N-30D 1 n30ddec02.txt December 31, 2002 __________________________________ Special Situations Annual Fund III, L.P. Report SPECIAL SITUATIONS FUND III, L.P. ------------------------------------------------- INDEX TO ANNUAL REPORT DECEMBER 31, 2002 __________________________________________________________________ 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 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, 2002, the related statement of operations for the year then ended and the statements 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 auditing standards generally accepted in the United States of America. 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, 2002 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, 2002, 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 accounting principles generally accepted in the United States of America. ANCHIN, BLOCK & ANCHIN LLP New York, New York February 6, 2003 1 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2002 _________________________________________________________________ ASSETS Investments, at fair value (cost $225,632,551) $ 226,450,000 Cash and cash equivalents 11,803,073 Receivable for investments sold 409,864 Other assets 73,300 ------------- Total Assets $ 238,817,237 ------------- LIABILITIES AND PARTNERS' CAPITAL Liabilities Payable for Units repurchased $ 4,858,819 Securities sold short, at fair value(proceeds $2,051,348) 1,545,290 Payable for investments purchased 1,924,495 Administrator's fee payable 814,528 Accrued expenses 233,442 ------------- Total Liabilities $ 9,376,574 ------------- Partners' Capital Limited Partners $ 214,012,386 Corporate General Partner 10,691,214 Individual General Partners 4,737,063 ------------- Total Partners' Capital 229,440,663 ------------- Total Liabilities and Partners' Capital $ 238,817,237 ------------- See the accompanying Notes to the Financial Statements. 2 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2002 Fair Shares Common Stocks Value _____________________________________________________________________ Aerospace 0.30% 779,900 SPACEHAB, Incorporated (a) $ 694,111 ------------ Automotive Components 2.48% 2,100,600 Amerigon Incorporated (a) 5,692,626 ------------ Biotechnology 5.13% 215,862 Adolor Corporation 3,002,640 517,800 ArQule, Inc. 1,579,290 494,132 Corixa Corporation 3,157,503 654,774 Discovery Laboratories, Inc. 1,839,915 545,618 Interleukin Genetics, Inc. 278,265 863,900 Paradigm Genetics, Inc. 251,395 153,400 Versicor, Inc. 1,655,186 ------------ 11,764,194 ------------ CAD/CAM/CAE 1.37% 439,730 Ansoft Corporation 2,704,340 114,000 Synplicity, Inc. 430,920 ------------ 3,135,260 ------------ Communications Equipment - Software 1.74% 1,608,707 Artisoft, Inc. (a) 659,570 1,034,000 Artisoft, Inc. (Restricted)(a) 423,940 1,049,082 ION Networks, Inc. (a) 241,289 1,835,700 Visual Networks, Inc. (a) 2,661,765 ----------- 3,986,564 ----------- Communications Products - Equipment 4.02% 1,288,700 NMS Communication Corporation 2,474,304 18,761 Novatel Wireless, Inc. 18,199 217,000 RADVision Ltd. 1,299,830 1,106,214 Superconductor Technologies, Inc.(a) 1,039,841 1,733,500 Superconductor Technologies, Inc.(Restricted)(a)1,629,490 738,600 Telular Corporation (a) 2,762,364 ----------- 9,224,028 ----------- See the accompanying Notes to the Financial Statements. 3 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2002 Fair Shares Common Stocks (Continued) Value Computer Services - Software 20.79% 2,066,056 Attunity, Ltd. (Israel) (a) 1,694,166 1,653,400 Brio Software, Inc. 2,562,770 690,100 CryptoLogic, Inc. (Canada)(a) 3,264,173 400,000 Docent, Inc. 1,139,999 825,750 dot com Entertainment Group, Inc. (Canada)(a) 165,150 944,900 eCollege.com (a) 3,259,905 421,800 Eloquent, Inc. 189,810 2,905,670 Extensity, Inc. (a) 5,055,866 4,444,164 First Virtual Communications, Inc.(a) 1,333,249 535,100 Gensym Corporation (a) 278,252 134,400 Interplay Entertainment Corp. 8,064 1,445,900 Landacorp, Inc. (a) 506,065 402,600 Made2Manage Systems, Inc. (a) 1,425,204 1,435,100 Net Perceptions, Inc. (a) 1,980,438 3,243,712 ON Technology Corporation (a) 12,488,291 1,022,643 ONYX Software Corporation 1,585,097 743,500 Quovadx, Inc. 1,799,270 918,950 Rogue Wave Software, Inc. (a) 1,635,731 1,359,600 Sagent Technology, Inc. 407,880 1,275,900 SupportSoft, Inc. 5,027,046 547,900 Witness Systems, Inc. 1,884,776 ----------- 47,691,202 ----------- Computer Systems 4.16% 586,500 Pinnacle Systems, Inc. 7,982,236 743,700 Procom Technology, Inc. 223,110 216,200 SeaChange International, Inc. 1,329,630 --------- 9,534,976 --------- Data Security 4.26% 1,024,150 Datakey, Inc. (a) 1,454,293 327,850 SafeNet, Inc. 8,310,998 --------- 9,765,291 --------- _________________________________________________________________________ See the accompanying Notes to the Financial Statements. 4 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 2002 Fair Shares Common Stocks (Continued) Value Electronic Components 7.73% 1,200,724 AMX Corporation (a) $ 3,434,071 182,800 Frequency Electronics, Inc. 1,870,044 533,732 OmniVision Technology, Inc. 7,242,743 523,400 Peerless Systems Corporation 727,526 2,077,800 Tvia, Inc. (a) 1,475,238 212,550 Zoran Corporation 2,990,578 ----------- 17,740,200 ----------- Electronic Equipment 2.91% 658,462 KVH Industries, Inc. (a) 5,662,773 1,515,400 Odetics, Inc. (a) 1,015,318 ---------- 6,678,091 ---------- Electronic Semiconductor 0.48% 759,600 PSi Technologies Holdings, Inc.(Philippines)(a) 1,109,016 ---------- Energy - Oil & Gas 0.30% 61,000 Core Laboratories, N.V. 692,350 --------- Energy - Technology 0.59% 274,400 Catalytica Energy Systems, Inc. 757,344 916,027 Electric Fuel Corporation 586,257 --------- 1,343,601 --------- Entertainment 0.77% 127,200 Steiner Leisure Limited (a) 1,773,168 --------- Gold Mining 0.48% 2,570,000 MK Gold Company (a) 1,092,250 ---------- Healthcare-Specialized Products & Services 1.31% 254,700 BioSphere Medical, Inc. 1,678,473 159,850 EPIX Medical, Inc. 1,155,716 14,200 Nutraceutical International Corporation 162,434 --------- 2,996,623 --------- _________________________________________________________________________ See the accompanying Notes to the Financial Statements. 5 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 2002 Fair Shares Common Stocks (Continued) Value Household Furniture - Appliances 1.55% 1,136,500 Meade Instruments Corp.(a) $ 3,545,880 ---------- Insurance 0.00% 200 Renaissance Acceptance Group, Inc. - ---------- Information Services 1.21% 1,561,671 EDGAR Online, Inc. (a) 2,764,158 ---------- Media 0.25% 1,924,623 Audible, Inc. (a) 579,312 --------- Medical Devices & Equipment 12.73% 814,154 Aksys, Ltd. 4,315,016 1,400,127 Applied Imaging Corporation (a) 3,080,279 470,100 Aradigm Corporation 761,562 290,200 Given Imaging Ltd.(Israel) 2,687,252 177,100 Invivo Corporation 2,486,484 974,982 Laserscope, Inc. (a) 4,387,419 1,255,225 LifeCell Corporation (a) 3,778,227 519,550 Micro Therapeutics, Inc. 1,117,032 49,691 Micro Therapeutics, Inc. (Restricted) 103,357 233,333 Optical Sensors Incorporated (a) 950,833 31,417 PharmaNetics, Inc. 218,348 393,400 Precision Optics Corporation, Inc. 98,350 214,100 Radiologix, Inc. 494,571 393,750 Regeneration Technologies, Inc. (Restricted) 2,854,688 337,100 Sonic Innovations, Inc. 1,284,351 160,000 VIVUS, Inc. 596,800 -------- 29,214,569 ---------- Medical-Drugs 1.22% 382,626 OraPharma, Inc. 2,800,822 ---------- Medical Instruments 1.54% 574,000 Intuitive Surgical, Inc. 3,535,840 ---------- Online Services 0.58% 1,639,250 The Knot, Inc. (a) 1,327,793 ---------- Paper-Packaging 0.00% 593,749 Chase Packaging Corporation - ---------- Pharmaceutical Products 1.09% 213,267 Axcan Pharma, Inc. (Canada) 2,510,152 ----------- See the accompanying Notes to the Financial Statements. 6 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 2002 Fair Shares Common Stocks (Continued) Value Restaurant 1.62% 274,515 Benihana Inc. Class A (a) 3,703,207 181,200 New World Restaurant Group, Inc. (a) 19,026 ------------- 3,722,233 ------------- Retail 8.09% 161,300 1-800 CONTACTS, INC. 4,447,041 2,174,561 EZCORP, Inc. (a) 7,284,779 300,000 Gaiam, Inc. 3,111,000 266,225 J.Jill Group, Inc. 3,721,826 ------------- 18,564,646 ------------- Semiconductor 1.91% 1,184,000 Sipex Corporation 4,380,800 ------------ Semiconductor Equipment 0.68% 1,042,200 Nova Measuring Instruments Ltd. (a) 1,563,300 ------------ Services 0.34% 217,425 Collectors Universe, Inc. 782,730 ------------ Specialized Services 0.69% 1,122,900 NIC, Inc. 1,583,289 ------------ Technology - Miscellaneous 0.82% 1,522,800 Pinnacor, Inc. 1,857,816 5,200 Vastera, Inc. 29,385 ------------ 1,887,201 ------------ Telecom Equipment 0.23% 839,700 Peco II, Inc. 537,408 ------------- Total Common Stocks 93.37% 214,213,684 --------------- ________________________________________________________________________ See the accompanying Notes to the Financial Statements. 7 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 2002 Fair Shares Preferred Stocks Value Communication Products - Equipment 0.48% 1,140,000 Artisoft, Inc. (a) $ 1,117,200 ----------- Electronics Instruments 0.18% 825 Metretek Technologies, Inc. 8% 412,500 ---------- Medical Devices & Equipment 0.40% 13,125 PharmaNetics, Inc. 6% 912,188 -------- Restaurant 1.12% 3,661 New World Restaurant Group, Inc. Series F (Restricted) (a) 2,562,820 --------- Total Preferred Stocks 2.18% 5,004,708 ---------- Principal Fair Amount Corporate Bonds Value Computer Services - Software 0.02% 2,100,000 EURO Titus Interactive, 2% due 7/1/05 (France) $ 37,500 ---------- Retail 0.78% 1,800,000 Bakers Footwear Group. 7%, due 4/4/07 1,800,000 ---------- Total Corporate Bonds 0.80% 1,837,500 ---------- ___________________________________________________________________________ See the accompanying Notes to the Financial Statements. 8 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2002 Fair Warrants Warrants Value Automotive Componets 0.55% 933,350 Amerigon Incorporated 2/25/07 (a) $ 1,269,356 ------------ Biotechnology 0.18% 642,900 Alliance Pharmaceutical Corp. 10/30/06 32,145 294,648 Discovery Laboratories 11/5/07 368,310 --------- 400,455 --------- Communications Equipment - Software 0.11% 1,140,000 Artisoft, Inc. 9/30/06 (a) 205,200 586,600 ION Network, Inc. 2/14/07 (a) 52,794 --------- 257,994 --------- Communication Products - Equipment 0.03% 1,198,052 Novatel Wireless, Inc. 12/21/05 11,981 57,861 Superconductor Technologies, Inc. 3/10/07(a) 12,729 433,375 Superconductor Technologies, Inc. 12/18/07(Rest)(a) - 427,500 Superconductor Technologies, Inc. 9/26/07 (a) 42,750 --------- 67,460 --------- Computer Services - Software 0.21% 1,557,792 Attunity, Ltd. A 10/25/05 (Israel) (a) 280,403 519,264 Attunity, Ltd. B 10/25/05 (Israel) (a) 77,890 375,000 Burst.com, Inc. 1/27/05 - 1,250,000 First Virtual Communications, Inc. 4/12/07 (a) 125,000 862,500 Interplay Entertainment Corp. 3/29/06 8,625 -------- 491,918 Data Security 0.11% -------- 650,000 Datakey, Inc. 2/16/06 (a) 260,000 -------- Electronic Equipment 0.15% 708,350 Odetics, Inc. A 8/16/07 (a) 177,088 708,350 Odetics, Inc. B 8/16/07 (a) 177,088 -------- 354,175 -------- Electronic Instruments 0.00% 82,500 Metretek Technologies, Inc. 12/9/04 825 -------- Energy - Miscellaneous 0.00% 180,000 Boots & Coots International Well Control 5/14/04(Rest) - -------- _____________________________________________________________________ See the accompanying Notes to the Financial Statements. 9 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2002 Fair Warrants Warrants (Continued) Value Energy - Oil & Gas 0.01% 72,414 Edge Petroleum Corporation 5/5/04 $ 23,172 ----------- Energy - Technology 0.01% 315,151 Electric Fuel Corporation 5/7/06 18,909 ----------- Information Services 0.04% 150,000 EDGAR Online, Inc. 1/8/06 (a) 84,000 ----------- Media 0.03% 627,906 Audible, Inc. 2/15/07 (a) 56,512 ----------- Medical Devices & Equipment 0.39% 90,000 Applied Imaging Corporation 12/14/03 (a) 14,400 268,600 Applied Imaging Corporation 7/29/06 (a) 166,532 241,984 Cardima, Inc. 2/14/05 43,557 14,616 Cardima, Inc. 2/14/05 (Restricted) - 218,750 LifeCell Corporation 7/6/06 (a) 325,938 350,000 Optical Sensors Incorporated 12/21/06 (a) 126,000 26,250 PharmaNetics, Inc. 2/25/05 39,375 12,252 Possis Medical, Inc. 6/2/03 82,088 10,760 Possis Medical, Inc. 3/6/04 67,680 47,476 SpectRx, Inc. 6/4/06 25,162 ---------- 890,732 ---------- Medical Information Systems 0.00% 2,200,000 LifeRate Systems, Inc. 9/14/07 (a) - ---------- Restaurant 0.53% 180,000 Benihana Inc. 6/1/04 (a) 1,218,600 2,411,548 New World Restaurant Group, Inc.5/16/06(Rest)(a) - 182,701 New World Restaurant Group, Inc.6/19/06(Rest)(a) - --------- 1,218,600 --------- Retail 0.00% 96,450 Gemstar-TV Guide International, Inc. A 11/2/04 - 47,143 Gemstar-TV Guide International, Inc. B 12/21/05 - 95,000 PawnMart, Inc. A 3/11/03 - 90,000 PawnMart, Inc. B 3/11/04 - ---------- - ---------- _________________________________________________________________________ See the accompanying Notes to the Financial Statements. 10 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2002 Fair Warrants Warrants (Continued) Value Specialized Services 0.00% 91,667 RateXchange Corporation 3/21/03 - --------- Total Warrants 2.35% 5,394,108 --------- TOTAL INVESTMENTS 98.70% $226,450,000 ------------ Securities Sold Short Fair Shares Common Stock Value Financial Services - Miscellaneous 0.66% 15,000 Citigroup Inc. $ 527,850 15,000 J.P. Morgan Chase & Co. 360,000 15,000 PNC Financial Services Group 628,448 ------------ 1,516,298 ------------ Insurance 0.01% 648 Travelers Property Casualty Corp.(New) Class A 9,493 1,331 Travelers Property Casualty Corp.(New) Class B 19,499 ----------- 28,992 ----------- TOTAL SECURITIES SOLD SHORT 0.67% $ 1,545,290 ------------
(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. _______________________________________________________________________ See the accompanying Notes to the Financial Statements. 11 SPECIAL SITUATIONS FUND III, L.P (A Limited Partnership) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 ______________________________________________________________________ INCOME Net realized loss on investments $ (2,464,756) Net change in unrealized appreciation (51,913,861) -------------- Net loss on investment portfolio (54,378,617) Interest 260,690 Dividends 749,287 Securities lending fees 554,299 -------------- Total (52,814,341) -------------- -------------- EXPENSES Administrator's fee $ 1,851,977 Professional fees 379,264 Independent General Partners' fees 30,000 Other 146,162 ------------- Total 2,407,403 ------------- Net Loss $(55,221,744) ------------- ------------- See the accompanying Notes to the Financial Statements. 12 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENT OF CHANGES IN PARTNERS' CAPTIAL Per Limited Corporate Individual Partners' Limited General General Unit Partners Partner Partners Total ---------- -------- --------- ---------- ----- YEAR ENDED DECEMBER 31, 2001: BALANCE, DECEMBER 31, 2000 $213,280,203 $11,125,844 $ 4,420,046 $228,826,093 Capital contributions 15,325,000 - - 15,325,000 Transfers - (705,611) 705,611 - Allocation of net income: Corporate General Partner-Performance - 7,258,461 - 7,258,461 Partners 32,377,450 1,521,133 722,922 34,621,505 Repurchases (12,631,064) (6,000,000) - (18,631,064) ------------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 2001 $25,000 248,351,589 13,199,827 5,848,579 267,399,995 ------- SIX MONTHS ENDED JUNE 30, 2002: Capital contributions 23,862,250 - - 23,862,250 Allocation of net loss $ (3,086) (33,597,539) (1,629,167) (721,851) (35,948,557) Repurchases --------- (4,266,017) - - (4,266,017) ------------ ----------- ---------- ------------ BALANCE, JUNE 30, 2002 $25,000 243,350,283 11,570,660 5,126,728 251,047,671 ------- ------------ ----------- ---------- ------------ SIX MONTHS ENDED December 31, 2002: Capital contributions 2,525,000 - - 2,525,000 Allocation of net loss $(1,900) (18,004,076) (879,446) (389,655) (19,273,187) Repurchases -------- (4,858,821) - - (4,858,821) ------------ --------- --------- ------------ BALANCE, December 31, 2002 $25,000 $214,012,386 $10,691,214 $4,737,063 $229,440,663 ------- ------------ ----------- ---------- -------------
See the accompanying Notes to the Financial Statements. 13 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 shall have perpetual existence unless sooner dissolved 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. Cash and cash equivalents consist principally of cash balances in a brokerage account. 14 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS NOTE 2 -ACCOUNTING POLICIES (CONTINUED): The Fund entered into an agreement to lend portfolio securities to a qualified borrower in order to earn additional income. The terms of the lending agreement require that loans are secured by cash or securities with an aggregate market value at lease equal to a percentage of the market value of the loaned securities agreed upon by the borrower and the Fund (which shall be not less than 100% of the market value of the loaned securities),computed on a daily basis. If the borrower defaults on its obligation to return the securities loaned because of insolvency of other reasons, the Fund could experience delays and costs in recovering the securities loaned or in gaining access to collateral. At December 31, 2002, the value of the loaned securities and corresponding collateral (U.S. Treasury Obligations) receive was $2,687,252 and $2,742,396, respectively. 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: 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. The amount of the loss carryover at December 31, 2002 was $55,221,744. 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. 15 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS 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 Partners Total __________ __________ __________ __________ Balance, December 31, 2000 8,531.2081 445.0338 176.8018 9,153.0437 Additional units sold 613.0000 - - 613.0000 Transfers - (28.2244) 28.2244 - Semi-annual adjustment of Units 1,295.0980 351.1838 28.9169 1,675.1987 Repurchases (505.2426) (240.0000) - (745.2426) ------------ ----------- ---------- ------------ Balance, December 31, 2001 9,934.0635 527.9932 233.9431 10,695.9998 Additional Units sold 954.4900 - - 954.4900 Semi-annual adjustment of Units (1,343.9015) (65.1668) (28.8740) (1,437.9423) Repurchases (170.6407) - - (170.6407) ------------ ---------- ----------- ------------ Balance, June 30, 2002 9,374.0113 462.8264 205.0691 10,041.9068 Additional units sold 101.0000 - - 101.0000 Semi-annual adjustment of Units (720.1630) (35.1778) (15.5866) (770.9274) Repurchases (194.3528) - - (194.3528) ----------- ----------- ------------ ------------ Balance, December 31, 2002 8,560.4955 427.6486 189.4825 9,177.6266 ----------- ----------- ------------ ----------
NOTE 5- PURCHASES AND SALES OF SECURITIES: Purchases and sales of securities for the year ended December 31, 2002 aggregated $175,680,309 and $143,069,296, respectively. 16 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS 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: Year Ended December 31, 2002 2001 2000 1999 1998 ------ ----- ------- ------ ------- Ratio of total expenses 0.97% 0.89% 0.85% 1.03% 1.02% to average net assets Ratio of net income (22.16)% 16.62% 15.19% 68.01% (12.73)% (loss) to average net assets Portfolio turnover rate 60.28% 92.33% 102.49% 140.88% 114.61%
17 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS NOTE 9- RETURN ON PARTNER INVESTMENT: At December 31, 2002, the value of a $25,000 investment made at each respective subscription date is as follows: Subscription Date Value ---------------------- ------ January 1, 1994 $ 95,451 January 1, 1995 87,263 July 1, 1995 77,267 January 1, 1996 64,437 July 1, 1996 48,643 January 1, 1997 46,037 July 1, 1997 43,608 January 1, 1998 38,688 July 1, 1998 39,669 January 1, 1999 43,977 July 1, 1999 40,578 January 1, 2000 26,448 July 1, 2000 22,655 January 1, 2001 23,169 July 1, 2001 20,254 January 1, 2002 20,249 July 1, 2002 23,100 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. 18