 Ravenswood Winery, Inc. (a) 7,271,205 ---------- Biotechnology 4.49% 156,862 Adolor Corporation (Restricted) 1,196,073 213,800 ArQule, Inc. 4,630,908 660,000 Interleukin Genetics, Inc. 1,729,200 518,500 Paradigm Genetics, Inc. 4,666,500 --------- 12,222,681 Broadcasting 0.11% --------- 288,400 Film Roman, Inc. 291,284 ---------- Computer Equipment 2.79% 390,100 ION Networks, Inc. 312,080 477,900 Procom Technology, Inc. 4,315,437 164,450 SeaChange International, Inc. 2,965,034 ---------- 7,592,551 Computer Services - Software 17.59% ---------- 1,138,400 3Dfx Interactive, Inc. 387,056 366,070 Ansoft Corporation 6,223,190 297,300 ANSYS, Inc. 5,565,456 388,800 Clarus Corporation 2,391,120 184,900 CryptoLogic, Inc. 4,213,871 310,500 dot com Entertainment Group, Inc. 614,790 1,211,364 First Virtual Communications, Inc.(a) 1,090,228 609,300 eCollege.com 1,913,202 421,800 Eloquent, Inc. 518,814 650,600 Gensym Corporation (a) 631,082 367,300 Interplay Entertainment Corp. 808,060 1,725,000 Interplay Entertainment Corp. (Restricted) 2,695,312 825,600 Landacorp, Inc. (a) 1,444,800 89,300 Made2Manage Systems, Inc. 275,937 --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements 2 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Common Stocks (Continued) Value - -------------------------------------------------------------------------- Computer Services - Software (Continued) 17.59% 284,500 Mechanical Dynamics, Inc. $ 3,271,750 523,400 Peerless Systems Corporation 968,290 852,600 Pinnacle Systems, Inc. 5,158,230 945,900 PlanetCAD, Inc. (a) 520,245 556,550 Rogue Wave Software, Inc. 2,437,689 970,448 Sagent Technology, Inc. 1,455,672 344,410 Silicon Valley Research, Inc. 44,773 94,000 Support.com, Inc. 606,300 184,100 Towne Services, Inc. 158,326 329,600 XCare.net, Inc. 4,449,600 --------- 47,843,793 Data Security 0.83% --------- 500,000 Visionics Corporation (Restricted) 2,250,000 ---------- Electronic Components 5.84% 181,800 Frequency Electronics, Inc. 3,363,300 201,532 OmniVision Technology, Inc. 1,136,640 540,549 Panja, Inc. 2,162,196 189,000 Tripath Technology, Inc. 2,126,250 1,110,500 Tvia, Inc. 2,498,625 155,200 Zoran Corporation 4,612,544 --------- 15,899,555 Electronic Equipment 4.45% --------- 1,003,150 Datakey, Inc. 3,210,080 472,727 Electric Fuel Corporation 1,200,727 663,462 KVH Industries, Inc. 4,577,888 311,250 SafeNet, Inc. 3,112,500 ---------- 12,101,195 Electronic Instruments 2.04% --------- 674,806 Genus, Inc. (Restricted) 2,024,418 603,200 Nova Measuring Instruments Ltd. 3,534,752 --------- 5,559,170 ---------- --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 3 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Common Stocks (Continued) Value -------------------------------------------------------------------------- Energy - Miscellaneous 2.10% 300,000 Boots & Coots International Well Control,Inc.(Rest) - 301,000 Itron, Inc. 5,709,970 5,700 TGC Industries, Inc. 5,586 --------- 5,715,556 Energy-Oil & Gas 1.21% -------- 116,200 3TEC Energy Corporation 2,062,550 210,000 Edge Petroleum Corporation 1,228,500 --------- 3,291,050 Environmental Services 0.66% -------- 900,000 ATG,Inc. (Restricted) 1,800,000 --------- Financial Services-Miscellaneous 2.86% 479,500 MicroFinancial Incorporated 7,772,695 --------- Food 1.60% 294,651 Suprema Specialties, Inc. (a) 4,346,102 --------- Gold Mining 0.91% 2,522,000 MK Gold Company (a) 2,471,560 --------- Healthcare Services 0.66% 258,600 SeraCare, Inc. 1,805,028 --------- Healthcare-Specialized Products & Services 0.00% 100,729 Accuhealth, Inc. (a) 2,015 --------- Insurance 0.60% 150,000 Vesta Insurance Group, Inc. 1,642,500 --------- Internet Commerce 0.24% 332,771 PartsBase.com, Inc. 332,771 761,450 The Knot, Inc. (a) 327,423 -------- 660,194 Medical - Drugs 0.61% -------- 292,626 OraPharma, Inc. 1,665,042 --------- See the accompanying Notes to the Financial Statements. 4 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Common Stocks (Continued) Value --------------------------------------------------------------------------- Medical Devices & Equipment 12.35% 769,900 Aksys, Ltd. $ 7,999,261 1,133,127 Applied Imaging Corporation (a) 2,458,886 864,600 LifeCell Corporation (a) 1,858,890 214,370 IRIDEX Corporation 836,043 102,400 Invivo Corporation 980,992 785,400 Laserscope, Inc. 1,335,180 124,050 Micro Therapeutics, Inc. 992,400 17,150 NMT Medical, Inc. 37,901 203,650 ORATEC Interventions, Inc. 1,887,835 196,600 PharmaNetics, Inc. 2,066,266 58,345 Possis Medical, Inc. 703,057 374,300 Precision Optics Corporation, Inc. 580,165 601,400 The Spectranetics Corporation 1,533,570 237,380 SpectRx, Inc. (Restricted) 1,500,242 448,400 Thoratec Laboratories Corporation 6,972,620 164,400 V.I. Technologies, Inc. 1,849,500 ---------- 33,592,808 Medical Instruments 2.85% ---------- 574,000 Intuitive Surgical, Inc. 7,754,740 ---------- Paper-Packaging 0.00% 593,749 Chase Packaging Corporation 5,937 --------- Pharmaceutical Products 0.58% 137,767 Axcan Pharma, Inc. 1,584,321 ---------- Restaurant 3.55% 206,100 Beni Hana, Inc. Class A 2,730,825 183,800 BRIAZZ, Inc. 514,640 662,100 Famous Dave's of America, Inc.(a) 6,402,507 --------- 9,647,972 --------- Retail 12.08% 127,500 1-800 CONTACTS, INC. 3,160,725 2,097,100 EZCORP, Inc. (a) 4,760,417 321,700 Gaiam, Inc. 4,568,140 859,000 iGo Corporation 833,230 --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 5 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Common Stocks (Continued) Value --------------------------------------------------------------------------- Retail (continued) 12.08% 466,500 J.Jill Group, Inc. (a) $ 9,446,627 419,025 Movado Group, Inc. 8,464,305 529,200 SkyMall, Inc. 1,640,520 --------- 32,873,964 ---------- Semiconductor - Capital Equipment 0.31% 58,800 August Technology Corporation 839,664 ---------- Services 0.39% 554,700 Collectors Universe, Inc. 1,053,930 ---------- Technology Services 0.53% 201,700 First Consulting Group, Inc. 1,452,240 ---------- Telecom Equipment 0.61% 843,800 Data Critical Corporation (a) 1,653,848 ---------- Transportation 1.00% 245,400 Aramex International Limited 2,728,848 --------- Total Common Stocks 87.21% 237,282,488 ----------- --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 5 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Preferred Stocks Value --------------------------------------------------------------------------- Electronic Instruments 0.14% 825 Metretek Technologies, Inc. 8% $ 394,003 ----------- Energy - Services 0.11% 139,300 TGC Industries, Inc. (a) 291,137 ----------- Healthcare - Specialized Products & Services 0.00% 425,000 Accuhealth,Inc. convertible preferred (a) 10,625 ---------- Medical Devices 0.51% 13,125 PharmaNetics, Inc. 6% 1,379,438 ---------- Restaurant 1.05% 2,850 New World Coffee-Manhattan Bagel,Inc. Series F 2,850,000 --------- Total Preferred Stocks 1.81% 4,925,203 --------- Principal Fair Amount Corporate Bonds Value --------------------------------------------------------------------------- Computer Services - Software 0.19% $ 30,000 Titus Interactive, due 7/1/05 $ 507,897 ----------- Medical Devices 0.19% 700,000 Optical Sensors Incorporated, due 9/10/01(a) 525,000 ----------- Total Corporate Bonds 0.38% 1,032,897 -------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 6 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Warrants Warrants Value --------------------------------------------------------------------------- Biotechnology 0.06% 330,000 Interleukin Genetics, Inc. 1/26/06 (Restricted) $ 165,000 --------- Computer Services - Software 0.00% 375,000 Burst.com, Inc. 1/27/05 - 1,725,000 Interplay Entertainment Corp. 3/29/06 - --------- Data Security 0.00% -------- 250,000 Visionics Corporation 6/28/06 (Restricted) - --------- Electronic Equipment 0.34% 650,000 Datakey, Inc. 2/16/06 (a) 910,000 315,151 Electric Fuel Corporation 5/7/06 (Restricted) - --------- 910,000 Electronic Instruments 0.01% -------- 337,403 Genus, Inc. 5/17/06 (Restricted) - 82,500 Metretek Technologies, Inc. 12/9/04 20,625 --------- 20,625 Engergy - Miscellaneous 0.01% -------- 300,000 Boots & Coots Int'l Well Control 5/14/02 (Rest) 15,000 180,000 Boots & Coots Int'l Well Control 5/14/04 (Rest) 18,000 -------- 33,000 Energy - Oil & Gas 0.05% --------- 72,414 Edge Petroleum Corporation 5/5/04 128,897 --------- Medical Devices & Equipment 0.12% 90,000 Applied Imaging Corp. 12/14/03 (a) 22,500 5,771 Cambridge Heart, Inc. 6/9/03 1,443 154,167 Cardima, Inc. 2/14/05 92,500 248,700 Hemagen Diagnostics,Inc. 4/30/02 82,071 26,250 PharmaNetics, Inc. 2/25/05 76,912 13,252 Possis Medical, Inc. 6/2/03 36,973 10,760 Possis Medical, Inc. 3/6/04 (Restricted) 10,760 47,476 SpectRx, Inc. 6/4/06 (Restricted) - -------- 323,159 ----------- ----------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 7 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Warrants Warrants (Continued) Value --------------------------------------------------------------------------- Medical Information Systems 0.00% 1,100,000 LifeRate Systems, Inc. 9/14/07 (a) $ - 1,100,000 LifeRate Systems, Inc. 9/14/07 (a) (Restricted) - --------- - Restaurant 0.00% -------- 2,411,548 New World Coffee-Manhattan Bagel, Inc. 5/16/06 (R) - -------- Retail 0.00% 95,000 PawnMart, Inc. A 3/11/03 950 90,000 PawnMart, Inc. B 3/11/04 900 96,450 SkyMall, Inc. A 11/02/04 - 47,143 SkyMall, Inc. B 12/21/05 - -------- 1,850 Specialized Services 0.00% -------- 91,667 RateXchange Corporation 3/21/03 917 -------- Total Warrants 0.58% 1,583,448 --------- TOTAL INVESTMENTS 89.99% $ 244,824,036 ------------- -------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 8 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS JUNE 30, 2001 Fair Shares Securities Sold Short Value - -------------------------------------------------------------------------- Consumer Finance 0.16% 7,500 Providian Financial Corporation $ 432,750 --------- Contract Manufacturing 0.06% 8,500 DDi Corporation 170,000 --------- Healthcare Services 0.00% 7,700 Maxicare Health Plans, Inc. 308 -------- Electronic Instruments 0.01% 2,500 Genus, Inc. 12,000 -------- Medical Devices & Equipment 0.50% 7,500 ChromaVision Medical Systems, Inc. 37,650 7,500 Guidant Corporation 270,000 88,345 Possis Medical, Inc. 1,064,504 --------- 1,372,154 Restaurant 0.55% --------- 30,000 McDonald's Corporation 811,800 26,500 Wendy's International,Inc. 676,810 --------- 1,488,610 Retail 0.30% --------- 19,199 Gemstar-TV Guide International, Inc. 817,878 --------- Specialized Services 0.13% 22,000 Sotheby's Holdings, Inc. 354,860 -------- TOTAL SECURITIES SOLD SHORT 1.71% $ 4,648,560 -----------
(a) Affiliated issuer under the Investment Company Act of 1940, inasumuch as the Fund owns more than 5% of the voting securities of the issuer. All percentages are relative to Partners' Capital. --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 8 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- INCOME Net realized gain on investments $ 17,957,131 Net change in unrealized appreciation 23,702,713 ------------ Net gain on investment portfolio 41,659,844 Interest 1,004,216 Dividends 238,965 ------------ Total 42,903,025 ------------ EXPENSES Administrator's fee - Note 7 948,347 Professional fees 107,476 Independent General Partners' fees 15,000 Other 46,074 ---------- Total 1,116,897 ------------ Net Income $ 41,786,128 ------------ -------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 9 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (Information Subsequent to December 31, 2000 is Unaudited) --------------------------------------------------------------------------- Per Limited Corporate Individual Partners' Limited General General Unit Partners Partner Partners Total ----------- -------- --------- --------- ----- ---- YEAR ENDED DECEMBER 31, 2000: BALANCE, DECEMBER 31, 1999 $194,712,153 $14,866,034 $3,720,110 $213,298,297 Capital contributions Transfers 1,475,000 - - 1,475,000 Allocation of net income: - ( 2,325,622) 2,325,622 - Corporate General Partner- Performance - 8,972,959 - 8,972,959 Partners 27,817,388 1,612,473 874,314 30,304,175 Repurchases (10,724,338)(12,000,000)(2,500,000) (25,224,338) ----------- ---------- ---------- ---- ------ BALANCE, DECEMBER 31, 2000 $ 25,000 213,280,203 11,125,844 4,420,046 228,826,093 -------- SIX MONTHS ENDED JUNE 30, 2001: Capital contributions 11,225,000 - - 11,225,000 Transfers - (592,248) (592,248) - Allocation of net income: Corporate General Partner- Performance - 7,239,693 - 7,239,693 Partners $ 3,598 32,309,182 1,515,920 721,333 34,546,435 ------- Repurchases (9,768,537) - - (9,768,537) ----------- ---------- --------- ----- ----- BALANCE, JUNE 30, 2001 $25,000 247,045,848 $19,289,209 $5,733,627 $272,068,684 ------ ------------- ----------- ---------- ----- -----
See Note 4 for changes in Units outstanding. --------------------------------------------------------------------------- See the accompanying Notes to the Financial Statements. 10 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS (Information Subsequent to December 31, 2000 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. 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. 11 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS (Information Subsequent to December 31, 2000 is Unaudited) NOTE 2- ACCOUNTING POLICIES (CONTINUED): Cash and cash equivalents consist principally of cash balances in a brokerage account. 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 INCOME AND LOSSES: Net income is 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% performance allocation to MGP. If there is a loss for an accounting period, the performance allocation to MGP will not apply to future periods until the loss has been recovered. For purposes of the performance allocation, net income for the six months ended June 30, 2001 was reduced by a loss carryover from December 31, 2000 of $5,587,662. Net 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. 12 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS (Information Subsequent to December 31, 2000 is Unaudited) NOTE 4- PARTNER CAPITAL ACCOUNT TRANSACTIONS (CONTINUED): The Fund has the right to sell additional Units at the beginning of each fiscal period. Changes in Units outstanding are as follows: Corporate Individual Limited General General Partners Partner Partner Total __________ __________ ____________ _______ Balance, December 31, 1999 7,788.4801 594.6413 148.8044 8,531.9318 Additional Units sold 59.0000 - - 59.0000 Transfers - (93.0248) 93.0248 - Semi-annual adjustment of Units 1,112.6955) 423.4173 34.9726 1,571.0854 Repurchases (428.9735) (480.0000)(100.0000)(1,008.9735) ---------- ---------- --------- ----------- Balance, December 31, 2000 8,531.2081 445.0338 176.8018 9,153.0437 Additional Units sold 449.0000 - - 449.0000 Transfer - (23.6899) 23.6899 - Semi-annual adjustment 1,292.3673 350.2245 28.8533 1,671.4451 of Units Repurchases (390.7415) - - (390.7415) ----------- ---------- --------- -------- Balance, June 30, 2001 9,881.8339 771.5684 229.3450 10,882.7473 ---------- --------- -------- ----------- NOTE 5- PURCHASES AND SALES OF SECURITIES: Purchases and sales of securities for the six months ended June 30, 2001 aggregated $110,802,411 and $119,462,203, respectively. 13 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS (Information Subsequent to December 31, 2000 is Unaudited) 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 partner's 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: Six Months Ended June 30, Years Ended December 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- Ratio of total 0.88%* 0.85% 1.03% 1.02% 0.98% 1.00% expenses to average net assets Ratio of net 32.96%* 15.19% 68.01% (12.73%) 21.84% 39.58% income (loss) to average net assets Portfolio 51.88% 102.49% 140.88% 114.61% 139.70% 228.00% turnover rate *Annualized 14 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS (Information Subsequent to December 31, 2000 is Unaudited) NOTE 9- RETURN ON PARTNER INVESTMENT: At June 30, 2001, the value of a $25,000 investment made at each respective subscription date is as follows: Subscription Date Value ----------------- ------- January 1, 1994 $117,817 January 1, 1995 107,709 July 1, 1995 95,372 January 1, 1996 79,535 July 1, 1996 60,041 January 1, 1997 56,825 July 1, 1997 53,825 January 1, 1998 47,753 July 1, 1998 48,964 January 1, 1999 54,281 July 1, 1999 50,086 January 1, 2000 32,645 July 1, 2000 27,963 January 1, 2001 28,598 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. 15