N-CSR 1 ncsrdec04t.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-08110 SPECIAL SITUATIONS FUND III, L.P. (Exact name of registrant as specified in charter) 153 EAST 53RD STREET, 55TH FLOOR, NEW YORK, NEW YORK 10022 (Address of principal executive offices) (Zip code) Allen B. Levithan, Esq. c/o Lowenstein Sandler PC 65 Livingston Avenue Roseland, New Jersey 07068 (Name and address of agent for service) Registrant?s telephone number, including area code (212) 207-6500 Date of fiscal year end: DECEMBER 31, 2004 Date of reporting period: DECEMBER 31, 2004 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ? 3507. Item 1. Reports to Stockholders. December 31, 2004 Special Situations Fund III, L.P. Annual Report SPECIAL SITUATIONS FUND III, L.P. INDEX TO ANNUAL REPORT DECEMBER 31, 2004 PAGE Independent Auditors? Report 1 Statement of Financial Condition 2 Portfolio of Investments 3 Statement of Operations 10 Statements of Changes in Partners? Capital 11 Notes to the Financial Statements 12 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004, the related statement of operations for the year then ended, the statements of changes in partners' capital for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund?s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights 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 at December 31, 2004, 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 and financial highlights as stated above, present fairly, in all material respects, the financial position of Special Situations Fund III, L.P. as of December 31, 2004, the results of its operations for the year then ended, the changes in its partners' capital for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with U.S. generally accepted accounting principles. Anchin, Block & Anchin LLP New York, N. Y. February 1, 2005 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2004 ASSETS Investments, at fair value (cost $288,353,573) $ 455,768,894 Cash and cash equivalents 96,480,341 Receivable for investments sold 2,721,153 Other assets 107,553 Total Assets $ 555,077,941 LIABILITIES AND PARTNERS' CAPITAL Liabilities Payable for Units repurchased $ 29,654,129 Securities sold short, at fair value (proceeds $1,098,038) 1,089,186 Payable for investments purchased 38,559 Administrator's fee payable 1,789,623 Consulting fee payable 838,945 Accrued expenses 299,141 Total Liabilities 33,709,583 Partners' Capital Limited Partners 483,206,780 Corporate General Partner 33,960,129 Individual General Partners 4,201,449 Total Partners' Capital 521,368,358 Total Liabilities and Partners' Capital $ 555,077,941
See the accompanying Notes to the Financial Statements. 2 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Shares Common Stocks Value Aerospace 0.40% 971,600 SPACEHAB, Incorporated (a) $ 2,069,508 Automotive Components 2.68% 2,343,535 Amerigon Incorporated (a) 8,764,821 321,800 Rush Enterprises, Inc. ? Class A 5,222,814 13,987,635 Biotechnology 1.86% 277,862 Adolor Corporation 2,756,391 497,095 Ciphergen Biosystems, Inc. 2,137,509 173,732 Corixa Corporation 632,384 1,520,124 Xcyte Therapies, Inc. (a) 4,195,542 9,721,826 Biotechnology - Drug Delivery 1.35% 1,589,184 Aradigm Corporation 2,749,288 580,094 DepoMed, Inc. 3,132,508 347,100 Durect Corporation 1,138,488 7,020,284 Building Materials 0.23% 123,222 L.B. Foster Company 1,184,163 CAD/CAM/CAE 1.20% 311,170 Ansoft Corporation 6,285,634 Communication Equipment - Software 2.84% 2,238,077 Artisoft, Inc. (a) 5,483,289 2,342,466 Artisoft, Inc. (Restricted) (a) 2,667,132 1,049,082 ION Networks, Inc. (a) 262,270 625,647 MetaSolv, Inc. 1,682,990 1,355,150 Visual Networks, Inc. 4,715,922 14,811,603 Communication Products - Equipment 3.13% 523,893 Centillium Communications, Inc. 1,273,060 1,111,483 NMS Communications Corporation 7,013,458 253,400 RADVision, Ltd. (Israel) 3,413,298 1,792,873 Superconductor Technologies, Inc. 2,492,093 251,580 Telular Corporation 2,140,946 16,332,855 Computer Equipment 0.86% 380,500 Optimal Group, Inc. (Canada) 4,482,290 Computer Services - Software 9.50% 1,023,500 ClickSoftware Technologies, Ltd. (Israel) 2,927,210 538,924 CryptoLogic, Inc. (Canada) 13,446,153 181,702 eCollege.com 2,064,135 1,442,603 First Virtual Communications, Inc. (a) 317,373 1,677,957 Net Perceptions, Inc. (a) 1,241,688 695,059 ONYX Software Corporation 2,224,189 245,900 Phoenix Technologies, Ltd. 2,031,134 13,800 Primal Solutions, Inc. 4,554 1,631,155 Quovadx, Inc. 3,898,460 1,575,000 Rainmaker Systems, Inc. 1,953,000 259,384 Stellent, Inc. 2,287,767 See the accompanying Notes to the Financial Statements. 3 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Shares Common Stocks (Continued) Value Computer Services ? Software (Continued) 326,780 SumTotal Systems, Inc. $ 1,699,256 767,850 SupportSoft, Inc. 5,113,881 1,800,000 Tarantella, Inc. (a) 3,024,000 2,480,200 Unify Corporation (a) 1,488,120 161,500 WebSideStory, Inc. 2,007,445 219,080 Witness Systems, Inc. 3,825,137 49,553,502 Computer Systems 2.62% 52,000 3D Systems Corporation 1,033,760 3,902,230 Adept Technology, Inc. (a) 5,619,211 388,100 Performance Technologies, Incorporated 3,609,330 554,127 Pinnacle Systems, Inc. 3,380,175 13,642,476 Consumer Products 0.70% 1,056,783 Meade Instruments Corp. (a) 3,624,766 Data Security 2.04% 1,657,001 Entrust, Inc. 6,280,034 119,197 SafeNet, Inc. 4,379,298 10,659,332 Electronic Components 1.65% 227,800 Frequency Electronics, Inc. 3,382,830 2,564,502 Tvia, Inc. (a) 5,205,939 8,588,769 Electronic Equipment 1.45% 1,845,205 Iteris Holdings, Inc. (a) 6,365,957 173,500 MagneTek, Inc. 1,197,150 7,563,107 Electronic Instruments 0.28% 56,749 Image Sensing Systems, Inc. 959,058 198,308 Metretek Technologies, Inc. 525,516 1,484,574 Electronic Semiconductor 0.47% 1,263,200 PSi Technologies Holdings, Inc. (Philippines) (a) 2,475,872 Energy - Oil & Gas 2.35% 179,900 Core Laboratories, N.V. (Netherlands) 4,200,665 349,000 Willbros Group, Inc. (Panama) 8,044,450 12,245,115 Energy - Technology 1.90% 804,475 Catalytica Energy Systems, Inc. 1,818,114 1,341,215 Quantum Fuel Systems Technologies Worldwide, Inc. 8,074,114 9,892,228 Entertainment 1.47% 379,500 Digital Theater Systems, Inc. 7,639,335 See the accompanying Notes to the Financial Statements. 4 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Shares Common Stocks (Continued) Value Financial Services - Miscellaneous 1.57% 249,935 ASTA Funding, Inc. $ 6,708,256 967,742 Orion Acquisition Corporation (Restricted) 1,500,000 8,208,256 Gold Mining 0.92% 2,335,500 MK Resources Company (a) 4,787,775 Healthcare Services 1.24% 478,500 I-Trax, Inc. 904,365 359,766 U.S. Physical Therapy, Inc. 5,547,592 6,451,957 Healthcare - Specialized Products & Services 1.80% 255,600 American Dental Partners, Inc. 4,846,176 619,700 STAAR Surgical Company 4,512,519 9,358,695 Housing - Construction 0.70% 166,200 Comstock Homebuilding Companies Inc. 3,651,414 Household Furniture - Appliances 0.41% 2,612,500 Chitaly Holdings Limited (Hong Kong) 2,142,250 Insurance 0.00% 200 Renaissance Acceptance Group, Inc. - Information Services 1.20% 2,937,679 EDGAR Online, Inc. (a) 4,494,649 1,102,500 FIND/SVP, Inc. (a) 1,764,000 6,258,649 Internet Commerce 0.95% 982,000 Youbet.com, Inc. 4,968,920 Media 0.23% 132,261 Napster, Inc. 1,182,413 Medical Devices & Equipment 11.02% 1,126,881 ATS Medical, Inc. 5,251,265 932,378 Applied Imaging Corporation (a) 615,370 250,000 CABG Medical, Inc. 1,497,500 316,587 Given Imaging, Ltd. (Israel) 11,387,634 365,131 Laserscope, Inc. 13,111,854 2,706,592 Micro Therapeutics, Inc. (a) 10,149,720 478,470 Natus Medical Incorporated 3,827,760 707,928 Orthovita, Inc. 2,966,218 1,559,807 Precision Optics Corporation, Inc. (a) 1,934,161 273,420 Quidel Corporation 1,388,974 393,100 Sonic Innovations, Inc. 1,639,227 1,421,381 World Heart Corporation (Canada) (a) 3,681,376 57,451,059 Medical - Drugs 1.42% 743,512 Advancis Pharmaceutical Corporation 2,840,216 621,535 CollaGenex Pharmaceuticals, Inc. 4,562,067 7,402,283 Medical Information Systems 0.49% 161,000 Schick Technologies, Inc. 2,535,750 See the accompanying Notes to the Financial Statements. 5 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Shares Common Stocks (Continued) Value Medical Instruments 0.36% 182,224 NuVasive, Inc. $ 1,867,796 Online Services 1.68% 1,735,650 The Knot, Inc. (a) 8,765,033 Paper - Packaging 0.00% 593,749 Chase Packaging Corporation - Pharmaceutical Products 0.79% 213,267 Axcan Pharma, Inc. (Canada) 4,120,318 Restaurant 1.14% 592,498 Buca, Inc. 4,123,786 542,499 Monterey Pasta, Inc. 1,839,072 5,962,858 Retail 8.32% 173,303 1-800 CONTACTS, INC. 3,812,666 447,000 Bakers Footwear Group, Inc. (a) 4,537,050 167,060 Candie's Inc. 902,124 1,198,341 EZCORP, Inc. (a) 18,466,441 431,054 Gaiam, Inc. 2,650,982 232,750 Gander Mountain Company 2,986,182 120,000 Orange 21, Inc. 1,254,000 361,500 Phoenix Footwear Group, Inc. 2,812,470 485,000 RedEnvelope, Inc. (a) 5,941,250 43,363,165 Semiconductor Equipment 1.58% 227,048 Celeritek, Inc. 351,924 1,189,299 Nova Measuring Instruments, Ltd. (Israel) (a) 4,126,868 977,326 Trikon Technologies, Inc. (Great Britain) 2,247,850 250,600 Ultra Clean Holdings, Inc. 1,518,636 8,245,278 Services 1.72% 439,385 Collectors Universe, Inc. (a) 8,976,636 Specialized Services 0.62% 632,900 NIC, Inc. 3,215,132 Technology - Miscellaneous 1.53% 238,700 Culp, Inc. 1,618,386 353,137 MarketWatch, Inc. 6,356,466 7,974,852 Telecom Equipment 1.33% 671,838 COMARCO, Inc. (a) 5,777,807 999,954 Peco II, Inc. 1,169,946 6,947,753 Telecom Services 0.67% 8,750,000 WPCS International Incorporated (Restricted) (a) 3,500,000 Therapeutics 0.88% 436,459 Pharmacyclics, Inc. 4,569,726 Total Common Stocks 81.55% 425,172,842 See the accompanying Notes to the Financial Statements. 6 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Shares Preferred Stocks Value Data Security 0.48% 1,250,000 Verdasys, Inc. Series B 2% (Restricted) $ 2,500,000 Total Preferred Stocks 0.48% 2,500,000 Principal Fair Amount Corporate Bonds Value Computer Services - Software 0.73% $3,800,000 Immersion Corporation 5% convertible, due 12/23/09 (Restricted) $ 3,800,000 ? 2,100,000 Titus Interactive 2%, due 7/1/05 (France) - 3,800,000 Computer Systems 0.70% $1,875,000 3D Systems Corporation 6%, due 11/30/13 3,661,500 Consumer Products 0.29% 1,500,000 Rockford Corporation 4.5%, due 6/11/09 1,500,000 Medical Devices & Equipment 1.19% 3,000,000 World Heart Corporation 3%, due 9/15/09 6,216,000 Transportation 0.43% 2,250,000 Velocity Express Corporation 6%, due 4/30/05 (Restricted) 2,250,000 Total Corporate Bonds 3.34% 17,427,500 Fair Warrants Warrants Value Biotechnology 0.04% 413,400 Alliance Pharmaceutical Corp. 10/30/06 $ 16,536 43,000 Discovery Laboratories, Inc. 9/19/10 123,840 4,819 Dov Pharmaceutical, Inc. 6/2/09 43,949 184,325 Biotechnology - Drug Delivery 0.22% 398,733 Aradigm Corporation 3/10/07 338,923 208,333 Aradigm Corporation 11/10/07 79,167 210,648 DepoMed, Inc. 4/21/08 741,481 1,159,571 Communication Equipment - Software 0.05% 1,140,000 Artisoft, Inc. 9/30/06 (a) 239,400 44,842 Artisoft, Inc. 12/16/08 (Restricted) (a) - 586,600 ION Networks, Inc. 2/14/07 (a) 46,928 286,328 Communication Products - Equipment 0.02% 57,861 Superconductor Technologies, Inc. 3/10/07 9,258 427,500 Superconductor Technologies, Inc. 9/26/07 98,325 107,583 See the accompanying Notes to the Financial Statements. 7 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Warrants Warrants (Continued) Value Computer Services - Software 0.14% 279,724 Attunity, Ltd. A 10/24/05 (Israel) $ 234,968 137,769 Attunity, Ltd. B 10/24/05 (Israel) 59,241 375,000 Burst.com, Inc. 1/27/05 (Restricted) - 1,250,000 First Virtual Communications, Inc. 4/12/07 (a) 12,500 276,885 First Virtual Communications, Inc. 11/12/08 (a) 22,151 81,121 Immersion Corporation 12/23/09 (Restricted) - 862,500 Interplay Entertainment Corp. 3/29/06 - 360,000 Tarantella, Inc. 2/20/09 205,200 929,560 Unify Corporation 4/26/09 204,503 738,563 Computer Systems 0.19% 1,666,700 Adept Technology, Inc. 11/18/08 (a) 983,353 Consumer Products 0.01% 70,889 Rockford Corporation 6/11/09 31,900 Electronic Components 0.09% 85,227 American Technology Corporation 7/10/07 445,737 Electronic Equipment 0.26% 708,350 Iteris Holdings, Inc. B 8/16/07 (a) 1,381,283 Electronic Instruments 0.01% 198,308 Metretek Technologies, Inc. 6/9/05 47,594 Energy - Technology 0.02% 132,667 Arotech Corporation 6/30/08 68,987 58,075 Arotech Corporation 12/31/08 21,488 90,475 Information Services 0.07% 150,000 EDGAR Online, Inc. 1/8/06 (a) 12,000 400,000 EDGAR Online, Inc. 5/26/09 (a) 172,000 600,000 FIND/SVP, Inc. 5/10/09 (a) 192,000 376,000 Medical Devices & Equipment 0.91% 268,600 Applied Imaging Corporation 7/29/06 (a) 29,546 46,526 Cardima, Inc. 2/25/05 (Restricted) - 301,050 Cardima, Inc. 2/25/05 - 114,286 Orthovita, Inc. 6/26/08 93,715 26,250 PharmaNetics, Inc. 2/25/05 - 818,182 Physiometrix, Inc. A 12/5/08 (a) 270,000 818,182 Physiometrix, Inc. B 12/5/08 (a) 245,455 47,476 SpectRx, Inc. 6/13/06 3,323 6,653,226 World Heart Corporation 9/22/08 (Canada) (a) 532,258 2,400,000 World Heart Corporation 9/15/09 (Canada) (a) 3,576,000 4,750,297 See the accompanying Notes to the Financial Statements. 8 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 Fair Warrants Warrants (Continued) Value Medical Information Systems 0.00% 2,200,000 LifeRate Systems, Inc. 11/14/07 (a) $ - Retail 0.00% 47,143 Gemstar-TV Guide International, Inc. B 12/21/05 - Semiconductor Equipment 0.01% 206,250 Trikon Technologies, Inc. 10/22/07 (Great Britain) (a) 37,125 Telecom Services 0.00% 150,780 GoAmerica, Inc. 12/19/08 18,094 8,750,000 WPCS International, Incorporated 11/17/09 (Restricted) (a) - 18,094 Telecommunications 0.01% 79,800 Q Comm International, Inc. 6/24/08 30,324 Total Warrants 2.05% 10,668,552 TOTAL INVESTMENTS 87.42% $ 455,768,894 Fair Shares Securities Sold Short Value Biotechnology 0.14% 103,800 CryoLife, Inc. $ 733,866 Retail 0.07% 18,000 Safeway, Inc. 355,320 TOTAL SECURITIES SOLD SHORT 0.21% $ 1,089,186 (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. All common stocks and warrants are non-income producing except for Asta Funding, Inc., CryptoLogic, Inc., and Frequency Electronics, Inc. See the accompanying Notes to the Financial Statements.
9 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) PORTFOLIO OF INVESTMENTS DECEMBER 31, 2004 % of Partners' Industry Concentration Total Capital Aerospace $ 2,069,508 0.40 Automotive Components 13,987,635 2.68 Biotechnology 9,172,285 1.76 Biotechnology - Drug Delivery 8,179,855 1.57 Building Materials 1,184,163 0.23 CAD/CAM/CAE 6,285,634 1.20 Communication Equipment ? Software 15,097,931 2.90 Communication Products ? Equipment 16,440,438 3.15 Computer Equipment 4,482,290 0.86 Computer Services ? Software 54,092,065 10.38 Computer Systems 18,287,329 3.51 Consumer Products 5,156,666 0.99 Data Security 13,159,332 2.52 Electronic Components 9,034,506 1.73 Electronic Equipment 8,944,390 1.72 Electronic Instruments 1,532,168 0.29 Electronic Semiconductor 2,475,872 0.47 Energy - Oil and Gas 12,245,115 2.35 Energy ? Technology 9,982,703 1.91 Entertainment 7,639,335 1.47 Financial Services ? Miscellaneous 8,208,256 1.57 Gold Mining 4,787,775 0.92 Healthcare Services 6,451,957 1.24 Healthcare - Specialized Products & Services 9,358,695 1.80 Housing ? Construction 3,651,414 0.70 Household Furniture ? Appliances 2,142,250 0.41 Insurance - 0.00 Information Services 6,634,649 1.27 Internet Commerce 4,968,920 0.95 Media 1,182,413 0.23 Medical Devices & Equipment 68,417,356 13.12 Medical ? Drugs 7,402,283 1.42 Medical Information Systems 2,535,750 0.49 Medical Instruments 1,867,796 0.36 Online Services 8,765,033 1.68 Paper ? Packaging - 0.00 Pharmaceutical Products 4,120,318 0.79 Restaurant 5,962,858 1.14 Retail 43,007,845 8.25 Semiconductor Equipment 8,282,403 1.59 Services 8,976,636 1.72 Specialized Services 3,215,132 0.62 Technology - Miscellaneous 7,974,852 1.53 Telecom Equipment 6,947,753 1.33 Telecom Services 3,518,094 0.67 Telecommunications 30,324 0.01 Therapeutics 4,569,726 0.88 Transportation 2,250,000 0.43 TOTAL PORTFOLIO $ 454,679,708 87.21% 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, 2004 REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments $ 100,630,636 Net change in unrealized appreciation 12,017,084 Total Realized and Unrealized Gain on Investments $ 112,647,720 INVESTMENT INCOME (LOSS) Investment Income Interest 1,061,496 Dividends (net of withholding taxes of $11,815) 669,614 Securities lending fees 121,580 Total Investment Income 1,852,690 Operating Expenses Administrator's fee 3,596,653 Professional fees 171,416 Independent General Partners' fees 80,000 Custody fee and other 192,647 Total Operating Expenses 4,040,716 Net Investment Loss (2,188,026) NET INCOME $ 110,459,694
See the accompanying Notes to the Financial Statements. 11 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Per Limited Corporate Individual Partners' Limited General General Unit Partners Partner Partners Total YEAR ENDED DECEMBER 31, 2003: BALANCE, DECEMBER 31, 2002 $ 214,012,386 $ 10,691,214 $ 4,737,063 $ 229,440,663 Capital contributions 6,246,000 - 5,000 6,251,000 Transfers - (73,684) 73,684 - Allocation of net income: Corporate General Partner - Performance - 36,456,814 - 36,456,814 Partners 186,001,814 10,913,052 4,134,137 201,049,003 Repurchases (25,869,523) (34,000,000) (2,000,000) (61,869,523) BALANCE, DECEMBER 31, 2003 $ 25,000 380,390,677 23,987,396 6,949,884 411,327,957 SIX MONTHS ENDED JUNE 30, 2004 Capital contributions 17,908,000 - - 17,908,000 Transfers 762 (609,673) 608,911 - Allocation of net income: Corporate General Partner - Performance - 8,127,117 - 8,127,117 Partners $ 1,893 30,165,471 1,770,528 572,470 32,508,469 Repurchases (11,587,049) - - (11,587,049) BALANCE, JUNE 30, 2004 $ 25,000 416,877,861 33,275,368 8,131,265 458,284,494 SIX MONTHS ENDED DECEMBER 31, 2004: Capital contributions 22,913,885 - - 22,913,885 Transfers 14,794 (127,937) 113,143 - Allocation of net income: Corporate General Partner - Performance - 13,964,822 - 13,964,822 Partners $ 2,902 51,054,369 3,847,876 957,041 55,859,286 Repurchases (7,654,129) (17,000,000) (5,000,000) (29,654,129) BALANCE, DECEMBER 31, 2004 $ 25,000 $ 483,206,780 $ 33,960,129 $ 4,201,449 $ 521,368,358 See Note 4 for changes in Units outstanding. See the accompanying Notes to the Financial Statements.
12 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. 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 least 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 or other reasons, the Fund could experience delays and costs in recovering the securities loaned or in gaining access to collateral. At December 31, 2004, there were no securities loans outstanding. The Fund entered into a consulting agreement (?agreement?) whereby the consultant will perform management and financial advisory services to companies (?covered investments?) in which the Fund invests. As compensation, the consultant earns ten percent of the appreciation on each covered investment for the agreed upon period. Of this amount, one half is currently payable and the remainder is deferred until a final payment date, as further defined in the agreement. 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. For purposes of the performance allocation, net income for the year ended December 31, 2003 was reduced by a loss carryover from December 31, 2002 of $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. 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, 2002 8,560.4955 427.6486 189.4825 9,177.6266 Additional Units sold 249.8400 - 0.2000 250.0400 Transfers - (2.9474) 2.9474 - Semi-annual adjustments of Units 7,440.0726 1,894.7946 165.3655 9,500.2327 Repurchases (1,034.7810) (1,360.0000) (80.0000) (2,474.7810) Balance, December 31, 2003 15,215.6271 959.4958 277.9954 16,453.1183 Additional Units sold 716.3200 - - 716.3200 Transfers 0.0305 (24.3869) 24.3564 - Semi-annual adjustments of Units 1,206.6188 395.9058 22.8988 1,625.4234 Repurchases (463.4820) - - (463.4820) Balance, June 30, 2004 16,675.1144 1,331.0147 325.2506 18,331.3797 Additional Units sold 916.5554 - - 916.5554 Transfers 0.5918 (5.1175) 4.5257 - Semi-annual adjustments of Units 2,042.1747 712.5079 38.2817 2,792.9643 Repurchases (306.1652) (680.0000) (200.0000) (1,186.1652) Balance, December 31, 2004 19,328.2711 1,358.4051 168.0580 20,854.7342
NOTE 5 - PURCHASES AND SALES OF SECURITIES: Purchases and sales of securities for the year ended December 31, 2004 aggregated $246,446,219 and $265,900,276, 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 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 0.75% of the average net assets. The Fund pays each Independent General Partner an annual fee of $20,000. NOTE 8 - SUPPLEMENTARY FINANCIAL INFORMATION: Year Ended December 31, 2004 2003 2002 2001 2000 1999 Ratio of investment expenses to average net assets 0.00% 0.57% 0.03% 0.00% 0.00% 0.00% Ratio of operating expenses to average net assets 0.84% 1.03% 0.94% 0.89% 0.85% 1.03% Ratio of total expenses to average net assets 0.84% 1.60% 0.97% 0.89% 0.85% 1.03% Ratio of net income (loss) to average net assets 23.09% 74.23% (22.16)% 16.62% 15.19% 68.01% Portfolio turnover rate 63.46% 52.43% 60.28% 91.33% 102.49 % 140.88 %
NOTE 9 - RETURN ON PARTNER INVESTMENT: At December 31, 2004, the value of a $25,000 investment made at each respective subscription date is as follows: Subscription Date Value January 1, 1994 $213,744 January 1, 1995 195,407 July 1, 1995 173,025 January 1, 1996 144,293 July 1, 1996 108,927 January 1, 1997 103,092 July 1, 1997 97,651 January 1, 1998 86,634 July 1, 1998 88,830 January 1, 1999 98,477 July 1, 1999 90,866 January 1, 2000 59,225 July 1, 2000 50,731 January 1, 2001 51,883 July 1, 2001 45,355 January 1, 2002 45,343 July 1, 2002 51,728 January 1, 2003 55,983 July 1, 2003 42,841 January 1, 2004 30,015 July 1, 2004 27,902 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. NOTE 11 - INVESTMENTS IN RESTRICTED AND ILLIQUID SECURITIES: The Fund has made investments in securities that are not freely tradable due to Securities and Exchange Commission?s regulations. These restricted securities may not be sold except in exempt transactions or when they have become registered under the Securities Act of 1933. Investing in restricted securities generally poses a greater risk than investing in more widely held, publicly traded companies. Restrictions imposed on the sale of these securities and the lack of a secondary market may affect the timing and price obtained for such sales. The following is a list of restricted and illiquid securities valued by the Fund as of December 31, 2004: Issuer Type of Security Acquisition Date Acquisition Cost Value Value as a % of Partners Capital Artisoft, Inc. Common 9/28/04 $2,667,132 $2,667,132 0.51% Orion Acquisition Corporation Common 12/17/04 1,500,000 1,500,000 0.29% WPCS International, Incorporated Common 11/17/04 3,500,000 3,500,000 0.67% Verdasys, Inc. Series B 2% Preferred 9/3/04 2,500,000 2,500,000 0.48% Immersion Corp. 5% convertible, due 12/23/09 Bond 12/27/04 3,800,000 3,800,000 0.73% Velocity Express Corporation 6%, due 4/30/05 Bond 12/22/04 2,250,000 2,250,000 0.43% Total restricted and illiquid securities $16,217,132 $16,217,132 3.11%
NOTE 12 - CREDIT RISK CONCENTRATION: Cash and cash equivalents consist principally of balances held in a custodial account with Banc of America Securities LLC. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. Net cash balances and securities in excess of these limits are protected by a guarantee provided by the broker?s parent company, Bank of America Corporation, in the amount of $300,000,000 per account or $1.2 billion in the aggregate. NOTE 13- PROXY VOTING (UNAUDITED): A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities is available (1) without charge, upon request, by calling (212) 207-6500 or (2) on the Securities and Exchange Commission (?SEC?) website at www.sec.gov. The Fund?s proxy voting record for the most recent 12-month period ended December 31 is available (1) without charge, upon request, by calling (212) 207-6500 or (2) on the SEC?s website at www.sec.gov. Information as of December 31 each year will generally be available by the following March 1. NOTE 14- FORM N-Q (UNAUDITED): The Fund files a complete Portfolio of Investments for the first and third quarters of its fiscal year with the SEC on Form N-Q. The Fund?s Form N-Q is available on the SEC?s website at www.sec.gov and may be reviewed and copied at the SEC?s Public Reference Room in Washington, DC. Information on the operation of the SEC?s Public Reference Room may be obtained by calling 1-800-SEC-0330. Item 2. Code of Ethics. The Registrant has adopted a Code of Ethics (the ?Code of Ethics?) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party. The Registrant undertakes to provide to any person without charge, upon request, a copy of the Code of Ethics. Such request can be made to Special Situations Fund III, L.P. at (212) 207-6500, 153 East 53rd Street, 55th Floor, New York, New York 10022, Attention: Rose M. Carling. There have been no amendments to the Code of Ethics during the period covered by this report. In addition, during the period covered by this report, the Registrant has not granted any waivers, including an implicit waiver, from a provision of the Code of Ethics. Item 3. Audit Committee Financial Expert. The Registrant?s board of directors (or persons performing similar functions) has determined that Stanley S. Binder possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an ?audit committee financial expert,? and has designated Stanley S. Binder as the audit committee financial expert. Stanley S. Binder is an ?independent? director (or the functional equivalent thereof) pursuant to paragraph (a)(2) of Item 3 to Form N- CSR. Item 4. Principal Accountant Fees and Services. Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Registrant?s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $123,000 and $86,800 for 2004 and 2003, respectively. Audit-Related Fees. There were no fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant?s financial statements and are not reported under ?Audit Fees? above. Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $35,300 and $26,000 for 2004 and 2003, respectively. All Other Fees. There were no fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported above. The audit committee of the Registrant was organized in 2003. All services to be performed for the Registrant by the Registrant?s accountant must be pre-approved by the audit committee. The above referenced fees for 2004 were pre-approved by the audit committee. The aggregate fees paid by the Registrant for non-audit professional services rendered by the Registrant?s accountant to the Registrant?s investment advisor and any entity controlling, controlled by, or under common control with the Registrant?s investment adviser that provides ongoing services to the Registrant for 2004 and 2003 were $40,930 and $30,699, respectively. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Schedule of Investments The Audited Schedule of Investments is included in the report to shareholders filed under Item 1 of the Form. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies The Registrant has adopted the following proxy voting policies and procedures of its investment adviser, MGP Advisers Limited Partnership: PROXY VOTING POLICIES AND PROCEDURES These policies and procedures apply to the voting of proxies by MGP Advisers Limited Partnership (the ?Adviser?) for those client accounts over which the Adviser has proxy voting authority. Adviser is the investment adviser for Special Situations Fund III, L.P. GENERAL The Adviser?s proxy voting policies and procedures are designed to ensure that the Adviser complies with the requirements under Rule 206(4)-6 and Rule 204-2 promulgated under the Investment Advisers Act of 1940, as amended, and fulfills its obligations thereunder with respect to proxy voting, disclosure, and recordkeeping. The Adviser?s objective is to ensure that its proxy voting activities on behalf of its clients are conducted in a manner consistent, under all circumstances, with the best interest of the clients. For most matters, however, the Adviser?s policy is not to vote where it believes the outcome is not in doubt in order to avoid the unnecessary expenditure of time and the cost to review the proxy materials in detail and carry out the vote. In such circumstances the Adviser believes that the client is best served by the Adviser?s devoting its time to investment activities on the client?s behalf. PROXY VOTING POLICIES The Adviser is committed to voting proxies in a manner consistent with the best interests of its clients. While the decision whether or not to vote a proxy must be made on a case-by-case basis, the Adviser generally does not vote a proxy if it believes the proposal is not adverse to the best interests of the client or if adverse, the outcome of the vote is not in doubt. In the situations where the Adviser does vote a proxy, the Adviser generally votes proxies in accordance with the following general guidelines: Proxy Proposal Issue Adviser?s Voting Policy Routine Election of Directors For Issuance of Authorized Common Stock For Stock Repurchase Plans For Domestic Reincorporation For Director Indemnification For Require Shareholder Approval to Issue Preferred Stock For Require Shareholder Approval to Issue Golden Parachutes For Require Shareholder Approval of Poison Pill For Shareholders? Right to Call Special Meetings For Shareholders? Right to Act by Written Consent For Shareholder Ability to Remove Directors With or Without Cause For Shareholders Electing Directors to Fill Board Vacancies For Majority of Independent Directors For Board Committee Membership Exclusively of Independent Directors For 401(k) Savings Plans for Employees For Anti-greenmail Charter or By-laws Amendments For Corporate Name Change For Ratification of Auditors For Supermajority Vote Requirement Against Blank Check Preferred Against Dual Classes of Stock Against Staggered or Classified Boards Against Fair Price Requirements Against Limited Terms for Directors Against Require Director Stock Ownership Against The following proxy proposal issues are so fact sensitive that no general voting policy with respect to such issues may be established by the Adviser: Reprice Management Options Fact Sensitive Adopt/Amend Stock Option Plan Fact Sensitive Adopt/Amend Employee Stock Purchase Plan Fact Sensitive Approve Merger/Acquisition Fact Sensitive Spin-offs Fact Sensitive Corporate Restructurings Fact Sensitive Asset Sales Fact Sensitive Liquidations Fact Sensitive Adopt Poison Pill Fact Sensitive Golden Parachutes Fact Sensitive Executive/Director Compensation Fact Sensitive Social Issues Fact Sensitive Contested Election of Directors Fact Sensitive Stock Based Compensation for Directors Fact Sensitive Increase Authorized Shares Fact Sensitive Tender Offers Fact Sensitive Preemptive Rights Fact Sensitive Debt Restructuring Fact Sensitive Foreign Reincorporation Fact Sensitive PROXY VOTING PROCEDURES The general partner (or other principals) of the Adviser will have the responsibility of voting proxies received by the Adviser on behalf of its clients. The Adviser will evaluate whether to vote the proxy proposals received by the Adviser. If the proxies are voted, the proxy proposals received by the Adviser and designated above in the proxy voting policies as ?For? or ?Against? will be voted by the Adviser in accordance with the proxy voting policies, and proxy proposals received by the Adviser and designated above in the proxy voting policies as ?Fact Sensitive? (or not addressed in the proxy voting policies) will be reviewed by the Adviser on a case-by-case basis. Notwithstanding the foregoing, the Adviser may vote a proxy contrary to the proxy voting guidelines if the Adviser determines that such action is in the best interest of the client. In the event that the Adviser votes contrary to the proxy voting guidelines, the Adviser will document the basis for the Adviser?s contrary voting decision. In addition to not voting proxies where the Adviser deems the expenditure of time and cost of voting would exceed the anticipated benefit to the client, the Adviser may choose not to vote proxies in certain situations or for certain clients, such as (i) where a client has informed the Adviser that it wishes to retain the right to vote the proxy, (ii) where the proxy is received for a client account that has been terminated, or (iii) where a proxy is received by the Adviser for a security it no longer manages on behalf of a client. MATERIAL CONFLICTS OF INTEREST The Adviser may occasionally be subject to material conflicts of interest in the voting of proxies due to business or personal relationships it maintains with persons having an interest in the outcome of certain votes. The Adviser, its affiliates and/or its employees may also occasionally have business or personal relationships with the proponents of proxy proposals, participants in proxy contests, corporate directors and officers, or candidates for directorships. If at anytime, the Adviser becomes aware of a material conflict of interest relating to a particular proxy proposal, the Adviser will handle the proposal as follows: * If the proposal is designated in proxy voting policies above as ?For? or ?Against,? the proposal will be voted by the Adviser in accordance with the proxy voting policies, provided little discretion on the part of the Adviser is involved; or * If the proposal is designated in the proxy voting policies above as ?Fact Sensitive? (or not addressed in the proxy voting policies), the Adviser will either (i) disclose to the client such material conflict and vote the client?s shares in accordance with the client?s instructions or (ii) take such other action as is necessary to ensure that the Adviser?s vote (including the decision whether to vote) is based on the client?s best interest and not affected by the Adviser?s material conflict of interest. PROXY VOTING RECORDS In accordance with Rule 204-2, the Adviser will maintain the following records in connection with the Adviser?s proxy voting policies and procedures: * a copy of the proxy voting policies and procedures; * a copy of all proxy statements received regarding client?s securities; * a record of each vote the Adviser casts on behalf of a client; * written records of client requests for proxy voting information, including a copy of each written client request for information on how the Adviser voted proxies on behalf of the requesting client, and a copy of any written response by the Adviser to any (written or oral) client request for information on how the Adviser voted proxies on behalf of the requesting client; and * any documents prepared by the Adviser that were material to making a decision on how to vote, or that memorialized the basis for a voting decision. Each of the foregoing records will be maintained and preserved by the Adviser for five years from the end of the last fiscal year in which an entry was made on such record, and for the first two years of such five-year period, shall be maintained at an appropriate office of the Adviser. Notwithstanding the foregoing, the Adviser may rely on proxy statements filed on the SEC?s EDGAR system instead of keeping its own copies. In addition, the Adviser may also rely upon a third party to maintain the foregoing records, provided such third party has provided to the Adviser an undertaking to provide a copy of such records promptly upon request. DISCLOSURE TO CLIENTS A copy of the Adviser?s written proxy voting policies and procedures will be provided to clients upon written request to the Adviser. In addition, information regarding how a client?s proxies were voted by the Adviser will be provided to a client upon written request to the Adviser. Item 8. Portfolio Managers of Closed-End Management Investment Companie. As of the filing of this report, March 10, 2005, Austin Marxe, President of AWM Investment Company, Inc, (?AWM?) since 1991 and David Greenhouse, Vice-President of AWM since 1992, are primarily responsible for the day-to-day management of the registrant?s portfolio. AWM serves as the general partner of MGP Advisers Limited Partnership (?MGP?), the registrant?s investment adviser. Mr. Marxe and Mr. Greenhouse are also limited partners of MGP. Mr. Marxe also serves as an Individual General Partner of the registrant. Mr. Marxe and Mr. Greenhouse also serve as members of the investment advisers to four other Special Situations funds (the ?Affiliates?) that have performance based advisory fees, with combined total assets of $ 954,330,646 as of December 31, 2004. MGP makes investments on behalf of the registrant in accordance with the stated investment objectives for the registrant. MGP is given discretionary authority over the registrant?s investments. When purchases of securities are made with respect to the registrant individually, the purchase is allocated solely to the account of the registrant. At times, however, MGP, along with AWM and the various investment advisers? to the Affiliates may purchase the same security in an aggregate amount for the accounts of one or more of the Special Situations funds (which includes the Registrant). When securities are purchased by the registrant in conjunction with other Special Situations funds, MGP and its Affiliates will allocate securities amongst the registrant and the other Special Situations funds in a fair and equitable manner depending upon the facts and circumstances of each situation, taking into account the Registrant?s stated investment objectives, liquidity, other holdings of such securities and overall portfolio, and other factors considered relevant. MGP, the registrant?s investment advisor, receives a 20% performance allocation at six month periods ending June 30 and December 31. 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. All investment advisers of the Special Situations funds managed by Mr. Marxe and Mr. Greenhouse receive similar 20% performance based advisory fees with loss recovery provisions. As of December 31, 2004, Austin Marxe and David Greenhouse each own in excess of $1,000,000 of equity securities in the registrant. Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable at this time. Item 10. Submission of Matters to a Vote of Security Holders. Not applicable at this time. Item 11. Controls and Procedures. (a) Based on an evaluation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, the registrant?s principal executive and principal financial officers, or persons performing similar functions, concluded that the disclosure controls and procedures are effective. (b) There were no significant changes in the registrant's internal control over financial reporting that occurred during the registrant's last fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) NOT APPLICABLE. (a)(2) CERTIFICATIONS REQUIRED BY ITEM 11(a)(2) OF FORM N-CSR ARE FILED HEREWITH AS EX-99.CERT. (b) CERTIFICATIONS REQUIRED BY ITEM 11(b) OF FORM N-CSR ARE FILED HEREWITH AS EX-99.906CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECIAL SITUATIONS FUND III, L.P. By: _/s/Austin Marxe____________ Austin Marxe, Principal Executive Officer Date March 10, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: _/s/Austin Marxe_____________ Austin Marxe, Principal Executive Officer Date March 9, 2005 By: _/s/ Rose M. Carling________________ Rose M. Carling, Principal Financial Officer Date March 10, 2005 12 SPECIAL SITUATIONS FUND III, L.P. (A Limited Partnership) NOTES TO THE FINANCIAL STATEMENTS 12 EX-99.906CERT