<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 2003
REGISTRATION NO. 333-85338
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
MARYLAND 6798 75-3027466
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code Number)
</Table>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
C/O JOHN G. WENKER
800 NICOLLET MALL
BC-MN-HO5W
MINNEAPOLIS, MN 55402
(612) 303-3381
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN G. WENKER
CHIEF EXECUTIVE OFFICER
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
800 NICOLLET MALL
BC-MN-HO5W
MINNEAPOLIS, MN 55402
(612) 303-3381
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS)
WITH COPIES TO:
<Table>
DOUGLAS P. LONG, ESQ. JAY L. BERNSTEIN, ESQ. JAMES D. ALT, ESQ.
P. GRAHAM VAN DER LEEUW, ESQ. LEONARD B. MACKEY, ESQ. DORSEY & WHITNEY LLP
FAEGRE & BENSON LLP CLIFFORD CHANCE US LLP 50 SOUTH SIXTH STREET
2200 WELLS FARGO CENTER 200 PARK AVENUE SUITE 1500
90 SOUTH SEVENTH STREET NEW YORK, NY 10166 MINNEAPOLIS, MN 55402
MINNEAPOLIS, MN 55402 (212) 878-8000 (612) 340-2803
(612) 766-7000
</Table>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective and after all
other conditions to the transactions described in the joint proxy
statement/prospectus have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act of 1933, as amended, registration
statement number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, as amended, check the following
box and list the Securities Act of 1933, as amended, registration statement
number of the earlier effective registration statement for the same
offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<Page>
EXPLANATORY NOTE
This Form S-4 Registration Statement includes a joint proxy
statement/prospectus which describes a proposed merger of four closed-end,
registered management investment companies (or the Existing Funds) with and into
First American Strategic Real Estate Portfolio Inc., a specialty finance company
that will elect to be taxed as a real estate investment trust for federal income
tax purposes (or First American). The terms of the merger contemplate that
shareholders of the Existing Funds participating in the merger will exchange
their shares for shares of common stock in First American or shares of common
stock in First American Strategic Income Portfolio Inc., a newly-formed,
closed-end, registered management investment company (or the New Fund). The
Form S-4 Registration Statement, of which the included joint proxy
statement/prospectus is a part, has been filed to register the shares of First
American common stock to be offered and issued in the merger. A Form N-14
Registration Statement (Securities Act No. 333-102309), of which the included
joint proxy statement/prospectus is also a part, was concurrently filed by the
New Fund to register its shares of common stock to be offered and issued in the
merger. A Form N-2 Registration Statement (Investment Company Act
No. 811-21271) was concurrently filed to register the New Fund as an investment
company under Section 8(b) under the Investment Company Act of 1940, as amended.
<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
AMERICAN SELECT PORTFOLIO INC.
800 Nicollet Mall
Minneapolis, MN 55402
(800) 677-3863
, 2003
Dear Shareholders:
We are asking you to consider and vote on a proposal that will merge each of
the following closed-end, registered management investment companies (each an
Existing Fund and together the Existing Funds) into First American Strategic
Real Estate Portfolio Inc., a specialty finance company that will elect to be
taxed as a real estate investment trust for federal income tax purposes:
- AMERICAN STRATEGIC INCOME PORTFOLIO INC.
- AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
- AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
- AMERICAN SELECT PORTFOLIO INC.
As a result of the merger, shareholders of Existing Funds participating in
the merger will receive one newly issued share of First American common stock
for each $10.00 of Existing Fund net asset value their holdings of Existing Fund
shares represent.
The terms of the merger also provide shareholders who prefer to receive and
retain an investment that is substantially similar to their existing investments
in the Existing Funds with an option (or the New Fund Option) to exchange their
Existing Fund shares for shares in First American Strategic Income Portfolio
Inc. (or the New Fund). The New Fund is registered as a closed-end management
investment company under the Investment Company Act of 1940, as amended, and has
investment policies, restrictions and strategies substantially similar to those
of the Existing Funds. One New Fund share will be issued for each $10.00 of
Existing Fund net asset value represented by Existing Fund shares that are
exchanged for New Fund shares. The New Fund will receive a portion of the assets
and liabilities of each participating Existing Fund and will have an initial net
asset value equal to the aggregate net asset value represented by Existing Fund
shares that are exchanged for New Fund shares.
The proposal is described in detail in the accompanying joint proxy
statement/prospectus. Additional information regarding the New Fund contained in
a statement of additional information relating to this joint proxy
statement/prospectus (or the Statement of Additional Information) is available
without charge, upon request by calling the toll free number set forth below or
writing to the Existing Funds at the address set forth below. The Statement of
Additional Information is incorporated by reference into this joint proxy
statement/prospectus.
You are invited to attend a special meeting of the shareholders for your
Existing Fund, which will be held on [the merger], 2003 at 9:00 a.m. at
[ ] to consider and vote upon a proposal to approve and adopt
the amended and restated agreement and plan of reorganization, including the
plan of merger constituting a part thereof, that was executed on November 21,
2002 and amended on January 23, 2003, by each Existing Fund listed above, First
American and the New Fund (or the Merger Agreement), and to approve the
contribution transactions required for the creation of the New Fund.
The board of directors of each Existing Fund has determined that the merger
is fair to, and in the best interests of, the shareholders of that Existing
Fund. Accordingly, the board of directors of each Existing Fund has approved the
merger and the Merger Agreement and has recommended that the shareholders of
that Existing Fund vote "FOR" the approval of the merger, the adoption of the
Merger Agreement and the approval of contribution transactions.
In the pages that follow, we have described the risks and benefits of voting
"FOR" the merger. We have also provided a question and answer memorandum
intended to answer many of the questions you might have. If you have further
questions, you can call our Call Center Department at (800) 677-3863.
Very truly yours,
Mark Jordahl,
Vice President--Investments
<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
AMERICAN SELECT PORTFOLIO INC.
800 Nicollet Mall
Minneapolis, MN 55402
(800) 677-3863
----------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2003
----------------------------------
A special meeting of shareholders of each of American Strategic Income
Portfolio Inc., American Strategic Income Portfolio Inc.--II, American Strategic
Income Portfolio Inc.--III and American Select Portfolio Inc. is scheduled to be
held at [ ] at 9:00 a.m., local time on [ ],
2003. Your board of directors asks you to attend this special meeting (in person
or by proxy) for the following purposes:
1. To consider and approve the proposals (a) to merge each Existing Fund into
First American Strategic Real Estate Portfolio Inc., with First American
Strategic Real Estate Portfolio Inc. as the surviving entity, (b) to adopt
the Merger Agreement and (c) to approve the contribution transactions
whereby the assets and liabilities of the Existing Funds will be allocated
between First American and the New Fund.
2. To transact any other business as may properly come before the special
meeting and any adjournments of the special meeting.
Only shareholders of record of each Existing Fund as of the close of
business on [ ], 2003 are entitled to notice of, and to vote at, this
special meeting and any adjournments of this special meeting. A list of
shareholders of record of each Existing Fund as of the close of business on
[ ], 2003 will be available at the special meeting for examination by
any shareholder or any shareholder's attorney or agent. Please note that, by
delivering a proxy to vote at the special meeting, you are also granting a proxy
to vote in favor of any adjournments of the special meeting. If the merger of an
Existing Fund is consummated, holders of record of that Existing Fund's shares
who do not vote their shares in favor of the merger and who strictly comply with
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act will be
entitled to statutory dissenters' appraisal rights as described under the
caption "THE MERGER--Availability of Statutory Dissenters' Appraisal Rights" in
the accompanying joint proxy statement/prospectus.
We invite you to attend the special meeting because it is important that
your shares be represented at the special meeting. Whether or not you plan to
attend the special meeting, please complete the enclosed proxy card by signing,
dating and returning the proxy card in the accompanying postage-paid envelope or
by taking advantage of our phone or internet voting procedures. If you attend
the special meeting, you may revoke your proxy and vote in person.
By the Orders of the Boards of
Directors,
James D. Alt,
Secretary
<Page>
SUBJECT TO COMPLETION
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
(OF WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS IS A PART) FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<Page>
JOINT PROXY STATEMENT/PROSPECTUS DATED , 2003
--------------------------
JOINT PROXY STATEMENT FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
AMERICAN STRATEGIC INCOME PORTFOLIO INC.,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
AND
AMERICAN SELECT PORTFOLIO INC.
TO BE HELD ON [ ], 2003
--------------------------
THIS JOINT PROXY STATEMENT ALSO SERVES AS THE PROSPECTUS OF
<Table>
FIRST AMERICAN STRATEGIC REAL ESTATE FIRST AMERICAN STRATEGIC INCOME
PORTFOLIO INC. PORTFOLIO INC.
UP TO 67,261,775 SHARES OF COMMON STOCK UP TO 33,288,027 SHARES OF COMMON STOCK
</Table>
--------------------------
This joint proxy statement/prospectus relates to the merger of American
Strategic Income Portfolio Inc., a Minnesota corporation, American Strategic
Income Portfolio Inc.--II, a Minnesota corporation, American Strategic Income
Portfolio Inc.--III, a Minnesota corporation, and American Select Portfolio
Inc., a Minnesota corporation (collectively, the Existing Funds), with and into
First American Strategic Real Estate Portfolio Inc., a Maryland corporation (or
First American). First American will ultimately be the surviving company in the
merger.
First American is a newly-formed specialty finance company that will elect
to be taxed as a real estate investment trust for federal income tax purposes.
As a result of the merger, shareholders of Existing Funds participating in the
merger will receive shares of First American common stock. The terms of the
merger also provide shareholders who prefer to receive and retain an investment
that is substantially similar to their existing investments in the Existing
Funds with an option to exchange their Existing Fund shares for shares in First
American Strategic Income Portfolio Inc. (or the New Fund). The New Fund, like
the Existing Funds, is a closed-end management investment company with
investment policies, restrictions and strategies substantially similar to those
of the Existing Funds.
THE MERGER INVOLVES RISKS THAT ARE DESCRIBED FULLY IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 43, INCLUDING:
- Prior to the closing of the merger, there will be no public market for the
shares of First American or the New Fund. There is substantial uncertainty
as to the price at which these shares will trade following the merger.
- At the time that the boards of directors of the Existing Funds approved
the transactions, one director was an executive officer of U.S. Bancorp,
the ultimate parent company of the Existing Funds' investment advisor,
U.S. Bancorp Asset Management, Inc. (or USBAM), which has interests in the
merger that may be different from, or in addition to, shareholder
interests. For example, as a result of the merger, USBAM stands to receive
greater compensation as investment advisor to First American than it does
under the advisory agreements with the Existing Funds.
- Shareholders of Existing Funds receiving shares of First American in the
merger will fundamentally change the nature of their investments from a
registered management investment company, which is regulated under and
afforded the protections of the Investment Company Act and holds a
relatively static portfolio of mortgages and mortgage-related assets, into
a larger, growth oriented, specialty finance company employing higher
levels of borrowings in its investment strategy. These higher levels of
borrowing could result in higher volatility of performance. These changes
may also entail greater risks, including adverse consequences should First
American fail to maintain its REIT status and the possible dilution of
shareholders if First American issues additional securities.
- First American will pay higher management fees than the Existing Funds. In
addition, First American, unlike the Existing Funds or the New Fund, may
have to pay a termination fee if its advisory agreement is terminated
without cause or is not renewed by First American.
- If an Existing Fund's shareholders fail to approve the merger or an
Existing Fund otherwise fails to participate in the merger and the merger
is consummated, the non-participating Existing Fund may face significant
operating and administrative challenges related to its size and its
responsiblility to bear its pro rata portion of the merger expenses.
- Shareholders electing New Fund shares may have such elections prorated
which may cause shareholders electing to receive shares of the New Fund to
instead receive a combination of New Fund shares and shares of First
American.
- The receipt of New Fund shares by shareholders who select the New Fund
Option will be a taxable event. The merger will not provide such
shareholders with cash to fund such tax payments.
First American has applied to list its common stock on the New York Stock
Exchange under the symbol "FAR." The New Fund has applied to list its common
stock on the American Stock Exchange under the symbol "FAP."
You should retain this joint proxy statement/prospectus for future
reference. It sets forth concisely the information about First American and the
New Fund that you should know before investing. A Statement of Additional
Information dated , 2003, containing additional information about the
New Fund has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. You may obtain a copy of the Statement of
Additional Information by contacting the Existing Funds, First American or the
New Fund at 800 Nicollet Mall, Minneapolis, Minnesota 55402, or calling (800)
677-3863.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated [ , 2003], and is
first being mailed to shareholders of the Existing Funds on or about [ ,
2003].
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
-----
WHERE YOU CAN FIND MORE INFORMATION............... v
WHAT INFORMATION YOU SHOULD RELY ON............... vi
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS...................................... vii
SUMMARY TERM SHEET................................ 1
QUESTIONS AND ANSWERS ABOUT THE MERGER............ 4
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS... 12
Introduction.................................... 12
Who We Are...................................... 12
The Merger...................................... 17
Stock Price and Dividend Information............ 32
If You Require Further Information.............. 33
Summary Historical Financial Data............... 34
First American Summary Pro Forma Financial
Data.......................................... 38
New Fund Summary Pro Forma Financial Data....... 39
NEW FUND PRO FORMA CAPITALIZATION................. 40
COMPARATIVE FEES AND EXPENSES TABLE............... 41
RISK FACTORS...................................... 43
Risks Related to the Merger..................... 43
Risks Related to Payment of Distributions....... 47
Risks Related to Business Operations............ 48
Risks Related to the Structure of First
American...................................... 57
Risks Related to the Structure of the New
Fund.......................................... 59
THE EXISTING FUNDS................................ 61
Investment Objectives and Policies.............. 61
Taxation........................................ 64
Portfolio Composition........................... 65
Historical Performance.......................... 67
Repurchase Offers............................... 69
Management and Administration................... 70
Directors and Officers.......................... 70
Valuation of Certain of the Existing Funds'
Assets........................................ 71
Regulatory Matters.............................. 72
The Investment Advisor.......................... 74
Legal Proceedings............................... 75
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO
INC............................................. 76
General......................................... 76
Investment Strategy............................. 76
Operating Policies and Strategies............... 77
Right to Inspect Books and Records.............. 82
Reports......................................... 82
Legal Proceedings............................... 82
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC..... 83
General......................................... 83
</Table>
i
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
-----
Investment Objective and Operating Policies..... 83
Repurchase of Common Shares; Conversion to
Open-End Fund................................. 85
Valuation of Certain of the New Fund's Assets... 86
Dividend Reinvestment Plan...................... 86
Regulatory Matters.............................. 87
Right to Inspect Books and Records.............. 87
Reports......................................... 87
Legal Proceedings............................... 87
THE MERGER........................................ 88
Background of the Merger........................ 88
Recommendations of the Board of Directors of
Each Existing Fund and the Special
Committee..................................... 95
Exchange of Existing Fund Shares for First
American Shares............................... 95
Exchange of Existing Fund Shares for New Fund
Shares........................................ 98
Alternatives to Merger.......................... 100
Interests of Certain Persons in the Merger...... 103
The Fairness Opinions of the Financial
Advisor....................................... 104
Opinion of the Financial Advisor................ 104
What Shareholders Will Receive in the Merger.... 110
The Merger Agreement............................ 111
Investment Allocation Procedures Following the
Merger........................................ 118
Delisting and Deregistration of the Existing
Funds' Shares................................. 119
Regulatory Approvals Required for the Merger.... 119
Exemptive Relief................................ 119
Accounting Treatment............................ 120
Tax Treatment of the Merger and Receipt of First
American Shares............................... 120
Tax Treatment of the Receipt of New Fund
Shares........................................ 121
Fees and Expenses of the Merger................. 122
Consequences if the Merger is Not Approved...... 122
Only American Strategic III May Approve the
Merger Without the Participation of Any Other
Existing Fund................................. 122
Availability of Statutory Dissenters' Appraisal
Rights........................................ 123
THE MEETING....................................... 127
The Existing Funds' Special Meeting............. 127
How to Elect the Merger Consideration You Are to
Receive....................................... 129
MANAGEMENT OF FIRST AMERICAN...................... 130
The Board of Directors and Executive Officers of
First American................................ 130
Committees of the Board of Directors............ 133
Vacancies on the Board of Directors............. 133
Compensation of Directors and Officers.......... 134
Indemnification................................. 134
The Investment Advisor.......................... 134
The REIT Advisory Agreement..................... 135
</Table>
ii
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
-----
MANAGEMENT OF THE NEW FUND........................ 139
The Board of Directors and Executive Officers of
the New Fund.................................. 139
Committees of the Board of Directors............ 141
Compensation of Directors and Officers of the
New Fund...................................... 142
Indemnification................................. 143
Investment Advisor to the New Fund.............. 143
The New Fund Advisory Agreement................. 145
Administration of the New Fund.................. 146
Custodian, Transfer Agent and Registrar for the
New Fund...................................... 146
Expenses of the New Fund........................ 146
Affiliated Brokerage............................ 147
Code of Ethics.................................. 147
SELECTED HISTORICAL FINANCIAL DATA................ 148
SELECTED PRO FORMA FINANCIAL DATA................. 153
COMPARATIVE MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE EXISTING FUNDS, THE NEW FUND AND FIRST
AMERICAN........................................ 155
Overview........................................ 155
Change in Accounting Basis...................... 155
Change in Financial Statements.................. 156
Change to a Growth Oriented Business Plan....... 157
Change in Management Fee Structure.............. 157
Change in Distribution Requirements............. 158
Change in Capital Loss Carryovers............... 158
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK AFFECTING FIRST AMERICAN............ 159
Market Risk..................................... 159
Credit Risk..................................... 161
Asset and Liability Management.................. 162
Liquidity Risk.................................. 162
Prepayment Risk................................. 162
STOCK OWNERSHIP OF THE EXISTING FUNDS............. 163
American Strategic Income Portfolio Inc......... 163
American Strategic Income Portfolio Inc.--II.... 164
American Strategic Income Portfolio Inc.--III... 165
American Select Portfolio Inc................... 166
DESCRIPTION OF CAPITAL STOCK OF FIRST AMERICAN.... 167
General......................................... 167
Preferred Stock................................. 167
Common Stock.................................... 167
Additional Classes of Stock..................... 168
Restrictions on Transfer........................ 168
DESCRIPTION OF CAPITAL STOCK OF THE NEW FUND...... 170
</Table>
iii
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
-----
US FEDERAL INCOME TAX CONSEQUENCES................ 171
US Federal Income Tax Treatment of the Merger
and the Receipt of First American Shares...... 171
US Federal Income Tax Treatment of the Receipt
of New Fund Shares............................ 172
US Federal Income Tax Consequences of the Merger
on First American's Qualification as a
REIT-Earnings and Profits Distribution
Requirement................................... 174
US Federal Income Taxation of First
American-General.............................. 175
Requirements for Qualification as a Real Estate
Investment Trust.............................. 177
US Federal Taxation of Taxable U.S. Shareholders
of First American............................. 180
US Federal Income Taxation of Tax-Exempt
Shareholders.................................. 182
US Federal Income Taxation of the New Fund...... 182
US Federal Income Taxation of Taxable U.S.
Shareholders of the New Fund.................. 184
US Federal Income Taxation of Tax-Exempt
Shareholders of the New Fund.................. 185
US Federal Income Taxation of Non-U.S.
Shareholders of Either First American or the
New Fund...................................... 185
State, Local and Foreign Taxation............... 187
ERISA CONSIDERATIONS.............................. 189
COMPARISON OF RIGHTS AND INVESTMENTS.............. 190
Comparison of Shareholder Rights................ 190
Comparison of Federal Tax Requirements for
Qualification as a Regulated Investment
Company and a Real Estate Investment Trust.... 199
Comparison of the Advisory Agreements to the
REIT Advisory Agreement....................... 201
EXPERTS........................................... 204
LEGAL MATTERS..................................... 204
OTHER MATTERS..................................... 204
APPENDICES
Appendix A--Amended and Restated Agreement and
Plan of Reorganization and Amendment
Thereto....................................... A-1
Appendix B--Plan of Merger...................... B-1
Appendix C-1--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Strategic
Income Portfolio Inc.......................... C-1-1
Appendix C-2--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Strategic
Income Portfolio Inc.--II..................... C-2-1
Appendix C-3--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Strategic
Income Portfolio Inc.--III.................... C-3-1
Appendix C-4--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Select
Portfolio Inc................................. C-4-1
Appendix D--Sections 302A.471 & 302A.473 of the
Minnesota Business Corporation Act............ D-1
Appendix E--Investment Policies of the Existing
Funds and the New Fund........................ E-1
</Table>
iv
<Page>
WHERE YOU CAN FIND MORE INFORMATION
First American has filed with the SEC a registration statement on Form S-4
(File No. 333-85338), of which this joint proxy statement/prospectus forms a
part. This Form S-4 Registration Statement registers the distribution of First
American common stock to Existing Fund shareholders. The New Fund has also filed
with the SEC registration statements on Form N-14 (Securities Act File
No. 333-102309), in which this joint proxy statement/prospectus is incorporated
by reference, and Form N-2 (Investment Company Act File No. 811-21271), and a
notification of registration on Form N-8A (Investment Company Act File
No. 811-21271). The Form N-14 Registration Statement registers the shares to be
offered and issued by the New Fund in the merger under the Securities Act of
1933, as amended (or the Securities Act). The Form N-8A Notification of
Registration registers the New Fund as an investment company under the
Investment Company Act and the Form N-2 Registration Statement contains
information about the New Fund required under the Investment Company Act. The
rules and regulations of the SEC allow the Existing Funds, First American and
the New Fund to omit some information included in the Form S-4 Registration
Statement and the Form N-14 and Form N-2 Registration Statements from this joint
proxy statement/prospectus. In addition, the Existing Funds file reports, proxy
statements and other information with the SEC under the Securities Exchange Act
of 1934, as amended (or the Exchange Act), and the Investment Company Act. You
may read and copy any of this information at the SEC's public reference room at
450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference room.
In addition, the SEC also maintains an internet web site that contains
reports, proxy statements and other information regarding issuers, including
First American, the Existing Funds and the New Fund, who file electronically
with the SEC. The address of that site is http://www.sec.gov. Reports, proxy
statements and other information concerning First American and the Existing
Funds may also be inspected at the offices of the New York Stock Exchange, which
are located at 20 Broad Street, New York, New York 10005. Following the merger,
reports, proxy statements and other information concerning the New Fund may also
be inspected at the offices of the American Stock Exchange, which are located at
86 Trinity Place, New York, New York 10006.
The SEC allows the Existing Funds, the New Fund and First American to
"incorporate by reference" information in this document, which means:
- that they can disclose important information to you by referring you
to another document filed separately with the SEC;
- the information incorporated by reference is considered to be a part
of this joint proxy statement/prospectus; and
- information that they file with the SEC will automatically update and
supersede the information in this joint proxy statement/prospectus
and any information that was previously incorporated in this joint
proxy statement/prospectus (provided that information about the New
Fund set forth in other documents separately filed by the New Fund
with the SEC will not automatically update and supersede the
information about the New Fund set forth herein).
The documents listed in the following numbered paragraphs that the Existing
Funds and the New Fund have previously filed with the SEC are considered to be a
part of this joint proxy statement/ prospectus. They contain important business
and financial information about the Existing Funds and the New Fund that is not
included in or delivered with this document.
1. American Strategic and American Select's Annual Report on Form N-30D for the
fiscal year ended November 30th in each of 2002, 2001 and 2000;
2. American Strategic II and American Strategic III's Annual Report on
Form N-30D for the fiscal year ended May 31st in each of 2002, 2001 and
2000;
v
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3. American Strategic II and American Strategic III's Semi-Annual Report on
Form N-30D for the semi-annual period ended November 30, 2002;
4. Each Existing Fund's Proxy Statement, dated August 23, 2002, for its Annual
Meeting of Shareholders held on October 1, 2002; and
5. The New Fund's Statement of Additional Information included in its Form N-14
Registration Statement, containing additional information about the New
Fund.
The Existing Funds also incorporate by reference all additional documents
that they may file with the SEC between the date of this joint proxy
statement/prospectus and the date of each Existing Fund's special meeting. These
include periodic reports, such as annual reports and semi-annual reports, as
well as proxy materials.
You may request a copy of each of the above-listed documents at no cost by
contacting the Existing Funds or the New Fund at:
800 Nicollet Mall
Minneapolis, MN 55402
(800) 677-3863
The Existing Funds also maintain a website on the internet at
www.firstamericanfunds.com. The information on the Existing Funds' website is
not considered part of this joint proxy statement/prospectus. Annual and
semi-annual reports are available free of charge on the Existing Funds' website.
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
SPECIAL SHAREHOLDERS MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN
[ ], 2003.
WHAT INFORMATION YOU SHOULD RELY ON
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS OR IN THE APPENDICES ATTACHED HERETO WHICH ARE
SPECIFICALLY INCORPORATED BY REFERENCE OR IN OTHER DOCUMENTS WHICH ARE
INCORPORATED BY REFERENCE IN THIS DOCUMENT. THEREFORE, IF ANYONE GIVES YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
THIS DOCUMENT IS DATED [ ], 2003. THE INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT/PROSPECTUS SPEAKS ONLY AS OF ITS DATE UNLESS THE
INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR A
SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, FIRST AMERICAN OR THE NEW FUND
COMMON STOCK OR TO ASK FOR PROXIES, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL
TO DIRECT THESE ACTIVITIES.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain information and statements included in, or incorporated by reference
into, this joint proxy statement/prospectus may constitute forward-looking
statements. Such forward-looking statements may involve First American's plans,
objectives, projections and expectations, which are dependent upon a number of
factors including the availability of capital, the availability of new mortgage
investments and other new business initiatives which are subject to a number of
contingent factors such as the effects of national and local economic
conditions, changes in interest rates and the condition of the capital markets
that may prevent First American from achieving its objectives. First American's
actual results, performance or achievements may differ materially from
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements are those statements
which are not statements of historical fact. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are intended to identify forward-looking statements. First American
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this joint proxy statement/prospectus may not occur.
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SUMMARY TERM SHEET
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE MERGER DESCRIBED IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS. YOU SHOULD CAREFULLY READ THIS ENTIRE
DOCUMENT AS WELL AS THOSE DOCUMENTS INCORPORATED BY REFERENCE FOR A MORE
COMPLETE DESCRIPTION OF THE MERGER.
- THE PARTIES.
FIRST AMERICAN--First American Strategic Real Estate Portfolio Inc.;
THE NEW FUND--First American Strategic Income Portfolio Inc.; and
THE EXISTING FUNDS--American Strategic Income Portfolio Inc. (or American
Strategic); American Strategic Income Portfolio Inc.--II (or American
Strategic II); American Strategic Income Portfolio Inc.--III (or American
Strategic III); and American Select Portfolio Inc. (or American Select).
- THE MERGER.
The merger is being proposed pursuant to an amended and restated plan of
reorganization, including the plan of merger constituting a part thereof,
dated as of November 21, 2002, as amended January 23, 2003, among each
Existing Fund, First American and the New Fund (or the Merger Agreement).
Pursuant to the Merger Agreement, each of the Existing Funds participating
in the merger will merge with and into First American, a specialty finance
company that will elect to be taxed as a real estate investment trust (or
a REIT) for federal income tax purposes, with First American being the
surviving entity in the merger.
As a result of the merger, Existing Fund shareholders will exchange their
shares in the Existing Funds for shares of First American common stock.
The Merger Agreement also provides shareholders who prefer to receive and
retain an investment that is substantially similar to their existing
investments in the Existing Funds with an option (or the New Fund Option)
to exchange their Existing Fund shares for shares in First American
Strategic Income Portfolio Inc. (or the New Fund). The New Fund, like the
Existing Funds, is a closed-end management investment company and has
investment policies, restrictions and strategies substantially similar to
those of the Existing Funds.
The mortgage loans and other assets, subject to related liabilities, of
each participating Existing Fund will be allocated through certain
contribution transactions described herein between First American and the
New Fund in proportion to the percentage in interest of shareholders in
each Existing Fund that receive shares in each company. Such assets will
constitute the initial assets of First American and the New Fund upon
completion of the merger.
- THE SPECIAL MEETING OF SHAREHOLDERS.
GENERAL. This joint proxy statement/prospectus is being furnished to
shareholders of each Existing Fund for use at a special meeting of
shareholders to be held collectively by the Existing Funds, or at any
adjournment or postponement of such meeting. At the special meeting, the
shareholders will be asked to consider and vote upon the proposals to
approve the merger, adopt the Merger Agreement and approve the
contribution transactions which will allocate the assets and liabilities
of the Existing Funds between First American and the New Fund. The three
proposals are related. The approval of each proposal is contigent upon the
approval of the others. Therefore, no action will be taken on any of these
three proposals unless each of them is approved.
VOTE REQUIRED. For each Existing Fund, the affirmative vote of holders
representing a majority of the outstanding shares of common stock of such
Existing Fund is required to approve the proposals.
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RECORD DATE. The Existing Funds have set [ ], 2003 as the
record date for determining those shareholders who are entitled to notice
of and to vote at the special meeting for each Existing Fund.
- WHAT YOU WILL RECEIVE IN THE MERGER.
Shareholders in the Existing Funds that participate in the merger will
receive shares of First American common stock at the exchange rate of one
newly issued share of First American common stock for each $10.00 of
Existing Fund net asset value their shares represent. In lieu of
receiving such shares, shareholders may elect to receive shares of common
stock in the New Fund at the rate of one newly issued share of the New
Fund common stock for each $10.00 of Existing Fund net asset value their
shares represent. Shareholders may elect the New Fund Option regardless
of how they vote on the merger proposals.
The terms of the merger provide that the number of shares held by
shareholders in each participating Existing Fund that may receive New
Fund shares or cash through the exercise of statutory dissenters'
appraisal rights described below will be limited to 49% of the shares of
that Existing Fund. Shareholder elections to receive New Fund shares in
excess of this limitation will be prorated based on individual share
holdings in the Existing Funds. If such prorating is necessary for any
Existing Fund, affected shareholders will receive First American common
stock for the portion of their Existing Fund shares that are not
converted into shares of the New Fund.
The net asset value of each Existing Fund for exchange ratio purposes
will be determined under the existing net asset value policies of the
Existing Funds, which will take into account the estimated expenses of
the merger, and will be calculated as of the last business day of the
week immediately preceding the closing of the merger. This date will be
used for the calculation because (i) it is standard practice for the
Existing Funds to calculate net asset value at the end of each week and
(ii) it will allow sufficient time to close the transaction without
having the number of shares fluctuate. The $10.00 per share net asset
value of First American and the New Fund common stock was selected
because it is a round number that simplifies the share exchange
calculation.
Shareholders are being asked to vote on the merger proposals and to
consider an election to receive New Fund shares even though the initial
size and asset mix of First American and the New Fund is uncertain. The
actual initial size of First American and the New Fund will depend upon
which Existing Funds participate in the merger, the number of
shareholders receiving New Fund shares and the number of holders
exercising statutory dissenters' appraisal rights. See "RISK
FACTORS--Risks Related to the Merger."
- THE BOARD OF DIRECTORS OF EACH EXISTING FUND RECOMMENDS THAT YOU VOTE FOR THE
MERGER PROPOSALS.
The board of directors of each Existing Fund has determined that the
merger is fair to, and in the best interests of, the shareholders of that
Existing Fund. Accordingly, the board of directors of each Existing Fund
has approved the merger and the Merger Agreement and has recommended that
the shareholders of that Existing Fund vote "FOR" the approval of the
merger, the adoption of the Merger Agreement and the related contribution
transactions.
In reaching this determination, the board of directors of each Existing
Fund considered the deliberations, findings and recommendations of a
special committee of independent directors, which was appointed by the
board of directors of each Existing Fund to make findings with respect to
the merger, to consider possible alternatives to the merger, to lead the
negotiations of the terms of the merger with USBAM, the investment
advisor to the Existing Funds and a wholly-owned subsidiary of U.S.
Bancorp, and to report to the full board of directors of each Existing
Fund on its deliberations, findings and recommendations. The boards of
directors and
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the special committee also consulted with Friedman, Billings, Ramsey &
Co., Inc. (or FBR), legal counsel and the Existing Funds' accountants and
received fairness opinions from FBR (or the Fairness Opinions).
- ALLOCATION OF THE ASSETS AND LIABILITIES OF THE EXISTING FUNDS BETWEEN FIRST
AMERICAN AND THE NEW FUND.
After shareholders vote and elect their consideration options, EquiServe
will calculate the percentage of shareholders of each Existing Fund
electing the New Fund Option. Immediately prior to the closing of the
merger, a specified percentage of the assets, subject to related
liabilities, of each Existing Fund approving and participating in the
merger will be contributed to the New Fund in exchange for shares of the
New Fund. The percentage of assets and liabilities in each Existing Fund
that will be contributed to the New Fund will equal the percentage in
interest of shareholders of that Existing Fund that are to receive New
Fund shares in the merger.
The assets allocated between First American and the New Fund will be
substantially equivalent. In particular, all multifamily and commercial
loans and corporate notes will be divided into two pools, each containing
similar characteristics such as income, credit risk, leverage against the
value of the underlying real estate, loan term, refinance risk, lien
position, property type, interest rate type, interest calculation method
and geographic location of underlying collateral. However, multiple loans
securing one property will be allocated to only one entity. All
investments collateralized by single-family residential properties (whole
loans, participations, subordinate bonds, etc.) will be allocated to the
New Fund. Any other holdings, including but not limited to, cash,
mortgage backed securities and REIT preferred stocks will be allocated on
a pro rata basis between First American and the New Fund adjusted
slightly to compensate First American for not receiving any allocation of
single-family loans. Further adjustments will be made to ensure that
First American and the New Fund are in compliance with the asset holding,
leverage and income regulations associated with REITs and regulated
investment companies (or RICs). The liabilities of the Existing Funds
will be allocated between First American and the New Fund on a pro rata
basis as of the effective date of the merger. See "THE MERGER--The Merger
Agreement."
- THE EXISTING FUNDS WILL INCUR FEES AND EXPENSES IN CONNECTION WITH THE
MERGER.
Except as set forth below, all costs and expenses incurred in connection
with the merger (including, but not limited to, the preparation of all
necessary registration statements, proxy materials and other documents,
preparation for and attendance at board and committee, shareholder,
planning, organizational and other meetings and costs and expenses of
accountants, attorneys, financial advisors and other experts engaged in
connection with the merger) shall be borne by the Existing Funds. Such
costs and expenses will be allocated among the Existing Funds based on
their relative net asset values whether or not an Existing Fund
participates in the merger. However, costs and expenses incurred in
connection with the legal representation of USBAM's interests with
respect to the merger and related matters will be borne by USBAM. The
estimated costs and expenses related to the merger are $4,500,000. The
Existing Funds as a group will bear the first $3,400,000 of such expenses
and will, subject to certain exceptions, equally share all transaction
expenses in excess of $3,400,000 with USBAM. Each Existing Fund's pro
rata share of expenses will be determined based on its relative net asset
value. Based on the net asset values of the Existing Funds as of
November 30, 2002, the Existing Funds would bear the following amounts
and percentages of the expenses of the merger that are to be borne by the
Existing Funds: American Strategic: $271,000 or 6.8%; American Strategic
II: $1,175,000 or 29.4%; American Strategic III: $1,708,000 or 42.7%; and
American Select: $846,000 or 21.1%. See "THE MERGER--Fees and Expenses of
the Merger."
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE PURPOSE OF THE MERGER PROPOSAL? (SEE PAGE 88)
A: The proposals, as described in this joint proxy statement/prospectus,
relates to a merger that will combine the Existing Funds into a single
newly-formed REIT, First American. Shareholders of the Existing Funds
participating in the merger will receive shares of First American common
stock. Alternatively, the merger also allows shareholders to elect to
exchange their Existing Fund shares for shares in the New Fund, a
newly-formed, closed-end, registered management investment company. This
joint proxy statement/prospectus details the proposed merger and provides
information about the Existing Funds, First American and the New Fund as
well as the benefits and risks associated with the merger. We encourage you
to carefully read this joint proxy statement/prospectus in its entirety.
Q: WHAT WILL FIRST AMERICAN DO? (SEE PAGE 76)
A: First American was formed as the vehicle through which the Existing Funds
will continue their businesses upon completion of the merger. First
American's strategy is to grow its investment portfolio and net income over
time through additional investments in mortgage-related assets that will
enable it to capitalize on the spread between the yield on its assets (net
of credit losses) and the cost of its borrowing and hedging activities.
First American will seek to qualify and will elect to be taxed as a REIT for
federal income tax purposes. First American will continue to invest in many
of the same types of assets held by the Existing Funds and will thus
emphasize direct ownership of commercial, multifamily and residential
mortgage loans.
As of November 30, 2002, the Existing Funds held nearly $900 million of
mortgate-related assets consisting of a portfolio of over 200 separate
mortgage loans with an aggregate outstanding principal amount of
approximately $670.0 million and U.S. agency mortgage-backed securities with
an aggregate outstanding balance of approximately $94.75 million. The loan
portfolio had a weighted average remaining maturity of approximately four
years and a weighted average interest rate of approximately 8.25%.
Approximately 58% of the loans pay interest at a fixed rate, while 42% are
adjustable-rate mortgages. Of the Existing Funds' remaining assets at
November 30, 2002, the largest portion consisted of approximately
$97.0 million in corporate notes to real estate opportunity funds.
The Existing Funds seek to enhance their earnings by financing portions of
their mortgage-related asset portfolios with short-term borrowings. As of
November 30, 2002, these borrowings totaled approximately $215.6 million,
which represented 24.10% of the Existing Funds' aggregate total assets as of
such date.
Upon completion of the merger, it is anticipated that First American will
have substantially greater borrowing capacity than any of the Existing
Funds. First American has obtained a verbal commitment from the institutions
with which the Existing Funds have lending relationships to expand their
current cumulative whole loan reverse repurchase agreement capacity of
$210,000,000 to $350,000,000. In addition, First American is taking steps to
add at least two additional lending facilities, each to provide $250,000,000
of additional borrowing capacity. First American is currently negotiating
with six financial institutions to obtain such financing, which remains
subject to further negotiation and execution of a mutually acceptable
agreement.
To the extent that the initial assets of First American are reduced by the
allocation of assets to the New Fund, First American's additional borrowing
capacity will also be reduced.
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Q: WHAT IS A REIT? (SEE PAGE 77)
A: A REIT is essentially a corporation or business trust that combines the
capital of many investors to acquire or provide financing for all forms of
real estate. A REIT serves much like a mutual fund for real estate in which
investors obtain the benefit of a diversified portfolio under professional
management. Its shares are often freely traded on a major stock exchange. A
company that qualifies as a REIT generally does not pay corporate income tax
to the extent that it distributes its net income to shareholders.
Q: WILL FIRST AMERICAN QUALIFY AS A REIT? (SEE PAGE 77)
A: Yes. First American will seek to qualify and elect to be taxed as a REIT.
Ernst & Young has delivered to First American an opinion that, commencing
with its taxable year ending December 31, 2003, First American will be
organized in accordance with, and its proposed method of operation will
enable it to meet, the requirements for qualification and taxation as a
REIT.
Q: WHAT WILL THE NEW FUND DO? (SEE PAGE 83)
A: The New Fund, like the Existing Funds, has registered under the Investment
Company Act as a closed-end, registered management investment company. This
registration imposes the Investment Company Act's regulatory structure on
the New Fund. The New Fund has investment policies, restrictions and
strategies that are substantially similar to those of the Existing Funds.
The New Fund's investment portfolio will initially consist of its share of
Existing Funds assets, primarily single-family, multifamily and commercial
loans and mortgage-backed securities. The New Fund will not qualify as a
REIT, but similar to a REIT, will not pay corporate income tax to the extent
that it distributes its net income to shareholders.
Q: WHAT WILL BE THE DIVIDEND POLICY OF FIRST AMERICAN? (SEE PAGE 77)
A: First American intends to pay quarterly dividends to its shareholders. Under
the applicable REIT requirements of the Code, First American is required to
distribute at least 90% of its taxable income. First American intends to
make quarterly distributions to its shareholders of amounts that will, at a
minimum, enable it to comply with these provisions. The actual amount of
such distributions will be determined on a quarterly basis by First
American's board of directors, taking into account, in addition to the REIT
requirements, the cash needs and net income of First American, the market
price for its common stock and other factors the board considers relevant.
Q: WHAT WILL BE THE DIVIDEND POLICY OF THE NEW FUND? (SEE PAGE 48)
A: The New Fund intends to pay monthly dividends to its shareholders in a
manner and form consistent with the dividend and distribution payments
currently made by the Existing Funds. Under the applicable RIC requirements
of the Code, the New Fund is required to distribute, on an annual basis, at
least 90% of the sum of (i) its investment company taxable income and
(ii) net tax-exempt income. The New Fund intends to make monthly
distributions to its shareholders of amounts that will, at a minimum, enable
it to comply with these provisions. The actual amount of such distributions
will be determined on a monthly basis by the New Fund's board of directors,
taking into account, in addition to the RIC requirements, the cash needs and
net income of the New Fund, the market price for its stock and other factors
the board of directors considers relevant.
Q: WHAT WERE THE PRINCIPAL CONSIDERATIONS TAKEN INTO ACCOUNT BY EACH EXISTING
FUND'S BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE WITH RESPECT TO THE
MERGER? (SEE PAGE 95)
A: The board of directors of each Existing Fund, including a special committee
appointed for purposes of the proposed merger, has determined that the
merger is fair to, and in the best interests of, the shareholders of that
Existing Fund. Accordingly, the board of directors of each Existing
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Fund has approved the merger and the Merger Agreement and has recommended
that the shareholders of that Existing Fund vote "FOR" the approval of the
merger, the adoption of the Merger Agreement and the approval of the related
contribution transactions.
In reaching their determinations, the board of directors of each Existing
Fund and the special committee considered that the merger allows Existing
Fund shareholders to exchange their shares in the Existing Fund for shares
of common stock in First American, which the boards of directors and the
special committee believe provides the following benefits to shareholders:
- the potential for company growth and enhanced access to capital;
- a more flexible operating structure and decreased regulatory burden;
- the opportunity to increase borrowings used in investment activities;
- the potential for enhanced liquidity;
- greater investment diversification; and
- the opportunity for shareholders to exchange their shares in a
tax-deferred transaction.
The board of directors of each Existing Fund and the special committee
also took into account the following potentially negative factors associated
with the exchange by shareholders of their shares in the Existing Funds for
shares of First American:
- uncertain market price of First American common stock after the
merger;
- the volatility of the REIT market;
- increased leverage may increase exposure to loss;
- increased compensation is payable to USBAM under the investment
advisory agreement with First American (or the REIT Advisory
Agreement);
- termination fees may be payable to USBAM upon termination or
non-renewal of the REIT Advisory Agreement;
- shareholders of First American will no longer enjoy certain
protections afforded by the Investment Company Act;
- restrictions imposed on operations and ownership in order to maintain
REIT status;
- the nature of the investment held by investors in the Existing Funds
will change;
- the initial size of First American is uncertain;
- First American may make lower and less frequent distributions than
the dividends historically paid by the Existing Funds; and
- failure of First American to maintain REIT status would have adverse
tax consequences.
In considering such negative factors associated with the exchange of
Existing Fund shares for shares in First American, the board of directors of
each Existing Fund and the special committee also took into account that the
merger offers shareholders of the Existing Fund the flexibility, subject to
certain limitations, to receive and retain an investment that is
substantially similar to their existing investments in the Existing Funds
and thus avoid many of the potential negative factors associated with the
receipt of shares of First American common stock in the merger.
Neither the board of directors of any Existing Fund nor the special
committee is making any recommendation to any individual shareholder as to
whether such shareholder should select the New Fund Option. The boards of
directors and the special committee believe that the decision to
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select the New Fund Option should depend upon the investment objectives,
risk profile, tax circumstances, organizational form and regulatory
limitations of each individual shareholder. However, in including the New
Fund Option as part of the merger proposal, the boards of directors and the
special committee considered the following positive and negative factors
relating to the New Fund Option.
The positive factors considered with respect to the New Fund Option
included:
- the ability of Existing Fund shareholders who are satisfied with
their current investments to continue an investment in the New Fund
which is substantially similar in terms of investment policies,
strategies and limitations;
- similar investment advisory fees and other expenses;
- the lower leverage and the related lesser volatility and more modest
risk/return characteristics that will be associated with the New Fund
as compared to First American; and
- the continued availability of Investment Company Act protections to
shareholders who select the New Fund Option.
The negative factors considered with respect to the New Fund Option
included:
- the uncertain market price of New Fund common stock after the merger;
- the more limited access to capital and more limited flexibility of
the New Fund as compared to First American;
- the potentially small size of the New Fund;
- the taxability of the New Fund Option;
- the potential necessary prorating of New Fund shares to shareholders
who elect to receive such shares; and
- the potentially higher management fee that will be paid by the New
Fund when compared to American Select.
After consideration of the positive and negative factors affecting the
transaction, the board of directors of each Existing Fund and the special
committee recommend a vote in favor of the merger, the adoption of the
Merger Agreement and the approval of the related contribution transactions.
In view of the wide variety of factors considered by the board of directors
of each Existing Fund and the special committee, the boards of directors and
the special committee did not find it practicable to, and did not, quantify
or otherwise attempt to assign relative weights to the specific factors
considered. The board of directors of each Existing Fund and the special
committee viewed their positions and recommendations based on the totality
of the information presented after taking into consideration all the factors
set forth above. The board of directors of each Existing Fund and the
special committee determined that the potential benefits of the merger
outweighed the potential detriments associated with the merger.
Q: WHO IS THE EXCHANGE AGENT IN THE TRANSACTION AND WHAT IS ITS ROLE? (SEE
PAGE 129)
A: The exchange agent for the transaction is EquiServe. EquiServe will process
the elections and will allocate New Fund shares and First American shares
among the shareholders consistent with their elections and the proration
procedures discussed in this joint proxy statement/prospectus. Soon after
the closing, EquiServe will send to each Existing Fund shareholder who has
not elected the New Fund Option or exercised statutory dissenters' rights a
letter of transmittal for use in the exchange of shares and instructions
explaining how to surrender stock certificates to EquiServe. If
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your shares are held in "street name" you will be contacted by your broker,
bank or other nominee.
Q: WHAT ARE THE SPECIFIC PROPOSALS WHICH SHAREHOLDERS OF THE EXISTING FUNDS
WILL BE ASKED TO CONSIDER AT THE SPECIAL MEETING? (SEE PAGE 127)
A: The purpose of the special meeting of shareholders is to obtain the consent
of the shareholders to the three proposals described in this joint proxy
statement/prospectus. The first proposal is the approval of the merger of
the Existing Funds into First American. The second proposal is the adoption
of the Merger Agreement. The third proposal is the approval of the
contribution transactions which will allocate the assets and liabilities of
the Existing Funds between First American and the New Fund. The three
proposals are related. The approval of each proposal is contingent upon the
approval of the others. Therefore, no action will be taken on any of these
three proposals unless each of them is approved.
Q: WHAT SHAREHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER? (SEE PAGE 127)
A: For each Existing Fund, an affirmative vote of a majority of the outstanding
shares of common stock of such Existing Fund is required to approve the
merger, adopt the Merger Agreement and approve the related contribution
proposals.
Q: WHAT ARE THE VOTING AND ELECTION PROCEDURES TO BE FOLLOWED BY SHAREHOLDERS?
(SEE PAGE 128)
A: In this joint proxy statement/prospectus, shareholders are being asked both
to vote on the merger transaction proposals and to decide whether to receive
shares of First American or to elect to receive shares of the New Fund.
Shareholders of record may vote in person at the special meeting or vote by
proxy. Shareholders of record may vote by proxy through the mail, by
telephone or through the internet. Instructions on how to vote your proxy
will be listed on your voting instructions form.
In order to elect shares of the New Fund, shareholders must return the
Consideration Election Form that is enclosed with this joint proxy
statement/prospectus, or which may be obtained from a shareholder's broker,
bank or other nominee if such shares are held in "street name." Shareholders
electing to receive shares of the New Fund must complete the Consideration
Election Form and return it to EquiServe on or prior to , 2003,
which is the date prior to the special meetings. Shareholders who do not
return the Consideration Election Form to EquiServe will receive shares of
First American. A shareholder may submit a Consideration Election Form
regardless of how such shareholder votes with respect to the merger
transaction.
The chart which is attached to the proxy card and the Consideration Election
Form which accompanies this joint proxy statement/prospectus illustrates the
steps each shareholder should follow in voting and electing consideration to
be received in connection with the merger.
Q: CAN I ELECT TO RECEIVE PART FIRST AMERICAN SHARES AND PART NEW FUND SHARES?
(SEE PAGE 110)
A: No. Shareholders must make one election with respect to all of their shares.
To the extent that a shareholder holds shares through different accounts,
such as an individual, IRA, pension plan or a family trust account, each
account may make its own election with respect to shares held in the
account.
Q: CAN I CHANGE MY ELECTION TO RECEIVE NEW FUND SHARES? (SEE PAGE 129)
A: You may change your election at any time before the deadline specified in
the Consideration Election Form by notifying EquiServe. If you hold your
shares through a bank, broker or other nominee, you should contact that firm
to find out how to change your election.
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Q: HOW MAY I CHANGE MY VOTE? (SEE PAGE 128)
A: Whether you vote by mail, telephone or through the internet, you may revoke
your proxy any time before it is exercised at the special meeting by
(i) notifying the Existing Fund's secretary in writing, (ii) returning a
later-dated proxy, (iii) voting again by telephone or through the internet
at a later time or (iv) voting at the special meeting. If you hold your
shares through a bank, broker or other nominee, you should contact that firm
to find out how to change your vote.
Q: WHAT IF, IN THE AGGREGATE, MORE THAN 49% OF THE SHARES IN ANY EXISTING FUND
ELECT TO RECEIVE NEW FUND SHARES OR EXERCISE STATUTORY DISSENTERS' APPRAISAL
RIGHTS? (SEE PAGE 110)
A: The terms of the merger provide that the number of shares held by
shareholders in each participating Existing Fund that may receive New Fund
shares or cash through the exercise of statutory dissenters' appraisal
rights will be limited to 49% of the shares of that Existing Fund. The
boards of directors determined such requirement was necessary in order to
allow the merger to be accomplished on a tax deferred basis for those
shareholders receiving First American shares. Shareholder elections to
receive New Fund shares in excess of this limitation will be prorated based
on individual share holdings in the Existing Funds. These shareholders will
receive First American common stock for the portion of their shares that is
not converted into New Fund shares. However, if the holders of 60% or more
of an Existing Fund's shares elect to receive New Fund shares, that Existing
Fund will not participate in the merger.
Q: HOW WILL THE ASSETS AND LIABILITIES OF THE EXISTING FUNDS BE ALLOCATED TO
THE NEW FUND? (SEE PAGE 118)
A: After shareholders vote and elect their consideration options, EquiServe
will calculate the percentage of shareholders of each Existing Fund electing
the New Fund Option. Immediately prior to the closing of the merger, a
specified percentage of the assets, subject to related liabilities, of each
Existing Fund approving and participating in the merger will be contributed
to the New Fund in exchange for shares of the New Fund. The percentage of
assets and liabilities in each Existing Fund that will be contributed to the
New Fund will equal the percentage in interest of shareholders of that
Existing Fund that are to receive New Fund shares in the merger. For
example, if 10% of the shares of an Existing Fund elect the New Fund Option,
10% of the assets, subject to related liabilities, of that Existing Fund
will be contributed to the New Fund in exchange for shares in the New Fund.
After such asset transfers and immediately prior to the merger, First
American will hold, in the aggregate, 100% of the outstanding shares of the
New Fund. These shares will then be issued to shareholders receiving New
Fund shares in the merger.
The assets allocated between the New Fund and First American will be
substantially equivalent, as measured by weighted average interest rates,
credit quality, remaining maturity dates and other specified factors.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER? (SEE PAGE 171)
A: The merger is intended to qualify as a tax-free reorganization. The Existing
Funds have received an opinion from Ernst & Young LLP stating that the
merger will qualify as a tax-free reorganization under Section 368(a) of the
Code. Neither the Existing Funds nor their shareholders will recognize
taxable gain or loss with respect to the distribution and receipt of common
shares of First American in the merger. However, shareholders of the
Existing Funds will recognize any gain realized with respect to the receipt
of cash (pursuant to the exercise of statutory dissenters' appraisal rights
or in lieu of fractional shares) or New Fund shares. The Existing Funds also
will recognize any gain realized with respect to the distribution of New
Fund shares. Each of the Existing Funds has capital loss carryovers
available, which may be utilized to offset gain recognized with respect to
the distribution of New Fund shares. USBAM believes that the amount of the
capital loss carryovers available to each Existing Fund will be sufficient
to offset completely any gain that each Existing Fund may recognize by
reason of the distribution of New Fund Shares. See
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"US FEDERAL INCOME TAX CONSEQUENCES--US Federal Income Tax Treatment of the
Merger and the Receipt of First American Shares" and "US FEDERAL INCOME TAX
CONSEQUENCES--US Federal Income Tax Treatment of the Receipt of New Fund
Shares."
Shareholders participating in the New Fund Option who receive solely New
Fund shares generally will be subject to tax on gain they realize at capital
gains rates (assuming the shares are held as capital assets) to the extent
that the fair market value of the shares of the New Fund received in the
merger exceeds the adjusted tax basis of their Existing Fund shares
converted into New Fund shares. Shareholders participating in the New Fund
Option who receive both New Fund shares and First American shares generally
will be subject to tax at capital gains rates on gain they realize, but in
an amount not in excess of the fair market value of the New Fund shares
received.
While the adjusted tax basis of a shareholder's investment will vary
depending on the circumstances under which the shareholder acquired the
shares, it is generally the case that a shareholder who purchased shares
will have an adjusted tax basis equal to the purchase price of the shares
plus expenses incurred in the acquisition plus undistributed capital gains
for which the shareholder is subject to tax. In addition, it is expected
that the fair market value of the New Fund shares will generally be equal to
the initial trading value of such shares on the AMEX on the initial trading
day for such shares following the closing of the merger. The tax rate on
income from capital gains is generally 20%, but is reduced to 10% for
taxpayers in the 15% income tax bracket, and is further reduced to 8% with
respect to gains from capital assets held more than 5 years by such
taxpayers. These capital gains tax rates are the rates in effect in 2002 and
are subject to future legislative change.
See "US FEDERAL INCOME TAX CONSEQUENCES--Examples of US Federal Income Tax
Treatment to Shareholders" for hypothetical examples of the U.S. federal
income tax treatment to shareholders who participate in the merger.
Notwithstanding the above, it is possible that a shareholder's receipt of
New Fund shares or cash could be treated as a dividend and subject to tax at
ordinary income rates if the shareholder's beneficial interest in the
Existing Fund (taking into account application of the constructive owner-
ship rules of the Code) is not sufficiently reduced in connection with the
merger. However, under applicable Internal Revenue Service guidelines, a
holder of a minority interest in First American whose relative stock
interest in First American is minimal, who exercises no control over the
affairs of First American, and who experiences a reduction in the
shareholder's proportionate interest in First American relative to the
shareholder's proportionate interest in the Existing Funds, both directly
and by application of the constructive ownership rules, generally will not
be deemed to have received a distribution of a dividend under the rules set
forth in Section 302(b)(1) of the Code. You should consult with your tax
advisors regarding the tax consequences of the merger to you.
Q: WHAT WILL THE TAX BASIS OF THE EXISTING FUNDS' SHAREHOLDERS BE IN STOCK THEY
RECEIVE IN THE MERGER? (SEE PAGE 173)
A: The tax basis of First American shares received by an Existing Fund
shareholder who exchanges Existing Fund stock for First American shares will
be the same as the basis of the Existing Fund shares surrendered in exchange
therefor. The tax basis of New Fund shares received by an Existing Fund
shareholder who exchanges Existing Fund shares for New Fund shares will
equal their fair market value. The tax basis of First American shares, if
any, received by an Existing Fund shareholder who exchanges Existing Fund
shares for First American shares and New Fund shares will be the same as the
basis of the Existing Fund shares surrendered in exchange therefor,
decreased by the fair market value of New Fund shares received by such
shareholder, and increased by the amount of capital gain recognized by such
shareholder and the amount, if any, treated as a
10
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dividend to such shareholder. See "US FEDERAL INCOME TAX CONSEQUENCES" for a
more detailed discussion.
Q: WHAT HAPPENS IF THE MERGER DOES NOT OCCUR? (SEE PAGE 122)
A: If the merger of any Existing Fund is not consummated for any reason, the
Existing Fund expects to continue to operate in its current form. There will
be no change in that Existing Fund's investment objectives, policies or
restrictions. No other transaction is currently being considered by the
board of directors of any Existing Fund as an alternative to the merger,
although other alternatives may be explored in the future.
Q: SHOULD THE EXISTING FUNDS' SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES
NOW? (SEE PAGE 129)
A: Only registered shareholders of the Existing Funds not holding shares in
"street name" and who elect the New Fund Option should forward their stock
certificates with their Consideration Election Forms. If your shares are
held in "street name" and you wish to elect to receive New Fund shares, you
must only return your properly completed Consideration Election Form but not
your Existing Fund stock certificates. Written instructions for exchanging
stock certificates will be included in the Consideration Election Form.
Shareholders not electing the New Fund Option or exercising statutory
dissenters' appraisal rights will receive a letter of transmittal shortly
after closing instructing them about exchanging their stock certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? (SEE PAGE 111)
A: We expect that the merger will be completed shortly following the special
meeting.
Q: WHAT IF I OBJECT TO THE MERGER? AM I ENTITLED TO STATUTORY DISSENTERS'
APPRAISAL RIGHTS? (SEE PAGE 123)
A: Yes. You have the right to dissent from the merger and, subject to strict
compliance with the requirements and procedures of Minnesota law, to receive
payment of the "fair value" of your shares of Existing Fund common stock.
These rights, as well as the requirements and procedures for asserting them
under Minnesota law, are described in this joint proxy statement/prospectus.
In addition, the full text of the relevant sections of the Minnesota
Business Corporation Act, as amended (or the MBCA), is reprinted in
Appendix D to this joint proxy statement/prospectus.
Q: WHAT ALTERNATIVES TO THE MERGER WITH FIRST AMERICAN WERE CONSIDERED? (SEE
PAGE 100)
A: The alternatives reviewed included:
- maintaining the status quo;
- liquidating the Existing Funds or conducting tender offers for their
shares;
- converting the Existing Funds into a single closed-end interval fund;
and
- converting the Existing Funds into a single open-end fund, a single
closed-end fund, a business development company or a taxable
corporation.
In reaching their determination to recommend the merger, the special
committee and the board of directors of each Existing Fund determined that
the merger is the alternative that is in the best interests of the Existing
Funds and their shareholders.
Q: WHO CAN HELP ANSWER MY ADDITIONAL QUESTIONS? (SEE PAGE 33)
A: Shareholders of any Existing Fund with additional questions should call our
Call Center Department at (800) 677-3863.
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SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
This summary highlights material information described more fully elsewhere
in this joint proxy statement/prospectus. This summary does not contain all of
the information that shareholders should consider. To understand the merger
fully and for a more complete description of the legal terms of the merger,
shareholders should read this document and the documents to which we have
referred shareholders carefully, including the Merger Agreement attached to this
joint proxy statement/prospectus. When we use the term "Merger Agreement" in
this document, we are referring, collectively, to the amended and restated
agreement and plan of reorganization, a copy of which is included in this joint
proxy statement/prospectus as Appendix A, and the form of plan of merger
constituting a part thereof, a copy of which is included in this joint proxy
statement/prospectus as Appendix B.
INTRODUCTION
This joint proxy statement/prospectus relates to the merger of the following
funds:
- American Strategic Income Portfolio Inc.;
- American Strategic Income Portfolio Inc.--II;
- American Strategic Income Portfolio Inc.--III; and
- American Select Portfolio Inc.
with and into First American Strategic Real Estate Portfolio Inc., a Maryland
corporation, with First American being the surviving company in the merger.
The merger will consolidate the Existing Funds into First American, a
specialty finance company that will elect to be taxed as a REIT under the Code.
The merger is being proposed in order to allow the Existing Funds to continue
their business and investment strategies in a more flexible vehicle which offers
the potential for enhanced liquidity to shareholders and for higher earnings and
distributions over time. See "THE MERGER--Recommendations of the Board of
Directors of Each Existing Fund and the Special Committee." The terms of the
merger also provide shareholders who prefer to receive and retain an investment
that is substantially similar to their existing investments in the Existing
Funds with an option to exchange their Existing Fund shares for shares of First
American Strategic Income Portfolio Inc., a Minnesota corporation. See "THE
MERGER--What Shareholders Will Receive in the Merger."
WHO WE ARE
THE EXISTING FUNDS
The Existing Funds are diversified, closed-end management investment
companies registered under the Investment Company Act. Their primary investment
objective is to provide a high level of current income, and secondarily, to seek
capital appreciation. The Existing Funds seek to achieve their objectives by
investing in mortgage-related assets consisting primarily of whole loans secured
by multifamily and commercial properties and, to a lesser extent, in U.S. agency
mortgage-backed securities.
As of November 30, 2002, the Existing Funds held nearly $950 million of
mortgage-related assets consisting of a portfolio of over 200 separate mortgage
loans with an aggregate outstanding principal amount of approximately $670.0
million and U.S. agency mortgage-backed securities with an aggregate outstanding
balance of approximately $94.75 million. The loan portfolio had a weighted
average remaining maturity of approximately four years and a weighted average
interest rate of approximately 8.25%. Approximately 58% of the loans pay
interest at a fixed rate, while 42% are adjustable-rate mortgages. Of the
Existing Funds' remaining assets at November 30, 2002, the largest portion
consisted of approximately $97.0 million in corporate notes issued by real
estate opportunity funds. As noted, the Existing Funds seek to enhance their
earnings by financing portions of their mortgage-related asset portfolios with
short-term borrowings. As of November 30, 2002, these borrowings totaled
approximately $215.6 million.
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The shares of common stock of each Existing Fund are listed on the NYSE, and
the shares of American Strategic II and American Strategic III are also listed
on the Chicago Stock Exchange.
THE INVESTMENT ADVISOR
USBAM, which is registered with the SEC as an investment advisor under the
Investment Advisers Act of 1940, as amended (or the Advisers Act), is the
investment advisor for each Existing Fund. USBAM is a wholly-owned subsidiary of
U.S. Bank National Association, which is in turn owned by U.S. Bancorp. As of
February 28, 2003, USBAM and its affiliated asset management groups had more
than $114.0 billion in assets under management.
USBAM will also serve as the investment advisor to First American and the
New Fund. At all times, USBAM will be subject to the direction and oversight of
the board of directors of First American and the New Fund, respectively. The
members of the existing management team of USBAM who are currently responsible
for advising the Existing Funds will serve as the management team for First
American and the New Fund.
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
First American Strategic Real Estate Portfolio Inc., a Maryland corporation,
was formed on January 11, 2002 as the vehicle through which the Existing Funds
will continue their businesses upon completion of the merger. First American
will elect to be taxed as a REIT under the Code. As a REIT, First American
generally will not be subject to federal income tax to the extent that it
distributes its net income to its shareholders. First American has applied to
list its common stock on the NYSE under the symbol "FAR." Prior to the closing
of the merger, there will be no public market for the common stock of First
American and there can be no assurance that an active trading market will
develop or be sustained following the merger. There is also substantial
uncertainty as to the price at which the common stock will trade following the
merger.
THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Following the merger, First American's board of directors will consist of
six directors, four of whom will not be affiliated with either First American or
USBAM. The executive officers of First American will consist of core members of
USBAM's management team. They will not be separately compensated for their
service to First American as officers. See "MANAGEMENT OF FIRST AMERICAN--The
Board of Directors and Executive Officers of First American."
INVESTMENT STRATEGY
First American's strategy is to continue to grow its asset base, which will
initially consist of the mortgage portfolio it acquires in the merger, and its
net income over time through additional investments in mortgages and
mortgage-related assets. First American will seek to capitalize on the spread
between the yield on its assets (net of credit losses) and the cost of its
borrowings and hedging activities. To achieve growth in its asset base and net
income, First American will:
- emphasize direct ownership of commercial, multifamily and residential
mortgage loans, focusing on loan sizes ranging from $1.0 million to $10.0
million. USBAM believes that loans of this size are readily available at
attractive prices, support portfolio diversification and offer opportunities
for First American to implement value-added financing techniques in portfolio
management activities;
- adhere to rigorous underwriting standards developed and implemented over the
last decade by the management team of USBAM;
- seek to acquire assets that will maximize returns on invested capital within
the context of balance sheet management and risk diversification
considerations;
- facilitate the acquisition of mortgage product for investment through
long-standing relationships enjoyed by the management team of USBAM with
national and regional mortgage bankers, life insurance companies and banks,
including affiliates of USBAM;
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- utilize greater levels of leverage than the Existing Funds (which currently
operate near the maximum leverage permitted under the Investment Company Act)
or the New Fund in its investment activities in an attempt to enhance returns
and cash available for distribution to shareholders;
- provide incentivized compensation to USBAM and its management team so as to
maximize the benefits First American derives from its advisory arrangement
with USBAM and the resources available to it through the U.S. Bancorp
network;
- capitalize on First American's more flexible organizational structure by
tapping capital sources, such as lines of credit, secured or unsecured debt,
and certain equity financings (which would otherwise be restricted by the
Investment Company Act and cannot be accessed by the Existing Funds or the
New Fund); and
- employ hedging transactions to protect its investment portfolio from interest
rate fluctuations and other changes in market conditions.
DISTRIBUTIONS
Under the REIT provisions of the Code, First American is required to
distribute annually at least 90% of its net taxable income. See "US FEDERAL
INCOME TAX CONSEQUENCES--Requirements for Qualification as a Real Estate
Investment Trust." First American intends to make quarterly distributions of its
taxable income to its shareholders of amounts that will, at a minimum, enable it
to comply with these provisions. The actual amount of such distributions will be
determined on a quarterly basis by First American's board of directors, taking
into account, in addition to the REIT requirements, the cash needs and net
income of First American, the market price for its common stock and other
factors the board considers relevant.
THE REIT ADVISORY AGREEMENT
As a condition to the merger, First American will enter into the REIT
Advisory Agreement with USBAM. Pursuant to the REIT Advisory Agreement, USBAM
will be responsible for the day-to-day operations of First American and
performing (or causing to be performed) such services and activities relating to
the assets and operations of First American as USBAM, subject to the direction
and control of First American's board of directors, deems appropriate.
Pursuant to the REIT Advisory Agreement, the services that USBAM will be
responsible for providing to First American include:
- establishing a complete program of investing and reinvesting the capital and
assets of First American in accordance with the investment objectives and
policies of First American;
- serving as a consultant to First American with respect to the formulation of
its investment criteria and policy guidelines;
- counseling First American in connection with policy decisions to be made by
First American's board of directors;
- advising First American on borrowing and leverage strategies and guidelines;
- representing First American in connection with its purchase, accumulation and
sale of assets and the incurrence of debt;
- furnishing reports and statistical and economic research to First American
regarding First American's investments and activities;
- administering the day-to-day operations of First American and performing or
supervising the performance of necessary administrative functions;
- communicating on behalf of First American with its investors;
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- assisting First American in complying with legal and regulatory requirements;
- providing the executive and administrative personnel, office space and
equipment required in rendering the foregoing services; and
- performing such other services as may be required from time to time for
management and other activities relating to the assets of First American as
First American's board of directors reasonably requests or USBAM considers
appropriate.
As compensation for these services, USBAM will receive the following base
management and performance fees payable quarterly:
BASE MANAGEMENT FEE
<Table>
0.25% per annum Payable on investment grade assets or residential mortgage-backed
securities of equivalent credit quality
1.0% per annum Payable on the first $1.0 billion of other assets
0.75% per annum Payable on other assets over $1.0 billion
</Table>
PERFORMANCE FEE
<Table>
20.0% of the "Excess yield" equals the amount by which (a) the net income
"excess yield" per share of First American common stock (before the
on all performance fee) exceeds (b) a net income per share that
outstanding would result in a yield, tied to historical offering prices
shares of of the common stock, equal to the greater of 10% or the
common stock applicable ten-year U.S. Treasury rate plus 3.5% (each
expressed as a quarterly percentage)
</Table>
First American may have to pay a termination fee to USBAM under certain
circumstances if the REIT Advisory Agreement is terminated without cause or is
not renewed by First American.
See "MANAGEMENT OF FIRST AMERICAN--The REIT Advisory Agreement" for a
complete description of the terms of the REIT Advisory Agreement.
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
First American Strategic Income Portfolio Inc., a Minnesota corporation, is
a newly-formed closed-end, registered management investment company. After
completion of the merger, the New Fund's investment portfolio will initially
consist of a portion (as determined in accordance with the allocation procedures
set forth in the Merger Agreement) of the Existing Funds' assets, primarily
single-family, multifamily and commercial loans and mortgage backed-securities.
The New Fund will have investment policies, restrictions and strategies
substantially similar to those of the Existing Funds.
The New Fund has applied to list its common stock on the AMEX under the
symbol "FAP." Prior to the closing of the merger, there will be no public market
for the common stock of the New Fund and there can be no assurance that an
active trading market will develop or be sustained following the merger. There
is also substantial uncertainty as to the price at which the common stock will
trade following the merger.
THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The New Fund's board of directors will consist of seven directors, one of
whom is an "interested person" (as defined in the Investment Company Act) and
six of whom are not "interested persons." All of these directors currently serve
as directors of the Existing Funds and will continue to serve in the same
capacities. See "MANAGEMENT OF THE NEW FUND--The Board of Directors and
Executive Officers of the New Fund" for the names and business addresses of the
directors and officers of the New Fund and their principal occupations and other
affiliations during the past five years.
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INVESTMENT STRATEGY
The New Fund's investment objective is to provide a high level of current
income. Under normal conditions, the New Fund will invest at least 80% of its
total assets in income producing securities (excluding zero coupon securities).
The New Fund will emphasize mortgage-related assets, which the New Fund defines
as investments that directly or indirectly represent a participation in or are
secured by and payable from mortgage loans, focusing primarily on multifamily
and commercial loans. The balance of the New Fund's total assets will be
invested in U.S. agency mortgage-backed securities and corporate debt
securities. The allocation of assets among mortgage-related assets and other
eligible investments will vary from time to time based upon USBAM's evaluation
of economic and market trends and its perception of the relative values
available from the different types of securities at any time. The New Fund may
use leverage to purchase assets. However, pursuant to the Investment Company
Act, the principal amount of the borrowing may not exceed 33 1/3% of the New
Fund's total assets. Both leverage and investments in the foregoing securities
and instruments pose special risks to investors. See "RISK FACTORS--Risks
Related to Business Operations."
The investment objectives of the New Fund and the Existing Funds are
substantially similar. The investment objective of the New Fund is to provide a
high level of current income. Each Existing Fund has a primary investment
objective of providing a high level of current income and a secondary objective
of capital appreciation. The investment policies, restrictions and strategies of
the New Fund and the Existing Funds also are substantially similar. There are,
however, some differences, including the following:
- The Existing Funds' investments in whole loans are restricted to loans
secured or partially secured by interests in real property. The New Fund may
also invest in whole loans that are secured by pledges of ownership interest
in entities that own and operate real property.
- Each Existing Fund may invest no more than 35% of its total assets in whole
loans and mortgage participations secured by commercial properties. The New
Fund is not subject to this percentage limitation.
- The New Fund may originate mortgage loans. The Existing Funds may not.
- The fundamental investment restrictions of the New Fund are somewhat less
limiting than those of the Existing Funds. The Investment Company Act
requires investment companies adopt certain fundamental investment
restrictions which may not be changed without shareholder approval. The New
Fund's fundamental investment restrictions were designed to avoid wherever
possible the necessity of shareholder meetings to approve any changes in
these restrictions that might be necessary or desirable as a result, for
example, of a change in law or a new investment opportunity.
DISTRIBUTIONS
The New Fund intends to make monthly dividend and distribution payments to
its shareholders in a manner and form consistent with the dividend and
distribution payments currently made by the Existing Funds. Under the applicable
RIC requirements of the Code, the New Fund will be required to distribute, on an
annual basis, at least 90% of the sum of its (i) investment company taxable
income and (ii) net tax-exempt income. The New Fund intends to make monthly
distributions to its shareholders of amounts that will, at a minimum, enable it
to comply with these provisions. See "US FEDERAL INCOME TAX CONSEQUENCES--US
Federal Income Taxation of the New Fund." The actual amount of such
distributions will be determined on a monthly basis, taking into account, in
addition to the RIC requirements, the cash needs and net income of the New Fund,
the market price for its stock and other factors the board considers relevant.
See "RISK FACTORS--Risks Related to Payment of Distributions."
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THE NEW FUND ADVISORY AGREEMENT
USBAM will also enter into an investment advisory agreement (or the New Fund
Advisory Agreement) with the New Fund. Pursuant to the New Fund Advisory
Agreement, USBAM will be responsible for the day-to-day operations of the New
Fund and performing (or causing to be performed) such services and activities
relating to the assets and operations of the New Fund as USBAM, subject to the
direction and control of the New Fund's board of directors, deems appropriate.
Pursuant to the New Fund Advisory Agreement, USBAM will furnish the New Fund
with investment advice and, in general, will supervise the management and
investment program of the New Fund. USBAM will furnish, at its own expense, all
necessary administrative services, office space, equipment and clerical
personnel for servicing the investments of the New Fund, and executive and
supervisory personnel for managing the investments and effecting the New Fund's
portfolio transactions. USBAM also will pay the salaries and fees of all
officers and directors of the New Fund who are affiliated persons of USBAM.
As compensation for these services, the New Fund is required to pay USBAM a
monthly advisory fee in an amount equal to the sum of 0.01667% of the average
weekly net assets of the New Fund during the month (approximately 0.20% on an
annual basis) and 4.5% of the daily gross income (I.E., investment income,
including amortization of discount income, other than gains from the sale of
securities or gains received from options and futures contracts less interest on
money borrowed by the New Fund) accrued by the New Fund during the month;
provided, however, that this monthly management fee shall not exceed in the
aggregate 1/12 of 0.725% of the New Fund's average weekly net assets during the
month (approximately 0.725% on an annual basis).
The New Fund's advisory agreement may be terminated by either party at any
time upon 60 days written notice without the payment of any penalty. The New
Fund may terminate the advisory agreement upon the vote of either a majority of
the New Fund's board of directors or a majority of the voting securities of the
New Fund.
INVESTMENT ALLOCATION PROCEDURES FOLLOWING THE MERGER
USBAM has advised the Existing Funds that until USBAM notifies First
American and the New Fund of any new policies, USBAM will follow the policies
set forth in "THE MERGER--Investment Allocation Procedures Following the
Merger." These guidelines are intended to fairly allocate investment
opportunities between First American, the New Fund and any Existing Fund that
does not participate in the merger.
THE MERGER
THE MERGER AGREEMENT
On November 21, 2002, each Existing Fund, First American and the New Fund
executed the Merger Agreement. If the merger is approved by shareholders of an
Existing Fund and the other conditions to the participation of that Existing
Fund in the merger are satisfied or waived, it will merge with and into First
American with First American being the surviving company in the merger. Further,
the Merger Agreement provides that in order to provide the New Fund with its
initial investments and other assets, immediately prior to the closing of the
merger, each Existing Fund participating in the merger will contribute to the
New Fund mortgage loans and other assets, subject to related liabilities. The
percentage of assets of each participating Existing Fund that will be
contributed to the New Fund will equal the percentage of outstanding shares of
that Existing Fund that are held by shareholders who will receive New Fund
shares in the merger. Specific assets will be allocated between First American
and the New Fund in accordance with the allocation procedures described below.
After such asset transfers and immediately prior to the merger First American
will hold 100% of the outstanding shares of the New Fund. These shares will then
be distributed by First American to shareholders of the
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Existing Funds receiving New Fund shares in the merger. As a result, First
American may be deemed an underwriter with respect to the New Fund shares within
the meaning of the Securities Act.
WHAT SHAREHOLDERS WILL RECEIVE IN THE MERGER
MERGER CONSIDERATION. Shareholders in the Existing Funds that participate in
the merger will receive shares of First American common stock at the exchange
rate of one newly issued share of First American common stock for each $10.00 of
Existing Fund net asset value their shares represent. In lieu of receiving such
shares, shareholders may elect to receive shares of common stock in the New
Fund. Shareholders electing this option will receive one newly issued share of
the New Fund common stock for each $10.00 of Existing Fund net asset value their
shares represent.
The terms of the merger provide that the number of shares held by
shareholders in each participating Existing Fund that may receive New Fund
shares or cash through the exercise of statutory dissenters' appraisal rights
will be limited to 49% of the shares of that Existing Fund. Shareholder
elections to receive New Fund shares in excess of this limitation will be
prorated based on individual share holdings in the Existing Funds. If such
prorating is necessary for any Existing Fund, affected shareholders will receive
First American common stock for the balance of their Existing Fund shares that
are not converted into shares of the New Fund.
The net asset value of each Existing Fund for purposes of determining the
number of shares of First American or New Fund common stock that Existing Fund
shareholders will receive will be determined under the existing net asset value
policies of the Existing Funds, which will take into account the estimated
expenses of the merger, and will be calculated as of the last business day of
the week immediately preceding the closing of the merger. This date will be used
for the calculation because (i) it is standard practice for the Existing Funds
to calculate net asset value at the end of each week and (ii) it will allow
sufficient time to close the transaction without having the number of shares
fluctuate. The $10.00 per share net asset value of First American and the New
Fund common stock was selected because it is a round number that simplifies the
share exchange calculation.
Shareholders of any Existing Fund that participates in the merger will
receive either First American or New Fund common stock. Neither First American
nor the New Fund will issue fractional shares in the merger. Instead,
shareholders will receive a cash payment in the amount of the proceeds from the
sale of their fractional shares in the market. See "THE MERGER--What
Shareholders Will Receive in the Merger."
The following table describes the aggregate net asset values and the net
asset value per Existing Fund share for each Existing Fund as of November 30,
2002, and the number of shares of First American or New Fund common stock that
would have been available to be issued for each Existing Fund share had the
merger been completed as of such date:
<Table>
<Caption>
SHARE EXCHANGE TABLE SHARES OF FIRST
NET ASSET VALUE AMERICAN OR THE NEW
PER EXISTING FUND SHARE FUND COMMON STOCK
AGGREGATE NET NET ASSET VALUE EXCLUDING ESTIMATED TO BE ISSUED PER
EXISTING FUND ASSET VALUE* PER EXISTING FUND SHARE* TRANSACTION EXPENSES EXISTING FUND SHARE
- ------------- ------------- ------------------------ ----------------------- -------------------
American Strategic $ 53,352,147 $12.61 $12.67 1.261
American Strategic II 211,502,484 13.25 13.32 1.325
American Strategic III 267,827,898 12.55 12.63 1.255
American Select 143,698,072 13.48 13.56 1.348
</Table>
- ---------------------
* Assumes estimated transaction expenses to be paid by the Existing Funds of
$271,000 or $0.064 per share for American Strategic, $1,175,000 or $0.074
per share for American Strategic II, $1,708,000 or $0.080 per share for
American Strategic III and $846,000 or $0.079 per share for American
Select.
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RECOMMENDATION OF THE EXISTING FUNDS' BOARDS OF DIRECTORS AND THE SPECIAL
COMMITTEE
The board of directors of each Existing Fund has determined that the merger
is fair to, and in the best interests of, the shareholders of that Existing
Fund. Accordingly, the board of directors of each Existing Fund has approved the
merger and the Merger Agreement and has recommended that the shareholders of
that Existing Fund vote "FOR" the approval of the merger, the adoption of the
Merger Agreement and the transfer of a portion of the assets and the liabilities
of the Existing Funds to the New Fund in exchange for New Fund shares.
In reaching this determination, the board of directors of each Existing Fund
considered the deliberations, findings and recommendations of a special
committee of independent directors, which was appointed by the board of
directors of each Existing Fund to make findings with respect to the merger, to
consider possible alternatives to the merger, to lead the negotiations of the
terms of the merger with USBAM and to report to the full board of directors of
each Existing Fund on its deliberations, findings and recommendations.
The special committee, consisting of Leonard W. Kedrowski (Chair), Richard
K. Riederer and Virginia L. Stringer, met on 25 occasions since its appointment
on December 5, 2001. On November 21, 2002, it reported to the full board of
directors of each Existing Fund as to its findings at which time it recommended
that the board of directors and shareholders of each Existing Fund approve the
merger, the Merger Agreement and the contribution transactions which will
allocate assets and liabilities of the Existing Funds between First American and
the New Fund. The boards of directors and the special committee engaged FBR to
act as their financial advisor, Gardner, Carton & Douglas to act as their
counsel and also consulted with USBAM and the Existing Funds' accountants and
legal counsel. The special committee also considered the Fairness Opinions from
FBR. See "THE MERGER--Recommendations of the Board of Directors of Each Existing
Fund and the Special Committee."
POSITIVE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF EACH EXISTING FUND
AND THE SPECIAL COMMITTEE WITH RESPECT TO THE EXCHANGE OF EXISTING FUND SHARES
FOR FIRST AMERICAN SHARES. In reaching their determinations, the board of
directors of each Existing Fund and the special committee considered that the
merger allows Existing Fund shareholders to exchange their shares in the
Existing Fund for shares of common stock in First American, which the boards and
the special committee believe provides the following benefits to shareholders:
POTENTIAL FOR GROWTH; ENHANCED ACCESS TO CAPITAL. Following the merger,
First American will have the potential for enhanced access to and flexibility in
obtaining additional equity capital and debt financing. First American intends
to use this enhanced flexibility to grow its investment portfolio by purchasing
additional mortgage and mortgage-related assets at positive spreads between the
yield on its assets (net of credit losses) and the cost of its borrowing and
hedging activities, and thereby to increase its earnings and distributions to
shareholders over time.
MORE FLEXIBLE OPERATING STRUCTURE AND DECREASED REGULATORY BURDEN. In the
merger, the participating Existing Funds will consolidate into First American,
which will not be subject to the regulatory framework of the Investment Company
Act. First American will provide a capital and operating structure that can
respond more efficiently to, and anticipate the occurrence of, changing
conditions in U.S. capital markets, thereby enhancing First American's ability
to generate higher risk-adjusted returns compared to the Existing Funds.
THE OPPORTUNITY TO INCREASE BORROWINGS USED IN INVESTMENT ACTIVITIES. Unlike
the Existing Funds, First American will not be subject to the borrowing
limitations of the Investment Company Act, which limits borrowings to an amount
equal to one-third of an investment company's assets. The Existing Funds
currently operate near the maximum amount of leverage permitted under the
Investment Company Act and operate with an internal control limitation on
leverage of 30% of each Existing Fund's total assets.
POTENTIAL FOR ENHANCED LIQUIDITY. Following the merger, the anticipated
listing of the shares of First American common stock on the NYSE and First
American's potentially larger equity market capitalization and growth strategy
should enhance the liquidity of First American common stock held by
shareholders.
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GREATER INVESTMENT DIVERSIFICATION. It is anticipated that, following the
merger, First American's portfolio of mortgage loans will be more diversified in
terms of number and type of investments and risk profile than the current
portfolio of any individual Existing Fund. Such diversification may be further
enhanced through First American's acquisition of additional mortgage loans.
THE OPPORTUNITY FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING FUND SHARES FOR
SHARES OF FIRST AMERICAN IN A TAX-DEFERRED TRANSACTION. The merger offers
shareholders an opportunity to exchange their Existing Fund shares for shares of
First American common stock on a basis expected to be tax-free for federal
income tax purposes.
NEGATIVE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF EACH EXISTING FUND
AND THE SPECIAL COMMITTEE WITH RESPECT TO THE EXCHANGE OF EXISTING FUND SHARES
FOR FIRST AMERICAN SHARES. The board of directors of each Existing Fund and the
special committee also took into account the following potentially negative
factors associated with the exchange by shareholders of their shares in the
Existing Funds for shares of First American:
UNCERTAIN MARKET PRICE OF FIRST AMERICAN COMMON STOCK AFTER THE
MERGER. Prior to the merger, there will have been no public market for First
American common stock and there can be no assurance that a regular trading
market for First American common stock to be issued in the merger will develop
or, if developed, that any such market will be sustained.
VOLATILITY OF REIT MARKET. Historically, the trading price of shares of
publicly-traded mortgage REITs has been more volatile than that of the Existing
Funds' shares.
INCREASED LEVERAGE MAY INCREASE EXPOSURE TO LOSS. Upon completion of the
merger, First American will not be subject to the borrowing limitations of the
Investment Company Act, and First American intends to be more highly leveraged
than any of the Existing Funds, thereby exposing First American to greater risk
of losses.
INCREASED COMPENSATION IS PAYABLE TO USBAM. The REIT Advisory Agreement
provides for compensation to be paid by First American to USBAM that is higher
than the compensation currently paid by the Existing Funds to USBAM. For
example, for the 12-month period ended November 30, 2002, the Existing Funds
paid aggregate fees to USBAM (including administration fees) of $5,801,000,
while on a pro forma basis for the same period (assuming maximum participation
in First American), the fees payable to USBAM would have been $7,246,000 (or
1.16% of shareholders' equity) for First American and $429,000 (or 0.85% of net
assets) for the New Fund. First American's plan is to utilize greater levels of
leverage in its investment activities. Thus, when compared to the fees based on
the Existing Funds' historical leverage levels, the fees based on the increased
leverage of First American will be higher than indicated above. Based on the
advice of FBR and their review of fee structures in place for comparable
companies identified by FBR, the board of directors of each Existing Fund
justified the higher management fee because substantially more active asset
management is required for First American (a growth-oriented company) compared
to the Existing Funds or the New Fund.
TERMINATION FEE MAY BE PAYABLE TO USBAM UPON TERMINATION OR NON-RENEWAL OF
THE REIT ADVISORY AGREEMENT. First American will be obligated to pay USBAM a
termination fee in the event First American terminates or declines to renew the
REIT Advisory Agreement, except in the case of a termination for cause. Applying
the pro forma net equity of First American as of November 30, 2002 (assuming
maximum participation) (I.E., approximately $626,380,601), it is estimated that
the termination fee payable to USBAM during the first two years of First
American's operations would be approximately $31,319,030. In contrast, no
termination fee is due to USBAM upon termination of any of the advisory
agreements with the Existing Funds or the New Fund. The Investment Company Act
requires that investment advisory contracts be terminable at any time without
the payment of any penalty.
SHAREHOLDERS OF FIRST AMERICAN WILL NO LONGER ENJOY CERTAIN PROTECTIONS
AFFORDED BY THE INVESTMENT COMPANY ACT. The Investment Company Act provides
certain protections to the shareholders of the Existing Funds (such as the
ability for a company to terminate its advisory contracts within 60 days
20
<Page>
without penalty, the limitation on leverage to one-third of assets, the severe
restrictions on transactions with affiliates, the required annual approval of
advisory contracts by a majority of the board of directors, including a majority
of the independent directors, and the approval of the shareholders required to
change fundamental policies) that First American's shareholders will not have.
See "THE EXISTING FUNDS--Regulatory Matters."
RESTRICTIONS IMPOSED ON OPERATIONS AND OWNERSHIP IN ORDER TO MAINTAIN REIT
STATUS. In order to maintain REIT status under the Code, First American will
need to satisfy certain tests as to its operations, imposing restrictions on the
nature of its assets, its ability to hedge its assets and related borrowings,
and requiring First American to distribute at least 90% of its taxable income to
its shareholders each year. In addition, First American's articles of
incorporation provide for restrictions regarding ownership and transfer of First
American's stock in order to comply with REIT ownership requirements. If any
shareholder becomes a shareholder of First American in violation of the
ownership limit, the excess shares held would be subject to the provisions of
the articles of incorporation relating to ownership limit violations, which have
the effect of depriving the excess shares of voting rights and the right to
receive regular dividends and subjecting the excess shares to repurchase by
First American, or a forced sale in the market. The board of directors of each
Existing Fund and the special committee also considered the fact that Existing
Funds' shareholders who stand to receive shares in the merger in amounts
exceeding the ownership limit would, unless sold prior to the closing of the
merger, be subject to the ownership limit provisions.
OTHER NEGATIVE FACTORS. The board of directors of each Existing Fund and the
special committee also considered that:
- the nature of the investment held by investors in the Existing Funds will
change;
- the sale of shares of First American common stock by Existing Fund
shareholders who received First American shares as a result of the New Fund
Option proration procedures could exert downward pressure on the trading
price of First American common stock;
- the initial size of First American is uncertain;
- First American may make lower and less frequent distributions than the
dividends historically paid by the Existing Funds; and
- failure of First American to maintain REIT status would have adverse tax
consequences.
EXCHANGE OF EXISTING FUND SHARES FOR NEW FUND SHARES. In considering such
negative factors associated with the exchange of Existing Fund shares for shares
in First American, the board of directors of each Existing Fund and the special
committee also took into account that the merger offers shareholders of the
Existing Funds the flexibility, subject to certain limitations, to receive and
retain an investment that is substantially similar to their existing investments
in the Existing Funds and thus avoid many of the potential negative factors
associated with the receipt of shares of First American common stock in the
merger. Neither the board of directors of any Existing Fund nor the special
committee is making any recommendation to any individual shareholder as to
whether such shareholder should select the New Fund Option. The boards of
directors and the special committee believe that the decision to select the New
Fund Option should depend upon the investment objectives, risk profile, tax
circumstances, organizational form and regulatory limitations of each individual
shareholder. However, in including the New Fund Option as part of the merger
proposal, the boards of directors and the special committee considered the
following positive and negative factors relating to the New Fund Option:
POSITIVE FACTORS RELATING TO THE NEW FUND OPTION. In general, the special
committee and the boards of directors viewed the negative factors described
above with respect to the exchange of Existing Fund shares for First American
shares to be positive factors with respect to the exchange of Existing Fund
21
<Page>
shares for New Fund shares. The special committee and the boards of directors
particularly noted the following positive factors:
CONTINUATION OF SIMILAR INVESTMENT. Existing Fund shareholders who elect the
New Fund Option will be able to continue an investment which is substantially
similar to their current investment in terms of investment policies, strategies
and limitations and in terms of investment advisory fees and other expenses.
CONSOLIDATION ELIMINATES MULTIPLE FIXED COSTS. Consolidation of the Existing
Funds into the New Fund creates the potential to eliminate the need to pay
multiple fixed costs associated with the Existing Funds, including the costs of
preparing multiple periodic filings and shareholder reports and multiple
administrative agent fees, transfer agent fees and other similar expenses.
LOWER LEVERAGE AND VOLATILITY. The New Fund, like the Existing Funds, will
be subject to the Investment Company Act's limitations on the use of leverage.
Thus, those Existing Fund shareholders who do not wish to experience the
increased leverage and the accompanying potentially increased volatility and
returns associated with First American have the ability to continue an
investment with the more modest risk/return characteristics associated with the
Existing Funds and the New Fund.
INVESTMENT COMPANY ACT PROTECTIONS. Shareholders of the New Fund, like
shareholders of the Existing Funds, will enjoy the protections afforded to
shareholders under the Investment Company Act. These protections include, among
others, the ability of the board of directors to terminate the New Fund's
investment advisory agreement at any time without the payment of any penalty or
other termination fee, and the prohibition of most transactions between the New
Fund and its affiliates, including its investment advisor and the advisor's
affiliates. See "THE EXISTING FUNDS--Regulatory Matters." Thus, those Existing
Fund shareholders who wish to continue to have the benefits of Investment
Company Act protections have the ability to do so by selecting the New Fund
Option.
NEGATIVE FACTORS RELATING TO THE NEW FUND OPTION. In general, the special
committee and the boards of directors viewed the positive factors described
above with respect to the exchange of Existing Fund shares for First American
shares to be negative factors with respect to the exchange of Existing Fund
shares for New Fund shares. The special committee and the boards of directors
particularly noted the following negative factors:
UNCERTAIN MARKET PRICE OF NEW FUND COMMON STOCK AFTER THE MERGER. Prior to
the merger, there will have been no public market for the New Fund's common
stock and there can be no assurance that a regular trading market for its common
stock to be issued in the merger will develop or, if developed, that any such
market will be sustained. In the absence of a public trading market, a
shareholder may be unable to liquidate his or her investment in the New Fund. In
this regard, the Existing Funds have tended to trade at discounts to their net
asset values. FBR has advised the Existing Funds' boards of directors and the
special committee that it has found no strong relationship between the market
capitalizations of closed-end funds and the discounts at which they trade to net
asset value. Thus, if a trading market for the New Fund shares develops, such
shares may, like those of the Existing Funds, trade at a discount to the New
Fund's net asset value.
MORE LIMITED ACCESS TO CAPITAL AND FLEXIBILITY. Following the merger, the
New Fund will be subject to the same regulatory restrictions under the
Investment Company Act as the Existing Funds and will therefore have
significantly less flexibility in accessing and obtaining additional equity
capital and debt financing compared to First American. Although the New Fund
will be permitted to borrow funds to acquire assets, such borrowings will be
limited to the types and levels of borrowings permitted by the Investment
Company Act. In addition, practical considerations, such as shares trading below
net asset values, limit prospects of raising additional capital through sales of
additional shares of common stock by the New Fund. As a result, compared to
First American, the New Fund will be far more limited in its ability to raise
capital and to employ such capital to acquire assets, exploit advantageous
market conditions and strategies and respond efficiently to changing conditions
in mortgage markets.
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<Page>
POTENTIALLY SMALL SIZE OF THE NEW FUND. Depending on how many Existing Fund
shareholders elect to receive New Fund shares in the merger, the New Fund's
initial aggregate net asset value could be as little as $50 million, which is
less than that of any of the four Existing Funds. If the New Fund is relatively
small compared to the Existing Funds, it could experience a higher expense
ratio, less diversification of assets and decreased trading liquidity for its
shares in comparison to the Existing Funds. If the New Fund's expense ratio is
higher than that of the Existing Funds, this could result in the New Fund making
lower dividend payments than the Existing Funds. In addition, as noted above,
the New Fund will have limited ability to raise additional equity capital and
will thus be limited in its ability to grow following the closing of the merger.
TAXABILITY OF THE NEW FUND OPTION. The distribution of First American shares
in the merger will be a tax-free transaction for Existing Fund shareholders, but
the distribution of New Fund shares in the merger will be a taxable transaction
for such shareholders. Thus, those Existing Fund shareholders who elect to
receive New Fund shares rather than First American shares may have to pay taxes
with respect to the transaction. Moreover, if an Existing Fund shareholder is
required to pay such taxes, he or she will not have received cash in the
transaction from which such taxes could be paid. Instead, the shareholder will
have to sell some of the New Fund shares in order to pay such taxes or draw upon
other sources of cash which are available to the shareholder.
POTENTIAL PRORATING OF NEW FUND SHARES. If holders of shares representing
more than 49% of an Existing Fund's aggregate net asset value select the New
Fund Option or exercise statutory dissenters' appraisal rights, all of the
holders who selected the New Fund Option will receive a combination of New Fund
shares and First American shares due to the prorating procedures described under
"THE MERGER--What Shareholders Will Receive in the Merger." Thus, it is possible
that shareholders electing to receive New Fund shares may be allocated First
American shares instead.
INCREASED MANAGEMENT FEE COMPARED TO AMERICAN SELECT. Pursuant to the
advisory agreement between USBAM and the New Fund, the New Fund shareholders
potentially will pay a higher management fee to USBAM under the New Fund
Advisory Agreement than American Select pays under its existing advisory
agreement with USBAM.
OTHER NEGATIVE FACTORS ASSOCIATED WITH THE MERGER. The board of directors of
each Existing Fund and the special committee also took into account the
following additional negative factors associated with the entire merger
transaction:
EXPENSES. The estimated costs and expenses related to the merger are
$4,500,000. The Existing Funds as a group will bear the first $3,400,000 of such
expenses and will, subject to certain exceptions, equally share all transaction
expenses in excess of $3,400,000 with USBAM. Each Existing Fund will bear a pro
rata share of the expenses to be borne by the Existing Funds as a group, whether
or not the merger is consummated. Each Existing Fund's pro rata share of
expenses will be determined based on its relative net asset value. See "THE
MERGER--Fees and Expenses of the Merger." The payment of such expenses will
reduce the net assets of First American, the New Fund and any non-participating
Existing Fund following the merger. Amounts used to pay such expenses would
otherwise be available for investment in additional mortgage-related assets or
for distribution to shareholders by the Existing Funds.
CONFLICTS OF INTEREST. The parties negotiating the terms of the merger
proposal have conflicts of interest. In addition, certain conflicts of interest
may arise in the allocation of investments by USBAM to First American, the New
Fund and any non-participating Existing Funds. See "THE MERGER--Interests of
Certain Persons in the Merger" and "THE MERGER--Investment Allocation Procedures
Following the Merger."
OVERALL CONCLUSIONS. After consideration of the positive and negative
factors affecting the transaction, the board of directors of each Existing Fund
and the special committee recommend a vote in favor of the merger and the
adoption of the Merger Agreement. Further, in view of the wide variety of
23
<Page>
factors considered by the board of directors of each Existing Fund and the
special committee, the boards of directors and the special committee did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered. The board of directors of
each Existing Fund and the special committee viewed their positions and
recommendations based on the totality of the information presented and
considered after taking into consideration all the factors set forth above. The
board of directors of each Existing Fund and the special committee determined
that the potential benefits of the merger outweighed the potential detriments
associated with the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When shareholders consider the recommendation of the board of directors of
each Existing Fund that shareholders of that Existing Fund vote in favor of the
merger and the adoption of the Merger Agreement, shareholders should be aware
that at the time the boards of directors of the Existing Funds approved the
transactions, John M. Murphy, Jr. was a member of the board of directors of each
Existing Fund and an executive officer of U.S. Bancorp, the ultimate parent
company of USBAM, and he will be a member of the board of directors of the New
Fund. USBAM has interests in the merger that may be different from, or in
addition to, shareholder interests, including:
- The new REIT Advisory Agreement contains compensation, termination and other
terms more favorable to USBAM than do the advisory agreements with the
Existing Funds and the New Fund. The New Fund's Advisory Agreement contains
terms identical to those of American Strategic, American Strategic II and
American Strategic III. See "COMPARISON OF RIGHTS AND INVESTMENTS--Comparison
of the Advisory Agreements to the REIT Advisory Agreement" for a summary
comparison of the agreements.
- Affiliates of USBAM are expected to hold two of the six positions on First
American's board of directors following the merger. John M. Murphy, Jr. will
hold one of seven positions on the New Fund's board of directors following
the merger and will be the only affiliate of USBAM serving on the board.
- Under the Merger Agreement, for six years after the closing date of the
merger, First American will indemnify and hold harmless the Existing Funds'
present and former officers and directors for acts or omissions occurring
before the close of the merger to the extent provided under the Existing
Funds' articles of incorporation, the MBCA or the Investment Company Act.
In addition, USBAM's current investment advisory management team to the
Existing Funds (which participated in the structuring of and negotiations
relating to the merger and relating to the advisory agreements on behalf of
USBAM) will become USBAM's management team for First American and the New Fund
upon completion of the merger. Certain members of this management team may stand
to earn greater incentive compensation from USBAM than they have historically
earned in their capacities as portfolio managers to the Existing Funds. Further,
because First American will not be registered under the Investment Company Act,
it will be permitted to engage in transactions with affiliates that would be
prohibited by the Investment Company Act for the Existing Funds. Thus, First
American will be permitted to acquire mortgage-related assets from, and sell
mortgage-related assets to, affiliates of USBAM. Such factors may result in
conflicts when allocating assets among First American, the New Fund and any
non-participating Existing Funds. See "The MERGER--Investment Allocation
Procedures Following the Merger."
THE FAIRNESS OPINIONS OF THE FINANCIAL ADVISOR
In deciding whether to approve the merger, the Merger Agreement and the
contribution transactions which will allocate the assets and liabilities of the
Existing Funds between First American and the New Fund, the board of directors
of each Existing Fund and the special committee retained FBR to render the
Fairness Opinions, each dated as of January 23, 2003, as to the fairness of the
financial consideration to be received by shareholders of each Existing Fund,
from a financial point of view. The
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<Page>
Fairness Opinions, including a discussion of the assumptions and qualifications
made, matters considered and limitations imposed on the review and analysis, is
described in this joint proxy statement/ prospectus under "THE MERGER--The
Fairness Opinions of the Financial Advisor." Copies of the Fairness Opinions can
be found in Appendices C-1 through C-4 to this joint proxy statement/
prospectus.
TAX TREATMENT OF THE MERGER
RECEIPT OF FIRST AMERICAN COMMON STOCK. The merger is intended to qualify as
a tax-free reorganization for shareholders electing to receive shares of First
American common stock. The Existing Funds' shareholders should not recognize
taxable gain or loss as a result of the merger. Shareholders should consult with
their tax advisors regarding the tax consequences of the merger to them. The
Existing Funds have received an opinion from Ernst & Young stating that the
merger will qualify as a tax-free reorganization under Section 368(a) of the
Code for shareholders receiving shares in First American, and that the Existing
Funds' shareholders receiving shares in First American (other than in respect of
cash received in the case of fractional shares) will not recognize a taxable
gain or loss as a result of the merger. See "US FEDERAL INCOME TAX
CONSEQUENCES--US Federal Income Tax Treatment of the Merger and the Receipt of
First American Shares."
RECEIPT OF THE NEW FUND COMMON STOCK. The New Fund Option will be taxable to
shareholders electing this option at capital gains rates to the extent of the
difference between the fair market value of the shares of the New Fund received
in the merger over the adjusted tax basis of their Existing Fund shares
converted into New Fund shares. See "US FEDERAL INCOME TAX CONSEQUENCES--US
Federal Income Tax Treatment of the Receipt of New Fund Shares."
It is possible that a shareholder's receipt of New Fund shares or cash could
be treated as a dividend and subject to tax at ordinary income rates if the
shareholder's beneficial interest in the Existing Fund (taking into account
application of the constructive ownership rules of the Code) is not sufficiently
reduced in connection with the merger. However, under applicable Internal
Revenue Service guidelines, a holder of a minority interest in First American
whose relative stock interest in First American is minimal, who exercises no
control over the affairs of First American, and who experiences a reduction in
the shareholder's proportionate interest in First American relative to the
shareholder's proportionate interest in the Existing Funds, both directly and by
application of the constructive ownership rules, generally will not be deemed to
have received a distribution of a dividend under the rules set forth in
Section 302(b)(1) of the Code.
CONDITIONS TO COMPLETION OF THE MERGER
Under the Merger Agreement, the completion of the merger for each Existing
Fund depends upon the satisfaction of the conditions specified in the Merger
Agreement:
- approval of the merger and adoption of the Merger Agreement by shareholders
of that Existing Fund representing at least a majority of its outstanding
shares;
- Existing Funds having, in the aggregate, a net asset value of at least $200
million (net of estimated cash needed to fund payments to shareholders
exercising statutory dissenters' appraisal rights and net of net assets to be
transferred to the New Fund) shall have elected to participate in the merger;
- shareholders of the Existing Funds holding, in the aggregate, shares
representing at least $50 million in net asset value shall elect to receive
New Fund shares, and in order to satisfy AMEX minimum round lot requirements
such shareholders shall consist of no fewer than 500 separate shareholders
that each hold shares representing a minimum of $1,000 in net asset value;
- for any proper New Fund elections that have been made, the allocation of
assets described in "THE MERGER--Opinion of the Financial Advisor--Asset
Allocation Methodology" between the participating Existing Fund and the New
Fund, as contemplated in the Merger Agreement, shall have been completed;
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- receipt of an asset transfer certificate from USBAM certifying that the
transfers of assets and liabilities comply with the agreed-upon asset
allocation methodology;
- holders of not more than 5% of the outstanding shares of that Existing Fund
shall have exercised statutory dissenters' appraisal rights in accordance
with the MBCA;
- holders of less than 60% of the outstanding Existing Fund shares of any
participating Existing Fund shall have elected to receive New Fund shares;
- absence of any law or court order prohibiting that Existing Fund's
participation in the merger or otherwise preventing the consummation of the
merger;
- receipt by the Existing Funds of an opinion from Ernst & Young to the effect
that the merger will be treated for federal income tax purposes as a tax-free
reorganization for those shareholders electing to receive shares of First
American common stock and stating that, commencing with its taxable year
ending December 31, 2003, First American's organization and proposed method
of operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code;
- receipt of all other necessary governmental consents and approvals, including
an exemptive order granted by the SEC described under "THE MERGER--Exemptive
Relief";
- execution and delivery of the REIT Advisory Agreement by USBAM and First
American;
- execution and delivery of the New Fund Advisory Agreement by the New Fund and
USBAM;
- accuracy of the representations and warranties of each other participating
Existing Fund, First American and the New Fund as of the closing date of the
merger;
- performance of the obligations of each Existing Fund, First American and the
New Fund under the Merger Agreement and receipt of an officer's certificate
to that effect;
- receipt of consents and/or waivers necessary in connection with the merger;
and
- the listing of First American shares on the NYSE and the listing of New Fund
shares on the AMEX.
Where the law permits, each Existing Fund (acting through its board of
directors) could decide to complete the merger even though one or more
conditions were not satisfied. By law, no Existing Fund can waive:
- the requirement that its shareholders approve the merger;
- the requirement that it receives an exemptive order; and
- the condition which requires the absence of any court order or law preventing
the closing of the merger.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined in the reasonable business judgment of the
boards of directors of the Existing Funds. The board of directors of each
Existing Fund has indicated that it will only waive the condition relating to
the maximum percentage of shareholders of that Existing Fund that can exercise
statutory dissenters' appraisal rights under the MBCA if doing so would not
result in the aggregate net asset value of the participating Existing Funds to
fall below $200 million. If any of the Existing Funds waived compliance with one
or more of the other conditions and the condition was deemed material to a vote
of shareholders, such Existing Fund would have to re-solicit shareholders before
closing the merger. The Existing Funds do not intend to notify shareholders of
any waiver that, in the judgment of their boards of directors, does not require
re-solicitation of shareholder approval.
TERMINATION OF THE MERGER AGREEMENT
The Existing Funds may agree to terminate the Merger Agreement by mutual
written consent at any time before completing the merger, even after
shareholders have approved the Merger Agreement and the merger. In addition, the
Merger Agreement may be terminated by any Existing Fund only as to such Existing
Fund if the board of directors of such Existing Fund determines that termination
is in the best interest of the Existing Fund and its shareholders.
26
<Page>
EFFECTIVE TIME OF THE MERGER
The merger for each Existing Fund will become effective as provided in the
Merger Agreement upon the filing of articles of merger for such Existing Fund
with the Minnesota Secretary of State and upon acceptance for filing of such
articles of merger by the Department of Assessments and Taxation of the State of
Maryland. It is anticipated that the effective time (or the Effective Time) will
occur on the closing date of the merger, which will be shortly following the
special meeting of shareholders.
THE SPECIAL MEETING OF SHAREHOLDERS
This joint proxy statement/prospectus is being furnished to the shareholders
of each Existing Fund for use at the special meeting of the shareholders to be
held collectively by the Existing Funds or at any adjournment or postponement of
the special meeting.
At the special meeting, shareholders of each Existing Fund will be asked to
approve the merger involving its Existing Fund, to adopt the Merger Agreement
and approve the contribution transactions which will allocate the assets and
liabilities of the Existing Funds between First American and the New Fund.
PROPOSALS FOR CONSIDERATION AT THE SPECIAL MEETING
The purpose of the special meeting of shareholders is to obtain the consent
of the shareholders to the three proposals described in the accompanying joint
proxy statement/prospectus. The first proposal is the approval of the merger of
the Existing Funds into First American. The second proposal is the adoption of
the Merger Agreement. The third proposal is the approval of the contribution
transactions which will allocate the assets and liabilities of the Existing
Funds between First American and the New Fund. The three proposals are related.
The approval of each proposal is contingent upon the approval of the others.
Therefore, no action will be taken on any of these three proposals unless each
of them is approved.
RECORD DATE
The Existing Funds have set , 2003 as the record date for
determining those shareholders who are entitled to notice of and to vote at the
special meeting for each Existing Fund.
QUORUM; VOTE REQUIRED
In order for each Existing Fund to proceed with the special meeting, there
must be a quorum. This means that at least a majority of that Existing Fund's
shares must be represented at the special meeting, either in person or by proxy.
All returned proxies other than broker non-votes count toward a quorum,
regardless of how they are voted. An abstention will be counted as shares
present at the special meeting in determining whether a quorum is present. If a
proxy is returned with a broker non-vote on the merger, the shareholder will not
be counted as present and entitled to vote with respect to the merger. A broker
"non-vote" occurs when the underlying owner of shares has not voted and the
broker holding the shares does not have discretionary authority to vote on the
particular matter.
For each Existing Fund, an affirmative vote of a majority of the outstanding
shares of common stock of such Existing Fund is required to approve the merger,
adopt the Merger Agreement and approve the contribution transactions which will
allocate the assets and liabilities of the Existing Funds between First American
and the New Fund. Shareholders are entitled to one vote for each Existing Fund
share held. The matters to be presented at the special meeting will not entitle
shareholders to cumulative voting. Abstentions and broker non-votes will have
the same effect as a vote "AGAINST" approving the merger, adopting the Merger
Agreement and approving the related contribution transactions.
None of the directors of any Existing Fund own any shares of the Existing
Funds. Messrs. Wenker and Kappenman, who are officers of the Existing Funds,
each own shares of stock in the Existing Funds and have indicated that they
intend to vote in favor of the merger and the adoption of the Merger
27
<Page>
Agreement and to receive shares of First American. See "STOCK OWNERSHIP OF THE
EXISTING FUNDS" regarding their beneficial ownership of shares of the Existing
Fund.
If you hold your Existing Fund shares in "street name" through a broker or
other nominee, your broker or nominee will not be permitted to vote your
Existing Fund shares on the merger without specific instructions from you.
VOTING PROCEDURES
Shareholders of record may vote in person at the special meeting or vote by
proxy. Shareholders of record have received with this joint proxy
statement/prospectus a proxy package which will include a proxy card and a
voting instruction form. There are three ways to vote your proxy. Your telephone
or internet vote authorizes the proxies to vote your shares in the same manner
as if you mark, sign and return your proxy card.
1. Voting by telephone--dial the toll-free number located on your voting
instruction form. You will need your 12-digit control number located on
the voting instruction form at the time of the call.
2. Voting through the internet--visit http://www.proxyvote.com. Once there,
enter the 12-digit control number located on your voting instruction
form.
3. Voting by mail--enclose your voting instruction form in the postage-paid
envelope found within your proxy package. If you sign, date and mail your
proxy card without indicating how you want to vote, your proxy will be
voted "FOR" the merger.
REVOCATION OF YOUR PROXY
You may revoke or change your vote at any time before the proxy is voted at
the special meeting. You can do this either by:
(i) notifying the Existing Fund's secretary in writing; or
(ii) returning a later-dated proxy; or
(iii) voting again by telephone or through the internet at a later time; or
(iv) attending the special meeting and voting in person.
HOW TO ELECT THE MERGER CONSIDERATION YOU ARE TO RECEIVE
A Consideration Election Form for Existing Fund shareholders to elect to
receive either shares of First American common stock or shares of New Fund
common stock in exchange for their Existing Fund shares is enclosed with this
joint proxy statement/prospectus. If your Existing Fund shares are held in
"street name," you will receive this form from your broker, bank or other
nominee. You may submit a Consideration Election Form whether you vote in favor
of the merger, against the merger or abstain.
If you do not hold your shares in "street name," you must return your
properly completed Consideration Election Form and your Existing Fund stock
certificates to EquiServe on or before [ ] p.m., eastern time, on
[ ], 2003. If your shares are held in "street name" and you wish to
elect to receive New Fund shares, you must only return your properly completed
Consideration Election Form. Soon after the closing, EquiServe will send to each
Existing Fund shareholder who does not hold his or her shares in "street name"
and who has not elected the New Fund Option or exercised statutory dissenters'
rights a letter of transmittal for use in the exchange of shares and
instructions explaining how to surrender stock certificates to EquiServe. If
your Existing Fund shares are held in "street name" you will be contacted by
your broker, bank or other nominee regarding the exchange of your shares.
28
<Page>
EquiServe will act as exchange agent in the merger and, in that role, will
process the exchange of Existing Fund stock certificates for First American
common stock or New Fund shares. The exchange agent will allocate First American
shares or New Fund shares among the shareholders consistent with their elections
and the allocation and prorating procedures discussed above. You may change your
election at any time before the deadline specified in the Consideration Election
Form by notifying EquiServe in writing. If you hold your shares through a bank,
broker or other nominee, you should contact that firm to find out how to change
your election.
If you do not submit a properly completed Consideration Election Form, you
will automatically receive First American common stock in exchange for your
Existing Fund shares.
CONSEQUENCES IF THE MERGER IS NOT APPROVED
If the merger for any Existing Fund is not consummated for any reason, the
Existing Fund expects to continue to operate in its current form. There will be
no change in the Existing Fund's investment objectives, policies or
restrictions. No other transaction is currently being considered by the board of
directors of any Existing Fund as an alternative to the merger, although the
Existing Funds may, from time to time, explore other alternatives.
Regardless of whether a particular Existing Fund elects to participate in
the merger, each Existing Fund will be responsible for bearing its pro rata
share of the expenses of the merger, based on its relative net asset value
determined as of the last day of the week immediately preceding the closing of
the merger. There will not be an adjustment of fees based on the number of
Existing Funds which elect to participate in the merger.
ONLY AMERICAN STRATEGIC III MAY APPROVE THE MERGER WITHOUT THE PARTICIPATION
OF ANY OTHER EXISTING FUND
The Merger Agreement provides that as a condition to closing Existing Funds
having, in the aggregate, a net asset value of at least $200 million (net of
cash needed to fund payments to shareholders exercising statutory dissenters'
appraisal rights and net of net assets, to be transferred to the New Fund) must
approve the merger. In addition, as a condition to closing, shareholders
receiving shares representing at least $50 million in net asset value must elect
to receive New Fund shares. American Strategic III (approximately $267.8 million
of net assets as of November 30, 2002) is the only Existing Fund that could
potentially individually meet both of these conditions. Whether American
Strategic III can individually fulfill the $200 million threshold will depend
upon several factors including net transaction expenses, the number of
shareholders of Existing Funds exercising statutory dissenters' appraisal rights
and the number of shareholders of Existing Funds electing the New Fund Option.
None of American Strategic, American Strategic II or American Select, with net
assets as of November 30, 2002 of approximately $53.4 million, $211.5 million
and $143.7 million, respectively, would be able to meet both conditions to
closing unless at least one additional Existing Fund elected to participate in
the merger. Consequently, only American Strategic III may approve the merger
without the participation of any other Existing Fund.
STATUTORY DISSENTERS' APPRAISAL RIGHTS
If the merger is completed, holders of Existing Fund shares on
[ ], 2003 of any Existing Fund that merged into First American who
did not vote "FOR" the approval of the merger, the adoption of the Merger
Agreement and the related contribution transactions, and who delivered a written
notice of intent to demand fair value to the applicable Existing Fund before the
shareholder vote was taken, will have the right to dissent from the merger and
to obtain payment for the "fair value" of their shares of the applicable
Existing Fund, plus interest, in accordance with Sections 302A.471 and 302A.473
of the MBCA. The term "fair value" means the value of shares of common stock of
the applicable Existing Fund immediately prior to the Effective Time of the
merger, and the term "interest" means interest commencing five days after the
Effective Time up to and
29
<Page>
including the date of payment at the rate provided by Minnesota law for interest
on verdicts and judgments, currently 4% per year. Shareholders of record who
desire to exercise their statutory dissenters' appraisal rights must satisfy all
of the conditions stated under "THE MERGER--Availability of Statutory
Dissenters' Appraisal Rights."
Neither USBAM, nor First American, nor the New Fund has any indication from
any shareholder of the Existing Funds that such shareholder intends to exercise
their statutory dissenters' appraisal rights. In the event that more than 5% of
the outstanding shares of an Existing Fund exercise statutory dissenters'
appraisal rights and the board of directors does not waive this condition to
closing of the merger, then such Existing Fund will not participate in the
merger.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Neither First American nor the Existing Funds are aware of any significant
regulatory approvals required for the merger other than an exemptive order from
the SEC. See "THE MERGER--Exemptive Relief."
EXEMPTIVE RELIEF
In order to consummate the merger, the Existing Funds, First American, the
New Fund and USBAM have applied for an exemptive order (or the Exemptive Order),
which is an order issued by the SEC exempting the applicants from certain
provisions of Section 17(a) of the Investment Company Act. Section 17(a) of the
Investment Company Act generally makes it unlawful for any person affiliated
with a registered investment company (or any affiliated person of such person),
acting as a principal, to sell any security or other property to, or purchase
any security or other property from, such investment company. Under the
Investment Company Act, an affiliated person of an investment company (or of
another person) includes (i) persons directly or indirectly owning, controlling
or holding with power to vote 5% or more of the outstanding voting securities of
the investment company (or such other person), (ii) any person 5% or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote by the investment company (or such other person),
(iii) any person directly or indirectly controlling, controlled by or under
common control with the investment company (or such other person), (iv) any
officer or director of the investment company (or such other person) and
(v) any investment advisor of the investment company.
USBAM is an affiliated person of each of the Existing Funds because it is
their investment advisor. USBAM also may be regarded as an affiliated person of
First American and the New Fund because USBAM, as the investment advisor to
First American, the New Fund and the Existing Funds, may be viewed as
"controlling" (as defined by the Investment Company Act) First American, the New
Fund and the Existing Funds. In addition, USBAM temporarily owns all of the
outstanding shares of First American. As a result, First American, the Existing
Funds and the New Fund may be regarded as affiliated persons of each other on
the basis that they are under the common control of USBAM. Accordingly, absent
an exemption, the transactions contemplated by the Merger Agreement may be
prohibited by Section 17(a) of the Investment Company Act.
Exemptions from the provisions of Section 17(a) may be granted by the SEC
pursuant to Section 17(b) of the Investment Company Act if evidence establishes
that (i) the terms of the proposed transaction, including the consideration to
be paid or received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, (ii) the proposed transaction is consistent
with the policy of each registered investment company concerned, as recited in
its registration statement and reports filed under the Investment Company Act
and (iii) the proposed transaction is consistent with the general purposes of
the Investment Company Act.
ACCOUNTING TREATMENT
The merger will be accounted for by First American using the purchase method
of accounting in accordance with accounting principles generally accepted in the
United States.
30
<Page>
The accounting survivor will be the Existing Fund participating in the First
American merger that has the largest portion of the voting rights in First
American. Thus, if all the Existing Funds participate in the First American
merger, the accounting survivor will be American Strategic III.
The merger will be accounted for by the New Fund by carrying forward the
historical cost basis of the assets and liabilities of the Existing Funds to the
surviving entity since the tax basis of such assets and liabilities will carry
forward. The accounting survivor will be the Existing Fund participating in the
merger whose shareholders will be allocated the largest number of shares of the
New Fund. As an accounting survivor, the historical financial information and
performance of such existing Fund will be carried forward and the historical per
share information will be adjusted based on a $10.00 net asset value per share.
COMPARATIVE RIGHTS OF SHAREHOLDERS
The Existing Funds are, and the New Fund will be, diversified, closed-end
management investment companies registered under the Investment Company Act,
organized as Minnesota corporations and governed by their respective articles of
incorporation and bylaws, which have been adopted pursuant to the MBCA. First
American, which is organized as a Maryland corporation, will be governed by its
articles of incorporation and bylaws, which have been adopted pursuant to the
Maryland General Corporation Law, as amended (or the MGCL).
As registered management investment companies, the Existing Funds and the
New Fund are subject to the provisions of, and the regulations under, the
Investment Company Act which imposes restrictions on their business and
investment activities. First American will not be registered under the
Investment Company Act and will seek to qualify as a REIT for federal income tax
purposes. First American will seek to be exempt from registration as an
investment company under Section 3(c)(5)(C) of the Investment Company Act.
Compliance with this exemption and First American's proposed qualification as a
REIT will impose restrictions on the business and investment activities of First
American. These restrictions are different in some important respects from those
applicable to the Existing Funds. See "COMPARISON OF RIGHTS AND
INVESTMENTS--Comparison of Shareholder Rights."
The following paragraphs highlight certain areas where differences exist
between the Existing Funds, the New Fund and First American:
CLASSIFICATION OF BOARD OF DIRECTORS. Neither the Existing Funds nor the New
Fund have classified boards of directors, and each director serves for a
one-year term. Under the articles of incorporation of First American, First
American will have a classified board of directors with three separate classes
in which the directors serve staggered three-year terms.
REMOVAL OF DIRECTORS. Shareholders representing a majority of an Existing
Fund's or the New Fund's outstanding shares may elect to remove a director with
or without cause. First American's articles of incorporation provide for removal
of a director with or without cause, but require the affirmative vote of
shareholders representing at least two-thirds of the shares outstanding.
SHAREHOLDER VOTING REQUIREMENTS. The articles of incorporation of each
Existing Fund and the New Fund require a vote of at least two-thirds of the
shares outstanding to convert from closed-end to open-end investment companies.
First American's articles of incorporation require a vote of at least two-thirds
of the shares outstanding to approve amendments to certain provisions of the
articles of incorporation or to amend the bylaws.
DISTRIBUTIONS. Under the REIT provisions of the Code, First American will be
required to make annual distributions of at least 90% of its taxable income.
First American intends to make quarterly distributions to its shareholders of
amounts that, at a minimum, will enable it to comply with these provisions. The
Existing Funds currently, and the New Fund expects to, pay distributions to
shareholders on a monthly basis. As registered investment companies, the
Existing Funds are, and the New Fund will be, required to distribute at least
90% of their investment company taxable income each taxable
31
<Page>
year. First American and the New Fund expect to operate with distribution
policies that are substantially similar.
BORROWING LIMITATIONS. Unlike the Existing Funds and the New Fund, First
American will not be subject to the borrowing limitations of the Investment
Company Act which limits borrowings to an amount equal to one-third of an
investment company's total assets. The New Fund will be subject to borrowing
limitations which limit borrowings in an amount equal to one-third of its total
assets which approximates a debt-equity ratio of 0.5:1. First American's
borrowing policy is currently expected to be to incur debt such that, once fully
invested, it will maintain a debt-to-equity ratio of between 1:1 to 1.5:1 with
regard to its mortgage loan portfolio and 4:1 to 9:1 with respect to its
portfolio of mortgage-backed securities. First American's borrowing policies are
subject to changes from time to time without being subject to shareholder
approval.
REGULATORY DIFFERENCES. There are substantial regulatory differences between
the Existing Funds and the New Fund, which are diversified, closed-end
management investment companies registered under the Investment Company Act, and
First American, which will be a REIT for tax purposes. First American's
qualification as a REIT will impose restrictions on the business and investment
activities of First American which are different in some important respects from
those applicable to the Existing Funds and the New Fund.
TAX STATUS. In contrast to the Existing Funds and the New Fund, First
American will be treated as a REIT.
ADVISORY AGREEMENTS. The fees payable by First American to USBAM will be
higher than those payable by the Existing Funds and the New Fund to USBAM. Also,
First American, unlike the Existing Funds or the New Fund, may have to pay a
termination fee to USBAM under certain circumstances if its advisory agreement
is terminated without cause or is not renewed. Upon completion of the merger and
assuming that the required numbers of Existing Fund shareholders elect to
receive New Fund shares, USBAM will serve as the investment advisor for First
American, the New Fund and any non-participating Existing Funds. As investment
advisor to these entities, a conflict of interest may arise because the
allocation of mortgages and mortgage-related assets to First American, the New
Fund or the non-participating Existing Funds will be determined in USBAM's sole
discretion. In allocating such investments to First American, USBAM may earn
greater incentive compensation under the REIT Advisory Agreement as compared to
the compensation it will earn under the New Fund Advisory Agreement or its
advisory agreements with the Existing Funds. As a result of the fee structure
under the REIT Advisory Agreement, USBAM may have financial incentive to
allocate certain investments to First American rather than to the New Fund or
the non-participating Existing Funds. See "THE MERGER--Investment Allocation
Procedures Following the Merger."
AFFILIATE TRANSACTIONS. Because First American will not be a registered
investment company under the Investment Company Act, it will be able to engage
in transactions with affiliates that would be prohibited by the Investment
Company Act for the Existing Funds and the New Fund. The board of directors of
First American will adopt operating policies requiring that any affiliate
transactions between First American and its affiliates must be conducted on
terms no less favorable to First American than those available from unaffiliated
parties. Any such transactions will also be subject to the review and oversight
of First American's independent directors.
ACCOUNTING MATTERS. The difference in the regulatory framework of First
American compared to the Existing Funds and the New Fund and the change in the
advisory fee structure will impact the accounting methods, financial condition,
results of operation and liquidity of First American compared to the Existing
Funds and the New Fund.
STOCK PRICE AND DIVIDEND INFORMATION
The Existing Funds' shares currently trade on the NYSE under the symbols ASP
(American Strategic), BSP (American Strategic II), CSP (American Strategic III)
and SLA (American Select). The shares of American Strategic II and American
Strategic III are also traded on the Chicago Stock
32
<Page>
Exchange. The following table presents the last reported sale price (on the
NYSE) for each Existing Fund's shares on March 20, 2002, the last trading day
before the announcement of the signing of the original merger agreement, and on
[ ] 2003, the last trading day before the printing of this joint
proxy statement/prospectus. The Existing Funds typically have distributed
dividends on a monthly basis.
<Table>
<Caption>
SHARE PRICE
-----------------------------------------------------
BEFORE DATE OF JOINT BEFORE ANNOUNCEMENT OF
NAME OF THE EXISTING FUND PROXY STATEMENT/PROSPECTUS ORIGINAL MERGER AGREEMENT
- ------------------------- -------------------------- -------------------------
American Strategic $12.73
American Strategic II 13.29
American Strategic III 12.12
American Select 13.83
</Table>
IF YOU REQUIRE FURTHER INFORMATION
If you have more questions about the merger or would like additional copies
of this joint proxy statement/prospectus, you should contact:
<Table>
Call Center Department -or- EquiServe
800 Nicollet Mall 150 Royall Street
Minneapolis, MN 55402 Canton, MA 02021
(800) 677-3683 (800) 426-5523
</Table>
33
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data of American Strategic and
American Select is derived from the financial statements of American Strategic
and American Select as of and for each of the four years in the period ended
November 30, 2002, which were audited by Ernst & Young, independent auditors,
and the year ended November 30, 1998, which were audited by other auditors. The
following summary historical financial data of American Strategic II and
American Strategic III is derived from the financial statements of American
Strategic II and American Strategic III as of and for each of the preceding four
years in the period ended May 31, 2002, which were audited by Ernst & Young,
independent auditors, and the year ended May 31, 1998, which were audited by
other auditors and the unaudited financial statements as of and for the six
months ended November 30, 2002. The information presented for American Strategic
and American Select for the interim periods is unaudited but, in the opinion of
American Strategic's and American Select's management, such information reflects
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial data for the interim periods. The results for
the interim periods presented are not necessarily indicative of the results for
a full year. The data should be read in conjunction with the financial
statements, related notes and other financial information included and
incorporated by reference herein.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
-------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 5,221 $ 5,872 $ 6,069 $ 6,972 $ 6,510
Interest expense 624 727 1,219 1,382 874
Investment management
fees 326 343 321 370 374
Other expenses 541 377 481 521 520
Net investment income 4,029 4,424 4,047 4,698 4,741
Net realized gain
(loss) on investments (492) 450 (964) 77 415
Net change in
unrealized gain
(loss) on investments 735 116 1,652 (2,991) (129)
Net increase in net
assets resulting from
operations 4,272 4,991 4,734 1,784 5,027
PER SHARE DATA:
Net investment income 0.96 1.05 0.97 1.00 1.01
Net realized and
unrealized gains
(losses) on
investments 0.05 0.13 0.15 (0.62) 0.06
Net increase in net
asset value resulting
from operations 1.01 1.18 1.12 0.38 1.07
Cash dividends paid 1.03 1.06 0.96 1.01 0.97
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 34,826 35,047 42,586 64,223 62,799
Other securities 34,830 40,029 21,422 14,568 13,673
Total assets 70,107 75,563 64,789 79,538 77,901
Reverse repurchase
agreements payable 16,600 21,952 11,705 21,125 16,500
Net assets 53,352 53,427 52,910 58,054 61,286
Net asset value per
share 12.61 12.63 12.51 12.35 12.98
Per-share market value 12.05 12.79 11.19 11.44 12.13
</Table>
34
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED MAY 31,
NOVEMBER 30, ---------------------------------------------------------------
2002 2002 2001 2000 1999 1998
--------------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 12,281 $ 22,822 $ 23,577 $ 24,650 $ 25,742 $ 27,601
Interest expense 1,463 2,409 4,346 5,092 4,082 4,943
Investment management
fees 699 1,332 1,284 1,295 1,445 1,498
Other expenses 1,482 1,091 1,091 1,238 1,304 1,870
Net investment income 8,637 17,990 16,856 17,025 18,911 19,290
Net realized gain
(loss) on investments 200 3,591 110 (1,692) 767 952
Net change on
unrealized gain
(loss) on investments (254) 67 13,119 (9,525) (4,169) 7,157
Net increase in net
assets resulting from
operations 8,582 21,648 30,085 5,808 15,508 27,399
PER SHARE DATA:
Net investment income 0.54 1.13 1.06 1.02 1.06 1.03
Net realized and
unrealized gains
(losses) on
investments (0.01) 0.23 0.83 (0.68) (0.19) 0.41
Net increase in net
asset value resulting
from operations 0.53 1.36 1.89 0.34 0.87 1.44
Cash dividends paid 0.57 1.13 1.03 1.06 1.02 1.00
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 219,226 220,437 193,356 194,602 244,440 232,480
Other securities 69,839 72,520 74,188 66,822 86,926 74,440
Total assets 290,690 295,085 278,610 263,831 334,495 311,025
Reverse repurchase
agreements payable 78,700 82,700 69,749 66,711 103,925 76,000
Net assets 211,502 212,016 208,439 194,759 229,843 234,484
Net asset value per
share 13.25 13.29 13.06 12.20 12.92 13.07
Per-share market value 12.74 13.17 12.30 11.00 11.94 11.81
</Table>
35
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED MAY 31,
NOVEMBER 30, ---------------------------------------------------------------
2002 2002 2001 2000 1999 1998
--------------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 14,854 $ 29,189 $ 30,620 $ 31,838 $ 35,211 $ 36,682
Interest expense 1,665 3,062 5,859 6,285 6,570 6,436
Investment management
fees 851 1,701 1,612 1,703 1,888 1,974
Other expenses 1,906 1,346 1,385 1,538 1,667 2,474
Net investment income 10,471 23,080 21,764 22,311 25,086 25,797
Net realized gain
(loss) on investments (213) 3,881 773 (4,347) 2,450 1,886
Net change in
unrealized gain
(loss) on investments 833 (737) 14,216 (7,398) (8,322) 7,937
Net increase in net
assets resulting from
operations 11,091 26,225 36,754 10,567 19,214 35,620
PER SHARE DATA:
Net investment income 0.49 1.08 1.02 1.00 1.05 1.02
Net realized and
unrealized gains
(losses) on
investments 0.04 0.15 0.70 (0.53) (0.24) 0.37
Net increase in net
asset value resulting
from operations 0.53 1.23 1.72 0.47 0.81 1.39
Cash dividends paid 0.53 1.05 1.02 1.05 1.02 1.05
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 286,134 289,141 249,702 271,291 328,105 308,568
Other securities 73,106 76,217 67,060 50,697 91,101 86,491
Total assets 361,296 367,937 336,934 325,296 424,581 399,617
Reverse repurchase
agreements payable 92,454 99,454 72,407 75,596 131,725 99,000
Net assets 267,828 267,942 264,074 249,144 292,059 299,913
Net asset value per
share 12.55 12.55 12.37 11.67 12.25 12.46
Per-share market value 12.03 12.43 11.88 10.56 11.88 11.38
</Table>
36
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
AMERICAN SELECT PORTFOLIO INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 15,954 $ 16,323 $ 15,538 $ 17,090 $ 17,651
Interest expense 1,920 2,822 3,249 3,331 3,486
Investment management
fees 716 710 676 766 773
Other expenses 2,098 726 856 917 897
Net investment income 12,018 12,065 10,754 12,076 12,495
Net realized gain
(loss) on investments 1,093 196 276 41 3,862
Net change in
unrealized gain
(loss) on investments 765 4,723 1,780 (3,224) (2,246)
Net increase in net
assets resulting from
operations 13,876 16,984 12,810 8,893 14,110
PER SHARE DATA:
Net investment income 1.13 1.13 1.01 1.02 1.06
Net realized and
unrealized gains
(losses) on
investments 0.17 0.47 0.18 (0.26) 0.12
Net increase in net
asset value resulting
from operations 1.30 1.60 1.19 0.76 1.18
Cash dividends paid 1.20 1.07 1.01 1.05 1.10
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 132,716 139,443 140,847 156,836 187,045
Other securities 38,853 49,464 40,547 43,380 22,905
Total assets 172,591 190,268 182,935 201,959 212,067
Reverse repurchase
agreements payable 28,500 47,365 45,586 50,975 57,000
Net assets 143,698 142,617 137,042 150,097 154,838
Net asset value per
share 13.48 13.38 12.85 12.67 12.96
Per-share market value 12.86 13.54 11.50 11.69 12.13
</Table>
37
<Page>
FIRST AMERICAN SUMMARY PRO FORMA FINANCIAL DATA
The following pro forma financial information has been prepared to show the
impact of the merger based upon two possible merger scenarios. The first
presentation of pro forma financial information assumes all four Existing Funds
approve and participate in the merger and also assumes that shareholders holding
Existing Fund shares representing an aggregate net asset value of $50 million
elect to participate in the New Fund and that no shareholder elects to exercise
statutory dissenters' appraisal rights (referred to as the First American
maximum participation scenario). The second presentation assumes a combination
of the Existing Funds whose combined net asset values exceed the minimum net
asset value requirement to effect the merger by the smallest margin and also
assumes that shareholders holding approximately 49% of the shares of each such
Existing Fund elect to participate in the New Fund and that no shareholder
elects to exercise statutory dissenters' appraisal rights (referred to as
minimum participation). The rationale for including the maximum and minimum
participation pro forma information is to provide the range of possible outcomes
to potential investors.
The following summary pro forma financial data as of and for the year ended
November 30, 2002 is derived from the pro forma financial statements of First
American and the Existing Funds (in the case of the First American maximum
participation scenario) and from the pro forma financial statements of First
American, American Strategic, American Strategic II and American Select (in the
case of the minimum participation scenario). The data should be read in
conjunction with the unaudited pro forma financial information and related notes
included herein. The pro forma financial information reflects the allocation of
the assets and liabilities of the Existing Funds in accordance with guidelines
outlined in "THE MERGER--The Merger Agreement--Transactions Relating to the New
Fund Option."
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
MAXIMUM PARTICIPATION MINIMUM PARTICIPATION
SCENARIO SCENARIO
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2002 NOVEMBER 30, 2002
--------------------- ---------------------
STATEMENT OF OPERATIONS DATA:
Total income $ 60,604 $ 19,926
Interest expense 7,974 2,693
Investment management fees 7,246 2,295
Other expenses 2,034 901
Net realized gain on investments 1,646 700
Net income 44,996 14,737
Net income per share 0.72 0.71
Cash dividends paid per share 0.72 0.71
BALANCE SHEET DATA (END OF PERIOD):
Mortgage loans, net of allowance 623,174 197,252
Available-for-sale securities 189,020 68,424
Total assets 825,828 270,742
Borrowings 200,273 63,138
Shareholders' equity 624,490 207,312
Book value per common share 10.00 10.00
PROFORMA EQUIVALENT CASH DIVIDENDS PER
SHARE:
American Strategic 0.91 0.90
American Strategic II 0.95 0.94
American Strategic III 0.90 0.89
American Select 0.97 0.96
</Table>
38
<Page>
NEW FUND SUMMARY PRO FORMA FINANCIAL DATA
The following pro forma financial information has been prepared to show the
impact of the merger based upon two possible merger scenarios. The first
presentation assumes all four Existing Funds approve the merger and also assumes
that shareholders holding approximately 49% of the shares of each such Existing
Fund elect to participate in the New Fund and that no shareholder elects to
exercise statutory dissenters' appraisal rights (referred to as maximum election
scenario). The second presentation of pro forma financial information assumes
all four Existing Funds approve and participate in the merger and also assumes
that shareholders holding the Existing Fund shares representing an aggregate net
asset value of $50 million elect to participate in the New Fund and that no
shareholder elects to exercise statutory dissenters' appraisal rights (referred
to as minimum election scenario). The rationale for including the maximum and
minimum participation pro forma information is to provide a range of possible
outcomes to potential investors.
The following summary pro forma financial data as of and for the year ended
November 30, 2002 is derived from the pro forma financial statements of New Fund
and the Existing Funds. The data should be read in conjunction with the
unaudited pro forma financial information and related notes included herein.
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
MAXIMUM NEW FUND MINIMUM NEW FUND
ELECTION SCENARIO ELECTION SCENARIO
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2002 NOVEMBER 30, 2002
------------------ ------------------
STATEMENT OF ASSETS AND LIABILITIES
DATA:
Investments in securities at value $436,134 $65,772
Reverse repurchase agreements payable 106,029 15,990
Net assets 330,618 50,000
Shares outstanding 33,062 5,000
Net asset value per share 10.00 10.00
STATEMENT OF OPERATIONS DATA:
Total income 36,892 5,561
Interest expense 4,221 636
Investment management fees 2,019 304
Other expenses 1,771 267
Net investment income 28,882 4,353
Net realized and unrealized gain
(losses) on securities 614 93
Net increase in net assets from
operations 30,348 4,574
Net investment income per share 0.87 0.87
Cash dividends paid per share 0.87 0.87
</Table>
39
<Page>
NEW FUND PRO FORMA CAPITALIZATION
The following table sets forth the unaudited capitalization of each Existing
Fund as of November 30, 2002, and on a pro forma basis for the New Fund as of
that date, based upon two possible merger scenarios. The first scenario,
referred to in the table as "Max," assumes all four Existing Funds approve the
merger, that shareholders holding approximately 49% of the shares of each
Existing Fund elect to receive New Fund shares and that no shareholder elects to
exercise statutory dissenters' appraisal rights. The second scenario, referred
to in the table as "Min," assumes that all four Existing Funds approve the
merger and also assumes that shareholders holding Existing Fund shares
representing an aggregate net asset value of $50 million elect to receive New
Fund shares and that no shareholder elects to exercise statutory dissenters'
appraisal rights. The estimated costs and expenses related to the merger are
$4,500,000. The Existing Funds as a group will bear the first $3,400,000 of such
expenses and will, subject to certain exceptions, equally share all transaction
expenses in excess of $3,400,000 with USBAM. Each Existing Fund's pro rata share
of expenses will be determined based on its relative net asset value. Based on
the net asset values of the Existing Funds as of November 30, 2002, the Existing
Funds would bear the following amounts and percentages of the expenses of the
merger that are to be borne by the Existing Funds: American Strategic: $271,000
or 6.8%; American Strategic II: $1,175,000 or 29.4%; American Strategic III:
$1,708,000 or 42.7%; and American Select: $846,000 or 21.1%. See "THE
MERGER--Fees and Expenses of the Merger."
<Table>
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND NEW FUND
STRATEGIC STRATEGIC II STRATEGIC III SELECT (MAX) (MIN)
----------- ------------ ------------- ------------ ------------ -----------
Net assets $53,352,147 $211,502,484 $267,827,898 $143,698,072 $330,618,379 $50,000,000
Net asset value per share $ 12.61 $ 13.25 $ 12.55 $ 13.48 $ 10.00 $ 10.00
Shares outstanding 4,230,294 15,957,289 21,343,292 10,662,195 33,061,838 5,000,000
</Table>
40
<Page>
COMPARATIVE FEES AND EXPENSES TABLE
The following table has been prepared to help shareholders compare the fees
and expenses of the Existing Funds with the fees and expenses of First American
and the New Fund. For the Existing Funds, the information is presented on an
historical basis for the one-year period ended November 30, 2002. For First
American and the New Fund, expenses are presented on a pro forma basis for the
one-year period ended November 30, 2002, assuming the merger was consummated on
December 1, 2001, under two scenarios.
With respect to First American, the first presentation assumes a combination
of the Existing Funds whose combined net assets exceed the minimum net asset
requirement to effect the merger by the smallest margin and also assumes that
49% of shares elect to participate in the New Fund (referred to in the chart
below as "Min"). The second presentation assumes all four Existing Funds approve
and participate in the merger and also assumes the First American maximum
participation scenario (referred to in the chart below as "Max").
With respect to the New Fund, the first presentation assumes that all four
Existing Funds approve the merger and also assumes that shareholders holding
Existing Fund shares representing an aggregate net asset value of $50 million
elect to receive New Fund shares and that no shareholder elects to exercise
statutory dissenters' appraisal rights (referred to in the chart below as
"Min"). The second presentation assumes all four Existing Funds approve the
merger, that shareholders holding approximately 49% of the shares in each
Existing Fund elect to receive New Fund shares and that no shareholder elects to
exercise statutory dissenters' appraisal rights (referred to in the chart below
as "Max"). The rationale for including these minimum participation and maximum
participation pro forma fees and expenses is to provide the range of possible
outcomes to potential shareholders.
<Table>
<Caption>
HISTORICAL FOR PRO FORMA FOR
THE ONE-YEAR PERIOD ENDED THE ONE-YEAR PERIOD ENDED
NOVEMBER 30, 2002 NOVEMBER 30, 2002
------------------------------------------------------ --------------------------------------------
AMERICAN AMERICAN AMERICAN AMERICAN NEW FIRST
STRATEGIC STRATEGIC II STRATEGIC III SELECT FUND AMERICAN
--------- ------------ ------------- -------- -------------------- --------------------
MIN MAX MIN MAX
SHAREHOLDER TRANSACTION
EXPENSES
Dividend Reinvestment
Plan Fees None (1) None (1) None (1) None (1) None (1) None (1) N/A N/A
ANNUAL OPERATING EXPENSES
(2)
Advisory/Investment
Management Fees (3) 0.62% 0.66% 0.64% 0.50% 0.61% 0.61% 1.11% 1.16%
Other Expenses
Administration Fee 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% None None
Other (4) 0.76% 1.15% 1.17% 0.72% 0.74% 0.74% 0.85% 0.80%
-------- -------- -------- -------- -------- -------- -------- --------
1.01% 1.40% 1.42% 0.97% 0.99% 0.99% 0.85% 0.80%
Interest Payments on
Borrowed Funds 1.18% 1.38% 1.24% 1.35% 1.29% 1.29% 1.30% 1.28%
Total Annual Fund
Operating Expenses 2.81% 3.44% 3.30% 2.82% 2.89% 2.89% 3.26% 3.24%
</Table>
(1) Shareholders will pay brokerage charges if they direct EquiServe Trust Co.,
N.A. (or the Plan Administrator) to sell their shares held in a dividend
reinvestment account.
(2) Ratios indicated for American Strategic, American Strategic II, American
Strategic III, American Select and the New Fund are based on a percentage
of net assets attributable to common stock and ratios indicated for First
American are based on a percentage of shareholder's equity as of
November 30, 2002.
(3) The monthly management fee paid to USBAM, in its role as investment advisor
to each of American Strategic, American Strategic II, American Strategic
III and the New Fund includes: a monthly management fee in an amount equal
to the sum of 0.01667% of their respective average weekly net assets during
the month (approximately 0.20% on an annual basis) and 4.5% of the daily
gross income (i.e., investment income, including amortization of discount
income, other than gains from the sale of securities or gains received from
options and futures contracts less interest on money borrowed) accrued by
each respectively during the month, provided that the monthly management
fee may not exceed in the aggregate 1/12 of 0.725% of their respective
average weekly net assets (0.725% on an annual basis).
(4) Includes actual costs and expenses related to the merger, for the year
ended November 30, 2002.
41
<Page>
EXAMPLE
The following is a hypothetical example intended to help shareholders
compare the cost of investing in the Existing Funds, First American and the New
Fund. The following example illustrates the expenses that shareholders would pay
on a $1,000 investment in an Existing Fund, First American or the New Fund,
assuming (1) total annual expenses as set forth in the foregoing table and
(2) a 5% annual return. Although shareholders' actual costs may be higher or
lower, under these assumptions shareholders' costs would be:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------- --------------------- ---------------------- ----------------------
American Strategic $ 28 $ 87 $ 148 $ 314
American Strategic II $ 35 $ 106 $ 179 $ 372
American Strategic III $ 33 $ 102 $ 172 $ 359
American Select $ 29 $ 87 $ 149 $ 315
New Fund
Maximum $ 27 $ 83 $ 142 $ 301
Minimum $ 27 $ 83 $ 142 $ 301
First American
Maximum $ 32 $ 97 $ 165 $ 347
Minimum $ 36 $ 109 $ 184 $ 382
</Table>
The example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those assumed. Moreover, an Existing
Fund's, First American's or the New Fund's actual rate of return may be greater
or less than the hypothetical 5% annual return shown in the example. The example
assumes that all dividends and distributions are reinvested at net asset value.
42
<Page>
RISK FACTORS
Before you decide how to vote on the merger, you should be aware that there
are various risks involved in the merger. In addition to the other information
included in this joint proxy statement/ prospectus, you should carefully
consider the following material risks related to the merger and an investment in
First American or the New Fund.
RISKS RELATED TO THE MERGER
UNCERTAIN MARKET PRICE OF FIRST AMERICAN AND THE NEW FUND COMMON STOCK AFTER
THE MERGER.
Prior to the merger, there will have been no public market for First
American or the New Fund common stock and there can be no assurance that a
regular trading market for First American or the New Fund common stock to be
issued in the merger will develop or, if developed, that any such market will be
sustained. In the absence of a public trading market, a shareholder may be
unable to liquidate his or her investment in First American or the New Fund.
There can be no assurance that the per share price at which First American or
the New Fund common stock trades in the public market after the merger will not
be lower than the net asset value of First American or the New Fund or the
prices at which the Existing Funds currently trade. Shares of closed-end,
registered management investment companies such as the New Fund frequently trade
at a discount from their net asset value.
The market price of First American and the New Fund common stock will likely
fluctuate in response to a number of factors:
- the markets' perception of First American and the New Fund and their
ability to generate distributions;
- for First American, its assets and market capitalization;
- changes in long-term and short-term interest rates; and
- conditions of the mortgage investment and stock markets.
THE PRORATING OF NEW FUND SHARES MAY AFFECT THE MARKET PRICE OF FIRST
AMERICAN COMMON STOCK AFTER THE MERGER.
The terms of the merger provide that the number of shares held by
shareholders in each participating Existing Fund that may receive New Fund
shares or cash through the exercise of statutory dissenters' appraisal rights
will be limited to 49% of the shares of that Existing Fund. Shareholder
elections to receive New Fund shares in excess of this limitation will be
prorated based on individual share holdings in the Existing Funds. If such
prorating is necessary for any Existing Fund, affected shareholders will receive
First American common stock for the balance of their Existing Fund shares that
are not converted into shares of the New Fund. Shareholders of Existing Funds
who elect the New Fund Option and subsequently receive shares of First American
as a result of the prorating of New Fund shares may decide that they do not want
to remain invested in First American and may sell their First American shares
immediately following the completion of the merger. This may delay the
development of an orderly trading market for First American shares for a period
of time following the merger. First American is also unable to predict whether
significant amounts of First American shares will be sold in the public market
immediately following the merger. Any sales of substantial amounts of First
American shares in the public market, or the perception that such sales might
occur, could have an adverse effect on the market price of First American
shares.
THE NEW FUND OPTION WILL BE TAXABLE.
The distribution of New Fund shares will be a taxable transaction for
Existing Fund shareholders. Thus, those Existing Fund shareholders who elect to
receive New Fund shares rather than First American shares may have to pay taxes
with respect to the transaction. Moreover, if an Existing Fund shareholder is
required to pay such taxes, he or she will not have received cash in the
transaction from which such taxes could be paid. Instead, the shareholder will
have to sell some of the New Fund shares in order to pay such taxes or draw upon
other sources of cash which are available to the shareholder.
43
<Page>
THE PARTIES NEGOTIATING THE TERMS OF THE MERGER PROPOSAL HAVE SIGNIFICANT
CONFLICTS OF INTEREST.
When you consider the recommendation of the board of directors of each
Existing Fund that shareholders of that Existing Fund vote in favor of the
merger and the adoption of the Merger Agreement, you should be aware that John
M. Murphy, Jr., who serves on the board of directors of each Existing Fund and
the New Fund, was an executive officer of U.S. Bancorp, USBAM's ultimate parent
company, and that USBAM has interests in the merger that may be different from,
or in addition to, your interests as shareholders. These conflicts include:
- The REIT Advisory Agreement contains compensation, termination and other
terms more favorable to USBAM than do the advisory agreements with the
Existing Funds and the New Fund. The New Fund's Advisory Agreement
contains terms identical to those of American Strategic, American
Strategic II and American Strategic III. See "COMPARISON OF RIGHTS AND
INVESTMENTS--Comparison of the Advisory Agreements to the REIT Advisory
Agreement" for a summary comparison of the agreements.
- Affiliates of USBAM are expected to hold two of the six positions on First
American's board of directors following the merger. John M. Murphy, Jr.
will hold one of seven positions on the New Fund's board of directors
following the merger and will be the only affiliate of USBAM serving on
the board.
- Under the Merger Agreement, for six years after the closing date of the
merger, First American will indemnify and hold harmless the Existing
Funds' present and former officers and directors for acts or omissions
occurring before the close of the merger to the extent provided under the
Existing Funds' articles of incorporation, the MBCA or the Investment
Company Act.
In addition, USBAM's current investment advisory management team to the
Existing Funds (which participated in the structuring of and negotiations
relating to the merger and relating to the advisory agreements on behalf of
USBAM) will become USBAM's management team for First American and the New Fund
upon completion of the merger. Certain members of this management team may stand
to earn greater incentive compensation from USBAM than they have historically in
their capacities as portfolio managers to the Existing Funds. Further, because
First American will not be registered under the Investment Company Act, it will
be permitted to engage in transactions with affiliates that would be prohibited
by the Investment Company Act for the Existing Funds and the New Fund. Thus,
First American will be permitted to acquire mortgage-related assets from, and
sell mortgage-related assets to, affiliates of USBAM.
CERTAIN CONFLICTS OF INTEREST MAY ARISE IN THE ALLOCATION OF INVESTMENTS BY
USBAM TO FIRST AMERICAN, THE NEW FUND AND ANY NON-PARTICIPATING EXISTING
FUNDS.
Upon completion of the merger, USBAM will serve as the investment advisor
for First American, the New Fund and any non-participating Existing Funds. As
investment advisor to these entities, a conflict of interest may arise because
the allocation of mortgages and mortgage-related assets to First American, the
New Fund or any non-participating Existing Funds will be determined by USBAM. In
allocating such investments to First American, USBAM may earn greater incentive
compensation under the REIT Advisory Agreement as compared to the compensation
it will earn under the New Fund Advisory Agreement or its advisory agreements
with the Existing Funds. As a result of the fee structure under the REIT
Advisory Agreement, USBAM may have financial incentive to allocate certain
investments to First American rather than to the New Fund or the
non-participating Existing Funds. USBAM will, however, follow the allocation
procedures described herein under "THE MERGER--Investment Allocation Procedures
Following the Merger" to determine the appropriate allocation of such
investments to either First American, the New Fund or any non-participating
Existing Funds.
44
<Page>
SHAREHOLDERS OF FIRST AMERICAN WILL NO LONGER ENJOY THE PROTECTIONS AFFORDED
BY THE INVESTMENT COMPANY ACT.
First American will not be regulated under the Investment Company Act, and
thus, its shareholders will not be afforded certain regulatory protections,
including those that require:
- that a majority of independent directors must approve new or renewed
investment advisory contracts;
- restrictions on borrowing and issuing senior securities;
- filing of a registration statement containing fundamental investment
policies;
- shareholder approval of changes in fundamental investment policies;
- investment advisory contracts conform to certain rules such as
prohibitions on termination fees;
- independent approval of service contracts with affiliates;
- that dividend distributions and share repurchases conform to certain
rules;
- prohibition of certain transactions with affiliates;
- banks or broker dealers to maintain custody of assets; and
- fidelity bonding.
The regulatory protections listed above are more fully discussed under the
section heading "THE EXISTING FUNDS--Regulatory Matters" in this joint proxy
statement/prospectus.
FAILURE TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER COULD HAVE A
NEGATIVE IMPACT ON THE MARKET PRICE OF FIRST AMERICAN COMMON STOCK.
It is possible that the anticipated benefits of the merger may not be
realized. This could reduce the market price for First American common stock,
making an investment in First American less attractive compared to an investment
in any of the Existing Funds or the New Fund.
THE COSTS OF THE MERGER WILL BE PAID BY THE EXISTING FUNDS EVEN IF THE
MERGER IS NOT COMPLETED.
Except as set forth below, each Existing Fund will bear a pro rata share of
the cost and expenses incurred in connection with the merger (including, but not
limited to, costs and expenses of preparing all necessary registration
statements, proxy materials and other documents, of preparing for and attending
board and committee, shareholder, planning, organizational and other meetings
and costs and expenses of accountants, attorneys, financial advisors and other
experts engaged in connection with the merger), whether or not the merger is
consummated and whether or not the particular Existing Fund participates in the
merger. The estimated costs and expenses related to the merger are $4,500,000.
The Existing Funds as a group will bear the first $3,400,000 of such expenses
and will, subject to certain exceptions, equally share all transaction expenses
in excess of $3,400,000 with USBAM. The payment of such expenses by the Existing
Funds will reduce the net worth of First American, the New Fund and any
non-participating Existing Fund following the merger. Amounts used to pay such
expenses would otherwise be available for investment in additional
mortgage-related assets or for distribution to shareholders by the Existing
Funds. Each Existing Fund's pro rata share of expenses will be determined based
on its relative net asset value. Based on the net asset values of the Existing
Funds as of November 30, 2002, the Existing Funds would bear the following
amounts and percentages of the expenses of the merger that are to be borne by
the Existing Funds: American Strategic: $271,000 or 6.8%; American
Strategic II: $1,175,000 or 29.4%; American Strategic III: $1,708,000 or 42.7%;
and American Select : $846,000 or 21.1%. See "THE MERGER--Fees and Expenses of
the Merger."
THE INITIAL SIZE OF FIRST AMERICAN AND THE NEW FUND IS UNCERTAIN.
Shareholders are being asked to vote on the merger even though the initial
size and asset mix of First American and the New Fund is uncertain. The actual
initial size of First American and the New Fund will depend upon which Existing
Funds participate in the merger, the number of shares receiving
45
<Page>
New Fund shares and the number of holders exercising statutory dissenters'
appraisal rights. A smaller company in terms of net assets may negatively impact
First American's and the New Fund's ability to access equity markets in the
future, the liquidity of First American's and the New Fund's shares and the
ability to achieve expected operating efficiencies.
First American's initial size will not be less than $200 million in net
asset value because it is a condition to the merger that Existing Funds having,
in the aggregate, a net asset value of at least $200 million (net of estimated
cash needed to fund payments to shareholders exercising statutory dissenters'
appraisal rights under Minnesota law and of the net assets to be transferred to
the New Fund) shall have elected to participate in the merger.
Additionally, the New Fund's initial net asset value will not be less than
$50 million because it is a condition to the completion of the merger provided
in the Merger Agreement. The maximum size of the New Fund is also limited. The
Merger Agreement limits the number of New Fund shares that can be issued to the
shareholders in each Existing Fund to a number that, when added to the number of
dissenters' shares, does not exceed 49% of the aggregate number of shares of
that Existing Fund. Shareholder elections to receive New Fund shares in excess
of this limitation will be prorated based on individual share holdings in the
Existing Funds.
REIT OWNERSHIP LIMIT COULD REQUIRE SHAREHOLDERS OF THE EXISTING FUNDS TO
SELL SHARES PRIOR TO THE MERGER.
For First American to maintain its qualification as a REIT under the Code,
no more than 50% in value of the outstanding First American stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) at any time during the last half of First American's
taxable year (other than the first taxable year for which the election to be
treated as a REIT has been made). To ensure that First American will not fail to
qualify as a REIT, First American's articles of incorporation, subject to
certain exceptions, limit direct and indirect ownership of stock of First
American by any person to no more than 9.8% of the number of shares of common
stock or of any series of preferred stock outstanding. If any shareholder
becomes a shareholder of First American in violation of the ownership limit, the
excess shares held would be subject to the provisions of the articles of
incorporation relating to ownership limit violations, which have the effect of
depriving the excess shares of voting rights and the right to receive regular
dividends and subjecting the excess shares to repurchase by First American, or a
forced sale in the market. Thus, Existing Funds' shareholders who stand to
receive shares in the merger in amounts exceeding the ownership limit would,
unless sold prior to the closing of the merger, be subject to the ownership
limit provisions.
The ownership limit applies to all shareholders who have "direct and
indirect ownership" of stock in First American. Direct or indirect ownership of
shares is determined by looking at a number of factors, including holding the
rights to receive dividends or distributions, voting rights and ability to sell
or transfer the shares. In the event that a record shareholder would violate the
ownership limit as a result of the exchange of Existing Fund shares into First
American shares, the board of directors of First American is authorized to waive
the ownership limit requirement. If, however, the board of directors does not
waive the ownership limit requirement, then such shareholder would be required
to sell a certain number of shares in each Existing Fund prior to the closing of
the merger in order to avoid a violation of the ownership limit.
According to the Schedule 13D/As filed with the SEC by Sit Investment
Associates, Inc. (or SIA), SIA and its affiliates exercise sole voting and
dispositive power over the following percentages of shares: (i) American
Strategic: 17.94% (Schedule 13D/A dated April 1, 2002), (ii) American
Strategic II: 22.87% (Schedule 13D/A dated February 1, 2002), (iii) American
Strategic III: 8.41% (Schedule 13D/A dated February 1, 2002) and (iv) American
Select: 12.90% (Schedule 13D/A dated November 2, 2001). Upon exchange of such
shares for shares of First American in the merger, SIA would be deemed to hold
"direct and indirect ownership" of shares in First American in excess of the
ownership limit. The board of directors of First American may waive the
ownership limit with respect to any shares of First American directly or
indirectly held by SIA upon completion of the merger that were received in
exchange for Existing Fund shares beneficially owned by SIA as of November 30,
2002.
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Neither the boards of directors of the Existing Funds nor the board of directors
of First American is aware of any other shareholder that is likely to be
affected by First American's ownership limit provision.
REQUIREMENTS OF THE MERGER AGREEMENT MAY CAUSE SHAREHOLDERS ELECTING TO
RECEIVE SHARES OF THE NEW FUND TO INSTEAD RECEIVE A COMBINATION OF FIRST
AMERICAN COMMON STOCK AND THE NEW FUND COMMON STOCK.
The terms of the merger provide that the number of shares held by
shareholders in each participating Existing Fund that may receive New Fund
shares or cash through the exercise of statutory dissenters' appraisal rights
will be limited to 49% of the shares of that Existing Fund. Shareholder
elections to receive New Fund shares in excess of this limitation will be
prorated based on individual share holdings in the Existing Funds. If such
prorating is necessary for any Existing Fund, affected shareholders will receive
First American common stock for the balance of their Existing Fund shares that
are not converted into shares of the New Fund. Thus, there is a possibility that
shareholders may request shares of the New Fund common stock but will only be
able to exchange a portion of their shares in the Existing Funds for New Fund
shares and will receive shares of First American common stock for the remainder
of their shares.
CHANGES IN THE NATURE OF THE INVESTMENT HELD BY INVESTORS IN FIRST AMERICAN.
Existing Fund shareholders who become First American shareholders will have
fundamentally changed the nature of their investments and their rights will be
different from their current rights as shareholders in their respective Existing
Fund. These changes may entail greater risks which could have an adverse effect
on the quality of the investments held by shareholders. This will affect the
frequency and amount of dividends distributed to shareholders, the market value
of the shares, First American's regulatory and disclosure obligations, First
American's exposure to interest rate fluctuations and the types and degree of
leverage of First American. Additionally, a number of changes will occur as a
result of the merger that will affect the financial condition and results of
operations of First American, including changes to the current status of the
Existing Funds' accounting basis, financial statements, fiscal year-end,
distribution requirements and capital loss carry-overs. See "COMPARATIVE
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE EXISTING FUNDS, THE NEW FUND AND FIRST AMERICAN."
CHANGES IN THE NATURE OF THE INVESTMENT HELD BY INVESTORS IN THE NEW FUND.
Although the investment policies and strategies of the New Fund will be
substantially similar to those of the Existing Funds, certain changes in the
investment policies of the New Fund may entail greater risks and may have an
adverse effect on the quality of the investments held by shareholders. For
example, the New Fund may engage in loan origination and is not subject to any
limitation on its investments secured by commercial properties, each of which
may result in greater risks for the shareholders receiving shares of the New
Fund relative to those of the Existing Funds.
RISKS RELATED TO PAYMENT OF DISTRIBUTIONS
POSSIBLE LOWER DISTRIBUTIONS FOR FIRST AMERICAN.
Under the REIT provisions of the Code, First American is required to
distribute annually at least 90% of its taxable income. First American intends
to make quarterly distributions to its shareholders of amounts that will, at a
minimum, enable it to comply with these provisions. The actual amount of such
distributions will be determined on a quarterly basis by First American's board
of directors, taking into account, in addition to the REIT requirements, the
cash needs and taxable income of First American, the market price of its common
stock and other factors the board of directors considers relevant. The amount of
distributions to shareholders for each of First American, the Existing Funds and
the New Fund is determined as a percentage of taxable income. It is possible
that the amount of First American's taxable income will be lower than that of
the Existing Funds following the merger. If First American's taxable income is
lower, then the dividends paid by First American will also be lower.
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LESS FREQUENT PAYMENT OF DISTRIBUTIONS BY FIRST AMERICAN.
The Existing Funds currently pay distributions to shareholders on a monthly
basis, and the New Fund intends to pay monthly distributions. Following the
merger, First American intends to pay quarterly distributions to its
shareholders. As a result, First American shareholders will have to adjust to
less frequent payments of distributions.
PROPOSED LEGISLATION MAY ADVERSELY AFFECT THE REIT MARKET.
On January 7, 2003, the Bush Administration released a proposal intended to
eliminate one level of the federal "double taxation" that is currently imposed
on corporate income for regular C corporations. Under this proposal, dividends
from a regular C corporation will be excluded from a shareholder's federal
taxable income to the extent that corporate income tax has been paid on the
earnings from which the dividends are paid. If a REIT receives a dividend from a
regular C corporation that has been subject to corporate income tax, the REIT
could distribute or retain the dividend amount without any additional federal
income tax being imposed on the REIT or its shareholders.
REITs currently are tax-advantaged relative to regular C corporations
because they are not subject to corporate-level federal income tax on income
that they distribute to shareholders. The Bush Administration's proposal, if
enacted, could decrease the tax advantage of a REIT relative to a regular C
corporation, because part or all of the dividends received by a shareholder from
the regular C corporation would be exempt from federal income tax. It is not
possible to predict whether the Bush Administration's proposal ultimately will
be enacted, the form which it might take, and, if enacted, the effects it may
have on the value of REIT shares.
POSSIBLE LOWER DISTRIBUTIONS FOR THE NEW FUND.
The New Fund's dividend policy will be the same as that of the Existing
Funds. The New Fund intends to make monthly distributions from its net
investment income. Net realized capital gains, if any, will be distributed at
least once annually. The New Fund may at times pay out more or less than the
entire amount of net investment income in any particular period. The
distributions paid by the New Fund may be less than those shareholders of the
Existing Funds received prior to the merger if, for example, the small size of
the New Fund results in a material increase in expenses as a percentage of net
assets.
RISKS RELATED TO BUSINESS OPERATIONS
MORTGAGE LOANS AND OTHER INVESTMENTS POSE RISK OF LOSS.
Upon completion of the merger, First American and the New Fund will succeed
to all of the assets held by the Existing Funds that elect to participate in the
merger. Upon completion of the merger, the New Fund will be allocated a
percentage of assets that corresponds to the percentage of outstanding shares
receiving New Fund shares in the merger. These assets are expected to consist
principally of mortgages secured by single-family, multifamily and commercial
properties and, to a lesser extent, U.S. agency and private label
mortgage-backed securities. First American and the New Fund intend to invest in
many of the same types of assets, and First American intends to grow its
portfolio of mortgages and mortgage-related assets over time. As a result, First
American and the New Fund (as well as any non-participating Existing Fund) will
be subject to the risks relating to the ownership of mortgage loans and other
mortgage-related assets discussed in the paragraphs below.
- BORROWER DEFAULTS COULD REDUCE THE VALUE OF FIRST AMERICAN'S AND THE NEW
FUND'S ASSETS AND CASH AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS. While
holding mortgage loans, First American and the New Fund will be subject to
risks of borrower defaults, bankruptcies, fraud and losses and special
hazard losses that are not covered by standard hazard insurance. If a
borrower default occurs, First American or the New Fund will bear the risk
of loss of principal to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the mortgage loan.
Loan foreclosures will cause First American and the New Fund to incur
costs and often involve delays, and there is no assurance that the
subsequent sale of the collateral will produce an amount equal to the
unpaid principal balance of the loan, accrued but unpaid
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interest and all foreclosure expenses, in which case First American or the
New Fund would suffer a loss. Defaults in First American's and the New
Fund's portfolio will reduce the value of that portfolio and the amount of
cash available for distribution to shareholders. In cases where First
American's or the New Fund's lien position is subject to a permitted prior
lien, there are additional risks associated with the rights and remedies
which may be afforded to the senior lender.
- RISK OF MORTGAGE SERVICER INSOLVENCY. Mortgage participations acquired by
First American or the New Fund may continue to have the mortgage servicers
reflected as record owners of the underlying mortgages. If the mortgage
servicer were to become insolvent or have a receiver, conservator or
similar official appointed for it by the appropriate regulatory authority
or become a debtor in a bankruptcy proceeding, there can be no assurance
that First American's or the New Fund's continuing rights to payments
under such mortgage participations would not be adversely affected. First
American or the New Fund could also incur costs and delays in enforcing
its rights to these payments.
- CHANGES IN INTEREST RATES COULD REDUCE THE VALUE OF FIRST AMERICAN'S AND
THE NEW FUND'S ASSETS. Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors
beyond the control of First American and the New Fund. When interest rates
decline, the value of a portfolio invested in fixed rate mortgages can be
expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested in fixed rate mortgages can be expected to decline. The
impact of interest rate changes on either the fair value of First
American's and the New Fund's assets or the market price of First American
common stock and the New Fund common stock cannot be predicted due to the
characteristics of the mortgages and mortgage-related assets in which
First American and the New Fund expect to invest and the various hedging
techniques that can be employed by First American and the New Fund.
- PREPAYMENTS OF MORTGAGES MAY ADVERSELY AFFECT FIRST AMERICAN'S AND THE NEW
FUND'S YIELDS. The yield characteristics of mortgage-related assets differ
from traditional debt securities. The major differences typically include
more frequent interest and principal payments (usually monthly) and the
possibility that prepayments of principal may be made at any time. As a
result, if First American or the New Fund purchases a security at a
premium, a prepayment rate that is faster than expected will reduce yield
to maturity while a prepayment rate that is slower than expected will
increase yield to maturity. Conversely, if First American or the New Fund
purchases the securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield
to maturity. Prepayment rates are influenced by changes in current
interest rates and a variety of other economic, geographic, social and
other factors. Amounts available for reinvestment by First American or the
New Fund are likely to be greater during a period of declining interest
rates than during a period of rising interest rates as prepayments on the
loans or other collateral underlying the securities in which First
American or the New Fund has invested result in prepayments of those
securities. The yield on the securities in which these amounts are
reinvested is likely to be lower than the yield on the securities that
were prepaid or the yield that could be achieved if the amounts were
reinvested during a time of rising interest rates. Mortgage-related assets
may decrease in value as a result of increases in interest rates and may
benefit less than other fixed income securities from declining interest
rates because of the risk of prepayment.
- DECLINE IN MARKET VALUE OF ASSETS COULD LIMIT FIRST AMERICAN'S BORROWING
CAPACITY. First American's leveraging strategy will be designed to
increase the size of its portfolio of mortgage loans and mortgage-backed
securities by borrowing against its existing mortgage loans and mortgage-
backed securities. Since First American will secure the borrowings with
pledges of its assets, a decline in the market value of its assets could
limit First American's ability to borrow or require First American to sell
assets, possibly at losses under adverse market conditions, in order to
maintain liquidity and comply with its investment policies.
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- FIRST AMERICAN AND THE NEW FUND MAY EXPERIENCE LOSSES ON CERTAIN
MORTGAGE-BACKED SECURITIES. While First American and the New Fund expect
that a substantial majority of their mortgage-backed securities
investments will be made in U.S. agency mortgage-backed securities, First
American and the New Fund may include in their portfolios privately issued
mortgage securities backed by pools of mortgage loans, which are typically
not guaranteed by the U.S. government or any agency of the U.S.
government. Although such mortgage-backed securities generally are
structured with one or more types of credit enhancement and are rated at
least A, if held by the New Fund, or rated investment grade, if held by
First American, or, in either case, of equivalent credit quality, any
losses due to borrower defaults on any of the underlying mortgage loans,
bankruptcies, fraud or special hazard losses, in excess of certain
insurance limits, would be the responsibility of First American and the
New Fund. Any such losses will reduce the value of First American's and
the New Fund's respective assets and the amount of cash available for
distribution to shareholders.
- VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY ADVERSELY AFFECT FIRST
AMERICAN'S AND THE NEW FUND'S MORTGAGE LOANS. The value of First
American's and the New Fund's mortgage loans will depend in part on the
value of the real properties securing such loans. Commercial and
multifamily property values and net operating income derived from these
properties are subject to volatility and may be affected adversely by a
number of factors, including:
- national, regional and local economic conditions;
- local real estate conditions (such as an oversupply of housing or
commercial space);
- changes or continued weakness in specific industry segments;
- perceptions by prospective tenants of the safety, attractiveness,
construction quality, age and design of the property;
- the willingness and ability of the property's owner to provide capable
management and adequate maintenance;
- demographic factors; and
- increases in operating expenses (such as energy or insurance costs).
In the event that the value of real properties collateralizing First
American's and the New Fund's respective mortgage loans decreases, the
market value of First American's and the New Fund's mortgage loans could
decline, which could limit First American's and the New Fund's ability to
borrow or require First American and the New Fund to sell assets, possibly
at losses under adverse market conditions, in order to maintain liquidity
and comply with their investment policies.
FIRST AMERICAN'S AND THE NEW FUND'S ABILITY TO INVEST IN ASSETS THAT ARE NOT
DIRECTLY SECURED BY REAL ESTATE MAY INCREASE THE RISK OF LOSS IN THE EVENT
OF BORROWER DEFAULT.
Both First American and the New Fund are permitted to invest in loans that
are secured or partially secured by pledges of ownership interests in single
purpose entities (such as partnerships or limited liability companies) whose
assets and activities are restricted to the ownership and operation of specified
real property, rather than secured by the real property itself. There are
additional risks associated with these single purpose entities undertaking
additional debt and/or security interests in the real property that could reduce
the value of First American's or the New Fund's collateral upon foreclosure.
POSSIBLE ENVIRONMENTAL LIABILITIES MAY RESULT IF FIRST AMERICAN OR THE NEW
FUND ACQUIRES INTERESTS IN PROPERTIES.
First American or the New Fund may become subject to environmental risks if,
in connection with a foreclosure of a mortgage loan, it acquires a property with
material environmental problems. Such environmental risks include the risk that
operating costs and values of these assets may be adversely affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances
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and regulations, as well as the cost of complying with future legislation. Such
laws often impose liability regardless of whether the owner or operator knows
of, or was responsible for, the presence of such hazardous or toxic substances.
The costs of investigation, remediation or removal of hazardous substances could
exceed the value of the property. First American's or the New Fund's income and
ability to make distributions to its shareholders could be affected adversely by
an environmental liability existing on a property so acquired by First American
or the New Fund.
INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE.
Many of First American's and the New Fund's assets are and will be
relatively illiquid. Thus, the ability of First American and the New Fund to
vary their portfolios in response to changes in economic and other conditions
may be relatively limited. This could result in depreciation in the value of
First American's and the New Fund's assets.
LEVERAGE INCREASES EXPOSURE TO LOSS.
Upon completion of the merger, First American and the New Fund will succeed
to the borrowings then held by the participating Existing Funds. In addition, as
discussed below, First American intends to utilize a greater degree of leverage
than either the Existing Funds or the New Fund.
- LEVERAGE EXPOSES BORROWERS TO GREATER RISK OF LOSSES. Leverage can reduce
the net income available for distributions to shareholders. If interest
income on assets purchased with borrowed funds fails to cover the cost of
the borrowings, First American or the New Fund will experience net
interest losses and may experience net losses and erosion or elimination
of its equity.
- INTEREST RATE MISMATCH COULD OCCUR BETWEEN ASSET YIELDS AND BORROWING
RATES RESULTING IN DECREASED YIELD. First American's operating results
will depend in large part, and the New Fund's operating results will
depend to a lesser extent, on differences between the income from their
assets (net of credit losses) and their borrowing costs. First American
intends to fund a substantial portion of its assets with borrowings which
have interest rates that reset relatively frequently, such as monthly or
quarterly. The New Fund's borrowings, although more limited, are also
expected to have interest rates that reset relatively frequently. First
American and the New Fund anticipate that, in most cases, the income from
their respective assets will respond more slowly to interest rate
fluctuations than the cost of their borrowings, creating a potential
mismatch between asset yields and borrowing rates. Consequently, changes
in interest rates, particularly short-term interest rates, may
significantly influence First American's and the New Fund's net income.
Increases in these rates will tend to decrease First American's and the
New Fund's net income and fair value of their net assets. To the extent
that First American utilizes a greater degree of leverage than the New
Fund, it will be subject to a greater impact from changing interest rates.
Interest rate fluctuations resulting in First American's interest expense
exceeding interest income would result in its incurring operating losses.
- UNAVAILABILITY OF BORROWINGS COULD ADVERSELY AFFECT INVESTMENT STRATEGIES.
The ability of First American to achieve its investment objectives depends
to a significant extent on its ability to borrow funds in sufficient
amounts and on sufficiently favorable terms to earn incremental returns.
First American may not be able to achieve the degree of leverage it
believes to be optimal due to decreases in the proportion of the value of
its assets that it can borrow against, decreases in the fair value of its
assets, increases in interest rates, changes in the availability of
financing in the market, conditions in the lending market and other
factors. This may cause First American to experience losses or to earn
smaller profits than would otherwise be the case.
- FIRST AMERICAN WILL BE MORE HIGHLY LEVERAGED THAN ANY OF THE EXISTING
FUNDS OR THE NEW FUND. As diversified, closed-end, registered management
investment companies, the Existing Funds and the New Fund are subject to
the provisions of the Investment Company Act which limit borrowings to an
amount equal to one-third of their total assets. However, unlike the
Existing Funds or the New Fund, First American will not be subject to the
borrowing limitations of the Investment Company Act and First American's
borrowing policy will be to incur debt such that, once fully
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invested, it will maintain a debt-to-equity ratio of between 1:1 to 1.5:1
with regard to its mortgage loan portfolio and 4:1 to 9:1 with respect to
its portfolio of mortgage-backed securities. These ratios are
substantially higher than are permitted to the Existing Funds or the New
Fund under the Investment Company Act. First American will thus be more
highly leveraged than any of the Existing Funds or the New Fund.
HEDGING STRATEGIES MAY NOT ELIMINATE INTEREST RATE RISK AND MAY REDUCE THE
OVERALL RETURNS ON INVESTMENTS.
First American and the New Fund intend to enter into hedging transactions to
protect their investment portfolios from interest rate fluctuations and other
changes in market conditions. These hedging strategies will be consistent with
the current strategies employed by the Existing Funds, and First American and
the New Fund will develop and utilize other strategies as appropriate and
consistent with their qualification as a REIT or a RIC. These hedging
transactions may include interest rate swaps, the purchase or sale of interest
rate collars, caps or floors, futures, options and other hedging instruments.
Developing an effective hedging strategy is complex and no strategy can
completely insulate First American or the New Fund from risks associated with
interest rate changes and prepayments. In addition, hedging typically involves
costs, including transaction costs, which increase dramatically as the period
covered by the hedge increases and which also increase during periods of rising
or volatile interest rates. First American or the New Fund may increase its
hedging activity, and thus increase its hedging costs, during such periods when
interest rates are volatile or rising and hedging costs have increased.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements on the part
of the counterparty with respect to record keeping, financial responsibility or
segregation of customer funds and positions. First American and the New Fund
intend to enter into these transactions only with counterparties with long-term
debt rated "AA" or better by at least one nationally recognized rating agency.
The business failure of a counterparty with which First American and the New
Fund has entered into a hedging transaction will most likely result in a
default, which may result in the loss of unrealized profit and force First
American and the New Fund to cover their resale commitments, if any, at the then
current market price. Although generally First American and the New Fund will
seek to reserve for themselves the right to terminate their hedging positions,
it may not always be possible to dispose of or close out a hedging position
without the consent of the counterparty, and First American and the New Fund may
not be able to enter into an offsetting contract in order to cover their risk.
There can be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and First American and the New Fund may be
required to maintain a position until exercise or expiration, which could result
in losses.
Hedging devices and mortgage instruments are complex and can produce
volatile results. Accordingly, there can be no assurance that First American's
or the New Fund's hedging strategy will have the desired beneficial impact on
First American's or the New Fund's earnings, financial condition and the
resulting dividend yield on their common stock. Instead, such hedging strategies
may have an adverse effect on First American's or the New Fund's net income and
cash available for distribution to shareholders.
SIGNIFICANT COMPETITION MAY ADVERSELY AFFECT FIRST AMERICAN'S AND THE NEW
FUND'S ABILITY TO ACQUIRE ASSETS.
First American's and the New Fund's net income depends, in large part, on
First American's and the New Fund's respective ability to acquire mortgage loans
and other mortgage-related assets at favorable spreads over First American's and
the New Fund's borrowing costs. In acquiring mortgage loans and other
mortgage-related assets, First American and the New Fund compete with other
mortgage REITs, specialty finance companies, savings and loan associations,
banks, mortgage bankers, insurance companies, mutual funds, institutional
investors, investment banking firms, other lenders, governmental bodies and
other entities. Many of First American's and the New Fund's competitors may be
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significantly larger than First American and the New Fund, have access to
greater capital and other resources and may have other advantages over First
American and the New Fund. In addition to existing companies, other companies
may be organized for purposes similar to that of First American or the New Fund.
A proliferation of such companies may increase the competition for equity
capital and thereby adversely affect the market price of the common stock of
First American and the New Fund. In addition, adverse publicity affecting this
sector of the capital markets or significant operating failures of competitors
may adversely affect the market price of First American's and the New Fund's
common stock.
DEPENDENCE ON USBAM AND KEY PERSONNEL.
After the merger is complete, USBAM's investment advisory management team
for the Existing Funds will serve as USBAM's investment advisory management team
for First American and the New Fund. First American and the New Fund will be
heavily dependent on the diligence and skill of this management team of USBAM
for the selection, structuring and monitoring of its mortgage assets and
associated borrowings. While First American and the New Fund believe that USBAM
could find replacements for its key executives, the loss of their services could
have an adverse effect on the operations of USBAM, First American and the New
Fund. In addition, there can be no guarantee that the investment decisions of
the current management team will produce the desired results.
PAYMENT UPON TERMINATION OF REIT ADVISORY AGREEMENT.
First American may, at its option, terminate, or decline to renew the term
of, the REIT Advisory Agreement with or without cause at any time upon 60 days'
written notice with the approval of a majority of the board of directors
(including at least a majority of the independent directors). In the event First
American terminates or declines to renew the REIT Advisory Agreement (other than
for cause), First American is obligated to pay USBAM a termination or
non-renewal fee which shall equal 5% of, for the first two years following the
initial date of the REIT Advisory Agreement, and 2% of, thereafter, the net
equity of First American, calculated as of the fiscal year-end immediately prior
to the termination or non-renewal, as the case may be, in accordance with
accounting principles generally accepted in the United States. Applying the pro
forma net equity of First American as of November 30, 2002 (assuming maximum
participation) (I.E., approximately $626,380,601), it is estimated that the
termination fee payable to USBAM during the first two years of First American's
operations would be approximately $31,319,030.
CONFLICTS OF INTEREST OF USBAM MAY RESULT IN DECISIONS THAT DO NOT FULLY
REFLECT SHAREHOLDERS' BEST INTERESTS.
First American and the New Fund are subject to conflicts of interest
involving USBAM. The executive officers and certain of the directors of First
American and the New Fund will be directors, officers and employees of USBAM. A
majority of the board of directors of First American and the New Fund, however,
will consist of independent directors. See "The Parties Negotiating the Terms of
the Merger Proposal Have Conflicts of Interest" above addressing the conflicts
arising from the affiliations of First American's officers and directors.
- FIRST AMERICAN MAY ACQUIRE MORTGAGE LOANS, MORTGAGE ASSETS AND OTHER
MORTGAGE-RELATED ASSETS FROM AFFILIATES OF USBAM. USBAM will seek to
locate, and facilitate in the acquisition of, mortgage product for
investment by First American through a variety of sources. These sources
include national and regional mortgage bankers, life insurance companies
and banks. In addition, unlike the Existing Funds and the New Fund, First
American will be permitted to acquire product from affiliates of USBAM,
which will potentially include its ultimate parent company, U.S. Bancorp,
and its affiliate, U.S. Bancorp Piper Jaffray. Although such investments
will be subject to review by the independent directors, it is anticipated
that the independent directors will rely primarily on information provided
by USBAM in reviewing such transactions. Because USBAM is a wholly-owned
subsidiary of U.S. Bancorp, there is a risk that U.S. Bancorp will be able
to exert influence over these investment decisions.
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- USBAM WILL EARN GREATER BASE MANAGEMENT FEES AS FIRST AMERICAN INCREASES
IN SIZE. As compensation for its services, USBAM will receive a base
management fee and a performance fee. The base management fee shall be
based on First American's assets and shall equal 0.25% per annum for
investment grade assets or residential mortgage-backed securities
determined in the reasonable judgment of USBAM to be of equivalent credit
quality (whether or not rated) and 1% per annum for the first $1 billion
of non-investment grade assets and 0.75% of non-investment grade assets
over $1 billion, payable quarterly not later than 30 days after the end of
each fiscal quarter. The structure of the base management fee may
encourage USBAM to increase leverage so as to increase the size of First
American's asset base and thus the size of the base management fee.
- THE INCENTIVE COMPENSATION PAYABLE TO USBAM WITH RESPECT TO FIRST AMERICAN
IS STRUCTURED TO REWARD INCOME MAXIMIZATION. In addition to the base
management fee from First American, USBAM will be entitled to receive a
performance fee for each fiscal quarter equal to the product of (i) the
weighted average number of shares of common stock outstanding during such
quarter, and (ii) 20% of the amount by which (a) the net income per share
of common stock of First American (before the performance fee) exceeds
(b) a net income per share that would result in a yield, tied to the
historical offering prices of the common stock, equal to the greater of
10% or the applicable ten-year U.S. Treasury rate plus 3.5% (each
expressed as a quarterly percentage). The structure of the incentive fee
may encourage USBAM to maximize net income of First American at the
expense of other investment considerations, such as the preservation of
capital.
- USBAM MAY ENGAGE IN OTHER BUSINESS ACTIVITIES. Neither the New Fund
Advisory Agreement nor the REIT Advisory Agreement limits or restricts the
right of USBAM or affiliates to engage in any business or render services
of any kind to any other person.
THE LIABILITY OF USBAM IS LIMITED.
INDEMNIFICATION. First American has agreed to indemnify USBAM and its equity
owners, officers, managers, employees, agents, associates and controlling
persons (and the equity owners, officers, managers, employees and agents of such
persons) against any liabilities and expenses incurred in connection with any
action or proceeding involving such person by reason of such person's service in
any of the foregoing capacities. First American also agrees that such persons
shall not have any liability to First American or its shareholders for any error
of judgment, mistake of law, loss arising out of any investment or act or
omission in performing its obligations under the REIT Advisory Agreement. First
American will not provide such indemnification or relieve such person of
liability if the liability arises as a result of such person's willful
misfeasance, bad faith, gross negligence, reckless disregard of the duties
involved in the conduct of its position or any material breach of the terms of
the REIT Advisory Agreement (unless such breach arises solely from USBAM's good
faith reliance upon the advice of outside professionals). Under the New Fund
Advisory Agreement, USBAM has agreed to indemnify the New Fund with respect to
any loss, liability, judgment, cost or penalty that the New Fund may suffer due
to a breach of the New Fund Advisory Agreement by USBAM.
USBAM shall be liable to the New Fund and its shareholders or former
shareholders for any negligence or willful misconduct on the part of USBAM or
any of its directors, officers, employees, representatives or agents in
connection with the responsibilities assumed by it under the New Fund Advisory
Agreement, provided, however, that USBAM will not be liable for any investments
made by it in accordance with the explicit or implicit direction of the board of
directors of the New Fund or the investment objectives and policies of the New
Fund, and provided further that any liability of USBAM resulting from a breach
of fiduciary duty with respect to the receipt of compensation for services shall
be limited to the period and amount set forth in Section 36(b)(3) of the
Investment Company Act.
TAX RISKS RELATED TO OPERATION OF FIRST AMERICAN.
- FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES. In
order to maintain its qualification as a REIT for federal income tax
purposes, First American must continually satisfy certain tests with
respect to the sources of its income, the nature of its assets, the amount
of its
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distributions to shareholders and the ownership of its stock. If First
American fails to qualify as a REIT in any taxable year (and is not
entitled to relief from such failure to qualify), it would be taxed as a
regular domestic corporation. In such event, First American would be
subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates, and
distributions to First American's shareholders would not be deductible by
First American in computing its taxable income. Any such corporate tax
liability could be substantial and would reduce the amount of cash
available for distribution to First American's shareholders, which in turn
could have an adverse effect on the value of, and trading price for, First
American's common stock. In addition, the disqualification of First
American as a REIT for any one year would disqualify First American from
being treated as a REIT for its four subsequent taxable years following
the taxable year in which such qualification is lost.
- QUALIFICATION AS A REIT MAY RESTRICT HEDGING. The Code may limit the
ability of First American to hedge its assets and the related First
American borrowings. Under the Code, First American must limit its income
in each year from hedging transactions qualifying under
Section 856(c)(5)(G) (together with any other income generated from other
than qualifying real estate assets) to 25% or less of First American's
gross income. As a result, First American may have to limit its use of
certain hedging techniques that might otherwise be advantageous. Any
limitation on First American's use of hedging techniques may result in
greater interest rate risk. If First American were to receive income from
such hedging transactions and other than qualifying real estate assets in
excess of the 25% limitation (and still retained its status as a REIT), it
could incur payment of a penalty tax equal to the amount of income in
excess of those limitations, multiplied by a fraction intended to reflect
its profitability or in the case of a willful violation, loss of REIT
status for federal income tax purposes.
- QUALIFICATION AS A REIT MAY LIMIT OPERATING FLEXIBILITY. First American
must also ensure that at the end of each fiscal quarter at least 75% of
the value of its assets consists of cash, cash equivalents, government
securities and qualifying real estate assets, and of the investments in
securities not included in the foregoing, First American does not hold
more than 10% of the outstanding securities (by vote or value) of any one
issuer (other than qualified REIT subsidiaries, taxable REIT subsidiaries
and with respect to the 10% value test, certain "straight debt"
securities), no more than 5% by value of First American's assets consist
of the securities of any one issuer (other than qualified REIT
subsidiaries or taxable REIT subsidiaries) and no more than 20% by value
of First American's assets consists of securities of one or more "taxable
REIT subsidiaries." Failure to comply with any of the foregoing tests as a
result of the acquisition of additional assets would require First
American to dispose of a portion of its assets within 30 days after the
end of the fiscal quarter or face loss of REIT status and related adverse
tax consequences.
- REIT DISTRIBUTION REQUIREMENTS COULD REQUIRE UNFAVORABLE ACTIONS. First
American must generally distribute at least 90% of its taxable income each
year. First American's operations may, from time to time, generate taxable
income in excess of cash flows. For example, subordinated mortgage-backed
securities often are originally issued at a discount to their redemption
price, which discount is generally equal to the difference between an
obligation's issue price and its redemption price (or OID). Mezzanine
loans also may be deemed to have OID for federal income tax purposes. OID
generally will be accrued using a constant yield methodology that does not
allow credit losses to be reflected until they are actually incurred.
First American will generally be required to recognize as income each year
the portion of the OID that accrues during that year, which will increase
the amount that First American must distribute for that year in order to
avoid a corporate-level income tax, and to avoid potential
disqualification as a REIT, notwithstanding that there may be no
corresponding contemporaneous receipt of cash by First American. However,
to the extent the OID that accrues during a taxable year (along with
certain other specified types of non-cash income) exceeds 5% of First
American's taxable income (without regard to the dividends paid deduction
or any net capital gain), First American will not be required to
distribute such amounts to avoid potential disqualification as a REIT. In
addition, First American may recognize taxable market discount income upon
the receipt of proceeds
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from the disposition of, or principal payments on, mortgage loans and
mortgage-backed securities that are "market discount bonds" (I.E.,
obligations with an adjusted issue price that is greater than First
American's tax basis in such obligations), although such proceeds often
will be used to make non-deductible principal payments on related
borrowings. Finally, First American may recognize taxable income without
receiving a corresponding cash distribution if it forecloses on or makes a
"significant modification" (as specifically defined in the U.S. Department
of Treasury Regulations) to a mortgage loan, to the extent that the fair
market value of the underlying property or the principal amount of the
modified loan, as applicable, exceeds First American's basis in the
original loan. Consequently, First American's investment activities could
have the effect of requiring First American to incur borrowings or to
liquidate a portion of its portfolio at rates or times that First American
regards as unfavorable in order to distribute at least 90% of its taxable
income and thereby avoid corporate-level income tax on the distributed
portion and to maintain its qualification as a REIT.
- TAX LAW APPLICABLE TO REITS COULD CHANGE. The rules dealing with federal
income taxation are constantly under review by the Internal Revenue
Service (or the IRS), the U.S. Department of the Treasury and Congress.
New federal tax legislation or other provisions may be enacted into law or
new interpretations, rulings or regulations could be adopted, all of which
could adversely affect the taxation of First American or its shareholders,
possibly with retroactive effect. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions
either directly or indirectly affecting First American or its
shareholders.
TAX RISKS RELATED TO OPERATION OF THE NEW FUND.
- FAILURE TO MAINTAIN RIC STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES. In
order to maintain its qualification as a RIC for federal income tax
purposes, the New Fund must continually satisfy certain tests with respect
to the nature of its assets, the composition of its gross income and the
amount of its distributions to shareholders. If the New Fund fails to
qualify as a RIC in any taxable year (and is not entitled to relief from
such failure to qualify), it would be taxed as a regular domestic
corporation. In that event, the New Fund would be subject to federal
income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to the New
Fund's shareholders would not be deductible by the New Fund in computing
its taxable income. Any such corporate tax liability could be substantial
and would reduce the amount of cash available for distribution to the New
Fund's shareholders, which in turn could have an adverse effect on the
value of, and trading price for, the New Fund's stock. The RIC
qualification requirements with which the New Fund is required to comply
are the same requirements imposed on the Existing Funds.
- QUALIFICATION AS A RIC MAY LIMIT OPERATING FLEXIBILITY. The New Fund must
ensure that at the end of each fiscal quarter its assets consist of cash,
cash equivalents, government securities and securities of other RICs, and
other securities, other than those of a single issuer representing 5% of
the RIC's total assets, or more than 10% of the voting securities of such
issuer; and no more than 25% of the RIC's total assets can consist of
securities (other than government securities and securities of other RICs)
of any one issuer or two or more issuers which the RIC controls and which
are engaged in the same, similar or related trade or businesses. Failure
to comply with any of these asset tests due to the acquisition of
additional assets would require the New Fund to dispose of a portion of
its assets within 30 days after the end of the fiscal quarter or face loss
of RIC status and the related tax consequences. The necessity to comply
with these requirements may require the New Fund to incur taxable gains or
dispose of specific assets at a time that the New Fund regards as
unfavorable.
- RIC DISTRIBUTION REQUIREMENTS COULD REQUIRE UNFAVORABLE ACTIONS. The New
Fund is permitted to invest in securities that are deemed to have original
issue discount or market discount for federal income tax purposes, such as
whole loans and mortgage participations purchased at a discount and
certain corporate debt securities. These securities are purchased at a
discount from their face values to reflect that interest payments are
either not made on a current basis or do not reflect prevailing interest
rates for instruments of like grade and quality. When held to
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maturity, part or all of the yield of these instruments will consist of
the payment of an amount equal to the original issue or market discount,
which is generally equal to the difference between their purchase price
and their redemption price. Each year, the New Fund is required to accrue
with respect to these securities a portion of the original issue discount
or the market discount (if the New Fund elects to accrue market discount
on a current basis with respect to these securities), which is considered
investment company taxable income in that year under the Code,
notwithstanding the fact that there is no corresponding distribution of
cash to the New Fund. In order to qualify as a RIC under the Code, the New
Fund must distribute to shareholders 90% of its investment company taxable
income for the taxable year. Consequently, an investment by the New Fund
in the above securities may cause the New Fund to incur borrowings, or to
liquidate a portion of its portfolio, at rates or at times that it regards
as unfavorable, to meet these distribution requirements.
- TAX LAW APPLICABLE TO RICS COULD CHANGE. The rules dealing with federal
income taxation are constantly under review by the IRS, the U.S.
Department of the Treasury and Congress. New federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings
or regulations could be adopted, all of which could adversely affect the
taxation of the New Fund or its shareholders, possibly with retroactive
effect. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly
affecting the New Fund or its shareholders.
RISKS RELATED TO THE STRUCTURE OF FIRST AMERICAN
POTENTIAL FUTURE OFFERINGS COULD DILUTE THE INTEREST OF HOLDERS OF FIRST
AMERICAN COMMON STOCK.
First American expects in the future to increase its capital resources by
making additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities and other borrowings, as well
as all classes of preferred stock, will be senior to the common stock in a
liquidation of First American. The effect of additional equity offerings may be
the dilution of the equity of shareholders of First American or the reduction of
the price of shares of First American's common stock, or both. First American is
unable to estimate the amount, timing or nature of additional offerings as they
will depend upon market conditions and other factors.
FAILURE TO MAINTAIN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD RESTRICT
FIRST AMERICAN'S OPERATING FLEXIBILITY.
First American at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, First American does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act excludes
from regulation entities that are primarily engaged in the business of
purchasing or otherwise acquiring "mortgages and other liens on and interests in
real estate." Under the current interpretations of the staff of the SEC, in
order to qualify for this exemption, First American must, among other things,
maintain at least 55% of its assets directly in mortgage loans, qualifying pass-
through certificates and certain other qualifying interests in real estate and
an additional 25% of its assets in real estate-related assets. In addition,
unless certain mortgage-backed securities represent all the certificates issued
with respect to an underlying pool of mortgage loans, such securities may be
treated as securities separate from the underlying mortgage loans and thus may
not qualify as qualifying interests in real estate for purposes of the 55%
requirement. First American's ownership of many mortgage-backed securities,
therefore, will be limited by the provisions of the Investment Company Act. If
First American fails to qualify for exemption from registration as an investment
company, its ability to use leverage would be substantially reduced, and it
would be unable to conduct its business as described herein. Any such failure to
qualify for such exemption would have a material adverse effect on First
American.
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POTENTIAL LIMITS ON CHANGE OF CONTROL.
- CERTAIN PROVISIONS OF FIRST AMERICAN'S ORGANIZATIONAL DOCUMENTS. Certain
provisions of First American's articles of incorporation and bylaws may
delay, defer or prevent a tender offer, proxy contest or other takeover
attempt involving First American. These provisions include:
- the availability of shares of preferred stock for issuance from time to
time at the discretion of the board of directors;
- prohibitions against shareholders acting by written consent in lieu of a
meeting other than by the unanimous written consent of the shareholders;
- the classification of the board of directors into three classes, each of
which will serve for staggered three-year periods; and
- directors may only be removed by shareholders representing at least
two-thirds of the outstanding shares entitled to vote in the election of
directors.
- POTENTIAL EFFECTS OF THE OWNERSHIP LIMIT. As detailed above, First
American's articles of incorporation establish the ownership limit. First
American's board of directors, upon receipt of a ruling from the IRS, an
opinion of counsel or other evidence satisfactory to First American's
board of directors and upon such other conditions as the board of
directors may establish, may exempt a proposed transferee from the
ownership limit. However, the board of directors may not grant an
exemption from the ownership limit to any proposed transferee whose
ownership, direct or indirect, of First American common stock in excess of
the ownership limit would result in the termination of First American's
status as a REIT. The foregoing restrictions on transferability and
ownership will continue to apply until a majority of the board of
directors (including at least a majority of the independent directors)
determines that it is no longer in the best interests of First American to
continue to qualify as a REIT. The ownership limit may have the effect of
delaying, deferring or preventing a transaction or a change in control of
First American that might involve a premium price for the common stock or
otherwise be in the best interests of the shareholders.
- POTENTIAL EFFECTS OF A CLASSIFIED BOARD OF DIRECTORS. First American's
board of directors will be divided into three classes. The initial terms
of the Class I, Class II and Class III directors will expire in 2004, 2005
and 2006, respectively. Beginning in 2004, directors of each class will be
chosen for three-year terms upon the expiration of their current terms and
each year one class of directors will be elected by the shareholders. The
staggered terms of directors may reduce the possibility of a tender offer
or an attempt to change control of First American, even though a tender
offer or change in control might involve a premium price for the common
stock or otherwise be in the best interests of the shareholders.
- POTENTIAL EFFECTS OF ISSUANCE OF ADDITIONAL SHARES. First American's
articles of incorporation authorize the board of directors to (i) cause
First American to issue additional authorized but unissued preferred or
common stock and (ii) classify or reclassify any unissued common or
preferred stock and to set the preferences, rights and other terms of such
classified or reclassified shares. Although the board of directors has no
such intention to do so at the present time, it could establish a class or
series of shares that could, depending on the terms of such series, delay,
defer or prevent a transaction or a change in control of First American
that might involve a premium price for the common stock or otherwise be in
the best interest of the shareholders. The articles of incorporation and
bylaws of First American also contain other provisions that may have the
effect of delaying, deferring or preventing a transaction or a change in
control of First American that might otherwise be in the best interest of
the shareholders.
- MARYLAND BUSINESS COMBINATION STATUTE. The MGCL establishes special
requirements for "business combinations" between a Maryland corporation
and "interested shareholders" unless exemptions are applicable. An
interested shareholder is any person who beneficially owns 10% or more of
the voting power of First American's then outstanding voting stock. Among
other things, the law prohibits for a period of five years, a merger and
other similar transactions
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between First American and an interested shareholder unless the board of
directors approves the transaction prior to the party becoming an
interested shareholder. The five-year period runs from the most recent
date on which the interested shareholder became an interested shareholder.
The law also requires payment of a fair price to shareholders to be
determined as set forth in the statute or a super majority shareholder
vote for such transactions after the end of the five-year period. This
means that the transaction must be approved by at least:
- 80% of the votes entitled to be cast by holders of outstanding voting
shares voting together as a single voting group; and
- 66 2/3% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested shareholder with whom the
business combination is to be effected.
The effects of these provisions of the MGCL may be to delay, defer or
prevent a transaction or change of control of First American that might
involve a premium price for common stock or otherwise be in the best
interests of shareholders.
- MARYLAND CONTROL SHARE ACQUISITION STATUTE. The MGCL provides that
"control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a
shareholder vote. Two-thirds of the shares other than the "control shares"
must vote in favor of granting the "control shares" voting rights.
"Control shares" are shares of stock that, taken together with all other
shares of stock the acquirer previously acquired, would entitle the
acquirer to exercise at least 10% of the voting power in electing
directors. Control shares do not include shares of stock that the
acquiring person is entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. If a person
who has made (or proposes to make) a control share acquisition satisfies
certain conditions (including agreeing to pay expenses), he may compel the
board of directors to call a special meeting of shareholders to be held
within 50 days to consider the voting rights of the shares. If such a
person makes no request for a meeting, First American has the option to
present the question at any shareholders' meeting.
The effects of these provisions of the MGCL may be to delay, defer or
prevent a transaction or change of control of First American that might
involve a premium price for common stock or otherwise be in the best
interests of shareholders.
RISKS RELATED TO THE STRUCTURE OF THE NEW FUND
MARKET PRICE AND REPURCHASES OF COMMON STOCK.
In an effort to reduce or eliminate a market value discount from net asset
value, the New Fund may repurchase shares in the open market or tender for
shares at net asset value, in either case in amounts deemed advantageous to the
New Fund and the holders of shares. The New Fund may incur debt to finance
repurchases, which poses certain risks to holders of shares. Any borrowings for
this purpose will be subject to the asset coverage requirements and borrowing
restrictions of the Investment Company Act. There can be no assurance that the
New Fund will undertake any repurchases and/or tender offers or that, if
undertaken, these actions will result in an improvement in the price of the
shares.
ANTI-TAKEOVER AND OPEN-ENDING PROVISIONS.
Some provisions in the New Fund's articles of incorporation and the MBCA
could limit the ability of other entities or persons to acquire control of the
New Fund or convert the New Fund to open-end status. The effects of these
provisions could delay, defer or deprive common shareholders of opportunities to
sell their common shares at a premium over the shares' then-current market
price.
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POSSIBLE FUTURE CONVERSION TO OPEN-END INVESTMENT COMPANY.
The New Fund's articles of incorporation provide that an affirmative vote of
holders of 66 2/3% of the outstanding shares is required to convert the New Fund
from a closed-end to an open-end investment company. This vote is higher than
the minimum vote required under the Investment Company Act. If the New Fund
converted to an open-end investment company, it would be able to continuously
issue and offer for sale its shares and each such share could be presented to
the New Fund at the option of the holder thereof for redemption at net asset
value per share. In that event, the New Fund could be required to liquidate
portfolio securities to meet requests for redemption, and its shares would no
longer be listed on a national securities exchange or market. In addition, the
New Fund would have to change many of its investment policies.
POTENTIALLY SMALL SIZE OF THE NEW FUND.
Depending on how many Existing Fund shareholders elect to receive the New
Fund shares in the merger, the New Fund's aggregate net asset value could be as
little as $50 million, which is less than that of any of the four Existing
Funds. If the New Fund is relatively small compared to the Existing Funds, it
could experience a higher expense ratio, less diversification of assets and
decreased trading liquidity for its shares in comparison to the Existing Funds.
INVESTMENTS OF THE NEW FUND MAY BE LIMITED BY THE RESTRICTIONS OF THE
INVESTMENT COMPANY ACT.
As an investment company registered under the Investment Company Act, the
New Fund will be subject to certain prohibitions and limitations that are not
imposed upon First American:
LIMITATIONS ON BORROWING. Under the Investment Company Act, the New Fund
will not generally be permitted to borrow unless immediately after the borrowing
the value of the New Fund's total assets is at least 300% of the principal
amount of the borrowing (I.E., the principal amount of the borrowing may not
exceed 33 1/3% of the New Fund's total assets). Thus, unlike First American, the
New Fund may not be able to participate in certain investment opportunities,
which may have an adverse affect on shareholder's investments, and New Fund
shareholders may forego potentially higher returns as a result.
INABILITY TO ACQUIRE ASSETS FROM AFFILIATES OF USBAM. The Investment Company
Act will prohibit many transactions between the New Fund and its affiliates,
including its investment advisor and the advisor's affiliates. Thus, unlike
First American, the New Fund will not be able to acquire mortgage loans and
other mortgage-related assets from affiliates of USBAM, which could adversely
affect the New Fund's ability to acquire assets.
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THE EXISTING FUNDS
Each Existing Fund is organized as a Minnesota corporation and is registered
under the Investment Company Act as a diversified, closed-end management
investment company. The Existing Funds were organized and commenced operations
on the following dates:
<Table>
<Caption>
ORGANIZATION COMMENCEMENT OF OPERATIONS
- ------------ --------------------------
American Strategic................................ December 27, 1991
American Strategic II............................. July 30, 1992
American Strategic III............................ March 25, 1993
American Select................................... September 21, 1993
</Table>
Shares of the common stock of each Existing Fund are listed on the NYSE under
the symbols "ASP" (American Strategic), "BSP" (American Strategic II), "CSP"
(American Strategic III) and "SLA" (American Select). Shares of American
Strategic II and American Strategic III are also listed on the Chicago Stock
Exchange.
The following sections set forth certain additional information about the
Existing Funds. You also can obtain more information about the Existing Funds
from the documents that have been incorporated by reference into this joint
proxy statement/prospectus, as described above in "WHERE YOU CAN FIND MORE
INFORMATION." In addition, selected financial information for each of the
Existing Funds is set forth below in "SELECTED HISTORICAL FINANCIAL DATA."
Certain historical performance information for the Existing Funds is set
forth in the sections that follow. However, the Existing Funds' historical
performance is not indicative of their future performance, or of First
American's or the New Fund's future performance, if the merger is completed. As
described elsewhere in this joint proxy statement/prospectus, if the merger is
completed, First American is expected to operate differently than the Existing
Funds.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL. The investment objective of each Existing Fund is to provide a high
level of current income; a secondary objective is to seek capital appreciation.
The investment objectives of the Existing Funds may not be changed without the
approval of the holders of a majority of the respective Existing Fund's
outstanding voting securities (defined under the Investment Company Act as the
lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the
shares represented at a meeting where more than 50% of the outstanding shares
are represented). Unless otherwise noted, the other investment policies of the
Existing Funds may be changed by the board of directors of the respective
Existing Fund, without shareholder approval. Under normal circumstances, each
Existing Fund invests primarily in income producing securities (excluding zero
coupon securities). The Existing Funds emphasize investments that directly or
indirectly represent a participation in or are secured by and payable from
mortgage loans (or mortgage-related assets), focusing primarily on multifamily
and commercial loans. The balance of each Existing Fund's total assets is
invested in U.S. Government securities and corporate debt securities. The
Existing Funds may also employ certain other investment management practices
which are described below to earn income, facilitate portfolio management and
mitigate risk.
MORTGAGE-RELATED ASSETS. Mortgage-related assets in which the Existing Funds
invest are investments that directly or indirectly represent a participation in
or are secured by and payable from mortgage loans. They include: (i) whole
loans, (ii) mortgage participations, (iii) mortgage-backed securities and
(iv) preferred issuances of real estate investment trusts.
WHOLE LOANS AND MORTGAGE PARTICIPATIONS. Whole loans are entire ownership
interests in loans which are secured or partially secured by mortgages or deeds
of trust and/or assignments or rent or installment sales contracts on
residential or commercial property. These security instruments will typically
create a first lien in the related collateral (subject to customary permitted
encumbrances), but may
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create a junior lien. In most cases where the security instrument creates a
junior lien, the Existing Funds seek to enter into an agreement with the holder
of a senior security instrument in order to protect the Existing Fund's interest
in the related collateral.
Mortgage participations are fractional interests in one or more whole loans.
Payments of principal and interest on the underlying whole loan(s) are made by
the borrower to the mortgage servicer who in turn is responsible for remitting
to each mortgage participation holder its proportionate share of these payments
in accordance with each holder's percentage interest in the underlying whole
loan(s).
The Existing Funds are authorized to invest in whole loans and mortgage
participations secured by multifamily and single-family residential properties
and by commercial properties. However, each Existing Fund is limited to
investing 35% of its total assets in whole loans and participation mortgages
secured by commercial properties. The Existing Funds currently emphasize
investments in multifamily residences and commercial properties.
The obligors with respect to whole loans and mortgage participations are
typically the borrowers on the underlying mortgage loans or installment sales
contracts. The Existing Funds acquire these whole loans and mortgage
participations through an assignment to the Existing Fund of the loan or
participation or contract interest by the financial institution which holds the
loan or participation or contract interest. The Existing Funds do not act as the
originator of mortgage loans, although they do enter into arrangements with
mortgage lenders pursuant to which, upon the closing of a loan, the Existing
Funds acquire the loan from the mortgage lender.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that,
directly or indirectly, represent participations in, or are secured by and
payable from, loans secured by real property. Mortgage-backed securities include
pass-through securities such as Government National Mortgage Association (or
Ginnie Mae or GNMA), Federal National Mortgage Association (or Fannie Mae or
FNMA) and Federal Home Loan Mortgage Corporation (or Freddie Mac or FHLMC)
Certificates, private pass-through securities, commercial mortgage-backed
securities and certain collateralized mortgage obligations. Mortgage-backed
securities may have fixed or adjustable interest rates.
PREFERRED ISSUES OF REAL ESTATE INVESTMENT TRUSTS. The Existing Funds invest
in issues of preferred securities of REITs. Each Existing Fund currently limits
its investment in issues of preferred securities of REITs to 10% of its total
assets. However, this limitation may be changed at any time by an Existing
Fund's board of directors, without shareholder approval. As a fundamental policy
which may not be changed without shareholder approval, no Existing Fund will
invest more than 25% of its total assets in issues of preferred securities of
REITs, with a maximum of 1% of the Existing Fund's total assets invested in REIT
issues of preferred securities of any one issuer or its affiliates.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations
issued or guaranteed by the United States Government, its agencies, authorities
or instrumentalities. Some U.S. Government securities, such as United States
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Other U.S. Government securities are
supported by the right of the issuer to borrow from the United States Treasury
or by only the credit of the issuer.
The Existing Funds may invest in U.S. Government zero coupon securities.
These securities are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. Government securities do not make
periodic payments of interest. These investments may experience greater
volatility in market value than U.S. Government securities that make regular
payments of interest.
CORPORATE DEBT SECURITIES. Corporate debt securities in which the Existing
Funds may invest are fixed income securities of United States corporations. The
values of corporate debt securities typically will fluctuate in response to
general economic conditions, to changes in interest rates and, to a greater
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extent than the values of mortgage-backed securities, to business conditions
affecting the specific industries in which the issuers are engaged. Corporate
debt securities will decrease in value as a result of increases in interest
rates. The Existing Funds' investments in corporate debt securities may include
unregistered securities that are purchased in private placements and are subject
to statutory or contractual restrictions and delays on resale.
RATINGS OF PORTFOLIO SECURITIES. Mortgage-backed securities in which the
Existing Funds invest must be rated A or higher by Standard & Poor's Ratings
Service (or S&P) or, if unrated, determined by USBAM to be of comparable
quality. The Existing Funds' investments in issues of preferred securities of
REITs and in corporate debt securities must be rated BBB or higher by S&P or, if
unrated, determined by USBAM to be of comparable quality, except that
unregistered corporate debt securities must be rated A or higher or, if unrated,
be determined by USBAM to be of comparable quality. Securities rated in the four
highest categories (BBB or higher) are considered "investment grade;" however,
securities rated BBB have speculative characteristics. In the event that a rated
portfolio security is downgraded below investment grade, the Existing Funds are
required to sell the security as promptly as practicable. Unrated securities are
sold in circumstances determined to be appropriate by USBAM.
HEDGING. The Existing Funds may engage in interest rate swaps, caps and
floors, futures and put and call transactions (collectively, hedging
transactions). Hedging transactions may be used to attempt to protect against
possible declines in the market value of an Existing Fund's portfolio resulting
from downward trends in the debt securities markets (generally due to a rise in
interest rates), to protect an Existing Fund's unrealized gains in the value of
its portfolio securities, to facilitate the sale of these securities for
investment purposes or to establish a position in the securities markets as a
temporary substitute for purchasing particular securities or, in the case of
calls, to enhance income.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Each Existing Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices and secure a favorable rate of return. When these
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date, which can be a month or more after
the date of the transaction. If the Existing Fund disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss
due to market fluctuation.
LEVERAGE AND BORROWING. Each Existing Fund may utilize leverage representing
not more than 33 1/3% of its total assets. The Existing Funds borrow money from
financial institutions unrelated to the Existing Funds, generally through
reverse repurchase agreements. See "--Reverse Repurchase Agreements" below. Each
Existing Fund also has reserved the right to utilize leverage through the
issuance of debt or preferred stock with such terms and provisions as are
determined by the Fund's board of directors.
REPURCHASE AGREEMENTS. The Existing Funds may enter into repurchase
agreements pertaining to the securities in which they may invest with securities
dealers or member banks of the Federal Reserve System. A repurchase agreement
arises when a buyer such as an Existing Fund purchases a security and
simultaneously agrees to resell it to the vendor at an agreed upon future date,
normally one day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed upon interest rate which is effective for
the period of time the buyer's money is invested in the security and which is
related to the current market rate rather than the coupon rate on the purchased
security. These agreements permit the Existing Funds to keep all of their assets
at work while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature.
REVERSE REPURCHASE AGREEMENTS. Under a reverse repurchase agreement, an
Existing Fund sells securities and agrees to repurchase them at a mutually
agreed upon date and price. Reverse repurchase agreements involve the risk that
the market value of the securities retained in lieu of sale by the Existing Fund
may decline more than or appreciate less than the securities the Existing Fund
has sold
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<Page>
but is obligated to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Existing Fund's obligation to repurchase the securities
and the Existing Fund's use of the proceeds of the reverse repurchase agreement
may effectively be restricted pending this decision. Reverse repurchase
agreements create leverage, a speculative factor, and will be considered
borrowings for purposes of the Existing Funds' limitation on borrowing.
INVESTMENT RESTRICTIONS. Each Existing Fund has adopted certain fundamental
investment restrictions that, along with the Existing Funds' investment
objectives, may not be changed without the approval of the holders of a majority
of the respective Existing Fund's outstanding voting securities (as defined
under the Investment Company Act). Among other restrictions, no Existing Fund
may:
- purchase, hold, sell or deal in real estate or interests therein other
than mortgage-related assets; provided, however that each Existing Fund
may hold and sell real estate acquired as a result of the ownership of
mortgage-related assets;
- make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the
Existing Fund may invest consistently with such Existing Fund's investment
objectives and policies or the acquisition of securities subject to
repurchase agreements; or
- invest 25% or more of the value of its total assets in the securities of
any one issuer or in the securities of issuers conducting their principal
business activities in the same industry, provided that this limitation
does not apply to securities issued or guaranteed by the United States
Government or its agencies or instrumentalities; and provided further that
American Select will invest more than 25% of its total assets in the real
estate industry, which American Select defines as including all
mortgage-related assets. (Each of the Existing Funds invests more than 25%
of its total assets in mortgage-related assets, but only American Select
has a fundamental policy requiring such investment.)
Additional information regarding the investments and techniques discussed
above, as well as a complete list of the Existing Funds' investment
restrictions, is set forth in Appendix E to this joint proxy
statement/prospectus.
TAXATION
Each of the Existing Funds has qualified and intends to continue to qualify
as a RIC under the Code. Assuming each Existing Fund so qualifies and
distributes at least 90% of its net investment income (including net short-term
capital gains) for the taxable year, it will not be subject to federal income
tax on income and gains to the extent that it distributes such income and gains
to its shareholders. Distributions to shareholders of an Existing Fund
attributable to the Existing Fund's net investment income (including interest
income and net short-term capital gains) are taxable as ordinary income, whether
paid in cash or reinvested in additional shares. Distributions of any net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss, if any) that are designated as capital gain dividends are taxable
to Existing Fund shareholders as long-term capital gains, whether paid in cash
or additional shares, regardless of how long the shares have been held. A
detailed discussion of the requirements imposed by the Code in order to qualify
as a RIC, and of the federal tax treatment of RICs and their shareholders,
appears in the discussion of the New Fund contained in "US FEDERAL INCOME TAX
CONSEQUENCES."
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PORTFOLIO COMPOSITION
AMERICAN STRATEGIC INCOME PORTFOLIO INC. At November 30, 2002, American
Strategic had total assets of approximately $70.1 million, outstanding reverse
repurchase agreements payable of approximately $16.6 million (equal to 23.7% of
total assets) and net assets of approximately $53.4 million. At that date,
American Strategic's portfolio composition, as a percentage of total assets, was
as follows:
<Table>
U.S. agency mortgage-backed securities............ 28%
Commercial loans.................................. 27%
Multifamily loans................................. 18%
Corporate notes................................... 9%
Single-family loans............................... 5%
Short-term securities............................. 6%
Preferred stock................................... 6%
Other assets...................................... 1%
</Table>
At November 30, 2002, the whole mortgage loans held by American Strategic
were secured by properties located in 34 states. At that date, properties
located in Minnesota secured 13% of these loans by principal balance, properties
located in California secured 10% and properties located in Texas secured 10%.
No other state accounted for 8% or more of such loans.
At November 30, 2002, none of the commercial loans or multifamily loans held
by American Strategic were delinquent. At that date, 94.7% by principal balance
of the single-family loans held by American Strategic were current, 5.3% were
delinquent by 30 to 59 days and none were delinquent by 60 or more days.
For additional information regarding American Strategic's primary
investments, investment objectives and policies and federal tax treatment of
distributions made during the 2002 fiscal year, see the Annual Report of
American Strategic Income Portfolio Inc. on Form N-30D for the year ended
November 30, 2002.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II. At November 30, 2002, American
Strategic II had total assets of approximately $290.7 million, outstanding
reverse repurchase agreements payable of approximately $78.7 million (equal to
27.1% of total assets) and net assets of approximately $211.5 million. At that
date, American Strategic II's portfolio composition, as a percentage of total
assets, was as follows:
<Table>
Multifamily loans................................. 42%
Commercial loans.................................. 33%
U.S. agency mortgage-backed securities............ 10%
Corporate notes................................... 11%
Short-term securities............................. 1%
Single-family loans............................... 1%
Other assets...................................... 2%
Preferred stock................................... N/A
</Table>
At November 30, 2002, the whole mortgage loans held by American Strategic II
were secured by properties located in 26 states. At that date, properties
located in Arizona, California, Florida, Minnesota and Texas secured 18%, 10%,
10%, 10% and 21%, respectively, of these loans by principal balance, with no
other state accounting for 5% or more of such loans.
At November 30, 2002, none of the commercial loans or multifamily loans held
by American Strategic II were delinquent. At that date, 90.9% by principal
balance of the single-family loans held by American Strategic II were current,
0.7% were delinquent by 30 to 59 days, none were delinquent by more than 60 and
less than 120 days and 8.4% were delinquent by 120 or more days.
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<Page>
For additional information regarding American Strategic II's primary
investments, investment objectives and policies and federal tax treatment of
distributions made during the 2002 fiscal year, see the Semi-Annual Report of
American Strategic Income Portfolio Inc.--II on Form N-30D for the period ended
November 30, 2002.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III. At November 30, 2002,
American Strategic III had total assets of approximately $361.3 million,
outstanding reverse repurchase agreements payable of approximately
$92.5 million (equal to 25.6% of total assets) and net assets of approximately
$267.8 million. At that date, American Strategic III's portfolio composition, as
a percentage of total assets, was as follows:
<Table>
Multifamily loans................................. 42%
Commercial loans.................................. 33%
Corporate notes................................... 11%
U.S. agency mortgage-backed securities............ 10%
Other assets...................................... 1%
Short-term securities............................. 1%
Preferred stock................................... 0%
Single-family loans............................... 2%
</Table>
At November 30, 2002, the whole mortgage loans held by American Strategic III
were secured by properties located in 17 states. At that date, properties
located in Arizona, California, Florida, Oklahoma and Texas secured 8%, 15%, 8%,
9% and 32%, respectively, of these loans by principal balance, with no other
state accounting for 6% or more of such loans.
At November 30, 2002, none of the commercial loans or multifamily loans held
by American Strategic III were delinquent. At that date, American Strategic III
held no single-family loans.
For additional information regarding American Strategic III's primary
investments, investment objectives and policies and federal tax treatment of
distributions made during the 2002 fiscal year, see the Semi-Annual Report of
American Strategic Income Portfolio Inc.--III on form N-30D for the period ended
November 30, 2002.
AMERICAN SELECT PORTFOLIO INC. At November 30, 2002, American Select had
total assets of approximately $172.6 million, outstanding reverse repurchase
agreements payable of approximately $28.5 million (equal to 16.5% of total
assets) and net assets of approximately $143.7 million. At that date, American
Select's portfolio composition, as a percentage of total assets, was as follows:
<Table>
Multifamily loans................................. 46%
Commercial loans.................................. 31%
U.S. agency mortgage-backed securities............ 11%
Corporate notes................................... 10%
Short-term securities............................. 1%
Preferred stock................................... 0%
Other assets...................................... 1%
Single-family loans............................... 0%
</Table>
At November 30, 2002, the whole mortgage loans held by American Select were
secured by properties located in 16 states. At that date, properties located in
Texas, Oklahoma, Washington and Minnesota secured 27%, 7%, 16% and 12%,
respectively, of these loans by principal balance, with no other state
accounting for 6% or more of such loans.
At November 30, 2002, none of the commercial loans or multifamily loans held
by American Select were delinquent. At that date, American Select held no
single-family loans.
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<Page>
For additional information regarding American Select's primary investments,
investment objectives and policies and federal tax treatment of distributions
during the 2002 fiscal year, see the Annual Report of American Select Portfolio
Inc. on Form N-30D for the year ended November 30, 2002.
HISTORICAL PERFORMANCE
HISTORICAL NAV-BASED PERFORMANCE. The following tables set forth, for each
of the Existing Funds, average annualized total returns, based on net asset
value, for the one-year, five-year and since-inception periods ended
November 30, 2002. The figures set forth in the table are based on the change in
the respective Existing Fund's net asset value, assuming all distributions were
reinvested, and do not reflect sales charges. Net asset value-based performance
is used to measure investment management results, and does not reflect changes
in the discount or premium to net asset value at which the Existing Fund's
common stock has traded in the open market during the periods presented.
NAV-BASED AVERAGE ANNUALIZED TOTAL RETURNS
<Table>
<Caption>
ONE YEAR ENDED FIVE YEARS ENDED INCEPTION
11/30/02 11/30/02 THROUGH 11/30/02
-------------- ---------------- ----------------
AMERICAN STRATEGIC 8.32% 7.81% 8.35%
AMERICAN STRATEGIC II 8.87% 8.91% 8.34%
AMERICAN STRATEGIC III 8.80% 8.94% 7.83%
AMERICAN SELECT 10.13% 9.63% 8.24%
</Table>
*Inception dates were 12/27/91 for American Strategic, 7/30/92 for American
Strategic II, 3/25/93 for American Strategic III and 9/21/93 for American
Select.
HISTORICAL MARKET PRICE-BASED PERFORMANCE. The following table sets forth,
for each Existing Fund, average annualized total returns, based on changes in
market price, for the one-year, five-year and since-inception periods ended
November 30, 2002. The figures set forth in the table are based on the change in
the respective Existing Fund's market price, assume reinvestment of all
distributions and reflect sales charges on initial purchases and on reinvested
distributions.
MARKET PRICE-BASED AVERAGE ANNUALIZED TOTAL RETURNS
<Table>
<Caption>
ONE YEAR ENDED FIVE YEARS ENDED INCEPTION
11/30/02 11/30/02 THROUGH 11/30/02
-------------- ---------------- ----------------
AMERICAN STRATEGIC 2.32% 9.14% 7.68%
AMERICAN STRATEGIC II 8.23% 11.08% 7.94%
AMERICAN STRATEGIC III 6.22% 10.13% 7.32%
AMERICAN SELECT 3.91% 11.25% 7.70%
</Table>
*Inception dates were 12/27/91 for American Strategic, 7/30/92 for American
Strategic II, 3/25/93 for American Strategic III and 9/21/93 for American
Select.
HISTORICAL MARKET DISCOUNTS TO NAV. Since each Existing Fund's inception,
its common stock has frequently traded at a discount to its net asset value. The
following tables set forth the history of public trading of the Existing Funds'
shares, by quarter, for the last two fiscal years and for each full fiscal
quarter since the beginning of the current fiscal year, as reported on the NYSE.
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<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
<Table>
<Caption>
PERCENTAGE PERCENTAGE
NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM
QUARTER ---------------- ---------------- ------------- ------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ----- ------- ------- ------- ------- ------ ----- ----- -----
02/28/01 $12.73 $12.52 $ 12.00 $ 11.16 10.62% 5.76% NA NA
05/31/01 $12.81 $12.72 $ 12.29 $ 11.73 8.06% 3.85% NA NA
08/31/01 $12.83 $12.58 $ 12.19 $ 11.90 6.06% 3.10% NA NA
11/30/01 $12.70 $12.58 $ 12.82 $ 11.85 5.29% 0.08% 1.51% 1.43%
02/28/02 $12.67 $12.41 $ 13.04 $ 12.40 0.96% 0.96% 3.90% 0.16%
05/31/02 $12.53 $12.40 $ 13.07 $ 11.80 5.29% 0.24% 0.72% 0.24%
08/31/02 $12.61 $12.51 $ 13.19 $ 11.26 9.70% 1.44% 3.75% 0.56%
11/30/02 $12.65 $12.57 $ 12.50 $ 11.89 5.48% 2.46% NA NA
02/28/03 $12.65 $12.56 $ 12.50 $ 11.91 5.63% 1.58% NA NA
</Table>
On March 20, 2002, the last trading day before the announcement of the
signing of the merger agreement in its original form, American Strategic's last
reported sale price on the NYSE was $12.73 which represented a premium of 2.50%
to American Strategic's net asset value per share. On , 2003, the
last trading day before the printing of this joint proxy statement/prospectus,
American Strategic's last reported sale price on the NYSE ($ )
represented a [discount] [premium] of % to American Strategic's net asset
value per share.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
<Table>
<Caption>
PERCENTAGE PERCENTAGE
NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM
QUARTER ---------------- ---------------- ------------- ------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ----- ------- ------- ------- ------- ------ ----- ----- -----
08/31/00 $12.54 $12.17 $ 11.5 $ 10.75 11.67% 8.78% NA NA
11/30/00 $ 12.8 $12.49 $11.625 $11.313 10.71% 8.58% NA NA
02/28/01 $13.01 $ 12.8 $ 12.42 $11.438 9.67% 4.48% NA NA
05/31/01 $13.12 $13.02 $ 12.45 $ 11.65 9.77% 5.37% NA NA
08/31/01 $13.22 $13.06 $ 12.6 $ 12.3 6.29% 4.34% NA NA
11/30/01 $13.24 $13.12 $ 13.08 $ 12.29 6.13% 0.99% NA NA
02/28/02 $13.26 $13.09 $ 13.44 $ 12.52 3.88% 0.53% 1.82% 0.91%
05/31/02 $13.29 $13.15 $ 13.35 $ 12.26 5.45% 0.23% 0.38% 0.38%
08/31/02 $13.30 $13.21 $ 13.56 $ 11.98 9.02% 0.15% 0.38% 0.38%
11/30/02 $13.26 $13.19 $ 13.15 $ 12.57 4.84% 0.45% 6.03% 6.03%
02/28/03 $13.20 $13.08 $ 13.25 $ 12.65 3.86% 0.46% 0.91% 0.15%
</Table>
On March 20, 2002, the last trading day before the announcement of the
signing of the merger agreement in its original form, American Strategic II's
last reported sale price on the NYSE was $13.29 which represented a premium of
0.99% to American Strategic II's net asset value per share. On ,
2003, the last trading day before the printing of this joint proxy
statement/prospectus, American Strategic II's last reported sale price on the
NYSE ($ ) represented a [discount] [premium] of % to American
Strategic II's net asset value per share.
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<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
<Table>
<Caption>
PERCENTAGE PERCENTAGE
NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM
QUARTER ---------------- -------------- ------------- ------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ----- ------- ------- ------ ------ ------ ----- ----- -----
08/31/00 $11.91 $11.63 $11.00 $10.50 10.71% 8.07% NA NA
11/30/00 $12.07 $11.87 $11.38 $10.81 9.83% 6.79% NA NA
02/28/01 $12.31 $12.14 $11.98 $11.13 7.14% 2.28% NA NA
05/31/01 $12.41 $12.31 $11.95 $11.41 6.66% 3.74% NA NA
08/31/01 $12.50 $12.38 $11.93 $11.73 5.68% 3.87% NA NA
11/30/01 $12.53 $12.40 $12.83 $11.53 7.76% 0.96% NA NA
02/28/02 $12.55 $12.39 $12.60 $11.90 4.02% 0.64% 0.64% 0.08%
05/31/02 $12.55 $12.41 $12.50 $11.75 5.39% 0.88% NA NA
08/31/02 $12.56 $12.49 $12.55 $11.32 8.46% 0.88% NA NA
11/30/02 $12.54 $12.46 $12.30 $11.86 4.65% 1.44% NA NA
02/28/03 $12.54 $12.46 $12.14 $11.81 5.60% 0.48% NA NA
</Table>
On March 20, 2002, the last trading day before the announcement of the
signing of the merger agreement in its original form, American Strategic III's
last reported sale price on the NYSE was $12.12 which represented a discount of
2.49% to American Strategic III's net asset value per share. On ,
2003, the last trading day before the printing of this joint proxy
statement/prospectus, American Strategic III's last reported sale price on the
NYSE ($ ) represented a [discount] [premium] of % to American
Strategic III's net asset value per share.
AMERICAN SELECT PORTFOLIO INC.
<Table>
<Caption>
PERCENTAGE PERCENTAGE
NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM
QUARTER ---------------- -------------- ------------- ------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ----- ------- ------- ------ ------ ------ ----- ----- -----
02/28/01 $13.14 $12.85 $12.35 $11.50 11.06% 5.80% NA NA
05/31/01 $13.25 $13.14 $12.30 $11.90 9.98% 7.03% NA NA
08/31/01 $13.38 $13.21 $12.70 $12.22 7.70% 4.31% NA NA
11/30/01 $13.42 $13.32 $13.75 $12.49 6.72% 0.30% 0.67% 0.23%
02/28/02 $13.42 $13.23 $13.89 $12.79 1.65% 1.28% 3.28% 0.45%
05/31/02 $13.41 $13.28 $13.83 $12.63 5.32% 0.30% 2.70% 0.75%
08/31/02 $13.52 $13.36 $13.91 $12.15 7.29% 0.17% 2.77% 0.52%
11/30/02 $13.49 $13.38 $13.55 $12.80 4.54% 0.64% 0.22% 0.22%
02/28/03 $13.54 $13.40 $13.63 $12.74 4.78% 0.59% 0.67% 0.67%
</Table>
On March 20, 2002, the last trading day before the announcement of the
signing of the merger agreement in its original form, American Select's last
reported sale price on the NYSE was $13.83 which represented a premium of 3.98%
to American Select's net asset value per share. On , 2003, the last
trading day before the printing of this joint proxy statement/prospectus,
American Select's last reported sale price on the NYSE ($ ) represented a
[discount] [premium] of % to American Select's net asset value per share.
REPURCHASE OFFERS
In an attempt to alleviate the discount from net asset value at which
Existing Fund shares were trading, each Existing Fund made an offer to
repurchase up to 10% of its outstanding shares at net asset value in November
1997 and again in November 1999. In both cases, shareholders of each Existing
Fund tendered the full 10% of outstanding shares for repurchase. Repurchases may
only be made when the previous day's closing market value was at a discount to
net asset value. For each Existing Fund, cumulative repurchases cannot exceed 5%
of the outstanding shares as of September 9,
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1998. None of the Existing Funds repurchased any shares during the year ended
November 30, 2002. As can be seen from the tables in the previous section,
neither the Existing Funds' repurchase offers nor the open market repurchase
plans have produced a lasting reduction in the discount from net asset value at
which the Existing Funds' shares trade.
MANAGEMENT AND ADMINISTRATION
USBAM acts as investment advisor to each of the Existing Funds and furnishes
related office facilities, equipment, research and personnel. Under their
advisory agreements with USBAM, American Strategic, American Strategic II and
American Strategic III each pay USBAM a monthly investment management fee for
these services in an amount equal to 0.01667% of the respective Existing Fund's
average weekly net assets (approximately 0.2% on an annual basis) and 4.50% of
the daily gross income accrued by such Existing Fund during the month (I.E.,
investment income, including amortization of discount and premium, other than
gains from the sale of securities or gains from options and futures contracts
less interest on money borrowed by such Existing Fund); provided, that in the
aggregate, the monthly investment management fee shall not exceed 1/12th of
0.725% of the Existing Fund's average weekly net assets during the month
(approximately 0.725% on an annual basis). For the year ended November 30, 2002,
the effective investment management fees incurred by American Strategic,
American Strategic II and American Strategic III were 0.62%, 0.66% and 0.64%,
respectively. American Select pays USBAM a monthly investment management fee in
an amount equal to an annualized rate of 0.50% of American Select's average
weekly net assets.
John G. Wenker, Russell J. Kappenman and Chris J. Neuharth are the existing
members of the management team of USBAM that act as portfolio managers for the
Existing Funds. Their biographies are set forth below under "MANAGEMENT OF FIRST
AMERICAN--The Board of Directors and Executive Officers of First American."
USBAM and U.S. Bancorp Fund Services, LLC (or Fund Services), a direct
subsidiary of U.S. Bancorp, provide or arrange for the provision of
administrative services, including various oversight and legal services,
accounting services, transfer agent and dividend disbursing services and
shareholder services, to the Existing Funds. For these services, each of the
Existing Funds pays USBAM and Fund Services a monthly fee in an amount equal to
an annualized rate of 0.25% of such Existing Fund's average weekly net assets.
U.S. Bank National Association, 336 North Robert Street, St. Paul, Minnesota
55101, the direct parent of USBAM, acts as custodian for each Existing Fund's
assets, for which it was paid approximately $10,611 by American Strategic,
$42,400 by American Strategic II, $53,482 by American Strategic III and $28,535
by American Select during the year ended November 30, 2002.
When entering into portfolio transactions on behalf of an Existing Fund,
USBAM may place transactions conducted on an agency basis through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on the transactions. In effecting portfolio
transactions through these affiliates, the Existing Funds comply with
Section 17(e)(1) of the Investment Company Act.
Each of the Existing Funds also pays fees and expenses to unaffiliated third
parties for mortgage loan servicing, printing and mailing of shareholder
materials, SEC registration and reporting, transfer agency services, legal and
auditing services, insurance and other miscellaneous expenses. During the period
ended November 30, 2002, the Existing Funds' total expense ratios (including
amounts paid to USBAM and its affiliates for investment advisory, administration
and custodian services as described above, but excluding interest expense)
equaled 1.63%% of average weekly net assets for American Strategic, 2.06% of
average weekly net assets for American Strategic II, 2.06% of average weekly net
assets for American Strategic III and 1.47% of average weekly net assets for
American Select.
DIRECTORS AND OFFICERS
The business and affairs of each Existing Fund are managed under the
direction of that Existing Fund's board of directors. Each Existing Fund's board
of directors consists of the same individuals. No current director of the
Existing Funds serves or is expected to serve as a director or officer of First
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<Page>
American. There are currently seven directors of each Existing Fund. At the time
the boards of directors approved the merger one of those directors, John M.
Murphy, Jr., was deemed to be an "interested person" of USBAM by virtue of his
employment by U.S. Bancorp and his ownership of U.S. Bancorp common stock. The
remaining seven directors at the time the merger was approved were not
"interested persons."
The same individuals serve as officers of each of the Existing Funds. The
following officers of the Existing Funds serve or are expected to serve as
officers of First American, in the capacities indicated:
<Table>
<Caption>
OFFICE TO BE HELD WITH FIRST
NAME OFFICE HELD WITH EXISTING FUNDS AMERICAN
---- ---------------------------------------- ----------------------------------------
John G. Wenker Senior Vice President Director, President and Chief Executive
Officer
Robert H. Nelson Treasurer Chief Financial Officer
Russell J. Kappenman Vice President and Assistant Treasurer Executive Vice President, Director of
Investments
Julene R. Melquist Vice President Senior Vice President
</Table>
The officers and directors of the Existing Funds will also serve in the same
capacities as officers and directors of the New Fund.
VALUATION OF CERTAIN OF THE EXISTING FUNDS' ASSETS
Securities in the Existing Funds' portfolios are valued at market value or,
if market quotations are not readily available, at "fair value." Each Existing
Fund's investments in whole loans (single-family, multifamily and commercial)
and participation mortgages are generally not traded in any organized market;
therefore, market quotations for these assets are not readily available. These
types of investments represent a substantial portion of each Existing Fund's
investment portfolio.
These investments are valued at "fair value" according to procedures adopted
by the Existing Funds' boards of directors. Pursuant to these procedures, whole
loan investments are initially valued at cost and their values are subsequently
monitored and adjusted pursuant to USBAM's pricing model designed to
incorporate, among other things, the present value of the projected stream of
cash flows on such investments. The pricing model takes into account a number of
relevant factors, including:
- the projected rate of prepayments;
- the delinquency profile;
- the historical payment record;
- the expected yield at purchase;
- changes in prevailing interest rates; and
- changes in the real or perceived liquidity of whole loans, participation
mortgages or mortgage servicing rights, as the case may be.
The results of the pricing model may be further subject to price ceilings
due to the illiquid nature of the loans.
Changes in prevailing interest rates, real or perceived liquidity, yield
spreads and credit worthiness are factored into the pricing model each week.
Certain mortgage loan information is received on a monthly basis and includes,
but is not limited to, the projected rate of prepayments, projected rate and
severity of defaults, the delinquency profile and the historical payment record.
Valuations of whole loans are determined no less frequently than weekly.
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REGULATORY MATTERS
As shareholders of management investment companies registered under the
Investment Company Act, the Existing Funds' shareholders are afforded certain
regulatory protections. The shareholders of the New Fund (but not of First
American) also will be afforded such protections, as follows:
- ELECTION OF DIRECTORS. Section 16(a) of the Investment Company Act
requires an investment company's initial board of directors to be elected
by the shareholders at an annual or special meeting. In the event that
less than a majority of the directors then holding office were elected by
shareholders, Section 16(a) requires that the board of directors hold a
meeting of shareholders to fill vacancies on the board within 60 days.
- APPROVAL OF INVESTMENT ADVISORY AND SERVICE CONTRACTS. Section 15(c) of
the Investment Company Act makes it unlawful for any registered investment
company to enter into, renew or perform any investment advisory or
principal underwriting contract unless the terms of such contract and any
renewal thereof are approved by a vote of the majority of independent
directors, after consideration of such information as may be reasonably
necessary to evaluate the terms of any such contract.
- SELECTION OF ACCOUNTANTS AND AUDITOR. Section 32(a) of the Investment
Company Act makes it unlawful for any registered investment company to
file with the SEC any financial statement signed or certified by an
independent public accountant unless, among other things, such selection
has been submitted for ratification or rejection at the next annual
meeting of shareholders, provided that any vacancy occurring due to the
death or resignation of the accountant may be filled by a majority vote of
the independent directors cast in person at a meeting called for that
purpose. (Rule 32a-4 under the Investment Company Act exempts companies
from this shareholder ratification requirement if they maintain an audit
committee satisfying certain requirements.)
- RESTRICTIONS ON BORROWING AND ISSUING SENIOR SECURITIES. Section 18 of the
Investment Company Act generally prohibits investment companies from
issuing senior securities. Notwithstanding this prohibition,
Section 18(a)-(e) permits closed-end investment companies to issue senior
securities representing debt or preferred stock, subject to certain
conditions. In the case of debt, Section 18(a)(1) requires that the
investment company have asset coverage of 300% immediately after the
issuance of such debt and no dividends on the investment company's stock
may be declared unless the indebtedness generally has an asset coverage at
that time of 300%. When asset coverage is less than 100%, holders of the
debt must be given the right to elect a majority of directors in certain
cases.
- FUNDAMENTAL INVESTMENT POLICIES. Section 8(b) of the Investment Company
Act requires an investment company to file a registration statement with
the SEC containing the investment company's "fundamental" policies as to:
(i) classification and sub-classification under the Investment Company
Act; (ii) borrowing money; (iii) issuing senior securities; (iv) engaging
in the business of underwriting; (v) concentration; (vi) the purchase and
sale of real estate and commodities; (vii) making loans to other persons;
and (viii) portfolio turnover.
- CHANGES IN INVESTMENT POLICIES. Section 13 of the Investment Company Act
prohibits an investment company from changing certain investment and other
policies without a shareholder vote. A shareholder vote is generally
required when an investment company: (i) changes its classification (such
as from closed-end to open-end or from diversified to non-diversified);
(ii) changes its policy regarding borrowing money, issuing senior
securities, underwriting the securities of others, investments in real
estate or commodities, or making loans to other persons; (iii) deviates
from its concentration policy or any other fundamental policy; or
(iv) changes the nature of its business such that it ceases to be an
investment company.
- CONTINUATION AND TERMINATION OF INVESTMENT ADVISORY CONTRACT.
Section 15(a) of the Investment Company Act makes it unlawful to serve or
act as investment advisor to a registered investment
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company except pursuant to a written contract which, among other
requirements: (i) shall continue in effect for a period of more than two
years only if such continuance is approved annually by the board of
directors or fund shareholders and (ii) provides that the agreement may be
terminated, without penalty and upon 60 days notice, by a vote of the
board of directors or shareholders at the election of the fund and shall
automatically terminate in the event of assignment or upon a change in
control of the investment advisor.
- APPROVAL OF SERVICE CONTRACTS WITH AFFILIATES. The SEC staff has taken the
position that Section 17(d) of the Investment Company Act and Rule 17d-1
thereunder require independent directors to apply a set of criteria when
reviewing the terms of service contracts with affiliates. Such contracts
with affiliates should be approved by the board of directors of the
investment company and by a majority of the independent directors,
considering such information as may be reasonably necessary to evaluate
the terms of the service contract. The independent directors should
conclude that: (i) the service contract is in the best interest of the
fund; (ii) the services to be performed are required for operation of the
fund; (iii) the services provided are of a nature and quality at least
equal to the same or similar service provided by independent third
parties; and (iv) the fees for such services are fair and reasonable in
light of the usual and customary changes made by others for services of
the same nature and quality.
- DISTRIBUTION AND REPURCHASE OF SHARES. Section 23(a) of the Investment
Company Act prohibits closed-end investment companies from issuing
securities for services or for property other than cash or securities,
except as a dividend or distribution to shareholders or in connection with
a reorganization.
Section 23(b) under the Investment Company Act generally prohibits
closed-end investment companies from selling their common stock at a price
below current net asset value. Excepted from this prohibition are shares
sold: (i) in an offering to existing shareholders; (ii) with the consent
of a majority of shareholders; (iii) upon conversion of a convertible
security; (iv) upon the exercise of a warrant; or (v) under such other
circumstances as the SEC may permit by rule or order.
Section 23(c) under the Investment Company Act prohibits closed-end
investment companies from repurchasing their securities, except:
(i) Section 23(c)(1) permits an investment company to purchase its shares
on a securities exchange or other open market; (ii) Section 23(c)(2)
permits a closed-end investment company to make purchases pursuant to
tenders, after reasonable opportunity to submit tenders is given to all
shareholders of the class to be purchased; and (iii) Section 23(c)(3)
authorizes the SEC to exempt, by rule or order, repurchases that do not
unfairly discriminate against any shareholders of the class to be
repurchased.
- TRANSACTIONS WITH AFFILIATES. Section 17 of the Investment Company Act
prohibits certain transactions involving registered investment companies
and their "affiliated persons" as defined in Section 2(a)(3) of the
Investment Company Act. Section 17(a) makes it unlawful for an affiliated
person or promoter of, or an underwriter for, a registered investment
company acting as principal to knowingly sell any security (other than
securities the investment company issues or securities which the seller
issues and which are part of a general offering to the holders of a class
of its securities) or other property to the company or to buy any security
(other than securities the investment company issues) or property from the
company.
Under its rulemaking authority, the SEC has adopted several rules under
Section 17(a) to exempt various transactions that would otherwise be
prohibited. Rule 17a-3 exempts transactions between a registered
investment company and one or more of its wholly-owned subsidiaries.
Rule 17a-7 provides that a registered investment company may purchase a
security from, or sell a security to, certain affiliated persons, provided
that, among other things, the board of directors, including a majority of
the independent directors, adopts procedures to comply with the rule.
Rule 17a-8 allows a merger, consolidation or purchase or sale of
substantially all the assets of certain registered investment companies
which are affiliated persons of one another.
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Section 17(d) prohibits any affiliated person, acting as principal, from
effecting any transaction in which the investment company is a joint
participant. Rule 17d-1 makes it unlawful for an affiliated person or
principal underwriter of an investment company, acting as principal, to
participate in or effect any transaction in connection with a joint
enterprise or arrangement. Rule 17d-1(d)(7) exempts from Section 17(d) and
Rule 17d-1 thereunder any arrangement regarding liability insurance
policies, provided that certain conditions apply.
Section 17(e) limits the compensation an affiliated person may receive
when acting as an agent or broker for a registered investment company.
Section 17(e)(1) provides that when selling property as an agent to or for
an investment company, an affiliate may not accept any compensation,
except usual and customary commissions in the course of the person's
business as an underwriter or broker. Rule 17e-1 defines a usual and
customary broker's commission as one that is fair when compared to the
commission received by brokers in connection with comparable transactions.
- CUSTODY OF ASSETS. Rule 17f-1 under the Investment Company Act requires
securities and other investments of registered investment companies to be
held in the custody of a bank, broker dealer or the registered investment
company. Rule 17f-1 requires that the custodian shall be engaged pursuant
to a written contract which has been approved by a majority of the board
of directors, and ratified at least annually thereafter.
- FIDELITY BONDING. Rule 17g-1 under the Investment Company Act provides
that every registered investment company shall maintain a bond against
larceny and embezzlement. Rule 17g-1(d) provides that the bond shall be in
such reasonable form and amount as a majority of the independent directors
of the investment company shall approve as often as their fiduciary duties
require, but not less often than annually. Rule 17g-1(e) provides that no
premium may be paid for a joint fidelity bond unless a majority of the
independent directors of each investment company named therein approve the
portion of the premium to be paid by each company, taking into account all
relevant factors.
THE INVESTMENT ADVISOR
USBAM, which is registered with the SEC as an investment advisor under the
Advisers Act, is the investment advisor for each Existing Fund. USBAM is a
wholly-owned subsidiary of U.S. Bank National Association, which is, in turn, a
subsidiary of U.S. Bancorp. USBAM, U.S. Bank National Association and U.S.
Bancorp are located at 800 Nicollet Mall, Minneapolis, Minnesota 55402.
USBAM provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of February 28, 2003, USBAM and its affiliates had more than $114
billion in assets under management.
USBAM currently manages both open-end funds and closed-end funds, including
Real Estate Securities Fund, a mutual fund organized as a separate series of
First American Investment Funds, Inc., an open-end registered investment
company. Real Estate Securities Fund invests primarily in income producing
common stocks of publicly traded companies engaged in the real estate industry.
A majority of Real Estate Securities Fund's total assets are invested in REITs.
Real Estate Securities Fund's objective is to provide above average current
income and long-term capital appreciation. At December 31, 2002, Real Estate
Securities Fund had net assets of approximately $145.5 million, 95.0% of
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<Page>
which were represented by investments in REIT common stocks. At that date, Real
Estate Securities Fund's REIT portfolio composition, as a percentage of net
assets, was as follows:
<Table>
Office/Industrial................................. 34.0%
Residential....................................... 19.7%
Mall/Retail....................................... 23.1%
Diversified....................................... 9.3%
Hotels............................................ 8.6%
Other............................................. 0.3%
Financial Services................................ 0%
Health Care....................................... 0%
Specialty Real Estate............................. 0%
Cash/Cash Equivalents............................. 5.00%
</Table>
Real Estate Securities Fund pays USBAM an annual management fee equal to
0.70% of average net assets.
The following table sets forth the Real Estate Securities Fund's average
annualized total returns for the one-year, five-year and since-inception periods
ended December 31, 2002. The figures set forth in the table are based on the
change in the Real Estate Securities Fund's Class Y net asset value, assuming
all distributions were reinvested, and do not reflect sales charges. Because
mutual fund shares are not publicly traded, there is no market price-based
performance information.
NAV-BASED AVERAGE ANNUALIZED TOTAL RETURNS FOR REAL ESTATE SECURITIES
<Table>
<Caption>
ONE YEAR ENDED FIVE YEARS ENDED INCEPTION (JUNE 30, 1995)
DECEMBER 31, 2002 DECEMBER 31, 2002 THROUGH DECEMBER 31, 2002
- ----------------- -------------------- ----------------------------
7.37% 4.77% 11.04%
</Table>
LEGAL PROCEEDINGS
There is no material litigation pending involving any of the Existing Funds
or USBAM, nor to the knowledge of the Existing Funds, is any material litigation
threatened against the Existing Funds or USBAM.
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FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
GENERAL
First American Strategic Real Estate Portfolio Inc., a Maryland corporation,
is a specialty finance company that was formed on January 11, 2002 as the
vehicle through which the Existing Funds will continue their businesses upon
completion of the merger. First American will seek to qualify and will elect to
be taxed as a REIT under the Code. If First American qualifies as a REIT, it
generally will not be subject to federal income tax to the extent that it
distributes its taxable income to its shareholders. See "US FEDERAL INCOME TAX
CONSEQUENCES."
Assuming the First American maximum participation scenario, First American
will own approximately $844.7 million in mortgage-related assets consisting of
Existing Fund assets. First American's investment portfolio will consist
primarily of whole loans and participating mortgages secured by commercial and
multifamily properties and, to a lesser extent, U.S. agency mortgage-backed
securities. As of November 30, 2002, the Existing Funds held a portfolio of over
200 separate mortgage loans with an aggregate outstanding principal amount of
approximately $670.0 million and U.S. agency mortgage-backed securities with an
aggregate outstanding balance of approximately $94.75 million. The loan
portfolio had a weighted average remaining maturity of approximately four years
and a weighted average interest rate of approximately 8.25%. Approximately 58%
of the loans pay interest at a fixed rate, while 42% are adjustable-rate
mortgages. Of the Existing Funds' remaining assets at November 30, 2002, the
largest portion was approximately $97.0 million in corporate notes issued by
real estate opportunity funds. As noted, the Existing Funds seek to enhance
their earnings by financing portions of their mortgage-related asset portfolios
with short-term borrowings. As of November 30, 2002, these borrowings totaled
approximately $215.6 million.
INVESTMENT STRATEGY
First American's strategy is to continue to grow its asset base, which will
initially consist of the mortgage portfolio it acquires in the merger, and its
net income over time through additional investments in mortgage-related assets
that will enable First American to capitalize on the spread between the yield on
its assets (net of credit losses) and the cost of its borrowings and hedging
activities. First American will continue to invest in many of the same types of
assets held by the Existing Funds and will thus emphasize direct ownership of
commercial, multifamily and residential mortgage loans. First American will also
continue to focus on loan sizes ranging from $1.0 million to $10.0 million.
First American's policy is to acquire those mortgage loans and other real
estate-related assets which USBAM believes are likely to generate high returns
on capital invested. USBAM will select assets for purchase by First American
based on the underwriting standards developed and implemented over the last
decade by its management team. In particular, USBAM will consider and analyze
various factors including: (i) interest rates on the underlying mortgages,
(ii) loan-to-value ratios, (iii) loan-to-cost ratios, (iv) seasoning and payment
history, (v) amortization type, (vi) the geographic regions in which the
underlying collateral is located, (vii) prepayment expectations, (viii) size of
the loans, (ix) property type and (x) enforceability of the loans. USBAM will
also assess the costs of financing, hedging and managing such assets. Prior to
an acquisition, potential returns on capital employed will be analyzed over the
expected life of such assets and in a variety of interest rate, yield spread,
financing cost, credit loss and prepayment scenarios. In managing First
American's portfolio, USBAM will also consider balance sheet management and risk
diversification issues.
In general, First American does not currently intend to originate loans,
although it may act as the originator of loans in limited circumstances, such as
in connection with loan administration and loan renewals and modifications.
First American will seek to facilitate the acquisition of mortgage product for
investment through a variety of sources. These sources include national and
regional mortgage bankers, life insurance companies and banks. In addition,
unlike the Existing Funds and the New Fund, First American will be permitted to
acquire product from affiliates of U.S. Bancorp, which will potentially include
U.S. Bancorp Piper Jaffray and USBAM. First American will also have
substantially
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enhanced flexibility in raising capital compared to the Existing Funds and the
New Fund and thus is expected to be a more regular participant in the commercial
and residential mortgage market.
Although First American intends to purchase primarily multifamily,
commercial and residential mortgage loans and other whole loan assets, First
American will also seek to invest in certain other asset types, some of which
are not permitted investments for the Existing Funds or the New Fund, such as
certain equity positions in entities that own real estate assets. In addition,
First American will consider other real estate investments depending on market
conditions. For example, First American anticipates providing corporate
financing to certain real estate funds and real estate operating companies.
Also, First American anticipates purchasing common and preferred stock of other
real estate investment trusts on an opportunistic basis. First American has a
great deal of discretion as to the manner in which it may invest, leverage and
hedge its assets, but does not currently have any specific plans to invest in
particular stocks, partnerships or joint ventures. First American may change its
policies without shareholder approval, but subject to approval by a majority of
First American's board of directors (including at least a majority of the
independent directors).
USBAM, in its discretion, subject to the supervision of First American's
board of directors and to the REIT provisions of the Code, will evaluate and
monitor First American's assets and how long such assets should be held in First
American's portfolio. First American's strategy is to be a portfolio investor in
the loans and other assets it acquires, and it does not anticipate purchasing
loans for sale. However, at times and depending on market conditions, USBAM will
more actively manage First American's assets, and assets may not be held to
maturity. First American intends to manage its portfolio so that gains realized
by First American on the sale of property will not be deemed "prohibited
transaction income" for federal income tax purposes. See "US FEDERAL INCOME TAX
CONSEQUENCES--Requirements for Qualification as a Real Estate Investment
Trust--Prohibited Transaction Income."
OPERATING POLICIES AND STRATEGIES
OPERATING POLICIES. First American's board of directors, by a vote of at
least a majority of directors (including a majority of the independent
directors), must approve operating policies for First American. First American's
board of directors may, in its discretion, revise such policies from time to
time in response to changes in market conditions or opportunities, acting by a
vote of at least a majority of directors (including at least a majority of the
independent directors), but without shareholder approval.
First American will also adopt compliance guidelines, including restrictions
on acquiring, holding and selling assets, to ensure that First American
establishes and maintains its qualification as a REIT and is excluded from
regulation as an investment company under the Investment Company Act. Before
acquiring any asset, USBAM will determine whether such asset would constitute a
"real estate asset" within the meaning of Section 856(c)(5)(B) of the Code.
Substantially all of the assets currently held by the Existing Funds and
substantially all of the assets that First American intends to acquire are
expected to be such "real estate assets." USBAM will regularly monitor purchases
of mortgage loans and the income generated from such assets, including income
from its hedging activities, in an effort to ensure that at all times First
American maintains its qualification as a REIT and its exclusion from regulation
under the Investment Company Act.
First American's board of directors will review First American's
transactions on a quarterly basis to ensure compliance with the operating
policies and to ratify all transactions with USBAM and its affiliates. First
American's board of directors is likely to rely substantially on information and
analysis provided by USBAM to evaluate First American's operating policies,
compliance therewith and other matters relating to First American's investments.
Under the REIT provisions of the Code, First American is required to
distribute at least 90% of its taxable income. See "US FEDERAL INCOME TAX
CONSEQUENCES--Requirements for Qualification as a Real Estate Investment Trust."
First American intends to make quarterly distributions to
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its shareholders of amounts that will, at a minimum, enable it to comply with
these provisions. The actual amount of such distributions will be determined on
a quarterly basis by First American's board of directors, taking into account,
in addition to the REIT requirements, the cash needs and net income of First
American, earnings of First American, the market price for its common stock and
other factors the board of directors considers relevant. Despite the change from
monthly to quarterly distributions, First American expects that its distribution
policies will be substantially similar to those of the Existing Funds and the
New Fund. In addition, First American anticipates that because of its increased
access to leverage and increased flexibility, distributions to shareholders may
be greater than those to shareholders of the Existing Funds or the New Fund.
CAPITAL AND LEVERAGE POLICIES. As diversified, closed-end, registered
management investment companies, the Existing Funds are subject to the
provisions of the Investment Company Act which limit borrowings to an amount
equal to one-third of their total assets. Consistent with these provisions, the
Existing Funds have used borrowings in their investment strategies. As of
November 30, 2002, the Existing Funds had aggregate total borrowings of
approximately $215,654,422, which represented 24.10% of their aggregate total
assets as of such date. Of these borrowings, approximately $130,700,000 have a
fixed interest rate of 4.65% and a maturity on April 11, 2003. Approximately
$130,700,000 of these borrowings bear interest at a floating rate and have a
weighted average interest rate of 2.28% as of November 30, 2002. The Existing
Funds currently cap their leverage at 30%, slightly less leverage than allowed
by the Investment Company Act so that in the event of a drastic, unforeseen
market movement, the Existing Funds will remain in compliance with the
Investment Company Act. The Existing Funds' borrowings consist of short-term
reverse repurchase agreements and whole loan revolving credit facility
agreements. Reverse repurchase agreements are structured as sale and repurchase
obligations and have the economic effect of allowing a borrower to pledge
purchased mortgage assets as collateral securing short-term loans to finance the
purchase of mortgage loan assets. Typically, the lender in a reverse repurchase
arrangement makes a loan in an amount equal to a percentage of the market value
of the pledged collateral. At maturity, the borrower is required to repay the
loan and the pledged collateral is released. In addition to their borrowings,
the Existing Funds have considered alternative capital raising initiatives. As a
practical matter, it is difficult and expensive for the Existing Funds, in their
current organizational forms, to raise additional equity capital or to access
entity level debt capital.
Upon completion of the merger, First American will succeed to its share of
borrowings then owed by the Existing Funds participating in the merger. However,
unlike the Existing Funds, First American will not be subject to the borrowing
limitations of the Investment Company Act and First American's borrowing policy
will be to incur debt such that, once fully invested, it will maintain a
debt-to-equity ratio of between 1:1 to 1.5:1 with regard to its mortgage loan
portfolio and 4:1 to 9:1 with respect to its portfolio of mortgage-backed
securities. The Investment Company Act restricts the borrowing of the New Fund
(as well as the Existing Funds) to 33 1/3% of its total assets which
approximates a debt-equity ratio of 0.5:1.
First American's articles of incorporation and bylaws do not limit the
amount of indebtedness First American can incur, and First American's borrowing
policy is subject to revision with the approval of a majority of First
American's board of directors (including at least a majority of the independent
directors) depending on market conditions and other factors deemed relevant by
First American's board of directors in consultation with USBAM. First American
intends to maintain an adequate capital base to protect against various business
conditions in which First American's financing and hedging costs might exceed
interest income (net of credit losses) from its mortgage loans and other real
estate-related assets. These conditions could occur, for example, due to credit
losses or when, due to interest rate fluctuations, interest income on First
American's mortgage loan assets lags behind amounts due on interest rate
increases as a result of First American's borrowings, which are expected to be
predominantly variable rate.
First American expects that reverse repurchase agreements, unsecured credit
lines, and collateralized and unsecured debt offerings will be the principal
means of leveraging its mortgage loans and
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other real estate-related assets. First American intends to enter into such
arrangements with financially sound institutions, including broker/dealers,
commercial banks and other lenders, which meet credit standards and terms
approved by First American's board of directors.
The structure of reverse repurchase agreements is such that they require
borrowers to deposit additional collateral (or a margin call) or reduce their
borrowings thereunder, if the market value of the pledged collateral declines
below a specified level. This may require First American to sell mortgage loan
assets, provide such additional collateral or reduce its borrowings. First
American intends to maintain an equity cushion sufficient to provide liquidity
in the event of interest rate movements and other market conditions affecting
the market value of the pledged mortgage loan assets. However, there can be no
assurance that First American will be able to safeguard against being required
to sell mortgage loan assets in the event of a change in market conditions.
In addition to reverse repurchase agreements, First American may also
utilize lines of credit if it appears advantageous to do so. First American also
expects to issue shares of common and preferred stock, including in connection
with the acquisition of assets.
Although First American has no immediate plans to do so, in different
interest rate and credit environments it may be advantageous to issue secured or
unsecured notes of varying maturities or seniorities. Secured debt offerings
would likely use mortgage-related assets as collateral. It is likely these
offerings will obtain credit ratings from nationally recognized rating agencies.
It is likely First American would sell the investment grade levels of a given
offering and retain the non-investment grade levels. In addition, First American
may from time to time sell participations in individual or collective pools of
mortgage loans. The goal of these types of offerings is to lock in spread
income, match assets to funding liabilities and enhance returns on equity of
First American.
ADDITIONAL BORROWINGS. Upon completion of the merger, it is anticipated that
First American will have greater borrowing capacity than the Existing Funds.
First American has obtained a verbal commitment from the institutions with whom
the Existing Funds have lending relationships to expand their current cumulative
whole loan reverse repurchase agreement capacity of $210,000,000 to
$350,000,000. In addition, First American is taking steps to add at least two
additional lending facilities, each to provide $250,000,000 of additional
borrowing capacity. First American is currently negotiating with six financial
institutions to obtain such financing, which remains subject to further
negotiation and execution of a mutually acceptable agreement.
CREDIT RISK MANAGEMENT. With respect to its assets, First American will be
exposed to various levels of credit and special hazard risk, depending on the
nature of the underlying assets and the nature and level of credit enhancements
supporting such assets. First American will purchase mortgage loans that meet
minimum debt service coverage standards established by First American. USBAM
will review and monitor credit risk and other risks of loss associated with each
investment. In addition, USBAM will seek to diversify First American's portfolio
of mortgage loan assets and other real estate-related assets to avoid undue
geographic, issuer, industry and property type concentrations. One of the
principal benefits of the merger is that it permits each Existing Fund to
achieve further diversification in managing credit risk by combining the
separate portfolios of each Existing Fund into a much larger investment vehicle
which is expected to continue to grow and achieve further diversification over
time. In furtherance of this objective, First American's board of directors will
also monitor First American's overall portfolio risk and review levels of
allowances for losses.
ASSET/LIABILITY MANAGEMENT. To the extent consistent with its election to
qualify as a REIT, First American will follow an interest rate risk management
policy intended to mitigate the negative effects of major interest rate changes.
First American intends to minimize its interest rate risk from borrowings both
through hedging activities and by attempting to structure the key terms of its
borrowings to generally correspond (in the aggregate for the entire portfolio,
and not on an asset-by-asset basis) to the interest rate and maturity parameters
of its assets.
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HEDGING ACTIVITIES. Like the Existing Funds, First American intends to enter
into hedging transactions to protect its investment portfolio from interest rate
fluctuations and other changes in market conditions. These hedging strategies
will be consistent with the current strategies employed by the Existing Funds,
and First American will develop and utilize other strategies as appropriate and
consistent with its qualification as a REIT. These transactions may include
interest rate swaps, the purchase or sale of interest rate collars, caps or
floors, options, mortgage derivatives and other hedging instruments. These
instruments may be used to hedge as much of the interest rate risk as USBAM
determines is in the best interest of First American, given the cost of such
hedges and the need to maintain First American's status as a REIT. USBAM may
elect to have First American bear a level of interest rate risk that could
otherwise be hedged when USBAM believes, based on all relevant facts, that
bearing such risk is advisable.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements on the part
of the counterparty with respect to record keeping, financial responsibility or
segregation of customer funds and positions. First American intends to enter
into these transactions only with counterparties with long-term debt rated "AA"
or better by at least one nationally recognized rating agency. The business
failure of a counterparty with which First American has entered into a hedging
transaction will most likely result in a default, which may result in the loss
of unrealized profits and force First American to cover its resale commitments,
if any, at the then current market price. Although generally First American will
seek to reserve for itself the right to terminate its hedging positions, it may
not always be possible to dispose of or close out a hedging position without the
consent of the counterparty, and First American may not be able to enter into an
offsetting contract in order to cover its risk. There can be no assurance that a
liquid secondary market will exist for hedging instruments purchased or sold,
and First American may be required to maintain a position until exercise or
expiration, which could result in losses.
First American intends to protect its investment portfolio against the
effects of significant interest rate fluctuations and to preserve the net income
and capital value of First American. Specifically, First American's asset
acquisition and borrowing strategies are intended to offset the potential
adverse effects resulting from the differences between fixed rates or other
limitations on coupon rate adjustment, such as interest rate caps, associated
with its mortgage loan assets and the shorter term predominantly variable rate
nature of First American's related borrowings.
First American's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from mortgage loan assets and First American's borrowing costs
across a reasonable range of adverse interest rate environments. Capital
preservation refers to maintaining a relatively steady level in the market value
of First American's capital across a reasonable range of adverse interest rate
scenarios. To monitor and manage capital preservation risk, First American will
model and measure the sensitivity of the market value of its capital (i.e., the
combination of its assets, liabilities and hedging positions) to various changes
in interest rates in various economic scenarios. First American will not enter
into hedging transactions for speculative purposes.
First American will focus its hedging activities on providing a level of
income and capital protection against reasonable interest rate risks. However,
no strategy can insulate First American completely from changes in interest
rates.
First American has not established specific policies as to the extent of the
hedging transactions in which it will engage; however, the board of directors
will be responsible for reviewing at its regular meetings the extent and effect
of hedging activities.
REGULATORY POLICIES. First American intends to invest and operate in a
manner consistent with the requirements of the Code to establish and maintain
its qualification as a REIT for federal income tax purposes, unless a majority
of First American's board of directors (including at least a majority of the
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independent directors) determines that it is no longer in the best interest of
First American to qualify as a REIT.
At the same time, First American intends to operate in a manner that will
not subject it to regulation as an investment company under the Investment
Company Act in reliance upon the exemption provided by Section 3(c)(5)(C) which
excludes from regulation entities that are primarily engaged in the business of
purchasing or otherwise acquiring "mortgages and other liens on and interests in
real estate." Under the current interpretations of the staff of the SEC, in
order to qualify for this exemption, First American must, among other things,
maintain at least 55% of its assets directly in mortgage loans, qualifying
pass-through certificates and certain other qualifying interests in real estate
and an additional 25% of its assets in real estate-related assets. In addition,
unless certain mortgage-backed securities represent all the certificates issued
with respect to an underlying pool of mortgage loans, such securities may be
treated as securities separate from the underlying mortgage loans and thus, may
not qualify as qualifying interests in real estate for purposes of the 55%
requirement.
Because First American will not be a registered investment company, First
American's shareholders will not enjoy the same regulatory protections as the
Existing Fund's shareholders under the Investment Company Act. See "THE EXISTING
FUNDS--Regulatory Matters."
AFFILIATE TRANSACTIONS. Because First American will not be a registered
investment company under the Investment Company Act, it will be able to engage
in transactions with affiliates that would be prohibited by the Investment
Company Act for the Existing Funds and the New Fund. The board of directors of
First American will adopt operating policies requiring that any affiliate
transactions between First American and its affiliates must be conducted on
terms no less favorable to First American than those available from unaffiliated
parties. Any such transactions will also be subject to the review and oversight
of First American's independent directors.
OTHER POLICIES. First American has the authority to offer shares of its
capital stock and to repurchase or otherwise reacquire such shares or any other
of its securities. Under certain circumstances, First American may purchase
shares of its common stock in the open market or otherwise. First American's
board of directors has no present intention to cause First American to
repurchase any of its shares, and any such action would be taken only in
conformity with applicable federal and state laws and the requirements for
qualification as a REIT for federal income tax purposes.
Except in connection with its formation, First American has not, to date,
issued shares of common stock or other securities. First American does not
intend to offer securities for property or to make direct investments in real
estate. First American has not made loans to officers and directors and does not
intend to do so. First American does not intend to engage in trading,
underwriting or agency distribution or sale of securities of other issuers.
First American has no present intention to invest in the securities of other
issuers for the purpose of exercising control. The decision to do so is vested
solely in First American's board of directors and may be changed without a vote
of First American's shareholders.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. First American's board of
directors (including the independent directors) will approve the investment
policies, the operating policies and the strategies set forth in this joint
proxy statement/prospectus. First American's board of directors has the power to
modify or waive such policies and strategies without the consent of the
shareholders to the extent that First American's board of directors determines
that such modification or waiver is in the best interest of First American or
its shareholders. Among other factors, developments in the market that affect
the policies and strategies mentioned herein or which change First American's
assessment of the market may cause First American's board of directors to revise
its policies and strategies.
COMPETITIVE CONDITIONS OF THE REIT MARKET. The commercial mortgage market is
very competitive. The products within the commercial mortgage market range from
straightforward commodity-like loan product to highly structured individualized
commercial loans. First American's net income depends on its ability to acquire
mortgages and mortgage-related assets for its investment portfolio at favorable
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spreads over its borrowing costs. In acquiring these assets, First American will
compete with other REITs, investment banking firms, savings and loan
associations, banks, insurance companies, mutual funds and other lenders and
other entities that purchase adjustable rate and fixed rate mortgage assets.
First American's principal methods of competition are service, loan
structure and price. The largest positive factor pertaining to First American's
competitive position is that the management team of USBAM has successfully
executed a similar business plan on behalf of the Existing Funds over a period
of ten years. However, many of First American's competitors have greater
financial resources than First American and, as a result, First American may not
be able to acquire sufficient adjustable rate and fixed rate mortgage assets at
favorable spreads over its borrowing costs.
RIGHT TO INSPECT BOOKS AND RECORDS
First American will be required to keep complete and accurate books with
respect to its business at its principal executive office. The books will be
maintained for financial accounting purposes in accordance with accounting
principles generally accepted in the United States. Shareholders will be
entitled to have access to First American's bylaws, minutes of the proceedings
of shareholders' meetings, annual statements of affairs of First American and
voting trust agreements filed with First American at reasonable times upon
reasonable notice to First American, subject to certain limitations, including
those intended to protect confidential business information. Each shareholder
has the right under the MGCL to obtain, upon written request, a statement
showing all stock and securities issued by First American during a specified
period of not more than the preceding 12 months.
REPORTS
First American will be required to satisfy the annual and periodic reporting
requirements of the Exchange Act, including filing an Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q, each of which requires the filing
of financial statements and officers' certifications with each report.
Furthermore, First American must file a Current Report on Form 8-K whenever a
reportable event occurs between the above reporting periods.
LEGAL PROCEEDINGS
There is no material litigation pending involving First American or USBAM,
nor, to the knowledge of either of the foregoing entities, is any material
litigation threatened or pending against such entities.
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FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
GENERAL
First American Strategic Income Portfolio Inc., a Minnesota corporation (or
the New Fund), is registered under the Investment Company Act as a diversified,
closed-end management investment company. The New Fund was formed on
November 19, 2002 to accommodate Existing Fund shareholders who desire to
maintain an investment in a similar fund upon the completion of the merger.
Shareholders electing to receive shares of the New Fund common stock may be
subject to tax on the transaction. See "US FEDERAL INCOME TAX CONSEQUENCES--US
Federal Income Tax Treatment of the Receipt of New Fund Shares." The New Fund
has applied to list its common stock on the AMEX under the symbol "FAP." The New
Fund has adopted a fiscal year-end of October 31.
INVESTMENT OBJECTIVE AND OPERATING POLICIES
The New Fund's investment objective and policies are substantially similar
to those of the Existing Funds. The New Fund's investment objective is to
provide a high level of current income. Unlike the Existing Funds, the New Fund
does not have a secondary objective of capital appreciation.
The New Fund will invest at least 80% of its total assets in income
producing securities (excluding zero coupon securities). It will emphasize
investments that directly or indirectly represent a participation in or are
secured by and payable from mortgage loans (or mortgage-related assets). The
balance of the New Fund's total assets will be invested in U.S. Government
securities and corporate debt securities. The allocation of assets among
mortgage-related assets and other eligible investments will vary from time to
time based upon USBAM's evaluation of economic and market trends and its
perception of the relative values available from the different types of
securities at any time. Like the Existing Funds, the New Fund may also employ
certain other investment management practices to earn income, facilitate
portfolio management and mitigate risk. These include hedging techniques such as
interest rate swaps, caps and floor, futures contracts and put and call
transactions; when-issued and forward commitment purchases and sales;
leveraging, including through reverse repurchase agreements and the use of
repurchase agreements.
The New Fund will emphasize direct ownership of commercial and multifamily
mortgage loans and will focus on loan sizes ranging from $1.0 million to
$10.0 million. The New Fund's policy is to acquire those mortgage loans and
other mortgage-related assets which USBAM believes are likely to generate high
returns on capital invested. USBAM will select assets for purchase by the New
Fund based on the underwriting standards developed and implemented over the last
decade by USBAM's management team. In particular, USBAM will consider and
analyze various factors including: (i) interest rates on the underlying
mortgages, (ii) loan-to-value ratios, (iii) loan-to-cost ratios, (iv) seasoning
and payment history, (v) amortization type, (vi) the geographic regions in which
the underlying collateral is located, (vii) prepayment expectations,
(viii) size of the loans, (ix) property type and (x) enforceability of the
loans. USBAM will also assess the costs of financing, hedging and managing such
assets. Prior to an acquisition, potential returns on capital employed will be
analyzed over the expected life of such assets and in a variety of interest
rate, yield spread, financing cost, credit loss and prepayment scenarios.
USBAM, in its discretion, subject to the supervision of the New Fund's board
of directors, will evaluate and monitor the New Fund's assets and how long such
assets should be held in the New Fund's portfolio. The New Fund's strategy is to
be a portfolio investor in the loans and other assets it acquires, and it does
not anticipate purchasing loans for sale. However, at times and depending on
market conditions, assets may not be held to maturity.
Except as set forth below, the investment policies of the New Fund are
identical in all material respects to those of the Existing Funds, which are
described under "THE EXISTING FUNDS--Investment Objectives and Policies."
DIFFERENCES IN INVESTMENT POLICIES OF THE NEW FUND AND THE EXISTING FUNDS.
The New Fund defines mortgage-related assets as investments that represent a
participation in or are secured by and payable
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from direct and/or indirect interests in real estate, but which do not include a
direct ownership interest in real estate. They include: (i) whole loans,
(ii) mortgage participations, (iii) mortgage-backed securities and
(iv) preferred issuances of real estate investment trusts. Whole loans are
defined as entire ownership interests in loans which are secured or partially
secured by interests in real property, or by ownership interests in entities
which own and operate real property, through the use of security instruments
such as:
- mortgages or deeds of trust and/or assignments of rent;
- installment sales contracts on residential or commercial property; and
- pledges of ownership interests in single purpose entities whose assets and
activities are restricted to the ownership and operation of specified real
property.
The New Fund defines "mortgage-related assets" and "whole loans" differently
than the Existing Funds by including investments that are secured by indirect
interests in real estate. As a result, the New Fund is permitted to invest in
loans that are secured or partially secured by pledges of ownership interests in
single purpose entities (such as partnerships or limited liability companies)
whose assets and activities are restricted to the ownership and operation of
specified real property, rather than secured by the real property itself.
Like the Existing Funds, the New Fund will emphasize investments in
multifamily residences and commercial properties. Unlike the Existing Funds,
each of which may invest only 35% of its total assets in whole loans and
mortgage participations secured by commercial properties, the New Fund is not
subject to any limitation on its investments secured by commercial properties.
The New Fund also differs from the Existing Funds in its ability to act as
the originator of mortgage loans. Each Existing Fund has a fundamental policy,
which may not be changed without shareholder approval, prohibiting it from
making loans. As a result, the Existing Funds do not act as the originators of
mortgage loans, although they do enter into arrangements with mortgage lenders
pursuant to which, upon the closing of a loan, an Existing Fund acquires the
loan from the mortgage lender. The New Fund, which has a fundamental policy
permitting it to make loans to the extent permitted by the Investment Company
Act, will act as the originator of mortgage loans in some cases, such as in
connection with loan administration and loan renewals and modifications.
The rating categories of securities in which the New Fund may invest are
substantially similar to the categories required for the Existing Funds. Rating
requirements for the Existing Funds, however, are tied to ratings given by S&P.
The New Fund must invest in mortgage-backed securities rated at least A (or its
equivalent) by at least one nationally recognized statistical rating
organization or, if unrated, determined by USBAM to be of comparable quality.
Similarly, the New Fund's investments in issues of preferred securities of REITs
and in corporate debt securities must be rated at least BBB (or its equivalent)
by at least one nationally recognized statistical rating organization or, if
unrated, determined by USBAM to be of comparable quality, except that
unregistered corporate debt securities must be rated at least A (or its
equivalent) or, if unrated, be determined by USBAM to be of comparable quality.
The New Fund has adopted certain fundamental investment restrictions that,
along with the New Fund's investment objective, may not be changed without
shareholder approval. Among other restrictions, the New Fund may not concentrate
its investments in a particular industry, with the exception that the New Fund
will concentrate its investments in the real estate industry, which the New Fund
defines as including all mortgage-related assets. The SEC currently considers a
fund to be concentrated in an industry if it invests 25% or more of it total
assets in securities of issuers in that industry. Securities of the U.S.
Government, its agencies or instrumentalities are not considered to represent
industries. Similarly, each Existing Fund has a fundamental investment policy
prohibiting it from investing 25% or more of the value of its total assets in
the securities of issuers conducting their principal business activities in the
same industry, provided that this limitation does not apply to securities issued
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or guaranteed by the U.S. government or its agencies or instrumentalities.
However, only the investment policy of American Select specifically provides
that it will concentrate its investments in the real estate industry, which is
defined as including all mortgage-related assets.
The other fundamental investment restrictions of the New Fund, which are set
forth in Appendix E, differ in some respects from those of the Existing Funds.
The investment restrictions of the New Fund are somewhat less limiting than
those of the Existing Funds. The New Fund's fundamental investment restrictions
have been adopted to avoid wherever possible the necessity of shareholder
meetings to approve changes in these restrictions. This change recognizes the
need to react quickly to changes in the law or new investment opportunities in
the securities markets and the cost and time involved in obtaining shareholder
approvals for diversely held investment companies.
New types of mortgage-related assets, hedging instruments and other
securities in which the New Fund may invest are developed and marketed from time
to time. Consistent with its investment limitations, the New Fund expects to
invest in these securities and instruments if USBAM believes they may assist the
New Fund in achieving its investment objective. These investments will be
disclosed to shareholders in the New Fund's annual and semi-annual reports.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The New Fund is a closed-end management investment company and as such its
shareholders will not have the right to cause the New Fund to redeem their
shares. Instead, the shares will trade in the open market at a price that will
be a function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, dividend stability, portfolio credit
quality, relative demand for and supply of these shares in the market, general
market and economic conditions and other factors. Shares of closed-end
investment companies frequently trade at a discount from net asset value. In an
attempt to reduce or eliminate significant market discounts from net asset
value, the New Fund may, from time to time, repurchase or make a tender offer
for its common shares, or it may, subject to shareholder approval, convert to an
open-end investment company. The New Fund does not have a fundamental policy
requiring it to make periodic repurchases or tender offers for its common
shares. The New Fund may incur debt to finance repurchases and tenders, and in
doing so will comply with the Investment Company Act asset coverage
requirements. Interest on any borrowings will reduce the New Fund's net income.
The New Fund anticipates that the market price of its shares will generally
vary from net asset value. Nevertheless, the fact that the New Fund's shares may
be the subject of repurchases or tender offers at net asset value from time to
time may reduce the spread between market price and net asset value that might
otherwise exist. There can be no assurance that share repurchases, tender
offers, or conversion to an open-end investment company will take place or that,
if they occur, they will result in the New Fund's shares trading at a price that
is equal to their net asset value or reduce or eliminate any market value
discount.
Any acquisition of its common stock by the New Fund would decrease the total
assets of the New Fund and therefore have the effect of increasing the New
Fund's expense ratio. The illiquid nature of certain of the New Fund's
investments will be considered in determining whether a repurchase or tender
offer should be made by the New Fund. Shares that have been purchased by the New
Fund will be returned to the status of authorized but unissued shares of common
stock.
If the New Fund converted to an open-end investment company, its shares
would no longer be listed on AMEX. In contrast to a closed-end investment
company, shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or under the Investment Company Act) at their net asset value,
less any redemption charge that is in effect at the time of the redemption. In
addition, the New Fund would have to change many of its investment policies. The
New Fund's articles of incorporation provide that the affirmative vote of 66
2/3% of the outstanding shares is required to convert the New Fund from a
closed-end to an open-end management investment company.
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Before deciding whether to take any action if the shares trade significantly
below net asset value, the board of directors would consider all factors that it
deemed relevant. Factors that the board of directors may consider include the
extent and duration of the discount, the liquidity of the New Fund's portfolio,
the impact of any action that might be taken on the New Fund or its
shareholders, and market considerations. Based on these considerations, even if
the New Fund's shares should trade at a significant discount for a significant
period of time, the board of directors may determine that no action should be
taken.
VALUATION OF CERTAIN OF THE NEW FUND'S ASSETS
As is the case with the Existing Funds, securities in the New Fund's
portfolio will be valued at market value or if market quotations are not readily
available at "fair value." Because market quotations for these assets are not
readily available, the New Fund's investments in whole loans and mortgage
participations will be valued at "fair value" according to procedures that have
been adopted by the New Fund's board of directors. These procedures are the same
as those used by the Existing Funds and described under "THE EXISTING
FUNDS--Valuation of Certain of the Existing Funds' Assets."
DIVIDEND REINVESTMENT PLAN
The New Fund will have a dividend reinvestment plan (or the New Fund
Dividend Reinvestment Plan) under which all shareholders whose shares are
registered in their own names may elect to have all distributions reinvested
automatically in additional common shares by EquiServe Trust Co., N.A. (or the
Plan Administrator), as agent under the New Fund Dividend Reinvestment Plan.
Otherwise, the shareholder will receive distributions in cash. Existing Fund
shareholders electing the New Fund Option will be deemed to have elected to have
their distributions reinvested automatically in additional common shares if they
participate in their Existing Fund's Dividend Reinvestment Plan. All
distributions to shareholders who do not elect to participate in the New Fund
Dividend Reinvestment Plan will be paid by check mailed directly to the record
holder by or under the direction of the Plan Administrator, as the dividend
paying agent. Generally, shareholders whose shares are held in the name of a
broker or nominee may elect to automatically have distributions reinvested by
the broker or the nominee in additional shares under the New Fund Dividend
Reinvestment Plan. Shareholders whose shares are held in the name of a broker or
nominee should contact that broker or nominee to determine whether and how they
may participate in the New Fund Dividend Reinvestment Plan. Participation in the
New Fund Dividend Reinvestment Plan is completely voluntary and may be
terminated or resumed at any time without penalty by contacting the Plan
Administrator before the dividend record date; otherwise the termination or
resumption will be effective with respect to any subsequently declared dividend
or other distribution.
The Plan Administrator will open an account for each shareholder under the
New Fund Dividend Reinvestment Plan in the same name in which that shareholder's
shares are registered. Whenever the Fund declares a dividend or capital gain
distribution (together, a dividend) payable in cash, non-participants in the New
Fund Dividend Reinvestment Plan will receive cash and participants in the New
Fund Dividend Reinvestment Plan will receive the equivalent in common shares.
Beginning no more than five business days before the dividend payment date, the
Plan Administrator will buy shares of the New Fund on the AMEX or elsewhere on
the open market only when the price of the New Fund's shares on the AMEX plus
commissions is at less than a 5% premium over the New Fund's most recently
calculated net asset value per share. If, at the close of business on the
dividend payment date, the shares purchased in the open market are insufficient
to satisfy the dividend reinvestment requirement, the Plan Administrator will
accept payment of the dividend, or the remaining portion, in authorized but
unissued shares of the New Fund. These shares will be issued at a per-share
price equal to the higher of (a) the net asset value per share as of the close
of business on the payment date or (b) 95% of the closing market price per share
on the payment date.
The Plan Administrator maintains all shareholders' accounts in the New Fund
Dividend Reinvestment Plan and furnishes written confirmation of all
transactions in the accounts, including information
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needed by shareholders for tax records. Shares in the account of each New Fund
Dividend Reinvestment Plan participant will be held by the Plan Agent on behalf
of the New Fund Dividend Reinvestment Plan participant, and each shareholder
proxy will include those shares purchased or received pursuant to the New Fund
Dividend Reinvestment Plan. The Plan Administrator will forward all proxy
solicitation materials to participants and vote proxies for shares held under
the New Fund Dividend Reinvestment Plan in accordance with the instructions of
the participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Administrator will
administer the New Fund Dividend Reinvestment Plan on the basis of the number of
shares certified from time to time by the record shareholder to be in its name
and held for the account of beneficial owners who participate in the New Fund
Dividend Reinvestment Plan.
Each participant will pay a pro rata share of brokerage commissions incurred
in connection with open-market purchases. The automatic reinvestment of
dividends will not relieve participants of any federal, state or local income
tax that may be payable (or required to be withheld) on those dividends.
The New Fund reserves the right to amend or terminate the New Fund Dividend
Reinvestment Plan. There is no direct service charge to participants in the New
Fund Dividend Reinvestment Plan; however, the New Fund reserves the right to
amend the New Fund Dividend Reinvestment Plan to include a service charge
payable by the participants.
All correspondence concerning the New Fund Dividend Reinvestment Plan should
be directed to EquiServe Trust Company, N.A. at P.O. Box 43011, Providence,
Rhode Island, 02940-3011, or you can call the Plan Administrator at
1-800-426-5523.
REGULATORY MATTERS
Because the New Fund is a management investment company registered under the
Investment Company Act, its shareholders will be afforded the same regulatory
protections as the shareholders of the Existing Funds. These are described above
under "THE EXISTING FUNDS--Regulatory Matters."
RIGHT TO INSPECT BOOKS AND RECORDS
The Investment Company Act imposes detailed record keeping obligations on
the New Fund and USBAM, as its investment advisor. The New Fund's accounts,
books and other documents required to be maintained by Section 31(a) of the
Investment Company Act and the rules promulgated thereunder will be maintained
by USBAM and at the offices of U.S. Bank National Association, the New Fund's
custodian, and EquiServe Trust Company, N.A., the New Fund's transfer agent.
Under Minnesota law, a New Fund shareholder will have the right, upon written
demand stating the purpose of such demand and which otherwise complies with
Minnesota law, to examine and copy the New Fund's share register and other
corporate records reasonably related to the stated purpose, provided that the
stated purpose must be reasonably related to the shareholder's interest as a
shareholder of the New Fund.
REPORTS
The New Fund will deliver annual and semi-annual reports, including
financial statements to shareholders and will file semi-annual reports on Form
N-SAR with the SEC.
LEGAL PROCEEDINGS
There is no material litigation pending involving the New Fund or USBAM,
nor, to the knowledge of either of the foregoing entities, is any material
litigation threatened against such entities.
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THE MERGER
BACKGROUND OF THE MERGER
On May 1, 1998, U.S. Bancorp, the ultimate parent company of USBAM,
completed its acquisition of Piper Jaffray Companies Inc. (or Piper). At that
time, Piper Capital Management Incorporated (or PCM), a subsidiary of Piper, was
the investment advisor to the Existing Funds. In connection with this
acquisition, the Existing Funds sought shareholder approval of a proposal that
First American Asset Management (or FAAM), a division of U.S. Bank, become the
investment advisor to the Existing Funds. FAAM is the corporate predecessor of
USBAM, and John G. Wenker and Russell J. Kappenman have managed the Existing
Funds on a continuous basis since their inceptions, first as employees of PCM,
next as employees of FAAM, and now as employees of USBAM.
When it was announced that the Existing Funds would be seeking such
shareholder approval, SIA, an investment advisor to holders of a substantial
number of shares in each Existing Fund, asked PCM to recommend to the Existing
Funds' boards of directors that the Existing Funds make discretionary cash
repurchase offers for up to 10% of each Existing Fund's outstanding shares at
their net asset values per share in December 1999 and December 2001 if the
respective Existing Funds' average trading discounts to net asset value per
share exceeded 5% during the 12 calendar weeks preceding October 1, 1999 and
October 1, 2001, respectively. At that time, it was anticipated that such
repurchase offers might have the effect of narrowing the discount to net asset
value at which the Existing Funds' shares traded. PCM agreed to this request,
and it publicly announced that it would make such recommendations to the
Existing Funds' boards of directors.
Each Existing Fund's average trading discount to net asset value per share
exceeded 5% during the applicable measuring period in 1999. Accordingly, FAAM,
which then was acting as the Existing Funds' investment advisor, recommended to
the Existing Funds' boards of directors that such 10% repurchase offers be made,
and the boards of directors approved this recommendation. These repurchase
offers were completed in December 1999 and resulted in each Existing Fund
repurchasing 10% of its outstanding shares at net asset value per share.
The measuring period for determining whether USBAM would recommend a second
repurchase offer began on July 9, 2001. Each Existing Fund's average trading
discount to net asset value per share slightly exceeded the applicable 5%
threshold during the period from July 9, 2001 to September 19, 2001, when the
Existing Funds' boards of directors held their regular quarterly meeting.
However, at that meeting, Messrs. Wenker and Nelson of USBAM informed the boards
of directors that USBAM was considering recommending the merger of the Existing
Funds into a newly-formed REIT rather than such cash repurchase offers.
These representatives stated that prior cash repurchase offers conducted by
the Existing Funds had not resulted in a lasting reduction of the Existing
Funds' trading discounts to net asset value. In support of this statement, they
presented summaries of the Existing Funds' trading histories following
completion of the December 1999 cash repurchase offers, and also following
completion of earlier 10% cash repurchase offers that the Existing Funds had
made at net asset value per share in 1997. They also stated that further cash
repurchase offers would likely reduce the Existing Funds' trading liquidity.
Subsequent to the September 19, 2001 board meeting, the members of the
boards of directors informally agreed to appoint the special committee to
consider any such proposal that might be advanced by USBAM, as well as other
potential means for enhancing the Existing Funds' shareholder value. The members
of the special committee are Leonard W. Kedrowski (chair), Richard K. Riederer
and Virginia L. Stringer, each of whom is a director of the Existing Funds and
is not an "interested person" of USBAM or the Existing Funds within the meaning
of the Investment Company Act.
The special committee retained the law firm of Gardner Carton & Douglas LLC,
which also acts as counsel to the independent directors of the Existing Funds,
to act as counsel to the special committee. At the special committee's
direction, on November 11, 2001, Gardner Carton & Douglas sent requests for
proposals to seven firms to act as financial advisor to the special committee.
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The special committee received responses from five of these firms. The
committee met on November 30, 2001 to consider these responses. At that time,
the committee determined to invite representatives of three of the firms to
interview with the committee in person.
At the December 5, 2001 regular quarterly meeting of the Existing Funds'
boards of directors, the boards of directors formalized the appointment of the
special committee, and Mr. Kedrowski updated the directors on the special
committee's steps toward retaining a financial advisor. At this meeting, it was
agreed that minutes of the special committee's meetings would be circulated to
all board members on a concurrent basis so that they could remain apprised of
developments at the committee level. In addition, Mr. Nelson reviewed several
alternatives, in addition to the merger of the Existing Funds into a
newly-formed REIT, which might be explored in order to enhance shareholder
value.
On December 10, 2001, the Existing Funds issued a press release to the
effect that, in an effort to enhance shareholder value, the boards of directors
and management of the Existing Funds were considering a number of alternatives,
including a possible reorganization of the Existing Funds into a specialty
finance company that would elect to be taxed as a REIT, the possible combination
of the Existing Funds, stock repurchases and other possible business strategies.
The statement noted that no decision had been made by the boards of directors or
Existing Fund management to pursue any particular alternative or to change the
current business strategy of the Existing Funds.
The special committee met again on December 14, 2001. At this meeting,
Mr. Nelson reviewed with the committee USBAM's views concerning the advantages
and disadvantages of several alternative courses of action which the Existing
Funds might pursue in an effort to enhance shareholder value. Mr. Nelson
expressed USBAM's view that the merger of the Existing Funds into a newly-formed
REIT advised by USBAM represented the best alternative for enhancing shareholder
value.
The special committee met on December 17, 2001 to interview representatives
of the three financial advisory firms which were identified at its November 30,
2001 meeting. After these interviews were completed, the special committee
directed Gardner Carton & Douglas to hold further discussions with one of the
potential financial advisors, FBR, concerning the fee and expense arrangements
that would apply if the special committee retained that firm.
The special committee met again on December 20, 2001, at which time Gardner
Carton & Douglas reported on its further discussions with FBR concerning the
latter's proposed fee and expense arrangements for providing financial advisory
services and, if the committee requested them, fairness opinions. At this time,
the special committee authorized the retention of FBR, subject to finalization
of fee and expense arrangements on the terms discussed at the meeting. At this
meeting, the special committee also discussed the understandings it would like
to reach with USBAM concerning the allocation of expenses relating to a
potential transaction.
The special committee next met on January 11, 2002, by which time the
Existing Funds' fee and expense arrangements with FBR were substantially
completed. At this meeting, representatives of FBR, committee members and
counsel discussed the range of alternatives for enhancing shareholder value that
would be reviewed by FBR and the committee, the analytical techniques that FBR
would use in preparing its analysis of these alternatives and matters relating
to fairness opinions that might be requested from FBR.
The special committee met again on January 17, 2002. At this time, the
special committee approved the engagement letter, dated as of January 10, 2002,
between the Existing Funds and FBR in connection with evaluating the Existing
Funds' strategic alternatives. The alternatives reviewed included:
- maintaining the status quo;
- liquidating the Existing Funds or conducting tender offers for their shares;
- converting the Existing Funds into a single closed-end interval fund; and
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- converting the Existing Funds into a single open-end fund, a business
development company, a corporation taxable at the entity level, a single
closed-end fund, or a REIT.
FBR concluded that combining the Existing Funds into a single
externally-managed, publicly-traded REIT was the alternative most likely to
maximize shareholder value.
The special committee, FBR, Gardner Carton & Douglas and Existing Fund
counsel then discussed this conclusion at length, as well as the significant
variables that were likely to determine whether conversion of the Existing Funds
to a particular REIT structure would be in Existing Fund shareholders' best
interest. These variables included the terms of the management agreement between
the REIT and its manager, including fee structures and levels, expense
provisions, and termination provisions; the corporate governance provisions
pertaining to the REIT; management incentive structures for the REIT's manager;
the REIT's anticipated operating and balance sheet management policies; and the
terms upon which the Existing Funds would be reorganized into the REIT. The
special committee then agreed that it would pursue discussions with USBAM
concerning such a transaction, and it so advised USBAM.
The special committee next met on January 25, 2002, at which time FBR
presented comparative data concerning the Existing Funds and various
publicly-traded mortgage REITs. Gardner Carton & Douglas reported that counsel
to USBAM and counsel to First American recently had provided initial drafts of
First American's proposed articles of incorporation and bylaws and of a proposed
agreement and plan of reorganization between First American and the Existing
Funds. The transaction contemplated by this version of the merger agreement did
not include the New Fund Option but did set aside up to 15% of the net asset
value of each Existing Fund to purchase the shares held by Existing Fund
shareholders who preferred to receive cash rather than shares of First American.
The special committee, Gardner Carton & Douglas and Existing Fund counsel then
discussed the process by which these drafts and the draft advisory agreement
between USBAM and First American, when it was made available, would be reviewed
and negotiated on behalf of the special committee. The special committee also
was updated on discussions with USBAM concerning the allocation of expenses
relating to the potential transaction.
Counsel to USBAM provided an initial draft of the proposed advisory
agreement between USBAM and First American to Gardner Carton & Douglas, Existing
Fund counsel and FBR on January 29, 2002. The special committee met on February
5, 2002 to discuss the terms of this draft and of the other draft documents that
previously were provided. At this meeting, the special committee identified
several corporate governance provisions in First American's draft articles of
incorporation and bylaws that it wished to modify, and it engaged in an
extensive discussion of the proposed management fee and termination fee
provisions set forth in the draft advisory agreement that was provided. At the
conclusion of this discussion, the special committee directed FBR to review
First American's proposed operations in depth with USBAM, so that the
anticipated impact of the proposed advisory fee and termination fee provisions
could be better understood.
Between February 5, 2002 and February 21, 2002, FBR engaged in extensive
discussions with Mr. Wenker and Mr. Nelson of USBAM concerning the proposed
financial terms of the advisory agreement, including the base management fee,
the performance incentive management fee and the termination fee. These
discussions resulted in an agreement by USBAM to provide for a lower base
management fee for investment grade assets than for non-investment grade assets,
although overall agreement on the management fee was not reached. During this
period, Gardner Carton & Douglas and Existing Fund counsel also negotiated with
counsel to USBAM and counsel to First American concerning several non-financial
provisions of the REIT Advisory Agreement and several terms of First American's
articles of incorporation and bylaws and of the proposed agreement and plan of
reorganization.
The special committee met on February 21, 2002, and was updated on the
status of these negotiations. Representatives of FBR reported that substantial
progress had been made in the negotiation of the management fee although final
terms had not yet been agreed upon, and that agreement had not
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yet been reached on the termination fee provisions of the proposed advisory
agreement. The special committee directed FBR and Gardner Carton & Douglas to
continue the negotiations and to keep committee members apprised of their
progress. In addition, the Existing Funds' full boards of directors held a
regular quarterly board meeting on February 20 and 21, 2002, at which time it
discussed the special committee's work to date.
The special committee met again on March 5, March 8 and March 12, 2002 to
receive updates on the negotiations and to provide direction to FBR and counsel
concerning the conduct of the negotiations. At these meetings, FBR and Gardner
Carton & Douglas also offered their views concerning the transaction terms which
remained under discussion. In addition, between these special committee meetings
and following the March 12 meeting, the chair of the special committee, acting
at the committee's direction, presented the committee's position concerning
several of the open issues directly to Mr. Wenker and Mr. Nelson.
These negotiations, which were substantially completed by March 18, 2002,
resulted in significant changes to the corporate governance provisions set forth
in First American's proposed articles of incorporation and bylaws and in a
restructuring of and substantial reduction in the termination fee provided for
in the proposed advisory agreement. The material changes that the special
committee obtained include the following:
- USBAM initially proposed that the base management fee payable under the
REIT Advisory Agreement would equal 1.00% per annum for all assets held by
First American. In its final form, the REIT Advisory Agreement provides
that the base management fee equals 0.25% per annum for investment grade
assets or residential mortgage-backed securities determined, in the
reasonable judgment of USBAM, to be of equivalent credit quality, and
1.00% per annum for the first $1 billion of other assets and 0.75% per
annum of other assets over $1 billion which recognizes the increased time
and management involved in managing a REIT relative to an investment
company.
- USBAM initially proposed that the "hurdle rate" that First American must
earn in order for USBAM to be entitled to a quarterly incentive fee under
the REIT Advisory Agreement would be the greater of 10% per annum or the
five-year U.S. Treasury rate. In its final form, the REIT Advisory
Agreement provides for a "hurdle rate" equal to the greater of 10% per
annum or the ten-year U.S. Treasury rate plus 3.5%.
- Based on its review of termination provisions of investment advisory
agreements involving comparable publicly-traded mortgage REITs, USBAM
proposed a termination fee equal to the appraised value of the REIT
Advisory Agreement for the five-year period following the date of
termination. In its final form, the REIT Advisory Agreement provides that,
if First American terminates (other than for cause) or chooses not to
renew the REIT Advisory Agreement, First American will pay USBAM a
termination fee equal to 5%, for the first two years of the REIT Advisory
Agreement, and 2% thereafter, of the net equity of First American
calculated as of the fiscal year-end immediately prior to the termination
or non-renewal in accordance with generally accepted accounting
principles. Based upon information provided by FBR, the special committee
believed that this revised arrangement is likely to result in a
substantially lower termination fee compared to USBAM's original proposal.
Based on FBR's analysis, the special committee also determined that the
REIT Advisory Agreement contained terms comparable to other REIT advisory
agreements and consistent with market practice.
- As initially proposed by USBAM, First American's bylaws would have
provided that First American directors could be removed only for cause,
and even then only with an 80% vote by shareholders. In its final form,
this director-removal provision appears in First American's articles of
incorporation, and it provides that First American directors can be
removed with or without cause by means of a two-thirds vote by
shareholders.
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- As initially proposed by USBAM, First American's articles of incorporation
would have provided that (i) an 80% shareholder vote is required to amend
or repeal specified provisions of the articles and (ii) an 80% shareholder
vote is required to amend any other provisions of the articles unless the
amendment is approved by three-quarters of First American's directors. In
their final form, First American's articles provide that any amendment or
repeal of the articles requires a majority vote of the directors
(including at least a majority of the independent directors), plus (A) a
two-thirds shareholder vote in the case of specified provisions of the
articles, and (B) a majority shareholder vote in the case of other
provisions.
- As initially proposed by USBAM, First American's articles of incorporation
and bylaws would have provided that the bylaws could be amended either
(i) by an 80% shareholder vote or (ii) by a two-thirds vote of directors.
In their final form, First American's articles and bylaws provide that the
bylaws can be amended either (A) by a two-thirds shareholder vote, or
(B) by a majority vote of directors (including a majority of the
independent directors).
Other changes negotiated by the special committee included: (i) changing the
termination provision of the REIT Advisory Agreement to allow for termination
with or without cause, (ii) requiring that, for purposes of establishing a
quorum to transact business, the required majority of directors include a
majority of independent directors, (iii) requiring that, for purposes of
approving corporate actions, that a vote of a majority of directors must also
include at least a majority of independent directors, (iv) requiring First
American to continue to qualify as a REIT unless a majority of directors
(including at least a majority of independent directors) determine that such
qualifications are no longer in the best interests of First American,
(v) decreasing the percentage of shareholders required to call a special
shareholders meeting from 50% to 10% and (vi) requiring that at least a majority
of the members of any committees of First American's board of directors be
independent directors, except for the Audit and Compensation Committees which
will consist only of independent directors.
The special committee met on March 20, 2002, and was advised that FBR was
prepared to render its fairness opinions with respect to the terms outlined in
the original merger agreement. Following a final review and discussion of these
terms, the special committee unanimously recommended that the full boards of
directors approve the original merger agreement.
The Existing Funds' full boards of directors met on March 20, 2002 following
the special committee meeting. At this board meeting, the chair of the special
committee and Gardner Carton & Douglas reviewed the course of the negotiations
and the special committee's proceedings in detail. The boards of directors also
had before them and reviewed final drafts of the original merger agreement, the
REIT Advisory Agreement, and First American's articles of incorporation and
bylaws, as well as drafts of the registration statement of which this joint
proxy statement/prospectus is a part and of the exemptive order that would be
filed by the Existing Funds and First American with the SEC. In addition,
Gardner Carton & Douglas advised the boards of directors concerning its legal
duties with respect to the proposed transaction. Finally, representatives of FBR
presented their analysis of the transaction and provided their verbal opinion
(subsequently confirmed in writing in the original fairness opinion) that the
financial consideration to be received by Existing Fund shareholders under the
original merger agreement is fair, from a financial point of view, to the
shareholders of each Existing Fund. Following an extensive discussion of the
transaction and questioning of FBR and Gardner Carton & Douglas by board
members, the boards of directors of each Existing Fund unanimously approved the
original merger agreement and recommended its approval by the shareholders of
each Existing Fund.
The Existing Funds publicly announced the proposed transaction on March 20,
2002, and the Registration Statement on Form S-4 of which this joint proxy
statement/prospectus is a part was initially filed with the SEC on April 1,
2002. In addition, the application for the Exemptive Order described below under
"--Exemptive Relief" was initially filed with the SEC on April 4, 2002.
By letter dated May 28, 2002, SIA, through its affiliate Sit Investment
Fixed Income Advisors, Inc., on behalf of its investment advisory clients which
held Existing Fund shares, advised the Existing Funds' boards of directors that
it opposed the proposed transaction in its then-current form. This letter
invited
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discussions with SIA concerning alternatives to the transaction in that form. At
this time, SIA's investment advisory clients held Existing Fund shares with an
aggregate market value of approximately $100 million, representing approximately
18% of the aggregate market value of all the Existing Funds. In addition, on
June 24, 2002 SIA, on behalf of its investment advisory clients, submitted to
the SEC a document opposing the application made by the Existing Funds for the
SEC exemptive order concerning the original merger agreement.
At the special committee's request, Thomas Schreier, chief executive officer
of USBAM, and Mark Jordahl, chief investment officer of USBAM, held several
meetings with representatives of SIA to discuss its objections to the proposed
transaction. SIA's principal objection was that its clients had a strong
preference for simply maintaining their investment in the Existing Funds in
their present form, or in something very much like them. As a result of these
discussions, USBAM recommended to the special committee that the following
changes be made to the transaction:
- As approved by the Existing Funds' boards of directors, the merger
agreement provided that Existing Fund shareholders who did not wish to
receive shares of First American common stock in the transaction could
elect, instead to receive cash in an amount equal to the net asset value
of their Existing Fund shares. The merger agreement limited the amount of
cash that any Existing Fund would pay in connection with such cash
elections to 15% of the Existing Fund's aggregate net asset value, and it
provided a pro rationing mechanism in the event that the cash elections
exceeded 15%.
In its revised form, the Merger Agreement has eliminated this cash
election option. In its place, the Merger Agreement now provides that
Existing Fund shareholders who do not wish to receive shares of First
American common stock in the transaction can elect, subject to the
limitations described elsewhere herein, to receive shares in the New Fund,
which has investment objectives, strategies, and limitations that are very
similar to those of the Existing Funds; which is advised by the same
investment advisor; and which is subject to the provisions of the
Investment Company Act.
- In their original form, First American's articles of incorporation
provided for an initial board of directors composed of seven persons,
three of whom would be associated with USBAM and four of whom would be
independent of USBAM. The articles also provided that all actions by First
American's board of directors must be approved by at least two-thirds of
the directors then in office.
This two-thirds voting requirement, coupled with the composition of the
seven-member board of directors, would have given the directors associated
with USBAM the ability to "block" any proposed board action, including
action relating to the Advisory Agreement. In order to remove this
"blocking" position, the composition of the board of directors was reduced
to six members comprised of four independent directors and only two
directors associated with USBAM rather than three directors.
The special committee met seven times between July 17, 2002 and September
25, 2002, to consider these proposed changes to the transaction and to address
two new issues that had arisen. During these meetings, no alternatives to the
cash election option, other than the New Fund Option, were considered. The first
new issue related to the need to obtain updated financial fairness opinions from
FBR addressing the transaction in its revised form. Because FBR's engagement by
the Existing Funds was scheduled to expire on December 31, 2002, the special
committee concluded that it should seek an extension of FBR's engagement beyond
such date, which necessitated negotiations with FBR relating to the additional
compensation required.
The second new issue related to the additional expenses that would be
associated with amending the transaction documents to reflect the proposed
revisions to the transaction. Because it appeared the expenses associated with
the transaction in its revised form would substantially exceed the expenses that
had been estimated when the Existing Funds' boards of directors originally
approved the transaction, the special committee believed that USBAM should bear
a significant portion of the increased
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expenses. Accordingly, the special committee negotiated with Mr. Schreier, and
the parties agreed that USBAM would bear 50% of the transaction expenses in
excess of $3.4 million, subject to certain adjustments.
After these issues were resolved, the special committee met again on
November 15, 2002 and November 18, 2002 to review and discuss the revised
transaction documents and to receive reports from FBR concerning its work with
respect to the revised transaction. At the November 18, 2002 meeting,
representatives of FBR confirmed that the transaction as revised remains, in its
view, the alternative most likely to maximize shareholder value for the Existing
Funds' shareholders. These representatives also stated that FBR believes the
agreed-upon methodology for allocating the Existing Funds' assets as between
First American and the New Fund is appropriate and fair to shareholders. At
these meetings, representatives of FBR also reviewed updated comparative data
concerning the Existing Funds and various publicly-traded mortgage REITs, and
then responded to questions from committee members and counsel. Although FBR is
not obligated to update its fairness opinions, the special committee may engage
FBR to provide new fairness opinions if the terms of the merger should
materially change in the future.
The special committee met next on November 21, 2002. At this meeting, FBR
stated that it was prepared to deliver its financial fairness opinions with
respect to the revised transaction to the Existing Funds' boards of directors.
Following a final discussion of the terms of the revised transaction, the
special committee unanimously recommended that the full boards of directors
approve the merger agreement in its revised form and the related actions
necessary to complete the transaction.
The Existing Funds' full boards of directors met on November 21, 2002,
following the special committee meeting. At this meeting, the chair of the
special committee reviewed the special committee's proceedings subsequent to
March 20, 2002. In addition, representatives of USBAM reviewed the proposed
changes to the transaction compared to the form in which it had been approved on
March 20. The boards of directors also had before them and reviewed drafts of
the revised merger agreement, registration statement and exemptive order
application, as well as the organizational documents for the New Fund.
Representatives of FBR presented FBR's analysis of the transaction, responded to
questions from board members and delivered FBR's written fairness opinions to
the effect that the financial consideration to be received by Existing Fund
shareholders in the merger is fair, from a financial point of view, to the
shareholders of each Existing Fund. Gardner Carton & Douglas advised the boards
of directors concerning their legal duties with respect to the transaction, and
board members discussed the proposed transaction as revised in detail. Following
this discussion, the board of directors of each Existing Fund approved the
revised Merger Agreement and related actions and recommended the transaction's
approval by shareholders of each Existing Fund.
Subsequent to this meeting, representatives of SIA suggested to
representatives of USBAM that it would be in the interest of the Existing Funds'
shareholders to add a condition to the closing of the merger of any given
Existing Fund into the Company. Under this condition, the merger of an Existing
Fund into First American would not be completed, even if it was approved by the
Existing Fund's shareholders, if the holders of 60% or more of that Existing
Fund's shares make a valid election to receive New Fund shares. Thus, if the
holders of 60% or more of an Existing Fund's shares make the New Fund election,
such holders would not be pro rationed into both New Fund shares and First
American shares, as would be the case if more than 49% and less than 60% make
the election. Instead, the Existing Fund would simply continue to operate in its
present form, and such electing holders (and all other holders of that Existing
Fund's shares) would simply continue to hold shares of that Existing Fund.
At a special committee meeting held on January 10, 2003, representatives of
USBAM recommended that this condition be added to the merger agreement. In
addition, a representative of FBR stated that FBR was prepared to deliver
updated financial fairness opinions to the Existing Funds if the condition was
added. Following a discussion of USBAM's recommendation among committee members,
USBAM representatives and counsel to the special committee, the special
committee adopted resolutions recommending that the Existing Funds' full boards
of directors approve the new condition.
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The Existing Funds' full boards of directors considered this recommendation
at a meeting held on January 23, 2003. Following a presentation and discussion
concerning the proposed new condition and the delivery of FBR's updated
financial fairness opinions dated January 23, 2003, the boards of directors
unanimously approved an amendment to the Merger Agreement setting forth the new
condition. This amendment, also dated January 23, 2003, then was executed on
behalf of the parties to the Merger Agreement.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF EACH EXISTING FUND AND THE SPECIAL
COMMITTEE
The board of directors of each Existing Fund has determined that the merger
is fair to, and in the best interests of, the shareholders of that Existing
Fund. Accordingly, the board of directors of each Existing Fund has approved the
merger and the Merger Agreement and has recommended that the shareholders of
that Existing Fund vote "FOR" the approval of the merger, the adoption of the
Merger Agreement and the transfer of a portion of the assets and the liabilities
of the Existing Funds to the New Fund in exchange for New Fund shares. In
addition, the boards of directors of the Existing Funds determined the amount of
consideration to be paid to the shareholders in the merger.
In reaching this determination, the board of directors of each Existing Fund
considered the deliberations, findings and recommendations of a special
committee of independent directors, which was appointed by the board of
directors of each Existing Fund to make findings with respect to the merger, to
consider possible alternatives to the merger, to lead the negotiations of the
terms of the merger with USBAM and to report to the full board of directors of
each Existing Fund on its deliberations, findings and recommendations.
The special committee, consisting of Leonard W. Kedrowski (Chair), Richard
K. Riederer and Virginia L. Stringer, met on 25 occasions since its appointment
on December 5, 2001. On November 21, 2002, it reported to the full board of
directors of each Existing Fund as to its findings at which time it recommended
that the board of directors and shareholders of each Existing Fund approve the
merger, the Merger Agreement and the contribution transactions which will
allocate the assets and liabilities of the Existing Funds between First American
and the New Fund. On January 23, 2003, it recommended that the board of
directors and shareholders of each Existing Fund approve the amendment to the
Merger Agreement described above.
EXCHANGE OF EXISTING FUND SHARES FOR FIRST AMERICAN SHARES
POSITIVE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF EACH EXISTING FUND
AND THE SPECIAL COMMITTEE WITH RESPECT TO THE EXCHANGE OF EXISTING FUND SHARES
FOR FIRST AMERICAN SHARES. In reaching their determinations, the board of
directors of each Existing Fund and the special committee considered that the
merger allows Existing Fund shareholders to exchange their shares in the
Existing Fund for shares of common stock in First American, which the boards and
the special committee believe provides the following benefits to shareholders:
POTENTIAL FOR GROWTH; ENHANCED ACCESS TO CAPITAL. Following the merger,
First American will have the potential for enhanced access to and flexibility in
obtaining additional equity capital and debt financing. First American intends
to use this enhanced flexibility to grow its investment portfolio by purchasing
additional mortgage and mortgage-related assets at positive yield spreads and
thereby to increase its earnings and distributions to shareholders over time. In
particular, First American will have the ability to fund future portfolio growth
through the issuance of additional publicly traded securities and the raising of
funds from borrowings under secured and unsecured debt obligations. In addition,
the potentially larger size and more flexible structure of First American should
provide financing alternatives presently not available to the Existing Funds.
The board of directors of each Existing Fund and the special committee believe
that the total market capitalization of First American will be greater than that
of the individual Existing Funds, which may encourage additional and continuing
investment, in many cases by larger institutional investors (which tend to favor
companies with larger market capitalizations), as well as increased market
research.
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MORE FLEXIBLE OPERATING STRUCTURE AND DECREASED REGULATORY BURDEN. In the
merger, the participating Existing Funds will consolidate into First American,
which will not be subject to the regulatory framework of the Investment Company
Act. First American will provide a capital and operating structure that can
respond more efficiently to, and to anticipate the occurrence of, changing
conditions in the U.S. capital markets, thereby enhancing First American's
ability to generate higher risk-adjusted returns compared to the Existing Funds.
THE OPPORTUNITY TO INCREASE BORROWINGS USED IN INVESTMENT ACTIVITIES. Unlike
the Existing Funds, First American will not be subject to the borrowing
limitations of the Investment Company Act, which limits borrowings to an amount
equal to one-third of an investment company's assets. First American's borrowing
policy will be to incur debt such that, once fully invested, it will maintain a
debt-to-equity ratio of between 1:1 to 1.5:1 with regard to its mortgage loan
portfolio and 4:1 to 9:1 with respect to its portfolio of mortgage-backed
securities. As a result of increased leverage, it is anticipated that First
American will, immediately upon completion of the merger, have a borrowing
capacity that will enable it to purchase additional mortgage-related assets
without the need to raise additional equity capital. The Existing Funds
currently cap the amount of leverage that may be incurred at 30%, to enable the
Existing Funds to react to any drastic, unforeseen market movement and still
maintain compliance with the Investment Company Act. The Existing Funds
currently operate near such maximum levels of borrowings.
POTENTIAL FOR ENHANCED LIQUIDITY. Following the merger, the anticipated
listing of the shares of First American common stock on the NYSE and First
American's potentially larger equity market capitalization and growth strategy
should enhance the liquidity of First American common stock held by
shareholders.
GREATER INVESTMENT DIVERSIFICATION. It is anticipated that, following the
merger, First American's portfolio of mortgage loans will be more diversified in
terms of number and type of investments and risk profile than the current
portfolio of any individual Existing Fund. Such diversification may be further
enhanced through First American's acquisition of additional mortgage loans.
Supporting their determination that the merger is in the best interests of
shareholders, the boards of directors and the special committee believe that the
potential increased size and diversity of First American's portfolio will reduce
the dependence of the performance of shareholders' investments on any particular
investment or group of investments.
THE OPPORTUNITY FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING FUND SHARES FOR
SHARES OF FIRST AMERICAN IN A TAX-DEFERRED TRANSACTION. The merger offers
shareholders an opportunity to exchange their Existing Fund shares for shares of
First American common stock on a basis expected to be tax-free for federal
income tax purposes.
NEGATIVE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF EACH EXISTING FUND
AND THE SPECIAL COMMITTEE WITH RESPECT TO THE EXCHANGE OF EXISTING FUND SHARES
FOR FIRST AMERICAN SHARES. The board of directors of each Existing Fund and the
special committee also took into account the following potentially negative
factors associated with the exchange by shareholders of their shares in the
Existing Funds for shares of First American:
UNCERTAIN MARKET PRICE OF FIRST AMERICAN COMMON STOCK AFTER THE MERGER.
Prior to the merger, there will have been no public market for First American
common stock and there can be no assurance that a regular trading market for
First American common stock to be issued in the merger will develop or, if
developed, that any such market will be sustained. In the absence of a public
trading market, an investor may be unable to liquidate his or her investment in
First American. There can be no assurance that the per share price at which
First American common stock trades in the public market after the merger will
not be lower than the net asset value of First American or the prices at which
the Existing Funds currently trade.
VOLATILITY OF REIT MARKET. Historically, the trading price of shares of
publicly-traded mortgage REITs has been more volatile than that of the Existing
Funds' shares.
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INCREASED LEVERAGE MAY INCREASE EXPOSURE TO LOSS. Upon completion of the
merger, First American will not be subject to the borrowing limitations of the
Investment Company Act, and First American intends to be more highly leveraged
than any of the Existing Funds, thereby exposing First American to greater risk
of losses.
INCREASED COMPENSATION IS PAYABLE TO USBAM. The REIT Advisory Agreement
provides for compensation to be paid by First American to USBAM that is higher
than the compensation currently paid by the Existing Funds to USBAM. For
example, for the 12-month period ended November 30, 2002, the Existing Funds
paid aggregate fees to USBAM (including administration fees) of $5,801,378,
while on a pro forma basis for the same period (assuming maximum participation
in First American), the fees payable to USBAM would have been $7,245,874 (or
1.16% of shareholders' equity) for First American and $429,000 (or 0.85% of net
assets) for the New Fund. First American's plan is to utilize greater levels of
leverage in its investment activities. Thus, when compared to the fees based on
the Existing Funds' historical leverage levels, the fees based on the increased
leverage of First American will be higher than indicated above. Based on the
advice of FBR and their review of fee structures in place for comparable
companies identified by FBR, the board of directors of each Existing Fund
justified the higher management fee because substantially more active asset
management is required for First American (a growth-oriented company) compared
to the Existing Funds or the New Fund.
TERMINATION FEE MAY BE PAYABLE TO USBAM UPON TERMINATION OR NON-RENEWAL OF
THE REIT ADVISORY AGREEMENT. First American will be obligated to pay USBAM a
termination fee in the event First American terminates or declines to renew the
REIT Advisory Agreement, except in the case of a termination for cause. Applying
the pro forma net equity of First American as of November 30, 2002 (assuming
maximum participation) (I.E., approximately $626,380,601), it is estimated that
the termination fee payable to USBAM during the first two years of First
American's operations would be approximately $31,319,030. In contrast, no
termination fee is due to USBAM upon termination of any of the advisory
agreements with the Existing Funds or the New Fund because the Investment
Company Act requires that investment advisory contracts be terminable at any
time without the payment of any penalty. Based on the advice of FBR and their
review of the termination fees in place for comparable companies identified by
FBR, the board of directors of each Existing Fund believed that the termination
fee payable by First American will be substantially lower than that payable by
most comparable mortgage REITs.
SHAREHOLDERS OF FIRST AMERICAN WILL NO LONGER ENJOY CERTAIN PROTECTIONS
AFFORDED BY THE INVESTMENT COMPANY ACT. Although the boards of directors of each
Existing Fund and the special committee believe that the structure of First
American and the REIT Advisory Agreement are in the best interests of the
Existing Funds' shareholders, the Investment Company Act provides certain
protections to the shareholders of the Existing Funds (such as the ability for a
company to terminate its advisory contracts within 60 days without penalty, the
limitation on leverage to one-third of assets, the severe restrictions on
transactions with affiliates, the required annual approval of advisory contracts
by a majority of the board of directors, including a majority of the independent
directors, and the approval of the shareholders required to change fundamental
policies) that First American's shareholders will not have. See "THE EXISTING
FUNDS--Regulatory Matters."
RESTRICTIONS IMPOSED ON OPERATIONS AND OWNERSHIP IN ORDER TO MAINTAIN REIT
STATUS. In order to maintain REIT status under the Code, First American will
need to satisfy certain tests as to its operations, imposing restrictions on the
nature of its assets, its ability to hedge its assets and related borrowings,
and requiring First American to distribute at least 90% of its taxable income to
its shareholders each year. In addition, First American's articles of
incorporation provide for restrictions regarding ownership and transfer of First
American's stock in order to comply with REIT ownership requirements. If any
shareholder becomes a shareholder of First American in violation of the
ownership limit, the excess shares held would be subject to the provisions of
the articles of incorporation relating to ownership limit violations, which have
the effect of depriving the excess shares of voting rights and the right to
receive regular dividends and subjecting the excess shares to repurchase by
First American, or a forced sale in the market. The board of directors of each
Existing Fund and the special committee also considered the fact that Existing
Funds' shareholders who stand to receive shares in the merger in
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amounts exceeding the ownership limit may need to sell their shares prior to the
closing of the merger in order to avoid a violation of the ownership limit.
OTHER NEGATIVE FACTORS. The board of directors of each Existing Fund and the
special committee also considered that:
- the nature of the investment held by investors in the Existing Funds will
change;
- the sale of shares of First American common stock by Existing Fund
shareholders who received First American shares as a result of the New Fund
Option proration procedures could exert downward pressure on the trading
price of First American common stock;
- the initial size of First American is uncertain;
- First American may make lower and less frequent distributions than the
dividends historically paid by the Existing Funds; and
- failure of First American to maintain REIT status would have adverse tax
consequences.
EXCHANGE OF EXISTING FUND SHARES FOR NEW FUND SHARES
In considering such negative factors associated with the exchange of
Existing Fund shares for shares in First American, the board of directors of
each Existing Fund and the special committee also took into account that the
merger offers shareholders of the Existing Fund the flexibility, subject to
certain limitations, to receive and retain an investment that is substantially
similar to their existing investments in the Existing Funds and thus avoid many
of the potential negative factors associated with the receipt of shares of First
American common stock in the merger. Neither the board of directors of any
Existing Fund nor the special committee is making any recommendation to any
individual shareholder as to whether such shareholder should select the New Fund
Option. The boards and the special committee believe that the decision to select
the New Fund Option should depend upon the investment objectives, risk profile,
tax circumstances, organizational form and regulatory limitations of each
individual shareholder. However, in including the New Fund Option as part of the
merger proposal, the boards of directors and the special committee considered
the following positive and negative factors relating to the New Fund Option:
POSITIVE FACTORS RELATING TO THE NEW FUND OPTION. In general, the special
committee and the boards of directors viewed the negative factors described
above with respect to the exchange of Existing Fund shares for First American
shares to be positive factors with respect to the exchange of Existing Fund
shares for New Fund shares. The special committee and the boards of directors
particularly noted:
CONTINUATION OF SIMILAR INVESTMENT. Existing Fund shareholders who elect the
New Fund Option will be able to continue an investment which is substantially
similar to their current investment in terms of investment policies, strategies
and limitations and in terms of investment advisory fees and other expenses.
CONSOLIDATION ELIMINATES MULTIPLE FIXED COSTS. Consolidation of the Existing
Funds into the New Fund creates the potential to eliminate the need to pay
multiple fixed costs associated with the Existing Funds, including the costs of
preparing multiple periodic filings and shareholder reports and multiple
administrative agent and transfer agent fees and other similar expenses.
LOWER LEVERAGE AND VOLATILITY. The New Fund, like the Existing Funds, will
be subject to the Investment Company Act's limitations on the use of leverage.
Thus, those Existing Fund shareholders who do not wish to experience the
increased leverage and the accompanying potentially increased volatility and
returns associated with First American have the ability to continue an
investment with the more modest risk/return characteristics associated with the
Existing Funds and the New Fund.
INVESTMENT COMPANY ACT PROTECTIONS. Shareholders of the New Fund, like
shareholders of the Existing Funds, will enjoy the protections afforded to
shareholders under the Investment Company Act. These protections include, among
others, the ability of the board of directors to terminate the New Fund's
investment advisory agreement at any time without the payment of any penalty or
other termination fee, and the prohibition of most transactions between the New
Fund and its affiliates, including
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its investment adviser and the adviser's affiliates. See "THE EXISTING
FUNDS--Regulatory Matters." Thus, those Existing Fund shareholders who wish to
continue to have the benefits of Investment Company Act protections have the
ability to do so by selecting the New Fund Option.
NEGATIVE FACTORS RELATING TO THE NEW FUND OPTION. In general, the special
committee and the boards of directors viewed the positive factors described
above with respect to the exchange of Existing Fund shares for First American
shares to be negative factors with respect to the exchange of Existing Fund
shares for New Fund shares. The special committee and the boards of directors
particularly noted:
UNCERTAIN MARKET PRICE OF NEW FUND COMMON STOCK AFTER THE MERGER. Prior to
the merger, there will have been no public market for the New Fund's common
stock and there can be no assurance that a regular trading market for its common
stock to be issued in the merger will develop or, if developed, that any such
market will be sustained. In the absence of a public trading market, a
shareholder may be unable to liquidate his or her investment in the New Fund. In
this regard, the Existing Funds have tended to trade at discounts to their net
asset values. FBR has advised the Existing Funds' boards of directors and the
special committee that it has found no strong relationship between the market
capitalizations of closed-end funds and the discounts at which they trade to net
asset value. Thus, if a trading market for the New Fund shares develops, such
shares may, like those of the Existing Funds, trade at a discount to the New
Fund's net asset value.
MORE LIMITED ACCESS TO CAPITAL AND FLEXIBILITY. Following the merger, the
New Fund will be subject to the same regulatory restrictions under the
Investment Company Act as the Existing Funds and will therefore have
significantly less flexibility in accessing and obtaining additional equity
capital and debt financing compared to First American. Although the New Fund
will be permitted to borrow funds to acquire assets, such borrowings will be
limited to the types and levels of borrowings permitted by the Investment
Company Act. In addition, practical considerations, such as shares trading below
net asset values, limit prospects of raising additional capital through sales of
additional shares of common stock by the New Fund. As a result, compared to
First American, the New Fund will be far more limited in its ability to raise
capital and to employ such capital to acquire assets, exploit advantageous
market conditions and strategies and respond efficiently to changing conditions
in mortgage markets.
POTENTIALLY SMALL SIZE OF THE NEW FUND. Depending on how many Existing Fund
shareholders elect to receive New Fund shares in the merger, the New Fund's
initial aggregate net asset value could be as little as $50 million, which is
less than that of any of the four Existing Funds. If the New Fund is relatively
small compared to the Existing Funds, it could experience a higher expense
ratio, less diversification of assets and decreased trading liquidity for its
shares in comparison to the Existing Funds. If the New Fund's expense ratio is
higher than that of the Existing Funds, this could result in the New Fund making
lower dividend payments than the Existing Funds. In addition, as noted above,
the New Fund will have limited ability to raise additional equity capital and
will thus be limited in its ability to grow following the closing of the merger.
TAXABILITY OF THE NEW FUND OPTION. The distribution of First American shares
in the merger will be a tax-free transaction for Existing Fund shareholders, but
the distribution of New Fund shares in the merger will be a taxable transaction
for such shareholders. Thus, those Existing Fund shareholders who elect to
receive New Fund shares rather than First American shares may have to pay taxes
with respect to the transaction. Moreover, if an Existing Fund shareholder is
required to pay such taxes, he or she will not have received cash in the
transaction from which such taxes could be paid. Instead, the shareholder will
have to sell some of the New Fund shares in order to pay such taxes or draw upon
other sources of cash which are available to the shareholder.
POTENTIAL PRORATING OF NEW FUND SHARES. If holders of shares representing
more than 49% of an Existing Fund's aggregate net asset value select the New
Fund Option or exercise statutory dissenters' appraisal rights, all of the
holders who selected the New Fund Option will receive a combination of New Fund
shares and First American shares due to the prorating procedures described under
"THE MERGER--What Shareholders Will Receive in the Merger." Thus, it is possible
that shareholders electing to receive New Fund shares may be allocated First
American shares instead.
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INCREASED MANAGEMENT FEE FOR AMERICAN SELECT SHAREHOLDERS. Pursuant to the
advisory agreement between USBAM and the New Fund, the New Fund potentially will
pay a higher management fee to USBAM under the New Fund Advisory Agreement than
American Select pays under its existing advisory agreement with USBAM.
OTHER NEGATIVE FACTORS ASSOCIATED WITH THE MERGER. The board of directors of
each Existing Fund and the special committee also took into account the
following additional negative factors associated with the entire merger
transaction:
EXPENSES. Except as set forth below, each Existing Fund will bear a pro rata
share of the costs and expenses incurred in connection with the merger
(including, but not limited to, costs and expenses of preparing all necessary
registration statements, proxy materials and other documents, of preparing for
and attending board and committee, shareholder, planning, organizational and
other meetings and costs and expenses of accountants, attorneys, financial
advisors and other experts engaged in connection with the merger), whether or
not the merger is consummated and whether or not the particular Existing Fund
participates in the merger. The estimated costs and expenses related to the
merger are $4,500,000. The Existing Funds as a group will bear the first
$3,400,000 of such expenses and will, subject to certain exceptions, equally
share all transaction expenses in excess of $3,400,000 with USBAM. The payment
of such expenses by the Existing Funds will reduce the net assets of First
American, the New Fund and any non-participating Existing Fund following the
merger. Amounts used to pay such expenses would otherwise be available for
investment in additional mortgage-related assets or for distribution to
shareholders by the Existing Funds. Each Existing Fund's pro rata share of
expenses will be determined based on its relative net asset value. Based on the
net asset values of the Existing Funds as of November 30, 2002, the Existing
Funds would bear the following amounts and percentages of the expenses of the
merger that are to be borne by the Existing Funds: American Strategic: $271,000
or 6.8%; American Strategic II: $1,175,000 or 29.4%; American Strategic III:
$1,708,000 or 42.7%; and American Select : $846,000 or 21.1%.
CONFLICTS OF INTEREST. The parties negotiating the terms of the merger
proposal have conflicts of interest. See "--Interests of Certain Persons in the
Merger" below.
OVERALL CONCLUSIONS. After consideration of the positive and negative
factors affecting the transaction, the boards of directors of each Existing Fund
and the special committee recommend a vote in favor of the merger and the
adoption of the Merger Agreement. Further, in view of the wide variety of
factors considered by the board of directors of each Existing Fund and the
special committee, the boards of directors and the special committee did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered. The board of directors of
each Existing Fund and the special committee viewed their positions and
recommendations based on the totality of the information presented and
considered after taking into consideration all the factors set forth above. The
board of directors of each Existing Fund and the special committee determined
that the potential benefits of the merger outweighed the potential detriments
associated with the merger.
ALTERNATIVES TO MERGER
In addition to considering the merger, the special committee and each
Existing Fund's board of directors considered several potential alternatives.
The discussion below considers these alternatives and the reasons that the
special committee, in consultation with FBR, and the boards of directors
determined that the merger is the alternative that is in the best interests of
the shareholders of the Existing Funds.
MAINTAINING THE STATUS QUO. The special committee and the boards of
directors recognized that the Existing Funds could continue to operate in their
present form with no change to their current expense structures and without
their incurring the expenses associated with a change in form. However, they
believed that maintaining the status quo would not address the historical
discounts to net asset value at which the Existing Funds generally have traded
and would not allow shareholders to benefit from the potential increased returns
and other advantages which might result from some of the other alternatives
discussed below. Nevertheless, the special committee and the boards of directors
did view the returns
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to shareholders from the Existing Funds in their present form as one of the
benchmarks against which other alternatives should be measured.
LIQUIDATING THE EXISTING FUNDS. The special committee and the boards of
directors considered liquidating and winding up the Existing Funds by selling
all of their assets and returning the proceeds, net of the expenses associated
with the liquidation and winding up, to shareholders. They recognized that a
liquidation would return an amount approximating the Existing Funds' net asset
value per share, less associated expenses, to shareholders, but they did not
believe that the discounts to net asset value at which the Existing Funds
historically have traded were so deep as to justify a step as drastic as
liquidation. They noted in this regard that a liquidation of the Existing Funds
would run counter to shareholders' expectations that they would remain the
owners of an ongoing, dividend-paying concern. They also noted that liquidation
of the Existing Funds would require the Existing Funds to incur the expense of
soliciting shareholder approvals, as well as the time, expense, and uncertainty
associated with selling all of the Existing Funds' largely-illiquid assets in a
relatively short time frame. For these reasons, they concluded that a
liquidation of the Existing Funds would be less beneficial to shareholders than
the merger or continuing the Existing Funds in their present form.
CONDUCTING TENDER OFFERS FOR THE EXISTING FUNDS' SHARES. The special
committee and the boards of directors considered conducting tender offers in
which the Existing Funds would offer to repurchase a portion of their
outstanding shares for cash at prices equal to their net asset values per share.
They recognized that such tender offers would enable some shareholders to
receive an amount of cash equal to net asset value per share, which would be
beneficial to those shareholders if the Existing Funds' shares were trading at a
discount to net asset value per share at the time of the tender offer. However,
based on prior tender offers conducted by the Existing Funds, the special
committee and the boards of directors had no evidence that such tender offers
would produce a lasting reduction in the trading discount to net asset value of
the shares that would remain outstanding following a tender offer. Thus, they
did not believe that a tender offer would provide a lasting benefit to those
shareholders who did not tender their shares or whose tenders were not accepted
due to pro-rationing procedures. In addition, a tender offer would reduce the
equity base of the Existing Funds, which would tend to increase the expense
ratios and reduce the returns experienced by the remaining shareholders
following a tender offer. A tender offer also would reduce the number of shares
outstanding, which would tend to reduce the trading liquidity of the shares that
would remain outstanding following a tender offer and could, if enough shares
were repurchased, cause an Existing Fund to be delisted from the NYSE. For these
reasons, they concluded that conducting tender offers would not be as
advantageous to the Existing Funds as the merger.
COMBINING THE EXISTING FUNDS INTO A SINGLE CLOSED-END "INTERVAL" FUND. The
special committee and the boards of directors considered combining the Existing
Funds into a single closed-end "interval" fund registered as a management
investment company under the Investment Company Act. Pursuant to rules under the
Investment Company Act, such an "interval" fund must have a fundamental policy
requiring it to make offers to repurchase from 5% to 25% of its then-outstanding
shares (as determined by its board of directors with respect to each given
repurchase offer) every three, six or 12 months at a cash repurchase price equal
to net asset value per share. The special committee and the boards of directors
recognized that such periodic repurchase offers might tend to reduce the
resulting fund's trading discount to net asset value per share, but, as noted
above, they had no evidence that prior tender offers conducted by the Existing
Funds had had this effect on a lasting basis. Because the resulting fund would
remain subject to the provisions of the Investment Company Act, including its
limitations on the use of leverage and on capital structure, the special
committee and the boards of directors believed that this alternative would not
produce as many benefits to shareholders as the combination of the Existing
Funds into a single newly-formed REIT. They also noted that a combination of the
Existing Funds into a single closed-end interval fund would, like a combination
of the Existing Funds into a REIT, require the Existing Funds to incur the
expense of soliciting shareholder approval. They also believed that this
alternative presented the disadvantages described above under "--Conducting
Tender Offers for the Existing Funds' Shares." In addition, because repurchase
offers would be required to be conducted (and paid for in cash) on a regular
periodic basis under this alternative, they believed that management of the
resulting fund's portfolio would require a greater bias
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toward liquid assets which could be readily sold in order to fund the repurchase
offers, which likely would reduce shareholder returns.
COMBINING THE EXISTING FUNDS INTO A SINGLE OPEN-END FUND. The special
committee and the boards of directors considered combining the Existing Funds
into a single open-end fund registered as a management investment company under
the Investment Company Act. Unlike a closed-end fund, such an open-end fund must
redeem its shares upon shareholder request at any time at a price equal to net
asset value per share. In order to ensure that an open-end fund can sell
securities quickly in order to satisfy such redemption requests, rules under the
Investment Company Act prohibit an open-end fund from holding more than 15% of
its assets in the form of illiquid assets. Because the Existing Funds currently
hold a much higher proportion of their assets than this in the form of illiquid
assets (I.E. , mortgage loans), the special committee and the boards of
directors concluded that combining the Existing Funds into a single open-end
fund would require a fundamental change in their investment policies and
strategies which likely would reduce returns to shareholders. In addition, this
change would require the Existing Funds to bear the expense of selling most of
their illiquid assets before or at the time the combination into an open-end
fund took place, as well as the expense of soliciting shareholder approvals of
the change. The change also would leave the resulting fund subject to the
provisions of the Investment Company Act, including its limitations on the use
of leverage and on capital structure. Thus, although the special committee and
the boards of directors recognized that this alternative would eliminate the
possibility of the resulting fund's trading at a discount to net asset value per
share, they concluded that the fundamental change in the nature of the resulting
fund, together with the disadvantages noted above, made this alternative less
advantageous than the merger.
COMBINING THE EXISTING FUNDS INTO A SINGLE BUSINESS DEVELOPMENT COMPANY. The
special committee and the boards of directors considered combining the Existing
Funds into a single "business development company." A "business development
company" is an entity which is registered under the Investment Company Act but
which is subject to somewhat less stringent limitations on its capital structure
and transactions with affiliates than other registered investment companies.
However, the Investment Company Act limits the types of securities which a
"business development company" may hold and requires that a "business
development company" must make available significant managerial assistance with
respect to the issuers of a substantial proportion of the securities held by it.
The special committee and the boards of directors concluded that the limitations
on the types of securities which the resulting entity could hold would require a
fundamental change in its investment policies and strategies compared with those
of the Existing Funds, which likely would reduce returns to shareholders. They
also believed that the "significant managerial assistance" requirement would
result in a fundamental change in the nature and cost of the services which the
resulting entity would require from its investment advisor. For these reasons,
the special committee and the boards of directors concluded that this
alternative was less advantageous to shareholders of the Existing Funds than the
proposed merger.
COMBINING THE EXISTING FUNDS INTO A SINGLE ENTITY TAXABLE AS A
CORPORATION. The special committee and the boards of directors considered
combining the Existing Funds into a single entity which would be taxed as a
corporation. Under this alternative, the resulting entity, unlike the Existing
Funds or a REIT, would be subject to so-called "double taxation," once at the
entity level, and a second time at the shareholder level. Although this
alternative would free the resulting entity from having to comply with the
asset-composition, income-composition and distribution rules with which the
Existing Funds or a REIT must comply in order to qualify for pass-through tax
treatment, the special committee and the boards concluded that the reduction in
returns to shareholders which would result from double taxation was unlikely to
be offset by increases in returns which might result from not having to comply
with these rules. They also believed that this alternative would likely require
fundamental changes in the resulting entity's investment policies and strategies
in order to attempt to offset the effects of double taxation.
COMBINING THE EXISTING FUNDS INTO A SINGLE CLOSED-END FUND. The board of
directors of each Existing Fund and the special committee considered combining
the Existing Funds into a single closed-end fund registered as a management
investment company under the Investment Company Act, but ultimately concluded
that the proposed merger which offers shareholders a choice of exchanging their
shares for either shares in (i) the New Fund (a closed-end fund) or (ii) First
American (a REIT),
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provides shareholders with more flexibility and is therefore a better option for
shareholders of the Existing Funds.
THE PROPOSED MERGER. The special committee and the boards of directors
concluded that combining the Existing Funds into a single newly-formed REIT
(with an option for shareholders to exchange into the New Fund) is the
alternative that is in the best interests of Existing Fund shareholders. They
noted that the increased leverage and capital structure flexibility which would
be available to a REIT, as compared with an entity subject to regulation under
the Investment Company Act, may increase returns to shareholders and may
increase the resulting entity's access to the capital markets. From this
standpoint, the REIT structure was deemed superior to any of the alternatives
discussed above which involve a surviving entity that would continue to be
regulated by the Investment Company Act, including the Existing Funds and the
New Fund. In addition, unlike maintaining the status quo, combining the Existing
Funds into a REIT potentially would increase shareholder liquidity due to
increased market capitalization, narrow or eliminate the trading price to net
asset value discount that has affected the Existing Funds, increase asset
diversification and produce economies of scale. In addition, the REIT structure
would avoid the disadvantages of Existing Fund shrinkage which would result from
conducting tender offers or periodic repurchase offers. The REIT structure also
would allow the resulting entity to continue investing in the same types of
assets without a dramatic change in investment policies or strategies, unlike a
conversion to an open-end fund, or a "business development company." This
alternative also would enable the resulting entity to continue to receive
pass-through tax treatment similar to that now enjoyed by the Existing Funds,
unlike conversion to an entity taxable as a corporation. At the same time, for
shareholders who do not perceive that these important benefits are significant
enough in view of their individual investment and risk profiles, the proposed
merger offers the New Fund Option which is intended to allow, subject to certain
conditions, shareholders to receive and retain an investment that is
substantially similar to their Existing Fund investments. For these reasons, the
special committee and the boards of directors concluded that the proposed merger
is the alternative that is in the best interests of the Existing Fund
shareholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you consider the recommendation of the board of directors of each
Existing Fund that shareholders of that Existing Fund vote in favor of the
merger and the adoption of the Merger Agreement, you should be aware that one
member of the board of directors of each Existing Fund was, at the time the
merger was approved, an officer of USBAM's ultimate parent company at the time
the boards of directors approved the merger transaction and that USBAM has
interests in the merger that may be different from, or in addition to, your
interests as shareholders. These conflicts include:
- The REIT Advisory Agreement contains compensation, termination and other
terms more favorable to USBAM, which is a subsidiary of U.S. Bancorp, than
do the advisory agreements between the Existing Funds and USBAM. See
"COMPARISON OF RIGHTS AND INVESTMENTS--Comparison of the Advisory
Agreements to the REIT Advisory Agreements" for a summary comparison of
the agreements.
- Affiliates of USBAM are expected to hold two of the six positions on First
American's board of directors following the merger.
- Under the Merger Agreement, for six years after the closing date of the
merger, First American will indemnify and hold harmless the Existing
Funds' present and former officers and directors for acts or omissions
occurring before the close of the merger to the extent provided under the
Existing Fund's articles of incorporation, the MBCA or the Investment
Company Act.
In addition, USBAM's current portfolio management team to the Existing Funds
(which participated in the structuring of and negotiations relating to the
merger and relating to the advisory agreements on behalf of USBAM) will become
USBAM's portfolio management team for First American upon completion of the
merger. Certain members of this portfolio management team may stand to earn
greater incentive compensation from USBAM than they have historically earned in
their capacities as portfolio managers to the Existing Funds. Further, because
First American will not be registered under the Investment Company Act, it will
be permitted to engage in transactions with affiliates that would be prohibited
by the Investment Company Act for the Existing Funds and the New Fund. Thus,
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First American will be permitted to acquire mortgage-related assets from and
sell mortgage-related assets to affiliates of USBAM.
THE FAIRNESS OPINIONS OF THE FINANCIAL ADVISOR
OPINION OF THE FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of September 17, 2002, the special
committee retained FBR to act as financial advisor to the special committee and
the boards of directors of the Existing Funds in connection with evaluating the
Existing Funds' strategic alternatives. On January 23, 2003, at a meeting of the
board of directors of the Existing Funds to consider and approve the Merger
Agreement, FBR delivered its written opinion to the effect that as of the date
of the Fairness Opinions, the financial consideration (based on the written
methodology used to allocate the assets between First American and the New Fund
pursuant to the terms of the Merger Agreement) is fair, from a financial point
of view, to the shareholders of the Existing Funds.
The full text of FBR's updated Fairness Opinions, which sets forth the
assumptions made, procedures followed, matters considered and limits on the
review undertaken by FBR, is attached in Appendices C-1 to C-4 to this joint
proxy statement/prospectus and is incorporated herein by reference. No
limitations were imposed by the boards of directors of the Existing Funds upon
FBR with respect to the investigation made or procedures followed by FBR in
rendering the Fairness Opinions. The description of FBR's updated Fairness
Opinions set forth herein are qualified in its entirety by reference to
Appendices C-1 to C-4. Shareholders are urged to read the Fairness Opinions in
their entirety. FBR is not providing an opinion as to the trading value of
Existing Fund common stock, of First American common stock or of New Fund common
stock going forward, nor should the delivery of the Fairness Opinions be
construed as a recommendation by FBR as to the suitability of First American
shares or New Fund shares as an investment by current investors in the Existing
Funds. FBR is not involved in the actual decision making process regarding the
allocation of assets, but FBR has reviewed the written methodology that will be
used in determining the allocation of assets between First American and the New
Fund.
FBR is a nationally recognized investment banking firm and was selected by
the boards of directors of the Existing Funds based on FBR's reputation and
experience in investment banking in general, and on its expertise in the real
estate and specialty finance sectors. FBR, as part of its investment banking
business, is frequently engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated underwriting,
competitive bidding, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
In connection with rendering the Fairness Opinions dated January 23, 2003,
FBR, among other things:
1. reviewed the Merger Agreement;
2. reviewed the REIT Advisory Agreement;
3. reviewed the New Fund Advisory Agreement;
4. reviewed First American's articles of incorporation;
5. reviewed First American's bylaws;
6. reviewed a draft of Amendment No. 2 to the Form S-4 Registration
Statement dated as of November 20, 2002, to be filed with the SEC;
7. reviewed the American Strategic and American Select annual reports to
shareholders for the years ended November 30, 1995, November 30, 1996,
November 30, 1997, November 30, 1998, November 30, 1999, November 30,
2000 and November 30, 2001;
8. reviewed the American Strategic II and American Strategic III annual
reports to shareholders for the periods ended May 31, 1995, May 31,
1996, May 31, 1997, May 31, 1998, May 31, 1999, May 31, 2000, May 31,
2001 and May 31, 2002;
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9. reviewed the American Strategic and American Select semi-annual reports
to shareholders for the periods ended May 31, 1995, May 31, 1996,
May 31, 1997, May 31, 1998, May 31, 1999, May 31, 2000, May 31, 2001 and
May 31, 2002;
10. reviewed the American Strategic II and American Strategic III
semi-annual reports to shareholders for the periods ended November 30,
1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999, November 30, 2000 and November 30, 2001;
11. reviewed the American Strategic prospectus dated December 19, 1991;
12. reviewed the American Strategic II prospectus dated July 23, 1992;
13. reviewed the American Strategic III prospectus dated March 19, 1993;
14. reviewed the American Select prospectus dated September 14, 1993;
15. reviewed the Existing Funds' portfolios as of May 31, 2002;
16. reviewed the Existing Funds' master loan and security agreements;
17. reviewed the reported market prices and trading history of the Existing
Funds' shares for the period November 30, 1995 through May 31, 2002;
18. discussed the financial condition, results of operations, earnings
projections, business and prospects of the Existing Funds with USBAM;
19. compared the results of operations and financial condition of the
Existing Funds with those of certain closed-end mutual funds that FBR
deemed to be reasonably comparable to the Existing Funds;
20. compared the results of operations and financial condition of the
Existing Funds with those of certain publicly-traded REITs that FBR
deemed to be reasonably comparable to First American;
21. participated in discussions and negotiations among representatives of
the Existing Funds and representatives of USBAM;
22. reviewed the financial terms, to the extent publicly available, of
external management contracts of certain publicly-traded REITs that FBR
deemed to be reasonably comparable to the proposed REIT Advisory
Agreement between First American and USBAM;
23. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate; and
24. reviewed the methodology to be used in allocating the Existing Fund
assets between First American and New Fund.
In connection with rendering the fairness opinions, FBR assumed and relied
upon, without independent verification, the accuracy and completeness of all
financial information, analyses, estimates and other information provided by
USBAM. With respect to the analyses reviewed with USBAM, FBR assumed that they
reflected the best then currently available estimates and judgments of
management of the future financial performance of First American and that such
performance will be achieved. FBR discussed with USBAM the Existing Funds'
earnings for periods ended November 30, 2001 and May 31, 2002 as they related to
the projections for First American. FBR also assumed that there has been no
material change in the Existing Funds' assets, financial conditions, results of
operations, business or prospects since the date of the last financial
statements noted above.
In connection with rendering the Fairness Opinions to the boards of
directors of the Existing Funds, FBR performed a variety of financial analyses.
The following is a summary of the material financial analyses performed by FBR,
but does not purport to be a complete description of its analyses or
presentations at the January 23, 2003 meeting of the Existing Funds' boards of
directors. FBR believes that its analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and the process underlying FBR's Fairness Opinions. The preparation of
a
105
<Page>
fairness opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or summary description. In its
analyses, FBR made numerous assumptions with respect to industry performance,
business and economic conditions and various other matters, many of which are
beyond the control of the Existing Funds and USBAM. Any estimates contained in
FBR's analyses are not necessarily indicative of futures results or values,
which may be significantly more or less favorable than such estimates. Estimates
of value of companies do not purport to be appraisals or necessarily reflect the
prices at which the companies or the securities may actually trade.
SUMMARY OF TERMS OF PROPOSED TRANSACTION. FBR reviewed the terms of the
proposed merger, including the proposed business structure and the proposed
financial consideration. The Merger Agreement provides that the participating
Existing Funds will merge with and into First American, a newly-formed company
that will elect to be taxed as a REIT. First American will be externally managed
by USBAM. The Merger Agreement provides that, as a condition to closing,
Existing Funds having, in the aggregate, a net asset value of at least $200
million (net of cash needed to fund payments to shareholders exercising
statutory dissenters' appraisal rights and net of net assets to be transferred
to the New Fund) must participate in the merger. The terms of the merger also
provide that the number of shares held by shareholders in each participating
Existing Fund that may receive New Fund shares or cash through the exercise of
statutory dissenters' appraisal rights will be limited to 49% of the shares of
that Existing Fund. Shareholder elections to receive New Fund shares in excess
of this limitation will be prorated based on individual share holdings in the
Existing Funds. If such prorating is necessary for any Existing Fund, affected
shareholders will receive First American common stock for the balance of their
Existing Fund shares that are not converted into shares of the New Fund. Thus,
there is a possibility that shareholders may request shares of the New Fund
common stock but will only be able to exchange a portion of their shares in the
Existing Funds for New Fund shares and will receive shares of First American
common stock for the remainder of their shares. The Merger Agreement further
states that holders of less than 60% of the outstanding Existing Fund shares of
any participating Existing Fund shall have elected to receive New Fund shares.
The Merger Agreement also requires, as a condition to the merger, that
shareholders of the Existing Funds holding shares representing at least $50
million in net asset value shall elect to receive New Fund shares. In order to
satisfy the AMEX minimum round lot requirements, such shareholders shall consist
of no fewer than 500 separate shareholders that each hold shares representing a
minimum of $1,000 in net asset value.
FBR reviewed the financial terms, to the extent publicly available, of
certain publicly traded REITs that FBR deemed to be reasonably comparable to
First American. FBR also reviewed the proposed asset allocation methodology to
be used in allocating the Existing Funds' assets between First American and the
New Fund.
SELECTED REIT ANALYSIS. In preparing its presentation, FBR used publicly
available information to compare selected financial and market trading
information, including capital levels, earnings performance, asset quality
ratios, leverage characteristics and profitability for First American and other
selected publicly traded REITs. This peer group consisted of mortgage REITs,
with investment focuses in commercial mortgages and residential mortgages as
shown in the table below. As a group, the comparable REITs trade on average at a
premium to book value. However, past performance of the peer group does not
guarantee future results. The actual trading performance of First American could
vary materially from the historical performance of the peer group. This analysis
did not purport to be indicative of the actual values or expected values of
First American common stock.
Because of the inherent differences between the businesses, operations and
prospects of First American and the businesses, operations and prospects of the
selected comparable companies, FBR believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis.
Accordingly, FBR also made qualitative judgments concerning differences between
First American's financial and operating characteristics and those of the
selected comparable companies that would affect First American's public trading
value and such comparable companies.
106
<Page>
<Table>
<Caption>
CLOSING
PRICE AS OF BOOK EPS P/E
NOVEMBER VALUE PER MARKET/ 3Q02 3Q02
TICKER 19, 2002 SHARE BOOK ANNUALIZED ANNUALIZED
------ ----------- --------- --------- ---------- ----------
American Mortgage
Acceptance Corp. AMC $13.16 $14.78 89% $1.63 8.1x
Annaly Mortgage NLY $17.22 $12.84 134% $2.76 6.2x
Anthracite Capital, Inc. AHR $10.19 $ 6.83 149% $1.68 6.1x
Anworth Mortgage Assets
Corporation ANH $12.00 $10.39 115% $1.68 7.1x
FBR Asset Investment
Corp. FB $31.50 $29.06 108% $5.96 5.3x
iStar Financial Inc. SFI $27.28 $21.61 126% $1.81 15.1x
MFA Mortgage
Investments, Inc. MFA $ 8.05 $ 7.99 101% $1.37 5.9x
RAIT Investment Trust RAS $20.25 $14.77 137% $2.45 8.3x
Redwood Trust RWT $26.95 $26.39 102% $3.41 7.9x
Thornburg Mortgage, Inc. TMA $17.66 $16.91 104% $2.56 6.9x
------ ----------
AVERAGE/TOTAL 116.5% 7.7x
====== ==========
</Table>
<Table>
<Caption>
PRICE MKT/ EPS P/E
TICKER 11/19/02 NAV NAV 5/31/02* 5/31/02*
------ -------- ------ ----- -------- ----------
American Strategic ASP $11.98 $12.59 95% $1.04 11.5x
American Strategic II BSP $12.86 $13.29 97% $1.13 11.4x
American Strategic III CSP $12.15 $12.55 97% $1.08 11.3x
American Select SLA $13.01 $13.44 97% $1.20 10.8x
</Table>
- ---------------------
* Annualized where necessary
This analysis illustrated that while the comparable companies currently trade
at an average premium to book value of 116.5%, the Existing Funds continue to
trade at an average discount to NAV of 97%.
ASSET ALLOCATION METHODOLOGY. In its analysis, FBR also reviewed the
proposed asset allocation methodology to be used in allocating the Existing
Funds' assets between First American and the New Fund. The Existing Funds' hold
similar asset types consisting of investments collateralized by single-family
residential properties, multifamily residential properties and commercial
properties, corporate notes and other holdings including, but not limited to,
REIT preferred stocks, cash and U.S. agency mortgage-backed securities. The
assets will be allocated as follows, subject to further adjustments to comply
with RIC and REIT rules regarding asset holdings, leverage and income
regulations:
SINGLE-FAMILY PORTFOLIO. All investments will be allocated to the New Fund.
MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE PORTFOLIO. All investments will
be divided into two pools based on the following criteria:
- income as measured by the effective interest rate (net coupon rate divided
by the purchase price), then weighted by the current loan balance
(variation to be no greater than 25 basis points);
- credit risk (calculated using a debt service coverage ratio to assess the
property's cash flows), weighted by the current loan balance (neither
option will have debt service coverage ratio less than 1.4 and the
variation will be no greater than 100 basis points);
- leverage against the value of the underlying real estate (measured using a
current weighted average loan-to-value ratio) (neither option will have a
loan-to-value ratio greater than 80% and the variation will be no greater
than 10%);
- loan term as measured by the weighted average remaining loan term;
- refinance risk based on whether the loan has a yield maintenance provision
or not;
- lien position based on a ratio of subordinated debt to senior debt;
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<Page>
- property type based on a ratio of multifamily loan to commercial loan
types;
- interest rate type based on a ratio of adjustable rate loans to fixed rate
loans;
- interest calculation method based on a ratio of actual/360 calculation to
30/360 calculation; and
- geographic location of underlying collateral.
OTHER HOLDINGS. All other holdings will be allocated on a pro rata basis
between First American and the New Fund adjusted slightly to compensate for not
receiving any allocations of single-family loans.
All of the Existing Funds' liabilities will be allocated to First American
and the New Fund on a pro rata basis as of the effective date of the merger.
Based on the Existing Fund's financial reports dated November 30, 2002, FBR
reviewed two possible scenarios for the allocation of the Existing Funds'
assets. The first scenario assumed a 51% asset allocation to First American and
a 49% asset allocation to the New Fund. Applying these assumptions and the asset
allocation methodology to the Existing Funds' assets as of November 30, 2002,
the resulting allocation was as follows:
<Table>
<Caption>
AVG WTD AVG WTD WTD WTD AVG WTD
% MARKET LOAN TOTAL LOAN EFFECTIVE AVG AVG REM AVG
ENTITY NAV VALUE COUNT BALANCE BALANCE RATE DSCR LTV TERM PREPAY
- ------ ------ ----------- ----- ------------ ---------- --------- ----- ------- ------- ------
American Strategic 100% 38,005,453 27 $ 37,083,367 $1,373,458 8.292% 2.06 64.37% 52.98 0.60
First American Split 50.99% 19,378,680 14 18,848,523 1,346,323 8.289% 1.70 61.96% 44.89 0.52
New Fund Split 49.01% 18,626,773 13 18,234,845 1,402,680 8.294% 2.44 66.85% 61.34 0.67
American Strategic II 100% 249,893,666 68 244,019,032 3,588,515 8.410% 2.34 70.31% 38.89 0.37
First American Split 51.03% 127,514,887 34 124,675,978 3,666,941 8.402% 2.40 72.68% 40.39 0.36
New Fund Split 48.97% 122,378,779 34 119,343,053 3,510,090 8.417% 2.28 67.83% 37.53 0.39
American Strategic III 100% 324,193,065 74 317,570,256 4,291,490 8.190% 2.51 69.50% 35.60 0.34
First American Split 50.99% 165,290,690 37 162,278,178 4,385,897 8.196% 2.06 69.36% 35.48 0.32
New Fund Split 49.01% 158,902,375 37 155,292,078 4,197,083 8.185% 2.99 69.65% 35.72 0.36
American Select 100% 149,886,635 41 145,020,835 3,537,094 8.225% 1.87 69.16% 53.32 0.59
First American Split 50.98% 76,411,177 21 73,899,201 3,519,010 8.225% 2.15 69.42% 48.09 0.57
New Fund Split 49.02% 73,475,458 20 71,121,634 3,656,082 8.225% 1.58 68.89% 58.76 0.61
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
EXISTING TOTAL 100% 761,978,819 210 743,693,490 3,541,398 8.274% 2.31 69.44% 41.04 0.41
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
FIRST AMERICAN TOTAL 51.00% 388,595,433 106 379,701,880 3,582,093 8.274% 2.17 70.10% 40.02 0.39
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
NEW FUND TOTAL 49.08% 373,383,385 104 363,991,609 3,499,919 8.274% 2.45 68.76% 42.10 0.43
===== =========== === ============ ========== ======= ==== ===== ===== ====
<Caption>
WTD WTD
AVG AVG
ENTITY CAP NAV
- ------ -------- --------
American Strategic 103.50% 102.49%
First American Split 103.18% 102.81%
New Fund Split 103.84% 102.15%
American Strategic II 102.74% 102.41%
First American Split 102.78% 102.28%
New Fund Split 102.70% 102.54%
American Strategic III 102.77% 102.09%
First American Split 102.72% 101.86%
New Fund Split 102.82% 102.32%
American Select 103.51% 103.36%
First American Split 103.47% 103.40%
New Fund Split 103.55% 103.31%
------ ------
EXISTING TOTAL 102.94% 102.46%
------ ------
FIRST AMERICAN TOTAL 102.91% 102.34%
------ ------
NEW FUND TOTAL 102.97% 102.58%
====== ======
</Table>
This scenario resulted in an 8.27% weighted average effective rate for First
American and an 8.27% weight average effective rate for the New Fund. The
weighted average effective rate is defined as the weighted average coupon rate
on the underlying mortgage pool(s), adjusted for the purchase price of the
individual mortgage loans, and less mortgage servicing fees. The resulting debt
service coverage ratios for First American and the New Fund differed by 28 basis
points, with ratios of 2.17 and 2.45 respectively. The leverage values of 70.10%
for First American and 68.76% for the New Fund varied by 1.34%. The variations
of these three measures between First American and the New Fund met the specific
quantitative requirements in the asset allocation criteria. The remaining
measures (loan term, refinancing risk, lien position, property type, interest
rate type, interest calculation and geographic distribution) for First American
and the New Fund did not vary significantly. Therefore, FBR concluded that the
resulting First American and the New Fund portfolios, based on the asset
allocation methodology as applied to the Existing Funds' assets as of
November 30, 2002, are fair.
108
<Page>
The second scenario assumed a 93% asset allocation to First American and a
7% allocation to the New Fund. Applying these assumptions and the asset
allocation methodology to the Existing Funds' assets as of November 30, 2002,
the resulting allocation was as follows:
<Table>
<Caption>
AVG WTD AVG WTD WTD WTD AVG WTD
% MARKET LOAN TOTAL LOAN EFFECTIVE AVG AVG REM AVG
ENTITY NAV VALUE COUNT BALANCE BALANCE RATE DSCR LTV TERM PREPAY
- ------ ------ ----------- ----- ------------ ---------- --------- ----- ------- ------- ------
American Strategic 100% 38,005,453 27 $ 37,083,367 $1,373,458 8.292% 2.06 64.37% 52.98 0.60
First American Split 96.01% 38,489,688 25 35,639,782 1,425,591 8.290% 2.10 63.93% 51.69 0.58
New Fund Split 3.99% 1,515,765 2 1,443,585 721,793 8.323% 1.25 75.14% 84.87 1.00
American Strategic II 100% 248,893,666 68 244,019,032 3,588,515 8.410% 2.34 70.31% 38.99 0.37
First American Split 93.84% 234,486,342 62 229,011,093 2,693,727 8.412% 2.39 70.32% 33.47 0.37
New Fund Split 6.16% 15,405,324 6 15,007,939 2,501,323 8.376% 1.60 70.08% 31.69 0.43
American Strategic III 100% 324,193,065 74 319,570,256 4,318,517 8.197% 2.56 69.38% 35.47 0.34
First American Split 92.59% 300,183,485 66 294,237,829 4,458,149 8.186% 2.58 69.59% 35.31 0.33
New Fund Split 7.41% 24,009,580 8 23,332,426 2,916,553 8.247% 1.68 68.43% 39.26 0.48
American Select 100% 149,886,635 41 145,020,835 3,537,094 8.22% 1.67 69.16% 53.32 0.59
First American Split 92.57% 138,744,352 36 134,076,790 3,724,355 8.223% 1.89 69.11% 53.58 0.59
New Fund Split 7.43% 11,142,283 5 10,944,045 2,188,809 6.249% 1.56 69.79% 50.24 0.65
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
EXISTING TOTAL 100% 761,978,819 210 745,693,490 3,550,921 8.277% 2.33 69.39% 40.96 0.41
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
FIRST AMERICAN TOTAL 93.17% 709,905,867 189 692,965,495 3,666,484 9.273% 2.36 69.45% 41.06 0.41
----- ----------- --- ------------ ---------- ------- ---- ----- ----- ----
NEW FUND TOTAL 6.83% 52,072,952 21 50,727,995 2,415,619 8.265% 1.62 69.40% 40.69 0.52
===== =========== === ============ ========== ======= ==== ===== ===== ====
<Caption>
WTD WTD
AVG AVG
ENTITY CAP NAV
- ------ -------- --------
American Strategic 103.50% 102.49%
First American Split 103.44% 102.38%
New Fund Split 105.00% 105.00%
American Strategic II 102.74% 102.41%
First American Split 102.71% 102.39%
New Fund Split 103.11% 102.65%
American Strategic III 102.76% 102.08%
First American Split 102.76% 102.02%
New Fund Split 102.90% 102.90%
American Select 103.51% 103.36%
First American Split 103.67% 103.48%
New Fund Split 102.74% 101.81%
------ ------
EXISTING TOTAL 102.93% 102.45%
------ ------
FIRST AMERICAN TOTAL 102.94% 102.44%
------ ------
NEW FUND TOTAL 102.99% 102.65%
====== ======
</Table>
This scenario resulted in an 8.27% weighted average effective rate for First
American and an 8.29% weight average effective rate for the New Fund with a
difference of less than 2.00 percent basis points. The resulting debt service
coverage ratios for First American and the New Fund differed by 74 basis points,
with ratios of 2.36 and 1.62 respectively. The leverage values of 69.45% for
First American and 69.40% for the New Fund varied by 0.05%. The variations of
these three measures between First American and the New Fund met the specific
quantitative requirements in the asset allocation criteria. The remaining
measures (loan term, refinancing risk, lien position, property type, interest
rate type, interest calculation and geographic distribution) for First American
and the New Fund did not vary significantly. Therefore, FBR concluded that the
resulting First American and the New Fund portfolios, based on the asset
allocation methodology as applied to the Existing Funds' assets as of
November 30, 2002, are fair.
The actual asset allocations to First American and the New Fund could vary
materially from these analyses. However, the Merger Agreement requires USBAM to
deliver, as a condition to closing, a certificate (i) certifying that the
transfers of assets and liabilities from each participating Existing Fund in
exchange for New Fund common stock comply with the agreed-upon asset allocation
methodology, and (ii) attaching calculations demonstrating such compliance with
respect to those criteria which are numerically based. While FBR reviewed the
asset allocation methodology and applied the methodology to the Existing Funds'
assets as of November 30, 2002, FBR will not be involved in the actual decision
making process of the asset allocation. These analyses do not purport to be
indicative of the actual asset allocations to First American and the New Fund.
Based upon and subject to the foregoing, as well as any such other matters
as FBR considered relevant, it is FBR's opinion that the financial consideration
to be received by the shareholders of the Existing Funds in the merger is fair,
from a financial point of view, to the shareholders of the Existing Funds. In
consideration for the issuance of the fairness opinions, FBR was paid $990,000.
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<Page>
WHAT SHAREHOLDERS WILL RECEIVE IN THE MERGER
MERGER CONSIDERATION. Shareholders in the Existing Funds that participate in
the merger will receive shares of First American common stock at the exchange
rate of one newly issued share of First American common stock for each $10.00 of
Existing Fund net asset value their shares represent. In lieu of receiving such
shares, shareholders may elect to receive shares of common stock in the New
Fund. Shareholders electing this option will receive one newly issued share of
the New Fund common stock for each $10.00 of Existing Fund net asset value their
shares represent. The terms of the merger provide that the number of shares held
by shareholders in each participating Existing Fund that may receive New Fund
shares or cash through the exercise of statutory dissenters' appraisal rights
will be limited to 49% of the shares of that Existing Fund. Shareholder
elections to receive New Fund shares in excess of this limitation will be
prorated based on individual share holdings in the Existing Funds. If such
prorating is necessary for any Existing Fund, affected shareholders will receive
First American common stock for the balance of their Existing Fund shares that
are not converted into shares of the New Fund. However, if the holders of 60% or
more of an Existing Fund's shares elect to receive New Fund shares, that
Existing Fund will not participate in the merger. The net asset value of each
Existing Fund for purposes of determining the number of shares of First American
or New Fund common stock that Existing Fund shareholders will receive will be
determined under the existing net asset value policies of the Existing Funds,
which will take into account the estimated expenses of the merger, and will be
calculated as of the last business day of the week immediately preceding the
closing of the merger. This date will be used for the calculation because
(i) it is standard practice for the Existing Funds to calculate net asset value
at the end of each week and (ii) it will allow sufficient time to close the
transaction without having the number of shares fluctuate. The $10.00 per share
net asset value of First American and the New Fund common stock was selected
because it is a round number that simplifies the share exchange calculation.
NO FRACTIONAL SHARES. Neither First American nor the New Fund will issue any
fractional shares. Each holder of shares of the Existing Funds exchanged in the
merger who would otherwise have been entitled to receive a fractional share of
either First American or the New Fund common stock (after taking into account
all stock certificates delivered by such shareholder or broker dealers on behalf
of shareholders holding shares on book entry form) will receive, from EquiServe,
a cash payment in lieu of such fractional share(s) of First American or the New
Fund common stock representing such holder's proportionate interest in the net
proceeds from the sale by the EquiServe in one or more transactions on behalf of
all such holders of the aggregate of the fractional shares of First American or
New Fund common stock which would otherwise have been issued. The sale of the
pooled fractional shares will be executed by EquiServe on the NYSE or AMEX (as
the case may be) through one or more member firms of the NYSE or AMEX (as the
case may be) and will be executed in round lots to the extent practicable. Until
the net proceeds of such sale or sales have been distributed to the holders of
share certificates and holders of book entry shares of the Existing Funds,
EquiServe will hold such proceeds in a fund for the holders of share
certificates. The sale of such pooled fractional shares is expected to occur
within three to seven business days after the effective date. Such cash amounts
will be distributed to shareholders within seven to ten business days upon
EquiServe's receipt of such shareholder's Existing Fund share certificate, and
to holders of book entry shares within ten to seventeen business days after the
effective date. First American or the New Fund will pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the expenses
and compensation of EquiServe incurred in connection with the sale of the pooled
fractional shares. After completion of the sale of all pooled fractional shares
exchanged in the merger, EquiServe will make payments to the holders of share
certificates and holders of book entry shares of the Existing Funds representing
their fractional shares without interest.
The following table describes the aggregate net asset values and the net
asset value per Existing Fund share for each Existing Fund as of November 30,
2002, and the number of shares of First
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<Page>
American or New Fund common stock that would have been available to be issued
for each Existing Fund share had the merger been completed as of such date:
<Table>
<Caption>
SHARE EXCHANGE TABLE SHARES OF FIRST
NET ASSET VALUE AMERICAN OR THE NEW
PER EXISTING FUND SHARE FUND COMMON STOCK
AGGREGATE NET NET ASSET VALUE EXCLUDING ESTIMATED TO BE ISSUED PER
EXISTING FUND ASSET VALUE* PER EXISTING FUND SHARE* TRANSACTION EXPENSES EXISTING FUND SHARE
- ------------- ------------- ------------------------ ----------------------- -------------------
American Strategic $ 53,352,147 $12.61 $12.68 1.261
American Strategic II 211,502,484 13.25 13.32 1.325
American Strategic III 267,827,898 12.55 12.63 1.255
American Select 143,698,072 13.48 13.56 1.348
</Table>
- ---------------------
* Assumes estimated transaction expenses to be paid by the Existing Funds of
$271,000 or $0.064 per share for American Strategic, $1,175,000 or $0.074
per share for American Strategic II, $1,708,000 or $0.080 per share for
American Strategic III and $846,000 or $0.079 per share for American
Select.
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement. Because this summary is not a complete description of the Merger
Agreement, we urge you to read the Merger Agreement in its entirety for a
complete description of the terms and conditions of the merger. We attach a copy
of the agreement and plan of reorganization and the form of plan of merger to
this joint proxy statement/prospectus as Appendix A and Appendix B,
respectively, and incorporate them by reference in this joint proxy
statement/prospectus.
TERMS OF THE MERGER. The Merger Agreement provides that the participating
Existing Funds will merge with and into First American, with First American
being the surviving company in the merger. At the Effective Time, the
participating Existing Funds will cease to exist and First American will be the
surviving corporation in the merger.
The merger will become effective upon the filing of the articles of merger
for such Existing Fund with the Minnesota Secretary of State and upon acceptance
for filing of such articles of merger by the Department of Assessments and
Taxation of the State of Maryland and the Secretary of State of the State of
Minnesota. It is anticipated that the Effective Time will occur on the closing
date of the merger, which is scheduled for the day following the special
meeting.
At the Effective Time, each share of common stock of the participating
Existing Funds issued and outstanding immediately prior to the Effective Time,
excluding shares held by shareholders exercising statutory dissenters' appraisal
rights under the MBCA, will be converted into the right to receive shares of
common stock of First American or the New Fund. See "THE MERGER--What
Shareholders Will Receive in the Merger" and "THE MEETING--How to Elect the
Merger Consideration You Are to Receive." At the Effective Time, each such share
shall automatically be canceled and cease to exist, and each certificate
previously evidencing such shares shall represent only the right to receive the
consideration payable in connection with the merger. Shares of First American
common stock issuable as consideration in the merger shall be subject to the
ownership limitations and other related provisions contained in First American's
articles of incorporation. See "DESCRIPTION OF CAPITAL STOCK OF FIRST
AMERICAN--Restrictions on Transfer."
At the Effective Time, each share of First American common stock issued and
outstanding immediately prior to the Effective Time shall automatically be
canceled and cease to exist. No consideration shall be payable with respect to
such shares.
EXCHANGE OF CERTIFICATES. After the Effective Time, First American's
exchange agent will mail to shareholders of participating Existing Funds who
have not elected the New Fund Option, a letter of transmittal and instructions
for surrendering of certificates representing shares of common stock of the
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participating Existing Funds. When a participating Existing Fund shareholder
delivers the share certificates to the exchange agent, along with an executed
letter of transmittal and any other required documents, the exchange agent will
cancel such stock certificates and send such shareholder shares of common stock
of First American to which that shareholder is entitled pursuant to the Merger
Agreement. If your Existing Fund shares are held in "street name," they are not
certificated and the exchange will occur automatically.
Shareholders not holding their shares in "street name" who elect the New
Fund Option must properly complete the Consideration Election Form and send it,
together with their Existing Fund stock certificates, to EquiServe on or before
[ ] p.m., eastern time, on [ ], 2003. Shareholders holding shares
in "street name" will be contacted by their broker, banker or other nominee
regarding the exchange of share certificates.
Until the certificates formerly representing Existing Fund common stock are
surrendered for cancellation after the Effective Time, holders of such
certificates will not be paid dividends or other distributions on First American
common stock into which such shares have been converted. When such certificates
have been surrendered, unpaid dividends or other distributions shall be paid,
without interest, to the shareholder.
At the Effective Time, the stock transfer books of the participating
Existing Funds shall be closed and there shall be no further registration of
transfers of common stock of such Existing Funds.
None of First American, the Existing Funds or the exchange agent shall be
liable to any person for any amount required to be paid to public officials
pursuant to applicable abandoned property laws. Unclaimed property held by the
exchange agent six months after the Effective Time shall be redelivered to First
American upon demand, and any holders of participating Existing Fund common
stock who have not surrendered stock certificates for cancellation shall look
only to First American for delivery of the consideration payable in connection
with the merger.
First American or the exchange agent may deduct and withhold from the merger
consideration payable to an Existing Fund shareholder pursuant to the Merger
Agreement such amounts at First American or the exchange agent are required to
deduct and withhold under the Code or any other state, local or foreign tax law.
REPRESENTATIONS AND WARRANTIES OF THE EXISTING FUNDS. The Merger Agreement
contains various representations and warranties of each Existing Fund relating
to, among other things:
- corporate organization, good standing and qualification;
- capital structure;
- execution, delivery and performance of the Merger Agreement and related
matters;
- non-contravention of agreements, applicable laws, court orders and the
Existing Fund's governing instruments;
- required governmental approvals of the merger;
- documents filed by the Existing Fund with the SEC and the accuracy of
information contained in such documents;
- financial statements;
- absence of undisclosed liabilities;
- absence of certain material adverse and other changes;
- litigation;
- brokers' fees;
- compliance with laws and court orders;
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- violations or defaults under material agreements;
- indebtedness;
- ownership of assets;
- books and records;
- accuracy of information supplied by the Existing Fund in connection with the
registration statement that contains this joint proxy statement/prospectus;
- vote required to approve the merger, the Merger Agreement and the asset
contribution transactions; and
- registration as a closed-end, registered management investment company and
qualification as a regulated investment company.
The representations and warranties of the Existing Funds terminate at the
Effective Time.
REPRESENTATIONS AND WARRANTIES OF FIRST AMERICAN. The Merger Agreement
contains various representations and warranties of First American relating to,
among other things:
- corporate organization, good standing and qualification;
- capital structure;
- execution, delivery and performance of the Merger Agreement and related
matters;
- non-contravention of agreements, applicable laws, court orders and First
American's organizational documents;
- required governmental approvals of the merger;
- absence of business activity since incorporation;
- litigation;
- absence of assets, liabilities and agreements to which First American is a
party, other than the Merger Agreement;
- brokers' fees;
- compliance with laws and court orders; and
- accuracy of information supplied by First American in connection with the
registration statement that contains this joint proxy statement/prospectus.
The representations and warranties of First American terminate at the Effective
Time.
REPRESENTATIONS AND WARRANTIES OF THE NEW FUND. The Merger Agreement
contains various representations and warranties of the New Fund relating to,
among other things:
- corporate organization, good standing and qualification;
- capital structure;
- execution, delivery and performance of the Merger Agreement and related
matters;
- non-contravention of agreements, applicable laws, court orders and the New
Fund's organizational documents;
- required governmental approvals;
- absence of business activity since incorporation;
- absence of assets, liabilities and agreements to which the New Fund is a
party, other than the Merger Agreement;
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- brokers' fees;
- compliance with laws and court orders; and
- accuracy of information supplied by the New Fund in connection with the
registration statement that contains this joint proxy statement/prospectus.
The representations and warranties of the New Fund terminate at the Effective
Time.
COVENANTS OF THE EXISTING FUNDS. Until the Effective Time, each Existing
Fund has agreed to carry on its business in the usual, regular and ordinary
course and in substantially the same manner as previously conducted. Each
Existing Fund also has agreed to use commercially reasonable efforts to preserve
intact its current business organization, goodwill and ongoing business status
and its status as a regulated investment company.
Except as otherwise contemplated by the Merger Agreement, each Existing Fund
has also agreed not to:
- split, combine or reclassify any shares of common stock of the Existing Fund;
- issue or authorize the issuance of any securities, except pursuant to the
terms of any existing dividend reinvestment plan of the Existing Fund, with
respect to any shares of common stock of the Existing Fund;
- purchase, redeem or otherwise acquire any shares of common stock of the
Existing Fund;
- issue, deliver or sell, or grant any option or other right regarding,
(i) any shares of common stock of the Existing Fund, (ii) any other
securities of the Existing Fund or (iii) any securities convertible into, or
granting rights to acquire, any securities of the Existing Fund;
- amend the articles of incorporation or bylaws of the Existing Fund;
- merge or consolidate with any person;
- make any tax election, unless required by law to preserve the Existing Fund's
status as a regulated investment company;
- change in any material manner any of its methods, principles or practices of
accounting, except as may be required by the SEC, applicable law or generally
accepted accounting principles;
- take or rescind any election relating to tax matters; or
- pay any distribution, except for regular quarterly distributions not in
excess of certain specified amounts.
Each Existing Fund also has agreed not to take any action that would result
in (i) any of the representations and warranties of the Existing Fund in the
Merger Agreement becoming untrue in any material respect or (ii) any of the
conditions to the merger not being satisfied.
COVENANTS OF FIRST AMERICAN. Until the Effective Time, First American has
agreed, except as contemplated by the Merger Agreement, not to do any of the
following:
- conduct any business;
- enter into any material contracts;
- acquire any assets or incur any liabilities; or
- amend its articles of incorporation or bylaws.
First American also has agreed not to take any action that would result in
(i) any of the representations and warranties of First American in the Merger
Agreement becoming untrue in any material respect or (ii) any of the conditions
to the merger not being satisfied.
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COVENANTS OF THE NEW FUND. Until the Effective Time, the New Fund has
agreed, except as contemplated by the Merger Agreement, not to do any of the
following:
- conduct any business;
- enter into any material contracts;
- acquire any assets or incur any liabilities; or
- amend its articles of incorporation or bylaws.
The New Fund also has agreed not to take any action that would result in
(i) any of the representations and warranties of the New Fund in the Merger
Agreement becoming untrue in any material respect or (ii) any of the conditions
to the asset transfers between the New Fund and the Existing Funds contemplated
in the Merger Agreement not being satisfied.
Furthermore, the New Fund has agreed to take all actions reasonable and
necessary to:
- enter into the New Fund Advisory Agreement;
- appoint certain individuals as directors of the New Fund;
- register as an investment company under the Investment Company Act;
- adopt investment objectives and policies substantially similar to those of
the Existing Funds; and
- complete the asset transfers in the manner set forth in the Merger Agreement.
COVENANTS REGARDING THE MERGER. Pursuant to the Merger Agreement, each
Existing Fund, the New Fund and First American has agreed to cooperate with each
other and to use its best efforts to do, or cause to be done, all things
necessary to consummate the transactions contemplated by the Merger Agreement.
Such cooperation includes, among other things, each Existing Fund, the New Fund
and First American using best efforts to:
- make requisite filings with governmental agencies and obtain requisite
consents, approvals and waivers from governmental agencies and
non-governmental third parties;
- defend lawsuits challenging the merger, the Merger Agreement or the
transactions contemplated by the Merger Agreement; and
- execute and deliver any additional instruments necessary to consummate the
merger and the other transactions contemplated by the Merger Agreement.
Each Existing Fund has agreed to hold a meeting of its shareholders for the
purpose of voting on the merger and the Merger Agreement asset transfers. Each
Existing Fund has also agreed to include in this joint proxy
statement/prospectus the recommendation of its board of directors to the effect
that the merger and the Merger Agreement are in the best interest of its
shareholders. Such recommendation may be withdrawn or modified if such Existing
Fund's board of directors determines to do so in good faith.
Each Existing Fund, the New Fund and First American has agreed to provide
notice to the other parties to the Merger Agreement if (i) any representation or
warranty contained in the Merger Agreement becomes untrue or inaccurate in any
material respect or (ii) it fails to comply with or satisfy in any material
respect any covenant, condition or agreement required to be complied with or
satisfied by it under the Merger Agreement.
The Merger Agreement further provides that, from and after the Effective
Time, First American shall indemnify any person who has been, at any time prior
to the Effective Time, an officer or director of a participating Existing Fund
from any and all liabilities resulting from his or her acts and omissions prior
to the Effective Time to the full extent permitted by the Existing Fund's
articles of incorporation, the MBCA or the MGCL or the Investment Company Act,
including but not limited to acts and omissions arising out of or pertaining to
the merger.
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CONDITIONS TO THE MERGER. For an Existing Fund to participate in the merger,
the merger and the Merger Agreement must be approved by the shareholders of such
Existing Fund by a vote of at least a majority of all the votes entitled to be
cast and all of the conditions to the merger shall be satisfied or waived.
Under the Merger Agreement, the completion of the merger for each Existing
Fund depends upon the satisfaction of the following conditions:
- approval of the merger and adoption of the Merger Agreement by shareholders
of that Existing Fund representing at least a majority of its outstanding
shares;
- Existing Funds having, in the aggregate, a net asset value of at least
$200 million (net of estimated cash needed to fund payments to shareholders
exercising statutory dissenters' appraisal rights and net of net assets to be
transferred to the New Fund) shall have elected to participate in the merger;
- shareholders of the Existing Funds holding, in the aggregate, shares
representing at least $50 million in net asset value shall elect to receive
New Fund shares, and in order to satisfy AMEX minimum round lot requirements
such shareholders shall consist of no fewer than 500 separate shareholders
that each hold shares representing a minimum of $1,000 in net asset value;
- for any proper New Fund elections that have been made, the allocation of
assets described in "THE MERGER--Opinion of the Financial Advisor--Asset
Allocation Methodology" between the participating Existing Fund and the New
Fund, as contemplated in the Merger Agreement, shall have been completed;
- receipt of an asset transfer certificate from USBAM certifying that the
transfers of assets and liabilities comply with the agreed-upon asset
allocation methodology;
- holders of not more than 5% of the outstanding shares of that Existing Fund
shall have exercised statutory dissenters' appraisal rights in accordance
with the MBCA;
- holders of less than 60% of the outstanding Existing Fund shares of any
participating Existing Fund shall have elected to receive New Fund shares;
- absence of any law or court order prohibiting that Existing Fund's
participation in the merger or otherwise preventing the consummation of the
merger;
- receipt by the Existing Funds of an opinion from Ernst & Young to the effect
that the merger will be treated for federal income tax purposes as a tax-free
reorganization for those shareholders electing to receive shares of First
American common stock and stating that, commencing with its taxable year
ending December 31, 2003, First American's organization and proposed method
of operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code;
- receipt of all other necessary governmental consents and approvals, including
an exemptive order granted by the SEC described under "THE MERGER--Exemptive
Relief";
- execution and delivery of the REIT Advisory Agreement by USBAM and First
American;
- execution and delivery of the New Fund Advisory Agreement by the New Fund and
USBAM;
- accuracy of the representations and warranties of each other participating
Existing Fund, First American and the New Fund as of the closing date of the
merger;
- performance of the obligations of each Existing Fund and First American under
the Merger Agreement and receipt of an officer's certificate to that effect;
- receipt of consents and/or waivers necessary in connection with the merger;
and
- the listing of First American shares on the NYSE and the listing of New Fund
shares on the AMEX.
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Where the law permits, each Existing Fund (acting through its board of
directors) could decide to complete the merger even though one or more
conditions were not satisfied. By law, no Existing Fund can waive:
- the requirement that its shareholders approve the merger;
- the requirement that it receives an exemptive order; and
- the condition which requires the absence of any court order or law preventing
the closing of the merger.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined in the reasonable business judgment of the
boards of directors of the Existing Funds. The board of directors of each
Existing Fund has indicated that it will only waive the condition relating to
the maximum percentage of shareholders of that Existing Fund that can exercise
statutory dissenters' appraisal rights under the MBCA if doing so would not
result in the aggregate initial net asset value of the participating Existing
Funds to fall below $200 million. If any of the Existing Funds waived compliance
with one or more of the other conditions and the condition was deemed material
to a vote of shareholders, such Existing Fund would have to re-solicit
shareholders before closing the merger. The Existing Funds do not intend to
notify shareholders of any waiver that, in the judgment of its board of
directors, does not require re-solicitation of shareholder approval.
TERMINATION OF THE MERGER AGREEMENT. The Existing Funds may terminate the
Merger Agreement, at any time prior to the effective date whether before or
after any shareholder approvals are obtained, by mutual written consent of the
Existing Funds duly authorized by their respective boards of directors. In
addition, any Existing Fund may terminate the Merger Agreement only as to such
Existing Fund, at any time prior to the effective date whether before or after
any shareholder approvals are obtained, if its board of directors shall have
determined that it is in the best interests of the Existing Fund and its
shareholders to terminate the Existing Fund's rights and obligations under the
Merger Agreement.
AMENDMENT OR WAIVER OF THE MERGER AGREEMENT. The Merger Agreement may be
modified or amended at any time prior to the effective date in a writing signed
by the Existing Funds, the New Fund and First American. However, if the Existing
Funds' shareholders have approved the merger and the Merger Agreement, the
Existing Funds may not amend or modify the Merger Agreement, without obtaining
shareholder approval, if such amendment or modification would require
shareholder approval.
Prior to receiving shareholder approval of the merger and the Merger
Agreement, any action required or permitted to be taken by the Existing Funds
under the Merger Agreement, including amendments, consents, waivers or
termination of the Merger Agreement, shall require the consent of all of the
Existing Funds. After shareholder approval of the merger and the Merger
Agreement, any such action shall require the consent of all of the Existing
Funds participating in the merger.
TRANSACTIONS RELATING TO THE NEW FUND OPTION. The merger agreement also
provides shareholders who prefer to receive and retain an investment option that
is substantially similar to their existing investments in the Existing Funds
with an option to exchange their shares for shares in the New Fund. In order to
provide the New Fund with its initial investments and other assets, the merger
agreement requires that immediately prior to the closing of the merger, each
Existing Fund will contribute to the New Fund mortgage loans and other assets,
subject to related liabilities. The percentage of assets of each participating
Existing Fund that will be contributed to the New Fund will equal the percentage
of outstanding shares of that Existing Fund that are held by shareholders who
will receive New Fund shares in the merger. After such asset transfers and
immediately prior to the merger, First American will hold, in the aggregate,
100% of the outstanding shares of the New Fund. These shares will then be
distributed by First American to shareholders of the Existing Funds who elect to
receive New Fund shares in the merger. As a result, First American may be deemed
an underwriter with respect to New Fund shares within the meaning of the
Securities Act. Specific assets will be allocated between First American and the
New Fund in accordance with the guidelines detailed in the following paragraphs.
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Applying such guidelines, actual initial allocations will be made by USBAM in
accordance with the asset allocation methodology prior to the closing of the
merger. In addition, the Merger Agreement requires USBAM to deliver, as a
condition to closing, a certificate (i) certifying that the transfers of assets
and liabilities from each participating Existing Fund in exchange for New Fund
common stock comply with the agreed-upon asset allocation methodology, and
(ii) attaching calculations demonstrating such compliance with respect to those
criteria which are numerically based.
ASSET ALLOCATION METHODOLOGY--MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE
PORTFOLIO. All multifamily and commercial loans and corporate notes will be
divided into two pools, each containing the following similar characteristics:
- income as measured by the effective interest rate (net coupon rate divided
by the purchase price), then weighted by the current loan balance
(variation to be no greater than 25 basis points);
- credit risk (calculated using a debt service coverage ratio to assess the
property's cash flows), weighted by the current loan balance (neither
option will have debt service coverage ratio less than 1.4 and the
variation will be no greater than 100 basis points);
- leverage against the value of the underlying real estate (measured using a
current weighted average loan-to-value ratio) (neither option will have a
loan-to-value ratio greater than 80% and the variation will be no greater
than 10%);
- loan term as measured by the weighted average remaining loan term;
- refinance risk based on whether the loan has a yield maintenance provision
or not;
- lien position based on a ratio of subordinated debt to senior debt;
- property type based on a ratio of multi-family loan to commercial loan
types;
- interest rate type based on a ratio of adjustable rate loans to fixed rate
loans;
- interest calculation method based on a ratio of actual/360 calculation to
30/360 calculation; and
- geographic location of underlying collateral.
In addition, the properties on which the Existing Funds own more than one
loan or which are cross-collateralized will be allocated to only one entity.
ASSET ALLOCATION METHODOLOGY--SINGLE-FAMILY. All investments collateralized
by single-family residential properties (whole loans, participations,
subordinate bonds, etc.) will be allocated to the New Fund.
ASSET ALLOCATION METHODOLOGY--OTHER. Any other holdings, including but not
limited to, cash, agencies and REIT preferred stocks will be allocated on a pro
rata basis between First American and the New Fund adjusted slightly to
compensate First American for not receiving any allocation of single-family
loans.
ADJUSTMENTS TO ALLOCATIONS TO COMPLY WITH REGULATIONS. Further adjustments
will be made to ensure that First American and the New Fund are in compliance
with the asset holding, leverage and income regulations associated with RICs and
REITs.
ALLOCATION OF LIABILITIES TO FIRST AMERICAN AND THE NEW FUND IN THE
MERGER. The liabilities of the Existing Funds will be allocated between First
American and the New Fund on a pro rata basis as of the effective date of the
merger.
INVESTMENT ALLOCATION PROCEDURES FOLLOWING THE MERGER
As discussed above, USBAM will serve as investment advisor to First
American, the New Fund and any non-participating Existing Fund upon completion
of the merger. The following factors will be applied by USBAM to determine how
to allocate a given loan to First American, the New Fund or the
non-participating Existing Funds.
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Loans up to 2% of net asset value/book value of the smallest of the New
Fund, any non-participating Existing Fund or First American will be considered
first for the smallest of these entities (based on net asset value for the New
Fund and any non-participating Existing Funds and book value for First
American.)
Loans greater than 2% of net asset value/book value of the smallest of the
New Fund, any non-participating Existing Fund or First American will be
considered first for the largest of these entities (based on net asset value for
the New Fund and any non-participating Existing Funds and book value for First
American.)
If First American, the New Fund and any non-participating Existing Funds are
of substantially similar size and each has funding capacity, USBAM will review
the following list of further investment considerations to determine where to
next allocate a loan. If, after review of the further investment considerations,
a loan still qualifies for placement in First American, the New Fund or a
non-participating Existing Fund, USBAM will alternate loan placement between
these entities.
Further investment considerations include: funding capacity, property type,
loan type, geographic concentration, borrower concentration, securitization
considerations and credit characteristics. If a loan is not an appropriate
investment for the New Fund or the non-participating Existing Funds, as
determined by USBAM, it will be considered for First American, and vice versa.
Loan acquisitions for the New Fund, First American and the non-participating
Existing Funds will be reviewed quarterly by USBAM's Investment Policy Committee
and reported to the respective boards of directors of First American, the New
Fund and the non-participating Existing Funds.
First American, the New Fund and the non-participating Existing Funds will
not be involved in loan participations on the same property.
USBAM has advised the Existing Funds that until USBAM notifies First
American and the New Fund of any new policies, USBAM will follow the above
allocation guidelines.
DELISTING AND DEREGISTRATION OF THE EXISTING FUNDS' SHARES
At the Effective Time, trading on the NYSE and, if applicable, the Chicago
Stock Exchange, in the common stock of the Existing Funds participating in the
merger will cease. Price quotations for such Existing Funds' common stock will
no longer be available and the registration of such Existing Funds' common stock
under the Exchange Act will be terminated.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Neither First American, the New Fund nor the Existing Funds are aware of any
significant regulatory approvals required for the merger other than the
Exemptive Order discussed in the section below.
EXEMPTIVE RELIEF
In order to consummate the merger, the Existing Funds, First American, the
New Fund and USBAM have applied for the Exemptive Order, which is an order
issued by the SEC exempting the applicants from certain provisions of
Section 17(a) of the Investment Company Act. Section 17(a) of the Investment
Company Act generally makes it unlawful for any person affiliated with a
registered investment company (or any affiliated person of such person), acting
as a principal, to sell any security or other property to, or purchase any
security or other property from, such investment company. Under the Investment
Company Act, an affiliated person of an investment company (or of another
person) includes (i) persons directly or indirectly owning, controlling or
holding with power to vote 5% or more of the outstanding voting securities of
the investment company (or such other person), (ii) any person 5% or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote by the investment company (or such other person),
(iii) any person directly or indirectly controlling, controlled by or under
common control of the investment company (or such other person), (iv) any
officer or director of the investment company (or such other person) and
(v) any investment advisor of the investment company.
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USBAM is an affiliated person of each of the Existing Funds because it is
their investment advisor. USBAM also may be regarded as an affiliated person of
First American, the New Fund and the Existing Funds because USBAM, as the
investment advisor to First American, the New Fund and the Existing Funds, may
be viewed as "controlling" (as defined by the Investment Company Act) First
American, the New Fund and the Existing Funds. In addition, USBAM temporarily
owns all of the outstanding shares of First American. As a result, First
American, the Existing Funds and the New Fund may be regarded as affiliated
persons of each other on the basis that they are under the common control of
USBAM. Accordingly, absent an exemption, the transactions contemplated by the
Merger Agreement may be prohibited by Section 17(a) of the Investment Company
Act.
Exemptions from the provisions of Section 17(a) may be granted by the SEC
pursuant to Section 17(b) of the Investment Company Act if evidence establishes
that (i) the terms of the proposed transaction, including the consideration to
be paid or received, are reasonable and fair and do not involve overreaching on
the part of any person concerned, (ii) the proposed transaction is consistent
with the policy of each registered investment company concerned, as recited in
its registration statement and reports filed under the Investment Company Act
and (iii) the proposed transaction is consistent with the general purposes of
the Investment Company Act.
ACCOUNTING TREATMENT
The merger will be accounted for by First American using the purchase method
of accounting in accordance with accounting principles generally accepted in the
United States.
The accounting survivor will be the Existing Fund participating in the First
American merger that has the highest amount of net assets at the date of the
merger since that Existing Fund's shareholders will be allocated the largest
number of shares of First American common stock. Thus, if all the Existing Funds
participate in the First American merger, the accounting survivor will be
American Strategic III.
The merger will be accounted for by the New Fund by carrying forward the
historical cost basis of the assets and liabilities of the Existing Funds to the
surviving entity since the tax basis of such assets and liabilities will carry
forward. The accounting survivor will be the Existing Fund participating in the
New Fund merger whose shareholders will be allocated the largest number of
shares of the New Fund. As an accounting survivor, the historical financial
information and performance of such Existing Fund will be carried forward and
the historical per share information will be adjusted based on a $10.00 net
asset value per share.
TAX TREATMENT OF THE MERGER AND RECEIPT OF FIRST AMERICAN SHARES
The merger is intended to qualify as a tax-free reorganization for
shareholders electing to exchange their Existing Fund shares for shares of First
American common stock. Ernst & Young provided the Existing Funds with an opinion
relating to the federal income tax consequences to the Existing Funds and the
Existing Funds' shareholders with respect to the merger. Specifically, Ernst &
Young opined that the merger will qualify as a tax-free reorganization under
Section 368(a) of the Code, and that neither the Existing Funds nor the Existing
Funds' shareholders will recognize taxable gain or loss as a result of the
common shares of First American distributed and received in the merger. In
issuing its tax opinion, Ernst & Young relied upon legal opinions from Clifford
Chance US LLP and Dorsey & Whitney LLP that each Existing Fund will merge with
and into First American under the applicable laws of the State of Minnesota and
the State of Maryland, respectively, and that each merger will qualify as a
statutory merger under applicable state law. The aggregate basis of First
American shares received by an Existing Fund shareholder who exchanges Existing
Fund stock for First American shares will be the same as the aggregate basis of
the Existing Fund shares surrendered in exchange therefor. Shareholders who
receive cash (pursuant to the exercise of statutory dissenters' appraisal rights
or in lieu of fractional shares) or participate in the New Fund Option will,
however, recognize taxable gain, if any, in the merger. You should consult with
your tax advisors regarding the tax consequences of the merger to you.
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Shareholders in the Existing Funds that participate in the merger will
receive shares of First American common stock at the exchange rate of one newly
issued share of First American common stock for each $10.00 of Existing Fund net
asset value their shares represent. As a result, shareholders of Existing Funds
that so elect will likely receive a different number of First American shares
than of the Existing Fund shares they exchange. For this reason, those
shareholders of Existing Funds should allocate the aggregate basis of their
Existing Fund shares to the shares they receive of First American equally among
all of the shares received.
Shareholders of Existing Funds that receive New Fund shares in addition to
First American shares will first decrease their aggregate basis in the Existing
Fund shares exchanged by the fair market value of New Fund shares received, and
increase such basis by the amount of capital gain recognized and the amount, if
any, treated as a dividend as a result of receiving New Fund shares.
Shareholders of Existing Funds receiving both New Fund shares and First American
shares should allocate this adjusted aggregate basis equally among all of the
First American shares received. Shareholders of Existing Funds will have a basis
in the New Fund shares received equal to their fair market value on the date
they are issued. As described in the section immediately below, shareholders of
Existing Funds will be subject to federal income tax on any gain realized upon
their receipt of New Fund shares. You should consult with your tax advisors
regarding the tax consequences of the merger to you.
TAX TREATMENT OF THE RECEIPT OF NEW FUND SHARES
Shareholders participating in the New Fund Option who receive solely New
Fund shares generally will be subject to tax on gain they realize at capital
gains rates (assuming the shares are held as capital assets) to the extent that
the fair market value of the shares of the New Fund received in the merger
exceeds the adjusted tax basis of their Existing Fund shares converted into New
Fund shares. The tax rate on income from capital gains is generally 20%, but is
reduced to 10% for taxpayers in the 15% income tax bracket, and is further
reduced to 8% with respect to gains from capital assets held more than 5 years
by such taxpayers. These capital gains tax rates are the rates in effect in 2003
and are subject to future legislative change. Shareholders participating in the
New Fund Option who receive both New Fund shares and First American common
shares generally will be subject to tax at capital gains rates on gain they
realize, but in an amount not in excess of the fair market value of the New Fund
shares received. You should consult with your tax advisors regarding the tax
consequences of the merger to you.
Notwithstanding the foregoing, it is possible that a shareholder's receipt
of New Fund shares could be treated as a dividend and subject to tax at ordinary
income rates if the shareholder's beneficial interest in the Existing Fund
(taking into account application of the constructive ownership rules of the
Code) is not sufficiently reduced in connection with the merger. However, under
applicable Internal Revenue Service guidelines, a holder of a minority interest
in First American whose relative stock interest in First American is minimal,
who exercises no control over the affairs of First American, and who experiences
a reduction in the shareholder's proportionate interest in First American
relative to the shareholder's proportionate interest in the Existing Funds, both
directly and by application of the constructive ownership rules, generally will
not be deemed to have received a distribution of a dividend under the rules set
forth in Section 302(b)(1) of the Code.
The basis of New Fund shares, if any, received by Existing Fund shareholders
will equal their fair market value. The aggregate basis of First American shares
received by an Existing Fund shareholder who exchanges Existing Fund stock for
First American shares and New Fund shares will be the same as the aggregate
basis of the Existing Fund shares surrendered in exchange therefor, decreased by
the fair market value of New Fund shares received by such shareholder, and
increased by the amount of capital gain recognized by such shareholder and the
amount, if any, treated as a dividend to such shareholder. The adjusted
aggregate basis should be allocated evenly among all of the First American
shares received.
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The Existing Funds also will recognize any gain realized with respect to the
distribution of New Fund shares because those shares will not constitute
"qualified property" within the meaning of Section 361(c)(2) of the Code. The
amount of any realized gain will equal the difference between each Existing
Fund's basis in New Fund shares that are distributed and the fair market value
of those shares. Each of the Existing Funds has capital loss carryovers
available, which may be utilized to offset gain recognized with respect to the
distribution of New Fund shares. USBAM believes that the amount of the capital
loss carryovers available to each Existing Fund will be sufficient to offset
completely any gain that each Existing Fund may recognize by reason of the
distribution of New Fund shares. You should consult with your tax advisors
regarding the tax consequences of the merger to you.
FEES AND EXPENSES OF THE MERGER
Except as set forth below, each Existing Fund will bear a pro rata share of
the costs and expenses incurred in connection with the merger (including, but
not limited to, costs and expenses of preparing all necessary registration
statements, proxy materials and other documents, of preparing for and attending
board and committee, shareholder, planning, organizational and other meetings
and costs and expenses of accountants, attorneys, financial advisors and other
experts engaged in connection with the merger), whether or not the merger is
consummated and whether or not the particular Existing Fund participates in the
merger. The estimated costs and expenses related to the merger are $4,500,000.
The Existing Funds as a group will bear the first $3,400,000 of such expenses
and will, subject to certain exceptions, equally share all transaction expenses
in excess of $3,400,000 with USBAM. The payment of such expenses by the Existing
Funds will reduce the net assets of First American, the New Fund and any
non-participating Existing Fund following the merger. Amounts used to pay such
expenses would otherwise be available for investment in additional
mortgage-related assets or for distribution to shareholders by the Existing
Funds. Each Existing Fund's pro rata share of expenses will be determined based
on its relative net asset value. Based on the net asset values of the Existing
Funds as of November 30, 2002, the Existing Funds would bear the following
amounts and percentages of the expenses of the merger that are to be borne by
the Existing Funds: American Strategic: $271,000 or 6.8%; American
Strategic II: $1,175,000 or 29.4%; American Strategic III: $1,708,000 or 42.7%;
and American Select: $846,000 or 21.1%.
CONSEQUENCES IF THE MERGER IS NOT APPROVED
If the merger for any Existing Fund is not consummated for any reason, the
Existing Fund expects to continue to operate in its current form. There will be
no change in the Existing Fund's investment objectives, policies or
restrictions. No other transaction is currently being considered by the board of
directors of any Existing Fund as an alternative to the merger, although the
Existing Funds that do not participate in the merger may, from time-to-time,
explore other alternatives.
Regardless of whether a particular Existing Fund elects to participate in
the merger, each Existing Fund will be responsible for bearing its pro rata
share of the expenses of the merger, based on its relative net asset value
determined as of the last day of the week immediately preceding the closing of
the merger. There will not be an adjustment of fees based on the number of
Existing Funds which elect to participate in the merger.
ONLY AMERICAN STRATEGIC III MAY APPROVE THE MERGER WITHOUT THE PARTICIPATION OF
ANY OTHER EXISTING FUND
The Merger Agreement provides that as a condition to closing Existing Funds
having, in the aggregate, a net asset value of at least $200 million (net of
cash needed to fund payments to shareholders exercising statutory dissenters'
appraisal rights and net of net assets to be transferred to the New Fund) must
approve the merger. In addition, as a condition to closing, shareholders
receiving shares representing at least $50 million in net asset value must elect
to receive New Fund shares. American Strategic III (approximately $267.8 million
of net assets as of November 30, 2002) is the only Existing Fund that could
potentially individually meet both of these conditions. Whether American
Strategic III
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can individually fulfill the $200 million threshold will depend upon several
factors including net transaction expenses, the number of shareholders of
Existing Funds exercising statutory dissenters' appraisal rights and the number
of shareholders of Existing Funds electing the New Fund Option. None of American
Strategic, American Strategic II or American Select, with net assets as of
November 30, 2002 of approximately $53.4 million, $211.5 million and $143.7
million, respectively, would be able to meet both conditions to closing unless
at least one additional Existing Fund elected to participate in the merger.
Consequently, only American Strategic III may approve the merger without the
participation of any other Existing Fund.
AVAILABILITY OF STATUTORY DISSENTERS' APPRAISAL RIGHTS
If the merger is completed, holders of Existing Fund shares on
[ ], 2003 of any Existing Fund that merged into First American and
who did not vote "FOR" the merger and the adoption of the Merger Agreement will
have the right to dissent from the merger and to obtain payment for the "fair
value" of their shares of the applicable Existing Fund, plus interest, in
accordance with Sections 302A.471 and 302A.473 of the MBCA. The term "fair
value" means the value of shares of common stock of the applicable Existing Fund
immediately prior to the Effective Time of the merger, and the term "interest"
means interest commencing five days after the Effective Time of the merger up to
and including the date of payment at the rate provided by Minnesota law for
interest on verdicts and judgments, currently 4% per year.
Any holder of Existing Fund shares contemplating the exercise of statutory
dissenters' appraisal rights is urged to review carefully the provisions of
Sections 302A.471 and 302A.473 of the MBCA, particularly with respect to the
procedural steps required to perfect statutory dissenters' appraisal rights.
Failure to comply with the statutory requirements will result in the loss of the
shareholder's statutory dissenters' appraisal rights. The following is a summary
of the material provisions of the statutory dissenters' appraisal rights
statute, but it is not a complete statement of the relevant provisions of
Minnesota law. This summary should be read in conjunction with the full text of
Sections 302A.471 and 302A.473, which is attached to this joint proxy
statement/prospectus as Appendix D, and any amendments to such sections as may
be adopted after the date of this joint proxy statement/prospectus.
Neither USBAM, nor First American, nor the New Fund has any indication from
any shareholder of the Existing Funds that such shareholder intends to exercise
their statutory dissenters' appraisal rights. In the event that more than 5% of
the outstanding shares of an Existing Fund exercise statutory dissenters'
appraisal rights and the board of directors does not waive this condition to
closing of the merger, then such Existing Fund will not participate in the
merger.
FILING WRITTEN OBJECTION. Shareholders of record who desire to exercise
their statutory dissenters' appraisal rights must satisfy all of the following
conditions. A written notice of intent to demand fair value for Existing Fund
shares must be delivered to the executive offices of the Existing Fund before
the taking of the shareholder vote to adopt the Merger Agreement, approve the
merger and approve the contribution transactions which will allocate the assets
and liabilities of the Existing Funds between First American and the New Fund at
the special meeting of shareholders on [ ], 2003. This written demand
must be in addition to and separate from any proxy or vote against approval of
the merger. Voting against, abstaining from voting or failing to vote to approve
the merger does not constitute a demand for fair value of the Existing Fund
shares within the meaning of the MBCA.
The written demand should be delivered to the secretary of the Existing Fund
at 800 Nicollet Mall, BC-HO5W, Minneapolis, Minnesota 55402. The written demand
should specify the shareholder's name and mailing address, the number of shares
owned and that the shareholder intends to demand the "fair value," plus
interest, of his or her Existing Fund shares.
A shareholder may not assert statutory dissenters' appraisal rights as to
less than all of the shares of common stock of an Existing Fund that are
registered in such holder's name, except where certain shares are beneficially
owned by another person but registered in such holder's name. A person who owns
shares of more than one Existing Fund may assert statutory dissenters' appraisal
rights as to all
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shares owned in a specific Existing Fund, without asserting statutory
dissenters' appraisal rights as to shares of any other Existing Funds. If a
record owner, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares of common stock of an Existing Fund beneficially owned by
another person, the shareholder must dissent with respect to all of such shares
and must disclose the name and address of the beneficial owner on whose behalf
the dissent is made. A beneficial owner of Existing Fund shares who is not the
record owner of those shares may assert statutory dissenters' appraisal rights
as to shares held on such person's behalf, provided that the beneficial owner
submits a written consent of the record owner to the applicable Existing Fund at
or before the time such rights are asserted.
NO VOTING IN FAVOR OF THE MERGER PROPOSAL. Shareholders electing to exercise
their statutory dissenters' appraisal rights under the MBCA must not vote for
approval of the merger. A shareholder's failure to vote against approval of the
merger will not constitute a waiver of statutory dissenters' appraisal rights.
However, if a shareholder returns a signed proxy but does not specify a vote
against approval of the merger or direction to abstain, the proxy will be voted
for adoption of the Merger Agreement and approval of the merger, and the
shareholder's statutory dissenters' appraisal rights will be waived.
NOTICE BY THE EXISTING FUNDS OR FIRST AMERICAN. After adoption of the Merger
Agreement and approval of the merger by the shareholders at the special meeting,
each Existing Fund that has approved the merger, or First American (as the
surviving entity in the merger), will send a written notice to its shareholders
who filed a written demand for statutory dissenters' appraisal rights. The
notice will contain:
- the address to which the shareholder must send a demand for payment and the
stock certificates in order to obtain payment;
- the date by which they must be received;
- any restrictions on transfer of uncertificated shares that will apply after
the demand for payment is received;
- a form to be used to certify the date on which such shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the
shares, or an interest in them, and to demand payment; and
- a copy of Sections 302A.471 and 302A.473 of the MBCA and a brief description
of the procedures to be followed under those sections.
REMITTANCE OF CERTIFICATES. In order to receive the fair value for his or
her shares under Section 302A.473, a dissenting shareholder must, within 30 days
after the date the Existing Fund or First American gives the notice described in
the preceding paragraph, demand payment and deposit his or her stock
certificates at the address specified in the notice. Under Minnesota law, notice
by mail is given by the Existing Fund or First American when deposited in the
U.S. mail. A dissenting shareholder will retain all rights as a shareholder
until the Effective Time of the merger. After a valid demand for payment and the
related stock certificates are timely received, or after the completion of the
merger, whichever is later, First American will remit to each dissenting
shareholder who has complied with the statutory requirements the amount that
First American estimates to be the fair value of the dissenting shareholder's
shares, with interest commencing five days after the Effective Time of the
merger at a rate prescribed by statute, currently 4% per year. First American
will also send the applicable Existing Fund's closing balance sheet and
statement of income for a fiscal year ending not more than 16 months before the
Effective Time of the merger, together with:
- the latest available interim financial statements;
- an estimate of the fair value of the shareholder's shares and a brief
description of the method used to reach the estimate;
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- a brief description of the procedure to be followed if the dissenting
shareholder decides to make a demand for a supplemental payment; and
- a copy of Sections 302A.471 and 302A.473 of the MBCA.
As described below, First American is not required at that time to send its
estimated payment to any person who was not a shareholder, and who is not
dissenting on behalf of a person who was the beneficial owner of Existing Fund
shares, of the applicable Existing Fund on March 20, 2002. If, however, the
merger is not completed or First American disputes a shareholder's right to
dissent, First American will not send to the shareholder the fair value of such
shareholder's shares or the additional information listed above.
ACCEPTANCE OR SETTLEMENT OF DEMAND. If the dissenting shareholder believes
that the amount remitted by First American is less than the fair value of the
holder's shares, plus interest, if any, the shareholder must give written notice
to First American of such holder's own estimate of the fair value of the shares,
plus interest, if any, within 30 days after the mailing date of the remittance
and demand payment of the difference. The notice must be given at the executive
offices of First American c/o John G. Wenker, 800 Nicollet Mall, BC-HO5W,
Minneapolis, Minnesota 55402. A shareholder who fails to give written notice
within this time period is entitled only to the amount remitted by First
American.
Within 60 days after receipt of a demand for supplemental payment, First
American must either (i) pay the shareholder the amount demanded or agreed to by
the shareholder after discussion with First American, or (ii) petition a county
court in Minnesota for the determination of the fair value of the shares, plus
interest, if any. Upon payment of the agreed value, the dissenting shareholder
will cease to have any interest in the Existing Fund.
COURT DETERMINATION. If, within the 60 days after the receipt of demand for
supplemental payment, any one or more of the dissenting shareholders and First
American do not agree on the fair value of the shares, then First American must
file a petition with the court to obtain a judicial finding and determination of
the fair value of the dissenting shareholder's shares. The petition must name as
parties all shareholders who have demanded supplemental payment and have not
reached an agreement with First American.
The court, after determining that the shareholder or shareholders in
question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by First American or a dissenting shareholder, and may appoint appraisers
to recommend the amount of the fair value of the shares. The court's
determination will be binding on all shareholders of the applicable Existing
Fund who properly exercised statutory dissenters' appraisal rights and did not
agree with First American as to the fair value of the shares and may be less
than, equal to or more than the value of the merger consideration. Dissenting
shareholders are entitled to judgment in cash for the amount by which the
court-determined fair value per share, plus interest, exceeds the amount per
share, plus interest, remitted to the shareholders by First American. The
shareholders shall not be liable to First American for any amounts paid by First
American which exceed the fair value of the shares as determined by the court,
plus interest.
The costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers, will be determined by the court and assessed
against First American, except that the court may, in its discretion, assess
part or all of those costs and expenses against any shareholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting shareholders out of the amount, if any, awarded to such shareholders.
The court may assess fees and expenses of experts or attorneys against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding and also may award fees and expenses of experts or attorneys against
First American if First American fails to comply substantially with
Section 302A.473 of the MBCA.
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First American may withhold the remittance of the estimated fair value, plus
interest, for any shares owned by any person who was not a shareholder or who is
dissenting on behalf of a person who was not a beneficial owner on March 20,
2002, the date on which the merger was first announced to the public. First
American will forward to any dissenting shareholder who was not a shareholder on
March 20, 2002 but who has complied with all requirements in exercising
statutory dissenters' appraisal rights the notice and all other materials sent
after shareholder approval of the Merger Agreement to all shareholders who have
properly exercised statutory dissenters' appraisal rights, together with a
statement of the reason for withholding the remittance and an offer to pay the
dissenting shareholder the amount listed in the materials if the shareholder
agrees to accept that amount in full satisfaction. The shareholder may decline
this offer and demand payment by following the same procedure as that described
for demand of supplemental payment by shareholders who owned their shares as of
March 20, 2002. Any shareholder who did not own shares on March 20, 2002 and who
fails properly to demand payment will be entitled only to the amount offered by
First American. Upon proper demand by any Existing Fund shareholder, rules and
procedures applicable in connection with receipt by First American of the demand
for supplemental payment given by a dissenting shareholder who owned shares on
March 20, 2002 will also apply to any shareholder properly giving a demand but
who did not own shares of record or beneficially on March 20, 2002, except that
any such shareholder is not entitled to receive any remittance from First
American until the fair value of the shares, plus interest, has been determined
pursuant to such rules and procedures.
Shareholders considering exercising statutory dissenters' appraisal rights
should bear in mind that the fair value of their shares determined under
Sections 302A.471 and 302A.473 of the MBCA could be more than, the same as or
less than the consideration they would receive pursuant to the Merger Agreement
if they did not seek appraisal of their shares. Furthermore, the opinion of any
investment banking firm as to fairness, from a financial point of view, is not
an opinion as to fair value under Sections 302A.471 and 302A.473 of the MBCA.
Under Section 302A.471 of the MBCA, a shareholder of the Existing Fund has
no right at law or equity to set aside the adoption of the Merger Agreement or
the consummation of the merger, unless such shareholder can establish that the
adoption or consummation was fraudulent with respect to such shareholder or the
Existing Fund.
Any holder who fails to comply fully with the statutory procedures
summarized above within the time periods specified above will forfeit his or her
rights of dissent and will receive the consideration payable in the merger for
his or her shares, which may be more or less than or equal to the fair value of
the shares determined under Section 302A.473 of the MBCA.
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THE MEETING
THE EXISTING FUNDS' SPECIAL MEETING
GENERAL. The board of directors of each Existing Fund is using this joint
proxy statement/prospectus to solicit proxies from its shareholders for use at a
special meeting of the shareholders to be held by each Existing Fund and at any
adjournment or postponement of the special meeting. The special meeting for the
Existing Funds will be held at [ ] on [ ], 2003.
This joint proxy statement/prospectus, the attached notice of special
meeting and the accompanying form of proxy are first being mailed to holders of
Existing Fund shares on or about [ ], 2003.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING. The purpose of the special
meeting of shareholders is to obtain the consent of the shareholders to the
three proposals described in this joint proxy statement/prospectus. The first
proposal is the approval of the merger of the Existing Funds into First
American. The second proposal is the adoption of the Merger Agreement. The third
proposal is the approval of the contribution transactions which will allocate
the assets and liabilities of the Existing Funds between First American and the
New Fund. The three proposals are related. The approval of each proposal is
contingent upon the approval of the others. Therefore, no action will be taken
on any of these three proposals unless each of them is approved.
Under Minnesota law, no business other than procedural matters may be raised
at the special meeting unless shareholders receive proper notice.
RECOMMENDATION OF THE BOARD OF DIRECTORS. After careful consideration and
advisement by the special committee, the board of directors of each Existing
Fund has approved the merger and the Merger Agreement, and has determined that
the merger is fair to, and in the best interests of, such Existing Fund and its
shareholders. The board of directors of each Existing Fund recommends that you
vote "FOR" approval of the merger and adoption of the Merger Agreement. For
further information, see 'THE MERGER--Recommendations of the Board of Directors
of Each Existing Fund and the Special Committee."
RECORD DATE; QUORUM; VOTE REQUIRED. Only shareholders of record of each
Existing Fund on [ ], 2003 may vote at the special meeting or any
adjournment of the special meeting for that Existing Fund. As of that date, the
Existing Funds had the following numbers of issued and outstanding shares of
common stock:
<Table>
<Caption>
AMERICAN AMERICAN AMERICAN
STRATEGIC INCOME STRATEGIC INCOME STRATEGIC INCOME AMERICAN SELECT
PORTFOLIO INC. PORTFOLIO INC.--II PORTFOLIO INC.--III PORTFOLIO INC.
------------------------ ------------------------ ------------------------ ------------------------
Common Shares.......
</Table>
In order for each Existing Fund to proceed with the special meeting, there
must be a quorum. This means that at least a majority of that Existing Fund's
shares must be represented at the special meeting, either in person or by proxy.
All returned proxies other than broker non-votes count towards a quorum,
regardless of how they are voted. An abstention will be counted as shares
present at the special meeting in determining whether a quorum is present. If a
proxy is returned with a broker non-vote on the merger, the shareholder will not
be counted as present and entitled to vote with respect to the merger. A broker
"non-vote" occurs when the underlying owner of shares has not voted and the
broker holding the shares does not have discretionary authority to vote on the
particular matter.
For each Existing Fund, an affirmative vote of a majority of the outstanding
shares of common stock of such Existing Fund is required to approve the merger,
adopt the Merger Agreement and approve the contribution transactions which will
allocate the assets and liabilities of the Existing Fund between First American
and the New Fund. You are entitled to one vote for each Existing Fund share
held. The matters to be presented at the special meeting will not entitle you to
cumulative voting.
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Abstentions and broker non-votes will have the same effect as a vote "AGAINST"
approving the merger, adopting the Merger Agreement and approving the
contribution transactions.
OWNERSHIP OF SHARES BY DIRECTORS AND EXECUTIVE OFFICERS. None of the
directors of any Existing Fund own any shares of the Existing Funds.
Messrs. Wenker and Kappenman, who are officers of the Existing Funds, each own
shares of stock in the Existing Funds and have indicated that they intend to
vote in favor of the merger and the adoption of the Merger Agreement. See "STOCK
OWNERSHIP OF THE EXISTING FUNDS" regarding their beneficial ownership of the
Existing Funds' shares.
VOTING PROCEDURES; PROXIES. Shareholders of record may vote in person at the
special meeting or vote by proxy. Shareholders of record have received with this
joint proxy statement/prospectus a proxy package which includes a proxy card and
a voting instruction form. There are three ways to vote your proxy. Your
telephone or internet vote authorizes the proxies to vote your shares in the
same manner as if you mark, sign and return your proxy card.
1. Voting by telephone--dial the toll-free number located on your voting
instruction form. You will need your 12-digit control number located on the
voting instruction form at the time of the call.
2. Voting through the internet--visit http://www.proxyvote.com. Once there,
enter the 12-digit control number located on your voting instruction form.
3. Voting by mail--enclose your voting instruction form in the postage-paid
envelope found within your proxy package. If you sign, date and mail your proxy
card without indicating how you want to vote, your proxy will be voted "FOR" the
merger.
If your shares are held in "street name" by your broker, do not follow the
above voting instructions. Rather, your broker will provide you with separate
written instructions on voting your shares, and you should follow those
instructions.
Existing Fund shares represented by properly executed proxies received at or
prior to the special meeting that have not been revoked will be voted at the
special meeting in accordance with the instructions indicated on the proxies.
Unless otherwise instructed, the proxies will vote "FOR" the approval of the
merger, adoption of the Merger Agreement and the related contribution
transactions. The proxy card also confers discretionary authority on the
individuals appointed by the board of directors of each Existing Fund and named
on the proxy card to vote the shares represented by such proxy on any other
matter that is properly presented for action at the special meeting, including
any adjournments or postponements of the special meeting.
If the special meeting is postponed or adjourned for any reason, all proxies
will be voted at the reconvened meeting in the same manner as such proxies would
have been voted at the original convening of the special meeting (except for any
proxies that have previously been revoked or withdrawn), even if they may have
been effectively voted on the same or any other matter at a previous meeting.
The cost of solicitation, including the cost of preparing and mailing this
joint proxy statement/ prospectus, will be allocated among and borne by the
Existing Funds, subject to the cost-sharing agreement with USBAM described under
"THE MERGER--The Merger Agreement--Fees and Expenses of the Merger."
Representatives of USBAM may, without cost to the Existing Funds, solicit
proxies on behalf of management of the Existing Funds by means of mail,
telephone, personal calls or otherwise. Brokerage firms, fiduciaries and other
custodians who forward soliciting material to the beneficial owners of Existing
Fund shares held of record by them will be reimbursed for their reasonable
expenses incurred in forwarding such material. The Existing Funds have retained
EquiServe to assist in the solicitation of proxies at an anticipated cost of
$[ ], plus reimbursement of out-of-pocket expenses.
REVOCATION. Whether you vote by mail, telephone or through the internet, you
may revoke your proxy any time before it is exercised at the special meeting by
(i) notifying the Existing Fund's secretary in writing, (ii) returning a
later-dated proxy, (iii) voting again by telephone or through the internet at a
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later time, or (iv) by voting at the special meeting. If you hold your shares
through a bank, broker or other nominee, you should contact that firm to find
out how to change your vote.
STATUTORY DISSENTERS' APPRAISAL RIGHTS. Under Minnesota law, holders of
Existing Fund shares will be entitled to statutory dissenters' appraisal rights
of appraisal in connection with the merger. For further information, see "THE
MERGER--Availability of Statutory Dissenters' Appraisal Rights."
HOW TO ELECT THE MERGER CONSIDERATION YOU ARE TO RECEIVE
A Consideration Election Form for Existing Fund shareholders to elect to
receive shares of New Fund common stock in exchange for their Existing Fund
shares is enclosed with this joint proxy statement/prospectus. If your Existing
Fund shares are held in "street name," you will receive this form from your
broker, bank or other nominee. You may submit a Consideration Election Form
whether you vote in favor of the merger, against the merger or abstain.
If your Existing Fund shares are not held in "street name," you must return
your properly completed Consideration Election Form and your Existing Fund stock
certificates to EquiServe on or before [ ] p.m., eastern time, on
[ ], 2003. Soon after the closing, EquiServe will send to each
Existing Fund shareholder not holding shares in "street name" who has not
elected the New Fund Option or exercised statutory dissenters' rights a letter
of transmittal for use in the exchange of shares and instructions explaining how
to surrender stock certificates to EquiServe.
EquiServe will act as exchange agent in the merger and, in that role, will
process the exchange of Existing Fund stock certificates for First American
common stock or New Fund shares. The exchange agent will allocate First American
common stock or New Fund shares among the shareholders consistent with their
elections and the allocation and prorating procedures discussed above. You may
change your election at any time before the deadline specified in the
Consideration Election Form by notifying EquiServe in writing. If you hold your
shares through a bank, broker or other nominee, you should contact that firm to
find out how to change your election. Shareholders must make one election with
respect to all of their shares. To the extent that a shareholder holds shares
through different accounts, such as an individual, IRA, pension plan or a family
trust account, each account may make its own election with respect to shares
held in the account.
If you do not hold your shares in "street name" and you do not submit a
properly completed Consideration Election Form, you will automatically receive
First American common stock in exchange for your Existing Fund shares. If your
shares are held in "street name" all forms and elections will be provided by
your broker, bank or other nominee.
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MANAGEMENT OF FIRST AMERICAN
First American's board of directors and officers will oversee the management
of the business and affairs of First American and, upon the closing of the
merger, will appoint USBAM to manage First American's day-to-day operations.
THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF FIRST AMERICAN
BOARD OF DIRECTORS.
First American's board of directors will be comprised of six directors, four
of whom will be independent directors. First American's board of directors will
establish written policies on investments and borrowings and will monitor the
administrative procedures, investment operations and performance of First
American and USBAM to assure compliance with such policies. Until modified by
First American's board of directors (acting by the vote of a majority of the
directors, including at least a majority of independent directors), First
American will follow the policies on investments and borrowings set forth in
this joint proxy statement/prospectus.
First American has a classified board of directors. Pursuant to First
American's articles of incorporation and bylaws, the six-member board of
directors will be divided into three classes, each class as nearly equal in
number as possible. A majority of First American's directors must be independent
directors. The number of directors in each class and the expiration of each
class term will be as follows:
<Table>
<Caption>
CLASS I CLASS II CLASS III
EXPIRES 2004 EXPIRES 2005 EXPIRES 2006
- ------------ -------------------- --------------------
James C. Leslie Mark Jordahl John G. Wenker
Jonathan Pettee Jeffrey S. Olson Stephen R. Blank
</Table>
At each annual meeting of shareholders, directors of the class to be elected
shall be elected for a three-year term. Directors will hold office until the
annual meeting for the year in which their terms expire and until their
successors are elected and qualify. The terms of the directors named above will
commence on the Effective Time of the merger.
Basic information about the identity and experience of each director is set
forth below. Information is set forth separately for directors who are
interested persons of First American and directors who are not interested
persons of First American.
INDEPENDENT DIRECTORS OF FIRST AMERICAN.
STEPHEN R. BLANK, 57, will serve as a director of First American. Mr. Blank
joined ULI-the Urban Land Institute (ULI) in December 1998 as Senior Resident
Fellow, Finance. From December 1993 to November 1998, Mr. Blank served as
Managing Director, Real Estate Investment Banking of CIBC World Markets, the
successor to Oppenheimer & Co., Inc. From February 1989 to November 1993,
Mr. Blank served as Managing Director of Cushman & Wakefield, Inc.'s Real Estate
Corporate Finance Department. From August 1979 to January 1998, Mr. Blank served
as Managing Director, Real Estate Investment Banking, of Kidder, Peabody &
Co., Inc. Additionally, Mr. Blank served as President of KP Realty
Advisers, Inc. the firm's real estate investment advisory subsidiary. Mr. Blank
also serves as a member of the boards of directors of WestCoast Hospitality
Corporation, BNP Residential Trust, Inc. and MFA Mortgage Investments, Inc. and
a member of the boards of trustees of Atlantic Realty Trust and Ramco-Gershenson
Properties Trust. Since 1998, Mr. Blank has also been an adjunct professor for
the Executive MBA Program at the Columbia University Graduate School of
Business. Mr. Blank received his B.A. degree from Syracuse University and was
awarded a M.B.A. degree from Adelphi University.
JAMES C. LESLIE, 46, will serve as a director of First American. Mr. Leslie
served as President and Chief Operating Officer of the Staubach Company from
1996 to 2001. As one of the founding members and directors of The Staubach
Company, Mr. Leslie has also served as its Chief Financial Officer,
President--Financial Services Division, and as a member of the Office of the
President of the Staubach
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Company. Mr. Leslie also serves on the board of directors for Stratus
Properties, Inc., Amresco Capital Trust, and Ascendant Solutions, Inc., as well
as several private companies. Mr. Leslie holds a B.A. from the University of
Nebraska and an M.B.A. from the University of Michigan.
JEFFREY S. OLSON, 34, will serve as a director of First American. Mr. Olson
currently serves as Director of West Coast Acquisitions for Kimco Realty. Prior
to joining Kimco, Mr. Olson covered the real estate sector for UBS Warburg,
Salomon Smith Barney and CIBC World Markets. Prior to such time, Mr. Olson was
Director of Finance and Investor Relations for The Mills Corporation for five
years. Prior to his employment with The Mills Corporation, Mr. Olson served for
four years as a public accountant at Reznick, Fedder and Silverman. Mr. Olson
received his B.S. in accounting from the University of Maryland and an M.S. in
real estate from the Johns Hopkins University. Mr. Olson is also a Certified
Public Accountant.
JONATHAN PETTEE, 43, will serve as a director of First American. Mr. Pettee
currently serves as Chief Financial Officer for NCS I LLC, a private LLC formed
by Fortress Investments, Goldman Sachs and Renewal Partners. From 1996 to 2001,
Mr. Pettee served as Chief Financial Officer of AMRESCO, Inc. and as President
and Chief Operating Officer of AMRESCO Capital Trust. From 1994 to 1996,
Mr. Pettee served as President and Managing Director of BBC Investment Advisors.
From 1992 to 1994, Mr. Pettee served as Managing Director of Copley Real Estate
Advisors. From 1986 to 1992, Mr. Pettee served with Morgan Stanley Realty
Incorporated, where he was primarily involved with sale, financing and merger
and acquisition assignments for real estate portfolios. Mr. Pettee received a
B.S. in mechanical engineering from Cornell University and an M.B.A. from
Harvard Graduate School of Business Administration.
INTERESTED DIRECTORS OF FIRST AMERICAN.
John G. Wenker and Mark S. Jordahl will serve as directors of First American
and are also "interested persons" of First American.
JOHN G. WENKER, 51, serves as the President, Chief Executive Officer and a
director of First American. Mr. Wenker currently serves as Senior Vice President
of the Existing Funds, overseeing the Whole Loan Mortgage team and serving as
lead manager of the Real Estate Securities team at USBAM. Mr. Wenker joined
USBAM in 1998, prior to which he had been a Managing Director of the Fixed
Income Department of Piper Jaffray Inc. from 1992 to 1998 and director of
Revitalization Resources at the Minneapolis Community Development Agency from
1990 to 1992. Mr. Wenker has a B.A. in public administration from Metropolitan
State University and an M.B.A. in finance from the University of St. Thomas. He
is also the lead manager for First American Real Estate Securities Fund, an
open-end fund investing primarily in equity real estate investment trusts.
Mr. Wenker has 16 years of financial industry experience, including ten years in
portfolio management.
MARK S. JORDAHL, 42, serves as Vice President--Investments of the Existing
Funds and will serve as a director of First American. Mr. Jordahl has served as
Chief Investment Officer of USBAM since 2001. Prior thereto, Mr. Jordahl served
as President and Chief Investment Officer, ING Investment Management--Americas
from September 2000 to June 2001. From January 1998 to September 2000,
Mr. Jordahl served as Senior Vice President and Chief Investment Officer,
ReliaStar Financial Corp. From January 1996 to December 1997, Mr. Jordahl served
as Executive Vice President and Managing Director, Washington Square Advisors.
Mr. Jordahl holds a B.S. degree from Concordia College and an M.B.A. from the
University of Minnesota Carlson School of Management. He has 20 years of
experience in the financial industry.
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EXECUTIVE OFFICERS.
The executive officers of First American following the merger will be as
follows:
<Table>
<Caption>
NAME AGE OFFICES HELD
---- ------------ ----------------------------------------------------------------------
John G. Wenker 51 Chief Executive Officer and President
Robert H. Nelson 39 Chief Financial Officer
Chris J. Neuharth 42 Executive Vice President
Russell J. Kappenman 38 Secretary and Executive Vice President--Director of Investments
Julene R. Melquist 36 Vice President
</Table>
JOHN G. WENKER, 51, serves as the President, Chief Executive Officer and a
director for First American. Information about the experience of Mr. Wenker is
set forth above.
ROBERT H. NELSON, 39, serves as the Chief Financial Officer for First
American. Mr. Nelson currently serves as Treasurer for the Existing Funds and as
Chief Operating Officer of USBAM. Mr. Nelson joined the Existing Funds in 1988
and previously was a senior auditor at KPMG Peat Marwick. He received a B.A. in
business and accounting from Concordia College. Mr. Nelson is on the Investment
Company Institute's Treasurers and Closed-end Fund committees; he is also an
advisory member of the Financial Technology Forum, the Asset Management
Operating Committee and treasurer of the First American Family of Funds.
Mr. Nelson has 16 years of financial industry experience, including representing
USBAM in critical relationships with major clients, industry organizations and
other key external/internal parties.
CHRIS J. NEUHARTH, 42, serves as Executive Vice President of First American.
Currently, Mr. Neuharth serves as a Managing Director and Senior Fixed Income
Portfolio Manager for USBAM, managing fixed-income mutual funds and
institutional accounts and working with other portfolio managers in developing
taxable fixed-income strategies and sector weightings. Mr. Neuharth joined USBAM
in 2000, having previously worked at Brinson Partners as a director and senior
portfolio manager from 1999 to 2000. He also worked at U.S. Bancorp Piper
Jaffray as director of risk management from 1997 to 1999, at Piper Capital
Management Incorporated as risk manager from 1995 to 1997, and prior thereto was
a fixed-income portfolio manager at Fortis Advisors and First Minnesota Bank.
Mr. Neuharth received a B.S. in business finance from Winona State University,
is a member of the Association for Investment Management and Research and holds
the Chartered Financial Analyst designation. He has 21 years of financial
industry experience, including 17 years in portfolio management.
RUSSELL J. KAPPENMAN, 38, serves as the Secretary and the Executive Vice
President Director of Investments for First American. Mr. Kappenman has been a
Managing Director of USBAM since 2001, prior to which he had been a Vice
President of USBAM since 1998. Mr. Kappenman was with Piper Jaffray Inc. from
1989 to 1998, serving as a tax manager and a fixed income analyst. He received a
B.A. in accounting from the University of South Dakota. Mr. Kappenman holds the
Certified Public Accountant designation and is a member of the American
Institute of Certified Public Accountants and the Minnesota Society of CPAs. He
has 16 years of financial industry experience, including seven years in
portfolio management.
JULENE R. MELQUIST, 36, serves as Vice President of First American.
Ms. Melquist has served as a Vice President of USBAM since 2001 and is the lead
analyst on the Real Estate Securities Team. Prior to becoming a Vice President,
Ms. Melquist had been an analyst at USBAM since 1998 and an Assistant Vice
President at Piper Capital Management Incorporated from 1994 to 1998.
Ms. Melquist previously was a retail investment executive at Kidder Peabody. She
received a B.A. from Gustavus Adolphus College and an M.B.A. in finance from the
University of St. Thomas. She has 15 years of financial industry experience,
including underwriting commercial and multifamily loan purchases, managing the
closing of commercial and multifamily loans and serving as a liaison with
correspondent and mortgage banking firms.
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COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. First American will establish an audit committee comprised
of certain independent members of First American's board of directors. The board
of directors of First American will determine that each member of the audit
committee is "independent" within the meaning of the listing standards of the
NYSE. The function of the audit committee is to recommend annually to First
American's board of directors a firm of independent certified public accountants
to audit the books and records of First American for the ensuing year. In
connection therewith, the audit committee will monitor that firm's performance
(including a review of each audit and a review of fees paid), confer with that
firm as to First American's financial statements and internal controls, evaluate
the firm's independence, review the purchase by First American from the firm of
nonaudit services, facilitate communications with management and service
providers and review First American's back-up procedures and disaster recovery
plans. The audit committee's duties will also include the review and oversight
of all transactions among First American and its directors, USBAM and its
affiliates, holders of 5% or more of its shares of First American common stock
or any affiliates. The audit committee will adopt a written charter setting
forth, among other things, requirements with respect to the composition of the
audit committee, the purposes of the audit committee and the audit committee's
duties and powers. At least one member of the Audit Committee will be an "audit
committee financial expert" as such term is defined by the SEC in accordance
with the Sarbanes-Oxley Act of 2002. At the discretion of First American's board
of directors, members of the audit committee may receive additional compensation
for serving on such committee.
INVESTMENT COMMITTEE. First American will establish an investment committee
comprised of members of First American's board of directors. The bylaws require
that a majority of the investment committee be comprised of independent
directors. The duties of the investment committee will include establishing
investment guidelines and criteria relating to the acquisition of mortgage loans
which (i) are not issued or guaranteed by an agency of the U.S. government or
(ii) are not rated within the rating categories set forth in First American's
investment policies. The investment guidelines and criteria will also ensure
that the investments and assets of First American will remain within the
parameters of the exemption provided by Section 3(c)(5)(C) of the Investment
Company Act.
COMPENSATION COMMITTEE. First American will establish a compensation
committee, which will be comprised of certain independent members (within the
meaning of the listing standards of the NYSE) of First American's board of
directors. The compensation committee will administer any compensation plans
adopted by the board of directors. The compensation committee will operate under
a written charter adopted by the board of directors.
NOMINATING COMMITTEE. First American will establish a nominating committee,
which will be comprised of certain independent members (within the meaning of
the listing standards of the NYSE) of First American's board of directors. The
nominating committee will be responsible for, among other things, recommending
to the board of directors individuals to serve as directors. The nominating
committee may also consider nominees for election as directors made by
stockholders. The nominating committee will operate under a written charter
adopted by the board of directors.
VACANCIES ON THE BOARD OF DIRECTORS
A vacancy on First American's board created by the death, resignation, or
incapacity of a director or by an increase in the number of directors may be
filled by the majority vote of the remaining directors. With respect to a
vacancy created by the death, resignation, or incapacity of an independent
director, the remaining independent directors shall nominate a replacement. A
director so nominated by the board of directors will hold office for the balance
of the term then remaining for that class. A director so chosen to fill a
vacancy will hold office for the remainder of the present term of office or
until the next annual meeting of shareholders, at which time the shareholders
will elect a director to hold office for the balance of the term then remaining
for that class. A director may resign at any time and may be removed with or
without cause with the affirmative vote of at least two-thirds of the aggregate
number of shares issued and outstanding and entitled to vote.
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COMPENSATION OF DIRECTORS AND OFFICERS
DIRECTORS. Members of the board of directors who are affiliated with First
American or USBAM will not receive cash compensation for serving as a member of
First American's board of directors and will not receive compensation for
attending meetings or for serving on any committees of First American's board of
directors; however, all members of First American's board of directors will
receive reimbursement for travel and other expenses and other out-of-pocket
disbursements incurred in connection with attendance at meetings.
INDEPENDENT DIRECTORS. Directors not affiliated with First American or USBAM
will be entitled to receive compensation for serving as directors at the rate of
$20,000 per annum in cash in addition to the expense reimbursement for
attendance at meetings described above. Directors will also be entitled to
receive compensation at the rate of $750 per meeting attended in person and $500
per meeting attended by phone. Directors who serve on a committee will receive
compensation of $500 per meeting of such committee. Such compensation is subject
to change by action of the board of directors. At the discretion of First
American's board of directors, independent directors may be granted additional
cash compensation for serving on a committee of First American's board of
directors.
OFFICERS. The executive officers of First American will receive no cash
compensation for serving as an executive officer of First American.
INDEMNIFICATION
First American's articles of incorporation and bylaws provide for the
indemnification of directors to the fullest extent permitted by Maryland law.
Other officers, employees and agents of First American may be indemnified to
such extent as shall be authorized by First American's board of directors or the
bylaws. Maryland law generally permits indemnification of directors, officers,
employees and agents against certain judgments, penalties, fines, settlements
and reasonable expenses that any such person actually incurred in connection
with any proceeding to which such person may be made a party by reason of
serving in such positions unless it is established that: (i) an act or omission
of the director, employee or agent was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) such person actually received an improper personal
benefit in money, property or services; or (iii) in the case of criminal
proceedings, such person had reasonable cause to believe that the act or
omission was unlawful. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling First American pursuant to the foregoing provisions, First American
has been informed that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The articles of incorporation of First American provide that the personal
liability of any director to First American or its shareholders for money
damages is limited to the fullest extent allowed by the statutory or decisional
law of the State of Maryland, as amended or interpreted. Maryland law authorizes
the limitation of liability of directors and officers to corporations and their
shareholders for money damages except (i) to the extent that it is proved that
the person actually received an improper personal benefit, or (ii) to the extent
that a judgment or other final adjudication adverse to the person is entered in
a proceeding based on a finding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated.
THE INVESTMENT ADVISOR
USBAM, which is registered with the SEC as an investment advisor under the
Advisers Act, is the investment advisor for each Existing Fund. USBAM is a
wholly-owned subsidiary of U.S. Bank National Association, which is in turn
owned by U.S. Bancorp. As of February 28, 2003, USBAM and its affiliated asset
management groups had more than $114 billion in assets under management.
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USBAM will also serve as the investment advisor to First American and the
New Fund. At all times, USBAM will be subject to the direction and oversight of
the board of directors of First American and the New Fund, respectively. The
members of the existing management team of USBAM who are currently responsible
for advising the Existing Funds will serve as the management team for First
American and the New Fund.
USBAM also acts as the investment advisor to Real Estate Securities Fund, a
mutual fund organized as a separate series of First American Investment Funds,
Inc., an open-end investment company. Real Estate Securities Fund invests
primarily in income producing common stocks of publicly traded companies engaged
in the real estate industry. A majority of Real Estate Securities Fund's total
assets are invested in REITs. Real Estate Securities Fund's objective is to
provide above average current income and long-term capital appreciation. At
December 31, 2002, Real Estate Securities Fund had net assets of approximately
$145.5 million, 95.0% of which were represented by investments in REIT common
stocks. At that date, Real Estate Securities Fund's REIT portfolio composition,
as a percentage of net assets, was as follows:
<Table>
Office/Industrial................................. 34.0%
Residential....................................... 19.7%
Mall/Retail....................................... 23.1%
Diversified....................................... 9.3%
Hotels............................................ 8.6%
Other............................................. 0.3%
Financial Services................................ 0%
Health Care....................................... 0%
Specialty Real Estate............................. 0%
Cash/Cash Equivalents............................. 5.00%
</Table>
Real Estate Securities Fund pays USBAM an annual management fee equal to
0.70% of average net assets.
The following table sets forth the Real Estate Securities Fund's average
annualized total returns for the one-year, five-year and since-inception periods
ended December 31, 2002. The figures set forth in the table are based on the
change in the Real Estate Securities Fund's Class Y net asset value, assuming
all distributions were reinvested, and do not reflect sales charges. Because
mutual fund shares are not publicly traded, there is no market price-based
performance information.
NAV-BASED AVERAGE ANNUALIZED TOTAL RETURNS
FOR REAL ESTATE SECURITIES FUND
<Table>
<Caption>
ONE YEAR ENDED FIVE YEARS ENDED INCEPTION (6/30/95)
DECEMBER 31, 2002 DECEMBER 31, 2002 THROUGH DECEMBER 31, 2002
- ----------------- ----------------- -------------------------
7.37% 4.77% 11.04%
</Table>
THE REIT ADVISORY AGREEMENT
TERM. As a condition to the merger, First American will enter into the REIT
Advisory Agreement with USBAM for an initial term of two years, beginning upon
consummation of the merger. Thereafter, successive extensions, each for a period
not to exceed two years, may be made by agreement between First American and
USBAM, subject to an affirmative vote of a majority of the independent
directors.
TERMINATION; TERMINATION FEE. First American may, at its option, terminate,
or decline to renew the term of, the REIT Advisory Agreement with or without
cause at any time upon 60 days written notice with the approval of a majority of
the board of directors (including at least a majority of the independent
directors). Upon termination of the REIT Advisory Agreement by First American
(other than in the case of termination by First American for cause) or if the
REIT Advisory Agreement is not renewed (other than in the case in which First
American, at least 60 days prior to expiration of the
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REIT Advisory Agreement or any extension thereof, gives written notice to USBAM
that it is offering to extend the terms of the REIT Advisory Agreement for an
additional two year period on the terms outlined in the REIT Advisory Agreement
and USBAM fails to accept such offer of renewal prior to the expiration date),
First American is obligated to pay USBAM a termination fee. The termination fee
shall be an amount equal to 5% of, for the first two years following the initial
date of the REIT Advisory Agreement, and 2% of, thereafter, the net equity of
First American, calculated as of the fiscal year-end immediately prior to the
termination or non-renewal, as the case may be, in accordance with accounting
principles generally accepted in the United States.
First American may terminate the REIT Advisory Agreement without payment of
any termination fee to USBAM with cause (including a material breach by USBAM of
any provision contained in the REIT Advisory Agreement not cured within 30 days)
upon 60 days' prior written notice of termination approved by a majority of the
board of directors of First American (including at least a majority of the
independent directors).
SERVICES PROVIDED. USBAM at all times will be subject to the direction and
control of First American's board of directors and will only have such functions
and authority as First American may delegate to it. USBAM will be responsible
for the day-to-day operations of First American and will perform such services
and activities relating to the assets and operations of First American as USBAM,
subject to the discretion and control of First American's board of directors,
deems appropriate, including, but not limited to:
- providing a complete program of investing and reinvesting the capital and
assets of First American in pursuit of its investment objectives and in
accordance with policies adopted by First American's board of directors from
time to time;
- serving as First American's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the board of
directors;
- assisting First American in developing criteria for mortgage asset purchase
commitments that are specifically tailored to First American's investment
objectives and making available to First American its knowledge and
experience with respect to mortgage assets and other real estate-related
assets;
- counseling First American in connection with policy decisions made by the
board of directors;
- evaluating and recommending hedging strategies to First American's board of
directors in accordance with hedging guidelines and policies adopted by First
American's board of directors;
- engaging in hedging activities on behalf of First American, consistent with
First American's status as a REIT;
- advising First American on borrowing strategies and guidelines;
- maintenance of First American's exemption from regulation as an investment
company;
- representing First American in connection with the purchase and commitment to
purchase or sell mortgage assets, including the accumulation of mortgage
loans for securitization and the incurrence of debt;
- furnishing reports and statistical and economic research to First American
regarding First American's activities and the services performed for First
American by USBAM;
- monitoring and providing to First American's board of directors on an ongoing
basis price information and other data, obtained from certain nationally
recognized dealers that maintain markets in mortgage assets identified by the
board of directors from time to time, and providing data and advice to the
board of directors in connection with the identification of such dealers;
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- administering the day-to-day operations of First American and performing and
supervising the performance of necessary administrative functions as may be
reasonably directed by the board of directors;
- contracting in the name of and on behalf of First American, with third
parties for master servicing and special servicing of assets acquired by
First American;
- communicating on behalf of First American with the holders of the equity and
debt securities of First American as required to satisfy the reporting and
other requirements of any governmental bodies or agencies and to maintain
effective relations with such holders;
- causing First American to qualify to do business in all applicable
jurisdictions;
- causing First American to retain qualified accountants and legal counsel to
assist in developing appropriate accounting procedures, compliance procedures
and testing systems and to conduct quarterly compliance reviews;
- assisting First American in complying with all federal and state legal and
regulatory requirements applicable to First American in respect of its
business activities, including preparing or causing to be prepared all
financial statements required under applicable regulations and contractual
undertakings and all reports and documents, if any, required under the
Exchange Act;
- assisting First American in making required tax filings and reports and
maintaining its status as a REIT, including soliciting shareholders for
required information to the extent provided in the REIT provisions of the
Code;
- performing such other services as may be required from time to time for
management and other activities relating to the assets of First American as
First American's board of directors shall reasonably request or USBAM shall
deem appropriate under the particular circumstances;
- supervising investor relations, public relations and relations with the
investment community;
- supervising the maintenance of First American's accounts, books and records;
and
- using reasonable efforts to cause First American to comply with applicable
laws.
MANAGEMENT FEES. As compensation for these services, USBAM will receive the
following base management and performance fees payable quarterly:
BASE MANAGEMENT FEE
<Table>
0.25% per annum Payable on investment grade assets or equivalent credit
quality
1.0% per annum Payable on the first $1.0 billion of other assets
0.75% per annum Payable on other assets over $1.0 billion
</Table>
PERFORMANCE FEE
<Table>
20.0% of the "excess yield" on "Excess yield" equals the amount by which (a) the net
all outstanding shares of income per share of First American common stock (before
common stock the performance fee) exceeds (b) a net income per share
that would result in a yield, tied to historical offering
prices of the common stock, equal to the greater of 10% or
the applicable ten-year U.S. Treasury rate plus 3.5% (each
expressed as a quarterly percentage)
</Table>
The ability of First American to achieve a quarterly investment yield and of
USBAM to earn the incentive compensation described in the preceding chart is
dependent upon the level and volatility of interest rates, First American's
ability to react to changes in interest rates and to utilize successfully the
operating strategies described herein, and other factors, many of which are not
within First American's control.
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USBAM's base management fee and performance fee shall be calculated by USBAM
within 15 days after the end of each fiscal quarter, and such calculation shall
be promptly delivered to First American. First American shall pay the base
management fee and the performance fee within 30 days after the end of each
fiscal quarter.
EXPENSES. USBAM will bear all costs and expenses of its officers and
employees and any overhead incurred in connection with its duties under the REIT
Advisory Agreement, the cost of office space and equipment required for
performance of its duties and shall bear the costs of any salaries or directors
fees of any officers or directors of First American who are affiliated with
USBAM.
USBAM is not expected to bear the following expenses:
- issuance and transaction costs incident to the acquisition, disposition and
financing of investments;
- legal, accounting and auditing fees and expenses;
- the compensation and expenses of the independent directors;
- costs of printing and mailing proxies and reports to shareholders;
- costs incurred for due diligence and travel on behalf of First American;
- costs associated with any computer software or hardware that is used
exclusively for First American;
- costs to obtain liability insurance to indemnify First American's directors
and officers, USBAM and its employees and directors;
- the compensation and expenses of First American's custodian and transfer
agent, if any;
- costs for the master and special servicing of mortgage loans;
- costs of the issuance and administration of mortgage-backed securities;
- costs of raising capital;
- costs associated with the incurrence of debt;
- interest expenses;
- taxes and license fees;
- non-cash costs;
- the base and incentive management fee;
- costs of litigation; or
- extraordinary or non-recurring expenses incurred on behalf of First American.
INDEMNIFICATION. First American has agreed to indemnify USBAM and its equity
owners, officers, managers, employees, agents, associates and controlling
persons (and the equity owners, officers, managers, employees and agents of such
persons) against any liabilities and expenses incurred in connection with any
action or proceeding involving such person by reason of such person's service in
any of the foregoing capacities. First American also agrees that such persons
shall not have any liability to First American or its shareholders for any error
of judgment, mistake of law, loss arising out of any investment, or act or
omission in performing its obligations under the REIT Advisory Agreement.
However, First American will not provide such indemnification or relieve such
person of liability if the liability arises as a result of such person's willful
misfeasance, bad faith, gross negligence, reckless disregard of the duties
involved in the conduct of its position or any material breach of the terms of
the REIT Advisory Agreement (unless such breach arises solely from USBAM's good
faith reliance upon the advice of outside professionals).
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MANAGEMENT OF THE NEW FUND
THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF THE NEW FUND
The business and affairs of the New Fund are managed under the direction of
the board of directors and officers of the New Fund. Upon the closing of the
merger, the New Fund will appoint USBAM to manage the New Fund's portfolio. The
management of the New Fund's day-to-day operations is delegated to its officers,
USBAM and the New Fund's administrator, subject always to the investment
objectives and policies of the New Fund and to the general supervision of the
directors of the New Fund. As of the date of this joint proxy
statement/prospectus, the directors and officers of the New Fund as a group did
not own any shares of the New Fund. Each of the directors is also a director of
each of the other closed-end and open-end investment companies managed by USBAM
(or the Fund Complex), and many of the officers are also officers of such
companies. The business address of the New Fund, USBAM and the New Fund's board
members and officers is 800 Nicollet Mall, Minneapolis, Minnesota 55402, unless
specified otherwise below.
BOARD OF DIRECTORS OF THE NEW FUND.
There are seven directors of the New Fund, one of whom is an "interested
person" (as defined in the Investment Company Act) and six of whom are not
"interested persons." All significant agreements between the New Fund and
persons or companies furnishing services to it, including the New Fund's
agreements with its investment advisor, administrator, custodian and transfer
agent must be approved by the board of directors of the New Fund.
Basic information about the identity and experience of each director and
officer is set forth below. Information is set forth separately for directors
who are interested persons of the New Fund (as defined in the Investment Company
Act) and directors who are not interested persons of the New Fund.
Each of the directors of the New Fund oversees sixty-one portfolios in the
Fund Complex. None of the directors of the New Fund hold any other
directorships. In addition, each of the directors of the New Fund is currently
serving a one-year term that expires at the next annual meeting of shareholders
of the New Fund.
INDEPENDENT DIRECTORS OF THE NEW FUND.
ROGER A. GIBSON, 56, has been a director of the New Fund since November 19,
2002. Since July of 2001, Mr. Gibson has served as Vice President--Cargo, United
Airlines. From 1995 to 2001, Mr. Gibson served as Vice President, North
America--Mountain Region for United Airlines.
LEONARD W. KEDROWSKI, 61, has been a director of the New Fund since
November 19, 2002. Since 1992, Mr. Kedrwoski has served as Owner of Executive
and Management Consulting, Inc., a management consulting firm. Since 1999,
Mr. Kedrowski has served as Chief Executive Officer, Creative Promotions
International, LLC, a promotional award programs and products company.
Mr. Kedrowski has also served as a board member of GC McGuiggan Corporation (dba
Smyth Companies), a label printer since 1993, was an Advisory Board member of
Designer Doors, a manufacturer of designer doors from 1998 to 2002 and acted as
CEO of Graphics Unlimited from 1996 to 1998.
RICHARD K. RIEDERER, 58, has been a director of the New Fund since
November 19, 2002. Mr. Reiderer is currently retired. From 1995 to 2001,
Mr. Reiderer served as Chief Executive Officer of Weirton Steel. From 1993 to
2001, Mr. Reiderer served as a director of Weirton Steel.
JOSEPH D. STRAUSS, 62, has been a director of the New Fund since
November 19, 2002. Mr. Strauss has served as Owner and Executive Officer,
Excensus-TM-, LLC, a consulting firm, since 2001. Mr. Strauss has served as
Owner and President, Strauss Management Company, a Minnesota holding company for
various organizational management business ventures, and as Owner, Chairman and
Chief Executive
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Officer, Community Resource Partnerships, Inc., a strategic planning, operations
management, government relations, transportation planning and public relations
organization, since 1993. Mr. Strauss is also an attorney at law.
VIRGINIA L. STRINGER, 58, has been a director of the New Fund since
November 19, 2002. Since 1993, Ms. Stringer has served as Owner and President,
Strategic Management Resources, Inc., a management consulting firm. Since 1997,
Ms. Stringer has served as Executive Consultant for State Farm Insurance
Company. Ms. Stringer was formerly President and director of The Inventure
Group, a management consulting and training company, President of
Scott's, Inc., a transportation company, and Vice President of Human Resources
of The Pillsbury Company.
JAMES M. WADE, 59, has been a director of the New Fund since November 19,
2002. Since 1999, Mr. Wade has served as Owner and President, Jim Wade Homes, a
homebuilding company.
INTERESTED DIRECTOR.
JOHN M. MURPHY, Jr., 61, has been a director of the New Fund since
November 19, 2002. Mr. Murphy is currently retired. Mr. Murphy served as
Minnesota State Chairman--U.S. Bancorp from 2000 to December 2002 and as
Executive Vice President of U.S. Bancorp from January 1999 to December 2002.
From 1991 to 1999, Mr. Murphy served as Chairman and Chief Investment Officer of
First American Asset Management and U.S. Bank Trust, N.A., and Executive Vice
President of U.S. Bancorp. Mr. Murphy is considered an "interested" director
because of his ownership of securities issued by U.S. Bancorp.
EXECUTIVE OFFICERS.
The executive officers of the New Fund following the merger will be as
follows:
<Table>
<Caption>
NAME AGE OFFICES HELD
- ---- ------------ ----------------------------------------
Thomas S. Schreier 40 President
John G. Wenker 51 Senior Vice President
Mark S. Jordahl 42 Vice President--Investments
Jeffrey M. Wilson 46 Vice President--Administration
Russell J. Kappenman 38 Vice President and Assistant Treasurer
Julene R. Melquist 36 Vice President
Robert H. Nelson 39 Treasurer
</Table>
The executive officers of the New Fund, their addresses, their ages, and
their principal occupations for at least the past five years are set forth
below. Each officer has served as such since the inception of the New Fund.
Officers serve at the discretion of the board of directors of the New Fund and
are re-elected annually by the board of directors of the New Fund.
THOMAS S. SCHREIER, Jr., 40, serves as President of the New Fund. Since May
2001, Mr. Schreier has served as Chief Executive Officer of USBAM. Prior
thereto, Mr. Schreier served as Chief Executive Officer of First American Asset
Management since December 2000 and of Firstar Investment & Research Management
Company since February 2001. From October 1998 through December 2000,
Mr. Schreier served as Senior Managing Director and Head of Equity Research of
U.S. Bancorp Piper Jaffray. From 1996 to 1998, Mr. Schreier served as Senior
Airline Analyst and a Director, Equity Research of Credit Suisse First Boston.
Mr. Schreier holds a B.A. in economics and German from the University of Notre
Dame and an M.B.A. from the Harvard Graduate School of Business. He has 13 years
of experience in the financial industry.
JOHN G. WENKER, 51, serves as Senior Vice President of the New Fund.
Mr. Wenker currently serves as Senior Vice President of the Existing Funds,
overseeing the Whole Loan Mortgage team and serving as lead manager of the Real
Estate Securities team at USBAM. Mr. Wenker has been with USBAM since 1998,
prior to which he had been a Managing Director of the Fixed Income Department of
Piper Jaffray Inc. from 1992 to 1998 and director of Revitalization Resources at
the Minneapolis Community
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Development Agency from 1990 to 1992. Mr. Wenker has a B.A. in public
administration from Metropolitan State University and an M.B.A. in finance from
the University of St. Thomas. He is also the lead manager for First American
Real Estate Securities Fund, an open-end fund investing primarily in equity real
estate investment trusts. Mr. Wenker has 16 years of financial industry
experience, including ten years in portfolio management.
MARK S. JORDAHL, 42, serves as Vice President--Investments of the New Fund.
Mr. Jordahl has served as Chief Investment Officer of USBAM since 2001. Prior
thereto, Mr. Jordahl served as President and Chief Investment Officer, ING
Investment Management--Americas from September 2000 to June 2001. From January
1998 to September 2000, Mr. Jordahl served as Senior Vice President and Chief
Investment Officer, ReliaStar Financial Corp. From January 1996 to December
1997, Mr. Jordahl served as Executive Vice President and Managing Director,
Washington Square Advisors. Mr. Jordahl holds a B.S. degree from Concordia
College and an M.B.A. from the University of Minnesota Carlson School of
Management. He has 20 years of experience in the financial industry.
JEFFERY M. WILSON, 46, serves as Vice President--Administration of the New
Fund. Mr. Wilson has served as Senior Vice President of USBAM since May 2001.
Prior thereto, Mr. Wilson had served as Senior Vice President of First American
Asset Management.
RUSSELL J. KAPPENMAN, 38, serves as Vice President and Assistant Treasurer
of the New Fund. Mr. Kappenman has been a managing director of USBAM since 2001,
prior to which he had been a Vice President of USBAM since 1998. Mr. Kappenman
was with Piper Jaffray Inc. from 1989 to 1998, serving as a tax manager and a
fixed income analyst. He received a B.A. in accounting from the University of
South Dakota. Mr. Kappenman holds the Certified Public Accountant designation
and is a member of the American Institute of Certified Public Accountants and
the Minnesota Society of CPAs. He has 16 years of financial industry experience,
including seven years in portfolio management.
JULENE R. MELQUIST, 36, serves as Vice President of the New Fund.
Ms. Melquist has served as Vice President of USBAM since 2001 and is the lead
analyst on the Real Estate Securities Team. Prior to becoming a Vice President,
Ms. Melquist had been an analyst at USBAM since 1998 and an Assistant Vice
President at Piper Capital Management Incorporated from 1994 to 1998.
Ms. Melquist, who joined the Existing Funds in 1994, previously was a retail
investment executive at Kidder Peabody. She received a B.A. from Gustavus
Adolphus College and an M.B.A. in finance from the University of St. Thomas. She
has 15 years of financial industry experience, including underwriting commercial
and multifamily loan purchases, managing the closing of commercial and
multifamily loans, managing portfolios of REIT common and preferred stock and
serving as a liaison with correspondent and mortgage banking firms.
ROBERT H. NELSON, 39, serves as Treasurer of the New Fund. Mr. Nelson
currently serves as Treasurer for the Existing Funds and as Chief Operating
Officer of USBAM. Mr. Nelson joined the Existing Funds in 1998 and previously
was a senior auditor at KPMG Peat Marwick. He received a B.A. in business and
accounting from Concordia College. Mr. Nelson is on the Investment Company
Institute's Treasurers and Closed-end Fund committees; he is also an advisory
member of the Financial Technology Forum, the Asset Management Operating
Committee and treasurer of the First American Family of Funds. Mr. Nelson has 16
years of financial industry experience, including representing USBAM in critical
relationships with major clients, industry organizations and other key external/
internal parties.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors of the New Fund has three standing committees: an
audit committee, a pricing committee and a nominating committee. None of the
committee members is considered an "interested" director under the Investment
Company Act, with the exception of Mr. Murphy who is a member of the Pricing
Committee.
AUDIT COMMITTEE. The function of the audit committee is to recommend
annually to the board of directors of the New Fund a firm of independent
certified public accountants to audit the books and
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records of the New Fund for the ensuing year. In connection therewith, the audit
committee monitors that firm's performance (including a review of each audit and
a review of fees paid), confers with that firm as to the New Fund's financial
statements and internal controls, evaluates the firm's independence, reviews
procedures to safeguard portfolio securities, reviews the purchase by the New
Fund from the firm of nonaudit services, facilitates communications with
management and service providers and reviews the New Fund's back-up procedures
and disaster recovery plans. The audit committee has adopted a written charter
setting forth, among other things, requirements with respect to the composition
of the audit committee, the purposes of the audit committee and the audit
committee's duties and powers. The audit committee currently consists of
Messrs. Gibson and Riederer, Ms. Stringer (ex officio) and Mr. Kedrowski, who
serves as its chairperson. Each member of the audit committee has been
determined by the board of directors of the New Fund to be "independent" within
the meaning of the listing standards of the AMEX.
NOMINATING COMMITTEE. The nominating committee is responsible for
recommending to the board of directors of the New Fund (i) nominees for election
as directors, (ii) a successor to the chairperson when a vacancy occurs, and
(iii) compensation plans and arrangements for the board of directors of the New
Fund, and for reviewing with the chairperson the chairperson's recommended
committee assignments. Current members of the nominating committee are
Messrs. Gibson and Wade, Ms. Stringer (ex officio) and Mr. Reiderer, who serves
as its chairperson. Each member of the nominating committee has been determined
by the board of directors of the New Fund to be "independent" within the meaning
of the listing standards of the AMEX. The nominating committee does not consider
nominees recommended by shareholders.
PRICING COMMITTEE. The pricing committee is responsible for valuing
portfolio securities for which market quotations are not readily available,
pursuant to procedures established by the board of directors of the New Fund.
Current members of the pricing committee are Messrs. Kedrowski and Murphy,
Ms. Stringer (ex officio) and Mr. Strauss, who serves as its chairperson.
COMPENSATION OF DIRECTORS AND OFFICERS OF THE NEW FUND
DIRECTORS. The fees and expenses of the independent directors of the New
Fund are paid by the New Fund. No compensation is paid by the New Fund to any
director who is an officer or employee of USBAM or any of its affiliates. Each
independent director of the New Fund, other than its chairperson, currently
receives from the Fund Complex a fee of $40,000 per year ($60,000 in the case of
the chairperson) plus $10,000 ($15,000 in the case of the chairperson) per
meeting of the full board of directors of the New Fund attending and $2,500 per
nominating committee or audit committee meeting attended ($3,750 in the case of
a committee chairperson). Since his retirement from U.S. Bancorp, Mr. Murphy is
considered to be an independent director for this purpose. Independent directors
of the New Fund are also reimbursed for their travel expenses to attend
meetings. In the event of telephonic board meetings, each participating
independent director of the New Fund receives a fee of $5,000 ($7,500 in the
case of the chairperson), and in the event of telephonic nominating or audit
committee meetings, each participating director receives a fee of $1,250 ($1,875
in the case of the committee chairperson). In the case of pricing committee
meetings, each participating independent director receives a fee of $1,250
($1,875 in the case of the committee chairperson) regardless of whether the
committee meets telephonically or in person. Independent directors of the New
Fund may receive a per diem fee of $2,500 per day, plus travel expenses, when
directors travel out of town on New Fund business. However, independent
directors of the New Fund do not receive the $2,500 per diem amount plus the
foregoing board or committee fee for an out-of-town committee or board meeting
but instead receive the greater of the total per diem fee or meeting fee. In
addition to compensation received for service on the board of directors, the
"Fund Review Liason" will receive an annual retainer of $10,000. This individual
is appointed by the chairperson, subject to the approval of the board of
directors, to lead the board of directors in reviewing the New Fund's investment
performance and certain contracts of the New Fund. Mr. Wade currently serves as
Fund Review Liason. The amounts specified in this paragraph are allocated among
the New Fund and the other closed- and open-end investment companies in the Fund
Complex on the basis of net assets.
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The independent directors of the New Fund may elect to defer payment of up
to 100% of the fees they receive in accordance with a deferred compensation plan
in place for the Fund Complex (or the Deferred Compensation Plan). Under the
Deferred Compensation Plan, a director may elect to have his or her deferred
fees treated as if they had been invested in shares of one or more funds and the
amount paid to the director under the Deferred Compensation Plan will be
determined based on the performance of such investments. Distributions may be
taken in a lump sum or over a period of years. The Deferred Compensation Plan
will remain unfunded for federal income tax purposes under the Code. Deferral of
director fees in accordance with the Deferred Compensation Plan is expected to
have no more than a negligible impact on New Fund assets and liabilities and
will not obligate the New Fund to retain any director or pay any particular
level of compensation. Neither the New Fund nor any other fund in the Fund
Complex provides any other pension or retirement benefits to directors.
The following table sets forth both the estimated compensation that the
independent directors of the New Fund will receive from the New Fund for its
calendar year ending December 31, 2003, assuming that the New Fund has been in
existence for the full calendar year, and the total compensation that each
independent director received from the Fund Complex (not including the New Fund)
for the 12 months ended December 31, 2002. With respect to independent
directors' estimated compensation from the New Fund, amounts set forth under
"Minimum" assume that all four Existing Funds approve the merger and also assume
that shareholders holding Existing Fund shares representing an aggregate net
asset value of $50 million elect to receive New Fund shares and that no
shareholders elect to exercise statutory dissenters' appraisal rights. Amounts
set forth under "Maximum" assume that all four Existing Funds approve the
merger, that shareholders holding approximately 49% of the shares in each
Existing Fund elect to receive New Fund shares and that no shareholders elect to
exercise statutory dissenters' appraisal rights.
<Table>
<Caption>
ESTIMATED COMPENSATION
FROM THE NEW FUND TOTAL COMPENSATION FROM THE
---------------------- FUND COMPLEX
NAME OF BOARD MEMBER MINIMUM MAXIMUM PAID TO BOARD MEMBER(1)(2)
- -------------------- --------- ----------- ---------------------------
Roger A. Gibson $119 $ 796 $121,250
Leonard W. Kedrowski $181 $1,211 $184,375
Richard K. Riederer $152 $1,018 $155,000
Joseph D. Strauss $115 $ 768 $116,875
Virginia L. Stringer $201 $1,347 $205,000
James M. Wade $100 $ 723 $110,000
</Table>
- ---------------------
(1) Includes amounts deferred pursuant to the New Fund Deferred Compensation
Plan as follows: Gibson, $60,625; and Kedrowski, $184,375.
(2) As of December 31, 2002, the Fund Complex consisted of four open-end
investment companies, each of which have multiple portfolios, and 10
closed-end investment companies, totaling 70 funds, managed by USBAM,
including the Existing Funds.
OFFICERS. The executive officers of the New Fund will receive no cash
compensation for serving as executive officers of the New Fund.
INDEMNIFICATION
USBAM will be liable to the New Fund under the New Fund Advisory Agreement
for any negligence or willful misconduct by USBAM. USBAM has agreed to indemnify
the New Fund with respect to any loss, liability, judgment, cost or penalty that
the New Fund may suffer due to a breach of the New Fund Advisory Agreement by
USBAM.
INVESTMENT ADVISOR TO THE NEW FUND
USBAM, which is registered with the SEC as an investment advisor under the
Advisers Act, is the investment advisor for each Existing Fund and will serve as
investment advisor for the New Fund.
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USBAM is a wholly-owned subsidiary of U.S. Bank which, in turn, is a subsidiary
of U.S. Bancorp. USBAM, U.S. Bank and U.S. Bancorp are located at 800 Nicollet
Mall, Minneapolis, Minnesota 55402.
USBAM provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of February 28, 2003, USBAM and its affiliated asset management groups
had more than $114 billion in assets under management.
USBAM furnishes the New Fund with investment advice and, in general,
supervises the management and investment program of the New Fund. USBAM
furnishes at its own expense all necessary administrative services, office
space, equipment and clerical personnel for servicing the investments of the New
Fund, and executive and supervisory personnel for managing the investments and
effecting the New Fund's portfolio transactions. USBAM also pays the salaries
and fees of all officers and directors of the New Fund who are affiliated
persons of USBAM.
USBAM will also serve as the investment advisor to First American. At all
times, USBAM will be subject to the direction and oversight of the board of
directors of First American and the New Fund, respectively. The members of the
existing management team of USBAM who are currently responsible for advising the
Existing Funds will serve as the management team for First American and the New
Fund.
The employees of USBAM who will be principally responsible for the New
Fund's investment program will be John G. Wenker, Russell J. Kappenman and Chris
J. Neuharth.
USBAM also acts as the investment advisor to Real Estate Securities Fund, a
mutual fund organized as a separate series of First American Investment Funds,
Inc., an open-end investment company. Real Estate Securities Fund invests
primarily in income producing common stocks of publicly traded companies engaged
in the real estate industry. A majority of Real Estate Securities Fund's total
assets are invested in REITs. Real Estate Securities Fund's objective is to
provide above average current income and long-term capital appreciation. At
December 31, 2002, Real Estate Securities Fund had net assets of approximately
$145.5 million, 95.0% of which were represented by investments in REIT common
stocks. At that date, Real Estate Securities Fund's REIT portfolio composition,
as a percentage of net assets, was as follows:
<Table>
Office/Industrial................................. 34.0%
Residential....................................... 19.7%
Mall/Retail....................................... 23.1%
Diversified....................................... 9.3%
Hotels............................................ 8.6%
Other............................................. 0.3%
Financial Services................................ 0%
Health Care....................................... 0%
Specialty Real Estate............................. 0%
Cash/Cash Equivalents............................. 5.00%
</Table>
Real Estate Securities Fund pays USBAM an annual management fee equal to
0.70% of average net assets.
The following table sets forth the Real Estate Securities Fund's average
annualized total returns for the one-year, five-year and since-inception periods
ended December 31, 2002. The figures set forth in the table are based on the
change in the Real Estate Securities Fund's Class Y net asset value,
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assuming all distributions were reinvested, and do not reflect sales charges.
Because mutual fund shares are not publicly traded, there is no market
price-based performance information.
NAV-BASED AVERAGE ANNUALIZED TOTAL RETURNS
FOR REAL ESTATE SECURITIES FUND
<Table>
<Caption>
ONE YEAR ENDED FIVE YEARS ENDED INCEPTION (6/30/95)
12/31/2002 12/31/2002 THROUGH 12/31/2002
- ---------- ---------------- -------------------
7.37% 4.77% 11.04%
</Table>
THE NEW FUND ADVISORY AGREEMENT
The board of directors of the New Fund, including a majority of the
independent directors of the New Fund, has the responsibility under the
Investment Company Act to approve the New Fund's investment advisory and
management agreement for its initial term and annually thereafter at a meeting
called for the purpose of voting on such matter. The New Fund Advisory Agreement
was approved for an initial two-year term by the New Fund's directors, including
a majority of the independent directors of the New Fund, at a meeting held on
November 21, 2002. The Existing Funds intend to approve the New Fund Advisory
Agreement immediately prior to the merger, at which time they will be the sole
shareholders of the New Fund. In determining to approve New Fund Advisory
Agreement, the directors reviewed the materials provided by USBAM and considered
the following: (1) the level of the management fees and estimated expense ratio
of the New Fund as compared to similar competitive closed-end funds of a
comparable size; (2) the nature and quality of the services to be rendered by
USBAM; (3) the historical performance of the Existing Funds; (4) the anticipated
benefits to be derived by USBAM from its relationship with the New Fund, noting
particularly the research and related services, within the meaning of
Section 28(e) of the Securities Exchange Act of 1934, that USBAM would be
eligible to receive by allocating the New Fund's brokerage transactions; and
(5) the historical profitability to USBAM of the Existing Funds.
The New Fund Advisory Agreement requires USBAM to arrange, if requested by
the New Fund, for officers or employees of USBAM to serve without compensation
from the New Fund as directors, officers, or employees of the New Fund if duly
elected to such positions by the shareholders or directors of the New Fund.
USBAM has the authority and responsibility to make and execute investment
decisions for the New Fund within the framework of the New Fund's investment
policies, subject to review by the board of directors of the New Fund. USBAM is
also responsible for monitoring the performance of the various organizations
providing services to the New Fund, including the New Fund's administrator,
custodian and transfer agent, and for periodically reporting to the board of
directors of the New Fund on the performance of such organizations. USBAM will,
at its own expense, furnish the New Fund with the necessary personnel, office
facilities, and equipment to service the New Fund's investments and to discharge
its duties as investment advisor of the New Fund. The New Fund Advisory
Agreement provides for the New Fund to pay USBAM a monthly advisory fee in an
amount equal to the sum of 0.01667% of the average weekly net assets of the New
Fund during the month (approximately 0.20% on an annual basis) and 4.5% of the
daily gross income (I.E., investment income, including amortization of discount
income, other than gains from the sale of securities or gains received from
options and futures contracts less interest on money borrowed by the New Fund)
accrued by the New Fund during the month, provided, however, that this monthly
management fee shall not exceed in the aggregate 1/12 of 0.725% of the New
Fund's average weekly net assets during the month (approximately 0.725% on an
annual basis).
In addition to the investment advisory fee, the New Fund pays all of its
expenses that are not expressly assumed by USBAM or any other organization with
which the New Fund may enter into an agreement for the performance of services.
The New Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the New Fund may be a party. The New Fund may have an
obligation to indemnify its directors and officers with respect to such
litigation. USBAM will be liable to the New Fund under the New Fund Advisory
Agreement for any negligence or willful misconduct by
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USBAM. USBAM has agreed to indemnify the New Fund with respect to any loss,
liability, judgment, cost or penalty that the New Fund may suffer due to a
breach of the New Fund Advisory Agreement by USBAM.
The New Fund Advisory Agreement will continue in effect for a period of two
years from its effective date, and if not sooner terminated, will continue in
effect for successive periods of 12 months thereafter, provided that each
continuance is specifically approved at least annually by both (1) the vote of a
majority of the board of directors of the New Fund or the vote of a majority of
the outstanding voting securities of the New Fund (as such term is defined in
the Investment Company Act) and (2) by the vote of a majority of the directors
of the New Fund who are not parties to the New Fund Advisory Agreement or
interested persons (as such term is defined in the Investment Company Act) of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The New Fund Advisory Agreement may be terminated at any time by
the New Fund, without the payment of any penalty, upon the vote of a majority of
the board of directors of the New Fund or a majority of the outstanding voting
securities of the New Fund or by USBAM, on 60 days' written notice by the
terminating party to the other. The New Fund Advisory Agreement will terminate
automatically in the event of its assignment (as such term is defined in the
Investment Company Act and the rules thereunder).
The following chart illustrates the yearly management fee under the New Fund
Advisory Agreement, expressed as a percentage of average New Fund net assets
during the year, that would be payable by the New Fund to USBAM in the event the
New Fund's gross income during the year (I.E., investment income, including
amortization of discount income, other than gains from the sale of securities or
gains received from options and futures contracts less interest on money
borrowed by the New Fund) equaled the respective indicated percentages of
average weekly net assets.
<Table>
<Caption>
ANNUAL FEE
ASSUMED GROSS YIELD (AS A % OF AVERAGE NET ASSETS)
- ------------------- ------------------------------
8.00% 0.560%
10.00% 0.650%
11.67% 0.725%
</Table>
ADMINISTRATION OF THE NEW FUND
The New Fund has entered into an administration agreement with USBAM under
which USBAM provides, or compensates others to provide, various oversight and
legal services, accounting services, and shareholder services to the New Fund.
For these services, the New Fund will pay USBAM an administration fee at an
annualized rate of 0.25% of the New Fund's average weekly net assets.
CUSTODIAN, TRANSFER AGENT AND REGISTRAR FOR THE NEW FUND
The New Fund's securities and cash will be held under a custodian agreement
by U.S. Bank National Association, 336 North Robert Street, St. Paul, Minnesota
55101. U.S. Bank is the parent company of USBAM. The New Fund will pay U.S. Bank
a monthly fee at an annualized rate of .015% of the New Fund's average weekly
net assets. The New Fund's assets will be held under bank custodianship in
compliance with the Investment Company Act. EquiServe Trust Company, N.A., 150
Royall Street, Canton, Massachusetts 02021, will act as the New Fund's transfer
agent, dividend-paying agent and registrar.
EXPENSES OF THE NEW FUND
In addition to advisory and administration fees paid to USBAM, the New Fund
pays all other costs and expenses of its operations, including compensation of
its directors other than those affiliated with USBAM, custodian, transfer agent
and dividend disbursing agent expenses, legal fees, listing fees and expenses,
expenses of independent auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
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AFFILIATED BROKERAGE
When entering into portfolio transactions on behalf of the New Fund, USBAM
may place transactions conducted on an agency basis through its affiliates, U.S.
Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc., which will earn
commissions on the transactions. In effecting portfolio transactions through
these affiliates, the New Fund intends to comply with Section 17(e)(1) of the
Investment Company Act.
CODE OF ETHICS
The New Fund and USBAM have adopted codes of ethics pursuant to Rule 17j-1
of the Investment Company Act. Each of these codes permits personnel to invest
in securities for their own accounts, including securities that may be purchased
or held by the New Fund. These codes of ethics can be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090.
These codes of ethics also are available on the EDGAR Database on the SEC's
Internet site at HTTP://www.sec.gov. In addition, copies of these codes of
ethics may be obtained, after paying a duplicating fee, by electronic request at
the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
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SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of American Strategic and
American Select is derived from the financial statements of American Strategic
and American Select as of and for each of the four years in the period ended
November 30, 2002, which were audited by Ernst & Young, independent auditors,
and the year ended November 30, 1998 which were audited by other auditors. The
following selected historical financial data of American Strategic II and
American Strategic III is derived from the financial statements of American
Strategic II and American Strategic III as of and for each of the preceding four
years in the period ended May 31, 2002 which were audited by Ernst & Young,
independent auditors, and the year ended May 31, 1998, which were audited by
other auditors and the unaudited financial statements as of and for the six
months ended November 30, 2002. The information presented for American Strategic
and American Select for the interim periods is unaudited but, in the opinion of
the Existing Fund's management, such information reflects all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial data for the interim periods. The results for the interim
periods presented are not necessarily indicative of the results for a full year.
The data should be read in conjunction with the financial statements, related
notes and other financial information included and incorporated by reference
herein.
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SELECTED HISTORICAL FINANCIAL DATA
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
-------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 5,221 $ 5,872 $ 6,069 $ 6,972 $ 6,510
Interest expense 624 727 1,219 1,382 874
Investment management
fees 326 343 321 370 374
Other expenses 541 377 481 521 520
Net investment income 4,029 4,424 4,047 4,698 4,741
Net realized gain
(loss) on investments (492) 450 (964) 77 415
Net change in
unrealized gain
(loss) on investments 735 116 1,652 (2,991) (129)
Net increase in net
assets resulting from
operations 4,272 4,991 4,734 1,784 5,027
PER SHARE DATA:
Net investment income 0.96 1.05 0.97 1.00 1.01
Net realized and
unrealized gains
(losses) on
investments 0.05 0.13 0.15 (0.62) 0.06
Net increase in net
asset value resulting
from operations 1.01 1.18 1.12 0.38 1.07
Cash dividends paid 1.03 1.06 0.96 1.01 0.97
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 34,826 35,047 42,586 64,223 62,799
Other securities 34,830 40,029 21,422 14,568 13,673
Total assets 70,107 75,563 64,789 79,538 77,901
Reverse repurchase
agreements payable 16,600 21,952 11,705 21,125 16,500
Net assets 53,352 53,427 52,910 58,054 61,286
Net asset value per
share 12.61 12.63 12.51 12.35 12.98
Per-share market value 12.05 12.79 11.19 11.44 12.13
</Table>
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SELECTED HISTORICAL FINANCIAL DATA
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED MAY 31,
NOVEMBER 30, ---------------------------------------------------------------
2002 2002 2001 2000 1999 1998
--------------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 12,281 $ 22,822 $ 23,577 $ 24,650 $ 25,742 $ 27,601
Interest expense 1,463 2,409 4,346 5,092 4,082 4,943
Investment management
fees 699 1,332 1,284 1,295 1,445 1,498
Other expenses 1,482 1,091 1,091 1,238 1,304 1,870
Net investment income 8,637 17,990 16,856 17,025 18,911 19,290
Net realized gain on
investments 200 3,591 110 (1,692) 767 952
Net change on
unrealized gain
(loss) on investments (254) 67 13,119 (9,525) (4,169) 7,157
Net increase in net
assets resulting from
operations 8,582 21,648 30,085 5,808 15,508 27,399
PER SHARE DATA:
Net investment income 0.54 1.13 1.06 1.02 1.06 1.03
Net realized and
unrealized gains
(losses) on
investments (0.01) 0.23 0.83 (0.68) (0.19) 0.41
Net increase in net
asset value resulting
from operations 0.53 1.36 1.89 0.34 0.87 1.44
Cash dividends paid 0.57 1.13 1.03 1.06 1.02 1.00
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 219,226 220,437 193,356 194,602 244,440 232,480
Other securities 69,839 72,520 74,188 66,822 86,926 74,440
Total assets 290,690 295,085 278,610 263,831 334,495 311,025
Reverse repurchase
agreements payable 78,700 82,700 69,749 66,711 103,925 76,000
Net assets 211,502 212,016 208,439 194,759 229,843 234,484
Net asset value per
share 13.25 13.29 13.06 12.20 12.92 13.07
Per-share market value 12.74 13.17 12.30 11.00 11.94 11.81
</Table>
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SELECTED HISTORICAL FINANCIAL DATA
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS
ENDED
NOVEMBER 30, YEAR ENDED MAY 31,
2002 ---------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 14,854 $ 29,189 $ 30,620 $ 31,838 $ 35,211 $ 36,682
Interest expense 1,665 3,062 5,859 6,285 6,570 6,436
Investment management
fees 851 1,701 1,612 1,703 1,888 1,974
Other expenses 1,906 1,346 1,385 1,538 1,667 2,474
Net investment income 10,471 23,080 21,764 22,311 25,086 25,797
Net realized gain on
investments (213) 3,881 773 (4,347) 2,450 1,886
Net change in
unrealized gain
(loss) on investments 833 (737) 14,216 (7,398) (8,322) 7,937
Net increase in net
assets resulting from
operations 11,091 26,225 36,754 10,567 19,214 35,620
PER SHARE DATA:
Net investment income 0.49 1.08 1.02 1.00 1.05 1.02
Net realized and
unrealized gains
(losses) on
investments 0.04 0.15 0.70 (0.53) (0.24) 0.37
Net increase in net
asset value resulting
from operations 0.53 1.23 1.72 0.47 0.81 1.39
Cash dividends paid 0.53 1.05 1.02 1.05 1.02 1.05
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 286,134 289,141 249,702 271,291 328,105 308,568
Other securities 73,106 76,217 67,060 50,697 91,101 86,491
Total assets 361,296 367,937 336,934 325,296 424,581 399,617
Reverse repurchase
agreements payable 92,454 99,454 72,407 75,596 131,725 99,000
Net assets 267,828 267,942 264,074 249,144 292,059 299,913
Net asset value per
share 12.55 12.55 12.37 11.67 12.25 12.46
Per-share market value 12.03 12.43 11.88 10.56 11.88 11.38
</Table>
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<Page>
SELECTED HISTORICAL FINANCIAL DATA
AMERICAN SELECT PORTFOLIO INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
Investment income,
before interest
expense $ 15,954 $ 16,323 $ 15,538 $ 17,090 $ 17,651
Interest expense 1,920 2,822 3,249 3,331 3,486
Investment management
fees 716 710 676 766 773
Other expenses 2,098 726 856 917 897
Net investment income 12,018 12,065 10,754 12,076 12,495
Net realized gain
(loss) on investments 1,093 196 276 41 3,862
Net change in
unrealized gain
(loss) on investments 765 4,723 1,780 (3,224) (2,246)
Net increase in net
assets resulting from
operations 13,876 16,984 12,810 8,893 14,110
PER SHARE DATA:
Net investment income 1.13 1.13 1.01 1.02 1.06
Net realized and
unrealized gains
(losses) on
investments 0.17 0.47 0.18 (0.26) 0.12
Net increase in net
asset value resulting
from operations 1.30 1.60 1.19 0.76 1.18
Cash dividends paid 1.20 1.07 1.01 1.05 1.10
BALANCE SHEET DATA (END
OF PERIOD):
Mortgage loans 132,716 139,443 140,847 156,836 187,045
Other securities 38,853 49,464 40,547 43,380 22,905
Total assets 172,591 190,268 182,935 201,959 212,067
Reverse repurchase
agreements payable 28,500 47,365 45,586 50,975 57,000
Net assets 143,698 142,617 137,042 150,097 154,838
Net asset value per
share 13.48 13.38 12.85 12.67 12.96
Per-share market value 12.86 13.54 11.50 11.69 12.13
</Table>
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FIRST AMERICAN SELECTED PRO FORMA FINANCIAL DATA
The following pro forma financial information has been prepared to show the
impact of the merger based upon two possible merger scenarios. The first
presentation of pro forma financial information assumes all four Existing Funds
approve and participate in the merger and also assumes that shareholders whose
combined net assets total $50 million elect to participate in the New Fund and
that no shareholders elect to exercise statutory dissenters' appraisal rights
(referred to as the First American maximum participation scenario). The second
presentation assumes a combination of the Existing Funds whose combined net
assets exceed the minimum net asset requirement to effect the merger by the
smallest margin and also assumes that approximately 49% of shareholders elect to
participate in the New Fund and that no shareholders elect to exercise statutory
dissenters' appraisal rights (referred to as minimum participation). The
rationale for including the maximum and minimum participation pro forma
information is to provide the range of possible outcomes to potential investors.
The following selected pro forma financial data as of and for the year ended
November 30, 2002, is derived from the pro forma financial statements of First
American and the Existing Funds (in the case of the maximum participation
scenario) and from the pro forma financial statements of First American,
American Strategic, American Strategic II and American Select (in the case of
the minimum participation scenario). The data should be read in conjunction with
the unaudited pro forma financial information and related notes included herein.
The pro forma financial information reflects the allocation of the assets and
liabilities of the Existing Funds in accordance with guidelines outlined in "THE
MERGER--The Merger Agreement--Transactions Relating to the New Fund Option."
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
MAXIMUM PARTICIPATION MINIMUM PARTICIPATION
SCENARIO SCENARIO
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2002 NOVEMBER 30, 2002
--------------------- ---------------------
STATEMENT OF OPERATIONS DATA:
Total income $ 60,604 $ 19,926
Interest expense 7,974 2,693
Investment management fees 7,246 2,295
Other expenses 2,034 901
Net realized gain on investments 1,646 700
Net income 44,996 14,737
Net income per share 0.72 0.71
Cash dividends per share 0.72 0.71
BALANCE SHEET DATA (AT END OF PERIOD):
Mortgage loans, net of allowance 623,174 197,252
Available-for-sale securities 189,020 68,424
Total assets 825,828 270,742
Borrowings 200,273 63,138
Shareholders' equity 624,490 207,312
Book value per common share 10.00 10.00
PRO FORMA EQUIVALENT CASH DIVIDENDS PER SHARE:
American Strategic 0.91 0.90
American Strategic II 0.95 0.94
American Strategic III 0.90 0.89
American Select 0.97 0.96
</Table>
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NEW FUND SELECTED PRO FORMA FINANCIAL DATA
The following pro forma financial information has been prepared to show the
impact of the merger based upon two possible merger scenarios. The first
presentation assumes a combination of the Existing Funds whose combined net
asset values exceed the minimum net asset value requirement to effect the merger
by the smallest margin and also assumes that shareholders holding approximately
49% of the shares of each such Existing Fund elect to participate in the New
Fund and that no shareholders elect to exercise statutory dissenters' appraisal
rights (referred to as maximum election scenario). The second presentation of
pro forma financial information assumes all four Existing Funds approve and
participate in the merger and also assumes that shareholders holding the
Existing Fund shares representing an aggregate net asset value of $50 million
elect to participate in the New Fund and that no shareholders elect to exercise
statutory dissenters' appraisal rights (referred to as minimum election
scenario). The rationale for including the maximum and minimum participation pro
forma information is to provide a range of possible outcomes to potential
investors.
The following summary pro forma financial data as of and for the year ended
November 30, 2002 is derived from the pro forma financial statements of New Fund
and the Existing Funds. The data should be read in conjunction with the
unaudited pro forma financial information and related notes included herein.
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
MAXIMUM NEW FUND MINIMUM NEW FUND
ELECTION SCENARIO ELECTION SCENARIO
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2002 NOVEMBER 30, 2002
------------------ ------------------
STATEMENT OF ASSETS AND LIABILITIES
DATA:
Investments in securities at value $436,134 $65,772
Reverse repurchase agreements payable 106,029 15,990
Net assets 330,618 50,000
Shares outstanding 33,062 5,000
Net asset value per share 10.00 10.00
STATEMENT OF OPERATIONS DATA:
Total income 36,892 5,561
Interest expense 4,221 636
Investment management fees 2,019 304
Other expenses 1,771 267
Net investment income 28,882 4,353
Net realized and unrealized gain
(losses) on securities 614 93
Net increase in net assets from
operations 30,348 4,574
Net investment income per share 0.87 0.87
Cash dividends paid per share 0.87 0.87
</Table>
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COMPARATIVE MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE EXISTING FUNDS, THE NEW FUND AND
FIRST AMERICAN
OVERVIEW
First American and the New Fund were formed as the vehicles through which
the Existing Funds will continue their businesses upon completion of the merger.
As a result of the merger, First American and the New Fund will succeed to the
mortgage and mortgage-related assets held by, and the borrowings of, the
participating Existing Funds.
As of November 30, 2002, the Existing Funds held nearly $900 million of
mortgage-related assets consisting of a portfolio of over 200 separate mortgage
loans with an aggregate outstanding principal amount of approximately
$670.0 million and U.S. agency mortgage-backed securities with an aggregate
outstanding balance of approximately $94.75 million. The loan portfolio had a
weighted average remaining maturity of approximately four years and a weighted
average interest rate of approximately 8.25%. Approximately 58% of the loans pay
interest at a fixed rate, while 42% are adjustable-rate mortgages. Of the
Existing Funds' remaining assets at November 30, 2002, the largest portion
consisted of approximately $97.0 million in corporate notes to real estate
opportunity funds. The Existing Funds seek to enhance their earnings by
financing portions of their mortgage-related asset portfolios with short-term
borrowings. As of November 30, 2002, these borrowings totaled approximately
$215.6 million, which represented 24.10% of the Existing Funds' aggregate total
assets as of such date.
A discussion of the performance for American Strategic and American Select
is included in their respective Annual Reports on Form N-30D for the fiscal year
ended November 30, 2002. A discussion of the performance for American
Strategic II and American Strategic III is included in their respective Annual
Reports on Form N-30D for the fiscal year ended May 31, 2001 and in their
respective Semi-Annual Reports on Form N-SAR for the semi-annual period ended
November 30, 2002. Such Annual and Semi-Annual Reports are incorporated in this
joint proxy statement/prospectus by reference.
Immediately prior to the closing of the merger, the assets of the Existing
Funds participating in the merger effectively will be divided between and
allocated to First American and the New Fund based on the relative proportions
of such Existing Funds' shares that will be converted into First American shares
and New Fund shares. The merger agreement specifies the methodology and criteria
under which these allocations will be made. This methodology and these criteria
are described above under "THE MERGER--The Merger Agreement--Transactions
Relating to the New Fund Option."
First American's strategy is to continue to grow the investment portfolio it
acquires in the merger and to grow its net income over time through additional
investments in mortgage-related assets that will enable First American to
capitalize on the spread between the yield on its assets (net of credit losses)
and the cost of its borrowings and hedging activities. First American will
continue to invest in many of the same types of assets held by the Existing
Funds and will thus emphasize direct ownership of commercial, multifamily and
residential mortgage loans.
The New Fund will be a more static investor in the investment portfolio it
acquires in the merger.
However, unlike the Existing Funds and the New Fund, First American will
seek to qualify as REIT under the Code and intends to operate in a manner that
will enable it to be exempt from the Investment Company Act. In addition, First
American will pay USBAM fees under the REIT Advisory Agreement, which was
structured to be generally consistent with fee arrangements that are being used
by other externally-advised mortgage REITS. The difference in the regulatory
framework of First American compared to the Existing Funds and the New Fund and
the change in the advisory fee structure will, as described below, impact the
financial condition, results of operation and liquidity of First American
compared to the Existing Funds and the New Fund.
CHANGE IN ACCOUNTING BASIS
As registered investment companies, the Existing Funds and the New Fund
present their financial statements at fair value. This means that all
investments are carried by the Existing Funds and will be
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<Page>
carried by the New Fund at their estimated fair value. Changes in unrealized
gains and losses on such investments are reflected by the Existing Funds and
will be reflected by the New Fund in their statements of operations in the
period of the change in value.
Since First American will not be registered under the Investment Company
Act, the financial statements of First American will be presented on a
historical cost basis. This means that most of First American's whole loan
investments will be recorded at their historical cost. Market appreciation on
these investments will not be reflected in First American's results until the
investments are sold. Unrealized depreciation of these investments that is
deemed to be temporary also will not be reflected in First American's results
until the investments are sold. Unrealized depreciation of the whole loan
investments that is deemed to be other than temporary will be reflected in First
American's results in the period of the impairment; however, recoveries in the
value of the investments subsequent to the impairment will not be reflected
until the investments are sold. First American expects that its mortgage-backed
securities and other debt securities will be treated as available-for-sale
securities in its financial statements. These securities will be recorded at
their estimated fair value and unrealized gains and losses will be recorded in
other comprehensive income as a separate component of shareholders' equity.
Realized gains and losses will be reflected in First American's statements of
operations upon disposition of the security.
The Existing Funds' and the New Fund's whole loan valuation methodologies
consider the impact of credit risk in the estimation of fair value of the loans.
As a result, the Existing Funds and the New Fund record changes in the credit
risk of loans in their financial results as unrealized gains and losses as
changes in credit risk occur. First American will record its loans at their
historical cost basis and will establish an allowance for credit losses for the
estimated losses inherent in the portfolio at each measurement date. First
American will record provisions for credit losses each quarter in amounts
necessary to establish the allowance at the level estimated to reflect the
current risk of collection.
The provisions for credit losses recorded by First American will generally
not be deductible by First American for income tax purposes. Accordingly, First
American will be required to make distribution of such amounts in order to avoid
taxation. Upon charge-off of the loans, the amount will be deductible for income
tax purposes. As a result, First American may distribute more than its book
income in periods when the provision for credit losses exceeds net charge-offs
and distribute amounts less than its book income in periods when net charge-offs
exceed the provision for credit losses.
As described above, the assets of the Existing Funds have historically been,
and those of the New Fund will be, recorded at their estimated fair value while
the assets will be recorded by First American at their historical cost. The
estimated fair values of the assets at the date of the merger will be the
initial cost basis for First American. Differences between the fair value of the
assets at the date of the merger and their par value will be amortized or
accreted over the estimated lives of the assets. If the fair value of the assets
exceeds the par value at the date of the merger, the amortization of the premium
will reduce earnings of First American over the life of the assets. If the fair
value of the assets is less than the par value at the date of the merger, the
accretion of this discount will increase earnings of First American over the
life of the assets.
CHANGE IN FINANCIAL STATEMENTS
The financial statements provided by the Existing Funds and the New Fund
under the Investment Company Act include statements of assets and liabilities,
operations, changes in net assets and schedules of investments. The financial
statements of First American will include a balance sheet and statements of
income, comprehensive income, cash flows, and shareholders' equity. Under the
Investment Company Act, the Existing Funds and the New Fund are required to
provide financial statements to shareholders semi-annually. In contrast, First
American will be required to provide its financial statements on a quarterly
basis. The Existing Funds have published and the New Fund will publish their net
asset values on a weekly basis. In contrast, First American is not expected to
publish its net asset value.
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<Page>
First American will adopt a fiscal year-end of December 31. American
Strategic and American Select currently have a fiscal year-end of November 30
and American Strategic II and American Strategic III currently have a fiscal
year-end of May 31. The New Fund has adopted a fiscal year end of October 31.
CHANGE TO A GROWTH ORIENTED BUSINESS PLAN
The Existing Funds are, and the New Fund will be, limited in their capital
raising options. The provisions of the Investment Company Act, for example,
limit their borrowings to an amount equal to one-third of their total assets.
For regulatory, structural and practical reasons, the Existing Funds and the New
Fund are limited in the types of borrowings they can utilize and in the types of
public or private offerings of their equity securities that can be used to raise
capital. The Existing Funds thus mostly depend on principal repayments from
their mortgage and mortgage-related investments and limited borrowings as a
source of liquidity to fund additional investments, as will the New Fund.
One of the principal reasons for the merger is to create an investment
vehicle that will be more flexible than any of the Existing Funds in accessing
capital sources. Because First American will not be registered as an investment
company, First American will not be subject to the borrowing limitations of the
Investment Company Act. First American's plan is to utilize greater levels of
leverage in its investment activities. Once fully invested, First American will
seek to maintain a debt-to-equity ratio of between 1:1 to 1.5:1 with regard to
its mortgage loan portfolio and 4:1 to 9:1 with respect to its portfolio of
mortgage-backed securities. Following the merger, First American will also have
more options in its borrowing activities. In addition to using the types of
borrowings available to the Existing Funds, First American will also seek to
borrow capital through public and private offerings of its debt securities and
through borrowings under secured and unsecured debt facilities. First American
will also be better positioned to raise additional capital through public and
private offerings of its equity securities.
First American's enhanced capital flexibility is intended to enable it to
grow its investment portfolio by purchasing additional mortgage and
mortgage-related assets at positive yield spreads and thereby to increase its
earnings and distributions to shareholders over time.
CHANGE IN MANAGEMENT FEE STRUCTURE
Pursuant to the advisory agreements with American Strategic, American
Strategic II and American Strategic III, USBAM is paid a monthly investment
management fee in an amount equal to an annualized rate of 0.20% of the Existing
Fund's average weekly net assets and 4.50% of the daily gross income accrued by
such Existing Fund during the month ( I.E., investment income, including
amortization of discount and premium, other than gains from the sale of
securities or gains from options and futures contracts less interest on money
borrowed by the Existing Fund). The New Fund will pay a monthly investment
management fee to USBAM pursuant to the same schedule. The monthly investment
management fee shall not exceed in the aggregate 1/12th of 0.725% of an Existing
Fund's or the New Fund's average weekly net assets during the month. Under the
advisory agreement with American Select, USBAM receives a monthly investment
management fee in an amount equal to an annualized rate of 0.50% of American
Select's average weekly net assets. USBAM is not entitled to receive a
performance fee.
Upon completion of the merger, First American will pay USBAM fees under the
REIT Advisory Agreement which has been structured to be generally consistent
with fee arrangements that are being used by other externally-advised,
publicly-traded mortgage REITs. Under the REIT Advisory Agreement, USBAM will
receive a base management fee and a performance fee. The base management fee
shall equal 0.25% per annum for assets that are rated at least investment grade
by a nationally recognized rating agency (and for residential mortgage-backed
securities, determined in the reasonable judgment of USBAM to be of equivalent
credit quality (whether or not rated)) and 1% per annum for the first $1 billion
of other assets and 0.75% of other assets over $1 billion, payable in quarterly
installments not later than 30 days after the end of each fiscal quarter. In
addition, USBAM will be entitled
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to receive a performance fee for each fiscal quarter equal to the product of
(i) the weighted average number of shares of common stock outstanding during
such quarter, and (ii) 20% of the amount by which (a) the net income per share
of common stock of First American (before the performance fee) exceeds (b) a net
income per share that would result in a yield, tied to the historical offering
prices of the common stock, equal to the greater of 10% or the applicable
ten-year U.S. Treasury rate plus 3.5% (each expressed as a quarterly
percentage). See "MANAGEMENT OF FIRST AMERICAN--The REIT Advisory Agreement."
The difference in the fee structure is expected to increase the amount of
the advisory fees payable by First American compared to the aggregate fees
payable by the Existing Funds, which will have the effect of reducing the
earnings and cash available for distribution to shareholders.
For example, for the 12-month period ended November 30, 2002, the Existing
Funds paid aggregate fees to USBAM (including administration fees) of
$5,801,000, while on a pro forma basis for the same period (assuming maximum
participation in First American), the fees payable to USBAM with respect to
First American would have been $7,246,000 (or 1.15% of shareholders equity) and
the fees payable to USBAM with respect to the New Fund would have been $429,000
or 0.85% of net assets. First American's plan is to utilize greater levels of
leverage in its investment activities. Thus, when compared to the fees based on
the Existing Funds' historical leverage levels, the fees based on the increased
leverage of First American will be higher than indicated above.
CHANGE IN DISTRIBUTION REQUIREMENTS
As registered investment companies, the Existing Funds are, and the New Fund
will be, required to distribute at least 90% of their investment company taxable
income each taxable year. Distributions can be made after their tax-year-end to
meet this distribution requirement. Any investment company taxable income or net
capital gains not distributed by the Existing Funds would be subject to
corporate-level income tax. In addition, each Existing Fund is, and the New Fund
will be, required to distribute at least 98% of its current calendar year
investment company taxable income, net capital gains, and any prior year's
undistributed amounts before December 31st of the applicable year in order to
avoid excise tax. In order to avoid all entity-level income and excise taxes, it
is the Existing Funds' practice to distribute 100% of investment company taxable
income and net capital gains.
As a REIT, First American will have moderately different distribution
requirements. To qualify as a REIT, First American must generally distribute, on
an annual basis, at least: the sum of 90% of its REIT taxable income for the tax
year and 90% of its untaxed net income from foreclosure property. Distributions
may be made after tax-year-end to meet this distribution requirement; however,
any REIT taxable income or net capital gains not distributed will be subject to
corporate-level income tax. To avoid a 4% excise tax, a REIT must distribute
annually the sum of 85% of its ordinary taxable income, 95% of its capital gain
net income, and any undistributed income or capital gain from prior tax years.
In computing the amount distributed for purposes of this excise tax,
distributions paid after the REIT's tax-year-end are disregarded. In addition to
the aforementioned distribution requirements, a REIT must distribute, before
tax-year-end, any earnings and profits accumulated in any non-REIT year.
CHANGE IN CAPITAL LOSS CARRYOVERS
As of the Existing Funds' most recent tax-year-ends (American Strategic II
and American Strategic III--May 31, 2002; American Strategic and American
Select--November 30, 2002), the Existing Funds had aggregate capital loss
carryovers of $96 million expiring between 2003 through 2009. These capital
losses primarily resulted from losses occurring in 1995 and 1996. Since these
losses were incurred, the Existing Funds have used these losses to offset all
capital gains realized by the Existing Funds. In each of the last three fiscal
years, the Existing Funds have, in the aggregate, been able to use only
$393,209, $8,760,127, and $7,472,175, respectively, of capital loss carryovers.
USBAM expects that the remaining capital loss carryovers would expire
substantially unused over the next several years. At the time of the merger,
outstanding capital loss carryovers will be available to be applied to offset
taxable gains at the Existing Fund level that are expected to be triggered by
the distribution of New Fund shares. In addition, as a result of the merger, all
but approximately $1.0 million of any further remaining capital loss carryovers
will immediately expire. The utilization of the capital loss carryovers that do
not so expire will be subject to annual limitations.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK AFFECTING FIRST AMERICAN
The following discussion sets forth quantitative information concerning
First American's anticipated market risk exposure. The information is presented
on a pro forma basis for First American assuming maximum participation, that the
merger had been completed on November 30, 2002 and that First American succeeded
to the assets and liabilities of the Existing Funds as of that date. First
American does not believe that its market risk exposure will be materially
different than the market risk exposure of the Existing Funds.
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, credit spreads, foreign currency exchange rates, commodity prices and
equity prices. The primary market risks to which First American will be exposed
following the merger are interest rate risk and credit spread risk. Interest
rate risk is highly sensitive to many factors, including governmental, monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond the control of First American. Credit
spread risk is highly sensitive to dynamics of the markets for mortgage loans
and other loans and securities to be held by First American. Excessive supply of
these assets combined with reduced demand will cause the market to require a
higher yield. This demand for higher yield will cause the market to use a higher
spread over the U.S. Treasury securities yield curve, or other benchmark
interest rates, to value these assets. Changes in the general level of the U.S.
Treasury yield curve and in the general level of credit spreads can have
significant effects on the market value of First American's portfolio.
As of November 30, 2002, approximately 50% of the total assets of the
Existing Funds to be acquired by First American upon completion of the merger
were fixed rate mortgage loans and notes valued based on a market credit spread
to U.S. Treasury securities. As U.S. Treasury securities are priced to a higher
yield and/or the credit spread to U.S. Treasury securities used to price other
debt securities is increased, the market value of First American's portfolio may
decrease. Conversely, as U.S. Treasury securities are priced to a lower yield
and/or the spread to U.S. Treasury securities used to price other debt
securities is decreased, the market value of First American's portfolio may
increase.
As of November 30, 2002 approximately 36% of the total assets of the
Existing Funds to be acquired by First American upon completion of the merger
were adjustable rate mortgage loans and notes valued based on a market credit
spread to the corresponding London Inter-Bank Offer Rate (or LIBOR) that is in
place on individual loans and notes. As of November 30, 2002, all such loans and
notes used U.S. one-month LIBOR or U.S. six-month LIBOR as their base index. As
LIBOR increases to higher yield levels and/or the credit spread to LIBOR used to
price other adjustable-rate mortgages increases, the market value of First
American's portfolio may decrease. Conversely, as LIBOR decreases to lower yield
levels and/or the credit spread to LIBOR used to price other adjustable rate
mortgages is decreased, the market value of First American's portfolio may
increase. Changes in the market value of First American's portfolio may affect
First American's net income or cash flow directly through their impact on
unrealized gains or losses on securities held for trading or sale or indirectly
through their impact on First American's ability to borrow. Changes in the level
of the U.S. Treasury yield curve can also affect, among other things, the
prepayment assumptions used to value certain of First American's securities and
First American's ability to realize gains from the sale of such assets. In
addition, changes in the general level of the LIBOR money market rates can
affect First American's net interest income.
All of the adjustable rate mortgage loans held by the Existing Funds as of
November 30, 2002 have "floor" rates, such that the interest rate on an
individual loan will never adjust lower than the "floor" rate regardless of any
downward movement in LIBOR. Floor rates on adjustable rate mortgage loans and
notes using the U.S. one-month LIBOR index range from 6.75% to 9.50%. Floor
rates on adjustable rate mortgage loans and notes using the U.S. six-month LIBOR
index range from 8.20% to 8.45%. The effect of floor rates in a falling interest
rate environment is to position the loan to maintain a
159
<Page>
higher level of interest income than if the floor rate were not in place. In a
rising interest rate environment the interest income from the loan will not
adjust upward until the index plus credit spread adjusts to a level higher than
the floor rate.
Based on the liabilities of the Existing Funds as of November 30, 2002,
First American's liabilities will be floating rate based on a market spread to
U.S. one-month LIBOR. A fixed rate credit facility in the amount of $84,954,422
expired on April 17, 2003. In the case of the floating rate liabilities, as the
level of U.S. one-month LIBOR increases or decreases, First American's interest
expense will move in the same direction. Based on November 30, 2002 outstanding
amounts, a 1.0% increase or decrease in U.S. one-month LIBOR would cause a
$1,313,000 change in the annual interest expense payable by First American.
Like the Existing Funds, First American intends to enter into hedging
transactions to protect its investment portfolio from interest rate fluctuations
and other changes in market conditions. These hedging strategies will be
consistent with the current strategies employed by the Existing Funds, and First
American will develop and utilize other strategies as appropriate and consistent
with its qualification as a REIT. These transactions may include interest rate
swaps, the purchase or sale of interest rate collars, caps or floors, options,
mortgage derivatives and other hedging instruments. These instruments may be
used to hedge as much of the interest rate risk as USBAM determines is in the
best interest of First American, given the cost of such hedges and the need to
maintain First American's status as a REIT. USBAM may elect to have First
American bear a level of interest rate risk that could otherwise be hedged when
USBAM believes, based on all relevant facts, that bearing such risk is
advisable.
Hedging devices and mortgage instruments are complex and can produce
volatile results. Accordingly, there can be no assurance that First American's
hedging strategy will have the desired beneficial impact on First American's
earnings, financial condition and the resulting dividend yield of its common
stock. Instead, such hedging strategies may have an adverse effect on First
American's net income and cash available for distribution to shareholders.
Moreover, with respect to certain of the instruments used as hedges, First
American will be exposed to the risk that the counterparties with which First
American trades may cease making markets and quoting prices in such instruments,
which may render First American unable to enter into an offsetting transaction
with respect to an open position.
The following tables quantify the potential changes in net portfolio value
and net interest income under various interest rates and credit spread
scenarios. Net portfolio value is defined as the value of interest-earning
assets net of the value of interest-bearing liabilities. It is evaluated using
an assumption that interest rates, as defined by the U.S. Treasury yield curve,
increase or decrease up to 150 basis points and the assumption that the yield
curves of the rate shocks will be parallel to each other.
Net interest income is defined as interest income earned from
interest-earning assets net of the interest expense incurred by the interest
bearing liabilities. It is evaluated using the assumptions that interest rates,
as defined by the LIBOR curve, increased or decreased by 150 basis points and
the assumption that the yield curve of the LIBOR shocks will be parallel to each
other. Market value in this scenario is calculated using the assumption that the
U.S. Treasury yield curve remains constant.
All changes in income and value are measured as percentage changes from the
respective values calculated in the scenario labeled as "Base Case." The base
interest rate scenario assumes interest rates as of November 30, 2002. Actual
results could differ significantly from these estimates.
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PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN U.S. TREASURY YIELD CURVE MOVEMENTS
<Table>
<Caption>
PROJECTED CHANGE IN CHANGE IN TREASURY YIELD
PORTFOLIO NET MARKET VALUE CURVE +/- BASIS POINTS
- -------------------------- --------------------------------------------------
0.67% -150
0.46% -100
0.24% -50
0.00% Base Case
-0.27% +50
-0.63% +100
-1.21% +150
</Table>
PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
GIVEN CREDIT SPREAD MOVEMENTS
<Table>
<Caption>
CHANGE IN CREDIT
PROJECTED CHANGE IN SPREADS
PORTFOLIO NET MARKET VALUE +/- BASIS POINTS
- -------------------------- --------------------------------------------------
0.21% -150
0.16% -100
0.09% -50
0.00% Base Case
-0.12% +50
-0.34% +100
-0.77% +150
</Table>
PROJECTED CHANGE IN PORTFOLIO NET INTEREST INCOME
GIVEN LIBOR MOVEMENTS
<Table>
<Caption>
PROJECTED CHANGE IN CHANGE IN LIBOR
PORTFOLIO NET INTEREST INCOME +/- BASIS POINTS
- ----------------------------- --------------------------------------------------
3.51% -150
2.36% -100
1.18% -50
0.00% Base Case
-1.18% +50
-2.36% +100
-3.53% +150
</Table>
CREDIT RISK
Credit risk is the exposure to loss from loan defaults. Default rates are
subject to a wide variety of factors, including:
- national, regional and local economic conditions;
- local real estate conditions (such as an oversupply of housing or commercial
space);
- changes or continued weakness in specific industry segments;
- perceptions by prospective tenants of the safety, attractiveness,
construction quality, age and design of the property;
- the willingness and ability of the property's owner to provide capable
management and adequate maintenance;
- demographic factors; and
- increases in operating expenses (such as energy or insurance costs).
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All loans are subject to a certain probability of default. In First
American's portfolio all losses experienced by a mortgage will be borne by First
American. Changes in the expected default rates of the underlying mortgages will
significantly affect the value of First American, its book value, net income and
cash available to pay distributions to shareholders.
First American will manage credit risk through adherence to the rigorous
underwriting standards developed and implemented over the last decade by the
management team of USBAM and through on-going monitoring of loan performance.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing and/or maturing of assets and liabilities. First American's asset
acquisition and borrowing strategies are intended to offset the potential
adverse effects resulting from the differences between fixed rates or other
limitations on coupon rate adjustment, such as interest rate caps, associated
with its mortgage loan assets and the shorter term predominantly variable rate
nature of First American's related borrowings. In general, USBAM's management
team's strategy has been to have a low advance rate on its less liquid
portfolio. This helps to mitigate the risk of margin calls due to deterioration
of collateral value in periods of rising interest rates. This is less important
for those assets considered liquid as there is a stable market for the financing
of these securities.
First American will use interest rate duration as its primary measure of
interest rate risk. This metric, expressed when considering any existing
leverage, will allow First American to approximate changes in the net market
value of its portfolio given potential changes in the U.S. Treasury yield curve.
Interest rate duration considers both assets and liabilities. As of
November 30, 2002, the duration of the combined portfolio was 2.76. This implies
that a parallel shift of the U.S. Treasury yield curve of 100 basis points would
cause the net asset value of the portfolio to increase or decrease by
approximately 2.76%. These assets may have more complex reactions to interest
rate changes than a straight duration calculation can predict. Although USBAM
believes this metric represents a good approximation of the change in portfolio
net market value in response to changes in interest rates, actual performance
may vary due to changes in prepayments, credit spreads and the cost of increased
market volatility.
LIQUIDITY RISK
The primary liquidity risk that will be faced by First American arises from
financing long maturity mortgage assets with short-term debt. As of
November 30, 2002, the Existing Funds had no long-term debt and instead held
approximately $95,615,305 of mortgage-backed securities and reverse repurchase
agreements. The assets pledged to secure these short-term borrowings are high
quality liquid assets. Thus, historically, the Existing Funds have not had
trouble rolling over short-term debt as it matures. However, there can be no
assurances First American will always be able to roll over its short-term debt.
Since the advance rate on this debt is 97% of collateral value, there is a risk
of margin calls that could be caused by asset value declines or changes in
lender over-collateralization requirements. In addition, at November 30, 2002,
the Existing Funds had $122,700,000 of whole loan reverse repurchase agreements.
The assets pledged to secure these short-term borrowings are relatively illiquid
mortgage loans. The roll-over risk is higher for these borrowings, but has been
mitigated by USBAM. Although the Existing Funds have not experienced problems
rolling over this short-term debt, there can be no assurances First American
will always be able to roll over this short-term debt.
PREPAYMENT RISK
First American will attempt to mitigate the effects of mortgage prepayments
on multifamily and commercial loans through the collection of prepayment
penalties whenever possible.
In general, First American believes it will be able to reinvest prepayments
at acceptable yields. However, no assurances can be given that, should
significant prepayments occur, market conditions would be such that acceptable
investments could be identified and repayment proceeds reinvested.
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STOCK OWNERSHIP OF THE EXISTING FUNDS
The following tables set forth, as of [ ], 2003, except as otherwise
noted, the beneficial ownership of the common stock of each Existing Fund by
(i) each person known by each Existing Fund to beneficially hold more than 5%
its outstanding common stock, (ii) each director of each Existing Fund,
(iii) each executive officer of each Existing Fund and (iv) all executive
officers and directors of each Existing Fund as a group. Except as otherwise
noted, the listed beneficial owner has sole voting and investment power with
respect to the listed shares.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP SHARES(1)
- ---------------- -------------------- -------------------------
Sit Investment Associates, Inc.
4600 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4130 758,846(2) 17.94%
Thomas S. Schreier, President(3) -- --
John G. Wenker, Senior Vice President(3) 1,782.68(4) (*)
Russell J. Kappenman, Vice President and
Assistant Treasurer(3) 63.195 (*)
Robert H. Nelson, Treasurer(3) -- --
Jeffery M. Wilson, Vice President
Administration(3) -- --
Roger A. Gibson, Director(3) -- --
Leonard W. Kedrowski, Director(3) -- --
John M. Murphy Jr., Director(3) -- --
Richard K. Riederer, Director(3) -- --
Joseph D. Strauss, Director(3) -- --
Virginia L. Stringer, Director(3) -- --
James M. Wade, Director(3) -- --
All executive officers and directors as
a group (12 persons) 1,845.875 (*)
</Table>
- ---------------------
(*) Represents less than 1%.
(1) Based on a total of [ ], 2003 shares outstanding as of [ ],
2003.
(2) Sit Investment Associates, Inc. has sole voting and dispositive power over
758,846 shares, 756,298 of which are held in client accounts of Sit
Investment Associates, Inc., 2,145 of which are owned by Sit Bond Fund and
403 of which are owned by Sit Balanced Fund. Sit Investment
Associates, Inc. is the investment advisor for Sit Bond Fund and Sit
Balanced Fund, and Sit Investment Associates, Inc. has sole voting power
and dispositive power for all securities held by such funds. The
information relating to the beneficial ownership of Sit Investment
Associates, Inc. and its affiliates has been derived from the
Schedule 13D/A, dated April 1, 2002, filed by Sit Investment
Associates, Inc. with the SEC.
(3) The address of the beneficial owner is 800 Nicollet Mall, Minneapolis,
Minnesota 55402.
(4) Includes 172.16 shares that Mr. Wenker owns jointly with his spouse, over
which Mr. Wenker shares voting and investment power with his spouse.
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<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF OUTSTANDING
- ---------------- -------------------- -------------------------
Sit Investment Associates, Inc.
4600 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4130 3,649,399(2) 22.87%
Thomas S. Schreier, President(3) -- --
John G. Wenker, Senior Vice President(3) 3,268.74(4) (*)
Russell J. Kappenman, Vice President and
Assistant Treasurer(3) 1,265.783 (*)
Robert H. Nelson, Treasurer(3) -- --
Jeffery M. Wilson, Vice President
Administration(3) -- --
Roger A. Gibson, Director(3) -- --
Leonard W. Kedrowski, Director(3) -- --
John M. Murphy Jr., Director(3) -- --
Richard K. Riederer, Director(3) -- --
Joseph D. Strauss, Director(3) -- --
Virginia L. Stringer, Director(3) -- --
James M. Wade, Director(3) -- --
All executive officers and directors as
a group (12 persons) 4,534.523 (*)
</Table>
- ---------------------
(*) Represents less than 1%.
(1) Based on a total of [ ] shares outstanding as of [ ], 2003.
(2) Sit Investment Associates, Inc. has sole voting and dispositive power over
3,649,399 shares, 3,601,535 of which are held in client accounts of Sit
Investment Associates, Inc., 32,394 of which are owned by Sit Bond Fund and
15,470 of which are owned by Sit Balanced Fund. Sit Investment
Associates, Inc. is the investment advisor for Sit Bond Fund and Sit
Balanced Fund, and Sit Investment Associates, Inc. has sole voting power
and dispositive power for all securities held by such funds. The
information relating to the beneficial ownership of Sit Investment
Associates, Inc. and its affiliates has been derived from the
Schedule 13D, dated February 1, 2002, filed by Sit Investment Associates,
Inc. with the SEC.
(3) The address of the beneficial owner is 800 Nicollet Mall, Minneapolis,
Minnesota 55402.
(4) Includes 817.185 shares that Mr. Wenker owns jointly with his spouse, over
which Mr. Wenker shares voting and investment power with his spouse.
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<Page>
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP SHARES(1)
- ---------------- -------------------- -------------------------
Sit Investment Associates, Inc.
4600 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4130 1,794,350(2) 8.41%
Thomas S. Schreier, President(3) -- --
John G. Wenker, Senior Vice President(3) 9,553.419(4) (*)
Russell J. Kappenman, Vice President and
Assistant Treasurer(3) 1,945.512(5) (*)
Robert H. Nelson, Treasurer(3) -- --
Jeffery M. Wilson, Vice President
Administration(3) -- --
Roger A. Gibson, Director(3) -- --
Leonard W. Kedrowski, Director(3) -- --
John M. Murphy Jr., Director(3) -- --
Richard K. Riederer, Director(3) -- --
Joseph D. Strauss, Director(3) -- --
Virginia L. Stringer, Director(3) -- --
James M. Wade, Director(3) -- --
All executive officers and directors as
a group (12 persons) 11,498.931 (*)
</Table>
- ---------------------
(*) Represents less than 1%.
(1) Based on a total of [ ] shares outstanding as of [ ], 2003.
(2) Sit Investment Associates, Inc. has sole voting and dispositive power over
1,794,350 shares, 1,776,061 of which are held in client accounts of Sit
Investment Associates, Inc., 7,672 of which are owned by Sit Bond Fund and
10,609 of which are owned by Sit Balanced Fund. Sit Investment
Associates, Inc. is the investment advisor for Sit Bond Fund and Sit
Balanced Fund, and Sit Investment Associates, Inc. has sole voting power
and dispositive power for all securities held by such funds. The
information relating to the beneficial ownership of Sit Investment
Associates, Inc. and its affiliates has been derived from the
Schedule 13D, dated February 1, 2002, filed by Sit Investment Associates,
Inc. with the SEC.
(3) The address of the beneficial owner is 800 Nicollet Mall, Minneapolis,
Minnesota 55402.
(4) Includes 4,922.098 shares that Mr. Wenker owns jointly with his spouse,
over which Mr. Wenker shares voting and investment power with his spouse.
Also includes 618.332 shares owned by Mr. Wenker's spouse, over which
Mr. Wenker shares voting and investment power with his spouse.
(5) Includes 2.185 shares that Mr. Kappenman owns jointly with his spouse, over
which Mr. Kappenman shares voting and investment power with his spouse.
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<Page>
AMERICAN SELECT PORTFOLIO INC.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP SHARES(1)
- ---------------- -------------------- -------------------------
Sit Investment Associates, Inc.
4600 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4130 1,540,122(2) 12.90%
Thomas S. Schreier, President(3) -- --
John G. Wenker, Senior Vice President(3) 784.296(4) (*)
Russell J. Kappenman, Vice President and
Assistant Treasurer(3) -- --
Robert H. Nelson, Treasurer(3) -- --
Jeffery M. Wilson, Vice President
Administration(3) -- --
Roger A. Gibson, Director(3) -- --
Leonard W. Kedrowski, Director(3) -- --
John M. Murphy Jr., Director(3) -- --
Richard K. Riederer, Director(3) -- --
Joseph D. Strauss, Director(3) -- --
Virginia L. Stringer, Director(3) -- --
James M. Wade, Director(3) -- --
All executive officers and directors as
a group (12 persons) 784.296 (*)
</Table>
- ---------------------
(*) Represents less than 1%.
(1) Based on a total of [ ] shares outstanding as of [ ],
2003.
(2) Sit Investment Associates, Inc. has sole voting and dispositive power over
1,540,122 shares, 1,527,388 of which are held in client accounts of Sit
Investment Associates, Inc., 6,725 of which are owned by Sit Bond Fund and
6,009 of which are owned by Sit Balanced Fund. Sit Investment
Associates, Inc. is the investment advisor for Sit Bond Fund and Sit
Balanced Fund, and Sit Investment Associates, Inc. has sole voting power
and dispositive power for all securities held by such funds. The
information relating to the beneficial ownership of Sit Investment
Associates, Inc. and its affiliates has been derived from the
Schedule 13D, dated November 2, 2001, filed by Sit Investment Associates,
Inc. with the SEC.
(3) The address of beneficial owner is 800 Nicollet Mall, Minneapolis,
Minnesota 55402.
(4) Includes 466.296 shares that Mr. Wenker owns jointly with his spouse, over
which Mr. Wenker shares voting and investment power with his spouse. Also
includes 116 shares owned by Mr. Wenker's spouse, over which Mr. Wenker
shares voting and investment power with his spouse.
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<Page>
DESCRIPTION OF CAPITAL STOCK OF FIRST AMERICAN
The following summary of the terms of the capital stock of First American
does not purport to be complete and is subject to and qualified in its entirety
by reference to First American's articles of incorporation and bylaws, each of
which is filed as an exhibit to the registration statement of which this joint
proxy statement/prospectus is a part.
GENERAL
Upon completion of the merger, the authorized capital stock of First
American will consist of 100 million shares, all with a par value of $0.01 per
share. Initially, 98 million shares will be classified as common stock and 2
million shares will be classified as preferred stock. Upon completion of the
merger, an estimated 62,449,001 shares of common stock will be outstanding
(assuming the First American maximum participation scenario) and no shares of
preferred stock will be outstanding.
First American's board of directors will be authorized (i) to classify and
reclassify any unissued shares of any series of capital stock; (ii) to provide
for the issuance of shares in other classes or series, including preferred stock
in one or more series; (iii) to establish the number of shares in each class or
series; and (iv) to fix the preferences, conversion and other rights, voting
powers, restrictions, distribution limitations, qualifications and redemption
terms and conditions of such class or series.
PREFERRED STOCK
First American's board of directors is authorized to issue 2 million shares
of currently undesignated preferred stock in classes or series. First American's
board of directors is also authorized to fix the designations, powers,
preferences and the relative, participating, optional or other special rights of
the shares of each class or series and any qualifications, limitations and
restrictions thereon. Any such preferred stock issued by First American may rank
prior to the common stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
common stock.
Preferred stock would be available for possible future financings of, or
acquisitions by, First American and for general corporate purposes without any
legal requirement that shareholder authorization for issuance be obtained. The
purpose of authorizing First American's board of directors to issue preferred
stock is, in part, to eliminate delays associated with a shareholder vote on
specific issuances. The issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or seeking to acquire, a significant portion of the
outstanding stock of First American by means of a merger, tender offer, proxy
contest or otherwise.
As of the date hereof, First American did not have any preferred stock
outstanding. First American's board of directors has no present plans to issue
any preferred stock.
COMMON STOCK
Each share of First American common stock issued in the merger will be duly
authorized, fully paid and nonassessable. Except as described below, the holders
of the common stock will be entitled to one vote for each share held of record
on all matters submitted to a vote of the shareholders. No cumulative voting
rights for the election of directors will attach to the shares of common stock.
Subject to the provisions of Maryland law and any preferential rights with
respect to any outstanding capital stock, holders of common stock are entitled
to receive ratably such dividends or other distributions as may be declared by
the board of directors out of funds legally available therefor. If First
American is liquidated or dissolved, subject to the right of any holders of the
capital stock to receive preferential distributions, each outstanding share of
common stock will be entitled to participate ratably in the net assets remaining
after payment of, or adequate provision for, all known debts and liabilities of
First American. Shares of common stock will have no conversion, preference,
redemption, exchange or preemptive rights. For a further description of First
American's common stock, see "COMPARISON OF RIGHTS AND INVESTMENTS."
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<Page>
The transfer agent and registrar for First American common stock is
EquiServe.
ADDITIONAL CLASSES OF STOCK
First American's board of directors may authorize the issuance of additional
classes or series of stock, including preferred stock. Prior to issuance of
shares of each series, First American's board of directors will be required by
the MGCL and the articles of incorporation to set, for each such series, subject
to the provisions of the articles of incorporation regarding ownership limits,
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to the dividends or other distributions, qualifications and terms
or conditions of redemption, as are permitted under the MGCL. First American's
board of directors could authorize the issuance of capital stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction which holders of some, or a majority, of the shares of common stock
might believe to be in their best interests or in which holders of some, or a
majority, of the common stock might receive a premium for their common stock
over the then market price of such common stock.
RESTRICTIONS ON TRANSFER
Two of the requirements of qualification as a REIT are that:
- First American common stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during
a proportionate part of a shorter taxable year (other than during its
first taxable year as a REIT); and
- not more than 50% of the value of the outstanding shares of First American
stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain exempt entities) during the
last half of a taxable year (other than during its first taxable year as a
REIT).
An opinion as to First American's initial qualification as a REIT following
the merger has been rendered by Ernst & Young. In order that First American may
meet these requirement at all times, the articles of incorporation provide that,
subject to certain exceptions, no person may own, or be deemed to own by virtue
of the attribution provisions of the REIT provisions or the Code, more than the
ownership limit, which is equal to 9.8% of the number or value of the
outstanding shares of capital stock of First American. First American's board of
directors may waive the ownership limit if evidence satisfactory to the board of
directors is presented that such ownership limit will not jeopardize First
American's status as a REIT. As a condition to such waiver, First American's
board of directors may require opinions of counsel satisfactory to it and must
receive an undertaking from the applicant with respect to preserving the REIT
status of First American. The ownership limit will not apply if a majority of
First American's board of directors (including at least a majority of the
independent directors) determine that it is no longer in the best interests of
First American to attempt to qualify, or to continue to qualify, as a REIT.
If shares of First American common stock and/or preferred stock in excess of
the ownership limit, or shares which would cause First American to be
beneficially owned by fewer than 100 persons, cause First American to become
"closely held" under Section 856(h) of the Code or otherwise to cause First
American to fail to qualify as a REIT, are issued or transferred to any person,
such issuance or transfer shall be void ab initio and the intended transferee
will acquire no rights to such First American common stock and/or preferred
stock. Shares issued or transferred that would cause any shareholder to own more
than the ownership limit or cause First American to be beneficially owned by
fewer than 100 persons or cause First American to become "closely held" under
Section 856(h) of the Code or otherwise to cause First American to fail to
qualify as a REIT will be transferred, without action by the prohibited owner,
to a trust for the exclusive benefit of one or more charitable beneficiaries
selected by First American, and the prohibited owner shall not acquire any
rights in such shares. Such automatic transfer shall be deemed to be effective
as of the close of business on the business day prior to the date of such
violative transfer. Shares of common or preferred stock held by the trustee
shall be issued and outstanding shares of common or preferred stock. The trustee
of the trust shall be appointed by
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First American and shall be independent of First American and the prohibited
owner. The prohibited owner shall have no right to receive dividends or other
distributions with respect to, or possess any rights to vote or other rights
attributable to the shares held in the trust. Any dividend or other distribution
paid prior to the discovery by First American that shares of common or preferred
stock have been transferred to the trustee shall be paid by the recipient of
such dividend or distribution to the trustee upon demand for the benefit of the
charitable beneficiary, and any dividend or other distribution authorized but
unpaid shall be paid when due to the trustee. The trustee shall have all
dividend and voting rights with respect to shares held in the trust, which
rights shall be exercised for the exclusive benefit of the charitable
beneficiary. Any dividend or distribution so paid to the trustee shall be held
in trust for the charitable beneficiary.
Within 20 days of receiving notice from First American that shares of common
or preferred stock of First American have been transferred to the trust, the
trustee shall sell the shares held in the trust to a person, designated by the
trustee, whose ownership of the shares will not violate the ownership
limitations set forth in the articles of incorporation. Upon such sale, any
interest of the charitable beneficiary in the shares sold shall terminate and
the trustee shall distribute the net proceeds of the sale to the prohibited
owner and to the charitable beneficiary as follows. The prohibited owner shall
receive the lesser of (i) the price paid by the prohibited owner for the shares
or, if the prohibited owner did not give value for the shares in connection with
the event causing the shares to be held in the trust (e.g., a gift, devise or
other such transaction), the market price of such shares on the day of the event
causing the shares to be held in the trust and (ii) the price per share received
by the trustee from the sale or other disposition of the shares held in the
trust. Any net sale proceeds in excess of the amount payable to the prohibited
owner shall be paid immediately to the charitable beneficiary. If, prior to the
discovery by First American that shares have been transferred to the trust, such
shares are sold by a prohibited owner, then (i) such shares shall be deemed to
have been sold on behalf of the trust and (ii) to the extent that the prohibited
owner received an amount for such shares that exceeds the amount that such
prohibited owner was entitled to receive pursuant to the aforementioned
requirement, such excess shall be paid to the trustee upon demand.
The ownership limit provision will not be automatically removed even if the
REIT provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration is increased. Any
change in the ownership limit would require an amendment to the articles of
incorporation. In addition to preserving First American's status as a REIT, the
ownership limit may have the effect of precluding an acquisition of control of
First American without the approval of the board of directors and shareholders.
All certificates representing shares of First American common stock will
bear a legend referring to the restrictions described above.
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DESCRIPTION OF CAPITAL STOCK OF THE NEW FUND
The New Fund was incorporated in Minnesota on November 19, 2002 and is
authorized to issue up to one billion shares of capital stock, $.01 par value.
The shares are divisible into classes and series, have the designations, voting
rights and other rights and preferences, and are subject to the restrictions,
that the New Fund's board of directors may from time to time establish, fix and
determine. Unless otherwise designated by the board of directors, all issued
shares will be deemed common shares. All of the shares offered in connection
with the merger will be common shares and will, upon issuance, be duly
authorized, fully paid and nonassessable. Common shareholders are entitled to
receive dividends when authorized by the board of directors out of assets
legally available for the payment of dividends. They are also entitled to share
ratably in the New Fund's assets legally available for distribution to the New
Fund's shareholders in the event of the New Fund's liquidation, dissolution or
winding up, after payment of or adequate provision for all of the New Fund's
known debts and liabilities. These rights are subject to the preferential rights
of any other class or series of the New Fund's stock.
Each outstanding common share entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of directors. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares entitled to vote in the election
of directors can elect all of the directors then standing for election and the
holders of the remaining shares will not be able to elect any directors.
Common shareholders have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of the New Fund's securities. All common shares will have equal dividend,
liquidation and other rights.
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US FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES
RELATING TO THE MERGER AND THE OWNERSHIP OF COMMON STOCK IN FIRST AMERICAN OR
THE NEW FUND. THIS SUMMARY IS BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION
ONLY AND IS NOT TAX ADVICE. YOUR TAX CONSEQUENCES MAY VARY DEPENDING ON YOUR
PARTICULAR SITUATION AND THIS DISCUSSION DOES NOT PURPORT TO DISCUSS ALL ASPECTS
OF TAXATION THAT MAY BE RELEVANT TO A SHAREHOLDER IN LIGHT OF HIS OR HER
PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO A SHAREHOLDER SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, EXCEPT TO THE EXTENT DISCUSSED
UNDER THE HEADINGS "--US FEDERAL INCOME TAXATION OF TAX-EXEMPT SHAREHOLDERS" AND
"--US FEDERAL INCOME TAXATION OF NON-U.S. SHAREHOLDERS OF EITHER FIRST AMERICAN
OR THE NEW FUND." SHAREHOLDERS SUBJECT TO SPECIAL TREATMENT INCLUDE, WITHOUT
LIMITATION, INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, BROKER-DEALERS,
TAX-EXEMPT ORGANIZATIONS, THOSE HOLDING COMMON STOCK AS PART OF A CONVERSION
TRANSACTION, A HEDGE OR HEDGING TRANSACTION OR AS A POSITION IN A STRADDLE FOR
TAX PURPOSES, FOREIGN CORPORATIONS OR PARTNERSHIPS, AND PERSONS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. IN ADDITION, THE SUMMARY BELOW DOES
NOT CONSIDER THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS THAT MAY
BE APPLICABLE TO YOU AS A SHAREHOLDER.
The information in this summary is based on the Code, current, temporary and
proposed regulations promulgated under the Code, the legislative history of the
Code, current administrative interpretations and practices of the IRS, and court
decisions, all as of the date of this joint proxy statement/ prospectus. The
administrative interpretations and practices of the IRS upon which this summary
is based include its practices and policies as expressed in private letter
rulings which are not binding on the IRS, except with respect to the taxpayers
who requested and received such rulings. Future legislation, regulations,
administrative interpretations and practices, and court decisions may affect the
tax consequences contained in this summary, possibly on a retroactive basis.
First American and the New Fund have not requested, and do not plan to request,
any rulings from the IRS concerning their tax treatment or the tax consequences
contained in this summary, and the statements in this joint proxy
statement/prospectus are not binding on the IRS or a court. Thus, First American
and the New Fund cannot provide any assurance that the tax consequences
contained in this summary will not be challenged by the IRS or sustained by a
court if challenged by the IRS.
US FEDERAL INCOME TAX TREATMENT OF THE MERGER AND THE RECEIPT OF FIRST AMERICAN
SHARES
The merger is intended to qualify as a tax-free reorganization. The Existing
Funds have received an opinion from Ernst & Young that the merger will qualify
as a tax-free reorganization. Specifically, Ernst & Young opined that the merger
will qualify as tax-free reorganization under Section 368(a) of the Code, and
that neither the Existing Funds nor the Existing Funds' shareholders will
recognize taxable gain or loss as a result of the common shares of First
American distributed and received in the merger. In issuing its tax opinion,
Ernst & Young relied upon legal opinions from Clifford Chance US LLP and
Dorsey & Whitney LLP that each Existing Fund will merge with and into First
American under the applicable laws of the State of Maryland and the State of
Minnesota, respectively, and that each merger will qualify as a statutory merger
under applicable state law. Shareholders who receive cash (pursuant to the
exercise of statutory dissenters' appraisal rights or in lieu of fractional
shares) or participate in the New Fund Option will, however, recognize taxable
gain, if any, in the merger. The basis of First American shares, if any,
received by an Existing Fund shareholder who exchanges Existing Fund stock for
First American shares will be the same as the basis of the Existing Fund shares
surrendered in exchange therefor, decreased by the fair market value of New Fund
shares, if any, received by such shareholder, and increased by the amount of
capital gain recognized by such shareholder and the amount, if any, treated as a
dividend to such shareholder as a result of receiving any New Fund shares.
Shareholders in the Existing Funds that participate in the merger will
receive shares of First American common stock at the exchange rate of one newly
issued share of First American common stock for each $10.00 of Existing Fund net
asset value their shares represent. As a result, shareholders of Existing Funds
that so elect will likely receive a different number of First American shares
than of
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the Existing Fund shares they exchange. For this reason, those shareholders of
Existing Funds should allocate the aggregate basis of their Existing Fund shares
to the shares they receive of First American shares equally among all of the
shares received.
Shareholders of Existing Funds that receive New Fund shares in addition to
First American shares will first decrease their aggregate basis in the Existing
Fund shares exchanged by the fair market value of New Fund shares received, and
increase such basis by the amount of capital gain recognized and the amount, if
any, treated as a dividend as a result of receiving New Fund shares.
Shareholders of Existing Funds receiving both New Fund shares and First American
shares should allocate this adjusted aggregate basis equally among all of the
First American shares received. Shareholders of Existing Funds will have a basis
in the New Fund shares received equal to their fair market value on the date
they are issued. As described in the section immediately below, shareholders of
Existing Funds will be subject to federal income tax on any gain realized upon
their receipt of New Fund shares.
The Existing Funds also will recognize any gain realized with respect to the
distribution of New Fund shares because those shares will not constitute
"qualified property" within the meaning of Section 361(c)(2) of the Code. The
amount of any realized gain will equal the difference between each Existing
Fund's basis in New Fund shares that are distributed and the fair market value
of those shares. Each of the Existing Funds has capital loss carryovers
available, which may be utilized to offset gain recognized with respect to the
distribution of New Fund shares. USBAM believes that the amount of the capital
loss carryovers available to each Existing Fund will be sufficient to offset
completely any gain that each Existing Fund may recognize by reason of the
distribution of New Fund shares. As a result of the merger, all but
approximately $1.0 million of capital loss carryovers will be used by the
Existing Funds or will expire immediately. Capital loss carryovers that are not
utilized and do not expire will be available exclusively to First American and
none will be available to the New Fund.
If the merger fails to qualify as a tax-free reorganization, the Existing
Funds' shareholders also could recognize taxable gain (at capital gains rates
assuming the Existing Fund shares are held as capital assets) to the extent that
the fair market value of the First American common shares received exceeds the
adjusted tax basis of their Existing Fund shares converted into First American
common shares. The basis of the First American shares received by the Existing
Funds' shareholders in the merger will be the same as the basis of the Existing
Fund shares surrendered in the merger, decreased by the fair market value of New
Fund shares received, if any, and increased by the amount of gain, if any,
recognized in the merger. You should consult with your tax advisors regarding
the tax consequences of the merger to you.
US FEDERAL INCOME TAX TREATMENT OF THE RECEIPT OF NEW FUND SHARES
Shareholders participating in the New Fund Option who receive solely New
Fund shares generally will be subject to tax on gain they realize at capital
gains rates (assuming the shares are held as capital assets) to the extent that
the fair market value of the shares of the New Fund received in the merger
exceeds the adjusted tax basis of their Existing Fund shares converted into New
Fund shares. Shareholders participating in the New Fund Option who receive both
New Fund shares and First American common shares generally will be subject to
tax at capital gains rates on gain they realize, but in an amount not in excess
of the fair market value of the New Fund shares received. While the adjusted tax
basis of a shareholder's investment will vary depending on the circumstances
under which the shareholder acquired the shares, it is generally the case that a
shareholder who purchased shares will have an adjusted tax basis equal to the
purchase price of the shares plus expenses incurred in the acquisition plus
undistributed capital gains for which the shareholder is subject to tax. In
addition, it is expected that the fair market value of the New Fund shares will
generally be equal to the initial trading value of such shares on the AMEX on
the initial trading day for such shares following the closing of the merger. The
tax rate on income from capital gains is generally 20%, but is reduced to 10%
for taxpayers in the 15% income tax bracket, and is further reduced to 8% with
respect to gains from capital assets held more than 5 years by such taxpayers.
These capital gains tax rates are the rates in
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effect in 2003 and are subject to future legislative change. You should consult
with your tax advisers regarding the tax consequences of the merger to you.
Notwithstanding the above, it is possible that a shareholder's receipt of
New Fund shares could be treated as a dividend and subject to tax at ordinary
income rates if the shareholder's beneficial interest in the Existing Fund is
not sufficiently reduced in connection with the mergers, taking into account
First American common shares received by persons treated as related to the
shareholder pursuant to Sections 302(c) and 318 of the Code. For example, if a
shareholder elects the New Fund Option and receives New Fund shares as well as
enough First American common shares in the merger that his ownership interest in
First American does not represent a sufficient reduction of his prior interest
in the Existing Funds (taking into account First American common shares received
by related persons), the New Fund shares received may be taxable as a dividend
to the shareholder. Whether a shareholder's ownership interest is sufficiently
reduced in the merger to avoid dividend treatment with respect to any New Fund
shares received will depend upon an application of the technical rules in
Section 302(b) of the Code to the shareholder's specific circumstances. Under
applicable IRS guidelines, a holder of a minority interest in First American
whose relative stock interest in First American is minimal, who exercises no
control over the affairs of First American, and who experiences a reduction in
the shareholder's proportionate interest in First American relative to the
shareholder's proportionate interest in the Existing Funds, both directly and by
application of the constructive ownership rules, generally will not be deemed to
have received a distribution of a dividend under the rules set forth in
Section 302(b)(1) of the Code. Because the determination of whether New Fund
stock received pursuant to the Merger will be treated as the distribution of a
dividend generally will depend upon the facts and circumstances specific to each
Existing Fund's shareholders, you are strongly advised to consult with your tax
advisor regarding the tax consequences of the receipt of New Fund shares to you.
The basis of New Fund shares, if any, received by Existing Fund shareholders
will equal their fair market value. The aggregate basis of First American
shares, if any, received by an Existing Fund shareholder who exchanges Existing
Fund stock for First American shares and New Fund shares will be the same as the
aggregate basis of the Existing Fund shares surrendered in exchange therefor,
decreased by the fair market value of New Fund shares received by such
shareholder, and increased by the amount of capital gain recognized by such
shareholder and the amount, if any, treated as a dividend to such shareholder.
This adjusted basis should be allocated evenly among all of the First American
shares received.
EXAMPLES OF US FEDERAL INCOME TAX TREATMENT TO SHAREHOLDERS
1. RECEIPT OF SOLELY FIRST AMERICAN SHARES
Assume that an Existing Fund shareholder owns 100 shares of an Existing Fund
with a basis of $9 per share (generally the shareholder's original cost, perhaps
increased by any dividends that were reinvested while the Existing Fund shares
were held) and a fair market value of $10 per share. The shareholder receives
100 First American shares in the merger. The shareholder in this situation would
recognize no gain in the merger because he received no consideration other than
First American shares. He would receive the First American shares with a basis
equal to his basis in the Existing Fund shares exchanged in the merger, or $900.
2. RECEIPT OF SOLELY NEW FUND SHARES OR CASH
Assume that an Existing Fund shareholder owns 100 shares of an Existing Fund
with a basis of $9 per share (generally the Existing Fund shareholder's original
cost, perhaps increased by any dividends that were reinvested while the Existing
Fund shares were held) and a fair market value of $10 per share. The Existing
Fund shareholder exercises statutory dissenter's appraisal rights and receives
$1,000 in cash, or elects to receive New Fund shares and receives 100 New Fund
shares in the merger. The
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shareholder in this situation would recognize gain of $100 attributable to his
receipt of cash or New Fund shares based upon the following:
<Table>
Fair market value of cash or New Fund shares received $1,000
Adjusted basis of stock surrendered in exchange $ 900
------
Total gain realized $ 100
Gain to be recognized equals lesser of gain realized or fair
market value of cash or New Fund shares received $ 100
======
</Table>
Assuming the gain would be treated as a capital gain to the shareholder and
assuming the Existing Fund shareholder would be in the highest marginal tax
bracket, the Existing Fund shareholder would be subject to tax on the $100 of
capital gain income at a tax rate of 20 percent. The Existing Fund shareholder
would have a basis in the cash or New Fund shares received equal to the amount
of cash or fair market value of the New Fund shares, respectively. With respect
to the New Fund shares, the aggregate basis of $1,000 would be allocated evenly
among the 100 New Fund shares received, such that the Existing Fund shareholder
has a basis of $10 per share (their fair market value).
3. RECEIPT OF BOTH FIRST AMERICAN SHARES AND NEW FUND SHARES
Assume that an Existing Fund shareholder owns 100 shares of an Existing Fund
with an adjusted tax basis of $9 per share and a fair market value of $10 per
share. As a result of proration procedures, the Existing Fund shareholder
receives 10 First American shares and 90 New Fund shares in the Merger. The
Existing Fund shareholder in this situation would recognize gain of $100
attributable to his receipt of New Fund shares based upon the following:
<Table>
Fair market value of First American shares received $ 100
Fair market value of New Fund shares received $ 900
------
Total fair market value of consideration received $1,000
Adjusted basis of stock surrendered in exchange $ 900
------
Total gain realized $ 100
======
Gain to be recognized equals lesser of gain realized or fair
market value of New Fund shares received $ 100
======
</Table>
Assuming the gain would be treated as a capital gain to the Existing Fund
shareholder and assuming the Existing Fund shareholder would be in the highest
marginal tax bracket, the Existing Fund shareholder would be subject to tax on
the $100 of capital gain income at a tax rate of 20%. The Existing Fund
shareholder's basis in the 10 First American shares received would equal its
original $900 basis in the Existing Fund shares exchanged for the shares First
American shares, decreased by the $900 value of New Fund shares received, and
increased by the $100 gain recognized upon receipt of the New Fund shares, for
an adjusted aggregate basis of $100. This adjusted aggregate basis should be
allocated evenly among the 10 First American shares received, such that the
Existing Fund shareholder has a basis of $10 per share. The Existing Fund
shareholder would have a $900 basis in the New Fund shares received (equal to
their fair market value).
US FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ON FIRST AMERICAN'S
QUALIFICATION AS A REIT--EARNINGS AND PROFITS DISTRIBUTION REQUIREMENT
A REIT is not permitted to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute such earnings
and profits. In a statutory merger qualifying as a tax-free reorganization, the
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acquired corporation's earnings and profits are generally carried over to the
surviving corporation. Any earnings and profits treated as having been acquired
by a REIT through such a merger will be treated as accumulated earnings and
profits of the REIT attributable to non-REIT years. The Existing Funds should
generally not have any earnings and profits, as a result of making distributions
of their net income. First American has requested that Ernst & Young determine
the earnings and profits of each Existing Fund for purposes of the earnings and
profits distribution requirement. Subject to certain qualifications and
assumptions, Ernst & Young has preliminarily determined that First American will
not have any current or accumulated earnings and profits as of the date of the
merger.
The calculation of the amount of earnings and profits acquired by First
American from the Existing Funds is subject to challenge by the IRS. The IRS may
examine prior tax returns of the Existing Funds and propose adjustments that
would increase their taxable income, which would result in corresponding
increases in the Existing Funds' earnings and profits.
If the IRS determines, and successfully asserts, that First American
acquired current or accumulated earnings and profits from the Existing Funds and
First American did not distribute all of such acquired earnings prior to the end
of the taxable year during which the merger occurs, First American would fail to
qualify as a REIT in such year, as well as other taxable years during which
First American held such acquired earnings. However, if First American made an
additional distribution within 90 days of such a determination by the IRS and
paid to the IRS an interest charge based on 50% of the amount of such acquired
earnings not previously distributed, the failure of First American to have
distributed the acquired earnings would not prevent First American from
qualifying as a REIT. Accordingly, in order to maintain its qualification as a
REIT under such circumstances, First American could be required to borrow funds
on a short-term basis or sell assets in order to meet the additional
distribution requirement even if the prevailing market conditions were not
generally favorable for such borrowings or sales.
US FEDERAL INCOME TAXATION OF FIRST AMERICAN--GENERAL
First American intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
2003. First American believes that it has been organized and will operate in a
manner that will allow it to qualify and to remain qualified to be taxed as a
REIT under the Code and intends to continue to be organized and operate in this
manner. Qualification and taxation as a REIT, however, will depend upon First
American's ability to meet, through actual annual operating results, asset
requirements, distribution levels, diversity of stock ownership, and the various
other qualification tests imposed under the Code. Accordingly, there can be no
assurance that First American will actually operate in a manner so as to allow
it to qualify and remain qualified as a REIT. See "--Requirements for
Qualification as a Real Estate Investment Trust" below.
Ernst & Young has acted as a tax advisor to First American in connection
with the contemplated merger and formation of First American. Ernst & Young has
given First American an opinion that, commencing with its taxable year ending
December 31, 2003, First American will be organized in accordance with, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT. Such opinion is not binding on the IRS or
a court and there cannot be any assurance that the IRS or a court will not take
a position different from that expressed by Ernst & Young. It also must be
emphasized that Ernst & Young's opinion is based on various assumptions and is
conditioned upon numerous representations made by First American as to factual
matters, including representations regarding the nature of First American's
assets and the future conduct of First American's business as described in this
joint proxy statement/prospectus. Moreover, First American's taxation and
qualification as a REIT depend upon First American's ability to meet on a
continuous basis the annual operating results, asset ownership tests,
distribution requirements, diversity of stock ownership, and the various other
qualification tests imposed by the Code described below. Ernst & Young will not
opine on First American's compliance with these tests on a continuing basis.
Therefore, no assurance can be given that the actual results of First American's
operations for any
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given taxable year will satisfy the requirements for qualification and taxation
as a REIT. See "--Failure to Qualify" below.
The sections of the Code that relate to the qualification and taxation of
REITs are highly technical and complex. The following describes the material
aspects of the sections of the Code that govern the federal income tax treatment
of a REIT and its shareholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated under the Code,
and administrative and judicial interpretations of the Code.
Provided First American qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income tax on its net income that is
currently distributed to its shareholders. This treatment substantially
eliminates the "double taxation" that generally results from an investment in a
corporation. Double taxation means taxation once at the corporate level when
income is earned and once again at the shareholder level when such income is
distributed. However, even as a REIT, First American will be subject to federal
income taxation in the following circumstances:
- It will be required to pay tax at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
- It may be subject to the "alternative minimum tax" on items of tax
preference, if any.
- If it has (i) net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary
course of business or (ii) other nonqualifying income from foreclosure
property, it will be required to pay tax at the highest corporate rate on
this income. In general, foreclosure property is property acquired through
foreclosure after a default on a loan secured by the property or on a lease
of the property.
- It will be required to pay a 100% tax on any net income from prohibited
transactions. In general, prohibited transactions are sales or other taxable
dispositions of property, other than foreclosure property, held for sale to
customers in the ordinary course of business.
- If it fails to satisfy the 75% or 95% gross income tests, as described below,
but has, nevertheless, maintained its qualification as a REIT, it will be
required to pay a 100% tax on an amount equal to (i) the gross income
attributable to the greater of the amount by which it fails the 75% or 95%
gross income test multiplied by (ii) a fraction intended to reflect First
American's profitability.
- It will be required to pay a 4% excise tax on the amount by which its annual
distributions to its shareholders is less than the sum of (i) 85% of its
ordinary income for the year, (ii) 95% of its real estate investment trust
capital gain net income for the year and (iii) any undistributed taxable
income from prior periods.
- If it acquires an asset from a corporation which is not a REIT in a
transaction in which the basis of the asset in First American's hands is
determined by reference to the basis of the asset in the hands of the
transferor corporation, and First American subsequently sells or otherwise
disposes of the asset within ten years, then under existing treasury
regulations, First American would be required to pay tax at the highest
regular corporate tax rate on this gain to the extent (i) the fair market
value of the asset exceeds (ii) its adjusted tax basis in the asset, in each
case, determined as of the date on which it acquired the asset. The results
described in this paragraph assume that First American will elect this
treatment in lieu of an immediate tax when the asset is acquired. It is not
intended that First American will sell or otherwise dispose of any assets, to
which this election applies, acquired in the merger during the ten-year
period following the merger in a manner that would cause First American to
incur the tax described above.
- It will generally be subject to tax on the portion of any "excess inclusion"
income derived from an investment in residual interests in real estate
mortgage investment conduits to the extent its stock is held by specified tax
exempt organizations not subject to tax on unrelated business taxable income.
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REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
GENERAL. The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) that issues transferable shares or transferable certificates to its
owners;
(3) that would be taxable as a regular corporation, but for its election to
be taxed as a REIT;
(4) that is not a financial institution or an insurance company under the
Code;
(5) that is owned by 100 or more persons;
(6) not more than 50% in value of the outstanding stock of which is owned,
actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of each year;
and
(7) that meets other tests, described below, regarding the nature of its
income and assets, and the amount of its distributions.
The Code provides that conditions (1) to (4) must be met during the entire
year and that condition (5) must be met during at least 335 days of a year of
twelve months, or during a proportionate part of a shorter taxable year.
Conditions (5) and (6) do not apply to the first taxable year for which an
election is made to be taxed as a REIT.
First American's articles of incorporation provide for restrictions
regarding ownership and transfer of First American's stock. These restrictions
are intended to assist First American in satisfying the share ownership
requirements described in (5) and (6) above. These restrictions, however, may
not ensure that First American will, in all cases, be able to satisfy the share
ownership requirements described in (5) and (6) above. If First American fails
to satisfy these share ownership requirements (other than during its first
taxable year), its status as a REIT would terminate. If, however, First American
complied with the rules contained in applicable regulations that require a REIT
to determine the actual ownership of its shares and First American does not
know, or would not have known through the exercise of reasonable diligence, that
it failed to meet the requirement described in condition (6) above, it would not
be disqualified as a REIT.
In addition, a corporation may not qualify as a REIT unless its taxable year
is the calendar year. First American will have a calendar taxable year.
QUALIFIED REIT SUBSIDIARIES. A "qualified REIT subsidiary" is a corporation,
all of the stock of which is owned by a REIT. Under the Code, a qualified REIT
subsidiary is not treated as a separate corporation from the REIT. Rather, all
of the assets, liabilities, and items of income, deduction, and credit of the
qualified REIT subsidiary are treated as the assets, liabilities, and items of
income, deduction, and credit of the REIT for purposes of the REIT income and
asset tests described below.
TAXABLE REIT SUBSIDIARIES. A "taxable REIT subsidiary" is a corporation
which, together with its parent REIT, makes an election to be treated as a
taxable REIT subsidiary. A taxable REIT subsidiary may earn income that would be
nonqualifying income if earned directly by a REIT, and is generally subject to
full corporate level tax. A REIT may own up to 100% of the stock of a taxable
REIT subsidiary.
INCOME TESTS. First American must meet two annual gross income requirements
to qualify as a REIT. First, each year First American must derive, directly or
indirectly, at least 75% of its gross income, excluding gross income from
prohibited transactions, from investments relating to real property or mortgages
on real property, including "rents from real property" and mortgage interest, or
from specified temporary investments. Second, each year First American must
derive at least 95% of its gross income, excluding gross income from prohibited
transactions, from investments meeting the 75% test described above, or from
dividends, interest and gain from the sale or disposition of stock or
securities. For these purposes, the term "interest" generally does not include
any interest of which the amount received depends on the income or profits of
any person. An amount will generally not be
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excluded from the term "interest," however, if such amount is based on a fixed
percentage of gross receipts or sales.
Any amount includable in the gross income of First American with respect to
a regular or residual interest in a real estate mortgage investment conduit is
generally treated as interest on an obligation secured by a mortgage on real
property for purposes of the 75% gross income test. If, however, less than 95%
of the assets of a real estate mortgage investment conduit consist of real
estate assets, First American will be treated as receiving directly its
proportionate share of the income of the real estate mortgage investment
conduit, which would generally include non-qualifying income for purposes of the
75% gross income test. In addition, if First American receives interest income
with respect to a mortgage loan that is secured by both real property and other
property and the principal amount of the loan exceeds the fair market value of
the real property on the date the mortgage loan was made by First American,
interest income on the loan will be apportioned between the real property and
the other property, which apportionment would cause First American to recognize
income that is not qualifying income for purposes of the 75% gross income test.
To the extent interest on a loan is based on the cash proceeds from the sale
or value of property, such income would be treated as gain from the sale of the
secured property, which generally should qualify for purposes of the 75% and 95%
gross income tests.
If First American fails to satisfy one or both of the 75% or 95% gross
income tests for any year, it may still qualify as a REIT if it is entitled to
relief under the Code. Generally, it may be entitled to relief if:
- the failure to meet the gross income tests was due to reasonable cause and
not due to willful neglect;
- a schedule of the sources of its income is attached to its federal income
tax return; and
- any incorrect information on the schedule was not due to fraud with the
intent to evade tax.
It is not possible to state whether in all circumstances First American
would be entitled to rely on these relief provisions. If these relief provisions
do not apply to a particular set of circumstances, First American would not
qualify as a REIT. As discussed above in "--US Federal Taxation of First
American--General," even if these relief provisions apply, and First American
retains its status as a REIT, a tax would be imposed with respect to First
American's income that does not meet the gross income tests. First American may
not always be able to maintain compliance with the gross income tests for REIT
qualification despite periodically monitoring its income.
FORECLOSURE PROPERTY. Net income realized by First American from foreclosure
property would generally be subject to tax at the maximum federal corporate tax
rate (currently 35%). Foreclosure property means real property and related
personal property that (1) is acquired through foreclosure following a default
on a lease of such property or a default on indebtedness that is secured by the
property and (2) for which an election is made to treat the property as
foreclosure property.
PROHIBITED TRANSACTION INCOME. Any gain realized by First American on the
sale of any property, other than foreclosure property, held as inventory or
otherwise held primarily for sale to customers in the ordinary course of
business will be prohibited transaction income, and subject to a 100% penalty
tax. Prohibited transaction income may also adversely affect First American's
ability to satisfy the gross income tests for qualification as a REIT. Whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business depends on all the facts and circumstances
surrounding the particular transaction. While the regulations provide standards
which, if met, would not cause a sale of property to result in prohibited
transaction income, First American may not be able to meet these standards in
all circumstances.
ASSET TESTS. At the close of each quarter of each year, First American also
must satisfy four tests relating to its assets. First, at least 75% of the value
of its total assets must be real estate assets, cash, cash items and government
securities. For purposes of this test, real estate assets include real estate
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mortgages, real property, interests in other REITs and stock or debt instruments
held for one year or less that are purchased with the proceeds of a stock
offering or a long-term public debt offering. Second, not more than 25% of its
total assets may be represented by securities, other than those securities
includable in the 75% asset class. Third, not more than 20% of the value of its
total assets may be represented by securities in one or more taxable REIT
subsidiaries. Fourth, of the investments included in the 25% asset class, the
value of any one issuer's securities may not exceed 5% of the value of First
American's total assets, and First American may not own more than 10% of the
total vote or value of the outstanding securities of any one issuer (other than
securities of a qualified REIT subsidiary or a taxable REIT subsidiary), and
with respect to the 10% value test, certain "straight debt" securities
(generally, debt (i) the interest on which is not contingent, (ii) which is not
convertible, directly or indirectly, into stock and (iii) which meets certain
other conditions).
After meeting the asset tests at the close of any quarter, First American
will not lose its status as a REIT if it fails to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. In addition,
if First American fails to satisfy the asset tests because it acquires assets
during a quarter, it can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter.
First American will monitor the status of the assets that it acquires for
purposes of the various asset tests and will manage its portfolio in order to
comply with such tests.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, First American is
required to distribute dividends, other than capital gain dividends, to its
shareholders in an amount at least equal to the sum of (1) 90% of its "REIT
taxable income" and (2) 90% of its after-tax net income, if any, from
foreclosure property, minus (3) the sum of certain items of non-cash income. In
general, "REIT taxable income" means taxable ordinary income without regard to
the dividends paid deduction.
First American is generally required to distribute income in the taxable
year in which it is earned, or in the following taxable year before it timely
files its tax return if such dividend distributions are declared and paid on or
before First American's first regular dividend payment. Except as provided in
"--US Federal Taxation of Taxable U.S. Shareholders of First American" below,
these distributions are taxable to holders of common stock in the year in which
paid, even though these distributions relate to the prior year for purposes of
First American's 90% distribution requirement. To the extent that First American
does not distribute all of its net capital gain or distribute at least 90%, but
less than 100%, of its "REIT taxable income," it will be subject to tax at
regular corporate tax rates.
From time to time, First American may not have sufficient cash or other
liquid assets to meet the above distribution requirements due to timing
differences between the actual receipt of cash and payment of expenses and the
inclusion of income and deduction of expenses in arriving at First American's
taxable income. If these timing differences occur, in order to meet the REIT
distribution requirements, First American may need to arrange for short-term, or
possibly long-term, borrowings, or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, First American may be able to rectify a failure
to meet a distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction for
dividends paid for the earlier year. Thus, it may be able to avoid being subject
to tax on amounts distributed as deficiency dividends. First American will be
required, however, to pay interest based upon the amount of any deduction
claimed for deficiency dividends. In addition, First American will be subject to
a 4% excise tax on the excess of the required distribution over the amounts
actually distributed if it should fail to distribute each year at least the sum
of 85% of its ordinary income for the year, 90% of its capital gain income for
the year, and any undistributed taxable income from prior periods.
RECORDKEEPING REQUIREMENTS. First American is required to maintain records
and request on an annual basis information from specified shareholders. This
requirement is designed to disclose the actual ownership of First American's
outstanding stock.
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EXCESS INCLUSION INCOME. If First American is deemed to have issued debt
obligations having two or more maturities, the payments on which correspond to
payments on mortgage loans owned by First American, such arrangement will be
treated as a "taxable mortgage pool" for federal income tax purposes. If all or
a portion of First American is considered a taxable mortgage pool, its status as
a REIT generally should not be impaired; however, a portion of its taxable
income may be characterized as "excess inclusion income" and allocated to its
shareholders. Any excess inclusion income:
- could not be offset by unrelated net operating losses of a shareholder;
- would be subject to tax as "unrelated business taxable income" to a
tax-exempt shareholder;
- would be subject to the application of federal income tax withholding
(without reduction pursuant to any otherwise applicable income tax treaty)
with respect to amounts allocable to foreign shareholders; and
- would be taxable (at the highest corporate tax rate) to First American,
rather than its shareholders, to the extent allocable to stock of First
American held by disqualified organizations (generally, tax-exempt
entities not subject to unrelated business income tax, including
governmental organizations).
FAILURE TO QUALIFY. If First American fails to qualify for taxation as a
REIT in any taxable year, and the relief provisions of the Code described above
do not apply, First American will be subject to tax, including any applicable
alternative minimum tax, and possibly increased state and local taxes, on its
taxable income at regular corporate rates. Such taxation would reduce the cash
available for distribution by First American to its shareholders. Distributions
to shareholders of First American in any year in which it fails to qualify as a
REIT will not be deductible by First American and First American will not be
required to distribute any amounts to its shareholders. Additionally, if First
American fails to qualify as a REIT, distributions to its shareholders will be
subject to tax as ordinary income to the extent of First American's current and
accumulated earnings and profits and, subject to certain limitations of the
Code, corporate shareholders may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, First
American would also be disqualified from taxation as a REIT for the four taxable
years following the year during which it lost its qualification. It is not
possible to state whether in all circumstances First American would be entitled
to statutory relief.
US FEDERAL TAXATION OF TAXABLE U.S. SHAREHOLDERS OF FIRST AMERICAN
When using the term "U.S. shareholders," First American means a holder of
shares of First American common stock who is, for U.S. federal income tax
purposes:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any state thereof or in the
District of Columbia, unless regulations provide otherwise;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DISTRIBUTIONS GENERALLY. Distributions out of current or accumulated
earnings and profits of First American, other than capital gain dividends, will
be taxable to U.S. shareholders as ordinary income. Provided First American
qualifies as a REIT, dividends paid by First American will not be eligible for
the dividends received deduction generally available to U.S. shareholders that
are corporations.
To the extent that First American makes distributions in excess of its
current and accumulated earnings and profits, these distributions will be
treated as a tax-free return of capital to each U.S. shareholder, and will
reduce the adjusted tax basis which each U.S. shareholder has in its shares of
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common stock by the amount of the distribution, but not below zero. Return of
capital distributions in excess of a U.S. shareholder's adjusted tax basis in
its common stock will be taxable as capital gain, provided that the shares have
been held as capital assets, and will be taxable as long-term capital gain if
the shares have been held for more than one year. Dividends declared in October,
November, or December of any year and paid to a shareholder of record on a
specified date in any of those months will be treated as both paid by First
American and received by the shareholder on December 31 of that year, provided
the dividend is actually paid in January of the following year. Shareholders may
not include in their own income tax returns any of First American's net
operating losses or capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions designated as net capital gain
dividends will be taxable to U.S. shareholders as capital gain income. Such
capital gain income will be taxable to non-corporate U.S. shareholders at a 20%
or 25% rate based on the characteristics of the asset sold that produced the
gain. U.S. shareholders that are corporations may be required to treat up to 20%
of certain capital gain dividends as ordinary income.
RETENTION OF NET CAPITAL GAINS. First American may elect to retain, rather
than distribute as a capital gain dividend, all or a portion of its net capital
gains. If this election is made, First American would pay tax on such retained
capital gains. In such a case, U.S. shareholders would generally:
- include their proportionate share of the undistributed net capital gains
in their taxable income;
- receive a credit for their proportionate share of the tax paid by First
American with respect to such retained capital gains; and
- increase the adjusted basis of their stock by the difference between the
amount of their capital gain and their share of the tax paid by First
American.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
made by First American and gain arising from the sale or exchange by a U.S.
shareholder of common stock will not be treated as passive activity income. As a
result, U.S. shareholders will not be able to apply any "passive losses" against
income or gain relating to the common stock. Distributions made by First
American, to the extent they do not constitute a return of capital, generally
will be treated as investment income for purposes of computing the investment
interest limitation.
DISPOSITIONS OF STOCK. If you are a U.S. shareholder and you sell or dispose
of your shares of common stock, you will recognize gain or loss for federal
income tax purposes in an amount equal to the difference between the amount of
cash and the fair market value of any property you receive on the sale or other
disposition and your adjusted tax basis in the shares of common stock. This gain
or loss will be capital gain or loss if you have held the stock as a capital
asset and will be long-term capital gain or loss if you have held the stock for
more than one year. In general, if you are a U.S. shareholder and you recognize
loss upon the sale or other disposition of stock that you have held for six
months or less, the loss you recognize will be treated as a long-term capital
loss to the extent you received distributions from First American which were
required to be treated as long-term capital gains.
BACKUP WITHHOLDING. First American will report to its U.S. shareholders and
the IRS the amount of dividends paid during each calendar year and the amount of
any tax withheld. Under the backup withholding rules, a U.S. shareholder may be
subject to backup withholding with respect to dividends paid unless the holder
is a corporation or comes within other exempt categories and, when required,
demonstrates this fact, or provides a taxpayer identification number or social
security number, certifies as to no loss of exemption from backup withholding,
and otherwise complies with applicable requirements of the backup withholding
rules. A U.S. shareholder that does not provide his correct taxpayer
identification number or social security number may also be subject to penalties
imposed by the IRS. Backup withholding is not an additional tax. Any amount paid
as backup withholding will be creditable against the U.S. shareholder's income
tax liability. In addition, First American may be required to withhold a portion
of capital gain distributions to any U.S. shareholders who fail to certify their
non-foreign status.
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US FEDERAL INCOME TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income when received by a tax-exempt
entity. Based on that ruling, provided that a tax-exempt U.S. shareholder has
not held its shares of common stock as "debt financed property" within the
meaning of the Code, the shares are not otherwise used in an unrelated trade or
business and First American has not incurred any "excess inclusion income," as
described above, dividend income on such shares and income from the sale of such
shares should not be unrelated business taxable income to a tax-exempt U.S.
shareholder. Generally, debt financed property is property, the acquisition or
holding of which was financed through a borrowing by the tax-exempt U.S.
shareholder.
For tax-exempt U.S. shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, or qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in First American's shares will constitute unrelated business taxable
income unless the organization is able to properly claim a deduction for amounts
set aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in First American's shares. These prospective
investors should consult their tax advisors concerning these "set aside" and
reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held REIT" may be treated as unrelated business taxable income as to
any pension trust which:
- is described in Section 401(a) of the Code;
- is tax-exempt under Section 501(a) of the Code; and
- holds more than 10%, by value, of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if:
- it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Code provides that stock owned by a qualified
trust is treated, for purposes of the 5/50 rule, as owned by the
beneficiaries of the trust, rather than by the trust itself; and
- either at least one qualified trust holds more than 25%, by value, of the
interests in the REIT, or one or more qualified trusts, each of which owns
more than 10%, by value, of the interests in the REIT, holds in the
aggregate more than 50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as unrelated business taxable
income is equal to the ratio of:
- the unrelated business taxable income earned by the REIT, treating the
REIT as if it were a qualified trust and therefore subject to tax on
unrelated business taxable income, to
- the total gross income of the REIT.
If, for any year, this percentage is less than 5%, no portion of REIT
dividends will be subject to tax as unrelated business income. As a result of
the limitations on the transfer and ownership of stock contained in First
American's articles of incorporation, First American does not expect to be
classified as a "pension-held REIT."
US FEDERAL INCOME TAXATION OF THE NEW FUND
The New Fund intends to make an election when it files its first tax return
to be considered a RIC under Sections 851 through 855 of the Code. To qualify as
a RIC, the New Fund must meet certain requirements imposed by the Code with
respect to the type of income it realizes and the diversification of its assets.
The New Fund must, among other things, (a) derive in each taxable year at least
90% of its gross income from dividends, interest, payments with respect to loans
of securities, gains from the
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sale or other disposition of stock or securities or foreign currencies or other
income derived with respect to its business of investing in such stock,
securities or currencies (including, but not limited to, gains from options,
futures or forward contracts) and (b) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the value of the New
Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, securities of other regulated investment companies
and other securities that, with respect to any one issuer, do not represent more
than 5% of the value of the New Fund's total assets and do not represent more
than 10% of the voting securities of such issuer, and (ii) no more than 25% of
the value of the New Fund's total assets is invested in the securities of any
issuer (other than U.S. Government securities or the securities of other
regulated investment companies) or invested in two or more issuers which the
taxpayer controls and which are determined to be engaged in the same or similar
trades or businesses or related trades or businesses.
After meeting the asset tests at the close of any quarter, the New Fund will
not lose its status as a RIC if it fails to satisfy the asset tests at the end
of a later quarter solely by reason of changes in asset values. In addition, if
the New Fund fails to satisfy the asset tests because it acquires assets during
a quarter, it can cure this failure by disposing of sufficient nonqualifying
assets within 30 days after the close of that quarter. The New Fund will monitor
the status of the assets that it acquires for purposes of the various asset
tests and will manage its portfolio in order to comply with such tests.
As a RIC, the New Fund must also satisfy a minimum distribution requirement.
The New Fund will not be subject to federal income tax on income and gains to
the extent that it distributes such income and gains to its shareholders. The
minimum distribution requirement is satisfied if the New Fund distributes at
least 90% of its net investment income (including tax-exempt interest and net
short-term capital gains) for the taxable year. Although the New Fund intends to
satisfy the minimum distribution requirement it may elect to retain its
remaining net investment income and some of its net long-term capital gains. The
New Fund would be subject to corporate tax on any undistributed income, other
than tax-exempt income from municipal securities. The New Fund will generally be
subject to a nondeductible 4% excise tax to the extent that the New Fund does
not distribute by the end of each calendar year, an amount equal to the sum of
(a) 98% of the New Fund's ordinary income for such calendar year; (b) 98% of the
excess of capital gains over capital losses for the one-year period ending on
October 31 of each year (unless the New Fund elects to use a different period);
and (c) the undistributed income and gains from the preceding years (if any).
Under certain circumstances, the New Fund may be able to rectify a failure
to meet a distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction for
dividends paid for the earlier year. Thus, it may be able to avoid being subject
to income tax on amounts distributed as deficiency dividends. The New Fund will
be required, however, to pay interest based upon the amount of any deduction
claimed for deficiency dividends. In addition, the New Fund will be subject to a
4% excise tax on the excess of the required distribution over the amounts
actually distributed if it should fail to distribute, for any year, at least the
minimum amounts required to avoid the 4% excise tax, as discussed above.
Certain New Fund investments may have tax consequences. The New Fund intends
to engage in various hedging transactions. Under various provisions of the Code,
the result of such transactions may be to change the character of recognized
gains and losses, accelerate the recognition of certain gains and losses and
defer the recognition of certain losses.
The New Fund may make investments that produce income that is not matched by
a corresponding cash distribution to the New Fund, such as investments in
obligations having original issue discount such as zero coupon securities or
market discount obligations (if the New Fund elects to accrue the market
discount on a current basis with respect to such instruments). Such income would
be treated as income earned by the New Fund and therefore would be subject to
the distribution requirements of the Code. Because such income may not be
matched by a corresponding cash distribution to the New Fund, the New Fund may
be required to borrow money or dispose of other securities to be able to make
distributions to shareholders of the New Fund.
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If the New Fund fails to qualify for taxation as a RIC in any taxable year,
and the relief provisions of the Code described above do not apply, the New Fund
will be subject to tax, including any applicable alternative minimum tax and
possibly increased state and local taxes, on its taxable income at regular
corporate rates. Such taxation would reduce the cash available for distribution
by the New Fund to its shareholders. Distributions to shareholders of the New
Fund in any year in which it fails to qualify as a RIC will not be deductible by
the New Fund and the New Fund will not be required to distribute any amounts to
its shareholders. Additionally, if the New Fund fails to qualify as a RIC,
distributions to its shareholders will be subject to tax as ordinary income to
the extent of the New Fund's current and accumulated earnings and profits and,
subject to certain limitations of the Code, corporate shareholders may be
eligible for the dividends received deduction.
US FEDERAL INCOME TAXATION OF TAXABLE U.S. SHAREHOLDERS OF THE NEW FUND
DISTRIBUTIONS GENERALLY. Distributions to shareholders of the New Fund
attributable to the New Fund's net investment income (including interest income,
net short-term capital gains and income from municipal securities) are taxable
as ordinary income whether paid in cash or reinvested in additional shares.
Since the New Fund's income is expected to be derived primarily from interest
and capital gains, it is not anticipated that any of the New Fund's
distributions will qualify for the dividends received deduction for corporate
shareholders of the New Fund.
CAPITAL GAIN DISTRIBUTIONS. Distributions of any net capital gain (I.E., the
excess of net long-term capital gain over net short-term capital loss, if any)
that are designated as capital gain dividends are taxable as long-term capital
gains, whether paid in cash or additional shares, regardless of how long the
shares have been held. These distributions are not eligible for the dividends
received deduction.
RETENTION OF NET CAPITAL GAINS. The New Fund may elect to retain all or a
portion of its net capital gain and be taxed at the corporate tax rate for such
capital gains. In such event, the New Fund would most likely make an election
that would require each shareholder of record on the last day of the New Fund's
taxable year to include in income for tax purposes its proportionate share of
the New Fund's undistributed net capital gain. If such an election is made, each
shareholder will be entitled to credit his proportionate share of the tax paid
by the New Fund against its federal income tax liabilities and to claim refunds
to the extent that the credit exceeds such liabilities. In addition, the
shareholder would be entitled to increase the basis of its shares for federal
tax purposes by a portion of such shareholder's proportionate share of the
undistributed net capital gain.
Dividends and distributions by the New Fund are generally taxable to the
shareholders of the New Fund at the time the dividend or distribution is made
(even if reinvested in additional shares of the New Fund). However, any dividend
declared by the New Fund in October, November or December of any calendar year
which is payable to shareholders of record on a specified date in such a month
and which is not paid on or before December 31 of such year will be treated as
received by the shareholders of the New Fund as of December 31 of such year if
the dividend is paid during January of the following year.
The New Fund will send written notices to its shareholders regarding the tax
status of all distributions made during each year. A portion of such
distributions may at times constitute a non-taxable return of capital and
shareholders must reduce the tax basis in their shares by the amount of any such
return of capital. A shareholder receiving a distribution in the form of
additional shares issued by the New Fund pursuant to the dividend reinvestment
plan of the New Fund will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
shares received, determined as of the distribution date. The basis of such
shares will also equal the fair market value of such shares on the distribution
date. A shareholder of the New Fund receiving a distribution in the form of
additional shares purchased by the Plan Agent on the open market will be treated
for federal income tax purposes as receiving the amount of cash received by the
Plan Agent on his behalf. In general, the basis of such shares will equal the
price paid by the Plan Agent for such shares (including brokerage commissions).
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LIQUIDATING DISTRIBUTIONS. Liquidating distributions which exceed a
shareholder's basis in its shares will be treated as gain from the sale of such
shares. If the total liquidating distributions are less than a shareholder's
basis, the shareholder will realize a loss on such liquidation. Such gain or
loss will be capital gain or loss unless the shareholder is considered to be a
dealer with respect to the New Fund shares.
SALE OF SHARES. In general, if a share is sold, the seller will recognize
gain or loss equal to the difference between the amount realized on the sale and
the seller's adjusted basis in the share. Any gain or loss realized upon a sale
of shares by a shareholder of the New Fund who is not a dealer in such shares
will be treated as long-term capital gain or loss if the shares have been held
for more than one year, and otherwise as short-term capital gain or loss.
Further, if such shares are held for six months or less, loss realized by a
shareholder will be treated as long-term capital loss to the extent of the total
of any capital gain dividend received by the shareholder. In addition, any loss
realized on a sale of shares will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
made by the New Fund and gain arising from the sale or exchange by a U.S.
shareholder of New Fund stock will not be treated as passive activity income. As
a result, U.S. shareholders will not be able to apply any "passive losses"
against income or gain relating to New Fund stock. Distributions made by the New
Fund, to the extent they do not constitute a return of capital, generally will
be treated as investment income for purposes of computing the investment
interest limitation.
US FEDERAL INCOME TAXATION OF TAX-EXEMPT SHAREHOLDERS OF THE NEW FUND
The Code excludes dividends from unrelated business taxable income provided
the tax-exempt entity receiving the dividends has not held its shares as "debt
financed property." Generally, debt-financed property is property acquired (or
held) by incurring acquisition indebtedness. Dividends paid to a tax-exempt
shareholder by the New Fund generally will not be treated as unrelated business
taxable income unless the tax-exempt shareholder has financed the acquisition or
holding of the New Fund shares with acquisition indebtedness.
For tax-exempt U.S. shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts or qualified
group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively,
income from an investment in the New Fund shares will constitute unrelated
business taxable income unless the organization is able to properly claim a
deduction for amounts set aside or placed in reserve for certain purposes so as
to offset the income generated by its investment in the New Fund shares. These
prospective investors should consult their tax advisors concerning these "set
aside" and reserve requirements.
US FEDERAL INCOME TAXATION OF NON-U.S. SHAREHOLDERS OF EITHER FIRST AMERICAN OR
THE NEW FUND
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, Non-U.S. shareholders) are complex and no attempt
will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO
DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO THE HOLDING OF SHARES OF COMMON STOCK OF FIRST AMERICAN OR THE NEW
FUND AND OF FIRST AMERICAN ELECTING TO BE TAXED AS A REIT, INCLUDING ANY
REPORTING REQUIREMENTS.
CAPITAL GAINS DISTRIBUTIONS THAT NON-US SHAREHOLDERS RECEIVE FROM THE NEW
FUND SHOULD NOT BE SUBJECT TO US FEDERAL INCOME TAX. Distributions made by the
New Fund to Non-U.S. shareholders that are not designated as capital gain
dividends will be treated as dividends of ordinary income to the extent that
they are made out of the New Fund's current or accumulated earnings and profits.
Such distributions
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will generally be subject to a withholding tax equal to 30% of the gross
distribution unless an applicable tax treaty reduces or eliminates that tax. The
New Fund expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any distributions made to a Non-U.S. shareholder unless a lower treaty
rate applies and any required form, such as IRS Form W-8BEN, evidencing
eligibility for that reduced rate is filed with the New Fund by the Non-U.S.
shareholder claiming the reduced treaty withholding rate, if any.
GAINS REALIZED BY NON-US SHAREHOLDERS UPON RECEIPT OF THE NEW FUND SHARES
PURSUANT TO THE MERGER SHOULD NOT BE SUBJECT TO US FEDERAL INCOME TAX. ALSO,
NON-US SHAREHOLDERS OF THE NEW FUND SHOULD NOT BE SUBJECT TO US FEDERAL INCOME
TAX ON GAINS THEY REALIZE ON THE DISPOSITION OF COMMON STOCK IN THE NEW FUND.
However, gain from the disposition would be subject to a 30 percent US federal
income tax in the hands of an individual Non-U.S. shareholder if such Non-US
shareholder is present in the U.S. for 183 days or more during the taxable year
and other conditions are met.
Distributions to Non-U.S. shareholders that are not attributable to gain
from sales or exchanges by First American or the New Fund of U.S. real property
interests and that are not designated as capital gain dividends or retained
capital gains will be treated as dividends of ordinary income to the extent that
they are made out of First American's or the New Fund's current or accumulated
earnings and profits. Such distributions will generally be subject to a
withholding tax equal to 30% of the gross distribution unless an applicable tax
treaty reduces or eliminates that tax. However, if the income from an investment
in common stock of First American is treated as effectively connected with the
Non-US shareholder's conduct of a US banking, financing or similar trade or
business, the Non-US shareholder generally will be subject to US federal income
tax at graduated rates, in the same manner as US shareholders are taxed with
respect to such distributions (and may be subject to the 30% branch profits tax
in the case of a Non-US shareholder that is a corporation). First American and
the New Fund expect to withhold U.S. income tax at the rate of 30% on the gross
amount of any distributions made to a Non-U.S. shareholder unless a lower treaty
rate applies and any required form, such as IRS Form W-8BEN, evidencing
eligibility for that reduced rate is filed with First American or the New Fund,
as the case may be, by the Non-U.S. shareholder claiming the reduced treaty
withholding rate, if any.
Distributions by the New Fund and First American in excess of their
respective current and accumulated earnings and profits will not be taxable to a
Non-U.S. shareholder to the extent that such distributions do not exceed the
adjusted basis of the shareholder's common stock in either entity, but rather
will reduce the Non-US Shareholder's adjusted basis of the stock he or she
holds. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. shareholder's
common stock, distributions from the New Fund should not be subject to US
federal income tax and distributions from First American will give rise to tax
liability if the Non-U.S. shareholder would otherwise be subject to tax on any
gain from the sale or disposition of its stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to a Non-US shareholder to the extent it is subsequently determined
that such distribution was, in fact, in excess of the New Fund's or First
American's current and accumulated earnings and profits (I.E., the Non-US
shareholder files a refund claim for the amount of overwithheld tax). First
American is also required to withhold 10% of any distribution in excess of its
current and accumulated earnings and profits. Consequently, although First
American intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that it does not do so, any portion of a
distribution not subject to withholding at a rate of 30% may be subject to
withholding at a rate of 10%.
For any year in which First American qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges of a U.S. real property
interest, which includes certain interests in real property, but generally does
not include non-participating mortgage loans or mortgage-backed securities, will
be taxed to a Non-U.S. shareholder under the provisions of the Foreign
Investment in Real
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Property Tax Act of 1980 (or FIRPTA). First American may hold assets that
constitute both U.S. real property interests and assets that are not so treated.
To the extent First American's assets do not constitute U.S. real property
interests, distributions by First American from the sale of such assets will not
be subject to tax under the FIRPTA rules or under general US federal income tax
rules. Under FIRPTA, distributions attributable to gain from sales of U.S. real
property interests are taxed to a Non-US shareholder as if such gain were
effectively connected with a U.S. trade or business of such Non-U.S.
shareholder. Non-US shareholders thus would be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA also may be subject to the 30%
branch profits tax in the hands of a Non-U.S. shareholder that is a corporation.
First American is required to withhold 35% of any gross distribution that is
designated as a U.S. real property capital gains dividend. The amount withheld
on the gross distribution is creditable against the Non-U.S. shareholder's net
FIRPTA tax liability.
Gain recognized by a Non-U.S. shareholder upon a sale of common stock
generally will not be subject to US federal income tax or taxed under FIRPTA if
First American is a "domestically controlled REIT," which is a REIT in which at
all times during a specified testing period less than 50% in value of the stock
was held directly or indirectly by Non-U.S. shareholders. Although First
American currently believes that it will be a "domestically controlled REIT,"
because the common stock will be publicly traded, no assurance can be given that
it will be or will remain a "domestically controlled REIT." Even if First
American does not qualify as a "domestically controlled REIT," an alternative
exemption to tax under FIRPTA might be available if either (i) First American is
not (and has not been within the five-year period prior to the sale) a U.S.
property holding corporation (as defined in the Code and applicable Treasury
Regulations to generally include a corporation, 50% or more of aggregate net
value of its US real property interests, foreign real property interests and
certain trade or business the assets consists of U.S. real property interests)
or (ii) the selling Non-US shareholder owns, actually or constructively, 5% or
less of the stock of First American throughout a specified testing period if the
shares are regularly traded (as defined in applicable Treasury Regulations) on
an established securities market.
Gain not subject to FIRPTA will however be subject to US federal income tax
at regular statutory rates in the hands of an individual Non-U.S. shareholder if
(i) the income from an investment in common stock of First American is treated
as effectively connected with the Non-US shareholder's conduct of a US banking,
financing or similar trade or business, or (ii) such Non-US shareholder is
present in the U.S. for 183 days or more during the taxable year and other
conditions are met. If the gain on the sale of the common stock were to be
subject to taxation under FIRPTA, the Non-US shareholder would be subject to the
same treatment as US shareholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-US corporations).
STATE, LOCAL AND FOREIGN TAXATION
First American and the New Fund may be required to pay state, local and
foreign taxes in various state, local and foreign jurisdictions, including those
in which it transacts business or makes investments, and its shareholders may be
required to pay state, local and foreign taxes in various state, local and
foreign jurisdictions, including those in which they reside. The state, local
and foreign tax treatment of First American and the New Fund may not conform to
the US federal income tax consequences summarized above. In addition, your
individual state, local and foreign tax treatment may not conform to the US
federal income tax consequences summarized above. CONSEQUENTLY, ALL NON-US
SHAREHOLDERS IN EITHER THE NEW FUND OR FIRST AMERICAN SHOULD CONSULT THEIR
RESPECTIVE TAX ADVISORS REGARDING THE EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS ON THE MERGER AND THE HOLDING OF COMMON STOCK OF FIRST AMERICAN OR THE NEW
FUND.
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PRESIDENT'S DIVIDEND EXCLUSION PROPOSAL. On January 21, 2003 the U.S.
Treasury Department released details of President Bush's dividend exclusion
proposal. The proposal is designed to eliminate the double taxation of corporate
earnings. The proposal as released would allow shareholders of corporations to
exclude from taxable income certain dividends made by corporations on or after
January 1, 2003. Corporations choosing not to distribute all earnings eligible
for a dividend exclusion may allocate and designate eligible undistributed
earnings as shareholder basis adjustments to their corporate shares. Because
RICs and REITS that distribute all of their taxable income generally do not pay
corporate income tax, shareholders receiving dividends from a REIT or RIC would
generally not be allowed to exclude these dividends from income under the
current dividend exclusion proposal. Thus, the taxation of REITs, RICs, and
their shareholders would generally remain unchanged under the current proposal.
As described below, if a REIT or RIC shareholder receives dividends from an
investment in the shares of a taxable corporation, a REIT or RIC shareholder may
receive some dividends from the REIT or RIC, which qualify for the dividend
exclusion.
The proposal provides that a REIT or a RIC that has excludable dividend
income will generally pass through this income as excludable to its
shareholders. In addition, REITs and RICs will be able to pass through certain
undistributed amounts as basis adjustments. Under current law, REITs and RICs
are entitled to a deduction for dividends they distribute to their shareholders.
Under the proposal, RICs and REITs will not be allowed a deduction for
distributions that are designated as excludable. For purposes of the
distribution requirements of REITs and RICs, excludable dividends will be
treated in the same manner as tax-exempt interest.
Please note that the President's dividend exclusion proposal is in the early
stages of the legislative process. This proposal may or may not ultimately be
enacted as law. If this proposal does ultimately result in a tax law change with
respect to the exclusion of corporate dividends, the form and details of a
future law change are extremely uncertain.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING REITS. The rules dealing
with US federal income taxation are constantly under review by persons involved
in the legislative process and by the IRS and the U.S. Treasury Department.
Changes to the tax law, which may have retroactive application, could adversely
affect First American, the New Fund, and their respective shareholders. It
cannot be predicted whether, when, in what forms, or with what effective dates,
the tax law applicable to First American, the New Fund or their respective
shareholders will be changed.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement or other employee
benefit plan (or Plan) subject to the Employee Retirement Income Security Act of
1974, as amended (or ERISA), should consider the fiduciary standards under ERISA
in the context of the Plan's particular circumstances before authorizing an
investment of a portion of such Plan's assets in the shares of First American
common stock. Accordingly, such fiduciary should consider (i) whether the
investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA, (ii) whether the investment is in accordance with
the documents and instruments governing the Plan as required by
Section 404(a)(1)(D) of ERISA, and (iii) whether the investment is prudent under
ERISA. In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA, and the corresponding provisions
of the Code, prohibit a wide range of transactions involving the assets of the
Plan and persons who have certain specified relationships to the Plan (or
parties in interest within the meaning of ERISA, and "disqualified persons"
within the meaning of the Code). Thus, a Plan fiduciary considering an
investment in the shares of First American common stock also should consider
whether the acquisition or the continued holding of the shares of First American
common stock might constitute or give rise to a direct or indirect prohibited
transaction.
The Department of Labor (or the DOL) has issued final regulations as to what
constitutes assets of an employee benefit plan under ERISA. Under these
regulations, if a Plan acquires an equity interest in an entity, which interest
is neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's assets
would include, for purposes of the fiduciary responsibility provision of ERISA,
both the equity interest and an undivided interest in each of the entity's
underlying assets unless certain specified exceptions apply. The regulations
define a publicly offered security as a security that is "widely held," "freely
transferable," and either part of a class of securities registered under the
Exchange Act, or sold pursuant to an effective registration statement under the
Securities Act (provided the securities are registered under the Exchange Act
within 120 days after the end of the fiscal year of the issuer during which the
public offering occurred). The shares of common stock of First American are
being sold in an offering registered under the Securities Act and will be
registered under the Exchange Act.
The DOL regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. First
American expects the common stock to be "widely held" upon completion of the
merger.
The DOL regulations provide that whether a security is "freely transferable"
is a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or less, as is the
case with the merger, certain restrictions ordinarily will not, alone or in
combination, affect the finding that such securities are "freely transferable."
First American believes that the restrictions imposed under its articles of
incorporation on the transfer of the common stock are limited to the
restrictions on transfer generally permitted under the DOL regulations and are
not likely to result in the failure of the common stock to be "freely
transferable." The DOL regulations only establish a presumption in favor of the
finding of free transferability, and, therefore, no assurance can be given that
the DOL will not reach a contrary conclusion.
Assuming that First American's common stock will be "widely held" and
"freely transferable," First American believes that the common stock will be
publicly offered securities for purposes of the regulations and that the assets
of First American will not be deemed to be "plan assets" of any Plan that
invests in the common stock.
For those shareholders who receive shares in the New Fund, the "plan assets"
analysis would involve Section 401(b)(1) of ERISA, which states that, in the
case of Plan investment in any security issued by an investment company
registered under the Investment Company Act, the assets of such company are not
plan assets solely by reason of such investment.
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COMPARISON OF RIGHTS AND INVESTMENTS
In evaluating whether to approve the merger, shareholders of each Existing
Fund should review the comparisons provided in this section. The organization
and operation of First American is substantially different than that of the
Existing Funds and the New Fund. The charts below highlight some of these
differences, including comparisons of shareholder rights, qualification as a
REIT and the investment advisory agreements.
The Existing Funds and the New Fund are organized as corporations under the
laws of the State of Minnesota and are diversified closed-end, registered
management investment companies registered under the Investment Company Act.
First American is organized as a corporation under the laws of the State of
Maryland and will elect to be taxed as a REIT for federal income tax purposes.
As registered management investment companies, the Existing Funds and the New
Fund are subject to the provisions of and the regulations under the Investment
Company Act which imposes restrictions on their business and investment
activities. The Existing Funds and the New Fund also are governed by their
respective articles of incorporation and bylaws, which have been adopted
pursuant to the MBCA.
As a Maryland corporation, First American is governed by certain provisions
of the MGCL and by First American's articles of incorporation and bylaws. See
"--Comparison of Shareholder Rights." Following the merger, First American will
not be regulated by the Investment Company Act and its shareholders will not be
afforded the same regulatory protections. See "THE EXISTING FUNDS--Regulatory
Matters." First American will seek to be exempt from registration as an
investment company under the Investment Company Act in reliance on
Section 3(c)(5)(C) of such Act. Compliance with this exemption and First
American's proposed qualification as a REIT will impose restrictions on the
business and investment activities of First American. These restrictions are
different in some important respects from those applicable to the Existing Funds
and the New Fund. See "--Comparison of Federal Tax Requirements for
Qualification as a Regulated Investment Company and a Real Estate Investment
Trust."
COMPARISON OF SHAREHOLDER RIGHTS
The rights of shareholders of the Existing Funds and the New Fund are
governed by the MBCA and by their respective articles of incorporation and
bylaws adopted pursuant to the MBCA. The rights of the shareholders of First
American will be governed by its articles of incorporation and bylaws, which
have been adopted pursuant to the MGCL. The summary contained in the following
chart is qualified by reference to the MBCA, the MGCL, the Existing Funds' and
the New Fund's articles of incorporation, the Existing Funds' and the New Fund's
bylaws, First American's articles of incorporation and First American's bylaws.
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<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
AUTHORIZED CAPITAL EXISTING FUNDS: The authorized capital stock of First American
STOCK: consists of 100 million shares, of which 98
The authorized capital stock of each Existing Fund million shares have been designated as common
consists of 1 billion shares of common stock, par stock and two million shares of preferred stock,
value of $.01 per share. each with a par value of $.01 per share.
The Existing Funds' bylaws prohibit the Existing
Funds from issuing shares of stock for an amount
less than the net asset value per share of the
shares outstanding at the time of issuance.
NEW FUND: The authorized capital stock consists of
1 billion shares of common stock, par value of
$.01 per share. The shares are divisible into
classes and series, have the designations, voting
rights and other rights and preferences, and are
subject to the restrictions, that the New Fund's
board of directors may from time to time
establish, fix and determine. Unless otherwise
designated by the board of directors, all issued
shares will be deemed common shares.
CAPITAL STRUCTURE: EXISTING FUNDS: The capital structure of First American is subject
to the MGCL and First American's articles and
The capital structure of the Existing Funds, as bylaws. First American is permitted to issue
closed-end funds, is regulated by Section 18 of common stock that has the same relative rights as
the Investment Company Act. In addition to issuing all other common stock that is issued. However,
common stock, the Existing Funds are permitted to First American is also permitted to issue shares
issue one class of preferred stock and/or one of preferred stock from time to time in one or
class of debt securities subject to certain more classes or series. The board of directors of
restrictions. First American has the power from time to time to
classify or reclassify unissued common or
NEW FUND: Same as above. preferred stock in one or more classes or series
and to establish for each class or series the
terms, preferences, conversion or other rights,
voting powers, restrictions, distribution
limitations, qualifications and redemption terms
and conditions, and to set or change the number of
shares in each class or series.
</Table>
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<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
NUMBER OF DIRECTORS: EXISTING FUNDS: First American's articles of incorporation provide
that the board of directors shall consist of not
American Select's and American Strategic III's less than five or more than ten directors. The
bylaws provide that the board of directors of each board of directors of First American will
Existing Fund shall consist of not less than three initially be composed of six members, two of whom
and not more than 15 directors, as fixed by the will be associated with USBAM and four of whom
board of directors or the shareholders of each will be independent directors.
Existing Fund. American Select and American
Strategic III each currently have seven directors.
American Strategic's and American Strategic II's
bylaws provide that the board of directors or the
shareholders of each Existing Fund shall fix the
number of directors. American Strategic and
American Strategic II each currently have seven
directors.
NEW FUND: The New Fund's bylaws provide that the
number of directors shall be determined from time
to time by the board of directors. The New Fund
currently has seven directors.
ACTIONS BY EXISTING FUNDS: First American's articles of incorporation provide
DIRECTORS: that, upon completion of the merger, all actions
The boards of directors of the Existing Funds act by its board of directors require the approval of
by majority vote. at least a majority of the entire board of
directors (including at least a majority of the
NEW FUND: Same as above. independent directors).
CLASSIFICATION OF EXISTING FUNDS: First American's articles of incorporation provide
BOARD OF for a classified board of directors upon
DIRECTORS: The organization documents of the Existing Funds completion of the merger. There will be three
do not provide for a classified board of classes of directors in which the term of office
directors. The directors of each Existing Fund will be staggered in three-year periods.
hold office for a one-year period.
NEW FUND: Same as above.
</Table>
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<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
REMOVAL OF EXISTING FUNDS: First American's articles of incorporation provide
DIRECTORS: that a director may be removed with or without
The Existing Funds' bylaws provide that an cause with the affirmative vote of at least
Existing Fund's directors may be removed from two-thirds of the shares outstanding and entitled
office with or without cause by vote of a majority to vote.
of the shares outstanding and entitled to vote,
except in the event that the entire board or any
one or more directors be so removed, new directors
shall be elected at the same meeting, or the
remaining directors may, to the extent vacancies
are not filled at such meeting, fill any vacancy
or vacancies created by such removal.
NEW FUND: Same as above, except that the New
Fund's bylaws provide that a director may be
removed from office, with or without cause, by a
vote of a majority of the outstanding shares of
the class or classes of capital stock that elected
such director.
</Table>
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<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
SHAREHOLDER VOTING EXISTING FUNDS: First American's articles of incorporation provide
REQUIREMENT: that the affirmative vote of at least two-thirds
Each Existing Fund's articles of incorporation of the shares of First American outstanding and
provide that amending its articles of entitled to vote is required to amend or repeal
incorporation to convert from a closed-end any provision that is inconsistent with the
investment company to an open-end investment articles entitled "Board of Directors,"
company requires the affirmative vote of at least "Restrictions on Ownership and Transfer of
two-thirds of its outstanding common shares. Shares," "Limitation of Liability and
Indemnification of Directors and Officers,"
All other amendments to the articles of "Amendment of Bylaws," "Amendment or Repeal of the
incorporation require the approval of at least a Articles" and "Restriction Termination Date and
majority of the shares present and entitled to REIT Qualification."
vote.
All other amendments to the articles of
NEW FUND: Same as above. incorporation require the approval of at least a
majority of the shares outstanding and entitled to
vote.
BYLAWS:
The bylaws may be repealed, altered, amended or
rescinded by (a) an affirmative vote of
shareholders holding at least two-thirds of the
aggregate number of shares outstanding and
entitled to vote or (b) the affirmative vote of
the board of directors, acting by a vote of at
least a majority of the directors (including at
least a majority of the independent directors).
</Table>
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<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
ANTI-TAKEOVER EXISTING FUNDS: INTERESTED SHAREHOLDER PROVISION. Section 3-601 of
PROVISIONS: the MGCL establishes special requirements for
INTERESTED SHAREHOLDER PROVISION. Under Section "business combinations" between a Maryland
302A.673 of the MBCA, the Existing Funds may not corporation and "interested shareholders" unless
enter into a business combination with an exemptions are applicable. An interested
"interested shareholder" for at least four years shareholder is any person who beneficially owns
after the shareholder acquired a 10% interest in 10% or more of the voting power of First
the Existing Fund. An "interested shareholder" is American's then outstanding voting stock. Among
a beneficial owner of 10% of the outstanding other things, the law prohibits for a period of
voting shares of the Existing Fund or the New Fund five years, a merger and other similar
or an affiliate or associate thereof who, within transactions between First American and an
the preceding four years, was a beneficial owner interested shareholder unless the board of
of 10% of the outstanding voting shares thereof. directors approved the transaction prior to the
party becoming an interested shareholder. The
This restriction does not apply, however, if a five-year period runs from the most recent date on
committee of the board of directors made up of all which the interested shareholder became an
of its disinterested directors approves the interested shareholder. The law also requires
acquisition of the 10% interest or the business payment of a fair price to shareholders to be
combination before the date that the shareholder determined as set forth in the statute or a
acquires the 10% interest. supermajority shareholder vote for such
transactions after the end of the five-year
NEW FUND: Same as above. period. This means that the transaction must be
approved by at least:
- 80% of the votes entitled to be cast by holders
of outstanding voting shares voting together as
a single voting group; and
- 66% of the votes entitled to be cast by holders
of outstanding voting shares other than shares
held by the interested shareholder with whom
the business combination is to be effected.
</Table>
195
<Page>
<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
ANTI-TAKEOVER EXISTING FUNDS: CONTROL SHARE STATUTE.Section 3-701 of the MGCL
PROVISIONS provides that "control shares" of a Maryland
(CONT.): CONTROL SHARE PROVISION. Under Section 302A.671 of corporation acquired in a "control share
the MBCA, before a person acquiring 20% or more of acquisition" have no voting rights except to the
an Existing Fund's voting shares can vote the extent approved by a shareholder vote. Two-thirds
shares in excess of the 20% level, the holders of of the shares other than the "control shares" must
a majority of all of the Existing Fund's, vote in favor of granting the "control shares"
including shares held by the acquiring person, and voting rights. "Control shares" are shares of
of a majority of the Existing Fund's voting shares stock that taken together with all other shares of
held by disinterested shareholders, is generally stock the acquiror previously acquired, would
required. Similar shareholder approvals are entitle the acquiror to exercise at least 10% of
required at the one-third and majority voting the voting power in electing directors. Control
levels. shares do not include shares of stock, that the
acquiring person is entitled to vote as a result
NEW FUND: Same as above. of having previously obtained shareholder
approval. A "control share acquisition" means the
acquisition of control shares, subject to certain
exceptions. If a person who has made (or proposes
to make) a control share acquisition satisfies
certain conditions (including agreeing to pay
expenses), he may compel the board of directors to
call a special meeting of shareholders to be held
within 50 days to consider the voting rights of
the shares. If such a person makes no request for
a meeting, First American has the option to
present the question at any shareholders' meeting.
EXISTING FUNDS: FAIR PRICE PROVISION. The MGCL does not have a
fair price provision.
FAIR PRICE PROVISION. Under Section 302A.675 of
the MBCA, an offeror may not acquire shares of an
Existing Fund within two years following the
offeror's last purchase of shares in a takeover
offer, unless the selling shareholder is given a
reasonable opportunity to dispose of his or her
shares to the offeror upon terms substantially
equivalent to those provided in the earlier
takeover offer. However, the fair price provision
does not apply if the acquisition is approved by a
committee of the board's disinterested directors
before the purchase of any shares by the offeror
under the earlier takeover offer.
NEW FUND: Same as above.
</Table>
196
<Page>
<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
ANTI-TAKEOVER EXISTING FUNDS: DISSENTING SHAREHOLDERS' RIGHTS. Section 3-202 of
PROVISIONS the MGCL limits First American's shareholders'
(CONT.): DISSENTING SHAREHOLDERS' RIGHTS. Under Section rights to demand and receive payment for their
302A.471 and Section 302A.473 of the MBCA, shares (referred to as appraisal or statutory
shareholders of an Existing Fund may dissent from, dissenters' appraisal rights) because First
and obtain payment for the fair value of the their American's shares are listed on a national
shares in each of the following events: securities exchange, the NYSE.
- amendment to the articles of incorporation that
materially and adversely affects a
shareholder's rights because it does any of the
following:
- alters or abolishes preferential rights
relating to the shares;
- creates, alters or abolishes redemption
rights relating to the shares;
- alters or abolishes preemptive rights of the
shareholder; or
- excludes or limits the rights of a
shareholder to vote on a matter or to
cumulate votes;
- disposition of all or substantially all of the
property and assets of the Existing Fund not
made in the usual course of its business;
- certain plans of merger;
- certain plans of exchange, if the Existing
Fund's shares will be acquired by the acquiring
corporation; or
- other corporate action taken under a
shareholder vote if the articles of
incorporation, bylaws or a board resolution
provides that dissenting shareholders may
obtain payment for their
shares.
NEW FUND: Same as above.
</Table>
197
<Page>
<Table>
<Caption>
THE EXISTING FUNDS' AND NEW FUND'S FIRST AMERICAN'S
SHAREHOLDERS RIGHTS SHAREHOLDERS RIGHTS
RIGHT TO INSPECT EXISTING FUNDS: Each shareholder has the right under the MGCL to
BOOKS: obtain, upon written request, a statement showing
The bylaws of each Existing Fund grant each all stock and securities issued by First American
Existing Fund shareholder the right to examine and during a specified period of not more than the
copy, for any proper purpose, the share register, preceding 12 months. Each shareholder or group of
books of account and records of the proceedings of shareholders who have owned 5% or more of the
the shareholders and directors of such Existing outstanding stock of any class of capital stock
Fund. The MBCA grants an Existing Fund's for at least six months shall have, upon written
shareholder the right, upon written demand stating request and for a proper purpose reasonably
the purpose of such demand, to examine and copy an related to that shareholder's interest as a
Existing Fund's share register and other corporate shareholder in First American, the right to have
records reasonably related to the stated purpose access to the books, records and stock ledger of
for any purpose reasonably related to the First American.
shareholder's interest as a shareholder of such
Existing Fund.
NEW FUND: The bylaws of the New Fund are silent on
this point and the MBCA governs.
REPORTING EXISTING FUNDS: First American will be required to satisfy the
REQUIREMENTS: annual and periodic reporting requirements of the
The Existing Funds will deliver annual and Exchange Act, including filing an Annual Report on
semi-annual reports, including financial Form 10-K and Quarterly Reports on Form 10-Q, each
statements, to shareholders and will file of which requires the filing of full financials
semi-annual reports on Forms N-CSR and N-SAR. with each report. Furthermore, First American must
file a Current Report Form 8-K report whenever a
NEW FUND: Same as above. reportable event occurs between the above
reporting periods.
</Table>
198
<Page>
COMPARISON OF FEDERAL TAX REQUIREMENTS FOR QUALIFICATION AS A REGULATED
INVESTMENT COMPANY AND A REAL ESTATE INVESTMENT TRUST
The Existing Funds and the New Fund are diversified, closed-end, registered
management investment companies that are qualified or intend to qualify as RICs
under the Code, whereas First American will be qualified as a REIT and subject
to the REIT provisions of the Code. The chart below summarizes the principal
difference between RICs and REITs.
<Table>
<Caption>
RIC REQUIREMENTS REIT REQUIREMENTS
ORGANIZATIONAL EXISTING FUNDS: To qualify as a REIT, First American must elect to
REQUIREMENTS: be taxed as a REIT and:
Must be a U.S. corporation which either (i) is
registered under the Investment Company Act as a (i) be organized as a corporation, trust, or
management company or unit investment trust, association;
(ii) has elected under the Investment Company Act
to be treated as a business development company, (ii) be managed by one or more trustees or
or (iii) is a common trust fund or similar fund directors;
excluded from the definition of "investment
company" under section 3(a)(3) of the Investment (iii) have transferable shares, which may be
Company Act, and is not included in the definition subject to certain transfer restrictions (e.g., to
of "common trust fund" under Section 584 of the maintain REIT status);
Code.
(iv) be otherwise taxable as a domestic
NEW FUND: Same as above. corporation but for the REIT provisions;
(v) not be a financial institution or insurance
company;
(vi) be owned by at least 100 persons for each of
its taxable years other than in the first year in
which an election to be taxed as a REIT is made;
(vii) during the last half of any taxable year
(other than in the first year for which an
election to be taxed as a REIT is made), more than
50% of the total value of its shares may not be
owned by 5 or fewer individuals, applying the
attribution rules of the Code; and
(viii) use a calendar year as its taxable year.
ACCOUNTING BASIS: EXISTING FUNDS: The financial statements of First American will be
presented based on historical cost.
The financial statements of the Existing Funds are
presented at fair value.
NEW FUND: Same as above.
</Table>
199
<Page>
<Table>
<Caption>
RIC REQUIREMENTS REIT REQUIREMENTS
ASSET REQUIREMENTS: EXISTING FUNDS: To qualify as a REIT, First American must satisfy
the following tests relating to its assets at the
To qualify as a RIC, an entity must satisfy the end of each quarter of its taxable year:
following tests relating to its assets at the end
of each quarter of its taxable year: (i) at least 75% of the value of First American's
total assets must consist of real estate assets
(i) at least 50% of the value of its total assets (including mortgages secured by real property),
must consist of cash and cash items (including cash, cash equivalents, and government securities;
receivables), government securities and securities
of other RICs, and any other securities, other (ii) no more than 5% of the value of First
than those of a single issuer representing more American's total assets may consist of the
than 5% of the entity's total assets, or more than securities of any one issuer and no more than 10%
10% of the voting securities of such issue; and of the outstanding securities, in terms of vote or
value, of any one issuer may be held, other than
(ii) no more than 25% of the entity's total assets (i) those assets included in the 75% test,
can consist of securities (other than government (ii) securities of a taxable REIT subsidiary or
securities and securities in other RICs) of any (iii) "safe harbor" debt; and
one issuer or of two or more issuers which the
entity controls and which are engaged in the same, (iii) no more than 20% of the value of First
similar, or related trades or businesses. American's total assets can consist of stock in a
taxable REIT subsidiary.
NEW FUND: Same as above.
INCOME REQUIREMENTS: EXISTING FUNDS: To qualify as a REIT, First American must satisfy
the following annual gross income tests:
To qualify as a RIC, at least 90% of the gross
income of the entity must consist of the (i) at least 75% of First American's gross income
following: must consist of rents from real property, interest
on obligations secured by mortgages, gain from the
(i) dividends, (ii) interest, (iii) payments with sale of real property not held primarily for sale
respect to securities loans, (iv) gains from the in the ordinary course of business, dividends from
sale or other disposition of stocks, securities or other REITs, gain from the sale of First
foreign currencies, or (v) other income derived American's shares, refunds and abatements of real
with respect to its business of investing in such property taxes, income and gain from foreclosure
stock, securities or currencies. property, commitment and certain other fees,
qualified temporary investment income, and gain
NEW FUND: Same as above. from the sale of certain other property, and
(ii) at least 95% of First American's gross income
must consist of items included in the 75% test
above, plus dividends, interest, and gains from
the sale or disposition of stocks or securities.
If First American violates either the 75% or 95%
test, or both, automatic disqualification may not
necessarily result. Instead, a penalty tax may
apply if certain requirements are met.
</Table>
200
<Page>
<Table>
<Caption>
RIC REQUIREMENTS REIT REQUIREMENTS
DISTRIBUTION EXISTING FUNDS: To qualify as a REIT, First American must
REQUIREMENTS: distribute annually at least:
To qualify as a RIC, the entity must distribute
annually at least 90% of the sum of (i) its (i) the sum of (i) 90% of its REIT taxable income
investment company taxable income for the taxable for the taxable year, determined without regard to
year, determined without regard to the dividends the dividends paid deduction and by excluding any
paid deduction, and (ii) its net tax-exempt income net capital gain; and (ii) 90% of the excess of
for the taxable year. its net income from foreclosure property for the
taxable year over any tax imposed on such net
In order to avoid a 4% excise tax, a RIC must income; minus (ii) any "excess non-cash income"
distribute annually at least the sum of (i) 98% of (as defined in Section 857(e) of the Code).
its investment company taxable income for the
calendar year, (ii) 98% of its capital gain net In order to avoid a 4% excise tax, First American
income for the one-year period ended on October 31 must distribute annually at least the sum of
of such calendar year, and (iii) any (A) 85% of its ordinary taxable income for the
undistributed income or gain from prior taxable taxable year, (B) 95% of its capital gain net
years. income for the taxable year, and (C) any
undistributed income or gain from prior taxable
Additionally, in order for the entity to qualify years.
as a RIC for any taxable year, it must distribute,
before the close of such taxable year, any Additionally, in order for First American to
earnings and profits accumulated in any non-RIC qualify as a REIT for any taxable year, it must
year. distribute, before the close of such taxable year,
any earnings and profits accumulated in any
NEW FUND: Same as above. non-REIT year.
</Table>
COMPARISON OF THE ADVISORY AGREEMENTS TO THE REIT ADVISORY AGREEMENT
The chart below summarizes and compares certain provisions of the investment
advisory and management agreements between each Existing Fund and the New Fund
and USBAM to the REIT Advisory Agreement between USBAM and First American. The
chart below is only a summary of the advisory contract for each entity. Please
refer to the respective advisory agreements for a more complete description. See
"Management of First American--The REIT Advisory Agreement" for a more detailed
discussion of the REIT Advisory Agreement.
<Table>
<Caption>
THE FUND ADVISORY AGREEMENT THE REIT ADVISORY AGREEMENT
DESCRIPTION OF EXISTING FUNDS: USBAM will be responsible for the day-to- day
SERVICES PROVIDED: operations of First American and will provide
USBAM furnishes each Existing Fund with investment investment advice with respect to the capital and
advice and supervises the management and assets of First American.
investment program of each Existing Fund.
NEW FUND: Same as above.
</Table>
201
<Page>
<Table>
<Caption>
THE FUND ADVISORY AGREEMENT THE REIT ADVISORY AGREEMENT
LENGTH OF TERM: EXISTING FUNDS: The initial term will be for two years subject to
successive extensions not to exceed two years with
The initial term was for two years and such term the approval of the independent directors unless
may be continued by the approval of an Existing terminated.
Fund's board of directors (including approval by a
majority of the independent directors) or
shareholders on an annual basis.
NEW FUND: Same as above.
BASE FEE: EXISTING FUNDS: The base management fee shall equal 0.25% per
annum for investment grade assets or residential
American Strategic, American Strategic II and mortgage-backed securities determined in the
American Strategic III pay USBAM a monthly reasonable judgment of USBAM to be of equivalent
management fee in an amount equal to 0.01667% of credit quality (whether or not rated) and 1% per
the Existing Fund's average weekly net assets annum for the first $1 billion of other assets and
(approximately 0.2% on an annual basis) and 4.50% 0.75% of other assets over $1 billion, payable
of the daily gross income accrued by such Existing quarterly not later than 30 days after such fiscal
Fund during the month (I.E., investment income, quarter.
including amortization of discount income, other
than gains from the sale of securities or gains
from options and futures contracts less interest
on money borrowed by the Existing Fund). The
monthly investment management fee shall not exceed
in the aggregate 1/12th of 0.725% of a Existing
Fund's average weekly net assets during the month.
American Select pays USBAM a monthly investment
management fee in an amount equal to an annualized
rate of 0.50% of American Select's average weekly
net assets.
NEW FUND: Same as American Strategic, American
Strategic II and American Strategic III.
</Table>
202
<Page>
<Table>
<Caption>
THE FUND ADVISORY AGREEMENT THE REIT ADVISORY AGREEMENT
PERFORMANCE FEE: EXISTING FUNDS: USBAM will be entitled to receive a performance
fee for each fiscal quarter equal to the product
USBAM is not entitled to a performance fee. of (i) the weighted average number of shares of
common stock outstanding during such quarter, and
NEW FUND: Same as above. (ii) 20% of the amount by which (a) the net
income per share of common stock of First American
(before the performance fee) exceeds (b) a net
income per share that would result in a yield,
tied to the historical offering prices of the
common stock, equal to the greater of 10% or the
applicable ten-year U.S. Treasury rate plus 3.5%
(each expressed as a quarterly percentage).
TERMINATION FEE: EXISTING FUNDS: Upon termination or non-renewal of the REIT
Advisory Agreement by First American without
No fee is payable by any Existing Fund upon cause, First American is obligated to pay USBAM a
termination of the agreement with USBAM. termination or non-renewal fee which shall be an
amount equal to 5% of, for the first two years
NEW FUND: Same as above. following the initial date of the REIT Advisory
Agreement, and 2% of, thereafter, the net equity
of First American, calculated as of the fiscal
year-end immediately prior to the termination or
non-renewal, as the case may be, in accordance
with accounting principles generally accepted in
the United States.
No termination fee will be assessed for
termination with cause.
</Table>
203
<Page>
<Table>
<Caption>
THE FUND ADVISORY AGREEMENT THE REIT ADVISORY AGREEMENT
ALLOCATION OF EXISTING FUNDS: USBAM will bear all costs and expenses of its
EXPENSES: officers and employees and any overhead incurred
USBAM is responsible for the following expenses: in connection with its duties under the REIT
- all necessary administrative facilities, office Advisory Agreement, the cost of office space and
space, equipment and personnel for servicing equipment required for performance of its duties
the investments of each Existing Fund; and shall bear the costs of any salaries or
- investment advisory facilities and executive directors fees of any officers or directors of
and supervisory personnel for managing the First American who are affiliated with USBAM.
investments and effecting the portfolio
transactions of each Existing Fund; and First American is responsible for paying certain
- compensation of all officers, directors and other costs associated with the administration of
employees of each Existing Fund who are First American.
affiliated persons of USBAM. Each Existing Fund
is responsible for paying certain other costs
associated with the administration of such
Existing Fund.
NEW FUND: Same as above.
</Table>
EXPERTS
The consolidated financial statements for each Existing Fund incorporated in
this joint proxy statement/prospectus by reference to the respective annual
report on Form N-30D for the year ended November 30, 2002 with respect to
American Strategic and American Select, and for the year ended May 31, 2002 with
respect to American Strategic II and American Strategic III, have been so
incorporated in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the shares of First American common stock offered to the
Existing Funds' shareholders by this joint proxy statement/prospectus has been
passed upon for First American by Clifford Chance US LLP. The validity of the
shares of the New Fund common stock offered to Existing Funds' shareholders by
this joint proxy statement/prospectus has been passed upon for the New Fund by
Dorsey & Whitney LLP. An opinion as to the qualification of First American as a
REIT following the merger has been rendered by Ernst & Young LLP. An opinion as
to certain federal income tax consequences of the merger for those shareholders
electing to receive shares of First American common stock will be rendered for
the Existing Funds and their shareholders by Ernst & Young LLP.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, the board of
directors of each Existing Fund does not know of any matters that will be
presented for consideration at the special meetings other than those described
in this joint proxy statement/prospectus. If any other matters properly come
before any of the special meetings or any adjournments or postponements of the
special meetings, and are voted upon, the enclosed proxies will confer
discretionary authority on the individuals named as proxies to vote the shares
represented by those proxies as to any other matters. Those individuals named in
the proxies intend to vote or not vote consistent with the recommendation of the
boards of directors of the Existing Funds.
204
<Page>
INDEX TO FINANCIAL INFORMATION
<Table>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
Report of Independent Auditors............................................................ F-2
Balance Sheet as of December 31, 2002..................................................... F-3
Notes to Balance Sheet.................................................................... F-4
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Maximum Participation Scenario:
Unaudited Pro Forma Balance Sheet as of November 30, 2002................................. F-7
Unaudited Pro Forma Statement of Operations for the Year Ended November 30, 2002.......... F-8
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements.............................................................................. F-9
Minimum Participation Scenario:
Unaudited Pro Forma Balance Sheet as of November 30, 2002................................. F-14
Unaudited Pro Forma Statement of Operations for the Year Ended November 30, 2002.......... F-15
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements.............................................................................. F-16
Selected Financial Information for Other Combination Scenarios............................ F-20
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Maximum New Fund Election Scenario:
Unaudited Pro Forma Statement of Assets and Liabilities as of November 30, 2002........... F-24
Unaudited Pro Forma Statement of Operations for the Year Ended November 30, 2002.......... F-25
Unaudited Pro Forma Schedule of Investments for the Year Ended November 30, 2002.......... F-26
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements.............................................................................. F-37
Minimum New Fund Election Scenario:
Unaudited Pro Forma Statement of Assets and Liabilities as of November 30, 2002........... F-39
Unaudited Pro Forma Statement of Operations for the Year Ended November 30, 2002.......... F-40
Unaudited Pro Forma Schedule of Investments for the Year Ended November 30, 2002.......... F-41
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements.............................................................................. F-52
Selected Financial Information for Other Combination Scenarios............................ F-54
</Table>
F-1
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of First American Strategic Real Estate Portfolio Inc.
We have audited the accompanying balance sheet of First American Strategic
Real Estate Portfolio Inc. (formerly known as American Real Estate Finance
Corporation) as of December 31, 2002. This balance sheet is the responsibility
of the management of the Company. Our responsibility is to express an opinion on
the balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the balance
sheet. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of First American Strategic Real
Estate Portfolio Inc. at December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 14, 2003
F-2
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
BALANCE SHEET
DECEMBER 31, 2002
<Table>
ASSETS
Cash $100
----
Total assets $100
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Common stock (98 million shares authorized, 10 shares issued and
outstanding, $.01 par value) $ --
Preferred stock (2 million shares authorized, no shares issued and
outstanding) --
Additional paid-in capital 100
----
Total stockholder's equity 100
----
Total liabilities and stockholder's equity $100
====
</Table>
(SEE NOTES TO BALANCE SHEET)
F-3
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
NOTES TO BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
First American Strategic Real Estate Portfolio Inc. (or First American)
(formerly known as American Real Estate Finance Corporation), a newly-formed
specialty finance company, was organized in the state of Maryland on
January 11, 2002 with an initial capitalization of $100. First American has
filed a registration statement on Form S-4 with the Securities and Exchange
Commission with respect to a proposed merger of four closed-end management
investment companies (or the Existing Funds) registered under the Investment
Company Act of 1940. The Existing Funds involved in the merger are American
Strategic Income Portfolio Inc. (or American Strategic), American Strategic
Income Portfolio Inc.--II (or American Strategic II), American Strategic Income
Portfolio Inc.--III (or American Strategic III), and American Select Portfolio
Inc (or American Select). As a result of the proposed merger, each Existing Fund
whose shareholders approve the merger will be merged with and into First
American.
First American intends to qualify as a real estate investment trust (or
REIT) for federal income tax purposes for the period ending December 31, 2003. A
REIT is a legal entity that holds real estate interests, and through payment of
dividends to shareholders, is permitted to reduce or avoid the payment of
federal income taxes at the corporate level.
First American had no operations from inception on January 11, 2002 to
December 31, 2002.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Management believes that the estimates
utilized in preparing its financial statements are reasonable and prudent.
Actual results could differ from these estimates.
INCOME TAXES
First American intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986 (or the Code). To
qualify as a REIT, First American must distribute at least 90% of its REIT
taxable income. If First American distributes at least 90% of its REIT taxable
income but distributes less than all of its REIT taxable income and capital gain
net income, First American will be subject to federal corporate income tax on
any undistributed amounts. A REIT is subject to a number of organizational and
operational requirements. If First American fails to qualify as a REIT in any
taxable year, First American will be subject to federal corporate income tax on
all of its net taxable income and capital gain net income. Even if First
American qualifies for taxation as a REIT, First American may be subject to
certain state and local taxes on its income and property and to federal excise
taxes on its undistributed income.
2. BORROWINGS
Concurrent with the consummation of the proposed merger, First American
intends to succeed to certain of the borrowings then held by the Existing Funds,
which consist of short-term reverse repurchase agreements that bear interest at
a floating rate of LIBOR plus .875% and whole loan revolving credit facility
agreements that bear interest at a fixed rate of 4.65% and mature on April 17,
2003 (collectively the Lines of Credit). Under the Lines of Credit, First
American may borrow to finance the cash payments to shareholders exercising
dissenters' rights as part of the merger, funding of mortgages, purchases of
investments and for other corporate purposes, including to obtain additional
working capital, if necessary. The borrowings under the Lines of Credit will be
secured by the assets of First American.
F-4
<Page>
3. RELATED PARTY TRANSACTIONS
First American will be externally managed under the direction of USBAM,
which is a subsidiary of the Existing Funds' current manager, U.S. Bancorp Asset
Management, Inc. USBAM will be paid a base management fee and an incentive fee,
pursuant to the terms of the Advisory Agreement.
The base management fee will equal 0.25% per annum for assets that are rated
at least investment grade or residential mortgage-backed securities of
equivalent credit quality and 1% per annum for the first $1 billion of other
assets and 0.75% of other assets over $1 billion, paid quarterly, in arrears. In
addition, USBAM will be entitled to receive a performance fee for each fiscal
quarter equal to the product of (i) the weighted average number of shares of
common stock outstanding during such quarter, and (ii) 20% of the amount by
which (a) the net income per share of common stock of First American (before the
performance fee) exceeds (b) a net income per share that would result in a
yield, tied to the historical offering prices of the common stock, equal to the
greater of 10% or the applicable ten-year U.S. Treasury rate plus 3.5% (each
expressed as a quarterly percentage). These management fees are payable not
later than 30 days after the end of each fiscal quarter.
USBAM will bear the costs and expenses of its officers and employees and
certain expenses incurred in connection with the investment management
activities, including the cost of its office space and equipment and the
salaries and directors fees of any officers or directors of First American who
are affiliated with USBAM. USBAM employs the executive officers and certain
directors of First American.
First American will be responsible for the issuance and transaction costs
incident to the acquisition, disposition and financing of investments, legal,
accounting and auditing fees and expenses, the compensation and expenses of
First American's independent directors, the costs of printing and mailing
proxies and reports to shareholders, the costs incurred for due diligence and
travel on behalf of First American, costs associated with any computer software
or hardware that is used exclusively for First American, costs to obtain
liability insurance to indemnify First American's directors and officers, USBAM
and its employees and directors, litigation costs, compensation and expenses of
First American's custodian and transfer agent, costs for the master and special
servicing of mortgage loans, costs of issuance and administration of
mortgage-backed securities, costs of raising capital, costs associated with the
incurrence of debt, interest expense, taxes and license fees, non-cash costs,
the base and incentive management fee or other extraordinary or non-recurring
expenses incurred on behalf of First American.
F-5
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
Given the structure of the merger, the composition of First American after
the merger will differ depending on (i) whether each of the Existing Fund's
shareholders approve the merger and (ii) if the Existing Funds' shareholders
approve the merger, the number of shareholders exercising their dissenters'
rights or making the election to receive shares of the New Fund.
To assist the Existing Funds' shareholders in analyzing the merger, two
presentations of pro forma financial statements have been prepared to show the
impact of the merger based upon two possible merger scenarios for First
American. The first presentation of pro forma financial statements assumes all
four Existing Funds approve the merger and also assumes that shareholders
holding Existing Fund shares representing an aggregate net asset value of $50
million elect to participate in the New Fund and that no shareholders elect to
exercise statutory dissenters' appraisal rights (referred to as maximum
participation). In this presentation, 7.4% of the net assets are allocated to
the New Fund. The second presentation assumes a combination of the Existing
Funds whose combined net asset values exceed the minimum net asset value
requirement to effect the merger by the smallest margin and also assumes that
shareholders holding approximately 49% of shares in each such Existing Fund
elect to participate in the New Fund and that no shareholders elect to exercise
statutory dissenters' appraisal rights (referred to as minimum participation).
The rationale for including the maximum and minimum participation scenarios in
pro forma information was to provide the range of possible outcomes to potential
investors.
The pro forma balance sheets of First American have been prepared as if the
merger was consummated on November 30, 2002. The pro forma statements of income
of First American for the year ended November 30, 2002 assume that the merger
was consummated on December 1, 2001. The amounts included in the pro forma
statements of income have been presented for the year ended November 30, 2002,
even for American Strategic II and American Strategic III, which have a fiscal
year end of May 31, 2002. Since the merger will be accounted for using the
purchase method of accounting, the pro forma financial statements have been
prepared using this method.
In the maximum participation presentation, American Strategic III was deemed
to be the acquirer of the other Existing Funds and First American for financial
reporting purposes because its shareholders would be allocated the largest
number of shares of First American common stock.
In the minimum participation presentation, American Strategic II was deemed
to be the acquirer of American Strategic, American Select and First American for
financial reporting purposes because its shareholders would be allocated the
largest number of shares of First American common stock.
Since First American will not be registered under the Investment Company
Act, the financial statements of First American will be presented on a
historical cost basis. Since the assets of the Existing Funds have historically
been recorded at estimated fair value, the estimated fair values at the date of
consummation will be considered the initial cost basis for the merged company.
The pro forma financial statements are based upon available information and
upon certain assumptions, as set forth in the notes to the pro forma financial
statements that management believes are reasonable under the circumstances. The
pro forma financial statements consider the allocation of assets (based on the
allocation methodology disclosed in the notes to the unaudited pro forma
financial statements and in "THE MERGER--The Merger Agreement--Transactions
Relating to the New Fund Option") to the New Fund that corresponds to the
percentage of shareholders electing to receive shares of the New Fund. These pro
forma financial statements do not purport to represent what First American's
financial position or results of operations would actually have been if the
merger in fact had occurred on such dates or at the beginning of such periods or
First American's financial position or results of operations for any future date
or period. Management believes that cash flows from operations will not
materially differ from net income.
F-6
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
PRO FORMA BALANCE SHEET
MAXIMUM PARTICIPATION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
FIRST AMERICAN AMERICAN AMERICAN AMERICAN
AMERICAN STRATEGIC STRATEGIC II STRATEGIC III SELECT
-------- ----------- ------------ ------------- ------------
ASSETS:
Investments in securities, at market value $ -- $69,656,374 $289,064,818 $359,239,604 $171,568,656
Cash and cash equivalents 100 21,199 55,241 -- --
Accrued interest receivable -- 397,593 1,431,515 1,833,734 988,169
Other assets -- 31,537 338,491 222,543 34,008
Available-for-sale securities -- -- -- -- --
Mortgage loans, net of allowance -- -- -- -- --
------ ----------- ------------ ------------ ------------
Total assets 100 70,106,703 290,690,065 361,295,881 172,590,833
====== =========== ============ ============ ============
LIABILITIES:
Reverse repurchase agreements payable -- 16,600,000 78,700,050 92,454,372 28,500,000
Accrued investment management fees -- 24,914 114,568 144,063 58,974
Bank overdraft -- -- -- 162,288 5,076
Accrued administrative fee -- 10,965 43,400 54,884 29,487
Accrued interest -- 24,870 174,954 203,651 54,745
Accrued reorganization expense -- 86,542 344,349 435,128 232,903
Other accrued expenses -- 7,265 10,260 13,597 11,576
------ ----------- ------------ ------------ ------------
Total liabilities -- 16,754,556 79,187,581 93,467,983 28,892,761
------ ----------- ------------ ------------ ------------
NET ASSETS / SHAREHOLDERS EQUITY:
Capital stock and additional paid-in capital 100 60,517,426 231,068,147 312,303,603 153,233,654
Undistributed net investment income -- 8,967 1,402,109 1,544,431 585,892
Accumulated net realized loss on investments -- (9,173,201) (28,290,850) (53,967,824) (15,944,453)
Accumulated deficit -- -- -- -- --
Unrealized appreciation of investments -- 1,998,955 7,323,078 7,947,688 5,822,979
------ ----------- ------------ ------------ ------------
Total-net assets / shareholders equity 100 53,352,147 211,502,484 267,827,898 143,698,072
------ ----------- ------------ ------------ ------------
Total liabilities and net assets /
shareholders equity $ 100 $70,106,703 $290,690,065 $361,295,881 $172,590,833
====== =========== ============ ============ ============
<Caption>
FIRST
PRO FORMA AMERICAN
ADJUSTMENTS PRO FORMA
------------- ------------
ASSETS:
Investments in securities, at market value (A)(B)(C)(D) $(889,529,452) $ --
Cash and cash equivalents (C)(E)(I) 8,669,359 8,745,899
Accrued interest receivable (H) (343,710) 4,307,301
Other assets (H) (46,304) 580,275
Available-for-sale securities (D) 189,020,172 189,020,172
Mortgage loans, net of allowance (B) 623,174,255 623,174,255
------------- ------------
Total assets (69,055,680) 825,827,902
============= ============
LIABILITIES:
Reverse repurchase agreements payable (H) (15,981,202) 200,273,220
Accrued investment management fees (H) (25,312) 317,207
Bank overdraft (H) (12,368) 154,996
Accrued administrative fee (H) (10,253) 128,483
Accrued interest (H) (33,862) 424,358
Accrued reorganization expense (E) (1,098,922) --
Other accrued expenses (H) (3,155) 39,543
------------- ------------
Total liabilities (17,165,075) 201,337,806
------------- ------------
NET ASSETS / SHAREHOLDERS EQUITY:
Capital stock and additional paid-in capital (G) (89,537,805) 667,585,125
Undistributed net investment income (F)(G) (3,541,399) --
Accumulated net realized loss on investments (F)(G) 107,376,328 --
Accumulated deficit (E)(F) (43,095,029) (43,095,029)
Unrealized appreciation of investments (F)(G) (23,092,700) --
------------- ------------
Total-net assets / shareholders equity (51,890,605) 624,490,096
------------- ------------
Total liabilities and net assets /
shareholders equity $ (69,055,680) $825,827,902
============= ============
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-7
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
PRO FORMA STATEMENT OF OPERATIONS
MAXIMUM PARTICIPATION SCENARIO
FOR THE YEAR ENDED NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
FIRST AMERICAN AMERICAN AMERICAN AMERICAN
AMERICAN STRATEGIC STRATEGIC II STRATEGIC III SELECT
-------- ---------- ------------ ------------- -----------
INCOME:
Interest $ -- $5,220,565 $23,785,175 $29,865,085 $15,954,302
Dividends -- 299,389 -- 39,280 81,098
-------- ---------- ----------- ----------- -----------
Total income -- 5,519,954 23,785,175 29,904,365 16,035,400
EXPENSES:
Interest expense -- 624,078 2,737,170 3,329,245 1,919,508
Provision for credit losses -- -- -- -- --
Investment management fees -- 326,423 1,365,577 1,710,518 715,716
Administration fees -- 132,636 527,233 666,593 356,682
Custodian fees -- 10,611 42,179 53,327 28,535
Transfer agent fees -- 47,264 66,150 58,126 52,741
Registration fees -- 58,129 216,789 297,180 147,234
Reports to shareholders -- 35,460 65,445 102,053 68,575
Mortgage servicing fees -- 45,060 186,213 239,623 140,563
Directors' fees -- 13,543 63,647 106,008 44,303
Audit and legal fees -- 118,688 537,973 588,675 298,753
Financial adviory &
accounting fees -- 70,079 314,000 480,368 231,438
Performance fees -- -- -- -- --
Other expenses -- 8,921 56,719 59,449 13,814
-------- ---------- ----------- ----------- -----------
Total expenses -- 1,490,892 6,179,095 7,691,165 4,017,862
-------- ---------- ----------- ----------- -----------
-- 4,029,062 17,606,080 22,213,200 12,017,538
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
Net realized gain (loss) on
investments in securities
and mortgage loans -- (491,966) 430,519 221,787 1,092,850
-------- ---------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS)
ON INVESTMENTS -- (491,966) 430,519 221,787 1,092,850
- ------------------------------ -------- ---------- ----------- ----------- -----------
NET CHANGE IN UNREALIZED
APPRECIATION OR
DEPRECIATION OF
INVESTMENTS -- 734,941 100,369 136,455 765,118
-------- ---------- ----------- ----------- -----------
NET GAIN ON INVESTMENTS -- 242,975 530,888 358,242 1,857,968
-------- ---------- ----------- ----------- -----------
NET INCOME $ -- $4,272,037 $18,136,968 $22,571,442 $13,875,506
======== ========== =========== =========== ===========
EARNINGS PER SHARE
<Caption>
FIRST
PRO FORMA AMERICAN
ADJUSTMENTS PRO FORMA
------------ -----------
INCOME:
Interest (a)(d) $(14,610,265) $60,214,862
Dividends (a) (31,021) 388,746
------------ -----------
Total income (14,641,286) 60,603,608
EXPENSES:
Interest expense (b) (636,279) 7,973,722
Provision for credit losses (h) -- --
Investment management fees (e) 3,127,640 7,245,874
Administration fees (i) (1,683,144) --
Custodian fees (b) (9,951) 124,701
Transfer agent fees (b) (16,574) 207,707
Registration fees (b)(l) (542,373) 176,959
Reports to shareholders (b) (20,066) 251,467
Mortgage servicing fees (b) (45,187) 566,272
Directors' fees (b)(l) (93,460) 134,041
Audit and legal fees (b)(l) (1,349,284) 194,805
Financial adviory &
accounting fees (l) (1,095,885) --
Performance fees (f) -- --
Other expenses (b)(j) 239,735 378,638
------------ -----------
Total expenses (2,124,828) 17,254,186
------------ -----------
-- (12,516,458) 43,349,422
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
Net realized gain (loss) on
investments in securities
and mortgage loans (a)(g) 392,961 1,646,151
------------ -----------
NET REALIZED GAIN (LOSS)
ON INVESTMENTS 392,961 1,646,151
- ------------------------------ ------------ -----------
NET CHANGE IN UNREALIZED
APPRECIATION OR
DEPRECIATION OF
INVESTMENTS (c) (1,736,883) --
------------ -----------
NET GAIN ON INVESTMENTS (1,343,922) 1,646,151
------------ -----------
NET INCOME $(13,860,380) $44,995,573
============ ===========
EARNINGS PER SHARE (k) $0.72
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-8
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
MAXIMUM PARTICIPATION SCENARIO (FIRST AMERICAN, AMERICAN STRATEGIC, AMERICAN
STRATEGIC II,
AMERICAN STRATEGIC III AND AMERICAN SELECT)
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
A. Represents the allocation of investments in mortgage-backed securities,
money market funds, and mortgage loans to the New Fund.
<Table>
<Caption>
INVESTMENTS IN NEW FUND INVESTMENTS IN
FUND SECURITIES LOANS AND SECURITIES
---- -------------- -----------------------
American Strategic $ (5,147,605) $ 5,147,605
American Strategic II (21,361,890) 21,361,890
American Strategic III (26,547,807) 26,547,807
American Select (12,678,924) 12,678,924
---------------------- ------------ -----------
Total $(65,736,226) $65,736,226
====================== ============ ===========
</Table>
Investments of the Existing Funds participating in the merger are allocated
between the REIT and the New Fund as of the effective date of the merger as
follows:
ASSET ALLOCATION METHODOLOGY--MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE
PORTFOLIO
The existing loans are divided into two pools, with each pool established in
order to have the following similar characteristics:
1) Income as measured by the effective interest rate (net coupon rate
divided by the purchase price), then weighted by current loan balance;
2) Credit risk (calculated using a debt service coverage ratio to assess
the property's cash flows), weighted by current loan balance;
3) Leverage against the value of the underlying real estate (measured using
a current weighted average loan-to-value ratio);
4) Loan term as measured by the weighted average remaining loan term;
5) Refinance risk based on whether the loan has a yield maintenance
provision or not;
6) Lien position based on a ratio of subordinate debt to senior debt;
7) Property type based on a ratio of multifamily loan to commercial loan
types;
8) Interest rate type based on a ratio of adjustable rate loans to fixed
rate loans; and
9) Interest calculation method based on a ratio of actual/360 calculation
to 30/360 calculation.
In addition, the properties on which the Existing Funds own more than one
loan or which are cross-collateralized will be allocated to only one entity.
ASSET ALLOCATION METHODOLOGY--SINGLE FAMILY
All investments collateralized by single family residential properties
(whole loans, participations, subordinate bonds, mortgage servicing rights,
etc.) other than mortgage-backed securities will be allocated to the New
Fund.
ASSET ALLOCATION METHODOLOGY--OTHER
Any other holdings, including but not limited to, cash, agencies, and REIT
preferred stocks will be allocated on a pro rata basis between the REIT and
the New Fund in order for the total assets to be allocated to the respective
entities based on the percentage of shareholders electing to receive
F-9
<Page>
New Fund shares and percentage receiving First American shares. This
allocation will compensate the REIT for not receiving any allocation of
single-family loans.
ADJUSTMENTS TO ALLOCATIONS TO COMPLY WITH REGULATIONS
Further adjustments may be made to ensure that the New Fund and the REIT are
in compliance with the asset holding, leverage and income regulations
associated with RICs and REITs.
B. Represents the reclassification of the respective Existing Funds'
investments in mortgage loans from securities to a separate classification
since First American will account for the mortgage loans at historical cost.
<Table>
<Caption>
INVESTMENTS IN
FUND SECURITIES MORTGAGE LOANS
---- -------------- --------------
American Strategic $ (32,252,397) $ 32,252,397
American Strategic II (203,025,215) 203,025,215
American Strategic III (264,988,604) 264,988,604
American Select (122,908,039) 122,908,039
---------------------- ------------- ------------
Total $(623,174,255) $623,174,255
====================== ============= ============
</Table>
The estimated fair value as of November 30, 2002 is reflected as the new
historical cost. The mortgage loans have a par value of $598,138,792.
C. Represents the reclassification of investments in money market funds from
the respective Existing Funds' investments in securities to cash and cash
equivalents. Cash and cash equivalents are defined for historical cost
purposes as highly liquid instruments with original maturities of 90 days or
less.
<Table>
<Caption>
INVESTMENTS IN CASH AND CASH
FUND SECURITIES EQUIVALENTS
---- -------------- -------------
American Strategic $ (4,202,584) $ 4,202,584
American Strategic II (2,578,112) 2,578,112
American Strategic III (2,932,775) 2,932,775
American Select (1,885,328) 1,885,328
---------------------- ------------ -----------
Total $(11,598,799) $11,598,799
====================== ============ ===========
</Table>
D. Represents the reclassification of mortgage-backed securities, treasury
securities and preferred stock to available-for-sale securities. Such
investments will be accounted for at fair value in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115--ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, with unrealized changes in fair
value reflected as a separate component of other comprehensive income, a
component of shareholders' equity. For purposes of the pro forma financial
statements, the fair value as of November 30, 2002 is reflected as the new
historical cost basis.
<Table>
<Caption>
INVESTMENTS IN AVAILABLE-FOR-
FUND SECURITIES SALE SECURITIES
---- -------------- ---------------
American Strategic $ (28,053,788) $ 28,053,788
American Strategic II (62,099,602) 62,099,602
American Strategic III (64,770,418) 64,770,418
American Select (34,096,364) 34,096,364
---------------------- ------------- ------------
Total Adj. $(189,020,172) $189,020,172
====================== ============= ============
</Table>
The available-for-sale securities have a par value of $186,226,678.
F-10
<Page>
E. Estimated pro rata share of financial and advisory, registration and
professional fees associated with the merger transaction of approximately
$2,923,791, adjusted for payment of accrued reorganization expenses of
$1,098,922, would be paid and would reduce the pro forma cash and cash
equivalents balance.
F. Represents the adjustments to reclassify undistributed net investment
income, accumulated net realized loss on investments and unrealized
appreciation of investments of the accounting survivor (American Strategic
III) to pro forma accumulated deficit and the New Fund.
G. Represents the adjustments to reclassify undistributed net investment
income, accumulated net realized loss on investments and unrealized
appreciation of investments of the non-accounting survivor Funds to pro
forma capital stock and additional paid-in capital.
H. Pro rata allocation of non-investment assets and liabilities allocated to
the New Fund based on the percentage of shareholders electing to receive
shares of the New Fund.
I. Represents the allocation of cash to New Fund.
<Table>
<Caption>
FUND CASH NEW FUND CASH
---- ------- -------------
American Strategic $(1,567) $1,567
American Strategic II (4,082) 4,082
------- ------
$(5,649) $5,649
======= ======
</Table>
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS
(a) Represents the adjustment to eliminate the interest income and gains
(losses) on investments associated with the investments allocated to the
New Fund based on the percentage of shareholders electing to receive shares
of the New Fund. Amounts allocated to the New Fund are as follows:
<Table>
Interest income $5,529,577
Dividend income 31,021
Net realized gain (loss) on investments 92,611
</Table>
(b) Represents the adjustment to eliminate the expenses which are attributable
to the New Fund based on the percentage of shareholders electing to receive
shares of the New Fund. Amounts allocated to the New Fund are as follows:
<Table>
Interest expense $636,279
Custodian fees 9,951
Transfer agent fees 16,574
Registration fees 14,121
Reports to shareholders 20,066
Mortgage servicing fees 45,187
Directors' fees 10,696
Audit and legal fees 15,545
Other expenses 10,265
</Table>
(c) Represents the adjustment to net unrealized appreciation or depreciation of
the Existing Funds to remove the income statement effect that was
previously recorded by the Funds under their existing accounting policy,
assuming that the combined entity had followed the historical cost basis of
accounting for the period. Available-for-sale securities would have been
accounted for at fair value in accordance with SFAS No. 115, with
unrealized changes in fair value reflected as a separate component of
comprehensive income, a component of shareholders' equity.
F-11
<Page>
(d) Represents the adjustment of $9,080,688 to interest income to reflect the
difference between the recorded cost basis of the mortgage loans and
available-for-sale securities and their par value. In accordance with SFAS
No. 141-BUSINESS COMBINATIONS, the estimated fair value of the mortgage
loans and available-for-sale securities as of the effective date of the
merger (or Effective Time) will be the initial cost basis for First
American. Differences between the fair value of the assets at the Effective
Time and their par value will be amortized or accrued over the estimated
lives of the assets using the interest method. If the fair value of the
assets exceeds the par value at the Effective Time, the premium will be
amortized over the life of the assets. If the fair value of the assets is
less than the par value at the Effective Time, the discount will be
accreted over the life of the assets.
The remaining amount to be amortized over the next five years is as follows:
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
-----------------------
2003 $ (9,080,688)
2004 (3,187,941)
2005 (36,833)
--------------------
$ (12,305,462)
====================
</Table>
(e) Represents the adjustment to reflect the management fees to be incurred by
First American under the REIT Advisory Agreement. Under the REIT Advisory
Agreement, the base management fee shall equal 0.25% per annum for assets
that are rated at least investment grade or residential mortgage-backed
securities, as determined in the reasonable judgment of USBAM to be of
equivalent credit quality (whether or not rated) and 1% per annum for the
first $1 billion of other assets and 0.75% per annum of other assets over
$1 billion, payable in quarterly installments on the last business day of
each fiscal quarter.
(f) Represents the performance fees which would have been incurred by First
American under the new Advisory Agreement. USBAM will be entitled to
receive a performance fee for each fiscal quarter equal to the product of
(i) the weighted average number of shares of common stock outstanding
during such quarter, and (ii) 20% of the amount by which (a) the net income
per share of common stock of First American (before the performance fee)
exceeds (b) a net income per share that would result in a yield, tied to
the historical offering prices of the common stock, equal to the greater of
10% or the applicable ten-year U.S. Treasury rate plus 3.5% (each expressed
as a quarterly percentage).
(g) Represents the adjustment to realized gains of $485,572 as a result of the
adjustment to the carrying value at the beginning of the period.
(h) Represents the estimated provision for credit losses for the period. First
American will establish an allowance for credit losses for the estimated
losses inherent in the portfolio at each measurement date. Management will
determine the adequacy of the allowance based on evaluations of the loan
portfolio, recent loss experience, and other pertinent factors, including
economic conditions. First American will record provisions for credit
losses each period in amounts necessary to establish the allowance at the
level estimated to reflect the inherent losses in the portfolio. The
allowance will be increased through provisions charged to operating
earnings and reduced by net charge-offs. Management determined that no
provision for credit losses was necessary for the year ended November 30,
2002.
(i) Represents the adjustment to eliminate the administration fees which the
Existing Funds incurred as part of their administration agreements with
USBAM. First American will not have a similar agreement and the services
previously provided under the administration agreements with the Funds will
be principally covered by the REIT Advisory Agreement.
(j) Represents estimated accounting agent fees of $250,000 which will be
incurred by First American.
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share was based on a $10.00 per share initial conversion
price.
F-12
<Page>
(l) Represents the adjustment to eliminate the financial and advisory,
registration and professional fees associated with the merger transaction
that would have been paid by the Existing Funds prior to the transaction.
<Table>
Registration fees $ 528,252
Directors' fees 82,764
Audit and legal fees 1,333,739
Financial advisory and accounting fees 1,095,885
</Table>
F-13
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
PRO FORMA BALANCE SHEET
MINIMUM PARTICIPATION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
FIRST
FIRST AMERICAN AMERICAN AMERICAN PRO FORMA AMERICAN
AMERICAN STRATEGIC STRATEGIC II SELECT ADJUSTMENTS PRO FORMA
-------- ----------- ------------ ------------ ------------- ------------
ASSETS:
Investments in
securities, at market
value $ -- $69,656,374 $289,064,818 $171,568,656 (A)(B)(C)(D) $(530,289,848) $ --
Cash and cash equivalents 100 21,199 55,241 -- (C)(E)(I) 3,346,687 3,423,227
Accrued interest
receivable -- 397,593 1,431,515 988,169 (H) (1,380,466) 1,436,811
Other assets -- 31,537 338,491 34,008 (H) (197,978) 206,058
Available-for-sale
securities -- -- -- -- (D) 68,423,901 68,423,901
Mortgage loans, net of
allowance -- -- -- -- (B) 197,251,573 197,251,573
-------- ----------- ------------ ------------ ------------- ------------
Total assets 100 70,106,703 290,690,065 172,590,833 (262,846,130) 270,741,571
======== =========== ============ ============ ============= ============
LIABILITIES:
Reverse repurchase
agreements payable -- 16,600,000 78,700,050 28,500,000 (H) (60,662,025) 63,138,026
Accrued investment
management fees -- 24,914 114,568 58,974 (H) (97,243) 101,213
Bank overdraft -- -- -- 5,076 (H) (2,487) 2,589
Accrued administrative
fee -- 10,965 43,400 29,487 (H) (41,087) 42,765
Accrued interest -- 24,870 174,954 54,745 (H) (124,739) 129,830
Accrued reorganization
expense -- 86,542 344,349 232,903 (E) (663,794) --
Other accrued expenses -- 7,265 10,260 11,576 (H) (14,259) 14,842
-------- ----------- ------------ ------------ ------------- ------------
Total liabilities -- 16,754,556 79,187,581 28,892,761 (61,605,635) 63,429,263
======== =========== ============ ============ ============= ============
NET ASSETS /
SHAREHOLDERS' EQUITY:
Capital stock and
additional paid-in
capital 100 60,517,426 231,068,147 153,233,654 (G) (226,478,860) 218,340,467
Undistributed net
investment income -- 8,967 1,402,109 585,892 (F)(G) (1,996,968) --
Accumulated net realized
loss on investments -- (9,173,201) (28,290,850) (15,944,453) (F)(G) 53,408,504 --
Accumulated deficit -- -- -- -- (E)(F) (11,028,159) (11,028,159)
Unrealized appreciation
of investments -- 1,998,955 7,323,078 5,822,979 (F)(G) (15,145,012) --
-------- ----------- ------------ ------------ ------------- ------------
Total -- net assets /
shareholders equity 100 53,352,147 211,502,484 143,698,072 (201,240,495) 207,312,308
-------- ----------- ------------ ------------ ------------- ------------
Total liabilities and
net assets /
shareholders equity $ 100 $70,106,703 $290,690,065 $172,590,833 $(262,846,130) $270,741,571
======== =========== ============ ============ ============= ============
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-14
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
PRO FORMA STATEMENT OF OPERATIONS
MINIMUM PARTICIPATION SCENARIO
FOR THE YEAR ENDED NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
FIRST AMERICAN AMERICAN AMERICAN PRO FORMA FIRST AMERICAN
AMERICAN STRATEGIC STRATEGIC II SELECT ADJUSTMENTS PRO FORMA
-------- ---------- ------------ ----------- ------------ --------------
INVESTMENT INCOME:
Interest $ -- $5,220,565 $23,785,175 $15,954,302 (a)(d) $(25,228,239) $19,731,803
Dividends -- 299,389 -- 81,098 (a) (186,439) 194,048
-------- ---------- ----------- ----------- ------------ -----------
Total investment
income -- 5,519,954 23,785,175 16,035,400 (25,414,678) 19,925,851
EXPENSES:
Interest expense -- 624,078 2,737,170 1,919,508 (b) (2,587,570) 2,693,186
Provision for credit
losses -- -- -- -- (h) -- --
Investment management
fees -- 326,423 1,365,577 715,716 (e) (112,391) 2,295,325
Administration fees -- 132,636 527,233 356,682 (i) (1,016,551) --
Custodian fees -- 10,611 42,179 28,535 (b) (39,849) 41,476
Transfer agent fees -- 47,264 66,150 52,741 (b) (81,416) 84,739
Registration fees 58,129 216,789 147,234 (b)(l) (358,171) 63,981
Reports to shareholders -- 35,460 65,445 68,575 (b) (83,045) 86,435
Mortgage servicing fees -- 45,060 186,213 140,563 (b) (182,200) 189,636
Directors' fees -- 13,543 63,647 44,303 (b)(l) (83,239) 38,254
Audit and legal fees -- 118,688 537,973 298,753 (b)(l) (850,199) 105,215
Financial advisory and
accounting fees -- 70,079 314,000 231,438 (l) (615,517) --
Performance fees -- -- -- -- (f) -- --
Other expense -- 8,921 56,719 13,814 (b)(j) 211,068 290,522
-------- ---------- ----------- ----------- ------------ -----------
Total expenses -- 1,490,892 6,179,095 4,017,862 (5,799,081) 5,888,768
-------- ---------- ----------- ----------- ------------ -----------
-- 4,029,062 17,606,080 12,017,538 -- (19,615,597) 14,037,083
-------- ---------- ----------- ----------- ------------ -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Net realized gain (loss)
on investments in
securities and mortgage
loans -- (491,966) 430,519 1,092,850 (a)(g) (331,623) 699,780
NET REALIZED GAIN (LOSS)
ON INVESTMENTS -- (491,966) 430,519 1,092,850 (331,623) 699,780
-------- ---------- ----------- ----------- ------------ -----------
NET CHANGE IN
UNREALIZED
APPRECIATION OR
DEPRECIATION OF
INVESTMENTS -- 734,941 100,369 765,118 (c) (1,600,428) --
-------- ---------- ----------- ----------- ------------ -----------
NET GAIN ON
INVESTMENTS -- 242,975 530,888 1,857,968 (1,932,051) 699,780
-------- ---------- ----------- ----------- ------------ -----------
NET INCOME $ -- $4,272,037 $18,136,968 $13,875,506 $(21,547,648) $14,736,863
======== ========== =========== =========== ============ ===========
EARNINGS PER SHARE (k) $0.71
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-15
<Page>
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
MINIMUM PARTICIPATION SCENARIO (FIRST AMERICAN, AMERICAN STRATEGIC, AMERICAN
STRATEGIC II, AND AMERICAN SELECT)
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
A. Represents the allocation of investments in mortgage-backed securities,
money market funds, and mortgage loans to the New Fund.
<Table>
<Caption>
INVESTMENTS IN NEW FUND INVESTMENTS IN
FUND SECURITIES LOANS AND SECURITIES
---- -------------- -----------------------
American Strategic $ (34,131,623) $ 34,131,623
American Strategic II (141,641,761) 141,641,761
American Select (84,068,641) 84,068,641
---------------------- ------------- ------------
Total $(259,842,025) $259,842,025
====================== ============= ============
</Table>
Investments of the Existing Funds participating in the merger are allocated
between the REIT and the New Fund as of the effective date of the merger as
follows:
ASSET ALLOCATION METHODOLOGY-MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE
PORTFOLIO
The existing loans are divided into two pools, with each pool established in
order to have the following similar characteristics:
1) Income as measured by the effective interest rate (net coupon rate
divided by the purchase price), then weighted by current loan balance;
2) Credit risk (calculated using a debt service coverage ratio to assess the
property's cash flows), weighted by current loan balance;
3) Leverage against the value of the underlying real estate (measured using
a current weighted average loan-to-value ratio);
4) Loan term as measured by the weighted average remaining loan term;
5) Refinance risk based on whether the loan has a yield maintenance
provision or not;
6) Lien position based on a ratio of subordinate debt to senior debt;
7) Property type based on a ratio of multifamily loan to commercial loan
types;
8) Interest rate type based on a ratio of adjustable rate loans to fixed
rate loans; and
9) Interest calculation method based on a ratio of actual/360 calculation to
30/360 calculation.
In addition, the properties on which the Existing Funds own more than one
loan or which are cross-collateralized will be allocated to only one entity.
ASSET ALLOCATION METHODOLOGY-SINGLE FAMILY
All investments collateralized by single family residential properties
(whole loans, participations, subordinate bonds, mortgage servicing rights,
etc.) other than mortgage-backed securities will be allocated to the New
Fund.
ASSET ALLOCATION METHODOLOGY-OTHER
Any other holdings, including but not limited to, cash, agencies, and REIT
preferred stocks will be allocated on a pro rata basis between the REIT and
the New Fund in order for the total assets to
F-16
<Page>
be allocated to the respective entities based on the percentage of
shareholders electing to receive New Fund shares and percentage receiving
First American shares. This allocation will compensate the REIT for not
receiving any allocation of single-family loans.
ADJUSTMENTS TO ALLOCATIONS TO COMPLY WITH REGULATIONS
Further adjustments may be made to ensure that the New Fund and the REIT are
in compliance with the asset holding, leverage and income regulations
associated with RICs and REITs.
B. Represents the reclassification of the respective Existing Funds'
investments in mortgage loans from securities to a separate classification
since First American will account for the mortgage loans at historical cost.
<Table>
<Caption>
INVESTMENTS IN
FUND SECURITIES MORTGAGE LOANS
---- -------------- --------------
American Strategic $ (17,761,281) $ 17,761,281
American Strategic II (111,805,269) 111,805,269
American Select (67,685,023) 67,685,023
--------------------- ------------- ------------
Total $(197,251,573) $197,251,573
===================== ============= ============
</Table>
The estimated fair value as of November 30, 2002 is reflected as the new
historical cost. The mortgage loans have a par value of $191,591,471.
C. Represents the reclassification of investments in money market funds from
the respective Existing Funds' investments in securities to cash and cash
equivalents. Cash and cash equivalents are defined for historical cost
purposes as highly liquid instruments with original maturities of 90 days or
less.
<Table>
<Caption>
INVESTMENTS IN CASH AND CASH
FUND SECURITIES EQUIVALENTS
---- -------------- -------------
American Strategic $(2,314,348) $2,314,348
American Strategic II (1,419,757) 1,419,757
American Select (1,038,244) 1,038,244
---------------------- ----------- ----------
Total $(4,772,349) $4,772,349
====================== =========== ==========
</Table>
D. Represents the reclassification of mortgage-backed securities, treasury
securities and preferred stock to available-for-sale securities. Such
investments will be accounted for at fair value in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115--ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, with unrealized changes in fair
value reflected as a separate component of other comprehensive income, a
component of shareholders' equity. For purposes of the pro forma financial
statements, the fair value as of November 30, 2002 is reflected as the new
historical cost basis.
<Table>
<Caption>
INVESTMENTS IN AVAILABLE-FOR-
FUND SECURITIES SALE SECURITIES
---- -------------- ---------------
American Strategic $(15,449,122) $15,449,122
American Strategic II (34,198,031) 34,198,031
American Select (18,776,748) 18,776,748
---------------------- ------------ -----------
Total $(68,423,901) $68,423,901
====================== ============ ===========
</Table>
The available-for-sale securities have a par value of $69,423,256.
F-17
<Page>
E. Estimated pro rata share of financial and advisory, registration and
professional fees associated with the merger transaction of
approximately $1,388,206, adjusted for payment of accrued
reorganization expenses of $663,794, would be paid and would reduce
the pro forma cash and cash equivalents balance.
F. Represents the adjustments to reclassify undistributed net
investment income, accumulated net realized loss on investments and
unrealized appreciation of investments of the accounting survivor
(American Strategic II) to pro forma accumulated deficit and the New
Fund.
G. Represents the adjustments to reclassify undistributed net
investment income, accumulated net realized loss on investments and
unrealized appreciation of investments of the non-accounting
survivor Funds to pro forma capital stock and additional paid-in
capital and the New Fund.
H. Pro rata allocation of non-investment assets and liabilities
allocated to the New Fund based on the percentage of shareholders
electing to receive shares of the New Fund.
I. Represents the allocation of cash to the New Fund.
<Table>
<Caption>
FUND CASH NEW FUND CASH
---- -------- -------------
American Strategic $(10,388) $10,388
American Strategic II (27,068) 27,068
-------- -------
$(37,456) $37,456
======== =======
</Table>
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS
(a) Represents the adjustment to eliminate the interest income and
gains (losses) on investments associated with the investments
allocated to the New Fund based on the percentage of shareholders
electing to receive shares of the New Fund. Amounts allocated to
the New Fund are as follows:
<Table>
Dividend Income $ 186,439
Interest income 22,030,420
Net realized gain (loss) on investments 505,387
</Table>
(b) Represents the adjustment to eliminate the expenses which are
attributable to the New Fund based on the percentage of shareholders
electing to receive shares of the New Fund. Amounts allocated to the
New Fund are as follows:
<Table>
Interest expense $2,587,570
Custodian fees 39,849
Transfer agent fees 81,416
Registration fees 61,472
Reports to shareholders 83,045
Mortgage servicing fees 182,200
Directors' fees 36,754
Audit and legal fees 101,089
Other expenses 38,932
</Table>
(c) Represents the adjustment to net unrealized appreciation or
depreciation of the Existing Funds to remove the income statement
effect that was previously recorded by the Funds under their existing
accounting policy, assuming that the combined entity had followed the
historical cost basis of accounting for the period.
Available-for-sale securities would have been accounted for at fair
value in accordance with SFAS No. 115, with unrealized
F-18
<Page>
changes in fair value reflected as a separate component of
comprehensive income, a component of shareholders' equity.
(d) Represents the adjustment of $3,197,819 to interest income to reflect
the difference between the recorded cost basis of the mortgage loans
and available-for-sale securities and their par value. In accordance
with SFAS No. 141-BUSINESS COMBINATIONS, the estimated fair value of
the mortgage loans and available-for-sale securities as of the
effective date of the merger will be the initial cost basis for First
American. Differences between the fair value of the assets at the
Effective Time and their par value will be amortized or accrued over
the estimated lives of the assets using the interest method. If the
fair value of the assets exceeds the par value at the Effective Time,
the premium will be amortized over the life of the assets. If the
fair value of the assets is less than the par value at the Effective
Time, the discount will be accreted over the life of the assets.
The remaining amount to be amortized over the next five years is as
follows:
<Table>
<Caption>
YEAR ENDED NOVEMBER 30,
-----------------------
2003 $ (3,197,819)
2004 (1,808,035)
2005 (20,284)
---------------------
$ (4,526,138)
=====================
</Table>
(e) Represents the adjustment to reflect the management fees to be
incurred by First American under the new Advisory Agreement. Under
the new Advisory Agreement, the base management fee shall equal
0.25% per annum for assets that are rated at least investment grade
or residential mortgage-backed securities, as determined in the
reasonable judgement of USBAM to be of equivalent credit quality
(whether or not rated) and 1% per annum for the first $1 billion of
other assets and 0.75% per annum of other assets over $1 billion,
payable in quarterly installments on the last business day of each
fiscal quarter.
(f) Represents the performance fees which would have been incurred by
First American under the new Advisory Agreement. USBAM will be
entitled to receive a performance fee for each fiscal quarter equal
to the product of (i) the weighted average number of shares of
common stock outstanding during such quarter, and (ii) 20% of the
amount by which (a) the net income per share of common stock of
First American (before the performance fee) exceeds (b) a net
income per share that would result in a yield, tied to the
historical offering prices of the common stock, equal to the
greater of 10% or the applicable ten-year U.S. Treasury rate plus
3.5% (each expressed as a quarterly percentage).
(g) Represents the adjustment to realized gains of $173,764 as a result
of the adjustment to the carrying value at the beginning of the
period.
(h) Represents the estimated provision for credit losses for the
period. First American will establish an allowance for credit
losses for the estimated losses inherent in the portfolio at each
measurement date. Management will determine the adequacy of the
allowance based on evaluations of the loan portfolio, recent loss
experience, and other pertinent factors, including economic
conditions. First American will record provisions for credit losses
each period in amounts necessary to establish the allowance at the
level estimated to reflect the inherent losses in the portfolio.
The allowance will be increased through provisions charged to
operating earnings and reduced by net charge-offs. Management
determined that no provision for credit losses was necessary for
the year ended November 30, 2002.
(i) Represents the adjustment to eliminate the administration fees
which the Existing Funds incurred as part of their administration
agreements with USBAM. First American will not
F-19
<Page>
have a similar agreement and the services previously provided under
the administration agreements with the Existing Funds will be
principally covered by the REIT Advisory Agreement.
(j) Represents estimated accounting agent fees of $250,000 which will
be incurred by First American.
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share was based on a $10.00 per share initial
conversion price.
(i) Represents the adjustment to eliminate the financial and advisory,
registration and professional fees associated with the merger
transaction that would have been paid by the Existing Funds prior
to the transaction:
<Table>
Registration fees $296,699
Directors fees 46,485
Audit and legal fees 749,110
Financial advisory and accounting fees 615,517
</Table>
SELECTED FINANCIAL INFORMATION FOR OTHER COMBINATION SCENARIOS
The ultimate size or composition of First American will be determined based
on the number of Existing Funds approving the merger and the percentage of
shareholders electing to receive shares of the New Fund. Accordingly, First
American's size and composition could differ significantly based on these
factors. The pro forma financial information reflects the allocation of the
assets and liabilities of the Existing Funds in accordance with guidelines
outlined in "THE MERGER--The Merger Agreement--Transactions Relating to the New
Fund Option" and only includes scenarios in which the Existing Funds have, in
the aggregate, a net asset value of at least $200 million.
Since First American will not be registered under the Investment Company
Act, the financial statements of First American will be presented on a
historical cost basis. Since the assets of the Existing Funds have historically
been recorded at estimated fair value, the estimated fair values at the date of
consummation will be considered the initial cost basis for the merged company.
This means that unrealized gains and losses are not included in net income until
realized. The pro forma net income and earnings per share amounts assume that
the merger occurred on December 1, 2001 and that the assets and liabilities were
allocated between First American and the New Fund as of that date. Management
believes that cash flows from operations will not materially differ from net
income. The following selected financial information is provided to illustrate
certain possible combination scenarios.
The selected financial information presented below reflects pro forma
adjustments similar to those described in "Notes and Management's Assumptions to
Unaudited Pro Forma Consolidated Financial Statements" and Maximum Participation
Scenarios and Minimum Participation Scenarios presented herein.
F-20
<Page>
Following is selected financial information for certain other possible scenarios
assuming that approximately 51% of shareholders receive shares of First
American:
<Table>
<Caption>
PRO FORMA AS OF
NOVEMBER 30, 2002
---------------------------------
SHAREHOLDERS'
SCENARIO ASSETS EQUITY BORROWINGS
- ------------------------------------------------------------------------------------- ------ ------------- ----------
(IN MILLIONS)
American Strategic American Strategic American Strategic American Select
II III $454.8 $343.9 $110.3
American Strategic American Strategic American Strategic
II III $366.9 $270.6 $ 95.8
American Strategic American Strategic American Select
III $306.6 $236.0 $ 70.2
American Strategic II American Strategic American Select
III $419.1 $316.7 $101.8
American Strategic II American Strategic
III $331.2 $243.4 $ 87.3
American Strategic American Select
III $270.9 $208.8 $ 61.7
<Caption>
PRO FORMA
FOR THE YEAR
ENDED
NOVEMBER 30,
2002
---------------------
EARNINGS
NET INCOME PER SHARE
- --------------------- ---------- ---------
American Strategic
$23.9 $0.69
American Strategic
$17.9 $0.66
American Strategic
$15.9 $0.67
American Strategic II
$21.5 $0.68
American Strategic II
$16.3 $0.67
American Strategic
III $17.0 $0.82
</Table>
Following is selected financial information for certain other possible scenarios
assuming that approximately 75% of shareholders receive shares of First
American:
<Table>
<Caption>
PRO FORMA AS OF
NOVEMBER 30, 2002
---------------------------------
SHAREHOLDERS'
SCENARIO ASSETS EQUITY BORROWINGS
- ------------------------------------------------------------------------------------- ------ ------------- ----------
(IN MILLIONS)
American Strategic American Strategic American Strategic American Select
II III $668.8 $505.7 $162.2
American Strategic American Strategic American Strategic
II III $539.5 $398.0 $140.8
American Strategic American Strategic American Select
III $450.9 $347.1 $103.2
American Strategic American Strategic American Select
II $398.1 $304.9 $ 92.9
American Strategic II American Strategic American Select
III $616.3 $465.7 $149.7
American Strategic American Strategic
III $321.6 $239.3 $ 81.8
American Strategic II American Strategic
III $487.0 $357.9 $128.4
American Strategic II American Select $345.6 $264.9 $ 80.4
American Strategic American Select
III $398.4 $307.1 $ 90.7
American Strategic
III $269.1 $199.3 $ 69.3
<Caption>
PRO FORMA
FOR THE YEAR
ENDED
NOVEMBER 30,
2002
---------------------
EARNINGS
NET INCOME PER SHARE
- --------------------- ---------- ---------
American Strategic
$34.8 $0.69
American Strategic
$26.4 $0.66
American Strategic
$23.4 $0.68
American Strategic
$20.5 $0.67
American Strategic II
$31.7 $0.68
American Strategic
$15.8 $0.66
American Strategic II
$24.0 $0.67
American Strategic II $18.1 $0.68
American Strategic
III $25.2 $0.82
American Strategic
III $13.4 $0.67
</Table>
F-21
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
Given the structure of the merger, the composition of the New Fund after the
merger will differ depending on (i) whether each of the Existing Fund's
shareholders approve the merger and (ii) if the Existing Funds' shareholders
approve the merger, the number of shareholders exercising their dissenters'
rights or making the election to receive shares of the New Fund. The New Fund
was initially created with no equity as indicated in the pro forma financial
statements herein, and upon completion of the transaction will have equity based
on the number of shareholders electing to receive shares of the New Fund.
To assist the Existing Funds' shareholders in analyzing the merger, two
presentations of pro forma financial statements have been prepared to show the
impact of the merger based upon two possible merger scenarios for the New Fund.
The first presentation (referred to as maximum New Fund election) of pro forma
financial statements assumes all four Existing Funds approve the merger, that
shareholders holding approximately 49% of the shares in each Existing Fund elect
to receive shares of the New Fund and that no shareholders elect to exercise
statutory dissenters' appraisal rights. The second presentation (referred to as
minimum New Fund election) assumes all four Existing Funds approve the merger
and also assumes that shareholders holding Existing Fund shares representing an
aggregate net asset value of $50 million elect to receive New Fund shares and
that no shareholders elect to exercise statutory dissenters' appraisal rights.
The rationale for including the maximum and minimum New Fund election scenarios
in pro forma information was to provide the range of possible outcomes to
potential investors.
The pro forma statements of assets and liabilities and pro forma schedules
of investments of the New Fund have been prepared as if the merger was
consummated on November 30, 2002. The pro forma statements of operations of the
New Fund for the year ended November 30, 2002 assume that the merger was
consummated on December 1, 2001. The amounts included in the pro forma
statements of operations have been presented for the year ended November 30,
2002, even for American Strategic II and American Strategic III, which have a
fiscal year end of May 31, 2002.
The merger will be accounted for by the New Fund by carrying forward the
historical cost basis of the assets and liabilities of the Existing Funds to the
surviving entity since the tax basis of such assets and liabilities will carry
forward. The accounting survivor will be the Existing Fund participating in the
New Fund merger whose shareholders will be allocated the largest number of
shares of the New Fund. Shareholders of the Existing Funds electing to receive
First American shares will not recognize a taxable gain or loss with respect to
the receipt of these shares. However, shareholders of the Existing Funds will
recognize any gain realized with respect to the receipt of cash or New Fund
shares (through the exercise of dissenters' rights) of the New Fund Option.
In the maximum and minimum New Fund election presentations, American
Strategic III was deemed to be the accounting survivor of the other Existing
Funds and the New Fund for financial reporting purposes because its shareholders
would be allocated the largest number of shares.
This form S-4 Registration Statement registers the distribution of First
American common stock to Existing Fund shareholders. The New Fund has also filed
with the SEC registration statements on Form N-14 (Securities Act File
No. 333-102309), in which this joint proxy statement/prospectus is incorporated
by reference, and Form N-2 (Investment Company Act File No. 811-21271). The
Form N-14 Registration Statement registers the shares to be offered and issued
by the New Fund in the merger under the Securities Act, as amended. The
Form N-2 Registration Statement registers the New Fund as an investment company
under Section 8(b) of the Investment Company Act.
The completion of the New Fund Option is conditioned upon a number of
conditions, including shareholders of the Existing Funds having shares
representing at least $50 million in net asset value electing to receive the New
Fund shares.
F-22
<Page>
The pro forma financial statements are based upon available information and
upon certain assumptions, as set forth in the notes to the pro forma financial
statements, that management believes are reasonable under the circumstances. The
pro forma financial statements consider the allocation of assets (based on the
allocation methodology disclosed in the notes to the unaudited pro forma
financial statements and in "THE MERGER--The Merger Agreement--Transactions
Relating to the New Fund Option") to the New Fund that corresponds to the
percentage of shareholders electing to receive shares of the New Fund. These pro
forma financial statements do not purport to represent what the New Fund's
financial position or results of operations would actually have been if the
merger in fact had occurred on such dates or at the beginning of such periods or
the New Fund's financial position or results of operations for any future date
or period. Shareholders should read the historical financial statements for
additional information regarding the Existing Funds.
F-23
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT
---------- ----------- ------------- -------------- ---------------
ASSETS:
Investments in securities, at value* $ -- $69,656,374 $289,064,818 $359,239,604 $171,568,656
Cash -- 21,199 55,241 -- --
Accrued interest receivable -- 397,593 1,431,515 1,833,734 988,169
Other assets -- 31,537 338,491 222,543 34,008
---------- ----------- ------------ ------------ ------------
Total assets -- 70,106,703 290,890,065 361,295,881 172,590,833
========== =========== ============ ============ ============
LIABILITIES:
Reverse repurchase agreements payable -- 16,600,000 78,700,050 92,454,372 28,500,000
Accrued investment management fees -- 24,914 114,568 144,063 58,974
Bank overdraft -- -- -- 162,288 5,076
Accrued administrative fee -- 10,965 43,400 54,884 29,487
Accrued interest -- 24,870 174,954 203,651 54,745
Accrued reorganization expense 86,542 344,349 435,128 232,903
Other accrued expenses -- 7,265 10,260 13,597 11,576
---------- ----------- ------------ ------------ ------------
Total liabilities -- 16,754,556 79,387,581 93,467,983 28,892,761
---------- ----------- ------------ ------------ ------------
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital -- 60,517,426 231,068,147 312,303,603 153,233,654
Undistributed net investment income -- 8,967 1,402,109 1,544,431 585,892
Accumulated net realized loss on investments -- (9,173,201) (28,290,850) (53,967,824) (15,944,453)
Unrealized appreciation of investments -- 1,998,955 7,323,078 7,947,688 5,822,979
---------- ----------- ------------ ------------ ------------
Total -- representing net assets
applicable to common stock -- 53,352,147 211,502,484 267,827,898 143,698,072
========== =========== ============ ============ ============
*Investments in securities at identified
cost $ -- $67,657,419 $281,741,740 $351,291,916 $165,745,677
========== =========== ============ ============ ============
NET ASSET VALUE AND MARKET PRICE OF CAPITAL
STOCK:
Net assets outstanding 53,352,147 211,502,484 267,827,898 143,698,072
Shares outstanding 4,230,294 15,957,289 21,343,292 10,662,195
Net asset value per share $ 12.61 $ 13.25 $ 12.55 $ 13.48
Market price per share $ 12.05 $ 12.74 $ 12.03 $ 12.86
<Caption>
PRO FORMA NEW FUND
ADJUSTMENTS PRO FORMA
---------------- ----------------
ASSETS:
Investments in securities, at value* (A) $(453,395,030) $436,134,422
Cash (B) (38,962) 37,478
Accrued interest receivable (B) (2,370,630) 2,280,381
Other assets (B) (319,369) 307,210
------------- ------------
Total assets (456,123,990) 438,759,492
============= ============
LIABILITIES:
Reverse repurchase agreements payable (B) (110,225,333) 106,029,089
Accrued investment management fees (B) (174,583) 167,936
Bank overdraft (B)(D) 1,463,103 1,630,467
Accrued administrative fee (B) (70,714) 68,022
Accrued interest (B) (233,556) 224,664
Accrued reorganization expense (D) (1,098,922) --
Other accrued expenses (B) (21,763) 20,935
------------- ------------
Total liabilities (110,361,768) 108,141,113
------------- ------------
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital (B)(D) (386,916,705) 370,206,125
Undistributed net investment income (B) (1,805,059) 1,736,340
Accumulated net realized loss on investments (B) 54,729,940 (52,646,388)
Unrealized appreciation of investments (B) (11,770,398) 11,322,302
------------- ------------
Total -- representing net assets
applicable to common stock (345,762,222) 330,618,379
============= ============
*Investments in securities at identified
cost (A) (441,624,632) $424,812,120
============= ============
NET ASSET VALUE AND MARKET PRICE OF CAPITAL
STOCK:
Net assets outstanding (C) (345,762,222) 330,618,379
Shares outstanding (E) (19,131,232) 33,061,838
Net asset value per share $ 10.00
Market price per share
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-24
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA STATEMENT OF OPERATIONS
MAXIMUM NEW FUND ELECTION SCENARIO
FOR THE YEAR ENDED NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
FIRST AMERICAN AMERICAN AMERICAN AMERICAN
AMERICAN STRATEGIC STRATEGIC II STRATEGIC III SELECT
---------- ---------- ------------- -------------- --------------
INCOME:
Interest $ -- $5,220,565 $23,785,175 $29,865,085 $15,954,302 (F)
Dividend Income -- 299,389 -- 39,280 81,098 (F)
---------- ---------- ----------- ----------- -----------
Total income -- 5,519,954 23,785,175 29,904,365 16,035,400
EXPENSES:
Interest expense -- 624,078 2,737,170 3,329,245 1,919,508 (F)
Investment management fees -- 326,423 1,365,577 1,710,518 715,716 (F)
Administration fees -- 132,636 527,233 666,593 356,682 (F)
Custodian fees -- 10,611 42,179 53,327 28,535 (F)
Transfer agent fees -- 47,264 66,150 58,126 52,741 (F)
Registration fees -- 58,129 216,789 297,180 147,234 (F)(G)
Reports to shareholders -- 35,460 65,445 102,053 68,575 (F)
Mortgage servicing fees -- 45,060 186,213 239,623 140,563 (F)
Directors' fees -- 13,543 63,647 106,008 44,303 (F)(G)
Audit and legal fees -- 118,688 537,973 588,675 298,753 (F)(G)
Financial Advisory & Accounting Fees 70,079 314,000 480,368 231,438 (G)
Other expenses -- 8,921 56,719 59,449 13,814 (F)
---------- ---------- ----------- ----------- -----------
Total expenses -- 1,490,892 6,179,095 7,691,165 4,017,862
---------- ---------- ----------- ----------- -----------
Net investment income -- 4,029,062 17,606,080 22,213,200 12,017,538
---------- ---------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gain (loss) on investments in
securities and mortgage loans -- (491,966) 430,519 221,787 1,092,850 (F)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -- (491,966) 430,519 221,787 1,092,850
- --------------------------------------------- ---------- ---------- ----------- ----------- -----------
Net change in unrealized appreciation or
depreciation of investments -- 734,941 100,369 136,455 765,118 (F)
---------- ---------- ----------- ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS -- 242,975 530,888 358,242 1,857,968
- --------------------------------------------- ---------- ---------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ -- $4,272,037 $18,136,968 $22,571,442 $13,875,506
========== ========== =========== =========== ===========
<Caption>
PRO FORMA NEW FUND
ADJUSTMENTS PRO FORMA
---------------- ----------------
INCOME:
Interest $ (38,138,524) $ 36,686,603
Dividend Income (213,956) 205,811
------------- ------------
Total income (38,352,480) 36,892,414
EXPENSES:
Interest expense (4,388,536) 4,221,465
Investment management fees (2,099,073) 2,019,161
Administration fees (857,902) 825,242
Custodian fees (68,632) 66,020
Transfer agent fees (114,316) 109,965
Registration fees (625,646) 93,686
Reports to shareholders (138,401) 133,132
Mortgage servicing fees (311,662) 299,797
Directors' fees (156,537) 70,964
Audit and legal fees (1,440,955) 103,134
Financial Advisory & Accounting Fees (1,095,885) --
Other expenses (70,799) 68,104
------------- ------------
Total expenses (11,368,344) 8,010,670
------------- ------------
Net investment income (26,984,137) 28,881,743
------------- ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gain (loss) on investments in
securities and mortgage loans (638,754) 614,436
NET REALIZED GAIN (LOSS) ON INVESTMENTS (638,754) 614,436
- --------------------------------------------- ------------- ------------
Net change in unrealized appreciation or
depreciation of investments (885,293) 851,590
------------- ------------
NET GAIN (LOSS) ON INVESTMENTS (1,524,046) 1,466,027
- --------------------------------------------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (28,508,183) $ 30,347,770
============= ============
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-25
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY
SECURITIES (13.1%)
U.S. AGENCY MORTGAGE-BACKED
SECURITIES (13.1%)
FIXED RATE (13.1%)
5.50%, FNMA , 2/1/17
$ -- $ -- $ -- $ 2,771,132 $ -- $ (1,303,430) $ 1,467,702
6.00%, FNMA, 5/1/31
-- 3,905,534 -- -- -- (1,658,686) 2,246,848
6.50%, FNMA, 6/1/29
-- 1,662,628 11,084,188 7,758,931 9,975,769 (13,688,609) 16,792,907
7.50%, FHLMC, 12/1/29
-- -- -- -- 3,713,527 (1,814,205) 1,899,322
7.50%, FNMA, 3/1/30
-- 4,008,154 -- -- -- (1,702,270) 2,305,884
7.50%, FNMA, 4/1/30
-- -- 1,698,093 1,521,917 -- (1,399,032) 1,820,978
7.50%, FNMA, 5/1/30
-- 551,135 1,984,084 1,984,084 1,102,269 (2,504,049) 3,117,523
8.00%, FNMA, 5/1/30
-- 189,131 680,873 680,873 378,263 (859,308) 1,069,832
8.00%, FNMA, 6/1/30
-- -- 1,937,468 1,743,721 -- (1,599,667) 2,081,522
9.00%, FHLMC, 7/1/30
-- 1,322,279 2,203,798 3,085,317 -- (2,899,426) 3,711,968
6.50%, FNMA, 11/1/31
-- 3,306,802 -- -- -- (1,404,404) 1,902,398
6.00%, FNMA, 10/1/16
-- 3,795,418 2,415,790 2,415,790 -- (3,720,142) 4,906,856
5.50%, FNMA, 6/1/17
-- -- 1,928,180 1,928,180 -- (1,682,691) 2,173,669
5.00%, FNMA, 9/1/17
-- -- 1,962,672 1,962,672 -- (1,712,793) 2,212,551
5.00%, FNMA, 11/1/17
-- -- 2,987,883 2,987,883 2,987,883 (4,067,178) 4,896,471
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES
PRIVATE MORTGAGE-BACKED
SECURITIES (D)(16.4%)
FIXED RATE (16.4%)
13.04%, Minnesota Mortgage
Corporation, 7/25/14
-- 33,957 -- -- -- -- 33,957
8.00%, Lone Star Fund III,
3/30/03
-- -- -- 15,000,000 -- -- 15,000,000
8.00%, Value Enhancement
Fund IV, 6/27/04
-- 4,000,000 15,000,000 12,000,000 12,000,000 (16,000,000) 27,000,000
8.31%, RFC 1997-NPC1,
8/27/23
-- -- 3,779,719 -- -- -- 3,779,719
8.79%, First Gibralter,
Series 1992-MM, Class B,
10/25/21
-- -- -- 588,676 -- -- 588,676
9.25%, Oly Holigan, LP,
1/1/04
-- 2,500,000 6,000,000 4,000,000 -- (10,000,000) 2,500,000
9.25%, Oly Holigan II, LP,
1/1/05
-- -- 6,000,000 -- -- (6,000,000) --
9.25%, Oly McKinney, 8/11/03
-- -- -- 7,500,000 -- (7,500,000) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
$ -- $ -- $ -- $ 2,842,520 $ -- $ (1,505,512) $ 1,337,008
-- 3,995,380 -- -- -- (2,298,536) 1,696,844
-- 1,722,383 11,482,553 8,037,787 10,334,298 (17,396,444) 14,180,577
-- -- -- -- 3,928,205 (2,009,121) 1,919,084
-- 4,247,808 -- -- -- (2,443,757) 1,804,051
-- -- 1,797,330 1,610,858 -- (1,927,396) 1,480,792
-- 583,343 2,100,034 2,100,034 1,166,686 (3,299,711) 2,650,386
-- 202,785 730,025 730,025 405,570 (1,147,063) 921,342
-- -- 2,077,334 1,869,600 -- (2,231,787) 1,715,147
-- 1,424,755 2,374,592 3,324,429 -- (3,999,645) 3,124,131
-- 3,417,284 -- -- -- (1,965,958) 1,451,326
-- 3,943,647 2,510,138 2,510,138 -- (5,098,492) 3,865,431
-- -- 1,978,020 1,978,020 -- (2,229,854) 1,726,186
-- -- 1,981,597 1,981,598 -- (2,233,886) 1,729,309
-- -- 3,016,695 3,016,695 3,016,695 (4,943,687) 4,106,398
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 19,537,385 30,048,318 30,001,704 18,851,454 (54,730,849) 43,708,012
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 34,466 -- -- -- -- 34,466
-- -- -- 15,481,500 -- -- 15,481,500
-- 4,040,000 15,150,000 12,120,000 12,120,000 (16,160,000) 27,270,000
-- -- 3,840,946 -- -- -- 3,840,946
-- -- -- -- -- -- --
-- 2,525,000 6,060,000 4,040,000 -- (10,100,000) 2,525,000
-- -- 6,060,000 -- -- (6,060,000) --
-- -- -- 7,500,000 -- (7,500,000) --
</Table>
F-26
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
9.25%, Stratus Properties,
1/1/06
-- -- -- -- 5,000,000 (5,000,000) --
9.25%, Stratus Properties,
7/1/06
-- -- 5,000,000 -- -- -- 5,000,000
TOTAL PRIVATE
MORTGAGE-BACKED SECURITIES
WHOLE LOANS AND PARTICIPATION
MORTGAGES (B,C,D) (99.4%)
COMMERCIAL LOANS (43.6%)
1200 Washington, 9.65%,
12/1/05
-- -- -- 2,891,593 -- -- 2,891,593
1336 and 1360 Energy Park
Drive, 7.55%, 10/1/08
-- -- 2,808,704 -- -- (2,808,704) --
4295/4299 San Felipe
Associates LP, 9.33%, 8/1/06
-- -- -- 5,144,887 -- -- 5,144,887
7 Broadway Place, 6.91%,
5/1/06
-- -- -- 3,402,515 -- 3,402,515
Academy Spectrum, 7.70%,
5/1/09
-- -- -- 4,377,713 -- -- 4,377,713
Advance Self Storage, 9.13%,
12/1/05
-- 1,275,631 -- -- -- -- 1,275,631
Advanced Circuits and
Hopkins II Business Center,
7.40%, 12/1/04
-- -- -- -- 3,796,735 (3,796,735) --
Atwood Oceanics I, 7.29%,
6/1/04
-- -- -- 2,900,000 -- (2,900,000) --
Atwood Oceanics II, 9.88%,
6/1/04
-- -- -- 720,000 -- (720,000) --
Best Buy, 8.63%, 1/1/11
-- -- -- -- 1,906,905 (1,906,905) --
Bigelow Office Building,
8.88%, 4/1/07
-- -- 1,291,816 -- -- -- 1,291,816
Blacklake Place I and II,
8.66%, 9/1/07
-- -- -- 4,398,798 -- (4,398,798) --
Blacklake Place III, 8.66%,
9/1/07
-- -- -- 2,199,399 -- (2,199,399) --
Brookhollow West and
Northwest Technical Center,
8.11%, 2/1/03
-- -- -- 3,411,064 -- -- 3,411,064
Buca Restaurant, 8.63%,
1/1/11
-- 931,196 -- -- -- -- 931,196
Canyon Portal, 10.38%,
1/1/07
-- -- -- -- 1,994,111 -- 1,994,111
Career Education
Corporation, 7.50%, 6/1/07
-- -- -- -- 3,364,725 (3,364,725) --
Community Coffee Office
Building, 6.91%, 5/1/04
-- -- -- -- 4,931,181 (4,931,181) --
Cottonwood Square, 9.20%,
5/1/04
-- -- 2,318,948 -- -- (2,318,948) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- -- -- 5,050,000 (5,050,000) --
-- -- 5,100,000 -- -- -- 5,100,000
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 6,599,466 36,210,946 39,141,500 17,170,000 (44,870,000) 54,251,912
------- ------------ ------------ ------------ ------------ ------------- ------------
-- -- -- 3,007,257 -- -- 3,007,257
-- -- 2,949,139 -- -- (2,949,139) --
-- -- -- 5,318,707 -- -- 5,318,707
-- -- -- -- 3,538,616 -- 3,538,616
-- -- -- 4,596,599 -- -- 4,596,599
-- 1,339,412 -- -- -- -- 1,339,412
-- -- -- -- 3,834,702 (3,834,702) --
-- -- -- 2,958,000 -- (2,958,000) --
-- -- -- 707,695 -- (707,695) --
-- -- -- -- 2,002,251 (2,002,251) --
-- -- 1,356,407 -- -- -- 1,356,407
-- -- -- 4,618,738 -- (4,618,738) --
-- -- -- 2,309,369 -- (2,309,369) --
-- -- -- 3,411,064 -- -- 3,411,064
-- 977,756 -- -- -- -- 977,756
-- -- -- -- 2,073,875 -- 2,073,875
-- -- -- -- 3,532,962 (3,532,962) --
-- -- -- -- 5,029,805 (5,029,805) --
-- -- 2,365,327 -- -- (2,365,327) --
</Table>
F-27
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
CUBB Properties Mobile Home
Park, 8.03%, 11/1/07
-- -- -- 2,587,396 -- -- 2,587,396
Denmark House Office
Building I, 8.80%, 2/1/05
-- -- -- 5,400,000 -- -- 5,400,000
Denmark House Office
Building II, 11.38%, 2/1/05
-- -- -- 1,060,000 -- -- 1,060,000
Dietzgen Industrial
Building, 9.00%, 1/1/06
-- 1,460,367 -- -- -- -- 1,460,367
Duncan Office Building,
7.88%, 6/1/08
-- -- -- 669,374 -- (669,374) --
Fortune Park V, VI, VII,
7.90%, 1/1/04
-- -- 3,615,068 -- -- -- 3,615,068
France Avenue Business Park
II, 7.40%, 10/1/12
-- -- -- 4,597,544 -- -- 4,597,544
Galtier Plaza, 9.19%, 3/1/05
-- -- -- -- 4,748,319 (4,748,319) --
Gardenswartz Plaza, 7.40%,
5/1/07
-- -- 2,590,399 -- -- -- 2,590,399
Hadley Avenue Business
Center, 8.38%, 1/1/11
-- -- 2,418,126 -- -- (2,418,126) --
Hampden Medical Office,
7.38%, 10/1/12
-- 1,798,323 -- -- -- -- 1,798,323
Harbor Corporate Center,
7.43%, 4/1/05
-- -- 5,400,000 -- -- -- 5,400,000
Hillside Crossing South
Shopping Center, 7.93%,
1/1/05
-- -- 1,667,429 -- -- -- 1,667,429
Hillside Office Park, 7.63%,
8/1/08
-- -- 934,111 -- -- -- 934,111
Holiday Village Shopping
Center, 7.15%, 11/1/07
-- -- -- 4,900,000 -- -- 4,900,000
INA Corporate Land, 7.88%,
11/1/04
-- -- 2,085,000 -- -- -- 2,085,000
Indian Street Shoppes,
7.88%, 2/1/09
-- -- -- 2,219,323 -- -- 2,219,323
Integrity Plaza Shopping
Center, 8.00%, 7/1/12
-- 2,142,314 -- -- -- 2,142,314
Jackson Street Warehouse,
8.53%, 7/1/07
-- -- -- 2,859,492 -- (2,859,492) --
Jamboree Building, 8.93%,
12/1/06
-- -- 1,834,667 -- -- -- 1,834,667
Jefferson Office Building,
7.38%, 12/1/13
-- -- -- 960,937 -- (960,937) --
John Brown Office Building,
7.40%, 11/1/04
-- -- -- 4,934,347 -- -- 4,934,347
Katy Plaza I, 7.43%, 1/1/05
-- -- 6,275,000 -- -- -- 6,275,000
Katy Plaza II, 9.88%, 1/1/05
-- -- 1,880,000 -- -- -- 1,880,000
Kimball Professional Office
Building, 7.88%, 7/1/08
-- -- -- 2,197,025 -- -- 2,197,025
La Posada & Casitas I,
7.93%, 11/1/04
-- -- 5,680,000 -- -- -- 5,680,000
La Posada & Casitas II,
11.88%, 11/1/04
-- -- 830,000 -- -- -- 830,000
Lake Pointe Corporate
Center, 8.57%, 7/1/07
-- -- -- 3,654,406 -- -- 3,654,406
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- -- 2,716,766 -- -- 2,716,766
-- -- -- 5,454,000 -- -- 5,454,000
-- -- -- 1,085,782 -- -- 1,085,782
-- -- 1,533,385 -- -- -- 1,533,385
-- -- -- 702,843 -- (702,843) --
-- -- 3,687,370 -- -- -- 3,687,370
-- -- -- 4,827,422 -- -- 4,827,422
-- -- -- -- 4,890,768 (4,890,768) --
-- -- 2,719,919 -- -- -- 2,719,919
-- -- 2,539,032 -- -- (2,539,032) --
-- 1,888,239 -- -- -- -- 1,888,239
-- -- 5,616,000 -- -- -- 5,616,000
-- -- 1,717,452 -- -- -- 1,717,452
-- -- 980,817 -- -- -- 980,817
-- -- -- 5,145,000 -- -- 5,145,000
-- -- 2,126,700 -- -- -- 2,126,700
-- -- -- 2,330,289 -- -- 2,330,289
-- 2,249,430 -- -- -- -- 2,249,430
-- -- -- 3,002,466 -- (3,002,466) --
-- -- 1,926,401 -- -- -- 1,926,401
-- -- -- 1,008,984 -- (1,008,984) --
-- -- -- 4,983,690 -- -- 4,983,690
-- -- 6,463,250 -- -- -- 6,463,250
-- -- 1,872,508 -- -- -- 1,872,508
-- -- -- 2,306,876 -- -- 2,306,876
-- -- 5,793,600 -- -- -- 5,793,600
-- -- 846,600 -- -- -- 846,600
-- -- -- 3,837,126 -- -- 3,837,126
</Table>
F-28
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Landmark Bank Center I,
7.90%, 6/1/07
-- -- -- -- 4,076,355 (4,076,355) --
Landmark Bank Center II,
14.88%, 5/1/07
-- -- -- -- 817,500 (817,500) --
LAX Air Freight Center,
7.90%, 1/1/08
-- -- -- 3,203,412 -- (3,203,412) --
Lincoln Industrial, 7.40%,
12/1/05
-- -- 3,000,000 -- -- (3,000,000) --
Main Street Office Building,
8.38%, 11/1/07
-- 835,083 -- -- -- (835,083) --
Minikahda Mini Storage V,
8.75%, 9/1/09
-- -- 2,243,392 -- -- (2,243,392) --
Minikahda MiniStorage III,
8.62%, 8/1/09
-- -- 4,058,100 -- -- -- 4,058,100
NCGR Office Building, 8.65%,
2/1/06
-- -- -- 4,252,826 -- (4,252,826) --
North Austin Business
Center, 9.05%, 5/1/07
-- -- -- 2,869,783 -- -- 2,869,783
Northlynn Plaza, 7.65%,
9/1/12
-- -- -- -- 3,991,212 (3,991,212) --
Oak Knoll Village Shopping
Center, 8.68%, 7/1/05
-- -- 1,318,635 -- -- -- 1,318,635
One Eastern Heights Office
Building, 8.21%, 12/1/07
-- 1,020,421 -- -- -- -- 1,020,421
One Metro Square Office
Building, 8.10%, 1/1/03
-- -- -- 2,775,003 -- -- 2,775,003
One Park Center, 8.93%,
2/1/06
-- -- -- 1,763,917 -- (1,763,917) --
Orchard Commons, 8.75%,
4/1/11
-- 1,010,455 -- -- -- (1,010,455) --
Pacific Periodicals
Building, 8.03%, 1/1/08
-- 1,279,753 -- -- -- (1,279,753) --
Pacific Shores Mobile Home
Park II, 11.00%, 10/1/06
-- -- -- 588,042 -- -- 588,042
Parkway Business Center,
7.65%, 11/1/03
-- -- -- -- 3,643,118 (3,643,118) --
PennMont Office Plaza,
6.88%, 5/1/06
-- -- 1,331,418 -- -- (1,331,418) --
Pilot Knob Service Center,
8.95%, 7/1/07
-- -- -- 1,414,863 -- (1,414,863) --
Plaza Colonial I, 7.88%,
11/1/04
-- -- 2,310,000 -- -- -- 2,310,000
Plaza Colonial II, 11.88%,
11/1/04
-- -- 390,000 -- -- -- 390,000
PMG Center, 8.93%, 9/1/03
-- -- 2,213,480 -- -- (2,213,480) --
PMG Plaza, 8.95%, 4/1/04
-- -- -- 2,400,459 -- (2,400,459) --
Point Plaza, 8.43%, 1/1/11
-- -- -- -- 6,283,409 -- 6,283,409
Pyramid Plaza Office
Building, 7.71%, 4/30/07
-- -- 4,544,169 -- -- (4,544,169) --
Rancho Bernardo Financial
Plaza, 8.88%, 1/1/05
-- -- -- 2,380,000 -- -- 2,380,000
Rapid Park Parking Lot,
8.90%, 9/1/07
-- -- 3,487,204 -- -- -- 3,487,204
Redwood Dental Building,
7.40%, 7/1/12
-- -- 2,724,137 -- -- (2,724,137) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- -- -- 4,280,172 (4,280,172) --
-- -- -- -- 858,375 (858,375) --
-- -- -- 3,363,582 -- (3,363,582) --
-- -- 3,090,000 -- -- (3,090,000) --
-- 876,838 -- -- -- (876,838) --
-- -- 2,355,561 -- -- (2,355,561) --
-- -- 4,261,004 -- -- -- 4,261,004
-- -- -- 4,422,939 -- (4,422,939) --
-- -- -- 3,013,272 -- -- 3,013,272
-- -- -- -- 4,190,773 (4,190,773) --
-- -- 1,358,194 -- -- -- 1,358,194
-- 807,239 -- -- -- -- 807,239
-- -- -- 2,775,003 -- -- 2,775,003
-- -- -- 1,834,474 -- (1,834,474) --
-- 1,060,978 -- -- -- (1,060,978) --
-- 1,343,741 -- -- -- (1,343,741) --
-- -- -- 617,445 -- -- 617,445
-- -- -- -- 3,643,118 (3,643,118) --
-- -- 1,384,675 -- -- (1,384,675) --
-- -- -- 1,485,606 -- (1,485,606) --
-- -- 2,356,200 -- -- -- 2,356,200
-- -- 397,800 -- -- -- 397,800
-- -- 2,235,615 -- -- (2,235,615) --
-- -- -- 2,448,468 -- (2,448,468) --
-- -- -- -- 6,597,579 -- 6,597,579
-- -- 4,725,936 -- -- (4,725,936) --
-- -- -- 2,321,883 -- -- 2,321,883
-- -- 3,661,564 -- -- -- 3,661,564
-- -- 2,860,344 -- -- (2,860,344) --
</Table>
F-29
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Ridgehill Professional
Building, 7.38%, 1/1/09
-- -- 2,536,559 -- -- (2,536,559) --
Rimrock Plaza, 7.65%,
12/1/08
-- -- 3,064,715 -- -- (3,064,715) --
Rockwall Technology Building
I, 7.40%, 11/1/06
-- -- -- 3,800,000 -- (3,800,000) --
Rockwall Technology Building
II, 9.58%, 11/1/06
-- -- -- 1,100,000 -- (1,100,000) --
Rodeo Shops, 9.03%, 6/1/07
-- -- -- -- 1,251,668 -- 1,251,668
Rubin Center, 8.78%, 7/1/12
-- -- 3,064,715 -- -- -- 3,064,715
Santa Monica Center, 8.35%,
2/1/07
-- -- -- 4,824,734 -- -- 4,824,734
Schendel Office Building,
8.20%, 10/1/07
-- 1,088,785 -- -- -- (1,088,785) --
Shallowford Business Park,
9.13%, 7/1/03
-- 1,504,885 -- -- -- (1,504,885) --
Sherwin Williams, 8.50%,
1/1/04
-- 1,325,359 -- -- -- (1,325,359) --
Shoppes at Jonathan's
Landing, 7.95%, 5/1/10
-- -- -- 2,934,027 -- (2,934,027) --
Stephens Retail Center,
9.23%, 8/1/03
-- 1,101,242 -- -- -- (1,101,242) --
Stevenson Office Building,
Port Orchard Cinema, and
Jensen Industrial Building,
7.88%, 2/1/09
-- -- 3,098,273 -- -- -- 3,098,273
Sundance Plaza, 7.13%,
11/1/08
-- -- 820,542 -- -- -- 820,542
Town Square #6, 7.40%,
9/1/12
-- -- -- -- 4,091,477 (4,091,477) --
Valley Rim Office Center I,
7.40%, 1/1/04
-- -- -- 4,500,000 -- (4,500,000) --
Valley Rim Office Center II,
8.88%, 1/1/04
-- -- -- 1,363,500 -- (1,363,500) --
Victory Packaging Facility,
8.53%, 1/1/12
-- -- -- -- 2,587,734 -- 2,587,734
Villa Ricca Industrial Park,
14.88%, 6/1/05
-- -- 2,500,000 -- -- -- 2,500,000
Voit Office Building, 8.13%,
9/1/08
-- 1,536,000 -- -- -- (1,536,000) --
Westwood Business Park,
8.43%, 5/1/04
-- -- 5,745,857 -- -- (5,745,857) --
Xtra Self Storage, 6.88%,
11/1/05
-- -- 2,125,000 -- -- (2,125,000) --
MULTIFAMILY LOANS (53.8%)
Ambassador House Apartments,
8.10%, 2/1/10
-- -- -- 3,416,853 -- (3,416,853) --
Applewood Manor, 8.63%,
1/1/08
-- 639,110 -- -- -- (639,110) --
Autumnwood, Southern Woods,
Hinton Hollow, 7.68%, 6/1/09
-- -- 7,228,809 -- -- (7,228,809) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- 2,663,387 -- -- (2,663,387) --
-- -- 3,217,950 -- -- (3,217,950) --
-- -- -- 3,952,000 -- (3,952,000) --
-- -- -- 1,026,282 -- (1,026,282) --
-- -- -- -- 1,289,218 -- 1,289,218
-- -- 3,208,799 -- -- -- 3,208,799
-- -- -- 4,824,734 -- -- 4,824,734
-- 1,051,719 -- -- -- (1,051,719) --
-- 1,519,934 -- -- -- (1,519,934) --
-- 1,351,867 -- -- -- (1,351,867) --
-- -- -- 3,080,728 -- (3,080,728) --
-- 1,112,254 -- -- -- (1,112,254) --
-- -- 3,253,187 -- -- -- 3,253,187
-- -- 861,569 -- -- -- 861,569
-- -- -- -- 4,296,050 (4,296,050) --
-- -- -- 4,590,000 -- (4,590,000) --
-- -- -- 1,299,486 -- (1,299,486) --
-- -- -- -- 2,717,120 -- 2,717,120
-- -- 2,575,000 -- -- -- 2,575,000
-- 1,612,800 -- -- -- (1,612,800) --
-- -- 5,803,316 -- -- (5,803,316) --
-- -- 2,188,750 -- -- (2,188,750) --
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 18,725,592 95,419,373 105,384,575 52,775,384 (127,679,799) 144,625,125
------- ------------ ------------ ------------ ------------ ------------- ------------
-- -- -- 3,587,696 -- (3,587,696) --
-- 671,065 -- -- -- (671,065) --
-- -- 7,590,249 -- -- (7,590,249) --
</Table>
F-30
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Barcley Square Apartments,
7.83%, 9/1/04
-- -- -- 8,800,000 -- (8,800,000) --
Bellewood Apartments, 9.13%,
12/1/05
-- -- -- 1,986,766 -- -- 1,986,766
Boardwalk Apartments, 7.33%,
2/1/08
-- -- -- 5,121,762 -- (5,121,762) --
Brays Village Apartments,
9.88%, 4/1/05
-- -- -- 1,394,000 -- -- 1,394,000
Cameron Lakes Apartments I,
6.93%, 1/1/05
-- -- 10,125,000 -- -- (10,125,000) --
Cameron Lakes Apartments II,
14.88%, 1/1/05
-- -- 1,260,000 -- -- (1,260,000) --
Cape Cod Apartments, 7.28%,
2/1/08
-- -- -- -- 1,754,677 -- 1,754,677
Casa del Vista Apartments,
8.40%, 1/1/08
-- -- -- -- 2,963,635 -- 2,963,635
Castle Arms Apartments,
8.00%, 4/1/06
-- -- -- -- 948,772 -- 948,772
Centre Court, White Oaks,
and Green Acres Apartments,
8.65%, 1/1/09
-- -- -- -- 3,940,013 -- 3,940,013
Chapel Hill Apartments,
8.38%, 1/1/08
-- -- -- -- 863,614 (863,614) --
Chardonnay Apartments,
8.60%, 1/1/07
-- -- 4,120,462 -- -- (4,120,462) --
Charleston Plaza Apartments,
7.38%, 7/1/08
-- 1,488,341 -- -- -- -- 1,488,341
Concorde Apartments, 8.15%,
6/1/05
-- -- -- 4,600,000 -- (4,600,000) --
Country Place Village I,
6.93%, 3/1/05
-- -- -- 10,300,000 -- (10,300,000) --
Country Place Village II,
9.88%, 3/1/05
-- -- -- 2,300,000 -- (2,300,000) --
Crown Cove Senior Care
Community, 7.93%, 11/1/04
-- -- 13,000,000 -- -- (13,000,000) --
Dakotah Hills Condominiums,
8.90%, 4/1/05
-- -- 3,509,984 -- -- (3,509,984) --
Deering Manor, 7.98%,
12/8/22
-- -- 1,119,793 -- -- -- 1,119,793
Eagles Landing Apartments,
9.01%, 2/1/06
-- -- 1,100,000 -- -- -- 1,100,000
El Conquistador Apartments,
7.65%, 4/1/09
-- -- -- -- 2,798,926 -- 2,798,926
El Dorado Apartments I,
7.13%, 10/1/05
-- 2,090,000 -- -- -- -- 2,090,000
El Dorado Apartments II,
9.88%, 10/1/05
-- 468,000 -- -- -- -- 468,000
Evergreen, Northview,
Greenwood, and Fern Court
Apartments, 9.40%, 6/1/05
-- -- -- -- 4,544,077 (4,544,077) --
Fairmount Apartments,
12.93%, 12/1/02
-- -- 5,500,000 -- -- (5,500,000) --
Fairways I and II, 8.65%,
2/1/03
-- -- 4,100,000 -- -- (4,100,000) --
Forest Estate Apartments,
9.88%, 3/15/05
-- -- 2,150,000 -- -- (2,150,000) --
Forestree Apartments, 7.83%,
6/1/04
-- -- 7,725,000 -- -- (7,725,000) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- -- 8,344,141 -- (8,344,141) --
-- -- -- 2,040,211 -- -- 2,040,211
-- -- -- 5,377,850 -- (5,377,850) --
-- -- -- 1,394,000 -- -- 1,394,000
-- -- 10,428,754 -- -- (10,428,754) --
-- -- 1,278,887 -- -- (1,278,887) --
-- -- -- -- 1,842,411 -- 1,842,411
-- -- -- -- 3,111,816 -- 3,111,816
-- -- -- -- 986,723 -- 986,723
-- -- -- -- 4,137,014 -- 4,137,014
-- -- -- -- 906,795 (906,795) --
-- -- 4,326,485 -- -- (4,326,485) --
-- 1,562,759 -- -- -- -- 1,562,759
-- -- -- 4,738,000 -- (4,738,000) --
-- -- -- 10,609,000 -- (10,609,000) --
-- -- -- 2,066,489 -- (2,066,489) --
-- -- 13,260,000 -- -- (13,260,000) --
-- -- 3,541,683 -- -- (3,541,683) --
-- -- 1,130,991 -- -- -- 1,130,991
-- -- 1,130,247 -- -- -- 1,130,247
-- -- -- -- 2,938,872 -- 2,938,872
-- 2,152,700 -- -- -- -- 2,152,700
-- 424,492 -- -- -- -- 424,492
-- -- -- -- 4,771,281 (4,771,281) --
-- -- 5,032,007 -- -- (5,032,007) --
-- -- 4,141,000 -- -- (4,141,000) --
-- -- 2,150,000 -- -- (2,150,000) --
-- -- 7,879,500 -- -- (7,879,500) --
</Table>
F-31
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Franklin Woods Apartments,
9.78%, 3/1/10
-- 1,107,234 -- -- -- -- 1,107,234
Fremont Plaza Apartments,
7.40%, 7/1/08
-- -- 2,488,321 -- -- (2,488,321) --
Garden Oaks Apartments,
8.43%, 4/1/06
-- 1,675,785 -- -- -- (1,675,785) --
Geneva Village Apartments,
9.38%, 11/1/04
-- -- -- 923,210 -- -- 923,210
Grand Courtyard Apartment I,
7.18%, 11/1/03
-- -- -- 19,125,000 -- -- 19,125,000
Grand Courtyard Apartment
II, 9.90%, 11/1/03
-- -- -- 4,490,000 -- -- 4,490,000
Granite Lake Apartments I,
6.68%, 5/1/05
-- -- -- 12,450,000 -- -- 12,450,000
Granite Lake Apartments II,
11.88%, 5/1/05
-- -- -- 778,000 -- -- 778,000
Greenwood Residences, 7.63%,
4/1/08
-- -- -- -- 2,288,570 -- 2,288,570
Harbor View Apartments,
7.98%, 1/25/18
-- -- 676,467 -- -- (676,467) --
Hartford Apartments, 14.88%,
6/1/05
-- -- -- 2,290,000 -- -- 2,290,000
Hidden Colony Apartments,
7.90%, 6/1/08
-- -- -- -- 3,014,771 (3,014,771) --
Hunters Meadow, 7.80%,
8/1/12
-- -- -- -- 6,481,798 -- 6,481,798
Huntington Hills Apartments,
8.63%, 11/1/05
-- -- -- 1,106,019 -- -- 1,106,019
Ironwood Apartments I,
9.38%, 2/1/04
-- -- 1,772,000 -- -- (1,772,000) --
Ironwood Apartments II,
14.88%, 2/1/04
-- -- 202,309 -- -- (202,309) --
Jaccard Apartments, 8.73%,
12/1/03
-- -- 2,652,949 -- -- -- 2,652,949
Kona Kai Apartments, 8.33%,
11/1/05
-- -- 1,053,881 -- -- -- 1,053,881
Lakeville Apartments, 7.90%,
5/1/08
-- -- -- -- 2,376,405 -- 2,376,405
Maple Village Apartments,
9.38%, 11/1/04
-- -- -- 964,747 -- -- 964,747
Meadowview Apartments,
9.38%, 11/1/04
-- -- -- 684,582 -- -- 684,582
Meridian Pointe Apartments,
8.73%, 2/1/12
-- -- -- 1,141,674 -- -- 1,141,674
Meridian, 8.93%, 9/1/04
-- -- -- 18,746,628 -- (18,746,628) --
Northaven Terrace
Apartments, 7.43%, 6/1/07
-- -- -- 6,828,581 -- (6,828,581) --
Park Hollywood, 7.50%,
6/1/12
-- 1,172,323 -- -- -- (1,172,323) --
Park Lane Townhomes I,
7.18%, 12/1/04
-- -- -- 12,600,000 -- (12,600,000) --
Park Lane Townhomes II,
11.88%, 12/1/04
-- -- -- 800,000 -- (800,000) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- 1,162,595 -- -- -- -- 1,162,595
-- -- 2,612,737 -- -- (2,612,737) --
-- 1,742,817 -- -- -- (1,742,817) --
-- -- -- 950,906 -- -- 950,906
-- -- -- 19,316,250 -- -- 19,316,250
-- -- -- 4,076,912 -- -- 4,076,912
-- -- -- 12,823,500 -- -- 12,823,500
-- -- -- 743,268 -- -- 743,268
-- -- -- -- 2,402,999 -- 2,402,999
-- -- 683,232 -- -- (683,232) --
-- -- -- 2,358,700 -- -- 2,358,700
-- -- -- -- 3,165,510 (3,165,510) --
-- -- -- -- 6,805,888 -- 6,805,888
-- -- -- 1,150,260 -- -- 1,150,260
-- -- 1,807,440 -- -- (1,807,440) --
-- -- 204,968 -- -- (204,968) --
-- -- 2,732,537 -- -- -- 2,732,537
-- -- 1,096,036 -- -- -- 1,096,036
-- -- -- -- 2,495,225 -- 2,495,225
-- -- -- 993,689 -- -- 993,689
-- -- -- 705,119 -- -- 705,119
-- -- -- 1,198,758 -- -- 1,198,758
-- -- -- 18,934,094 -- (18,934,094) --
-- -- -- 7,170,010 -- (7,170,010) --
-- 1,230,939 -- -- -- (1,230,939) --
-- -- -- 12,978,000 -- (12,978,000) --
-- -- -- 775,044 -- (775,044) --
</Table>
F-32
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Park Place of Venice
Apartments, 10.63%, 12/1/02
-- -- 2,450,080 -- -- -- 2,450,080
Park Terrace Apartments,
8.33%, 11/1/05
-- -- 2,367,232 -- -- -- 2,367,232
Park Vista Apartments,
8.58%, 9/1/05
-- -- -- -- 2,200,000 -- 2,200,000
Park Woods Apartments,
19.88%, 3/1/05
-- -- -- 1,300,000 -- (1,300,000) --
Parkway Village Apartments,
9.38%, 11/1/04
-- -- -- 664,460 -- -- 664,460
Primrose Apartments, 8.50%,
11/1/07
-- -- 1,039,437 -- -- -- 1,039,437
Revere Apartments, 7.28%,
5/1/09
-- -- -- -- 1,252,978 -- 1,252,978
Rio Nueces Apartments,
6.76%, 9/1/03
-- -- -- 10,085,869 -- (10,085,869) --
Riverbrook Apartments I,
8.55%, 3/1/10
-- -- -- 2,994,956 -- (2,994,956) --
Riverbrook Apartments II,
10.88%, 3/1/10
-- -- -- 320,496 -- (320,496) --
Rose Park Apartments, 9.38%,
11/1/04
-- -- -- 448,942 -- (448,942) --
Rush Oaks Apartments, 7.78%,
12/1/07
-- 512,406 -- -- -- (512,406) --
Scottsdale Courtyards,
7.93%, 3/1/05
-- -- 21,000,000 -- -- -- 21,000,000
Shelter Island Apartments,
7.63%, 12/1/08
-- -- -- 12,932,546 -- -- 12,932,546
Sheridan Ponds Apartments,
8.63%, 1/1/07
-- -- -- -- 7,042,674 (7,042,674) --
Signature Park Apartments,
9.90%, 12/1/07
-- -- -- -- 4,725,000 -- 4,725,000
Southlake Villa Apartments,
9.38%, 11/1/04
-- -- -- 413,407 -- -- 413,407
Southridge Apartments,
8.43%, 4/1/09
-- -- 7,753,434 -- -- -- 7,753,434
The Falls Apartments I,
7.43%, 2/1/05
-- -- -- -- 7,200,000 -- 7,200,000
The Falls Apartments II,
12.88%, 1/1/05
-- -- -- -- 800,000 -- 800,000
The Firs Retirement
Apartments, 9.13%, 12/1/04
-- -- 1,991,353 -- -- -- 1,991,353
The Gables at Westlake
Apartments, 7.33%, 2/1/08
-- -- 6,165,083 -- -- (6,165,083) --
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- 2,450,080 -- -- -- 2,450,080
-- -- 2,461,921 -- -- -- 2,461,921
-- -- -- -- 2,179,153 -- 2,179,153
-- -- -- 1,339,000 -- (1,339,000) --
-- -- -- 684,394 -- -- 684,394
-- -- 1,091,409 -- -- -- 1,091,409
-- -- -- -- 1,315,627 -- 1,315,627
-- -- -- 10,186,727 -- (10,186,727) --
-- -- -- 3,144,704 -- (3,144,704) --
-- -- -- 336,521 -- (336,521) --
-- -- -- 462,410 -- (462,410) --
-- 538,026 -- -- -- (538,026) --
-- -- 21,210,000 -- -- -- 21,210,000
-- -- -- 13,579,174 -- -- 13,579,174
-- -- -- -- 7,394,808 (7,394,808) --
-- -- -- -- 4,689,861 -- 4,689,861
-- -- -- 425,809 -- -- 425,809
-- -- 8,141,106 -- -- -- 8,141,106
-- -- -- -- 7,416,000 -- 7,416,000
-- -- -- -- 752,466 -- 752,466
-- -- 1,969,789 -- -- -- 1,969,789
-- -- 6,473,338 -- -- (6,473,338) --
</Table>
F-33
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
The Meadows, Fairfield
Manor, and Auburn
Apartments, 8.50%, 11/1/07
-- -- 1,475,614 -- -- (1,475,614) --
The Oaks of Lake Bluff
Apartments, 8.40%, 2/1/06
-- -- -- -- 3,871,423 -- 3,871,423
The Willows Retirement
Apartments, 9.13%, 12/1/04
-- -- 1,692,650 -- -- -- 1,692,650
The Willows Retirement at
Bellingham, 9.38%, 3/1/05
-- -- -- -- 1,495,962 (1,495,962) --
Timber Ridge Apartments,
9.88%, 5/1/05
-- -- 2,100,000 -- -- (2,100,000) --
Twin Oaks Apartments I,
7.15%, 6/1/05
-- -- -- -- 5,000,000 (5,000,000) --
Twin Oaks Apartments II,
12.88%, 6/1/05
-- -- -- -- 500,000 (500,000) --
Valley Manor Apartments,
8.35%, 11/1/05
-- -- -- 3,526,144 -- -- 3,526,144
Vanderbilt Condominiums,
8.16%, 10/1/09
-- 1,167,336 -- -- -- (1,167,336) --
Warwick West Apartment I,
7.93%, 7/1/04
-- -- -- 12,696,000 -- -- 12,696,000
Warwick West Apartment II,
9.90%, 7/1/04
-- -- -- 2,856,000 -- -- 2,856,000
Westhollow Place Apartments,
8.46%, 4/1/03
-- 938,061 -- -- -- -- 938,061
WestTree Apartments, 8.90%,
11/1/10
-- -- -- 4,817,176 -- (4,817,176) --
Willamette Oaks, 9.15%,
12/1/05
-- -- -- 2,582,795 -- -- 2,582,795
Winterland Apartments I,
9.23%, 7/1/12
-- -- 574,850 -- -- (574,850) --
Winterland Apartments II,
9.23%, 7/1/12
-- -- 1,101,796 -- -- (1,101,796) --
Woodland Garden Apartments,
7.38%, 9/1/08
-- 1,018,777 -- -- -- -- 1,018,777
Woodstock Apartments I,
7.43%, 1/1/05
-- -- -- -- 8,300,000 (8,300,000) --
Woodstock Apartments II,
13.38%, 1/1/05
-- -- -- -- 1,000,000 (1,000,000) --
Woodvine Park Condominiums,
8.48%, 4/1/10
-- -- -- -- 1,769,716 (1,769,716) --
SINGLE FAMILY LOANS (2.0%)
Aegis II, 9.65%, 1/28/14
-- 281,747 -- -- -- -- 281,747
Aegis, 9.21%, 3/26/10
-- 49,943 -- -- -- -- 49,943
American Bank, Mankato,
10.00%, 12/10/12
-- 33,160 -- -- -- -- 33,160
American Portfolio, 7.32%,
10/18/15
-- 29,724 -- -- -- -- 29,724
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- -- 1,549,395 -- -- (1,549,395) --
-- -- -- -- 4,064,994 -- 4,064,994
-- -- 1,674,321 -- -- -- 1,674,321
-- -- -- -- 1,504,513 (1,504,513) --
-- -- 1,966,987 -- -- (1,966,987) --
-- -- -- -- 5,125,000 (5,125,000) --
-- -- -- -- 512,500 (512,500) --
-- -- -- 3,667,190 -- (3,667,190) --
-- 1,225,703 -- -- -- (1,225,703) --
-- -- -- 12,949,920 -- -- 12,949,920
-- -- -- 2,802,852 -- -- 2,802,852
-- 938,061 -- -- -- -- 938,061
-- -- -- 5,058,035 -- (5,058,035) --
-- -- -- 2,653,955 -- -- 2,653,955
-- -- 603,593 -- -- (603,593) --
-- -- 1,156,886 -- -- (1,156,886) --
-- 1,069,716 -- -- -- -- 1,069,716
-- -- -- -- 8,549,000 (8,549,000) --
-- -- -- -- 1,013,690 (1,013,690) --
-- -- -- -- 1,858,202 (1,858,202) --
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 12,718,873 121,775,578 179,622,588 79,940,348 (215,671,901) 178,385,486
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 290,199 -- -- -- -- 290,199
-- 51,441 -- -- -- -- 51,441
-- 34,154 -- -- -- -- 34,154
-- 30,616 -- -- -- -- 30,616
</Table>
F-34
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
Anivan, 7.77%, 4/14/12
-- 129,718 -- -- -- -- 129,718
Arbor, 9.27%, 8/16/17
-- -- -- 1,126,736 -- -- 1,126,736
Bank of New Mexico, 9.29%,
3/31/10
-- 96,706 -- -- -- -- 96,706
Bluebonnet Savings and Loan
II, 11.63%, 8/31/10
-- 15,545 -- -- -- -- 15,545
Bluebonnet Savings and Loan,
8.06%, 8/31/10
-- 258,303 -- -- -- -- 258,303
CLSI Allison Williams,
10.27%, 8/1/17
-- 163,443 -- -- -- -- 163,443
Cross Roads Savings and Loan
II, 9.20%, 1/1/21
-- 72,866 -- -- -- -- 72,866
Cross Roads Savings and
Loan, 9.44%, 1/1/21
-- 100,372 -- -- -- -- 100,372
Fairbanks, Utah, 10.02%,
9/23/15
-- 25,776 -- -- -- -- 25,776
First Boston Mortgage Pool,
9.12%, 6/29/03
-- 98,884 -- -- -- -- 98,884
Hamilton Financial, 8.68%,
6/29/10
-- 101,850 -- -- -- -- 101,850
Huntington MEWS, 9.66%,
8/1/17
-- 434,912 -- -- -- -- 434,912
Knutson Mortgage Portfolio
I, 8.78%, 8/1/17
-- 204,179 -- -- -- -- 204,179
McClemore, Matrix Funding
Corporation, 10.50%, 9/30/12
-- 135,467 -- -- -- -- 135,467
Merchants Bank, 10.48%,
12/1/20
-- -- 346,767 -- -- -- 346,767
Meridian, 9.59%, 12/1/20
-- 237,651 -- -- -- 237,651
Neslund Properties, 9.88%,
2/1/23
-- -- 887,344 -- -- -- 887,344
Nomura II, 8.25%, 3/22/15
-- -- 78,184 -- -- -- 78,184
Nomura III, 9.39%, 4/29/17
-- 483,372 -- -- -- -- 483,372
PHH U.S. Mortgage, 8.65%,
1/1/12
-- -- 755,201 -- -- -- 755,201
Rand Mortgage Corporation,
9.50%, 8/1/17
-- 121,778 -- -- -- -- 121,778
Salomon II, 9.21%, 11/23/14
-- 174,633 -- -- -- -- 174,633
Valley Bank of Commerce,
8.34%, 8/31/10
-- 51,612 -- -- -- -- 51,612
TOTAL WHOLE LOANS AND
PARTICIPATION MORTGAGES
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
-------- ------------- ------------- ------------- ------------ --------------- ------------
-- 133,608 -- -- -- -- 133,608
-- -- -- 1,126,736 -- -- 1,126,736
-- 99,478 -- -- -- -- 99,478
-- 15,368 -- -- -- -- 15,368
-- 263,608 -- -- -- -- 263,608
-- 168,020 -- -- -- 168,020
-- 74,805 -- -- -- -- 74,805
-- 103,364 -- -- -- -- 103,364
-- 26,549 -- -- -- -- 26,549
-- 101,850 -- -- -- -- 101,850
-- 102,557 -- -- -- -- 102,557
-- 447,959 -- -- -- -- 447,959
-- 210,304 -- -- -- -- 210,304
-- 139,531 -- -- -- -- 139,531
-- -- 357,114 -- -- -- 357,114
-- 244,781 -- -- -- -- 244,781
-- -- 913,964 -- -- -- 913,964
-- -- 53,643 -- -- -- 53,643
-- 484,921 -- -- -- -- 484,921
-- -- 706,346 -- -- -- 706,346
-- 125,431 -- -- -- -- 125,431
-- 179,872 -- -- -- -- 179,872
-- 53,161 -- -- -- -- 53,161
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 3,381,577 2,031,067 1,126,736 -- -- 6,539,380
-- 34,826,042 219,226,018 286,133,899 132,715,732 (343,351,700) 329,549,991
------- ------------ ------------ ------------ ------------ ------------- ------------
</Table>
F-35
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
------ ----------- ------------ ------------- ----------- --------------- ------------ ------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
MORTGAGE SERVICING RIGHTS
(D) (0.0%)
Matrix Servicing Rights,
0.12%, 7/10/22
-- 11,028,533 -- -- -- -- 11,028,533
PREFERRED STOCK (0.8%)
<Caption>
REAL ESTATE INVESTMENT TRUST
(0.8%)
AMB Property
-- 5,000 5,000 5,000 5,000 (11,123) 8,877
Archstone Community Trust,
Series D
-- 13,125 3,525 3,525 3,525 (12,635) 11,065
Avalonbay Communities,
Series D
-- 8,900 -- -- -- (5,120) 3,780
Avalonbay Communities,
Series H
-- 9,200 -- -- -- (5,293) 3,907
CarrAmerica Realty Trust,
Series B
-- 5,128 2,175 2,175 2,175 (5,793) 5,860
CarrAmerica Realty Trust,
Series C
-- 2,800 5,000 5,000 5,000 (9,813) 7,987
CarrAmerica Realty Trust,
Series D
-- 11,800 5,000 5,000 5,000 (14,991) 11,809
Centerpoint Properties,
Series A
-- 14,700 5,000 5,000 5,000 (16,664) 13,036
Duke Realty Investments,
Series E
-- 625 625 625 625 (1,385) 1,115
Equity Office Properties
Trust, Series C
-- 9,400 -- -- -- (5,408) 3,992
Equity Office Properties
Trust, Series E
-- 3,000 -- -- -- (1,726) 1,274
Equity Office Properties
Trust, Series G
-- 13,200 -- -- -- (7,594) 5,606
Equity Residential
Properties, Series D
-- 1,600 -- -- -- (920) 680
Equity Residential
Properties, Series L
-- 11,700 -- -- -- (11,203) 497
New Plan Excel Realty Trust,
Series B
-- 24,800 5,000 5,000 5,000 (22,485) 17,315
Prologis Trust, Series D
-- 15,900 -- -- -- (9,147) 6,753
Prologis Trust, Series E
-- 9,400 -- -- -- (5,408) 3,992
TOTAL PREFERRED STOCK
RELATED PARTY MONEY MARKET
FUND (E) (1.7%)
First American Prime
Obligations Fund
-- 4,537,937 2,783,837 3,166,802 2,035,772 (6,719,097) 5,805,251
TOTAL INVESTMENTS
<Caption>
SHARE
SHARES SHARES SHARES SHARES SHARES ADJUSTMENT SHARES
------ ----------- ------------ ------------- ----------- --------------- ------------
-- 84,611 -- -- -- -- 84,611
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 129,250 129,250 129,250 129,250 (287,537) 229,463
-- 343,875 92,355 92,355 92,355 (331,033) 289,907
-- 222,055 -- -- -- (127,748) 94,307
-- 242,236 -- -- -- (139,358) 102,878
-- 128,303 54,419 54,419 54,418 (144,942) 146,617
-- 70,140 125,250 125,250 125,250 (245,827) 200,063
-- 295,590 125,250 125,250 125,250 (375,528) 295,812
-- 369,705 125,750 125,750 125,750 (419,109) 327,846
-- 16,125 16,125 16,125 16,125 (35,733) 28,767
-- 238,760 -- -- -- (137,358) 101,402
-- 74,850 -- -- -- (43,061) 31,789
-- 332,640 -- -- -- (191,367) 141,273
-- 42,640 -- -- -- (24,531) 18,109
-- 289,926 -- -- -- (277,613) 12,313
-- 631,408 127,300 127,300 127,300 (572,475) 440,833
-- 403,542 -- -- -- (232,157) 171,385
-- 239,888 -- -- -- (138,007) 101,881
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 4,070,933 795,699 795,699 795,698 (3,723,384) 2,734,645
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 4,537,937 2,783,837 3,166,802 2,035,772 (6,719,097) 5,805,251
------- ------------ ------------ ------------ ------------ ------------- ------------
-- 69,656,374 289,064,818 359,239,604 171,568,656 (453,395,030) 436,134,422
======= ============ ============ ============ ============ ============= ============
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-36
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
MAXIMUM NEW FUND ELECTION SCENARIO
ADJUSTMENTS TO PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
A. Represents allocation of Existing Funds' investment assets between First
American and the New Fund as determined based on the percentage of
shareholders electing to receive shares of the New Fund and the asset
allocation methodology described in note (a).
B. Represents pro rata allocation of non-investment assets and liabilities to
First American as determined based on the percentage of shareholders
electing to receive shares of the New Fund and the asset allocation
methodology described in note (a).
C. Represents new shares issued, net of retired shares of the Existing Funds.
D. Represents pro rata share of financial and advisory, registration and
professional fees associated with the merger transaction of approximately
$1,548,408 that would be paid and would reduce the pro forma cash balance.
E. Shares outstanding calculated based on a $10.00 net asset value per share.
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS
F. Represents the adjustment to eliminate the income and expenses which are
attributable to First American based on the percentage of shareholders
electing to receive shares of the New Fund. In determining the allocation of
the percentage of shareholders electing to participate in the New Fund
certain fixed costs have been eliminated.
G. Represents the adjustment to eliminate the financial and advisory,
registration and professional fees associated with the merger transaction
that would have been paid by the Existing Funds prior to the transaction.
<Table>
Registration fees $ 528,252
Directors' fees 82,764
Audit and legal fees 1,333,739
Financial advisory and accounting fees 1,095,886
</Table>
ADJUSTMENTS TO PRO FORMA SCHEDULE OF INVESTMENTS
(a) Represents allocation of Existing Fund's assets between First American and
the New Fund based on the percentage of shareholders electing to receive
shares of the New Fund and determined based on the following asset
allocation methodology:
ASSET ALLOCATION METHODOLOGY--MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE
PORTFOLIO.
The existing loans will be divided into two pools, with each pool
established in order to have the following similar characteristics:
1) Income as measured by the effective interest rate (net coupon rate
divided by the purchase price), then weighted by current loan balance;
2) Credit risk (calculated using a debt service coverage ratio to assess
the property's cash flows), weighted by current loan balance;
3) Leverage against the value of the underlying real estate (measured using
a current weighted average loan-to-value ratio);
4) Loan term as measured by the weighted average remaining loan term;
5) Refinance risk based on whether the loan has a yield maintenance
provision or not;
F-37
<Page>
6) Lien position based on a ratio of subordinate debt to senior debt;
7) Property type based on a ratio of multifamily loan to commercial loan
types;
8) Interest rate type based on a ratio of adjustable rate loans to fixed
rate loans; and
9) Interest calculation method based on a ratio of actual/360 calculation
to 30/360 calculation.
In addition, the properties on which the Existing Fund owns more than one
loan or which are cross-collateralized will be allocated to only one entity.
ASSET ALLOCATION METHODOLOGY--SINGLE FAMILY
All investments collateralized by single family residential properties
(whole loans, participations, subordinate bonds, mortgage servicing rights,
etc.) other than mortgage-backed securities will be allocated to the New
Fund.
ASSET ALLOCATION METHODOLOGY--OTHER
Any other holdings, including but not limited to, cash, agencies and REIT
preferred stocks will be allocated on a pro rata basis between First
American and the New Fund in order for the total assets to be allocated to
the respective entities based on the percentage of shareholders electing to
receive New Fund shares and percentage receiving First American shares. This
allocation will compensate First American for not receiving any allocation
of single-family loans.
ADJUSTMENTS TO ALLOCATIONS TO COMPLY WITH REGULATIONS
Further adjustments will be made to ensure that the New Fund and First
American are in compliance with the asset holding, leverage and income
regulations associated with RICs and REITs.
(b) Interest rates on commercial and multifamily loans are the rates in effect
on November 30, 2002. Interest rates and maturity dates disclosed on single
family loans represent the weighted average coupon and weighted average
maturity for the underlying mortgage loans as of November 30, 2002.
(c) Commercial and multifamily loans are described by the name of the mortgaged
property. Pools of single family loans are described by the name of the
institution from which the loans were purchased.
(d) Securities purchased as part of a private placement which have not been
registered with the Securities and Exchange Commission under the Securities
Act of 1933 are considered to be illiquid. On November 30, 2002, the total
fair value of these investments was $379,191,364 or 115.1% of pro forma net
assets.
(e) This money market fund is advised by USBAM, which also serves as advisor to
the Existing Funds.
F-38
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT
-------- ----------- ------------ ------------- ------------
ASSETS:
Investments in securities, at value* $ -- $69,656,374 $289,064,818 $359,239,604 $171,568,656
Cash and cash equivalents -- 21,199 55,241 -- --
Accrued interest receivable -- 397,593 1,431,515 1,833,734 988,169
Other assets -- 31,537 338,491 222,543 34,008
------- ----------- ------------ ------------ ------------
Total assets -- 70,106,703 290,690,065 361,295,881 172,590,833
======= =========== ============ ============ ============
LIABILITIES:
Reverse repurchase agreements payable -- 16,600,000 78,700,050 92,454,372 28,500,000
Accrued investment management fees -- 24,914 114,568 144,063 58,974
Bank overdraft -- -- -- 162,288 5,076
Accrued administrative fee -- 10,965 43,400 54,884 29,487
Accrued interest -- 24,870 174,954 203,651 54,745
Accrued reorganization expense 86,542 344,349 435,128 232,903
Other accrued expenses -- 7,265 10,260 13,597 11,576
------- ----------- ------------ ------------ ------------
Total liabilities -- 16,754,556 79,187,581 93,467,983 28,892,761
======= =========== ============ ============ ============
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital -- 60,517,426 231,068,147 312,303,603 153,233,654
Undistributed net investment income -- 8,967 1,402,109 1,544,431 585,892
Accumulated net realized loss on investments -- (9,173,201) (28,290,850) (53,967,824) (15,944,453)
Unrealized appreciation of investments -- 1,998,955 7,323,078 7,947,688 5,822,979
------- ----------- ------------ ------------ ------------
Total -- representing net assets
applicable to common stock -- 53,352,147 211,502,484 267,827,898 143,698,072
======= =========== ============ ============ ============
*Investments in securities at identified cost $ -- $67,657,419 $281,741,740 $351,291,916 $165,745,677
NET ASSET VALUE AND MARKET PRICE OF CAPITAL
STOCK:
Net assets outstanding 53,352,147 211,502,484 267,827,898 143,698,072
Shares outstanding (authorized 1 billion
shares of $0.01 par value) 4,230,294 15,957,289 21,343,292 10,662,195
Net asset value per share $ 12.61 $ 13.25 $ 12.55 $ 13.48
Market price per share $ 12.05 $ 12.74 $ 12.03 $ 12.86
<Caption>
PRO FORMA NEW FUND
ADJUSTMENTS PRO FORMA
--------------- ----------------
ASSETS:
Investments in securities, at value* (A) $(823,757,644) $65,771,808
Cash and cash equivalents (B) (70,788) 5,652
Accrued interest receivable (B) (4,307,115) 343,896
Other assets (B) (439,733) 186,846
------------- -----------
Total assets (828,575,280) 66,308,202
============= ===========
LIABILITIES:
Reverse repurchase agreements payable (B) (200,264,570) 15,989,852
Accrued investment management fees (B) (317,193) 25,326
Bank overdraft (B)(D) 78,363 245,727
Accrued administrative fee (B) (128,478) 10,258
Accrued interest (B) (424,339) 33,881
Accrued reorganization expense (D) (1,098,922) --
Other accrued expenses (B) (39,541) 3,157
------------- -----------
Total liabilities (202,194,679) 16,308,202
============= ===========
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital (B)(D) (701,152,749) 55,970,081
Undistributed net investment income (B) (3,279,548) 261,851
Accumulated net realized loss on investments (B) 99,436,922 (7,939,406)
Unrealized appreciation of investments (B) (21,385,226) 1,707,474
------------- -----------
Total -- representing net assets
applicable to common stock (626,380,601) 50,000,000
============= ===========
*Investments in securities at identified cost (A) $(802,372,418) $64,064,334
NET ASSET VALUE AND MARKET PRICE OF CAPITAL
STOCK:
Net assets outstanding (C) (626,380,601) 50,000,000
Shares outstanding (authorized 1 billion
shares of $0.01 par value) (E) (47,193,070) 5,000,000
Net asset value per share $ 10.00
Market price per share
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-39
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC
PRO FORMA STATEMENT OF OPERATIONS
MINIMUM NEW FUND ELECTION SCENARIO
FOR THE YEAR ENDED NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
AMERICAN AMERICAN AMERICAN AMERICAN
NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT
-------- ---------- ------------ ------------- ------------
INCOME:
Interest $ -- $5,220,565 $23,785,175 $29,865,085 $15,954,302
Dividends 299,389 -- 39,280 81,098
------- ---------- ----------- ----------- -----------
Total income -- 5,519,954 23,785,175 29,904,365 16,035,400
------- ---------- ----------- ----------- -----------
EXPENSES:
Interest expense -- 624,078 2,737,170 3,329,245 1,919,508
Investment management fees -- 326,423 1,365,577 1,710,518 715,716
Administration fees -- 132,636 527,233 666,593 356,682
Custodian fees -- 10,611 42,179 53,327 28,535
Transfer agent fees -- 47,264 66,150 58,126 52,741
Registration fees -- 58,129 216,789 297,180 147,234
Reports to shareholders -- 35,460 65,445 102,053 68,575
Mortgage servicing fees -- 45,060 186,213 239,623 140,563
Directors' fees -- 13,543 63,647 106,008 44,303
Audit and legal fees -- 118,688 537,973 588,675 298,753
Financial advisory and accounting fees 70,079 314,000 480,368 231,438
Other expenses -- 8,921 56,719 59,449 13,814
------- ---------- ----------- ----------- -----------
Total expenses -- 1,490,892 6,179,095 7,691,165 4,017,862
------- ---------- ----------- ----------- -----------
Net Investment Income -- 4,029,062 17,606,080 22,213,200 12,017,538
------- ---------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gain (loss) on investments in
securities and mortgage loans -- (491,966) 430,519 221,787 1,092,850
------- ---------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS) ON INVESTMENTS -- (491,966) 430,519 221,787 1,092,850
- --------------------------------------------- ------- ---------- ----------- ----------- -----------
NET CHANGE IN UNREALIZED APPRECIATION
OR DEPRECIATION OF INVESTMENTS -- 734,941 100,369 136,455 765,118
------- ---------- ----------- ----------- -----------
NET GAIN ON INVESTMENTS -- 242,975 530,888 358,242 1,857,968
------- ---------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ -- $4,272,037 $18,136,968 $22,571,442 $13,875,506
======= ========== =========== =========== ===========
<Caption>
PRO FORMA NEW FUND
ADJUSTMENTS PRO FORMA
--------------- ----------------
INCOME:
Interest (F) $(69,295,550) $5,529,577
Dividends (F) (388,746) 31,021
------------ ----------
Total income (69,684,296) 5,560,598
------------ ----------
EXPENSES:
Interest expense (F) (7,973,722) 636,279
Investment management fees (F) (3,813,897) 304,337
Administration fees (F) (1,558,760) 124,384
Custodian fees (F) (124,701) 9,951
Transfer agent fees (F) (207,707) 16,574
Registration fees (F)(G) (705,211) 14,121
Reports to shareholders (F) (251,467) 20,066
Mortgage servicing fees (F) (566,272) 45,187
Directors' fees (F)(G) (216,805) 10,696
Audit and legal fees (F)(G) (1,528,544) 15,545
Financial advisory and accounting fees (G) (1,095,885) --
Other expenses (F) (128,638) 10,265
------------ ----------
Total expenses (18,171,608) 1,207,406
------------ ----------
Net Investment Income (51,512,688) 4,353,192
------------ ----------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gain (loss) on investments in
securities and mortgage loans (F) (1,160,579) 92,611
------------ ----------
NET REALIZED GAIN (LOSS) ON INVESTMENTS (1,160,579) 92,611
- --------------------------------------------- ------------ ----------
NET CHANGE IN UNREALIZED APPRECIATION
OR DEPRECIATION OF INVESTMENTS (F) (1,608,527) 128,356
------------ ----------
NET GAIN ON INVESTMENTS (2,769,107) 220,966
------------ ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(54,281,795) $4,574,158
============ ==========
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-40
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY
SECURITIES (4.85%)
U.S. AGENCY MORTGAGE-BACKED
SECURITIES (4.85%)
FIXED RATE (4.85%)
$ -- $ -- $ -- $ 2,771,132 $ -- $ (2,665,102) $ 106,030 5.50%, FNMA , 2/1/17
-- 3,905,534 -- -- -- (3,905,534) -- 6.00%, FNMA, 5/1/31
-- 1,662,628 11,084,188 7,758,931 9,975,769 (29,474,746) 1,006,770 6.50%, FNMA, 6/1/29
-- -- -- -- 3,713,527 (3,449,264) 264,263 7.50%, FHLMC, 12/1/29
-- 4,008,154 -- -- -- (4,008,154) -- 7.50%, FNMA, 3/1/30
-- -- 1,698,093 1,521,917 -- (3,161,778) 58,232 7.50%, FNMA, 4/1/30
-- 551,135 1,984,084 1,984,084 1,102,269 (5,467,217) 154,355 7.50%, FNMA, 5/1/30
-- 189,131 680,873 680,873 378,263 (1,876,170) 52,970 8.00%, FNMA, 5/1/30
-- -- 1,937,468 1,743,721 -- (3,614,471) 66,718 8.00%, FNMA, 6/1/30
-- 1,322,279 2,203,798 3,085,317 -- (6,493,343) 118,051 9.00%, FHLMC, 7/1/30
-- 3,306,802 -- -- -- (3,306,802) -- 6.50%, FNMA, 11/1/31
-- 3,795,418 2,415,790 2,415,790 -- (8,534,564) 92,434 6.00%, FNMA, 10/1/16
-- -- 1,928,180 1,928,180 -- (3,782,583) 73,777 5.50%, FNMA, 6/1/17
-- -- 1,962,672 1,962,672 -- (3,850,248) 75,096 5.00%, FNMA, 9/1/17
-- -- 2,987,883 2,987,883 2,987,883 (8,636,702) 326,947 5.00%, FNMA, 11/1/17
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES
PRIVATE MORTGAGE-BACKED
SECURITIES (D) (7.75%)
FIXED RATE (7.75%)
-- 33,957 -- -- -- -- 33,957 13.04%, Minnesota Mortgage
Corporation, 7/25/14
-- -- -- 15,000,000 -- (15,000,000) -- 8.00%, Lone Star Fund III,
3/30/03
-- 4,000,000 15,000,000 12,000,000 12,000,000 (43,000,000) -- 8.00%, Value Enhancement Fund IV,
6/27/04
-- -- 3,779,719 -- -- -- 3,779,719 8.31%, RFC 1997-NPC1, 8/27/23
-- -- -- 588,676 -- -- 588,676 8.79%, First Gibralter,
Series 1992-MM, Class B,
10/25/21
-- 2,500,000 6,000,000 4,000,000 -- (12,500,000) -- 9.25%, Oly Holigan, LP, 1/1/04
-- -- 6,000,000 -- -- (6,000,000) -- 9.25%, Oly Holigan II, LP, 1/1/05
-- -- -- 7,500,000 -- (7,500,000) -- 9.25%, Oly McKinney, 8/11/03
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ -- $ -- $ -- $ -- $ 2,842,520 $ -- $ (2,736,574) $ 105,946
-- -- 3,995,380 -- -- -- (3,995,380) --
-- -- 1,722,383 11,482,553 8,037,787 10,334,298 (30,561,065) 1,015,956
-- -- -- -- -- 3,928,205 (3,655,902) 272,303
-- -- 4,247,808 -- -- -- (4,247,808) --
-- -- -- 1,797,330 1,610,858 -- (3,348,148) 60,040
-- -- 583,343 2,100,034 2,100,034 1,166,686 (5,790,950) 159,147
-- -- 202,785 730,025 730,025 405,570 (2,013,081) 55,324
-- -- -- 2,077,334 1,869,600 -- (3,877,251) 69,683
-- -- 1,424,755 2,374,592 3,324,429 -- (6,999,869) 123,907
-- -- 3,417,284 -- -- -- (3,417,284) --
-- -- 3,943,647 2,510,138 2,510,138 -- (8,870,365) 93,558
-- -- -- 1,978,020 1,978,020 -- (3,882,315) 73,725
-- -- -- 1,981,597 1,981,598 -- (3,889,337) 73,858
-- -- -- 3,016,695 3,016,695 3,016,695 (8,728,530) 321,555
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 19,537,385 30,048,318 30,001,704 18,851,454 (96,013,859) 2,425,002
-------- ----------- ------------ ------------ ------------ ------------- -----------
--
-- 34,466 -- -- -- -- 34,466
--
-- -- -- 15,481,500 -- (15,481,500) --
--
-- 4,040,000 15,150,000 12,120,000 12,120,000 (43,430,000) --
-- -- -- 3,840,946 -- -- -- 3,840,946
--
-- -- -- -- -- -- --
-- -- 2,525,000 6,060,000 4,040,000 -- (12,625,000) --
-- -- -- 6,060,000 -- -- (6,060,000) --
-- -- -- -- 7,500,000 -- (7,500,000) --
</Table>
F-41
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ -- $ -- $ 5,000,000 $ (5,000,000) $ -- 9.25%, Stratus Properties, 1/1/06
-- -- 5,000,000 -- -- (5,000,000) -- 9.25%, Stratus Properties, 7/1/06
TOTAL PRIVATE MORTGAGE-BACKED
SECURITIES
WHOLE LOANS AND PARTICIPATION
MORTGAGES (B,C,D) (117.62%)
COMMERCIAL LOANS (70.91%)
-- -- -- 2,891,593 -- (2,891,593) -- 1200 Washington, 9.65%, 12/1/05
-- -- 2,808,704 -- -- (2,808,704) -- 1336 and 1360 Energy Park Drive,
7.55%, 10/1/08
-- -- -- 5,144,887 -- (5,144,887) -- 4295/4299 San Felipe Associates
LP, 9.33%, 8/1/06
-- -- -- -- 3,402,515 (3,402,515) -- 7 Broadway Place, 6.91%, 5/1/06
-- -- -- 4,377,713 -- -- 4,377,713 Academy Spectrum, 7.70%, 5/1/09
-- 1,275,631 -- -- -- (1,275,631) -- Advance Self Storage, 9.13%,
12/1/05
-- -- -- -- 3,796,735 -- 3,796,735 Advanced Circuits and Hopkins II
Business Center, 7.40%, 12/1/04
-- -- -- 2,900,000 -- (2,900,000) -- Atwood Oceanics I, 7.29%, 6/1/04
-- -- -- 720,000 -- (720,000) -- Atwood Oceanics II, 9.88%, 6/1/04
-- -- -- -- 1,906,905 (1,906,905) -- Best Buy, 8.63%, 1/1/11
-- -- 1,291,816 -- -- (1,291,816) -- Bigelow Office Building, 8.88%,
4/1/07
-- -- -- 4,398,798 -- (4,398,798) -- Blacklake Place I and II, 8.66%,
9/1/07
-- -- -- 2,199,399 -- (2,199,399) -- Blacklake Place III, 8.66%,
9/1/07
-- -- -- 3,411,064 -- -- 3,411,064 Brookhollow West and Northwest
Technical Center, 8.11%, 2/1/03
-- 931,196 -- -- -- -- 931,196 Buca Restaurant, 8.63%, 1/1/11
-- -- -- -- 1,994,111 (1,994,111) -- Canyon Portal, 10.38%, 1/1/07
-- -- -- -- 3,364,725 (3,364,725) -- Career Education Corporation,
7.50%, 6/1/07
-- -- -- -- 4,931,181 (4,931,181) -- Community Coffee Office Building,
6.91%, 5/1/04
-- -- 2,318,948 -- -- (2,318,948) -- Cottonwood Square, 9.20%, 5/1/04
-- -- -- 2,587,396 -- (2,587,396) -- CUBB Properties Mobile Home Park,
8.03%, 11/1/07
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ -- $ -- $ -- $ -- $ -- $ 5,050,000 $ (5,050,000) $ --
-- -- -- 5,100,000 -- -- (5,100,000) --
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 6,599,466 36,210,946 39,141,500 17,170,000 (95,246,500) 3,875,412
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- -- -- -- 3,007,257 -- (3,007,257) --
--
-- -- 2,949,139 -- -- (2,949,139) --
--
-- -- -- 5,318,707 -- (5,318,707) --
-- -- -- -- -- 3,538,616 (3,538,616) --
-- -- -- -- 4,596,599 -- -- 4,596,599
--
-- 1,339,412 -- -- -- (1,339,412) --
--
-- -- -- -- 3,834,702 -- 3,834,702
-- -- -- -- 2,958,000 -- (2,958,000) --
-- -- -- -- 707,695 -- (707,695) --
-- -- -- -- -- 2,002,251 (2,002,251) --
--
-- -- 1,356,407 -- -- (1,356,407) --
--
-- -- -- 4,618,738 -- (4,618,738) --
--
-- -- -- 2,309,369 -- (2,309,369) --
--
-- -- -- 3,411,064 -- -- 3,411,064
-- -- 977,756 -- -- -- -- 977,756
-- -- -- -- -- 2,073,875 (2,073,875) --
--
-- -- -- -- 3,532,962 (3,532,962) --
--
-- -- -- -- 5,029,805 (5,029,805) --
-- -- -- 2,365,327 -- -- (2,365,327) --
--
-- -- -- 2,716,766 -- (2,716,766) --
</Table>
F-42
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ -- $ 5,400,000 $ -- $ (5,400,000) $ -- Denmark House Office Building I,
8.80%, 2/1/05
-- -- -- 1,060,000 -- (1,060,000) -- Denmark House Office Building II,
11.38%, 2/1/05
-- 1,460,367 -- -- -- (1,460,367) -- Dietzgen Industrial Building,
9.00%, 1/1/06
-- -- -- 669,374 -- (669,374) -- Duncan Office Building, 7.88%,
6/1/08
-- -- 3,615,068 -- -- -- 3,615,068 Fortune Park V, VI, VII, 7.90%,
1/1/04
-- -- -- 4,597,544 -- (4,597,544) -- France Avenue Business Park II,
7.40%, 10/1/12
-- -- -- -- 4,748,319 (4,748,319) -- Galtier Plaza, 9.19%, 3/1/05
-- -- 2,590,399 -- -- -- 2,590,399 Gardenswartz Plaza, 7.40%, 5/1/07
-- -- 2,418,126 -- -- (2,418,126) -- Hadley Avenue Business Center,
8.38%, 1/1/11
-- 1,798,323 -- -- -- (1,798,323) -- Hampden Medical Office, 7.38%,
10/1/12
-- -- 5,400,000 -- -- (5,400,000) -- Harbor Corporate Center, 7.43%,
4/1/05
-- -- 1,667,429 -- -- (1,667,429) -- Hillside Crossing South Shopping
Center, 7.93%, 1/1/05
-- -- 934,111 -- -- (934,111) -- Hillside Office Park, 7.63%,
8/1/08
-- -- -- 4,900,000 -- (4,900,000) -- Holiday Village Shopping Center,
7.15%, 11/1/07
-- -- 2,085,000 -- -- (2,085,000) -- INA Corporate Land, 7.88%,
11/1/04
-- -- -- 2,219,323 -- (2,219,323) -- Indian Street Shoppes, 7.88%,
2/1/09
-- 2,142,314 -- -- -- (2,142,314) -- Integrity Plaza Shopping Center,
8.00%, 7/1/12
-- -- -- 2,859,492 -- (2,859,492) -- Jackson Street Warehouse, 8.53%,
7/1/07
-- -- 1,834,667 -- -- (1,834,667) -- Jamboree Building, 8.93%, 12/1/06
-- -- -- 960,937 -- (960,937) -- Jefferson Office Building, 7.38%,
12/1/13
-- -- -- 4,934,347 -- (4,934,347) -- John Brown Office Building,
7.40%, 11/1/04
-- -- 6,275,000 -- -- (6,275,000) -- Katy Plaza I, 7.43%, 1/1/05
-- -- 1,880,000 -- -- (1,880,000) -- Katy Plaza II, 9.88%, 1/1/05
-- -- -- 2,197,025 -- -- 2,197,025 Kimball Professional Office
Building, 7.88%, 7/1/08
-- -- 5,680,000 -- -- (5,680,000) -- La Posada & Casitas I, 7.93%,
11/1/04
-- -- 830,000 -- -- (830,000) -- La Posada & Casitas II, 11.88%,
11/1/04
-- -- -- 3,654,406 -- -- 3,654,406 Lake Pointe Corporate Center,
8.57%, 7/1/07
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ -- $ 5,454,000 $ -- $ (5,454,000) $ --
--
-- -- -- 1,085,782 -- (1,085,782) --
--
-- 1,533,385 -- -- -- (1,533,385) --
--
-- -- -- 702,843 -- (702,843) --
--
-- -- 3,687,370 -- -- -- 3,687,370
--
-- -- -- 4,827,422 -- (4,827,422) --
-- -- -- -- -- 4,890,768 (4,890,768) --
-- -- -- 2,719,919 -- -- -- 2,719,919
--
-- -- 2,539,032 -- -- (2,539,032) --
--
-- 1,888,239 -- -- -- (1,888,239) --
--
-- -- 5,616,000 -- -- (5,616,000) --
--
-- -- 1,717,452 -- -- (1,717,452) --
--
-- -- 980,817 -- -- (980,817) --
--
-- -- -- 5,145,000 -- (5,145,000) --
--
-- -- 2,126,700 -- -- (2,126,700) --
--
-- -- -- 2,330,289 -- (2,330,289) --
--
-- 2,249,430 -- -- -- (2,249,430) --
--
-- -- -- 3,002,466 -- (3,002,466) --
-- -- -- 1,926,401 -- -- (1,926,401) --
--
-- -- -- 1,008,984 -- (1,008,984) --
--
-- -- -- 4,983,690 -- (4,983,690) --
-- -- -- 6,463,250 -- -- (6,463,250) --
-- -- -- 1,872,508 -- -- (1,872,508) --
--
-- -- -- 2,306,876 -- -- 2,306,876
--
-- -- 5,793,600 -- -- (5,793,600) --
--
-- -- 846,600 -- -- (846,600) --
--
-- -- -- 3,837,126 -- -- 3,837,126
</Table>
F-43
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ -- $ -- $ 4,076,355 $ (4,076,355) $ -- Landmark Bank Center I, 7.90%,
6/1/07
-- -- -- -- 817,500 (817,500) -- Landmark Bank Center II, 14.88%,
5/1/07
-- -- -- 3,203,412 -- (3,203,412) -- LAX Air Freight Center, 7.90%,
1/1/08
-- -- 3,000,000 -- -- (3,000,000) -- Lincoln Industrial, 7.40%,
12/1/05
-- 835,083 -- -- -- (835,083) -- Main Street Office Building,
8.38%, 11/1/07
-- -- 2,243,392 -- -- -- 2,243,392 Minikahda Mini Storage V, 8.75%,
9/1/09
-- -- 4,058,100 -- -- (4,058,100) -- Minikahda MiniStorage III, 8.62%,
8/1/09
-- -- -- 4,252,826 -- (4,252,826) -- NCGR Office Building, 8.65%,
2/1/06
-- -- -- 2,869,783 -- (2,869,783) -- North Austin Business Center,
9.05%, 5/1/07
-- -- -- -- 3,991,212 (3,991,212) -- Northlynn Plaza, 7.65%, 9/1/12
-- -- 1,318,635 -- -- (1,318,635) -- Oak Knoll Village Shopping
Center, 8.68%, 7/1/05
-- 1,020,421 -- -- -- (1,020,421) -- One Eastern Heights Office
Building, 8.21%, 12/1/07
-- -- -- 2,775,003 -- -- 2,775,003 One Metro Square Office Building,
8.10%, 1/1/03
-- -- -- 1,763,917 -- (1,763,917) -- One Park Center, 8.93%, 2/1/06
-- 1,010,455 -- -- -- (1,010,455) -- Orchard Commons, 8.75%, 4/1/11
-- 1,279,753 -- -- -- (1,279,753) -- Pacific Periodicals Building,
8.03%, 1/1/08
-- -- -- 588,042 -- (588,042) -- Pacific Shores Mobile Home Park
II, 11.00%, 10/1/06
-- -- -- -- 3,643,118 (3,643,118) -- Parkway Business Center, 7.65%,
11/1/03
-- -- 1,331,418 -- -- (1,331,418) -- PennMont Office Plaza, 6.88%,
5/1/06
-- -- -- 1,414,863 -- (1,414,863) -- Pilot Knob Service Center, 8.95%,
7/1/07
-- -- 2,310,000 -- -- (2,310,000) -- Plaza Colonial I, 7.88%, 11/1/04
-- -- 390,000 -- -- (390,000) -- Plaza Colonial II, 11.88%,
11/1/04
-- -- 2,213,480 -- -- -- 2,213,480 PMG Center, 8.93%, 9/1/03
-- -- -- 2,400,459 -- (2,400,459) -- PMG Plaza, 8.95%, 4/1/04
-- -- -- -- 6,283,409 (6,283,409) -- Point Plaza, 8.43%, 1/1/11
-- -- 4,544,169 -- -- (4,544,169) -- Pyramid Plaza Office Building,
7.71%, 4/30/07
-- -- -- 2,380,000 -- (2,380,000) -- Rancho Bernardo Financial Plaza,
8.88%, 1/1/05
-- -- 3,487,204 -- -- (3,487,204) -- Rapid Park Parking Lot, 8.90%,
9/1/07
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ -- $ -- $ 4,280,172 $ (4,280,172) $ --
--
-- -- -- -- 858,375 (858,375) --
--
-- -- -- 3,363,582 -- (3,363,582) --
--
-- -- 3,090,000 -- -- (3,090,000) --
--
-- 876,838 -- -- -- (876,838) --
--
-- -- 2,355,561 -- -- -- 2,355,561
--
-- -- 4,261,004 -- -- (4,261,004) --
--
-- -- -- 4,422,939 -- (4,422,939) --
--
-- -- -- 3,013,272 -- (3,013,272) --
-- -- -- -- -- 4,190,773 (4,190,773) --
--
-- -- 1,358,194 -- -- (1,358,194) --
--
-- 807,239 -- -- -- (807,239) --
--
-- -- -- 2,775,003 -- -- 2,775,003
-- -- -- -- 1,834,474 -- (1,834,474) --
-- -- 1,060,978 -- -- -- (1,060,978) --
--
-- 1,343,741 -- -- -- (1,343,741) --
--
-- -- -- 617,445 -- (617,445) --
--
-- -- -- -- 3,643,118 (3,643,118) --
--
-- -- 1,384,675 -- -- (1,384,675) --
--
-- -- -- 1,485,606 -- (1,485,606) --
-- -- -- 2,356,200 -- -- (2,356,200) --
--
-- -- 397,800 -- -- (397,800) --
-- -- -- 2,235,615 -- -- -- 2,235,615
-- -- -- -- 2,448,468 -- (2,448,468) --
-- -- -- -- -- 6,597,579 (6,597,579) --
--
-- -- 4,725,936 -- -- (4,725,936) --
--
-- -- -- 2,321,883 -- (2,321,883) --
--
-- -- 3,661,564 -- -- (3,661,564) --
</Table>
F-44
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ 2,724,137 $ -- $ -- $ (2,724,137) $ -- Redwood Dental Building, 7.40%,
7/1/12
-- -- 2,536,559 -- -- (2,536,559) -- Ridgehill Professional Building,
7.38%, 1/1/09
-- -- 3,064,715 -- -- (3,064,715) -- Rimrock Plaza, 7.65%, 12/1/08
-- -- -- 3,800,000 -- (3,800,000) -- Rockwall Technology Building I,
7.40%, 11/1/06
-- -- -- 1,100,000 -- (1,100,000) -- Rockwall Technology Building II,
9.58%, 11/1/06
-- -- -- -- 1,251,668 (1,251,668) -- Rodeo Shops, 9.03%, 6/1/07
-- -- 3,064,715 -- -- (3,064,715) -- Rubin Center, 8.78%, 7/1/12
-- -- -- 4,824,734 -- (4,824,734) -- Santa Monica Center, 8.35%,
2/1/07
-- 1,088,785 -- -- -- (1,088,785) -- Schendel Office Building, 8.20%,
10/1/07
-- 1,504,885 -- -- -- (1,504,885) -- Shallowford Business Park, 9.13%,
7/1/03
-- 1,325,359 -- -- -- (1,325,359) -- Sherwin Williams, 8.50%, 1/1/04
-- -- -- 2,934,027 -- (2,934,027) -- Shoppes at Jonathan's Landing,
7.95%, 5/1/10
-- 1,101,242 -- -- -- (1,101,242) -- Stephens Retail Center, 9.23%,
8/1/03
-- -- 3,098,273 -- -- (3,098,273) -- Stevenson Office Building, Port
Orchard Cinema, and Jensen
Industrial Building, 7.88%,
2/1/09
-- -- 820,542 -- -- (820,542) -- Sundance Plaza, 7.13%, 11/1/08
-- -- -- -- 4,091,477 (4,091,477) -- Town Square #6, 7.40%, 9/1/12
-- -- -- 4,500,000 -- (4,500,000) -- Valley Rim Office Center I,
7.40%, 1/1/04
-- -- -- 1,363,500 -- (1,363,500) -- Valley Rim Office Center II,
8.88%, 1/1/04
-- -- -- -- 2,587,734 -- 2,587,734 Victory Packaging Facility,
8.53%, 1/1/12
-- -- 2,500,000 -- -- (2,500,000) -- Villa Ricca Industrial Park,
14.88%, 6/1/05
-- 1,536,000 -- -- -- (1,536,000) -- Voit Office Building, 8.13%,
9/1/08
-- -- 5,745,857 -- -- (5,745,857) -- Westwood Business Park, 8.43%,
5/1/04
-- -- 2,125,000 -- -- (2,125,000) -- Xtra Self Storage, 6.88%, 11/1/05
MULTIFAMILY LOANS (33.64%)
-- -- -- 3,416,853 -- (3,416,853) -- Ambassador House Apartments,
8.10%, 2/1/10
-- 639,110 -- -- -- (639,110) -- Applewood Manor, 8.63%, 1/1/08
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ 2,860,344 $ -- $ -- $ (2,860,344) $ --
--
-- -- 2,663,387 -- -- (2,663,387) --
-- -- -- 3,217,950 -- -- (3,217,950) --
--
-- -- -- 3,952,000 -- (3,952,000) --
--
-- -- -- 1,026,282 -- (1,026,282) --
-- -- -- -- -- 1,289,218 (1,289,218) --
-- -- -- 3,208,799 -- -- (3,208,799) --
--
-- -- -- 4,824,734 -- (4,824,734) --
--
-- 1,051,719 -- -- -- (1,051,719) --
--
-- 1,519,934 -- -- -- (1,519,934) --
-- -- 1,351,867 -- -- -- (1,351,867) --
--
-- -- -- 3,080,728 -- (3,080,728) --
--
-- 1,112,254 -- -- -- (1,112,254) --
--
-- -- 3,253,187 -- -- (3,253,187) --
-- -- -- 861,569 -- -- (861,569) --
-- -- -- -- -- 4,296,050 (4,296,050) --
--
-- -- -- 4,590,000 -- (4,590,000) --
--
-- -- -- 1,299,486 -- (1,299,486) --
--
-- -- -- -- 2,717,120 -- 2,717,120
--
-- -- 2,575,000 -- -- (2,575,000) --
--
-- 1,612,800 -- -- -- (1,612,800) --
--
-- -- 5,803,316 -- -- (5,803,316) --
-- -- -- 2,188,750 -- -- (2,188,750) --
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 18,725,592 95,419,373 105,384,575 52,775,384 (236,850,213) 35,454,711
-------- ----------- ------------ ------------ ------------ ------------- -----------
--
-- -- -- 3,587,696 -- (3,587,696) --
-- -- 671,065 -- -- -- (671,065) --
</Table>
F-45
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ 7,228,809 $ -- $ -- $ (7,228,809) $ -- Autumnwood, Southern Woods,
Hinton Hollow, 7.68%, 6/1/09
-- -- -- 8,800,000 -- (8,800,000) -- Barcley Square Apartments, 7.83%,
9/1/04
-- -- -- 1,986,766 -- (1,986,766) -- Bellewood Apartments, 9.13%,
12/1/05
-- -- -- 5,121,762 -- (5,121,762) -- Boardwalk Apartments, 7.33%,
2/1/08
-- -- -- 1,394,000 -- -- 1,394,000 Brays Village Apartments, 9.88%,
4/1/05
-- -- 10,125,000 -- -- (10,125,000) -- Cameron Lakes Apartments I,
6.93%, 1/1/05
-- -- 1,260,000 -- -- (1,260,000) -- Cameron Lakes Apartments II,
14.88%, 1/1/05
-- -- -- -- 1,754,677 (1,754,677) -- Cape Cod Apartments, 7.28%,
2/1/08
-- -- -- -- 2,963,635 (2,963,635) -- Casa del Vista Apartments, 8.40%,
1/1/08
-- -- -- -- 948,772 (948,772) -- Castle Arms Apartments, 8.00%,
4/1/06
-- -- -- -- 3,940,013 (3,940,013) -- Centre Court, White Oaks, and
Green Acres Apartments, 8.65%,
1/1/09
-- -- -- -- 863,614 -- 863,614 Chapel Hill Apartments, 8.38%,
1/1/08
-- -- 4,120,462 -- -- (4,120,462) -- Chardonnay Apartments, 8.60%,
1/1/07
-- 1,488,341 -- -- -- (1,488,341) -- Charleston Plaza Apartments,
7.38%, 7/1/08
-- -- -- 4,600,000 -- -- 4,600,000 Concorde Apartments, 8.15%,
6/1/05
-- -- -- 10,300,000 -- (10,300,000) -- Country Place Village I, 6.93%,
3/1/05
-- -- -- 2,300,000 -- (2,300,000) -- Country Place Village II, 9.88%,
3/1/05
-- -- 13,000,000 -- -- (13,000,000) -- Crown Cove Senior Care Community,
7.93%, 11/1/04
-- -- 3,509,984 -- -- (3,509,984) -- Dakotah Hills Condominiums,
8.90%, 4/1/05
-- -- 1,119,793 -- -- (1,119,793) -- Deering Manor, 7.98%, 12/8/22
-- -- 1,100,000 -- -- (1,100,000) -- Eagles Landing Apartments, 9.01%,
2/1/06
-- -- -- -- 2,798,926 (2,798,926) -- El Conquistador Apartments,
7.65%, 4/1/09
-- 2,090,000 -- -- -- (2,090,000) -- El Dorado Apartments I, 7.13%,
10/1/05
-- 468,000 -- -- -- (468,000) -- El Dorado Apartments II, 9.88%,
10/1/05
-- -- -- -- 4,544,077 (4,544,077) -- Evergreen, Northview, Greenwood,
and Fern Court Apartments, 9.40%,
6/1/05
-- -- 5,500,000 -- -- (5,500,000) -- Fairmount Apartments, 12.93%,
12/1/02
-- -- 4,100,000 -- -- (4,100,000) -- Fairways I and II, 8.65%, 2/1/03
-- -- 2,150,000 -- -- (2,150,000) -- Forest Estate Apartments, 9.88%,
3/15/05
-- -- 7,725,000 -- -- (7,725,000) -- Forestree Apartments, 7.83%,
6/1/04
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ 7,590,249 $ -- $ -- $ (7,590,249) $ --
--
-- -- -- 8,344,141 -- (8,344,141) --
--
-- -- -- 2,040,211 -- (2,040,211) --
--
-- -- -- 5,377,850 -- (5,377,850) --
--
-- -- -- 1,394,000 -- -- 1,394,000
--
-- -- 10,428,754 -- -- (10,428,754) --
--
-- -- 1,278,887 -- -- (1,278,887) --
--
-- -- -- -- 1,842,411 (1,842,411) --
--
-- -- -- -- 3,111,816 (3,111,816) --
--
-- -- -- -- 986,723 (986,723) --
--
-- -- -- -- 4,137,014 (4,137,014) --
--
-- -- -- -- 906,795 -- 906,795
--
-- -- 4,326,485 -- -- (4,326,485) --
--
-- 1,562,759 -- -- -- (1,562,759) --
--
-- -- -- 4,738,000 -- -- 4,738,000
--
-- -- -- 10,609,000 -- (10,609,000) --
--
-- -- -- 2,066,489 -- (2,066,489) --
--
-- -- 13,260,000 -- -- (13,260,000) --
--
-- -- 3,541,683 -- -- (3,541,683) --
-- -- -- 1,130,991 -- -- (1,130,991) --
--
-- -- 1,130,247 -- -- (1,130,247) --
--
-- -- -- -- 2,938,872 (2,938,872) --
--
-- 2,152,700 -- -- -- (2,152,700) --
--
-- 424,492 -- -- -- (424,492) --
--
-- -- -- -- 4,771,281 (4,771,281) --
--
-- -- 5,032,007 -- -- (5,032,007) --
-- -- -- 4,141,000 -- -- (4,141,000) --
--
-- -- 2,150,000 -- -- (2,150,000) --
--
-- -- 7,879,500 -- -- (7,879,500) --
</Table>
F-46
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ 1,107,234 $ -- $ -- $ -- $ (1,107,234) $ -- Franklin Woods Apartments, 9.78%,
3/1/10
-- -- 2,488,321 -- -- (2,488,321) -- Fremont Plaza Apartments, 7.40%,
7/1/08
-- 1,675,785 -- -- -- (1,675,785) -- Garden Oaks Apartments, 8.43%,
4/1/06
-- -- -- 923,210 -- (923,210) -- Geneva Village Apartments, 9.38%,
11/1/04
-- -- -- 19,125,000 -- (19,125,000) -- Grand Courtyard Apartment I,
7.18%, 11/1/03
-- -- -- 4,490,000 -- (4,490,000) -- Grand Courtyard Apartment II,
9.90%, 11/1/03
-- -- -- 12,450,000 -- (12,450,000) -- Granite Lake Apartments I, 6.68%,
5/1/05
-- -- -- 778,000 -- (778,000) -- Granite Lake Apartments II,
11.88%, 5/1/05
-- -- -- -- 2,288,570 (2,288,570) -- Greenwood Residences, 7.63%,
4/1/08
-- -- 676,467 -- -- (676,467) -- Harbor View Apartments, 7.98%,
1/25/18
-- -- -- 2,290,000 -- (2,290,000) -- Hartford Apartments, 14.88%,
6/1/05
-- -- -- -- 3,014,771 (3,014,771) -- Hidden Colony Apartments, 7.90%,
6/1/08
-- -- -- -- 6,481,798 (6,481,798) -- Hunters Meadow, 7.80%, 8/1/12
-- -- -- 1,106,019 -- -- 1,106,019 Huntington Hills Apartments,
8.63%, 11/1/05
-- -- 1,772,000 -- -- (1,772,000) -- Ironwood Apartments I, 9.38%,
2/1/04
-- -- 202,309 -- -- (202,309) -- Ironwood Apartments II, 14.88%,
2/1/04
-- -- 2,652,949 -- -- -- 2,652,949 Jaccard Apartments, 8.73%,
12/1/03
-- -- 1,053,881 -- -- (1,053,881) -- Kona Kai Apartments, 8.33%,
11/1/05
-- -- -- -- 2,376,405 (2,376,405) -- Lakeville Apartments, 7.90%,
5/1/08
-- -- -- 964,747 -- (964,747) -- Maple Village Apartments, 9.38%,
11/1/04
-- -- -- 684,582 -- (684,582) -- Meadowview Apartments, 9.38%,
11/1/04
-- -- -- 1,141,674 -- (1,141,674) -- Meridian Pointe Apartments,
8.73%, 2/1/12
-- -- -- 18,746,628 -- (18,746,628) -- Meridian, 8.93%, 9/1/04
-- -- -- 6,828,581 -- (6,828,581) -- Northaven Terrace Apartments,
7.43%, 6/1/07
-- 1,172,323 -- -- -- (1,172,323) -- Park Hollywood, 7.50%, 6/1/12
-- -- -- 12,600,000 -- (12,600,000) -- Park Lane Townhomes I, 7.18%,
12/1/04
-- -- -- 800,000 -- (800,000) -- Park Lane Townhomes II, 11.88%,
12/1/04
-- -- 2,450,080 -- -- (2,450,080) -- Park Place of Venice Apartments,
10.63%, 12/1/02
-- -- 2,367,232 -- -- (2,367,232) -- Park Terrace Apartments, 8.33%,
11/1/05
-- -- -- -- 2,200,000 -- 2,200,000 Park Vista Apartments, 8.58%,
9/1/05
-- -- -- 1,300,000 -- (1,300,000) -- Park Woods Apartments, 19.88%,
3/1/05
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ 1,162,595 $ -- $ -- $ -- $ (1,162,595) $ --
--
-- -- 2,612,737 -- -- (2,612,737) --
--
-- 1,742,817 -- -- -- (1,742,817) --
--
-- -- -- 950,906 -- (950,906) --
--
-- -- -- 19,316,250 -- (19,316,250) --
--
-- -- -- 4,076,912 -- (4,076,912) --
--
-- -- -- 12,823,500 -- (12,823,500) --
--
-- -- -- 743,268 -- (743,268) --
--
-- -- -- -- 2,402,999 (2,402,999) --
--
-- -- 683,232 -- -- (683,232) --
--
-- -- -- 2,358,700 -- (2,358,700) --
--
-- -- -- -- 3,165,510 (3,165,510) --
-- -- -- -- -- 6,805,888 (6,805,888) --
--
-- -- -- 1,150,260 -- -- 1,150,260
--
-- -- 1,807,440 -- -- (1,807,440) --
--
-- -- 204,968 -- -- (204,968) --
--
-- -- 2,732,537 -- -- -- 2,732,537
--
-- -- 1,096,036 -- -- (1,096,036) --
--
-- -- -- -- 2,495,225 (2,495,225) --
--
-- -- -- 993,689 -- (993,689) --
--
-- -- -- 705,119 -- (705,119) --
--
-- -- -- 1,198,758 -- (1,198,758) --
-- -- -- -- 18,934,094 -- (18,934,094) --
--
-- -- -- 7,170,010 -- (7,170,010) --
-- -- 1,230,939 -- -- -- (1,230,939) --
--
-- -- -- 12,978,000 -- (12,978,000) --
--
-- -- -- 775,044 -- (775,044) --
--
-- -- 2,450,080 -- -- (2,450,080) --
--
-- -- 2,461,921 -- -- (2,461,921) --
--
-- -- -- -- 2,179,153 -- 2,179,153
--
-- -- -- 1,339,000 -- (1,339,000) --
</Table>
F-47
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ -- $ 664,460 $ -- $ (664,460) $ -- Parkway Village Apartments,
9.38%, 11/1/04
-- -- 1,039,437 -- -- (1,039,437) -- Primrose Apartments, 8.50%,
11/1/07
-- -- -- -- 1,252,978 (1,252,978) -- Revere Apartments, 7.28%, 5/1/09
-- -- -- 10,085,869 -- (10,085,869) -- Rio Nueces Apartments, 6.76%,
9/1/03
-- -- -- 2,994,956 -- (2,994,956) -- Riverbrook Apartments I, 8.55%,
3/1/10
-- -- -- 320,496 -- (320,496) -- Riverbrook Apartments II, 10.88%,
3/1/10
-- -- -- 448,942 -- (448,942) -- Rose Park Apartments, 9.38%,
11/1/04
-- 512,406 -- -- -- -- 512,406 Rush Oaks Apartments, 7.78%,
12/1/07
-- -- 21,000,000 -- -- (21,000,000) -- Scottsdale Courtyards, 7.93%,
3/1/05
-- -- -- 12,932,546 -- (12,932,546) -- Shelter Island Apartments, 7.63%,
12/1/08
-- -- -- -- 7,042,674 (7,042,674) -- Sheridan Ponds Apartments, 8.63%,
1/1/07
-- -- -- -- 4,725,000 (4,725,000) -- Signature Park Apartments, 9.90%,
12/1/07
-- -- -- 413,407 -- (413,407) -- Southlake Villa Apartments,
9.38%, 11/1/04
-- -- 7,753,434 -- -- (7,753,434) -- Southridge Apartments, 8.43%,
4/1/09
-- -- -- -- 7,200,000 (7,200,000) -- The Falls Apartments I, 7.43%,
2/1/05
-- -- -- -- 800,000 (800,000) -- The Falls Apartments II, 12.88%,
1/1/05
-- -- 1,991,353 -- -- (1,991,353) -- The Firs Retirement Apartments,
9.13%, 12/1/04
-- -- 6,165,083 -- -- (6,165,083) -- The Gables at Westlake
Apartments, 7.33%, 2/1/08
-- -- 1,475,614 -- -- (1,475,614) -- The Meadows, Fairfield Manor, and
Auburn Apartments, 8.50%, 11/1/07
-- -- -- -- 3,871,423 (3,871,423) -- The Oaks of Lake Bluff
Apartments, 8.40%, 2/1/06
-- -- 1,692,650 -- -- -- 1,692,650 The Willows Retirement
Apartments, 9.13%, 12/1/04
-- -- -- -- 1,495,962 -- 1,495,962 The Willows Retirement at
Bellingham, 9.38%, 3/1/05
-- -- 2,100,000 -- -- (2,100,000) -- Timber Ridge Apartments, 9.88%,
5/1/05
-- -- -- -- 5,000,000 (5,000,000) -- Twin Oaks Apartments I, 7.15%,
6/1/05
-- -- -- -- 500,000 (500,000) -- Twin Oaks Apartments II, 12.88%,
6/1/05
-- -- -- 3,526,144 -- (3,526,144) -- Valley Manor Apartments, 8.35%,
11/1/05
-- 1,167,336 -- -- -- (1,167,336) -- Vanderbilt Condominiums, 8.16%,
10/1/09
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ -- $ 684,394 $ -- $ (684,394) $ --
--
-- -- 1,091,409 -- -- (1,091,409) --
-- -- -- -- -- 1,315,627 (1,315,627) --
--
-- -- -- 10,186,727 -- (10,186,727) --
--
-- -- -- 3,144,704 -- (3,144,704) --
--
-- -- -- 336,521 -- (336,521) --
--
-- -- -- 462,410 -- (462,410) --
--
-- 538,026 -- -- -- -- 538,026
--
-- -- 21,210,000 -- -- (21,210,000) --
--
-- -- -- 13,579,174 -- (13,579,174) --
--
-- -- -- -- 7,394,808 (7,394,808) --
--
-- -- -- -- 4,689,861 (4,689,861)
--
-- -- -- 425,809 -- (425,809) --
--
-- -- 8,141,106 -- -- (8,141,106) --
--
-- -- -- -- 7,416,000 (7,416,000) --
--
-- -- -- -- 752,466 (752,466) --
--
-- -- 1,969,789 -- -- (1,969,789) --
--
-- -- 6,473,338 -- -- (6,473,338) --
--
-- -- 1,549,395 -- -- (1,549,395) --
--
-- -- -- -- 4,064,994 (4,064,994) --
--
-- -- 1,674,321 -- -- -- 1,674,321
--
-- -- -- -- 1,504,513 -- 1,504,513
--
-- -- 1,966,987 -- -- (1,966,987) --
--
-- -- -- -- 5,125,000 (5,125,000) --
--
-- -- -- -- 512,500 (512,500) --
--
-- -- -- 3,667,190 -- (3,667,190) --
--
-- 1,225,703 -- -- -- (1,225,703) --
</Table>
F-48
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ -- $ -- $12,696,000 $ -- $(12,696,000) $ -- Warwick West Apartment I, 7.93%,
7/1/04
-- -- -- 2,856,000 -- (2,856,000) -- Warwick West Apartment II, 9.90%,
7/1/04
-- 938,061 -- -- -- (938,061) -- Westhollow Place Apartments,
8.46%, 4/1/03
-- -- -- 4,817,176 -- (4,817,176) -- WestTree Apartments, 8.90%,
11/1/10
-- -- -- 2,582,795 -- (2,582,795) -- Willamette Oaks, 9.15%, 12/1/05
-- -- 574,850 -- -- (574,850) -- Winterland Apartments I, 9.23%,
7/1/12
-- -- 1,101,796 -- -- (1,101,796) -- Winterland Apartments II, 9.23%,
7/1/12
-- 1,018,777 -- -- -- (1,018,777) -- Woodland Garden Apartments,
7.38%, 9/1/08
-- -- -- -- 8,300,000 (8,300,000) -- Woodstock Apartments I, 7.43%,
1/1/05
-- -- -- -- 1,000,000 (1,000,000) -- Woodstock Apartments II, 13.38%,
1/1/05
-- -- -- -- 1,769,716 (1,769,716) -- Woodvine Park Condominiums,
8.48%, 4/1/10
SINGLE FAMILY LOANS (13.07%)
-- 281,747 -- -- -- -- 281,747 Aegis II, 9.65%, 1/28/14
-- 49,943 -- -- -- -- 49,943 Aegis, 9.21%, 3/26/10
-- 33,160 -- -- -- -- 33,160 American Bank, Mankato, 10.00%,
12/10/12
-- 29,724 -- -- -- -- 29,724 American Portfolio, 7.32%,
10/18/15
-- 129,718 -- -- -- -- 129,718 Anivan, 7.77%, 4/14/12
-- -- -- 1,126,736 -- -- 1,126,736 Arbor, 9.27%, 8/16/17
-- 96,706 -- -- -- -- 96,706 Bank of New Mexico, 9.29%,
3/31/10
-- 15,545 -- -- -- -- 15,545 Bluebonnet Savings and Loan II,
11.63%, 8/31/10
-- 258,303 -- -- -- -- 258,303 Bluebonnet Savings and Loan,
8.06%, 8/31/10
-- 163,443 -- -- -- -- 163,443 CLSI Allison Williams, 10.27%,
8/1/17
-- 72,866 -- -- -- -- 72,866 Cross Roads Savings and Loan II,
9.20%, 1/1/21
-- 100,372 -- -- -- -- 100,372 Cross Roads Savings and Loan,
9.44%, 1/1/21
-- 25,776 -- -- -- -- 25,776 Fairbanks, Utah, 10.02%, 9/23/15
-- 98,884 -- -- -- -- 98,884 First Boston Mortgage Pool,
9.12%, 6/29/03
-- 101,850 -- -- -- -- 101,850 Hamilton Financial, 8.68%,
6/29/10
-- 434,912 -- -- -- -- 434,912 Huntington MEWS, 9.66%, 8/1/17
-- 204,179 -- -- -- -- 204,179 Knutson Mortgage Portfolio I,
8.78%, 8/1/17
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ -- $ -- $ 12,949,920 $ -- $ (12,949,920) $ --
--
-- -- -- 2,802,852 -- (2,802,852) --
--
-- 938,061 -- -- -- (938,061) --
--
-- -- -- 5,058,035 -- (5,058,035) --
-- -- -- -- 2,653,955 -- (2,653,955) --
--
-- -- 603,593 -- -- (603,593) --
--
-- -- 1,156,886 -- -- (1,156,886) --
--
-- 1,069,716 -- -- -- (1,069,716) --
--
-- -- -- -- 8,549,000 (8,549,000) --
--
-- -- -- -- 1,013,690 (1,013,690) --
--
-- -- -- -- 1,858,202 (1,858,202) --
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 12,718,873 121,775,578 179,622,588 79,940,348 (377,239,782) 16,817,605
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- -- 290,199 -- -- -- -- 290,199
-- -- 51,441 -- -- -- -- 51,441
--
-- 34,154 -- -- -- -- 34,154
--
-- 30,616 -- -- -- -- 30,616
-- -- 133,608 -- -- -- -- 133,608
-- -- -- -- 1,126,736 -- -- 1,126,736
--
-- 99,478 -- -- -- -- 99,478
--
-- 15,368 -- -- -- -- 15,368
--
-- 263,608 -- -- -- -- 263,608
--
-- 168,020 -- -- -- -- 168,020
--
-- 74,805 -- -- -- -- 74,805
--
-- 103,364 -- -- -- -- 103,364
-- -- 26,549 -- -- -- -- 26,549
--
-- 101,850 -- -- -- -- 101,850
--
-- 102,557 -- -- -- -- 102,557
-- -- 447,959 -- -- -- -- 447,959
--
-- 210,304 -- -- -- -- 210,304
</Table>
F-49
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ 135,467 $ -- $ -- $ -- $ -- $ 135,467 McClemore, Matrix Funding
Corporation, 10.50%, 9/30/12
-- -- 346,767 -- -- -- 346,767 Merchants Bank, 10.48%, 12/1/20
-- 237,651 -- -- -- -- 237,651 Meridian, 9.59%, 12/1/20
-- -- 887,344 -- -- -- 887,344 Neslund Properties, 9.88%, 2/1/23
-- -- 78,184 -- -- -- 78,184 Nomura II, 8.25%, 3/22/15
-- 483,372 -- -- -- -- 483,372 Nomura III, 9.39%, 4/29/17
-- -- 755,201 -- -- -- 755,201 PHH U.S. Mortgage, 8.65%, 1/1/12
-- 121,778 -- -- -- -- 121,778 Rand Mortgage Corporation, 9.50%,
8/1/17
-- 174,633 -- -- -- -- 174,633 Salomon II, 9.21%, 11/23/14
-- 51,612 -- -- -- -- 51,612 Valley Bank of Commerce, 8.34%,
8/31/10
TOTAL WHOLE LOANS AND
PARTICIPATION MORTGAGES
MORTGAGE SERVICING
RIGHTS (D) (0.17%)
-- 11,028,533 -- -- -- -- 11,028,533 Matrix Servicing Rights, 0.12%,
7/10/22
PREFERRED STOCK (0.36%)
REAL ESTATE INVESTMENT TRUST
(0.36%)
-- 5,000 5,000 5,000 5,000 (19,453) 547 AMB Property
-- 13,125 3,525 3,525 3,525 (23,314) 386 Archstone Community Trust,
Series D
-- 8,900 -- -- -- (8,900) -- Avalonbay Communities, Series D
-- 9,200 -- -- -- (9,200) -- Avalonbay Communities, Series H
-- 5,128 2,175 2,175 2,175 (7,422) 4,231 CarrAmerica Realty Trust,
Series B
-- 2,800 5,000 5,000 5,000 (17,253) 547 CarrAmerica Realty Trust,
Series C
-- 11,800 5,000 5,000 5,000 (26,253) 547 CarrAmerica Realty Trust,
Series D
-- 14,700 5,000 5,000 5,000 (29,153) 547 Centerpoint Properties, Series A
-- 625 625 625 625 (2,432) 68 Duke Realty Investments,
Series E
-- 9,400 -- -- -- (9,400) -- Equity Office Properties Trust,
Series C
-- 3,000 -- -- -- (3,000) -- Equity Office Properties Trust,
Series E
-- 13,200 -- -- -- (13,200) -- Equity Office Properties Trust,
Series G
-- 1,600 -- -- -- (1,600) -- Equity Residential Properties,
Series D
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ 139,531 $ -- $ -- $ -- $ -- $ 139,531
-- -- -- 357,114 -- -- -- 357,114
-- -- 244,781 -- -- -- -- 244,781
-- -- -- 913,964 -- -- -- 913,964
-- -- -- 53,643 -- -- -- 53,643
-- -- 484,921 -- -- -- -- 484,921
-- -- -- 706,346 -- -- -- 706,346
--
-- 125,431 -- -- -- -- 125,431
-- -- 179,872 -- -- -- -- 179,872
--
-- 53,161 -- -- -- -- 53,161
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 3,381,577 2,031,067 1,126,736 -- -- 6,539,380
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 34,826,042 219,226,018 286,133,899 132,715,732 (614,089,995) 58,811,696
-------- ----------- ------------ ------------ ------------ ------------- -----------
--
-- 84,611 -- -- -- -- 84,611
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- -- 129,250 129,250 129,250 129,250 (503,418) 13,582
--
-- 343,875 92,355 92,355 92,355 (611,164) 9,776
-- -- 222,055 -- -- -- (222,055) --
-- -- 242,236 -- -- -- (242,236) --
--
-- 128,303 54,419 54,419 54,418 (188,503) 103,056
--
-- 70,140 125,250 125,250 125,250 (432,571) 13,319
--
-- 295,590 125,250 125,250 125,250 (658,025) 13,315
-- -- 369,705 125,750 125,750 125,750 (733,600) 13,355
--
-- 16,125 16,125 16,125 16,125 (62,786) 1,714
--
-- 238,760 -- -- -- (238,760) --
--
-- 74,850 -- -- -- (74,850) --
--
-- 332,640 -- -- -- (332,640) --
--
-- 42,640 -- -- -- (42,640) --
</Table>
F-50
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
PRO FORMA SCHEDULE OF INVESTMENTS
MINIMUM NEW FUND ELECTION SCENARIO
NOVEMBER 30, 2002
(UNAUDITED)
<Table>
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT PAR PRO FORMA
PAR PAR PAR PAR PAR ADJUSTMENTS (A) PAR DESCRIPTION
- --- ----------- ------------ ------------- ----------- --------------- ------------ -----------------------------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO PRO FORMA TOTAL NET ASSETS)
$ -- $ 11,700 $ -- $ -- $ -- $ (11,700) $ -- Equity Residential Properties,
Series L
-- 24,800 5,000 5,000 5,000 (39,253) 547 New Plan Excel Realty Trust,
Series B
-- 15,900 -- -- -- (15,900) -- Prologis Trust, Series D
-- 9,400 -- -- -- (9,400) -- Prologis Trust, Series E
TOTAL PREFERRED STOCK
RELATED PARTY MONEY MARKET
FUND (E) (0.79%)
-- 4,537,937 2,783,837 3,166,802 2,035,772 (12,120,406) 403,942 First American Prime Obligations
Fund
TOTAL INVESTMENTS
<Caption>
NEW AMERICAN AMERICAN AMERICAN AMERICAN NEW FUND
FUND NEW FUND STRATEGIC STRATEGIC II STRATEGIC III SELECT VALUE PRO FORMA
PAR VALUE VALUE VALUE VALUE VALUE ADJUSTMENTS (A) VALUE
- --- --------- ------------ ------------- ------------- ------------ --------------- -----------
$ --
$ -- $ 289,926 $ -- $ -- $ -- $ (289,926) $ --
--
-- 631,408 127,300 127,300 127,300 (999,825) 13,483
-- -- 403,542 -- -- -- (403,542) --
-- -- 239,888 -- -- -- (239,888) --
-------- ----------- ------------ ------------ ------------ ------------- -----------
-- 4,070,933 795,699 795,699 795,698 (6,276,429) 181,600
-------- ----------- ------------ ------------ ------------ ------------- -----------
--
-- 4,537,937 2,783,837 3,166,802 2,035,772 (12,130,861) 393,487
-------- ----------- ------------ ------------ ------------ ------------- -----------
$ $69,656,374 $289,064,818 $359,239,604 $171,568,656 $(823,757,644) $65,771,808
======== =========== ============ ============ ============ ============= ===========
</Table>
(SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS)
F-51
<Page>
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
MINIMUM NEW FUND ELECTION SCENARIO
ADJUSTMENTS TO PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
A. Represents allocation of Existing Fund's assets between First American and
the New Fund based on the percentage of shareholders electing to receive
shares of the New Fund and based on the asset allocation methodology
described in note (a) below.
B. Represents pro rata allocation of non-investment assets and liabilities to
First American as determined based on the percentage of shareholders
electing to receive shares of the New Fund and the asset allocation
methodology described in note (a).
C. Represents new shares issued, net of retired shares of the Existing Funds.
D. Represents pro rata share of financial and advisory, registration and
professional fees associated with the merger transaction of approximately
$233,352 that would be paid and would reduce the pro forma cash balance.
E. Shares outstanding calculated based on a $10.00 net asset value per share.
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS
F. Represents the adjustment to eliminate the income and expenses which are
attributable to First American based on the percentage of shareholders
electing to receive shares of the New Fund. In determining the allocation
of the percentage of shareholders electing to participate in the New Fund,
certain fixed costs have been eliminated.
G. Represents the adjustment to eliminate the financial and advisory,
registration and professional fees associated with the merger transaction
that would have been paid by the Existing Funds prior to the transaction.
<Table>
Registration fees $ 528,252
Directors' fees 82,764
Audit and legal fees 1,333,739
Financial advisory and accounting fees 1,095,885
</Table>
ADJUSTMENTS TO PRO FORMA SCHEDULE OF INVESTMENTS
(a) Represents allocation of Existing Fund's assets between First American and
the New Fund based on the percentage of shareholders electing to receive
shares of the New Fund and determined based on the following asset
allocation methodology:
ASSET ALLOCATION METHODOLOGY--MULTIFAMILY, COMMERCIAL AND CORPORATE NOTE
PORTFOLIO.
The existing loans will be divided into two pools, with each pool
established in order to have the following similar characteristics:
1) Income as measured by the effective interest rate (net coupon rate
divided by the purchase price), then weighted by current loan balance;
2) Credit risk (calculated using a debt service coverage ratio to assess
the property's cash flows), weighted by current loan balance;
3) Leverage against the value of the underlying real estate (measured using
a current weighted average loan-to-value ratio);
4) Loan term as measured by the weighted average remaining loan term;
F-52
<Page>
5) Refinance risk based on whether the loan has a yield maintenance
provision or not;
6) Lien position based on a ratio of subordinate debt to senior debt;
7) Property type based on a ratio of multifamily loan to commercial loan
types;
8) Interest rate type based on a ratio of adjustable rate loans to fixed
rate loans; and
9) Interest calculation method based on a ratio of actual/360 calculation
to 30/360 calculation.
In addition, the properties on which the Existing Fund owns more than one
loan or which are cross-collateralized will be allocated to only one entity.
ASSET ALLOCATION METHODOLOGY--SINGLE FAMILY
All investments collateralized by single family residential properties
(whole loans, participations, subordinate bonds, mortgage servicing rights,
etc.) other than mortgage-backed securities will be allocated to the New
Fund.
ASSET ALLOCATION METHODOLOGY--OTHER
Any other holdings, including but not limited to, cash, agencies and REIT
preferred stocks will be allocated on a pro rata basis between First
American and the New Fund in order for the total assets to be allocated to
the respective entities based on the percentage of shareholders electing to
receive New Fund shares and percentage receiving First American shares. This
allocation will compensate First American for not receiving any allocation
of single-family loans.
ADJUSTMENTS TO ALLOCATIONS TO COMPLY WITH REGULATIONS
Further adjustments will be made to ensure that the New Fund and First
American are in compliance with the asset holding, leverage and income
regulations associated with RICs and REITs.
(b) Interest rates on commercial and multifamily loans are the rates in effect
on November 30, 2002. Interest rates and maturity dates disclosed on single
family loans represent the weighted average coupon and weighted average
maturity for the underlying mortgage loans as of November 30, 2002.
(c) Commercial and multifamily loans are described by the name of the mortgaged
property. Pools of single family loans are described by the name of the
institution from which the loans were purchased.
(d) Securities purchased as part of a private placement which have not been
registered with the Securities and Exchange Commission under the Securities
Act of 1933 are considered to be illiquid. On November 30, 2002, the total
market value of these investments was $62,771,719 or 125.54% of total net
assets.
(e) This money market fund is advised by USBAM, which also serves as advisor to
the Existing Funds.
F-53
<Page>
SELECTED FINANCIAL INFORMATION FOR OTHER COMBINATION SCENARIOS
Within the range of the maximum and minimum New Fund election scenarios
(described above) are many other possible combination scenarios based on the
number of Existing Funds approving the merger and the percentage of shareholders
electing to receive shares of the New Fund. The pro forma financial information
reflects the allocation of the assets and liabilities of the Existing Funds in
accordance with guidelines outlined in "THE MERGER--The Merger
Agreement--Transactions Relating to New Fund Option." The completion of the New
Fund Option is conditioned upon a number of conditions, including shareholders
of the Existing Funds holding shares representing at least $50.0 million in net
asset value electing to receive the New Fund shares. The following is selected
financial information for certain other possible combination scenarios assuming
that approximately 49% of shareholders elect to receive shares of the New Fund:
<Table>
<Caption>
PRO FORMA AS OF
NOVEMBER 30, 2002
----------------------------------
SHARES NET ASSET
SCENARIO NET ASSETS OUTSTANDING VALUE
- -------------------------------------------------------------------------------------- ---------- ----------- ---------
(IN MILLIONS) (PER
SHARE)
First American American Strategic American Strategic II American Select $199.2 $19.9 $10.00
First American American Strategic American Strategic II American Strategic III $260.0 $26.0 $10.00
First American American Strategic American Strategic III American Select $227.8 $22.8 $10.00
First American American Strategic II American Strategic III American Select $304.3 $30.4 $10.00
First American American Strategic II American Strategic III $233.9 $23.4 $10.00
First American American Strategic III American Select $200.6 $20.1 $10.00
<Caption>
PRO FORMA FOR
THE YEAR ENDED
NOVEMBER 30, 2002
------------------------------------------------------
RATIO OF
EXPENSES,
RATIO OF NET INCLUDING
NET INCREASE IN INVESTMENT INTEREST EXPENSE,
NET ASSETS FROM INCOME TO AVERAGE TO
OPERATIONS NET ASSETS AVERAGE NET ASSETS
- -------------- --------------- ----------------- ------------------
(IN MILLIONS)
First American $ 18.1 8.41% 2.72%
First American $ 22.5 8.41% 2.73%
First American $ 20.3 8.43% 2.68%
First American $ 27.2 8.50% 2.71%
First American $ 20.3 8.48% 2.73%
First American $ 18.2 8.52% 2.68%
</Table>
Following is selected financial information for certain other possible
scenarios assuming that approximately 25% of Existing Fund shareholders elect to
receive New Fund shares:
<Table>
<Caption>
SCENARIO
- -------------------------------------------------------------------------------------------------------
First American American Strategic American Strategic II American Strategic III American Select
First American American Strategic American Strategic II American Strategic III
First American American Strategic American Strategic III American Select
First American American Strategic American Strategic II American Select
First American American Strategic II American Strategic III American Select
First American American Strategic American Strategic III
First American American Strategic II American Strategic III
First American American Strategic II American Select
First American American Strategic III American Select
<Caption>
PRO FORMA FOR
THE YEAR ENDED
NOVEMBER 30, 2002
------------------------------------------
RATIO OF
PRO FORMA AS OF EXPENSES,
NOVEMBER 30, 2002 RATIO OF NET INCLUDING
--------------------------- INVESTMENT INTEREST
NET NET INCREASE IN INCOME EXPENSE, TO
NET SHARES ASSET NET ASSETS FROM TO AVERAGE AVERAGE
ASSETS OUTSTANDING VALUE OPERATIONS NET ASSETS NET ASSETS
- -------------- ------ ----------- ------ --------------- ------------ -----------
(IN MILLIONS) (PER (IN MILLIONS)
SHARE)
First American $168.6 $16.9 $10.00 $ 15.0 8.45% 2.71%
First American $132.7 $13.3 $10.00 $ 11.5 8.41% 2.73%
First American $115.7 $11.6 $10.00 $ 10.4 8.43% 2.68%
First American $101.6 $10.2 $10.00 $ 9.2 8.42% 2.72%
First American $155.2 $15.5 $10.00 $ 13.9 8.51% 2.71%
First American $ 79.8 $ 7.8 $10.00 $ 6.8 8.37% 2.70%
First American $119.3 $11.9 $10.00 $ 10.4 8.49% 2.73%
First American $ 88.3 $ 8.8 $10.00 $ 8.1 8.52% 2.73%
First American $102.4 $10.2 $10.00 $ 9.3 8.53% 2.68%
</Table>
F-54
<Page>
APPENDICES
<Table>
Appendix A--Amended and Restated Agreement and
Plan of Reorganization and Amendment Thereto A-1
Appendix B--Plan of Merger B-1
Appendix C-1--Fairness Opinion of Friedman,
Billings & Co. To American Strategic Income
Portfolio Inc. C-1-1
Appendix C-2--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Strategic
Income Portfolio Inc.--II C-2-1
Appendix C-3--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Strategic
Income Portfolio Inc.--III C-3-1
Appendix C-4--Fairness Opinion of Friedman,
Billings, Ramsey & Co. To American Select
Portfolio Inc. C-4-1
Appendix D--Sections 302A.471 & 302A.473 of the
Minnesota Business Corporation Act D-1
Appendix E--Investment Policies of the Existing
Funds and the New Fund E-1
</Table>
<Page>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF NOVEMBER 21, 2002
AMONG
AMERICAN STRATEGIC INCOME PORTFOLIO INC.,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III,
AMERICAN SELECT PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
A-1
<Page>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
AMERICAN STRATEGIC INCOME PORTFOLIO INC.,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III,
AMERICAN SELECT PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
A-2
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
---------
ARTICLE I THE MERGER.............................. A-6
Section 1.1 The Merger.......................... A-6
Section 1.2 Closing............................. A-7
Section 1.3 Effective Date...................... A-7
Section 1.4 Effects of the Merger............... A-7
Section 1.5 Organizational Documents............ A-7
Section 1.6 Officers and Directors.............. A-7
Section 1.7 Asset Transfer...................... A-7
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF
CERTIFICATES..................................... A-8
Section 2.1 Conversion of Securities............ A-8
Section 2.2 New Fund Elections.................. A-9
Section 2.3 Exchange of Certificates............ A-10
ARTICLE III REPRESENTATIONS AND WARRANTIES........ A-14
Section 3.1 Representations and Warranties of
the Funds..................................... A-14
Section 3.2 Representations and Warranties of
the Company................................... A-17
Section 3.3 Representations and Warranties of
the New Fund.................................. A-19
ARTICLE IV COVENANTS.............................. A-21
Section 4.1 Conduct of Business by the Funds.... A-21
Section 4.2 Other Actions....................... A-21
Section 4.3 Conduct of Business by the
Company....................................... A-22
Section 4.4 Other Actions of the Company........ A-22
Section 4.5 New Fund Covenants and Actions...... A-22
ARTICLE V ADDITIONAL COVENANTS.................... A-23
Section 5.1 Preparation of the Registration
Statements and the Proxy Statement/Prospectus;
Exemptive Order...................... A-23
Section 5.2 Best Efforts; Notification.......... A-24
Section 5.3 Public Announcements................ A-24
Section 5.4 Indemnification From and After the
Effective Time................................ A-25
ARTICLE VI CONDITIONS PRECEDENT................... A-26
Section 6.1 Conditions Precedent................ A-26
Section 6.2 Additional Conditions to Obligations
of the Funds.................................. A-27
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER..... A-28
Section 7.1 Termination......................... A-28
Section 7.2 Expenses............................ A-28
Section 7.3 Effect of Termination............... A-29
Section 7.4 Amendment........................... A-29
Section 7.5 Waiver/Approvals.................... A-29
ARTICLE VIII GENERAL PROVISIONS................... A-29
Section 8.1 Non-survival of Representations and
Warranties.................................... A-29
Section 8.2 Notices............................. A-29
Section 8.3 Interpretation...................... A-30
Section 8.4 Counterparts........................ A-30
Section 8.5 Entire Agreement; No Third-Party
Beneficiaries................................. A-30
Section 8.6 Governing Law....................... A-30
Section 8.7 Assignment.......................... A-30
Section 8.8 Enforcement......................... A-30
ARTICLE IX CERTAIN DEFINITIONS.................... A-30
Section 9.1 Certain Definitions................. A-30
</Table>
EXHIBITS
Exhibit A -- Plan of Merger
Exhibit B -- Articles of Incorporation of the Surviving Corporation
Exhibit C -- Bylaws of the Surviving Corporation
Exhibit D -- REIT Advisory Agreement
Exhibit E -- New Fund Directors
Exhibit F -- Asset Transfer Allocation Procedures
A-3
<Page>
DEFINED TERMS
<Table>
Affiliate......................................... 32
AMEX.............................................. 9
Approving Funds................................... 32
Articles of Merger................................ 2
ASP............................................... 1
ASP Stock......................................... 3
BSP............................................... 1
BSP Stock......................................... 3
Book-Entry Shares................................. 5
ByLaws............................................ 2
Cancelable Shares................................. 3
Certificates...................................... 5
Charter........................................... 2
Closing........................................... 2
Closing Date...................................... 2
Code.............................................. 1
Company........................................... 1
Company Common Stock.............................. 1
Company Material Adverse Effect................... 16
CSP............................................... 1
CSP Stock......................................... 3
Dissenting Shares................................. 10
Effective Date.................................... 2
Effective Time.................................... 2
Election Deadline................................. 6
Excess Shares..................................... 9
Exchange Act...................................... 13
Exchange Agent.................................... 7
Exchange Fund..................................... 7
Exchange Ratio.................................... 4
Exchange Trust.................................... 9
Exchanged Shares.................................. 5
Exemptive Order................................... 13
Financial Consultant.............................. 14
Financial Statement Date.......................... 13
Form of Election.................................. 5
Funds............................................. 1
Fund Board........................................ 1
Fund Indemnified Liabilities...................... 25
Fund Material Adverse Effect...................... 11
Funds Board....................................... 1
Fund SEC Documents................................ 13
Fund Shareholder Meetings......................... 32
Fund Stock........................................ 3
GAAP.............................................. 13
Governmental Entity............................... 12
Indebtedness...................................... 15
Indemnified Parties............................... 25
Investment Act.................................... 13
Laws.............................................. 12
Lien.............................................. 12
</Table>
A-4
<Page>
<Table>
MBCA.............................................. 2
MGCL.............................................. 2
Merger............................................ 1
Merger Consideration.............................. 3
Merger Plan....................................... 2
Merger Shares..................................... 3
NYSE.............................................. 9
Net Assets........................................ 4
New Fund.......................................... 1
New Fund Election................................. 4
New Fund Election Shares.......................... 5
New Fund Excess Shares............................ 9
New Fund Exchange Trust........................... 10
New Fund Proration Factor......................... 5
New Fund Share Maximum............................ 4
New Fund Shares................................... 3
Non-Electing Shares............................... 5
Participating Funds............................... 32
Person............................................ 32
Proxy Statement/Prospectus........................ 12
Registration Statement............................ 13
REIT.............................................. 1
Representative.................................... 5
RIC............................................... 15
SEC............................................... 12
Securities Act.................................... 13
Shareholder Approvals............................. 12
SLA............................................... 1
SLA Stock......................................... 3
Special Committee................................. 32
Surviving Corporation............................. 2
</Table>
A-5
<Page>
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"),
dated as of November 21, 2002, among FIRST AMERICAN STRATEGIC REAL ESTATE
PORTFOLIO INC., a Maryland corporation (the "Company"), AMERICAN STRATEGIC
INCOME PORTFOLIO INC., a Minnesota corporation ("ASP"), AMERICAN STRATEGIC
INCOME PORTFOLIO INC.-II, a Minnesota corporation ("BSP"), AMERICAN STRATEGIC
INCOME PORTFOLIO INC.-III, a Minnesota corporation ("CSP"), and AMERICAN SELECT
PORTFOLIO INC., a Minnesota corporation ("SLA" and together with ASP, BSP and
CSP, the "Funds"), and FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC., a
Minnesota corporation (the "New Fund").
RECITALS
WHEREAS, certain terms used herein shall have the meanings assigned to them
in Article X of this Agreement;
WHEREAS, the Board of Directors and stockholder of the Company have
determined that it is advisable and in the best interest of the Company and its
stockholder to proceed with the strategic business combination involving the
parties hereto on the terms described in this Agreement, pursuant to which each
of the Funds will merge with the Company, the Company will be the surviving
corporation in such merger and each outstanding share of common stock of the
Funds will be converted into the right to receive common stock, par value $0.01
per share, of the Company (the "Company Common Stock") and/or New Fund Shares
(as defined in Section 1.7) as provided herein (the "Merger");
WHEREAS, the Board of Directors of each of the Funds (each a "Fund Board"
and together, the "Funds Board") has determined that it is advisable and in the
best interest of the respective Fund and its respective shareholders to proceed
with the Merger and the other transactions contemplated hereby, including the
Asset Transfers (as defined in Section 1.7);
WHEREAS, the Board of Directors and shareholder of the New Fund have
determined that it is advisable and in the best interest of the New Fund and its
shareholder to proceed with the Asset Transfers;
WHEREAS, the Company, as the surviving corporation in the Merger, intends
that following the Merger it shall be subject to taxation as a real estate
investment trust (a "REIT") within the meaning of the Internal Revenue Code of
1986, as amended (the "Code");
WHEREAS, for Federal income tax purposes, the parties intend that the Merger
qualify as reorganization within the meaning of Section 368(a) of the Code.
WHEREAS, certain of the parties hereto originally entered into an Agreement
and Plan of Merger dated as of March 20, 2001, as amended by the First Amendment
to Agreement and Plan of Reorganization dated as of June 5, 2002 (as so amended,
the "Original Agreement"); and
WHEREAS, the parties hereto desire to amend and restate in its entirety the
Original Agreement.
NOW, THEREFORE, in consideration of the representations and warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement and the Plan of Merger attached hereto as Exhibit A (the
"Merger Plan"), (i) in accordance with the Maryland General Corporation Law (the
"MGCL") and the Minnesota Business Corporation Act (the "MBCA"), ASP, BSP, CSP
and SLA shall each be merged with and into the Company at the Effective Time.
Following the Merger, the separate existence of ASP, BSP, CSP and SLA shall
cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of ASP, BSP, CSP and SLA in accordance with the MGCL
A-6
<Page>
and MBCA. Prior to any filing as required under Section 1.3, the Merger Plan
shall be automatically revised to include as constituent corporations only those
Funds that constitute Participating Funds.
Section 1.2 CLOSING. The closing of the Merger (the "Closing") will take
place at 9:00 a.m., Minneapolis time, on a date to be specified by the parties,
which shall be no later than the second business day after satisfaction or
waiver of the conditions set forth in Article VI (other than those conditions
that by their nature are to be fulfilled at the Closing, but subject to the
fulfillment or waiver of those conditions), at the offices of Faegre & Benson
LLP, 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota
55402, unless another date or place is agreed to in writing by the Funds (the
"Closing Date").
Section 1.3 EFFECTIVE DATE. As soon as practicable following the Closing,
the parties shall file the Merger Plan, articles of merger, certificate of
merger or other appropriate documents for the merger of the Funds with and into
the Company executed in accordance with the MGCL and MBCA (collectively, the
"Articles of Merger") and shall make all other filings or recordings required
under the MGCL and the MBCA to effect the Merger. The Merger shall become
effective at such time as the Articles of Merger have been duly filed with the
Department of Assessments and Taxation of the State of Maryland and the Office
of the Secretary of State of the State of Minnesota, or at such other time as
the parties shall specify in the Articles of Merger (the time and the date of
Merger becomes effective being the "Effective Time" and the "Effective Date,"
respectively), it being understood that the parties shall cause the Effective
Date to be the Closing Date.
Section 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 1.1, the Merger Plan, and in the MGCL and the MBCA, as
appropriate.
Section 1.5 ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation of the
Company as in effect immediately prior to the Effective Time, the form of which
is attached hereto as Exhibit B, shall be the Articles of Incorporation of the
Surviving Corporation (the "Charter"), until duly amended as provided therein or
by applicable law. The bylaws of the Company as in effect immediately prior to
the Effective Time, the form of which is attached hereto as Exhibit C, shall be
the bylaws of the Surviving Corporation (the "ByLaws"), until duly amended as
provided therein or by applicable law.
Section 1.6 OFFICERS AND DIRECTORS. The officers of the Company at the
Effective Time shall continue to be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the MGCL,
the Charter and the ByLaws. The Board of Directors of the Surviving Corporation
immediately following the Effective Time shall be those persons hereafter
identified in writing by the Company and not objected to by the Funds.
Section 1.7 ASSET TRANSFERS. Upon the terms and subject to the conditions
set forth in this Agreement, immediately prior to the Effective Time, each
Participating Fund will transfer assets and liabilities of such Fund to the New
Fund in exchange for shares of common stock, par value $.01 per share ("New Fund
Shares"), of the New Fund (the "Asset Transfers"). The amount of Net Assets
transferred by each Participating Fund will be determined by multiplying the
total Net Assets of such Fund by a fraction, the numerator of which is the
number of New Fund Election Shares to be converted into New Fund Shares (as
determined in Article II, including any applicable proration pursuant to
Section 2.2(c)) and the denominator of which is the total number of shares of
Fund Stock of such Fund outstanding immediately prior to the Effective Time
(excluding Cancelable Shares). The specific assets and liabilities transferred
by each Participating Fund to the New Fund in exchange for New Fund Shares will
be determined as set forth in Section 4.5. In exchange for such assets and
liabilities, the transferring Participating Fund shall receive from New Fund
that number of New Fund Shares equal to the Net Assets transferred by such Fund
divided by $10, rounded to the nearest whole share.
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ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
Section 2.1 CONVERSION OF SECURITIES. At the Effective Time, by virtue of
the Merger and without any action on the part of the Company, the Funds or the
holders of any of the following shares of capital stock:
(a) FUND STOCK. Subject to the other provisions of this Section 2.1 and to
Sections 2.2 and 2.3:
(i) each share of common stock, par value $.01 per share, of ASP ("ASP
Stock"), each share of common stock, par value $.01 per share, of BSP ("BSP
Stock"), each share of common stock, par value $.01 per share, of CSP ("CSP
Stock"), and each share of common stock, par value $.01 per share, of SLA ("SLA
Stock", and together with ASP Stock, BSP Stock and CSP Stock, the "Fund Stock")
issued and outstanding immediately prior to the Effective Time (excluding any
shares of Fund Stock held by the Company or any of the Funds immediately prior
to the Merger (the "Cancelable Shares") and Dissenting Shares (as defined in
Section 2.3(i))) shall be converted into the right to receive (A) that number of
shares of Company Common Stock equal to the Exchange Ratio (as calculated in
accordance with Section 2.1(c)), or (B) that number of New Fund Shares equal to
the Exchange Ratio, or (C) a combination of shares of Company Common Stock and
New Fund Shares, determined in accordance with this Section 2.1 (the "Merger
Consideration"); provided, however, that notwithstanding any other provision
hereof, only shares of Fund Stock of Participating Funds shall be subject to the
conversion and other terms of this Section 2.1 and Sections 2.2 and 2.3 (such
shares of Fund Stock of Participating Funds but excluding Cancelable Shares and
Dissenting Shares are defined as the "Merger Shares"). At the Effective Time,
all Merger Shares shall no longer be outstanding and automatically shall be
cancelled and cease to exist, and each certificate previously evidencing any
such shares shall thereafter represent solely the right to receive the Merger
Consideration. The holders of certificates previously evidencing the Merger
Shares outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to Merger Shares except as otherwise provided herein, in
the Merger Plan or by the MBCA or the MGCL. Such certificates previously
evidencing Merger Shares shall be exchanged for the Merger Consideration,
without interest, in accordance with the allocation procedures of this
Article II and upon the surrender of such certificates in accordance with the
provisions of Sections 2.2 and 2.3;
(ii) each Cancelable Share shall automatically be cancelled and cease to
exist, and no Merger Consideration or other consideration shall be paid or
payable in respect of such shares;
(iii) each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time shall automatically be cancelled and cease to exist,
and no Merger Consideration or other consideration shall be paid or payable in
respect of such shares; and
(iv) subject to the allocation and election procedures set forth in
Section 2.2, each record holder of Merger Shares outstanding immediately prior
to the Election Deadline will be entitled with respect to the Merger
Consideration to receive New Fund Shares for all, but not less than all, of such
shares, provided the election procedures set forth herein have been satisfied (a
"New Fund Election").
(b) CHARTER LIMITATIONS. Notwithstanding the foregoing, the parties
understand that following the Merger the rights of each stockholder of the
Company under this Section 2.1 and the Merger Plan will be subject to the
ownership limitations and other related provisions contained in the Charter.
(c) EXCHANGE RATIO. The "Exchange Ratio" for each Fund shall be determined
by (i) dividing that Fund's Net Assets by the number of shares of Fund Stock of
such Fund issued and outstanding immediately prior to the Effective Time, and
(ii) then dividing such result by $10.00. Each Fund's "Net Assets" shall be
determined as of the last business day of the week immediately preceding the
Effective Time and shall be calculated in a manner consistent with the existing
policies of the Funds, but adjusted to give effect to the expenses of the Merger
and the other transactions contemplated by this Agreement, including the Asset
Transfers, to the extent such expenses have not been accrued prior thereto and
reflected in the Net Assets.
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Section 2.2 NEW FUND ELECTIONS.
(a) NEW FUND SHARE MAXIMUM. The maximum number of shares of Fund Stock of
each Fund to be converted into the right to receive New Fund Shares in the
Merger (the "New Fund Share Maximum") shall be that number of shares, when added
to the number of Dissenting Shares of such Fund, that is equal to 49% of
(w) the number of shares of Fund Stock of such Fund issued and outstanding
immediately prior to the Effective Time less (x) the number of Cancelable Shares
of such Fund (the number of shares determined in accordance with clauses
(w) and (x) shall be deemed the "Exchanged Shares").
(b) REPRESENTATIVE HOLDERS. Holders of record of shares of Fund Stock who
hold such shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the shares
of Fund Stock held by such Representative for a particular beneficial owner.
(c) PRORATION. If, for any Fund, the aggregate number of shares covered by
New Fund Elections (the "New Fund Election Shares") exceeds the New Fund Share
Maximum, all Merger Shares not covered by New Fund Elections (the "Non-Electing
Shares") shall be converted into the right to receive Company Common Stock, and
the New Fund Election Shares shall be converted into the right to receive
Company Common Stock and New Fund Shares in the following manner:
(1) A proration factor (the "New Fund Proration Factor") for each
Fund will be determined by dividing the New Fund Share Maximum for such Fund
by the total number of New Fund Election Shares of such Fund.
(2) The number of New Fund Election Shares of such Fund covered
by New Fund Share Elections to be converted into New Fund Shares will be
determined by multiplying the New Fund Proration Factor for such Fund by the
total number of New Fund Election Shares covered by such New Fund Share
Election, rounded down to the nearest whole number (such number of shares
shall be deemed the "New Fund Proration Shares"), and each New Fund
Proration Share of such Fund shall be converted into New Fund Shares in
accordance with Section 2.1(a)(i).
(3) Each New Fund Election Share, other than those converted into
the right to receive New Fund Shares in accordance with Section 2.2(c)(2),
will be converted into the right to receive shares of Company Common Stock
(on a consistent basis among shareholders of that Fund who did make a New
Fund Election), as if such shares were not New Fund Election Shares.
(d) NO PRORATION. If, for any Fund, the aggregate number of New Fund
Election Shares is equal to or less than the New Fund Share Maximum, each New
Fund Election Share shall be converted into the right to receive New Fund
Shares, and each Non-Electing Share shall be converted into the right to receive
Company Common Stock.
(e) FORM OF ELECTION. All New Fund Elections shall be made on a form
designed for that purpose (a "Form of Election") whereby holders of Fund Stock
may elect to exchange certificates that immediately prior to the Effective Time
represented shares of Fund Stock (the "Certificates") and shares of Fund Stock
represented by book-entry ("Book-Entry Shares"). New Fund Elections shall be
made by holders of Fund Stock by mailing to the Exchange Agent a Form of
Election, which shall be in such form and have such provisions as the Funds may
reasonably specify. To be effective, a Form of Election must be properly
completed, signed and accompanied by (i) Certificates representing the shares of
Fund Stock to which such Form of Election relates, duly endorsed in blank or
otherwise in form acceptable for transfer on the books of the Fund (or by an
appropriate guarantee of delivery of such Certificates as set forth in such Form
of Election from a firm which is an "eligible guarantor institution" (as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")); provided that such Certificates are in fact delivered to the
Exchange Agent by the time set forth in such guarantee of delivery) or (ii) in
the case of Book-Entry Shares, any additional document specified in the
procedures set forth in the Form of Election. Furthermore, such holder's
election to receive New Fund Shares will have been properly made only if the
Exchange Agent has
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received the Form of Election and other required materials at its designated
office, by 5:00 p.m., Minneapolis time on the last business day prior to the
Fund Shareholder Meeting of the respective Fund (the "Election Deadline"). The
Funds will have the discretion, which they may delegate in whole or in part to
the Exchange Agent, to determine whether Forms of Election have been properly
completed, signed and submitted or revoked and to disregard immaterial defects
in Forms of Election. The decision of the Funds (or the Exchange Agent) in such
matters shall be conclusive and binding. Neither the Funds nor the Exchange
Agent will be under any obligation to notify any person of any defect in a Form
of Election submitted to the Exchange Agent. The Exchange Agent shall also make
all computations contemplated by this Section 2.2 (other than the calculation of
the Net Assets of the Funds) and all such computations shall be conclusive and
binding on the holders of Fund Stock absent manifest error. A New Fund Election
may be revoked, but only by written notice received by the Exchange Agent prior
to the Election Deadline. Upon any such revocation, unless a duly completed Form
of Election is thereafter submitted in accordance with this paragraph (e), the
Certificate or Certificates (or guarantees of delivery or Book-Entry Shares, as
appropriate) for the shares of Fund Stock to which such Form of Election relates
shall be promptly returned by the Exchange Agent to the shareholder of the Fund
submitting the same and such shares shall be deemed to be Non-Electing Shares.
(f) FAILED ELECTIONS. For the purposes hereof, a holder of Fund Stock who
does not make a valid New Fund Election prior to the Election Deadline,
including as a result of revocation, shall be deemed not to have made a New Fund
Election and such holder's shares shall be treated as Non-Electing Shares. If
the Funds or the Exchange Agent shall determine that any purported New Fund
Election was not properly made, such purported New Fund Election shall be deemed
to be of no force and effect and the shareholder making such purported New Fund
Election shall for purposes hereof be deemed not to have made a New Fund
Election.
(g) FORM DISTRIBUTIONS. The Funds and the Company, or any transfer agent or
other responsible party acting on behalf of the Funds and the Company, shall
mail the Form of Election to each person who is a holder of record of Fund Stock
on the record date for the Fund Shareholder Meetings and shall each use its best
efforts to mail the Form of Election to all persons who become holders of Fund
Stock during the period between (i) such record date and (ii) the date seven
calendar days prior to the Election Deadline and to make the Form of Election
available to all persons who become holders of Fund Stock subsequent to the date
described in clause (ii) and no later than the close of business on the business
day prior to the Election Deadline.
Section 2.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Promptly following the Effective Time, the Company
shall deposit, or shall cause to be deposited, with a bank or trust company
organized under the laws of, and having an office in, the United States or any
state thereof and designated by the Funds (the "Exchange Agent"), for the
benefit of the holders of shares of Fund Stock, for exchange in accordance with
this Article II, through the Exchange Agent, (i) certificates evidencing such
number of shares of Company Common Stock necessary to make all exchanges
pursuant to Section 2.3(b), and (ii) certificates evidencing all New Fund Shares
held by each Fund after completion of the Asset Transfers (such certificates for
shares of Company Common Stock and New Fund Stock, together with any dividends
or distributions with respect thereto, and cash received by the Exchange Agent
pursuant to Section 2.3(f), being hereinafter referred to as the "Exchange
Fund"). The Exchange Agent shall, pursuant to irrevocable instructions from the
Company, deliver the Company Common Stock, New Fund Shares and cash contemplated
to be issued pursuant to Section 2.1 and Section 2.3(f) out of the Exchange
Fund. The Exchange Fund shall not be used for any other purpose; PROVIDED,
HOWEVER, that the Exchange Fund may be invested by the Exchange Agent, pursuant
to instructions from the Company, in obligations of or guaranteed by the United
States of America or any agency thereof and backed by the full faith and credit
of the United States of America, in commercial paper obligations rated A-1 or
P-1 or better by Moody's Investors Services, Inc. or Standard & Poor's
Corporation, respectively, or in deposit accounts, certificates of deposit or
banker's acceptances of, repurchase or reverse repurchase agreements with, or
Eurodollar time deposits purchased from, commercial banks located in the United
States with capital, surplus and
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undivided profits aggregating in excess of $75 million (based on the most recent
financial statements of such bank which are then publicly available at the SEC
or otherwise); PROVIDED, FURTHER, that any such investment or resulting payment
of earnings shall not delay the receipt by holders of shares of Fund Stock of
the Merger Consideration or otherwise impair such holders' respective rights
hereunder. In the event the Exchange Fund shall realize a loss on any such
investment, the Company shall promptly thereafter deposit in such Exchange Fund
cash in an amount sufficient to enable such Exchange Fund to satisfy all
remaining obligations originally contemplated to be paid out of such Exchange
Fund. Any net profit resulting from, or interest or income produced by, such
investments shall be payable to the Company.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Company will instruct the Exchange Agent to mail to each
holder of record, as of the Effective Time, of a Certificate or Book-Entry
Shares (other than such holders who properly made an election to receive New
Fund Shares with respect to such Certificates or Book-Entry Shares in accordance
with Section 2.2), (i) a letter of transmittal and (ii) instructions for use in
effecting the surrender for cancellation of the Certificates or Book--Entry
Shares in exchange for certificates evidencing shares of Company Common Stock.
Upon surrender of a Certificate or Book-Entry Shares for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, and such
other customary documents as may be required pursuant to such instructions, the
holder of such Certificate or Book-Entry Shares shall be entitled to receive in
exchange therefore the Merger Consideration and the Certificate or Book-Entry
Shares so surrendered shall forthwith be cancelled. Subject to Section 2.3(h),
under no circumstances will any holder of a Certificate or Book--Entry Share be
entitled to receive any part of the Merger Consideration until such holder shall
have surrendered such Certificate or, in the case of Book-Entry Shares, the
surrender of such shares. In the event of a transfer of ownership of shares of
Fund Stock which is not registered in the transfer records of the Funds, the
Merger Consideration may be paid in accordance with this Article II to the
transferee if the Certificate evidencing such shares of Fund Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 2.3 (but
subject to Section 2.3(i)), each Certificate and each Book-Entry Share shall be
deemed at any time after the Effective Time to evidence only the right to
receive upon such surrender the Merger Consideration. No interest shall be paid
on the Merger Consideration.
(c) RECORD DATES; DISTRIBUTIONS WITH RESPECT TO UNCONVERTED FUND STOCK. No
dividends or other distributions with respect to Company Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate or Book-Entry Share with respect to the Company Common
Stock represented thereby until the surrender of such Certificate or Book-Entry
Shares in accordance with this Article II. Subject to the effect of applicable
abandoned property, escheat or similar laws, following surrender of any such
Certificate or Book-Entry Shares there shall be paid to the holder of such
Certificate or Book-Entry Shares, without interest, (A) at the time of such
surrender, the amount of any cash payable in lieu of any fractional share of
Company Common Stock to which such holder is entitled pursuant to
Section 2.3(f) and (B) if such Certificate or Book-Entry Shares are exchangeable
for one or more whole shares of Company Common Stock, (x) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to such whole shares
of Company Common Stock and (y) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of Company Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN FUND STOCK. All Merger Consideration
paid upon the surrender of Certificates and Book-Entry Shares in accordance with
the terms of this Article II shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Fund Stock theretofore represented
by such Certificates or Book-Entry Shares, subject, however, to the obligation
of the Company to pay, without interest, any dividends or make any other
distributions with a record date
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prior to the Effective Time which may have been declared or made by the Funds on
such Fund Stock in accordance with the terms of this Agreement or prior to the
date of this Agreement and which remain unpaid at the Effective Time and have
not been paid prior to such surrender, and there shall be no further
registration of transfers on the transfer books of the Funds of the shares of
Fund Stock which are outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates or Book-Entry Shares are properly
presented to the Company, they shall be cancelled and exchanged as provided in
this Article II.
(e) NO LIABILITY. None of the Company, the Funds, New Fund or the Exchange
Agent shall be liable to any person in respect of any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. Any portion of the Merger Consideration delivered to the
Exchange Agent pursuant to this Agreement that remains unclaimed for six months
after the Effective Time shall be redelivered by the Exchange Agent to the
Company, upon demand, and any holders of Certificates or Book-Entry Shares who
have not theretofore complied with Section 2.3(b) shall thereafter look only to
the Company for delivery of the Merger Consideration, subject to applicable
abandoned property, escheat or similar laws.
(f) NO FRACTIONAL SHARES.
(i) No certificates or script representing fractional shares of Company
Common Stock shall be issued upon the surrender for exchange of Certificates or
Book-Entry Shares, and such fractional share interests will not entitle the
owner thereof to vote, to receive dividends or to any other rights of a
stockholder of the Company.
(ii) Notwithstanding any other provision of this Agreement, each holder of
shares of Fund Stock exchanged in the Merger who would otherwise have been
entitled to receive a fraction of a share of Company Common Stock (after taking
into account all Certificates and/or Book-Entry Shares of each Fund delivered by
such holder) shall receive, from the Exchange Agent in accordance with the
provisions of this Section 2.3(f), a cash payment in lieu of such fractional
share of Company Common Stock representing such holder's proportionate interest,
if any, in the net proceeds from the sale by the Exchange Agent in one or more
transactions (which sale transactions shall be made at such times, in such
manner and on such terms as the Exchange Agent shall determine in its reasonable
discretion) on behalf of all such holders of the aggregate of the fractional
shares of Company Common Stock which would otherwise have been issued (the
"Excess Shares"). The sale of the Excess Shares by the Exchange Agent shall be
executed on the New York Stock Exchange (the "NYSE") through one or more member
firms of the NYSE and shall be executed in round lots to the extent practicable.
Until the net proceeds of such sale or sales have been distributed to the
holders of Certificates and Book-Entry Shares, the Exchange Agent will hold such
proceeds in trust (the "Exchange Trust") for such holders. The Company shall pay
all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with this sale of the Excess Shares. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of
Certificates and Book-Entry Shares in lieu of any fractional shares of Company
Common Stock, the Exchange Agent shall deliver such amounts to such holders of
Certificates and Book-Entry Shares without interest.
(iii) Notwithstanding any other provision of this Agreement, each holder of
shares of Fund Stock exchanged in the Merger who would otherwise have been
entitled to receive a fraction of a New Fund Share (after taking into account
all Certificates and/or Book-Entry Shares of each Fund delivered by such holder)
shall receive, from the Exchange Agent in accordance with the provisions of this
Section 2.3(f), a cash payment in lieu of such fractional New Fund Share
representing such holder's proportionate interest, if any, in the net proceeds
from the sale by the Exchange Agent in one or more transactions (which sale
transactions shall be made at such times, in such manner and on such terms as
the Exchange Agent shall determine in its reasonable discretion) on behalf of
all such holders of the aggregate of the fractional New Fund Shares which would
otherwise have been issued (the "New Fund Excess Shares"). The sale of the New
Fund Excess Shares by the Exchange Agent shall be executed on
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the American Stock Exchange ("AMEX") through one or more member firms of the
AMEX and shall be executed in round lots to the extent practicable. Until the
net proceeds of such sale or sales have been distributed to the holders of
Certificates and Book-Entry Shares, the Exchange Agent will hold such proceeds
in trust (the "New Fund Exchange Trust") for such holders. The Company shall pay
all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with this sale of the New Fund Excess Shares. As soon as practicable
after the determination of the amount of cash, if any, to be paid to holders of
Certificates in lieu of any fractional New Fund Shares, the Exchange Agent shall
deliver such amounts to such holders of Certificates and Book-Entry Shares
without interest.
(g) WITHHOLDING RIGHTS. The Company or the Exchange Agent shall be
entitled to deduct and withhold from the Merger Consideration otherwise payable
pursuant to this Agreement to any holder of shares of Fund Stock such amounts as
the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Fund Stock,
in respect of which such deduction and withholding was made by the Company or
the Exchange Agent.
(h) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such persons of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it and the Exchange Agent with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration payable, and unpaid dividends and
distribution on shares of Company Common Stock and/or New Fund Shares
deliverable in respect thereof pursuant to this Agreement.
(i) DISSENTING SHARES.
(i) Notwithstanding any provision of this Agreement to the contrary, any
issued and outstanding shares of Fund Stock which are held by shareholders of a
Fund who shall have not voted in favor of the Merger and who shall have filed
with such Fund, prior to the taking of the vote of the shareholders of such Fund
on the Merger, a written notice of intent to demand payment of the fair value
for such shares of Fund Stock and, after the taking of such vote, shall make
written demand for payment of the fair value of such shares in accordance with
and otherwise comply with Section 302A.473 of the MBCA (collectively, the
"Dissenting Shares") shall not be converted into or represent the right to
receive the Merger Consideration. Such shareholders shall be entitled to receive
payment of the fair value of such Dissenting Shares held by them in accordance
with the provisions of Section 302A.473 of the MBCA, except that all Dissenting
Shares held by shareholders who shall have failed to perfect or who effectively
shall have withdrawn or lost their rights to appraisal of such shares of Company
Common Stock under Section 302A.473 of the MBCA shall thereupon be deemed to
have been converted into, as of the Effective Time, the right to receive the
Merger Consideration as if such shares were Non-Electing Shares, without any
interest thereon, upon surrender, in the manner provided in Section 2.2 and 2.3,
of the Certificate or Certificates that formerly evidenced such shares of Fund
Stock.
(ii) Each Fund shall give each other Fund prompt notice upon receipt by
such Fund, at any time prior to the Effective Time, of any notice of intent to
demand payment of the fair value of shares of Fund Stock in accordance with
Section 302A.473 of the MBCA and withdrawals of any such notice. No Fund shall,
except with the prior approval of the Funds, make any payment with respect to
any demands for the fair value of shares of Fund Stock or offer to settle or
settle any such demands.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 REPRESENTATIONS AND WARRANTIES OF THE FUNDS. Each of the Funds
represents and warrants to the other Funds, to the Company and to the New Fund
as follows; PROVIDED, HOWEVER, that for purposes of Section 3.1(b)(i) each Fund
shall only represent and warrant as to its own capitalization and for purposes
of Section 3.1(e)(ii) each Fund shall only represent and warrant as to its own
distributions:
(a) ORGANIZATION, STANDING AND POWER OF THE FUND. The Fund is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota and has the requisite corporate power and authority to
carry on its business as now being conducted. The Fund is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its businesses or the ownership of its assets makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the businesses, properties, assets,
financial conditions or results of operations of the Fund (a "Fund Material
Adverse Effect").
(b) CAPITAL STRUCTURE.
(i) The authorized capital stock of ASP consists of 1,000,000,000 shares of
ASP Stock, of which, as of the date of this Agreement, 4,230,294.34 shares are
issued and outstanding. The authorized capital stock of BSP consists of
1,000,000,000 shares of BSP Stock, of which, as of the date of this Agreement,
15,957,288.691 shares are issued and outstanding. The authorized capital stock
of CSP consists of 1,000,000,000 shares of CSP Stock, of which, as of the date
of this Agreement, 21,343,292.487 shares are issued and outstanding. The
authorized capital stock of SLA consists of 1,000,000,000 shares of SLA Stock,
of which, as of the date of this Agreement, 10,662,195.00 shares are issued and
outstanding.
(ii) All outstanding shares of Fund Stock of the Fund are validly issued,
fully paid and nonassessable and not subject to preemptive rights. There are no
bonds, debentures, notes or other indebtedness of the Fund having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which shareholders of the Fund may vote. There are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Fund is a
party or by which such entity is bound, obligating the Fund to issue, deliver or
sell, or cause to be issued, delivered or sold, additional Fund Stock, voting
securities or other ownership interests in the Fund or obligating the Fund to
issue, grant, extend or enter into any such option, warrant, call, right,
commitment, agreement, arrangement or undertaking. There are no outstanding
contractual obligations of the Fund to repurchase, redeem or otherwise acquire
any shares of Fund Stock, voting securities or other ownership interests in the
Fund or make any material investment (in the form of a loan, capital
contribution or otherwise) in any Person.
(c) AUTHORITY; NONCONTRAVENTION; CONSENTS. The Fund has the requisite
corporate power and authority to enter into this Agreement and the Merger Plan.
The Fund has the requisite corporate power and authority, subject to approval of
the Merger, the Merger Plan and any other transactions contemplated hereby,
including the Asset Transfers, by the requisite vote of the shareholders of the
Fund (the "Shareholder Approvals"), to consummate the Merger and other
transactions contemplated by this Agreement, including the Asset Transfers, and
the Merger Plan. The execution and delivery of this Agreement and the Merger
Plan by the Fund and the consummation by the Fund of the Merger and the other
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Fund, subject to the Shareholder Approvals.
Each of this Agreement and the Merger Plan has been duly executed and delivered
by the Funds and constitutes a valid and binding obligation of the Fund,
enforceable against such entity in accordance with its terms except as may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally or by general principles of equity. The execution
and delivery of this Agreement and the Merger Plan by the Fund does not, and the
consummation of the Merger and other transactions contemplated
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hereby and thereby and compliance by the Fund with the provisions of this
Agreement and the Merger Plan will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any pledge, claim, lien, charge, encumbrance or security interest of any kind
or nature whatsoever (a "Lien") upon any of the properties or assets of the Fund
under (i) the articles of incorporation or bylaws of the Fund, each as amended
or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to the Fund or its properties or assets, or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgement, order, decree, statute, law, ordinance, rule or regulation
(collectively "Laws") applicable to the Fund or its properties or assets, other
than, in the case of clause (ii) or (iii), any such conflicts, violations,
defaults, rights or Liens that individually or in the aggregate would not
(x) have a Fund Material Adverse Effect or (y) prevent the consummation of the
Merger or any other transaction contemplated hereby. No consent, approval, order
or authorization of, or registration, declaration or filing with, any federal,
state or local government or any court, administrative authority or agency (a
"Governmental Entity") is required by or with respect to the Fund in connection
with the execution and delivery of this Agreement or the Merger Plan by the Fund
or the consummation by the Fund of the Merger and other transactions
contemplated hereby and thereby, except for (i) the filing with the Securities
and Exchange Commission ("SEC") of (x) a proxy statement/prospectus (the "Proxy
Statement/Prospectus") relating to the approval by the shareholders of the Fund
of the Merger, the Merger Plan and the other transactions contemplated by this
Agreement, and a registration statement relating to the issuance of the Merger
Consideration ("Registration Statement") in which the Proxy Statement/Prospectus
will be included as a prospectus, (y) the issuance by the SEC of an order
exempting the Merger from the provisions of Section 17(a) of the Investment Act
(the "Exemptive Order") and (z) such reports under Section 13(a) and Section 14
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may
be required in connection with this Agreement and the other transactions
contemplated by this Agreement, (ii) the filing of the Articles of Merger for
the Merger with the Department of Assessments and Taxation of the State of
Maryland and the Office of the Secretary of State of the State of Minnesota, and
(iii) such other consents, approvals, orders, authorization, registrations,
declarations and filings which, if not obtained or made, would not prevent or
delay in any material respect the consummation of the Merger or any of the
transactions contemplated by this Agreement or otherwise prevent the Fund from
performing its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Fund Material Adverse Effect.
(d) SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. The Fund
has filed all required reports, schedules, forms, statement and other documents
with the SEC since January 1, 2000 (the "Fund SEC Documents"). All of the Fund
SEC Documents (other than preliminary materials), as of their respective filing
dates, complied in all material respects with all applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act and
the Investment Company Act of 1940 (the "Investment Act") and, in each case, the
rules and regulations promulgated thereunder applicable to such Fund SEC
Documents. None of the Fund SEC Documents at the time of filing contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. There is no unresolved violation, criticism or exception by any
Governmental Entity of which the Fund has received written notice with respect
to such entity or statement which, if resolved in a manner unfavorable to the
Fund, could have a Fund Material Adverse Effect. The financial statements of the
Fund included in the Fund SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of the Fund as of the
dates thereof and the results of operations and cash flows of the Fund for the
periods then ended (subject, in
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the case of interim financial statements, to normal year-end adjustments).
Except as set forth in the most recent balance sheet contained in the Fund SEC
Documents, the Fund does not have any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by GAAP to be set
forth on a balance sheet of the Fund or in the notes thereto and which,
individually or in the aggregate, would have a Fund Material Adverse Effect.
(e) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Fund
SEC Documents, since the date of the most recent financial statements included
in the Fund SEC Documents (the "Financial Statement Date") and to the date of
this Agreement, the Fund has conducted its business only in the ordinary course
and there has not been (i) any material adverse change in the business,
financial condition or results of operations of the Fund that has resulted or
would result, individually or in the aggregate, in a Fund Material Adverse
Effect, nor has there been any occurrence or circumstance that with the passage
of time would reasonably be expected to result in a Fund Material Adverse
Effect, (ii) except for regular monthly distributions with customary record and
payment date, any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Fund Stock of the Fund, (iii) any split, combination or reclassification of any
of the shares of Fund Stock of the Fund or any issuance or the authorization of
any issuance of any other securities in respect of, in lieu of or in
substitution for, or giving the right to acquire by exchange or exercise, Fund
Stock of the Fund, (iv) any damage, destruction or loss affecting the Fund,
whether or not covered by insurance, that has or would have a Fund Material
Adverse Effect or (v) any change in accounting methods, principles or practices
by the Fund materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in the Fund SEC Documents or required by a
change in GAAP.
(f) LITIGATION. Except as disclosed in the Fund SEC Documents, there is no
suit, action or proceeding pending or, to the knowledge of the Fund, threatened
against or affecting such entity that, individually or in the aggregate, could
reasonably be expected to (i) have a Fund Material Adverse Effect or
(ii) prevent the consummation of the Merger or any of the transactions
contemplated by this Agreement, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against the
Fund having, or which, insofar as reasonably can be foreseen, in the future
would have, any such effect.
(g) BROKERS; FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person, other than Friedman, Billings, Ramsey & Co. ("the
Financial Consultant"), the fees and expenses of which, as set forth in a letter
agreement between the Funds and the Financial Consultant, will be paid by the
Funds pro rata in accordance with their respective Net Assets, is entitled to
any broker's, finder's, financial advisor's or other similar fee or commission
in connection with the Merger based upon arrangements made by or on behalf of
the Fund.
(h) COMPLIANCE WITH LAWS. Except as disclosed in the SEC Documents, the
Fund has not violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgement, decree or order of any Governmental Entity
applicable to its business, properties or operations, except for violations and
failures to comply that would not, individually or in the aggregate, reasonably
be expected to result in a Fund Material Adverse Effect.
(i) CONTRACTS; DEBT INSTRUMENTS.
(i) The Fund is not in violation of or in default under, in any material
respect (nor does there exist any condition which upon the passage of time or
the giving of notice or both would cause such a violation of or default under),
any material loan or credit agreement, note, bond, mortgage, indenture, lease,
permit, concession, franchise or license, or any agreement to acquire real
property, or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound, except for violations or defaults that would not, individually
or in the aggregate, result in a Fund Material Adverse Effect.
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(ii) Except for any of the following expressly identified in the most recent
financial statements contained in the Fund SEC Documents, there are no loan or
credit agreements, notes, bonds, mortgage, indentures, and other agreements and
instruments outstanding pursuant to which the Fund is indebted in an aggregate
principal amount in excess of $1,000,000 per item or pursuant to which such
indebtedness may be incurred. For purposes of this Section 3.1(i)(ii),
"Indebtedness" shall mean, with respect to any person, without duplication,
(a) all indebtedness of such person for borrowed money, whether secured or
unsecured, (b) all obligations of such person under conditional sale or other
title retention agreement related to property purchased by such person, (c) all
capitalized lease obligations of such person, (d) all obligations of such person
under interest rate or currency hedging transactions (valued at the termination
value thereof), (e) all guarantees of such person of any such indebtedness of
any other person and (f) any agreements to provide any of the foregoing.
(j) PROPERTY AND ASSETS. The Fund has good and marketable fee simple title
to those assets set forth in its most recent report filed with the SEC on Form
N-SAR, free and clear of all Liens other than (i) any statutory Lien arising in
the ordinary course of business by operation of law with respect to a liability
that is not yet due or delinquent and (ii) any easement, restriction or minor
imperfection of title or similar Lien which individually or in the aggregate
with other such Liens does not materially impair the value of the property or
asset subject to such Lien or the use of such property or asset in the conduct
of the business of the Fund.
(k) BOOKS AND RECORDS. The books of account and other financial records of
the Fund are in all material respects true, complete and correct, have been
maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
Fund SEC Documents.
(l) REGISTRATION STATEMENT. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(m) VOTE REQUIRED. The affirmative vote of at least a majority of the
outstanding shares of Fund Stock of the Fund is the only vote of any security
holder in the Fund (under applicable law or otherwise) required to approve the
Merger, the Merger Plan and the other transactions contemplated hereby.
(n) REGULATED INVESTMENT COMPANY. The Fund is registered as a closed-end
management investment company under the 1940 Act, and its registration with the
SEC as an investment company is in full force and effect. The Fund has elected
to qualify and has qualified as a regulated investment company ("RIC") under
Part I of Subchapter M of Subtitle A, Chapter 1, of the Code, as of and since
its first taxable year; it has been a regulated investment company under such
Part of the Code at all times since the end of its first taxable year when it so
qualified.
Section 3.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Funds and to the New Fund as follows:
(a) ORGANIZATION, STANDING AND POWER OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland and has the requisite corporate power and authority to
carry on its business as currently contemplated. The Company is duly qualified
or licensed to do business and is in good standing in each jurisdiction in which
the nature of its businesses or the ownership of its assets makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the businesses, properties, assets,
financial conditions or results of operations of the Company (a "Company
Material Adverse Effect").
(b) CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock, of which, as of the date
of this Agreement, ten shares are issued and outstanding and held by U.S.
Bancorp Asset Management, Inc., the Company's sole stockholder, and
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2,000,000 shares of preferred stock, none of which are issued or outstanding.
All outstanding shares of Company Stock of the Company are validly issued, fully
paid and nonassessable and not subject to preemptive rights. The Articles of
Incorporation of the Company will be amended prior to the Effective Time to read
as set forth in Exhibit B. There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of the Company may vote. Except as set forth herein or in
connection with the Merger, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company is a party or by which such entity is bound,
obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional Company Common Stock, voting securities or other
ownership interests in the Company or obligating the Company to issue, grant,
extend or enter into any such option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any shares
of Company Common Stock, voting securities or other ownership interests in the
Company or make any material investment (in the form of a loan, capital
contribution or otherwise) in any Person.
(c) AUTHORITY; NONCONTRAVENTION; CONSENTS. The Company has the requisite
corporate power and authority to enter into this Agreement and the Merger Plan.
The Company has the requisite corporate power and authority to consummate the
Merger and other transactions contemplated by this Agreement and the Merger
Plan. The execution and delivery of this Agreement and the Merger Plan by the
Company and the consummation by the Company of the Merger and the other
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company. Each of this Agreement and the
Merger Plan has been duly executed and delivered by the Company and constitutes
a valid and binding obligation of the Company, enforceable against such entity
in accordance with its terms except as may be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors' rights generally or by
general principles of equity. The execution and delivery of this Agreement and
the Merger Plan by the Company does not, and the consummation of the Merger and
other transactions contemplated hereby and thereby and compliance by the Company
with the provisions of this Agreement and the Merger Plan will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or result
in the creation of any Lien upon any of the properties or assets of the Company
under (i) the articles of incorporation or bylaws of the Company, each as
amended or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to the Company or its properties or assets, or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any Laws applicable to the Company or its properties or assets, other than, in
the case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) have a
Company Material Adverse Effect or (y) prevent the consummation of the Merger or
any other transaction contemplated hereby. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to the Company in connection with the
execution and delivery of this Agreement or the Merger Plan by the Company or
the consummation by the Company of the Merger and other transactions
contemplated hereby and thereby, except for (i) the filing with the SEC of
(x) the Registration Statement, (y) the Exemptive Order and (z) such reports
under Section 13(a) and Section 14 of the Exchange Act, as may be required in
connection with this Agreement and the other transactions contemplated by this
Agreement, (ii) the filing of the Articles of Merger for the Merger with the
Department of Assessments and Taxation of the State of Maryland and the Office
of the Secretary of State of the State of Minnesota, and (iii) such other
consents, approvals, orders, authorization, registrations, declarations and
filings which, if not obtained or made, would not prevent or delay in any
material respect the consummation of the Merger or any of the transactions
contemplated by
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this Agreement or otherwise prevent the Company from performing its obligations
under this Agreement in any material respect or have, individually or in the
aggregate, a Company Material Adverse Effect.
(d) NO BUSINESS. The Company was incorporated on January 11, 2002 and has
not conducted any business. There is no suit, action or proceeding pending or,
to the knowledge of the Company, threatened against or affecting such entity
that, individually or in the aggregate, could reasonably be expected to
(i) have a Company Material Adverse Effect or (ii) prevent the consummation of
the Merger or any of the transactions contemplated by this Agreement, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against the Company having, or which, insofar as
reasonably can be foreseen, in the future would have, any such effect. Except
for this Agreement and the Merger Plan, the Company is not a party to any loan
or credit agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise or license, or any agreement to acquire real property, or any other
contract, agreement, arrangement or understanding. The Company has no assets or
liabilities.
(e) BROKERS; FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person will be paid by the Company, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the Merger based upon arrangements made by or on behalf of the
Company.
(f) COMPLIANCE WITH LAWS. The Company has not violated or failed to comply
with any statute, law, ordinance, regulation, rule, judgement, decree or order
of any Governmental Entity applicable to its business, properties or operations,
except for violations and failures to comply that would not, individually or in
the aggregate, reasonably be expected to result in a Company Material Adverse
Effect.
(g) REGISTRATION STATEMENT. The information furnished by the Company for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
Section 3.3 REPRESENTATIONS AND WARRANTIES OF THE NEW FUND. The New Fund
represents and warrants to the Funds and to the Company as follows:
(a) ORGANIZATION, STANDING AND POWER OF THE NEW FUND. The New Fund is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota and has the requisite corporate power and authority to
carry on its business as currently contemplated. The New Fund is duly qualified
or licensed to do business and is in good standing in each jurisdiction in which
the nature of its businesses or the ownership of its assets makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the businesses, properties, assets,
financial conditions or results of operations of the New Fund (a "New Fund
Material Adverse Effect"). The New Fund has delivered to the Funds accurate and
complete copies of the articles of incorporation and bylaws, as currently in
effect, of the New Fund.
(b) CAPITAL STRUCTURE. The authorized capital stock of the New Fund
consists of 1,000,000,000 New Fund Shares, of which, as of the date of this
Agreement, no shares are issued and outstanding. There are no bonds, debentures,
notes or other indebtedness of the New Fund having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which shareholders of the New Fund may vote. Except as set forth
herein or in connection with the Asset Transfers, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the New Fund is a party or by
which such entity is bound, obligating the New Fund to issue, deliver or sell,
or cause to be issued, delivered or sold,
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additional New Fund Shares, voting securities or other ownership interests in
the New Fund or obligating the New Fund to issue, grant, extend or enter into
any such option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There are no outstanding contractual obligations of the New Fund to
repurchase, redeem or otherwise acquire any New Fund Shares, voting securities
or other ownership interests in the New Fund or make any material investment (in
the form of a loan, capital contribution or otherwise) in any Person.
(c) AUTHORITY; NONCONTRAVENTION; CONSENTS. The New Fund has the requisite
corporate power and authority to enter into this Agreement. The New Fund has the
requisite corporate power and authority to consummate the Asset Transfers and
other transactions contemplated by this Agreement. The execution and delivery of
this Agreement by the New Fund and the consummation by the New Fund of the Asset
Transfers and the other transactions contemplated hereby have been duly
authorized by all necessary action on the part of the New Fund. This Agreement
has been duly executed and delivered by the New Fund and constitutes a valid and
binding obligation of the New Fund, enforceable against such entity in
accordance with its terms except as may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally or by
general principles of equity. The execution and delivery of this Agreement by
the New Fund does not, and the consummation of the Asset Transfers and other
transactions contemplated hereby and compliance by the New Fund with the
provisions of this Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or to loss of a material benefit under, or result in the creation of any Lien
upon any of the properties or assets of the New Fund under (i) the articles of
incorporation or bylaws of the New Fund, each as amended or supplemented to the
date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, reciprocal easement agreement, lease or other agreement, instrument,
permit, concession, franchise or license applicable to the New Fund or its
properties or assets, or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any Laws applicable to the New
Fund or its properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights or Liens that
individually or in the aggregate would not (x) have a New Fund Material Adverse
Effect or (y) prevent the consummation of the Asset Transfers or any other
transaction contemplated hereby. No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity is
required by or with respect to the New Fund in connection with the execution and
delivery of this Agreement by the New Fund or the consummation by the New Fund
of the Asset Transfers and other transactions contemplated hereby and thereby,
except for (i) the filing with the SEC of (v) the Registration Statement,
(w) the Exemptive Order, (x) a Form N-14 Registration Statement to register the
New Fund Shares to be offered in the Merger (the 'N-14 Registration Statement'),
(y) a Form N-2 Registration Statement to register the New Fund as an investment
company under Section 8(b) of the Investment Company Act (the 'N-2 Registration
Statement') and (z) such reports under Section 13(a) and Section 14 of the
Exchange Act, as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, and (ii) such other consents,
approvals, orders, authorization, registrations, declarations and filings which,
if not obtained or made, would not prevent or delay in any material respect the
consummation of the Asset Transfers or any of the transactions contemplated by
this Agreement or otherwise prevent the New Fund from performing its obligations
under this Agreement in any material respect or have, individually or in the
aggregate, a New Fund Material Adverse Effect.
(d) NO BUSINESS. The New Fund was incorporated on November 19, 2002 and
has not conducted any business. There is no suit, action or proceeding pending
or, to the knowledge of the New Fund, threatened against or affecting such
entity that, individually or in the aggregate, could reasonably be expected to
(i) have a New Fund Material Adverse Effect or (ii) prevent the consummation of
the Asset Transfers or any of the transactions contemplated by this Agreement,
nor is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the New Fund having, or which, insofar
as reasonably can be foreseen, in the future would have, any such effect. Except
for this Agreement, the New Fund is not a party to any loan or credit agreement,
note, bond,
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mortgage, indenture, lease, permit, concession, franchise or license, or any
agreement to acquire real property, or any other contract, agreement,
arrangement or understanding. The New Fund has no assets or liabilities.
(e) BROKERS; FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person will be paid by the New Fund, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the Asset Transfers or Merger based upon arrangements made by or
on behalf of the New Fund.
(f) COMPLIANCE WITH LAWS. The New Fund has not violated or failed to
comply with any statute, law, ordinance, regulation, rule, judgement, decree or
order of any Governmental Entity applicable to its business, properties or
operations, except for violations and failures to comply that would not,
individually or in the aggregate, reasonably be expected to result in a New Fund
Material Adverse Effect.
(g) REGISTRATION STATEMENT. The information furnished by the New Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
ARTICLE IV COVENANTS
Section 4.1 CONDUCT OF BUSINESS BY THE FUNDS. Except as otherwise
contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, each Fund shall carry on its respective
businesses in the usual, regular and ordinary course and in substantially the
same manner as heretofore conducted and, to the extent consistent therewith, use
commercially reasonable efforts to preserve intact its current business
organization, goodwill, and ongoing businesses and its status as a RIC within
the meaning of the Code. Without limiting the generality of the foregoing, the
following additional restrictions shall apply. During the period from the date
of this Agreement to the Effective Time, except as otherwise contemplated by
this Agreement, each Fund shall not (and shall not authorize or commit or agree
to):
(a) (i) split, combine or reclassify any shares of Fund Stock or, except
pursuant to the terms of any existing dividend reinvestment plan of the Fund,
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for Fund Stock or (ii) purchase, redeem or otherwise
acquire any shares of Fund Stock;
(b) issue, deliver or sell, or grant any option or other right, in respect
of, any Fund Stock, any other securities of the Fund or any securities
convertible into, or any rights, warrants or options to acquire, any such
securities;
(c) amend the articles of incorporation or bylaws of the Fund
(d) merge or consolidate with any Person;
(e) make any tax election (unless required by law or necessary to preserve
the Fund's status as a RIC);
(f) (i) change in any material manner any of its methods, principles or
practices of accounting, except as may be required by the SEC, applicable law or
GAAP or (ii) make or rescind any express or deemed election relating to tax
matters; or
(g) pay any distribution except regular monthly distributions.
Section 4.2 OTHER ACTIONS. None of the Funds shall take any action that
would result in (i) any of the representations and warranties of such Fund
(without giving effect to any "knowledge" qualification) set forth in this
Agreement that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties (without giving effect to any "knowledge"
qualification) that are not so
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qualified becoming untrue in any material respect or (iii) any of the conditions
to the Merger set forth in Article VI not being satisfied.
Section 4.3 CONDUCT OF BUSINESS BY THE COMPANY. Except as contemplated by
this Agreement, during the period from the date of this Agreement to the
Effective Time, the Company will not conduct any business; will not enter into
any material contracts; and will not acquire any assets or incur any
liabilities. Without limiting the generality of the foregoing, the following
additional restrictions shall apply. During the period from the date of this
Agreement to the Effective Time, except as otherwise contemplated by this
Agreement, the Company shall not (and shall not authorize or commit or agree to)
amend the articles of incorporation or bylaws of the Company.
Section 4.4 OTHER ACTIONS OF THE COMPANY. The Company shall not take any
action that would result in (i) any of the representations and warranties of the
Company (without giving effect to any "knowledge" qualification) set forth in
this Agreement that are qualified as to materiality becoming untrue, (ii) any of
such representations and warranties (without giving effect to any "knowledge"
qualification) that are not so qualified becoming untrue in any material respect
or (iii) any of the conditions to the Merger set forth in Article VI not being
satisfied.
Section 4.5 NEW FUND COVENANTS AND ACTIONS.
(a) Except as contemplated by this Agreement, during the period from the
date of this Agreement to the Effective Time, the New Fund will not conduct any
business; will not enter into any material contracts; and will not acquire any
assets or incur any liabilities. Without limiting the generality of the
foregoing, the following additional restrictions shall apply. During the period
from the date of this Agreement to the Effective Time, except as otherwise
contemplated by this Agreement, the New Fund shall not (and shall not authorize
or commit or agree to) amend the articles of incorporation or bylaws of the New
Fund.
(b) The New Fund shall not take any action that would result in (i) any of
the representations and warranties of the New Fund (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Asset Transfers set forth in Article VI not being satisfied.
(c) Prior to the Effective Time, the New Fund shall take all actions
reasonable and necessary to organize itself in the following manner:
(i) New Fund shall enter into an Advisory Agreement with US Bancorp Asset
Management substantially in the form approved by the Funds' board on November
21, 2002 (the "New Fund Advisory Agreement");
(ii) The Directors of New Fund shall be those persons listed in Exhibit E
hereto or such other persons as mutually agreed to by the Funds and the New
Fund;
(iii) The New Fund shall be a registered investment company under the
Investment Company Act; and
(iv) The investment objectives and policies, and the investment management
practices, of the New Fund shall be substantially as set forth in the draft of
the S-4 Registration Statement approved by the Funds' board on November 21,
2002.
(d) The New Fund and the Funds shall take all actions reasonable and
necessary to complete the Asset Transfers substantially in the manner described
in Section 1.7 hereof and in accordance with the asset and liability allocation
procedures and methodology set forth in Exhibit F hereto, including the
execution and delivery of appropriate bills of sale and other transfer
documents.
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ARTICLE V
ADDITIONAL COVENANTS
Section 5.1 PREPARATION OF THE REGISTRATION STATEMENTS AND THE PROXY
STATEMENT/PROSPECTUS; EXEMPTIVE ORDER.
(a) As soon as practicable following the date of this Agreement, the Funds,
the New Fund and the Company shall prepare and file with the SEC a preliminary
Registration Statement in form and substance satisfactory to each of the Funds
in which the Proxy Statement/Prospectus will be included as a prospectus. The
Company, the New Fund and each of the Funds shall use its best efforts to
(i) respond to any comments of the SEC and (ii) have the Registration Statement
declared effective under the Securities Act and the rules and regulations
promulgated thereunder as promptly as practicable after such filing and to keep
the Registration Statement effective as long as is necessary to consummate the
Merger. Each Fund shall use its best efforts to mail the Proxy
Statement/Prospectus to the holders of Fund Stock, together with the Notice of
Election, as promptly as practicable after the Registration Statement is
declared effective. Each party will notify the others promptly of the receipt of
any comments from the SEC and of any request by the SEC for amendments or
supplements to the Registration Statement or the Proxy Statement/Prospectus or
for additional information, and will supply the other Funds with copies of all
correspondence between such party or any of its representatives and the SEC with
respect to the Registration Statement or the Proxy Statement/Prospectus. The
Registration Statement and the Proxy Statement/Prospectus shall comply in all
material respects with all applicable requirements of Law. Whenever any event
occurs which is required to be set forth in an amendment or supplement to the
Registration Statement or the Proxy Statement/Prospectus, the Company, the New
Fund, the Fund or Funds, as the case may be, shall promptly inform the Company,
the New Fund and the Funds of such occurrences and cooperate in filing with the
SEC, and/or mailing to the holders of Fund Stock such amendment or supplement in
a form reasonably acceptable to the Funds.
(b) Each Fund shall cause a meeting of its shareholders (each, a
"Shareholders Meeting") for the purpose of voting on the approval and adoption
of the Merger Plan, the Merger and the transactions contemplated hereby,
including the Asset Transfers. Each Fund covenants that the Proxy Statement/
Prospectus shall include the recommendation of such Fund Board to the effect
that the Merger, this Agreement and the Merger Plan are in the best interest of
the holders of Fund Stock of such Fund; PROVIDED, HOWEVER, that the
recommendation of such Fund Board may not be included or may be withdrawn,
modified or amended if such Fund Board determines so in good faith.
(c) As soon as practicable following the date of this Agreement, the New
Fund shall prepare and file with the SEC the N-14 Registration Statement and the
N-2 Registration Statement, each in form and substance satisfactory to each of
the Funds. The New Fund, the Company, and each of the Funds shall use its best
efforts to (i) respond to any comments of the SEC and (ii) have both the N-14
Registration Statement and the N-2 Registration Statement declared effective
under the Securities Act and the Investment Company Act and the rules and
regulations promulgated thereunder as promptly as practicable after such filing
and to keep the N-14 Registration Statement effective as long as is necessary to
consummate the Merger. The New Fund will notify the other parties hereto
promptly of the receipt of any comments from the SEC and of any request by the
SEC for amendments or supplements to the N-14 Registration Statement or the N-2
Registration Statement or for additional information, and will supply the other
parties with copies of all correspondence between the New Fund or any of its
representatives and the SEC with respect to such Registration Statements. The
N-14 Registration Statement and the N-2 Registration Statement shall comply in
all material respects with all applicable requirements of Law. Whenever any
event occurs which is required to be set forth in an amendment or supplement to
the N-14 Registration Statement or the N-2 Registration Statement, the New Fund
shall promptly inform the other parties hereto of such occurrences and cooperate
in filing with the SEC, and/or mailing to the holders of Fund Stock such
amendment or supplement in a form reasonably acceptable to the Funds.
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Section 5.2 BEST EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, the Company, the New Fund and each of the Funds agrees to use its
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, and to assist and cooperate with the Company, the New Fund and other
Funds in doing all things necessary, proper or advisable to fulfill all
conditions applicable to such party pursuant to this Agreement and to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated hereby, including (i) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
and the taking of all reasonable steps as may be necessary to obtain an
approval, waiver or exemption from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) the obtaining of all necessary consents, approvals,
waivers or exemption from non-governmental third parties, (iii) the defending of
any lawsuits or other legal proceedings, whether judicial or administrative,
challenging the Merger, this Agreement or the consummation of the Merger and the
other transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (iv) the execution and delivery of any additional
instruments necessary to consummate the Merger and the other transactions
contemplated by, and to fully carry out the purposes of, this Agreement and the
Merger Plan.
(b) Each Fund shall give prompt notice to the Company, the New Fund and the
other Funds, if (i) any representation or warranty made by it contained in this
Agreement that is qualified as to materiality becomes untrue or inaccurate in
any respect or any such representation or warranty that is not so qualified
becomes untrue or inaccurate in any material respect or (ii) it fails to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement; provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) The Company shall give prompt notice to the Funds and the New Fund, if
(i) any representation or warranty made by it contained in this Agreement that
is qualified as to materiality becomes untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becomes untrue or
inaccurate in any material respect or (ii) it fails to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
(d) The New Fund shall give prompt notice to the Company and the Funds, if
(i) any representation or warranty made by it contained in this Agreement that
is qualified as to materiality becomes untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becomes untrue or
inaccurate in any material respect or (ii) it fails to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
Section 5.3 PUBLIC ANNOUNCEMENTS. Each Fund, the New Fund and the Company
will consult with the other parties before issuing, and provide the other
parties the opportunity to review and comment upon, any press release or other
public statements with respect to this Agreement and/or the Merger and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange. The parties agree that the initial press release to be issued with
respect to the Merger will be in the form agreed to by the parties hereto prior
to the execution of this Agreement.
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Section 5.4 INDEMNIFICATION FROM AND AFTER THE EFFECTIVE TIME.
(a) (i) From and after the Effective Time, the Company shall indemnify,
defend and hold harmless each person who is now or has been at any time prior to
the date hereof or who becomes prior to the Effective Time, an officer or a
member of the board of directors of a Participating Fund (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees and expenses), liabilities or judgments or amounts that are paid
in settlement of, with the approval of the indemnifying party (which approval
shall not be unreasonably withheld), or otherwise in connection with, any
threatened or actual claim, action, suit, proceeding or investigation based on
or arising out of the fact that such person is or was an officer or a member of
the board of directors at or prior to the Effective Time, whether asserted or
claimed prior to, or at or after, the Effective Time ("Fund Indemnified
Liabilities"), including all Fund Indemnified Liabilities based on, or arising
out of, or pertaining to this Agreement or the Merger, in each case to the full
extent permitted under its articles of incorporation, the MBCA or the 1940 Act,
including rights to receive advance payment of fees and expenses in defending
any suits, actions or proceedings.
(ii) Any Indemnified Parties proposing to assert the right to be
indemnified under this Section 5.4 shall, promptly after receipt of notice of
commencement of any action against such Indemnified Parties in respect of which
a claim is to be made under this Section 5.4 against the Company, notify the
Company of the commencement of such action, enclosing a copy of all papers
served. If any such action is brought against any of the Indemnified Parties and
such Indemnified Parties notify the Company of its commencement, the Company
will be entitled to participate in and, to the extent that it elects by
delivering written notice to such Indemnified Parties promptly after receiving
notice of the commencement of the action from the Indemnified Parties, to assume
the defense of the action and after notice from the Company to the Indemnified
Parties of its election to assume the defense, the Company will not be liable to
the Indemnified Parties for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the Indemnified Parties in connection with the defense. If the Company assumes
the defense, the Company shall have the right to settle such action without the
consent of the Indemnified Parties; provided, however, that the Company shall be
required to obtain such consent (which consent shall not be unreasonably
withheld) if the settlement includes any admission of wrongdoing on the part of
the Indemnified Parties or any decree or restriction on the Indemnified Parties
or their partners, officers or directors; provided, further, that the Company
shall not, in the defense of any such action, except with the consent of the
Indemnified Parties (which consent shall not be unreasonably withheld), consent
to entry of any judgment or enter into any settlement that does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Parties of a release from all liability with respect to such action.
The Indemnified Parties will have the right to employ their own counsel in any
such action, but the fees, expenses and other charges of such counsel will be at
the expense of such Indemnified Parties unless (i) the employment of counsel by
the Indemnified Parties has been authorized in writing by the Company, (ii) the
Indemnified Parties have reasonably concluded (based on advice of counsel) that
there may be legal defenses available to them that are different from or in
addition to those available to the Company, or (iii) the Company has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which cases
the reasonable fees, disbursements and other charges of counsel will be at the
expense of Company.
(iii) It is understood that the Company shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees, disbursements and other charges of more than one separate firm
admitted to practice in such jurisdiction at any one time for all such
Indemnified Parties unless (a) the employment of more than one counsel has been
authorized in writing by the Company, or (b) any of the Indemnified Parties have
reasonably concluded (based on advice of counsel) that there may be legal
defenses available to them that are different from or in addition to those
available to other Indemnified Parties, in each case of which the Company shall
be obligated to pay the reasonable fees and expenses of such additional counsel
or counsels.
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(iv) The Company will not be liable for any settlement of any action or
claim effected without its written consent (which consent shall not be
unreasonably withheld).
(b) The provisions of this Section 5.4 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his or her heirs and
personal representatives and shall be binding on all successors and assigns of
the Company.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 CONDITIONS PRECEDENT.
(a) CONDITION TO ANY FUND PARTICIPATING IN THE MERGER. For any Fund to
participate in the Merger as a constituent corporation, the Merger, the Merger
Plan and the transactions contemplated thereby, including the Asset Transfers,
shall have been duly approved by the shareholders of such Fund by a vote of at
least a majority of all the votes entitled to be cast with respect thereto in
accordance with the MBCA and the 1940 Act.
(b) CONDITIONS TO THE FUNDS AND THE NEW FUND TO EFFECT THE ASSET
TRANSFERS. The respective obligation of the Funds and the New Fund to
consummate the Asset Transfers is subject to the satisfaction on or prior to the
Effective Time of the following conditions:
(i) MERGER CONDITIONS. All conditions to the obligations of the Funds
and the Company to consummate the Merger shall have been satisfied or, if
permitted, waived (other than the condition set forth in Section 6.1(c)(ii)).
(ii) NEW FUND ELECTIONS. The number of New Fund Shares to be issued by
the Funds, in the aggregate and after any required proration, in connection with
the Asset Transfers shall be at least 5 million New Fund Shares, and the
recipients of such New Fund Shares shall consist of no fewer than 500 separate
holders that each hold at least 100 New Fund Shares.
(iii) LISTING OF NEW FUND SHARES. The AMEX shall have approved for
listing the New Fund Shares to be issued in the Merger and such approval shall
remain in effect at the Effective Time.
(iv) EXECUTION OF THE NEW FUND ADVISORY AGREEMENT. The New Fund Advisory
Agreement in the form of Exhibit E attached hereto shall have been executed and
be effective.
(c) CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of the Funds and the Company to effect the Merger
and to consummate the other transactions contemplated by this Agreement to occur
on the Closing Date is subject to the satisfaction on or prior to the Effective
Time of the following conditions:
(i) SHAREHOLDER CONSENTS; AGGREGATE NAV. Funds having, in the
aggregate, Net Assets of at least $200 million (net of the aggregate New Fund
Share Maximums of such Funds, or the number of New Fund Election Shares where
such number for any Fund is less than the applicable New Fund Share Maximum for
each Participating Fund, and the number of Dissenting Shares for each
Participating Fund multiplied by the Net Asset Value Per Share) shall have duly
approved the Merger in accordance with Section 6.1(a).
(ii) ASSET TRANSFERS. The Asset Transfers shall have been completed
immediately prior to the Effective Time.
(iii) LISTING OF COMPANY COMMON STOCK. The NYSE shall have approved for
listing the Company Common Stock to be issued in the Merger and such approval
shall remain in effect at the Effective Time.
(iv) REGISTRATION STATEMENT. Each of the Registration Statement, N-14
Registration Statement and the N-2 Registration Statement shall have become
effective under the Securities Act and/or the
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Investment Company Act and shall not be the subject of any stop order or
proceedings by the SEC seeking a stop order.
(v) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect.
(vi) OPINION RELATED TO REIT STATUS OF THE COMPANY. The Funds shall have
received an opinion dated as of the Closing Date of Ernst & Young LLP,
reasonably satisfactory to the Funds that following the Merger (after giving
effect thereto), the Company's proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the Code.
(vii) CONSENTS AND APPROVALS. The receipt of all necessary governmental
consents and approvals on or before (and remaining in effect at) the Effective
Time.
(viii) EXEMPTIVE ORDER. The Exemptive Order shall have been issued by the
SEC and shall not contain any terms or conditions that are unacceptable to the
Funds, in their reasonable discretion, or be inconsistent with this Agreement,
and such Exemptive Order shall remain in effect at the Effective Time.
(ix) TAX OPINION REGARDING THE MERGER. The Funds shall have received an
opinion dated the Closing Date of Ernst & Young LLP, reasonably satisfactory to
the Funds that the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the Code,
which shall be dated on or about the date that is two business days prior to the
date of the Proxy Statement/Prospectus and which shall be updated as of the
Effective Time.
(x) EXECUTION OF REIT ADVISORY AGREEMENT. The REIT Advisory Agreement in
the form of Exhibit D attached hereto shall have been executed and be effective.
Section 6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE FUNDS. The
obligations of each of the Approving Funds to effect the Merger and to
consummate the other transactions contemplated in this Agreement to occur on the
Closing Date are further subject to the following conditions, any one or more of
which may be waived by the Approving Funds:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company, the New Fund and the Approving Funds (without giving effect to any
"materiality" qualification or limitation) set forth in this Agreement shall be
true and correct in all material respects as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and each Approving
Fund shall have received a certificate signed on behalf of the Company, the New
Fund and the other Approving Funds to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY, THE NEW FUND AND THE OTHER
FUNDS. The Company, the New Fund and the Approving Funds shall have performed
in all material respects all obligations required to be performed by them under
this Agreement at or prior to the Effective Time, and each Approving Fund shall
have received a certificate signed on behalf of each of the Company, the New
Fund and the other Approving Funds to such effect.
(c) MATERIAL ADVERSE CHANGE OF THE OTHER FUNDS. Since the date of this
Agreement, there has not been any material adverse change in the business,
results of operations or financial condition of any of other Approving Funds.
Each Approving Fund shall have received a certificate of the other Approving
Funds to the effect that there has been no such material adverse change.
(d) MATERIAL ADVERSE CHANGE OF THE COMPANY AND OF THE NEW FUND. Since the
date of this Agreement, there has not been any material adverse change in the
business, results of operations or financial condition of either the Company or
the New Fund. Each Approving Fund shall have received a
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certificate of the Company and the New Fund to the effect that there has been no
such material adverse change.
(e) MATERIAL ADVERSE CHANGE OF THE ADVISER. Since the date of this
Agreement, there has not been any material adverse change in the business,
results of operations or financial condition of the Adviser. Each Approving Fund
shall have received a certificate of the Adviser to the effect that there has
been no such material adverse change.
(f) CONSENTS. All consents and waivers from third parties necessary in
connection with the consummation of the Merger and the other transactions
contemplated by this Agreement, including those related to any loan or credit
agreement, shall have been received, other than such consents and waivers from
third parties, which, if not obtained, would not result, individually, or in the
aggregate, in a Fund Material Adverse Effect.
(g) DISSENTERS RIGHTS. The holders of not more than 5% of the outstanding
Fund Stock of any Approving Fund shall have exercised dissenters' rights in
accordance with the MBCA.
(h) ASSET TRANSFER CLOSING CERTIFICATE. The Funds and the New Fund shall
have received a certificate signed by the Chief Investment Officer of U.S.
Bancorp Asset Management, Inc., dated the Closing Date and addressed to the
Funds and the New Fund, (i) certifying that the Asset Transfers being made at
the Closing comply in all respects with the asset and liability allocation
procedures and methodology set forth in Exhibit H hereto, and (ii) attaching
calculations demonstrating such compliance with respect to those criteria which
are numerically-based.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Date whether before or after any Shareholder Approvals are
obtained:
(a) by mutual written consent of the Funds duly authorized by their
respective board of directors;
(b) by any Fund, but only as to such Fund, if the board of directors of
such Fund shall have determined that it is in the best interests of the Fund and
its shareholders to terminate such Fund's rights and obligations under this
Agreement.
Section 7.2 EXPENSES. Except as otherwise specified in this Section 7.2 or
agreed in writing by the parties, all costs and expenses incurred in connection
with this Agreement, the Merger and the other transactions contemplated hereby
shall be paid by the Funds (pro rata in accordance with their aggregate Net
Assets) whether or not the Merger is consummated (provided, however, that the
Funds and the Company acknowledge that no fees and expenses of US Bancorp Asset
Management relating to maintaining and negotiating US Bancorp Asset Management's
interest in the proposed transactions (including all internal and outside
counsel fees used for its direct purposes) will be paid by the Funds). If the
total costs and expenses incurred by the Funds in connection with this
Agreement, the Merger and the other transactions contemplated hereby exceed $3.4
million, then U.S. Bancorp Asset Management, on the one hand, and the Funds, on
the other hand in the aggregate, shall pay 50% of such excess amount, except:
(i) if the fees of Gardner Carton & Douglas incurred from and after
August 1, 2002 exceed $200,000, then the Funds will bear sole responsibility for
such excess amount;
(ii) if the aggregate fees of Clifford Chance US LLP and of Faegre &
Benson LLP incurred from and after August 1, 2002 exceed $320,000, then US
Bancorp Asset Management will bear sole responsibility for such excess amount;
and
(iii) US Bancorp Asset Management will pay the first $50,000 of aggregate
fees incurred by Ernst & Young LLP and Friedman, Billings, Ramsey & Co. from and
after August 1, 2002, the Funds
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will pay up to the next $200,000 of such fees, and if such fees are in excess of
$250,000, such excess fees will be paid 50% by the Funds and 50% by US Bancorp
Asset Management.
No Special Committee fees will be deemed fees related to this Agreement for
purposes of this Section 7.2.
Section 7.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 7.1(a), this Agreement shall forthwith become
void and have no effect, without any liability or obligation on the part of any
Fund, the New Fund or the Company, other than under Section 7.2 and
Article VIII. In the event that any Fund terminates its rights and obligations
under this Agreement as provided in Section 7.1(b), this Agreement shall
forthwith (i) have no effect with regard to such Fund and (ii) impose no
liability or obligation upon such Fund other than such Fund's rights and
obligations under Section 7.2 and Article VIII.
Section 7.4 AMENDMENT. This Agreement may be amended or modified by the
consent of the Company, the New Fund and each Fund in writing by appropriate
instrument executed thereby at any time prior to obtaining Shareholder
Approvals; provided, however, that, after Shareholder Approvals are obtained, no
such amendment, modification or supplement shall be made which requires the
further approval of shareholders without obtaining such approval of all the
Approving Funds.
Section 7.5 WAIVER/APPROVALS. Prior to receiving Shareholder Approvals, any
action required or permitted to be taken by the Funds under this Agreement
(including amendments hereto, any consents or waivers hereunder or any
termination of this Agreement) shall require the consent of all the Funds. After
Shareholder Approvals, any such action shall require the consent of all the
Approving Funds.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performances after the Effective Time.
Section 8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to the Funds, to
US Bancorp Asset Management, Inc.
800 Nicollet Mall
Minneapolis, Minnesota 55402
Telecopy: (612) 303-1189
Attention: Thomas S. Schreier, Jr.
(b) if to the Company, to
First American Strategic Real Estate Portfolio Inc.
c/o U.S. Bancorp Asset Management, Inc.
800 Nicollet Mall
Minneapolis, Minnesota 55402
Telecopy: (612) 303-1189
Attention: Robert H. Nelson
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(c) if to the New Fund, to
U.S. Bancorp Asset Management, Inc.
800 Nicollet Mall
Minneapolis, Minnesota 55402
Telecopy: (612) 303-1189
Attention: Thomas S. Schreier, Jr.
Section 8.3 INTERPRETATION. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
Section 8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
and the other agreements entered into in connection with this Agreement,
including the Merger Plan (a) constitute the entire agreement and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter of this Agreement and, (b) except for the
provisions of Article II and Section 5.4, are not intended to confer upon any
person other than the parties hereto any rights or remedies.
Section 8.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MINNESOTA, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF
LAWS THEREOF.
Section 8.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
Section 8.8 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Minnesota or in any Minnesota state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself (without
making such submission exclusive) to the personal jurisdiction of any federal
court located in the State of Minnesota or any Minnesota state court in the
event any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement and (b) agrees that it will not attempt to deny
or defeat such personal jurisdiction by motion or other request for leave from
any such court.
ARTICLE IX
CERTAIN DEFINITIONS
Section 9.1 CERTAIN DEFINITIONS. For purposes of this Agreement
"Affiliate" of any person means another person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first person.
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<Page>
"Approving Funds" means those Funds that have received the required
shareholder approvals at their respective Fund Shareholder Meeting, and have not
terminated this Agreement pursuant to Section 7.1(b).
"Fund Shareholder Meetings" means those meetings of the shareholders of the
Funds called to consider and approve this Agreement, the Merger Plan and the
Merger.
"Participating Funds" means those Approving Funds that have satisfied all
conditions contained in Article VI (except for any of those that have been
waived or those that by their nature are to be fulfilled at the Closing).
"Person" means an individual, corporation, partnership, limited liability
company, limited liability partnership, joint venture, association, trust,
unincorporated organization or other entity.
"Special Committee" means the special committee of the Funds Board appointed
to consider the Merger.
IN WITNESS WHEREOF, ASP, BSP, CSP, SLA, the New Fund and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
<Table>
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.
By /s/ John G. Wenker
--------------------------------------------
Its Senior Vice President
--------------------------------------------
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.--II
By /s/ John G. Wenker
--------------------------------------------
Its Senior Vice President
--------------------------------------------
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.--III
By /s/ John G. Wenker
--------------------------------------------
Its Senior Vice President
--------------------------------------------
AMERICAN SELECT PORTFOLIO INC.
By /s/ John G. Wenker
--------------------------------------------
Its Senior Vice President
--------------------------------------------
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO
INC.
By /s/ John G. Wenker
--------------------------------------------
Its President
--------------------------------------------
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
By /s/ John G. Wenker
--------------------------------------------
Its Senior Vice President
--------------------------------------------
</Table>
A-31
<Page>
AMENDMENT
DATED AS OF JANUARY 23, 2003
TO
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF NOVEMBER 21, 2002
AMONG
AMERICAN STRATEGIC INCOME PORTFOLIO INC.,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III,
AMERICAN SELECT PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
A-32
<Page>
AMENDMENT DATED JANUARY 23, 2003
TO
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF NOVEMBER 21, 2002
AMONG
AMERICAN STRATEGIC INCOME PORTFOLIO INC.,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II,
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III,
AMERICAN SELECT PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
AND
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
WHEREAS, American Strategic Income Portfolio Inc., a Minnesota corporation
("ASP"), American Strategic Income Portfolio Inc.--II, a Minnesota corporation
("BSP"), American Strategic Income Portfolio Inc.--III, a Minnesota corporation
("CSP"), American Select Portfolio Inc., a Minnesota corporation ("SLA" and
together with ASP, BSP and CSP, the "Funds"), First American Strategic Real
Estate Portfolio Inc., a Maryland corporation (the "Company"), and First
American Strategic Income Portfolio Inc., a Minnesota corporation (the "New
Fund"), previously entered into that Amended and Restated Agreement and Plan of
Reorganization dated as of November 21, 2002 (the "Agreement"); and
WHEREAS, the Funds, the Company and the New Fund wish to amend the Agreement
in the manner set forth herein.
NOW, THEREFORE, the Funds, the Company and the New Fund hereby agree as
follows:
1. Capitalized terms which are used in this Amendment and are not otherwise
defined in this Amendment have the meanings assigned to them in the Agreement.
2. The following paragraph (i) is hereby added to the Agreement immediately
following paragraph (h) of Section 6.2:
"(i) New Fund Elections. The holders of less than 60% of the outstanding
Fund Stock of any Approving Fund shall have made valid New Fund
Elections."
3. The Agreement, as amended by this Amendment, is hereby ratified and
confirmed.
IN WITNESS WHEREOF, the Funds, the Company and the New Fund have caused this
Amendment to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
[SIGNATURE PAGE FOLLOWS]
A-33
<Page>
<Table>
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.
By /s/ Robert H. Nelson
--------------------------------------------
Its Treasurer
--------------------------------------------
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.--II
By /s/ Robert H. Nelson
--------------------------------------------
Its Treasurer
--------------------------------------------
AMERICAN STRATEGIC INCOME
PORTFOLIO INC.--III
By /s/ Robert H. Nelson
--------------------------------------------
Its Treasurer
--------------------------------------------
AMERICAN SELECT PORTFOLIO INC.
By /s/ Robert H. Nelson
--------------------------------------------
Its Treasurer
--------------------------------------------
FIRST AMERICAN STRATEGIC REAL ESTATE
PORTFOLIO INC.
By /s/ John G. Wenker
--------------------------------------------
Its President and Chief Executive Officer
--------------------------------------------
FIRST AMERICAN STRATEGIC INCOME
PORTFOLIO INC.
By /s/ John G. Wenker
--------------------------------------------
Its President and Chief Executive Officer
--------------------------------------------
</Table>
A-34
<Page>
APPENDIX B
PLAN OF MERGER
Dated as of November 21, 2002
Merging
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(a Minnesota corporation)
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-II
(a Minnesota corporation)
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-III
(a Minnesota corporation)
AMERICAN SELECT PORTFOLIO INC.
(a Minnesota corporation)
with and into
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
(a Maryland corporation)
B-1
<Page>
APPENDIX B
PLAN OF MERGER
Merging
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
(a Minnesota corporation)
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-II
(a Minnesota corporation)
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-III
(a Minnesota corporation)
AMERICAN SELECT PORTFOLIO INC.
(a Minnesota corporation)
with and into
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
(a Maryland corporation)
BACKGROUND
AMERICAN STRATEGIC INCOME PORTFOLIO INC., a Minnesota corporation ("ASP"),
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-II, a Minnesota corporation ("BSP"),
AMERICAN STRATEGIC INCOME PORTFOLIO INC.-III, a Minnesota corporation ("CSP"),
and AMERICAN SELECT PORTFOLIO INC., a Minnesota corporation ("SLA" and together
with ASP, BSP and CSP, the "Funds") and FIRST AMERICAN STRATEGIC REAL ESTATE
PORTFOLIO INC., a Maryland corporation (the "Company"), are parties to an
Amended and Restated Agreement and Plan of Reorganization dated as of
November 21, 2002 (the "Reorganization Agreement"), providing for the merger of
the Funds with and into the Company (the "Merger") upon the terms and conditions
set forth in this Plan of Merger, the Reorganization Agreement and pursuant to
the Minnesota Business Corporation Act (the "MBCA") and the Maryland General
Corporation Law (the "MGCL"). The Company and the Funds are sometimes
hereinafter together referred to as the "Constituent Corporations." Terms used
herein that are not defined herein shall have the meanings ascribed thereto in
the Reorganization Agreement.
TERMS AND CONDITIONS
1. MERGER TERMS AND CONDITIONS. The Constituent Corporations shall effect
the Merger upon the terms and subject to the conditions set forth in this Plan
of Merger.
1.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Plan of Merger, the Reorganization Agreement and in accordance with the
MGCL and the MBCA, ASP, BSP, CSP and SLA shall each be merged with and into the
Company at the Effective Time. Following the Merger, the separate existence of
ASP, BSP, CSP and SLA shall cease and the Company shall continue as the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of ASP, BSP, CSP and SLA in accordance
with the MGCL and MBCA.
1.2 CLOSING. The closing of the Merger (the "Closing") will take place at
9:00 a.m., Minneapolis time, on a date to be specified by the parties, which
shall be no later than the second business day after satisfaction or waiver of
the conditions set forth in the Reorganization Agreement (other than those
conditions that by their nature are to be fulfilled at the Closing, but subject
to the fulfillment or waiver of those conditions), at the offices of Faegre &
Benson LLP, 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis,
Minnesota 55402, unless another date or place is agreed to in writing by the
Funds (the "Closing Date").
1.3 EFFECTIVE DATE. As soon as practicable following the Closing, the
parties shall file articles of merger, certificate of merger or other
appropriate documents for the merger of the Funds with and into the Company
executed in accordance with the MGCL and MBCA (collectively, the "Articles of
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<Page>
Merger") and shall make all other filings or recordings required under the MGCL
and the MBCA to effect the Merger. The Merger shall become effective at such
time as the Articles of Merger have been duly filed with the Department of
Assessments and Taxation of the State of Maryland and the Office of the
Secretary of State of the State of Minnesota, or at such other time as the
parties shall specify in the Articles of Merger (the time and date the Merger
becomes effective being the "Effective Time" and the "Effective Date,"
respectively), it being understood that the parties shall cause the Effective
Date to be the Closing Date.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
Section 1.1 and in the MGCL and the MBCA, as appropriate.
1.5 ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation of the Company
as in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation (the "Charter"), until duly amended
as provided therein or by applicable law. The bylaws of the Company as in effect
immediately prior to the Effective Time shall be the bylaws of the Surviving
Corporation (the "ByLaws"), until duly amended as provided therein or by
applicable law.
1.6 OFFICERS AND DIRECTORS. The officers of the Company at the Effective
Time shall continue to be the officers of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the MGCL, the Charter
and the ByLaws. The Board of Directors of the Surviving Corporation immediately
following the Effective Time shall be those persons identified in writing by the
Company and not objected to by the Funds.
2.1 CONVERSION OF SECURITIES. At the Effective Time, by virtue of the
Merger and without any action on the part of the Company, the Funds or the
holders of any of the following shares of capital stock:
(a) FUND STOCK. Subject to the other provisions of this Section 2.1 and
to Sections 2.2 and 2.3:
(i) each share of common stock, par value $.01 per share, of ASP
("ASP Stock"), each share of common stock, par value $.01 per share, of BSP
("BSP Stock"), each share of common stock, par value $.01 per share, of CSP
("CSP Stock"), and each share of common stock, par value $.01 per share, of
SLA ("SLA Stock", and together with ASP Stock, BSP Stock and CSP Stock, the
"Fund Stock") issued and outstanding immediately prior to the Effective Time
(excluding any shares of Fund Stock held by the Company or any of the Funds
immediately prior to the Merger (the "Cancelable Shares") and Dissenting
Shares (as defined in Section 2.3(i))) shall be converted into the right to
receive (A) that number of shares of Company Common Stock equal to the
Exchange Ratio (as calculated in accordance with Section 2.1(c)), or
(B) that number of shares of common stock, par value $.01 per share ("New
Fund Shares"), of First American Select Portfolio Inc., a Minnesota
corporation (the "New Fund"), equal to the Exchange Ratio, or (C) a
combination of shares of Company Common Stock and New Fund Shares,
determined in accordance with this Section 2.1 (the "Merger Consideration");
provided, however, that notwithstanding any other provision hereof, only
shares of Fund Stock of Participating Funds shall be subject to the
conversion and other terms of this Section 2.1 and Sections 2.2 and 2.3
(such shares of Fund Stock of Participating Funds but excluding Cancelable
Shares and Dissenting Shares are defined as the "Merger Shares"). At the
Effective Time, all Merger Shares shall no longer be outstanding and
automatically shall be cancelled and cease to exist, and each certificate
previously evidencing any such shares shall thereafter represent solely the
right to receive the Merger Consideration. The holders of certificates
previously evidencing the Merger Shares outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to Merger Shares
except as otherwise provided herein, in the Merger Plan or by the MBCA or
the MGCL. Such certificates previously evidencing Merger Shares shall be
exchanged for the Merger Consideration, without interest, in accordance with
the allocation procedures of this Section 2.1 and upon the surrender of such
certificates in accordance with the provisions of Sections 2.2 and 2.3;
B-3
<Page>
(ii) each Cancelable Share shall automatically be cancelled and
cease to exist, and no Merger Consideration or other consideration shall be
paid or payable in respect of such shares;
(iii) each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall automatically be cancelled and
cease to exist, and no Merger Consideration or other consideration shall be
paid or payable in respect of such shares; and
(iv) subject to the allocation and election procedures set forth
in Section 2.2, each record holder of Merger Shares outstanding immediately
prior to the Election Deadline will be entitled with respect to the Merger
Consideration to receive New Fund Shares for all, but not less than all, of
such shares, provided the election procedures set forth herein have been
satisfied (a "New Fund Election").
(b) CHARTER LIMITATIONS. Notwithstanding the foregoing, the parties
understand that following the Merger the rights of each stockholder of the
Company under this Section 2.1 and the Merger Plan will be subject to the
ownership limitations and other related provisions contained in the Charter.
(c) EXCHANGE RATIO. The "Exchange Ratio" for each Fund shall be
determined by (i) dividing that Fund's Net Assets by the number of shares of
Fund Stock of such Fund issued and outstanding immediately prior to the
Effective Time, and (ii) then dividing such result by $10.00. Each Fund's "Net
Assets" shall be determined as of the last business day of the week immediately
preceding the Effective Time and shall be calculated in a manner consistent with
the existing policies of the Funds, but adjusted to give effect to the expenses
of the Merger and the other transactions contemplated by the Reorganization
Agreement, including the Asset Transfers, to the extent such expenses have not
been accrued prior thereto and reflected in the Net Assets.
2.2 NEW FUND ELECTIONS.
(a) NEW FUND SHARE MAXIMUM. The maximum number of shares of Fund Stock of
each Fund to be converted into the right to receive New Fund Shares in the
Merger (the "New Fund Share Maximum") shall be that number of shares, when added
to the Dissenting Shares of such Fund, that is equal to 49% of (w) the number of
shares of Fund Stock of such Fund issued and outstanding immediately prior to
the Effective Time less (x) the number of Cancelable Shares of such Fund (the
number of shares determined in accordance with clauses (w) and (x) shall be
deemed the "Exchanged Shares").
(b) REPRESENTATIVE HOLDERS. Holders of record of shares of Fund Stock who
hold such shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the shares
of Fund Stock held by such Representative for a particular beneficial owner.
(c) PRORATION. If, for any Fund, the aggregate number of shares covered
by New Fund Elections (the "New Fund Election Shares") exceeds the New Fund
Share Maximum, all Merger Shares not covered by New Fund Elections (the
"Non-Electing Shares") shall be converted into the right to receive Company
Common Stock, and the New Fund Election Shares shall be converted into the right
to receive Company Common Stock and New Fund Shares in the following manner:
(1) A proration factor (the "New Fund Proration Factor") for each
Fund will be determined by dividing the New Fund Share Maximum for such Fund
by the total number of New Fund Election Shares of such Fund.
(2) The number of New Fund Election Shares of such Fund covered
by New Fund Share Elections to be converted into New Fund Shares will be
determined by multiplying the New Fund Proration Factor for such Fund by the
total number of New Fund Election Shares covered by such New Fund Share
Election, rounded down to the nearest whole number (such number of shares
shall be deemed the "New Fund Proration Shares"), and each New Fund
Proration Share of such Fund shall be converted into New Fund Shares in
accordance with Section 2.1(a)(i).
B-4
<Page>
(3) Each New Fund Election Share, other than those converted into
the right to receive New Fund Shares in accordance with Section 2.2(c)(2),
will be converted into the right to receive shares of Company Common Stock
(on a consistent basis among shareholders of that Fund who did make a New
Fund Election), as if such shares were not New Fund Election Shares.
(d) NO PRORATION. If, for any Fund, the aggregate number of New Fund
Election Shares is equal to or less than the New Fund Share Maximum, each New
Fund Election Share shall be converted into the right to receive New Fund
Shares, and each Non-Electing Share shall be converted into the right to receive
Company Common Stock.
(e) FORM OF ELECTION. All New Fund Elections shall be made on a form
designed for that purpose (a "Form of Election") whereby holders of Fund Stock
may elect to exchange certificates that immediately prior to the Effective Time
represented shares of Fund Stock (the "Certificates") and shares of Fund Stock
represented by book-entry ("Book-Entry Shares"). New Fund Elections shall be
made by holders of Fund Stock by mailing to the Exchange Agent a Form of
Election, which shall be in such form and have such provisions as the Funds may
reasonably specify. To be effective, a Form of Election must be properly
completed, signed and accompanied by (i) Certificates representing the shares of
Fund Stock to which such Form of Election relates, duly endorsed in blank or
otherwise in form acceptable for transfer on the books of the Fund (or by an
appropriate guarantee of delivery of such Certificates as set forth in such Form
of Election from a firm which is an "eligible guarantor institution" (as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")); provided that such Certificates are in fact delivered to the
Exchange Agent by the time set forth in such guarantee of delivery) or (ii) in
the case of Book-Entry Shares, any additional document specified in the
procedures set forth in the Form of Election. Furthermore, such holder's
election to receive New Fund Shares will have been properly made only if the
Exchange Agent has received the Form of Election and other required materials at
its designated office, by 5:00 p.m., Minneapolis time on the last business day
prior to the Fund Shareholder Meeting of the respective Fund (the "Election
Deadline"). The Funds will have the discretion, which they may delegate in whole
or in part to the Exchange Agent, to determine whether Forms of Election have
been properly completed, signed and submitted or revoked and to disregard
immaterial defects in Forms of Election. The decision of the Funds (or the
Exchange Agent) in such matters shall be conclusive and binding. Neither the
Funds nor the Exchange Agent will be under any obligation to notify any person
of any defect in a Form of Election submitted to the Exchange Agent. The
Exchange Agent shall also make all computations contemplated by this
Section 2.2 (other than the calculation of the Net Assets of the Funds) and all
such computations shall be conclusive and binding on the holders of Fund Stock
absent manifest error. A New Fund Election may be revoked, but only by written
notice received by the Exchange Agent prior to the Election Deadline. Upon any
such revocation, unless a duly completed Form of Election is thereafter
submitted in accordance with this paragraph (e), the Certificate or Certificates
(or guarantees of delivery or Book-Entry Shares, as appropriate) for the shares
of Fund Stock to which such Form of Election relates shall be promptly returned
by the Exchange Agent to the shareholder of the Fund submitting the same and
such shares shall be deemed to be Non-Electing Shares.
(f) FAILED ELECTIONS. For the purposes hereof, a holder of Fund Stock who
does not make a valid New Fund Election prior to the Election Deadline,
including as a result of revocation, shall be deemed not to have made a New Fund
Election and such holder's shares shall be treated as Non-Electing Shares. If
the Funds or the Exchange Agent shall determine that any purported New Fund
Election was not properly made, such purported New Fund Election shall be deemed
to be of no force and effect and the shareholder making such purported New Fund
Election shall for purposes hereof be deemed not to have made a New Fund
Election.
(g) FORM DISTRIBUTIONS. The Funds and the Company, or any transfer agent
or other responsible party acting on behalf of the Funds and the Company, shall
mail the Form of Election to each person who is a holder of record of Fund Stock
on the record date for the Fund Shareholder Meetings and shall each use its best
efforts to mail the Form of Election to all persons who become holders of Fund
Stock during the period between (i) such record date and (ii) the date seven
calendar days prior to the
B-5
<Page>
Election Deadline and to make the Form of Election available to all persons who
become holders of Fund Stock subsequent to the date described in clause
(ii) and no later than the close of business on the business day prior to the
Election Deadline.
2.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Promptly following the Effective Time, the Company
shall deposit, or shall cause to be deposited, with a bank or trust company
organized under the laws of, and having an office in, the United States or any
state thereof and designated by the Funds (the "Exchange Agent"), for the
benefit of the holders of shares of Fund Stock, for exchange in accordance with
this Plan of Merger, through the Exchange Agent, (i) certificates evidencing
such number of shares of Company Common Stock necessary to make all exchanges
pursuant to Section 2.3(b) and (ii) certificates evidencing all New Fund Shares
held by each Fund after completion of the Asset Transfers (such certificates for
shares of Company Common Stock and New Fund Stock, together with any dividends
or distributions with respect thereto, and cash received by the Exchange Agent
pursuant to Section 2.3(f), being hereinafter referred to as the "Exchange
Fund"). The Exchange Agent shall, pursuant to irrevocable instructions from the
Company, deliver the Company Common Stock, New Fund Shares and cash contemplated
to be issued pursuant to Section 2.1 and Section 2.3(f) out of the Exchange
Fund. The Exchange Fund shall not be used for any other purpose; PROVIDED,
HOWEVER, that the Exchange Fund may be invested by the Exchange Agent, pursuant
to instructions from the Company, in obligations of or guaranteed by the United
States of America or any agency thereof and backed by the full faith and credit
of the United States of America, in commercial paper obligations rated A-1 or
P-1 or better by Moody's Investors Services, Inc. or Standard & Poor's
Corporation, respectively, or in deposit accounts, certificates of deposit or
banker's acceptances of, repurchase or reverse repurchase agreements with, or
Eurodollar time deposits purchased from, commercial banks located in the United
States with capital, surplus and undivided profits aggregating in excess of $75
million (based on the most recent financial statements of such bank which are
then publicly available at the SEC or otherwise); PROVIDED, FURTHER, that any
such investment or resulting payment of earnings shall not delay the receipt by
holders of shares of Fund Stock of the Merger Consideration or otherwise impair
such holders' respective rights hereunder. In the event the Exchange Fund shall
realize a loss on any such investment, the Company shall promptly thereafter
deposit in such Exchange Fund cash in an amount sufficient to enable such
Exchange Fund to satisfy all remaining obligations originally contemplated to be
paid out of such Exchange Fund. Any net profit resulting from, or interest or
income produced by, such investments shall be payable to the Company.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Company will instruct the Exchange Agent to mail to each
holder of record, as of the Effective Time, of a Certificate or Book-Entry
Shares (other than such holders who properly made an election to receive New
Fund Shares with respect to such Certificates or Book-Entry Shares in accordance
with Section 2.2), (i) a letter of transmittal and (ii) instructions for use in
effecting the surrender for cancellation of the Certificates or Book-Entry
Shares in exchange for certificates evidencing shares of Company Common Stock.
Upon surrender of a Certificate or Book-Entry Shares for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, and such
other customary documents as may be required pursuant to such instructions, the
holder of such Certificate or Book-Entry Shares shall be entitled to receive in
exchange therefore the Merger Consideration and the Certificate or Book-Entry
Shares so surrendered shall forthwith be cancelled. Subject to Section 2.3(h),
under no circumstances will any holder of a Certificate or Book-Entry Shares be
entitled to receive any part of the Merger Consideration until such holder shall
have surrendered such Certificate or, in the case of Book-Entry Shares, the
surrender of such shares. In the event of a transfer of ownership of shares of
Fund Stock which is not registered in the transfer records of the Funds, the
Merger Consideration may be paid in accordance with this Plan of Merger to the
transferee if the Certificate and each Book-Entry Share evidencing such shares
of Fund Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.3 (but subject
B-6
<Page>
to Section 2.3(i)), each Certificate shall be deemed at any time after the
Effective Time to evidence only the right to receive upon such surrender the
Merger Consideration. No interest shall be paid on the Merger Consideration.
(c) RECORD DATES; DISTRIBUTIONS WITH RESPECT TO UNCONVERTED FUND STOCK.
No dividends or other distributions with respect to Company Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate or Book-Entry Share with respect to the Company Common
Stock represented thereby until the surrender of such Certificate or Book-Entry
Shares in accordance with this Plan of Merger. Subject to the effect of
applicable abandoned property, escheat or similar laws, following surrender of
any such Certificate or Book-Entry Shares there shall be paid to the holder of
such Certificate or Book-Entry Shares, without interest, (A) at the time of such
surrender, the amount of any cash payable in lieu of any fractional share of
Company Common Stock to which such holder is entitled pursuant to
Section 2.3(f) and (B) if such Certificate or Book-Entry Shares are exchangeable
for one or more whole shares of Company Common Stock, (x) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to such whole shares
of Company Common Stock and (y) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of Company Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN FUND STOCK. All Merger Consideration
paid upon the surrender of Certificates or Book-Entry Shares in accordance with
the terms of this Plan of Merger shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Fund Stock theretofore represented
by such Certificates and Book-Entry Shares, subject, however, to the obligation
of the Company to pay, without interest, any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Funds on such Fund Stock in accordance with the terms of
the Reorganization Agreement or prior to the date of the Reorganization
Agreement and which remain unpaid at the Effective Time and have not been paid
prior to such surrender, and there shall be no further registration of transfers
on the transfer books of the Funds of the shares of Fund Stock which are
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates or Book-Entry Shares are properly presented to the Company,
they shall be cancelled and exchanged as provided in this Plan of Merger.
(e) NO LIABILITY. None of the Company, the Funds, the New Fund or the
Exchange Agent shall be liable to any person in respect of any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Any portion of the Merger
Consideration delivered to the Exchange Agent pursuant to this Agreement that
remains unclaimed for six months after the Effective Time shall be redelivered
by the Exchange Agent to the Company, upon demand, and any holders of
Certificates or Book-Entry Shares who have not theretofore complied with
Section 2.3(b) shall thereafter look only to the Company for delivery of the
Merger Consideration, subject to applicable abandoned property, escheat or
similar laws.
(f) NO FRACTIONAL SHARES.
(i) No certificates or script representing fractional shares of
Company Common Stock shall be issued upon the surrender for exchange of
Certificates or Book-Entry Shares, and such fractional share interests will
not entitle the owner thereof to vote, to receive dividends or to any other
rights of a stockholder of the Company.
(ii) Notwithstanding any other provision of this Plan of Merger,
each holder of shares of Fund Stock exchanged in the Merger who would
otherwise have been entitled to receive a fraction of a share of Company
Common Stock (after taking into account all Certificates and/or Book-Entry
Shares of each Fund delivered by such holder) shall receive, from the
Exchange Agent in accordance with the provisions of this Section 2.3(f), a
cash payment in lieu of such fractional share of Company Common Stock
representing such holder's proportionate interest, if any, in the net
proceeds from the sale by the Exchange Agent in one or more transactions
(which sale
B-7
<Page>
transactions shall be made at such times, in such manner and on such terms
as the Exchange Agent shall determine in its reasonable discretion) on
behalf of all such holders of the aggregate of the fractional shares of
Company Common Stock which would otherwise have been issued (the "Excess
Shares"). The sale of the Excess Shares by the Exchange Agent shall be
executed on the New York Stock Exchange (the "NYSE") through one or more
member firms of the NYSE and shall be executed in round lots to the extent
practicable. Until the net proceeds of such sale or sales have been
distributed to the holders of Certificates and Book-Entry Shares, the
Exchange Agent will hold such proceeds in trust (the "Exchange Trust") for
such holders. The Company shall pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with this sale of
the Excess Shares. As soon as practicable after the determination of the
amount of cash, if any, to be paid to holders of Certificates and Book-Entry
Shares in lieu of any fractional shares of Company Common Stock, the
Exchange Agent shall deliver such amounts to such holders of Certificates
and Book-Entry Shares without interest.
(iii) Notwithstanding any other provision of this Plan of Merger,
each holder of shares of Fund Stock exchanged in the Merger who would
otherwise have been entitled to receive a fraction of a New Fund Share
(after taking into account all Certificates and/or Book-Entry Shares of each
Fund delivered by such holder) shall receive, from the Exchange Agent in
accordance with the provisions of this Section 2.3(f), a cash payment in
lieu of such fractional New Fund Share representing such holder's
proportionate interest, if any, in the net proceeds from the sale by the
Exchange Agent in one or more transactions (which sale transactions shall be
made at such times, in such manner and on such terms as the Exchange Agent
shall determine in its reasonable discretion) on behalf of all such holders
of the aggregate of the fractional New Fund Shares which would otherwise
have been issued (the "New Fund Excess Shares"). The sale of the New Fund
Excess Shares by the Exchange Agent shall be executed on the American Stock
Exchange ("AMEX") through one or more member firms of the AMEX and shall be
executed in round lots to the extent practicable. Until the net proceeds of
such sale or sales have been distributed to the holders of Certificates and
Book-Entry Shares, the Exchange Agent will hold such proceeds in trust (the
"New Fund Exchange Trust") for such holders. The Company shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with this sale of the New Fund Excess Shares. As soon as
practicable after the determination of the amount of cash, if any, to be
paid to holders of Certificates and Book-Entry Shares in lieu of any
fractional New Fund Shares, the Exchange Agent shall deliver such amounts to
such holders of Certificates and Book-Entry Shares without interest.
(g) WITHHOLDING RIGHTS. The Company or the Exchange Agent shall be
entitled to deduct and withhold from the Merger Consideration otherwise payable
pursuant to this Agreement to any holder of shares of Fund Stock such amounts as
the Company or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Company or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Fund Stock,
in respect of which such deduction and withholding was made by the Company or
the Exchange Agent.
(h) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such persons of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it and the Exchange Agent with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration payable, and unpaid dividends and
distribution on shares of Company Common Stock and/or New Fund Shares
deliverable in respect thereof pursuant to this Agreement.
B-8
<Page>
(i) DISSENTING SHARES.
(i) Notwithstanding any provision of this Agreement to the
contrary, any issued and outstanding shares of Fund Stock which are held by
shareholders of a Fund who shall have not voted in favor of the Merger and
who shall have filed with such Fund, prior to the taking of the vote of the
shareholders of such Fund on the Merger, a written notice of intent to
demand payment of the fair value for such shares of Fund Stock and, after
the taking of such vote, shall make written demand for payment of the fair
value of such shares in accordance with and otherwise comply with
Section 302A.473 of the MBCA (collectively, the "Dissenting Shares") shall
not be converted into or represent the right to receive the Merger
Consideration. Such shareholders shall be entitled to receive payment of the
fair value of such Dissenting Shares held by them in accordance with the
provisions of Section 302A.473 of the MBCA, except that all Dissenting
Shares held by shareholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of Company Common Stock under Section 302A.473 of the MBCA shall
thereupon be deemed to have been converted into, as of the Effective Time,
the right to receive the Merger Consideration as if such shares were
Non-Electing Shares, without any interest thereon, upon surrender, in the
manner provided in Section 2.2 and 2.3, of the Certificate or Certificates
that formerly evidenced such shares of Fund Stock.
(ii) Each Fund shall give each other Fund prompt notice upon
receipt by such Fund, at any time prior to the Effective Time, of any notice
of intent to demand payment of the fair value of shares of Fund Stock in
accordance with Section 302A.473 of the MBCA and withdrawals of any such
notice. No Fund shall, except with the prior approval of the Funds, make any
payment with respect to any demands for the fair value of shares of Fund
Stock or offer to settle or settle any such demands.
3.1 TERMINATION. This Plan of Merger may be terminated at any time on or
before the Effective Time by agreement of the Boards of Directors of the
Constituent Corporations. This Plan of Merger shall be automatically terminated
if the Reorganization Agreement is terminated in accordance with the terms
thereof.
B-9
<Page>
APPENDIX C-1
FAIRNESS OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO.
TO AMERICAN STRATEGIC INCOME PORTFOLIO INC.
January 23, 2003
Board of Directors
American Strategic Income Portfolio Inc.
800 Nicollet Mall
Minneapolis, MN 55402
Ladies and Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co, Inc. ("FBR") provide
you with its opinion as to the fairness of the consideration, from a financial
point of view, to the shareholders of American Strategic Portfolio Inc. (the
"Fund") in the transaction contemplated by the Merger Agreement as referred to
herein as the "Merger" pursuant to the terms of the Amended and Restated
Agreement and Plan of Reorganization dated as of November 21, 2002 as amended by
the Amendment dated January 23, 2003 (as so amended, the "Merger Agreement") by
and among the Fund, American Strategic Income Portfolio Inc.--II, American
Strategic Income Portfolio Inc.--III, American Select Portfolio Inc.
(collectively with the Fund, the "Funds"), First American Strategic Real Estate
Portfolio Inc. (the "New REIT") and First American Strategic Income Portfolio
Inc. (the "New Fund"). FBR is not providing an opinion as to the trading value
of the Fund common stock, or of the New REIT or New Fund common stock going
forward, nor should the delivery of this Fairness Opinion be construed as a
recommendation by FBR as to the suitability of the New REIT or the New Fund
shares as an investment by current investors in the Fund. FBR is not involved in
the actual decision making process regarding the allocation of assets, but we
have reviewed the written methodology that will be used in determining the
allocation. The risk factors to be considered by the individual investors will
be described in the Form S-4 Registration Statement, a draft of which FBR has
reviewed.
The Merger Agreement provides, among other things, that upon the effectiveness
of the Merger, each Fund whose shareholders approve the Merger will merge into
the New REIT and that each share of such Fund's common stock, other than shares
with respect to which dissenters rights' of appraisal are exercised under the
Minnesota Business Corporation, shall be converted into the right to receive a
number of shares of common stock of the New REIT or a number of shares of common
stock of the New Fund having a net asset value equal to the net asset value of
the converted share. The Merger Agreement requires, as a condition to the
Merger, that Funds having, in the aggregate, a net asset value of at least $200
million (net of cash payments to be paid for dissenting shares based on their
net asset value and net of net assets to be transferred to the New Fund) elect
to participate in the Merger. The number of shares that may receive New Fund
shares or cash through the exercise of dissenters' rights will be limited to 49%
of the shares of the Fund. Shareholder elections to receive New Fund shares in
excess of this limitation will be pro rated based on the individual
shareholdings in the Fund. The Merger Agreement also requires, as a condition to
the Merger, that the New Fund shall have been approved for listing on the
American Stock Exchange (which will require that the New Fund have at least $50
million of net assets and no fewer than 500 separate shareholders). The Merger
Agreement also requires, as a condition to a Fund's participation in the Merger,
that less than 60% of the outstanding stock of that Approving Fund shall have
made valid New Fund election. The Merger will be a tax-free transaction for
shareholders electing to receive New REIT shares and will be a taxable
transaction for shareholders electing the New Fund Option. The complete terms of
the proposed transaction are described in the Merger Agreement, and this summary
is qualified in its entirety by reference thereto. The Merger Agreement will be
considered at a special meeting of the shareholders of the Fund.
C-1-1
<Page>
In order to prepare and deliver this opinion, FBR has completed the following
tasks:
1. reviewed the Merger Agreement;
2. reviewed the REIT Advisory Agreement (as defined in the Merger Agreement);
3. reviewed the New Fund Advisory Agreement (as defined in the Merger
Agreement);
4. reviewed the Charter (as defined in the Merger Agreement);
5. reviewed the ByLaws (as defined in the Merger Agreement);
6. reviewed Amendment No. 2 to the Form S-4 Registration Statement filed with
the SEC on December 26, 2002;
7. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. annual reports to shareholders for the years ended
November 30, 1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999, November 30, 2000, and November 30, 2001;
8. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III annual reports to shareholders for the
periods ended May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998,
May 31, 1999, May 31, 2000, May 31, 2001, and May 31, 2002;
9. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. semi-annual reports to shareholders for the periods ended
May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998, May 31, 1999,
May 31, 2000, May 31, 2001, and May 31, 2002;
10. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III semi-annual reports to shareholders
for the periods ended November 30, 1995, November 30, 1996, November 30,
1997, November 30, 1998, November 30, 1999, November 30, 2000, and
November 30, 2001;
11. reviewed the American Strategic Income Portfolio Inc. prospectus dated
December 19, 1991;
12. reviewed the American Strategic Income Portfolio Inc.--II prospectus dated
July 23, 1992
13. reviewed the American Strategic Income Portfolio Inc.--III prospectus dated
March 19, 1993
14. reviewed the American Select Portfolio Inc. prospectus dated December
September 14, 1993;
15. reviewed the Funds' portfolios as of May 31, 2002;
16. reviewed the Funds' master loan and security agreements;
17. reviewed the reported market prices and trading history of the Funds'
shares for the period November 30, 1995 through May 31, 2002;
18. discussed the financial condition, results of operations, earnings
projections, business and prospects of the Funds with the Funds' manager,
U.S. Bancorp Asset Management, Inc.;
19. compared the results of operations and financial condition of the Funds
with those of certain closed-end mutual funds that FBR deemed to be
reasonably comparable to the Funds;
20. compared the results of operations and financial condition of the Funds
with those of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Funds;
21. participated in discussions and negotiations among representatives of the
Funds and representatives of U.S. Bancorp Asset Management, Inc.;
22. reviewed the financial terms, to the extent publicly available, of external
management contracts of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Acquiring Company;
23. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate; and
C-1-2
<Page>
24. reviewed the methodology to be used in allocating the existing fund assets
between New REIT and New Fund.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning the Fund furnished to it by U.S. Bancorp Asset Management, Inc., or
the publicly available financial and other information regarding the Fund. FBR
has assumed that all such information is accurate and complete and has no reason
to believe otherwise. FBR has further relied on the assurances of management
personnel of U.S. Bancorp Asset Management, Inc. that they are not aware of any
facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts for the
Fund provided to FBR by U.S. Bancorp Asset Management, Inc., FBR has assumed,
for purposes of this opinion, that the forecasts have been reasonably prepared
on bases reflecting the best available estimates and judgements of such
company's management at the time of preparation as to the future financial
performance of the Fund. FBR has assumed that there has been no undisclosed
material change in the Fund's assets, financial conditions, results of
operations, business or prospects since May 31, 2002. FBR did not undertake an
independent appraisal of the assets or liabilities of the Fund nor was FBR
furnished with any such appraisals. FBR is not expressing any opinion as to the
Fund's, the New REIT's or the New Fund's valuation or pricing procedures, any
differences between them, or any determinations made or to be made thereunder.
FBR has assumed that there will be no significant disruption in market
conditions between the valuation time specified in the Merger Agreement and the
closing date. FBR is not an expert in the evaluation of loan loss allowances,
and was not requested to and did not review any individual credit files relating
to any assets held by the Fund. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Merger
and did not consider any particular federal or state tax consequences to any
individual shareholder in rendering its opinion. FBR has assumed that the assets
and liabilities are allocated between the new REIT and the New Fund in
accordance with the terms of the written allocation methodology.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
financial institutions and real estate related companies, initial and secondary
offerings and mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial institutions and
real estate related companies.
FBR has acted as a financial advisor to the Fund's Special Committee and the
Board of Directors in connection with the Merger and will receive a fee for
services rendered.
Based upon and subject to the foregoing, as well as any such other matters as we
considered relevant, it is FBR's opinion, as of the date hereof, that the
financial consideration to be received by the shareholders of the Fund in the
Merger is fair, from a financial point of view, to the shareholders of the Fund.
It is understood that:(i) any Fairness Opinion which may be rendered by FBR
concerning the Merger shall be used by the Board of Directors solely in
connection with their consideration of the Merger; and (ii) the Fund will not
furnish any Fairness Opinion or other material prepared by FBR to any other
person or persons or use or refer to any Fairness Opinion for any other purposes
without the prior written approval of FBR. Notwithstanding the foregoing, FBR
acknowledges that any such Fairness Opinion, at the Fund's option, may be
referred to and reproduced in its entirety in proxy materials filed with the
Securities and Exchange Commission and sent to the Fund's shareholders in
connection with the solicitation of approval for the Merger and may be required
by the Fund to be addressed to the shareholders of the Fund as well as the Board
of Directors.
Very truly yours,
/s/ Friedman, Billings, Ramsey & Co., Inc.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C-1-3
<Page>
APPENDIX C-2
FAIRNESS OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO.
TO AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
January 23, 2003
Board of Directors
American Strategic Income Portfolio Inc.--II
800 Nicollet Mall
Minneapolis, MN 55402
Ladies and Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co, Inc. ("FBR") provide
you with its opinion as to the fairness of the consideration, from a financial
point of view, to the shareholders of American Strategic Portfolio Inc.--II (the
"Fund") in the transaction contemplated by the Merger Agreement as referred to
herein as the "Merger" pursuant to the terms of the Amended and Restated
Agreement and Plan of Reorganization dated as of November 21, 2002 as amended by
the Amendment dated January 23, 2003 (as so amended, the "Merger Agreement") by
and among the Fund, American Strategic Income Portfolio Inc., American Strategic
Income Portfolio Inc.--III, American Select Portfolio Inc. (collectively with
the Fund, the "Funds"), First American Strategic Real Estate Portfolio Inc. (the
"New REIT") and First American Strategic Income Portfolio Inc. (the "New Fund").
FBR is not providing an opinion as to the trading value of the Fund common
stock, or of the New REIT or New Fund common stock going forward, nor should the
delivery of this Fairness Opinion be construed as a recommendation by FBR as to
the suitability of the New REIT or the New Fund shares as an investment by
current investors in the Fund. FBR is not involved in the actual decision making
process regarding the allocation of assets, but we have reviewed the written
methodology that will be used in determining the allocation. The risk factors to
be considered by the individual investors will be described in the Form S-4
Registration Statement, a draft of which FBR has reviewed.
The Merger Agreement provides, among other things, that upon the effectiveness
of the Merger, each Fund whose shareholders approve the Merger will merge into
the New REIT and that each share of such Fund's common stock, other than shares
with respect to which dissenters rights' of appraisal are exercised under the
Minnesota Business Corporation, shall be converted into the right to receive a
number of shares of common stock of the New REIT or a number of shares of common
stock of the New Fund having a net asset value equal to the net asset value of
the converted share. The Merger Agreement requires, as a condition to the
Merger, that Funds having, in the aggregate, a net asset value of at least $200
million (net of cash payments to be paid for dissenting shares based on their
net asset value and net of net assets to be transferred to the New Fund) elect
to participate in the Merger. The number of shares that may receive New Fund
shares or cash through the exercise of dissenters' rights will be limited to 49%
of the shares of the Fund. Shareholder elections to receive New Fund shares in
excess of this limitation will be pro rated based on the individual
shareholdings in the Fund. The Merger Agreement also requires, as a condition to
the Merger, that the New Fund shall have been approved for listing on the
American Stock Exchange (which will require that the New Fund have at least $50
million of net assets and no fewer than 500 separate shareholders). The Merger
Agreement also requires, as a condition to a Fund's participation in the Merger,
that less than 60% of the outstanding stock of that Approving Fund shall have
made valid New Fund election. The Merger will be a tax-free transaction for
shareholders electing to receive New REIT shares and will be a taxable
transaction for shareholders electing the New Fund Option. The complete terms of
the proposed transaction are described in the Merger Agreement, and this summary
is qualified in its entirety by reference thereto. The Merger Agreement will be
considered at a special meeting of the shareholders of the Fund.
C-2-1
<Page>
In order to prepare and deliver this opinion, FBR has completed the following
tasks:
1. reviewed the Merger Agreement;
2. reviewed the REIT Advisory Agreement (as defined in the Merger Agreement);
3. reviewed the New Fund Advisory Agreement (as defined in the Merger
Agreement);
4. reviewed the Charter (as defined in the Merger Agreement);
5. reviewed the ByLaws (as defined in the Merger Agreement);
6. reviewed Amendment No. 2 to the Form S-4 Registration Statement filed with
the SEC on December 26, 2002;
7. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. annual reports to shareholders for the years ended
November 30, 1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999, November 30, 2000, and November 30, 2001;
8. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III annual reports to shareholders for the
periods ended May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998,
May 31, 1999, May 31, 2000, May 31, 2001, and May 31, 2002;
9. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. semi-annual reports to shareholders for the periods ended
May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998, May 31, 1999,
May 31, 2000, May 31, 2001, and May 31, 2002;
10. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III semi-annual reports to shareholders
for the periods ended November 30, 1995, November 30, 1996, November 30,
1997, November 30, 1998, November 30, 1999, November 30, 2000, and
November 30, 2001;
11. reviewed the American Strategic Income Portfolio Inc. prospectus dated
December 19, 1991;
12. reviewed the American Strategic Income Portfolio Inc.--II prospectus dated
July 23, 1992
13. reviewed the American Strategic Income Portfolio Inc.--III prospectus dated
March 19, 1993
14. reviewed the American Select Portfolio Inc. prospectus dated December
September 14, 1993;
15. reviewed the Funds' portfolios as of May 31, 2002;
16. reviewed the Funds' master loan and security agreements;
17. reviewed the reported market prices and trading history of the Funds'
shares for the period November 30, 1995 through May 31, 2002;
18. discussed the financial condition, results of operations, earnings
projections, business and prospects of the Funds with the Funds' manager,
U.S. Bancorp Asset Management, Inc.;
19. compared the results of operations and financial condition of the Funds
with those of certain closed-end mutual funds that FBR deemed to be
reasonably comparable to the Funds;
20. compared the results of operations and financial condition of the Funds
with those of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Funds;
21. participated in discussions and negotiations among representatives of the
Funds and representatives of U.S. Bancorp Asset Management, Inc.;
22. reviewed the financial terms, to the extent publicly available, of external
management contracts of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Acquiring Company;
23. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate; and
C-2-2
<Page>
24. reviewed the methodology to be used in allocating the existing fund assets
between New REIT and New Fund.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning the Fund furnished to it by U.S. Bancorp Asset Management, Inc., or
the publicly available financial and other information regarding the Fund. FBR
has assumed that all such information is accurate and complete and has no reason
to believe otherwise. FBR has further relied on the assurances of management
personnel of U.S. Bancorp Asset Management, Inc. that they are not aware of any
facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts for the
Fund provided to FBR by U.S. Bancorp Asset Management, Inc., FBR has assumed,
for purposes of this opinion, that the forecasts have been reasonably prepared
on bases reflecting the best available estimates and judgements of such
company's management at the time of preparation as to the future financial
performance of the Fund. FBR has assumed that there has been no undisclosed
material change in the Fund's assets, financial conditions, results of
operations, business or prospects since May 31, 2002. FBR did not undertake an
independent appraisal of the assets or liabilities of the Fund nor was FBR
furnished with any such appraisals. FBR is not expressing any opinion as to the
Fund's, the New REIT's or the New Fund's valuation or pricing procedures, any
differences between them, or any determinations made or to be made thereunder.
FBR has assumed that there will be no significant disruption in market
conditions between the valuation time specified in the Merger Agreement and the
closing date. FBR is not an expert in the evaluation of loan loss allowances,
and was not requested to and did not review any individual credit files relating
to any assets held by the Fund. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Merger
and did not consider any particular federal or state tax consequences to any
individual shareholder in rendering its opinion. FBR has assumed that the assets
and liabilities are allocated between the new REIT and the New Fund in
accordance with the terms of the written allocation methodology.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
financial institutions and real estate related companies, initial and secondary
offerings and mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial institutions and
real estate related companies.
FBR has acted as a financial advisor to the Fund's Special Committee and the
Board of Directors in connection with the Merger and will receive a fee for
services rendered.
Based upon and subject to the foregoing, as well as any such other matters as we
considered relevant, it is FBR's opinion, as of the date hereof, that the
financial consideration to be received by the shareholders of the Fund in the
Merger is fair, from a financial point of view, to the shareholders of the Fund.
It is understood that:(i) any Fairness Opinion which may be rendered by FBR
concerning the Merger shall be used by the Board of Directors solely in
connection with their consideration of the Merger; and (ii) the Fund will not
furnish any Fairness Opinion or other material prepared by FBR to any other
person or persons or use or refer to any Fairness Opinion for any other purposes
without the prior written approval of FBR. Notwithstanding the foregoing, FBR
acknowledges that any such Fairness Opinion, at the Fund's option, may be
referred to and reproduced in its entirety in proxy materials filed with the
Securities and Exchange Commission and sent to the Fund's shareholders in
connection with the solicitation of approval for the Merger and may be required
by the Fund to be addressed to the shareholders of the Fund as well as the Board
of Directors.
Very truly yours,
/s/ Friedman, Billings, Ramsey & Co., Inc.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C-2-3
<Page>
APPENDIX C-3
FAIRNESS OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO.
TO AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
January 23, 2002
Board of Directors
American Strategic Income Portfolio Inc.--III
800 Nicollet Mall
Minneapolis, MN 55402
Ladies and Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co, Inc. ("FBR") provide
you with its opinion as to the fairness of the consideration, from a financial
point of view, to the shareholders of American Strategic Portfolio Inc.--III
(the "Fund") in the transaction contemplated by the Merger Agreement as referred
to herein as the "Merger" pursuant to the terms of the Amended and Restated
Agreement and Plan of Reorganization dated as of November 21, 2002 as amended by
the Amendment dated January 23, 2003 (as so amended, the "Merger Agreement") by
and among the Fund, American Strategic Income Portfolio Inc., American Strategic
Income Portfolio Inc.--II, American Select Portfolio Inc. (collectively with the
Fund, the "Funds"), First American Strategic Real Estate Portfolio Inc. (the
"New REIT") and First American Strategic Income Portfolio Inc. (the "New Fund").
FBR is not providing an opinion as to the trading value of the Fund common
stock, or of the New REIT or New Fund common stock going forward, nor should the
delivery of this Fairness Opinion be construed as a recommendation by FBR as to
the suitability of the New REIT or the New Fund shares as an investment by
current investors in the Fund. FBR is not involved in the actual decision making
process regarding the allocation of assets, but we have reviewed the written
methodology that will be used in determining the allocation. The risk factors to
be considered by the individual investors will be described in the Form S-4
Registration Statement, a draft of which FBR has reviewed.
The Merger Agreement provides, among other things, that upon the effectiveness
of the Merger, each Fund whose shareholders approve the Merger will merge into
the New REIT and that each share of such Fund's common stock, other than shares
with respect to which dissenters rights' of appraisal are exercised under the
Minnesota Business Corporation, shall be converted into the right to receive a
number of shares of common stock of the New REIT or a number of shares of common
stock of the New Fund having a net asset value equal to the net asset value of
the converted share. The Merger Agreement requires, as a condition to the
Merger, that Funds having, in the aggregate, a net asset value of at least $200
million (net of cash payments to be paid for dissenting shares based on their
net asset value and net of net assets to be transferred to the New Fund) elect
to participate in the Merger. The number of shares that may receive New Fund
shares or cash through the exercise of dissenters' rights will be limited to 49%
of the shares of the Fund. Shareholder elections to receive New Fund shares in
excess of this limitation will be pro rated based on the individual
shareholdings in the Fund. The Merger Agreement also requires, as a condition to
the Merger, that the New Fund shall have been approved for listing on the
American Stock Exchange (which will require that the New Fund have at least $50
million of net assets and no fewer than 500 separate shareholders). The Merger
Agreement also requires, as a condition to a Fund's participation in the Merger,
that less than 60% of the outstanding stock of that Approving Fund shall have
made valid New Fund election. The Merger will be a tax-free transaction for
shareholders electing to receive New REIT shares and will be a taxable
transaction for shareholders electing the New Fund Option. The complete terms of
the proposed transaction are described in the Merger Agreement, and this summary
is qualified in its entirety by reference thereto. The Merger Agreement will be
considered at a special meeting of the shareholders of the Fund.
C-3-1
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In order to prepare and deliver this opinion, FBR has completed the following
tasks:
1. reviewed the Merger Agreement;
2. reviewed the REIT Advisory Agreement (as defined in the Merger Agreement);
3. reviewed the New Fund Advisory Agreement (as defined in the Merger
Agreement);
4. reviewed the Charter (as defined in the Merger Agreement);
5. reviewed the ByLaws (as defined in the Merger Agreement);
6. reviewed Amendment No. 2 to the Form S-4 Registration Statement filed with
the SEC on December 26, 2002;
7. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. annual reports to shareholders for the years ended
November 30, 1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999, November 30, 2000, and November 30, 2001;
8. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III annual reports to shareholders for the
periods ended May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998,
May 31, 1999, May 31, 2000, May 31, 2001, and May 31, 2002;
9. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. semi-annual reports to shareholders for the periods ended
May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998, May 31, 1999,
May 31, 2000, May 31, 2001, and May 31, 2002;
10. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III semi-annual reports to shareholders
for the periods ended November 30, 1995, November 30, 1996, November 30,
1997, November 30, 1998, November 30, 1999, November 30, 2000, and
November 30, 2001;
11. reviewed the American Strategic Income Portfolio Inc. prospectus dated
December 19, 1991;
12. reviewed the American Strategic Income Portfolio Inc.--II prospectus dated
July 23, 1992
13. reviewed the American Strategic Income Portfolio Inc.--III prospectus dated
March 19, 1993
14. reviewed the American Select Portfolio Inc. prospectus dated December
September 14, 1993;
15. reviewed the Funds' portfolios as of May 31, 2002;
16. reviewed the Funds' master loan and security agreements;
17. reviewed the reported market prices and trading history of the Funds'
shares for the period November 30, 1995 through May 31, 2002;
18. discussed the financial condition, results of operations, earnings
projections, business and prospects of the Funds with the Funds' manager,
U.S. Bancorp Asset Management, Inc.;
19. compared the results of operations and financial condition of the Funds
with those of certain closed-end mutual funds that FBR deemed to be
reasonably comparable to the Funds;
20. compared the results of operations and financial condition of the Funds
with those of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Funds;
21. participated in discussions and negotiations among representatives of the
Funds and representatives of U.S. Bancorp Asset Management, Inc.;
22. reviewed the financial terms, to the extent publicly available, of external
management contracts of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Acquiring Company;
23. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate; and
C-3-2
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24. reviewed the methodology to be used in allocating the existing fund assets
between New REIT and New Fund.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning the Fund furnished to it by U.S. Bancorp Asset Management, Inc., or
the publicly available financial and other information regarding the Fund. FBR
has assumed that all such information is accurate and complete and has no reason
to believe otherwise. FBR has further relied on the assurances of management
personnel of U.S. Bancorp Asset Management, Inc. that they are not aware of any
facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts for the
Fund provided to FBR by U.S. Bancorp Asset Management, Inc., FBR has assumed,
for purposes of this opinion, that the forecasts have been reasonably prepared
on bases reflecting the best available estimates and judgements of such
company's management at the time of preparation as to the future financial
performance of the Fund. FBR has assumed that there has been no undisclosed
material change in the Fund's assets, financial conditions, results of
operations, business or prospects since May 31, 2002. FBR did not undertake an
independent appraisal of the assets or liabilities of the Fund nor was FBR
furnished with any such appraisals. FBR is not expressing any opinion as to the
Fund's, the New REIT's or the New Fund's valuation or pricing procedures, any
differences between them, or any determinations made or to be made thereunder.
FBR has assumed that there will be no significant disruption in market
conditions between the valuation time specified in the Merger Agreement and the
closing date. FBR is not an expert in the evaluation of loan loss allowances,
and was not requested to and did not review any individual credit files relating
to any assets held by the Fund. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Merger
and did not consider any particular federal or state tax consequences to any
individual shareholder in rendering its opinion. FBR has assumed that the assets
and liabilities are allocated between the new REIT and the New Fund in
accordance with the terms of the written allocation methodology.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
financial institutions and real estate related companies, initial and secondary
offerings and mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial institutions and
real estate related companies.
FBR has acted as a financial advisor to the Fund's Special Committee and the
Board of Directors in connection with the Merger and will receive a fee for
services rendered.
Based upon and subject to the foregoing, as well as any such other matters as we
considered relevant, it is FBR's opinion, as of the date hereof, that the
financial consideration to be received by the shareholders of the Fund in the
Merger is fair, from a financial point of view, to the shareholders of the Fund.
It is understood that:(i) any Fairness Opinion which may be rendered by FBR
concerning the Merger shall be used by the Board of Directors solely in
connection with their consideration of the Merger; and (ii) the Fund will not
furnish any Fairness Opinion or other material prepared by FBR to any other
person or persons or use or refer to any Fairness Opinion for any other purposes
without the prior written approval of FBR. Notwithstanding the foregoing, FBR
acknowledges that any such Fairness Opinion, at the Fund's option, may be
referred to and reproduced in its entirety in proxy materials filed with the
Securities and Exchange Commission and sent to the Fund's shareholders in
connection with the solicitation of approval for the Merger and may be required
by the Fund to be addressed to the shareholders of the Fund as well as the Board
of Directors.
Very truly yours,
/s/ Friedman, Billings, Ramsey & Co., Inc.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C-3-3
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APPENDIX C-4
FAIRNESS OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO.
TO AMERICAN SELECT PORTFOLIO INC.
January 23, 2003
Board of Directors
American Select Portfolio Inc.
800 Nicollet Mall
Minneapolis, MN 55402
Ladies and Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co, Inc. ("FBR") provide
you with its opinion as to the fairness of the consideration, from a financial
point of view, to the shareholders of American Select Portfolio Inc. (the
"Fund") in the transaction contemplated by the Merger Agreement as referred to
herein as the "Merger" pursuant to the terms of the Amended and Restated
Agreement and Plan of Reorganization dated as of November 21, 2002 as amended by
the Amendment dated January 23, 2003 (as so amended, the "Merger Agreement") by
and among the Fund, American Strategic Income Portfolio Inc., American Strategic
Income Portfolio Inc.--II, American Strategic Portfolio Inc.--III (collectively
with the Fund, the "Funds"), First American Strategic Real Estate Portfolio Inc.
(the "New REIT") and First American Strategic Income Portfolio Inc. (the "New
Fund"). FBR is not providing an opinion as to the trading value of the Fund
common stock, or of the New REIT or New Fund common stock going forward, nor
should the delivery of this Fairness Opinion be construed as a recommendation by
FBR as to the suitability of the New REIT or the New Fund shares as an
investment by current investors in the Fund. FBR is not involved in the actual
decision making process regarding the allocation of assets, but we have reviewed
the written methodology that will be used in determining the allocation. The
risk factors to be considered by the individual investors will be described in
the Form S-4 Registration Statement, a draft of which FBR has reviewed.
The Merger Agreement provides, among other things, that upon the effectiveness
of the Merger, each Fund whose shareholders approve the Merger will merge into
the New REIT and that each share of such Fund's common stock, other than shares
with respect to which dissenters rights' of appraisal are exercised under the
Minnesota Business Corporation, shall be converted into the right to receive a
number of shares of common stock of the New REIT or a number of shares of common
stock of the New Fund having a net asset value equal to the net asset value of
the converted share. The Merger Agreement requires, as a condition to the
Merger, that Funds having, in the aggregate, a net asset value of at least $200
million (net of cash payments to be paid for dissenting shares based on their
net asset value and net of net assets to be transferred to the New Fund) elect
to participate in the Merger. The number of shares that may receive New Fund
shares or cash through the exercise of dissenters' rights will be limited to 49%
of the shares of the Fund. Shareholder elections to receive New Fund shares in
excess of this limitation will be pro rated based on the individual
shareholdings in the Fund. The Merger Agreement also requires, as a condition to
the Merger, that the New Fund shall have been approved for listing on the
American Stock Exchange (which will require that the New Fund have at least $50
million of net assets and no fewer than 500 separate shareholders). The Merger
Agreement also requires, as a condition to a Fund's participation in the Merger,
that less than 60% of the outstanding stock of that Approving Fund shall have
made valid New Fund election. The Merger will be a tax-free transaction for
shareholders electing to receive New REIT shares and will be a taxable
transaction for shareholders electing the New Fund Option. The complete terms of
the proposed transaction are described in the Merger Agreement, and this summary
is qualified in its entirety by reference thereto. The Merger Agreement will be
considered at a special meeting of the shareholders of the Fund.
C-4-1
<Page>
In order to prepare and deliver this opinion, FBR has completed the following
tasks:
1. reviewed the Merger Agreement;
2. reviewed the REIT Advisory Agreement (as defined in the Merger Agreement);
3. reviewed the New Fund Advisory Agreement (as defined in the Merger
Agreement);
4. reviewed the Charter (as defined in the Merger Agreement);
5. reviewed the ByLaws (as defined in the Merger Agreement);
6. reviewed Amendment No. 2 to the Form S-4 Registration Statement filed with
the SEC on December 26, 2002;
7. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. annual reports to shareholders for the years ended
November 30, 1995, November 30, 1996, November 30, 1997, November 30, 1998,
November 30, 1999, November 30, 2000, and November 30, 2001;
8. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III annual reports to shareholders for the
periods ended May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998,
May 31, 1999, May 31, 2000, May 31, 2001, and May 31, 2002;
9. reviewed the American Strategic Income Portfolio Inc. and American Select
Portfolio Inc. semi-annual reports to shareholders for the periods ended
May 31, 1995, May 31, 1996, May 31, 1997, May 31, 1998, May 31, 1999,
May 31, 2000, May 31, 2001, and May 31, 2002;
10. reviewed the American Strategic Income Portfolio Inc.--II and American
Strategic Income Portfolio Inc.--III semi-annual reports to shareholders
for the periods ended November 30, 1995, November 30, 1996, November 30,
1997, November 30, 1998, November 30, 1999, November 30, 2000, and
November 30, 2001;
11. reviewed the American Strategic Income Portfolio Inc. prospectus dated
December 19, 1991;
12. reviewed the American Strategic Income Portfolio Inc.--II prospectus dated
July 23, 1992
13. reviewed the American Strategic Income Portfolio Inc.--III prospectus dated
March 19, 1993
14. reviewed the American Select Portfolio Inc. prospectus dated December
September 14, 1993;
15. reviewed the Funds' portfolios as of May 31, 2002;
16. reviewed the Funds' master loan and security agreements;
17. reviewed the reported market prices and trading history of the Funds'
shares for the period November 30, 1995 through May 31, 2002;
18. discussed the financial condition, results of operations, earnings
projections, business and prospects of the Funds with the Funds' manager,
U.S. Bancorp Asset Management, Inc.;
19. compared the results of operations and financial condition of the Funds
with those of certain closed-end mutual funds that FBR deemed to be
reasonably comparable to the Funds;
20. compared the results of operations and financial condition of the Funds
with those of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Funds;
21. participated in discussions and negotiations among representatives of the
Funds and representatives of U.S. Bancorp Asset Management, Inc.;
22. reviewed the financial terms, to the extent publicly available, of external
management contracts of certain publicly-traded REITs that FBR deemed to be
reasonably comparable to the Acquiring Company;
23. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate; and
C-4-2
<Page>
24. reviewed the methodology to be used in allocating the existing fund assets
between New REIT and New Fund.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning the Fund furnished to it by U.S. Bancorp Asset Management, Inc., or
the publicly available financial and other information regarding the Fund. FBR
has assumed that all such information is accurate and complete and has no reason
to believe otherwise. FBR has further relied on the assurances of management
personnel of U.S. Bancorp Asset Management, Inc. that they are not aware of any
facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts for the
Fund provided to FBR by U.S. Bancorp Asset Management, Inc., FBR has assumed,
for purposes of this opinion, that the forecasts have been reasonably prepared
on bases reflecting the best available estimates and judgements of such
company's management at the time of preparation as to the future financial
performance of the Fund. FBR has assumed that there has been no undisclosed
material change in the Fund's assets, financial conditions, results of
operations, business or prospects since May 31, 2002. FBR did not undertake an
independent appraisal of the assets or liabilities of the Fund nor was FBR
furnished with any such appraisals. FBR is not expressing any opinion as to the
Fund's, the New REIT's or the New Fund's valuation or pricing procedures, any
differences between them, or any determinations made or to be made thereunder.
FBR has assumed that there will be no significant disruption in market
conditions between the valuation time specified in the Merger Agreement and the
closing date. FBR is not an expert in the evaluation of loan loss allowances,
and was not requested to and did not review any individual credit files relating
to any assets held by the Fund. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Merger
and did not consider any particular federal or state tax consequences to any
individual shareholder in rendering its opinion. FBR has assumed that the assets
and liabilities are allocated between the new REIT and the New Fund in
accordance with the terms of the written allocation methodology.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
financial institutions and real estate related companies, initial and secondary
offerings and mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial institutions and
real estate related companies.
FBR has acted as a financial advisor to the Fund's Special Committee and the
Board of Directors in connection with the Merger and will receive a fee for
services rendered.
Based upon and subject to the foregoing, as well as any such other matters as we
considered relevant, it is FBR's opinion, as of the date hereof, that the
financial consideration to be received by the shareholders of the Fund in the
Merger is fair, from a financial point of view, to the shareholders of the Fund.
It is understood that:(i) any Fairness Opinion which may be rendered by FBR
concerning the Merger shall be used by the Board of Directors solely in
connection with their consideration of the Merger; and (ii) the Fund will not
furnish any Fairness Opinion or other material prepared by FBR to any other
person or persons or use or refer to any Fairness Opinion for any other purposes
without the prior written approval of FBR. Notwithstanding the foregoing, FBR
acknowledges that any such Fairness Opinion, at the Fund's option, may be
referred to and reproduced in its entirety in proxy materials filed with the
Securities and Exchange Commission and sent to the Fund's shareholders in
connection with the solicitation of approval for the Merger and may be required
by the Fund to be addressed to the shareholders of the Fund as well as the Board
of Directors.
Very truly yours,
/s/ Friedman, Billings, Ramsey & Co., Inc.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C-4-3
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APPENDIX D
SECTIONS 302A.471 & 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing
or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to
the shareholders in accordance with their respective interests within
one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a constituent organization, except as provided
in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, except as provided in
subdivision 3; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for
their shares.
Subd. 2. Beneficial owners.
(a) A shareholder shall not assert dissenters' rights as to less than all
of the shares registered in the name of the shareholder, unless the
shareholder dissents with respect to all the shares that are
beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner
on whose behalf the shareholder dissents. In that event, the rights of
the dissenter shall be determined as if the shares as to which the
shareholder has dissented and the other shares were registered in the
names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder
under the terms of this section and section 302A.473, if the beneficial
owner
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submits to the corporation at the time of or before the assertion of
the rights a written consent of the shareholder.
Subd. 3. Rights not to apply.
(a) Unless the articles, the bylaws, or a resolution approved by the board
otherwise provide, the right to obtain payment under this section does
not apply to a shareholder of (1) the surviving corporation in a merger
with respect to shares of the shareholder that are not entitled to be
voted on the merger and are not canceled or exchanged in the merger or
(2) the corporation whose shares will be acquired by the acquiring
corporation in a plan of exchange with respect to shares of the
shareholder that are not entitled to be voted on the plan of exchange
and are not exchanged in the plan of exchange.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to
vote on an action described in subdivision 1, only shareholders as of
the date fixed, and beneficial owners as of the date fixed who hold
through shareholders, as provided in subdivision 2, may exercise
dissenters' rights.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
Subdivision 1. Definitions.
(a) For purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate
action referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1,
up to and including the date of payment, calculated at the rate
provided in section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters' rights must file with the corporation
before the vote on the proposed action a written notice of intent to demand the
fair value of the shares owned by the shareholder and must not vote the shares
in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all
shareholders who have complied with subdivision 3 and to all
shareholders entitled to dissent if no shareholder vote was required, a
notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the
date by which they must be received;
D-2
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(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment;
and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or
comply with any restrictions on transfer of uncertificated shares
within 30 days after the notice required by paragraph (a) was given,
but the dissenter retains all other rights of a shareholder until the
proposed action takes effect.
Subd. 5. Payment; return of shares.
(a) After the corporate action takes effect, or after the corporation
receives a valid demand for payment, whichever is later, the
corporation shall remit to each dissenting shareholder who has complied
with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective
date of the corporate action, together with the latest available
interim financial statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action
dissented from was first announced to the public or who is dissenting
on behalf of a person who was not a beneficial owner on that date. If
the dissenter has complied with subdivisions 3 and 4, the corporation
shall forward to the dissenter the materials described in paragraph
(a), a statement of the reason for withholding the remittance, and an
offer to pay to the dissenter the amount listed in the materials if the
dissenter agrees to accept that amount in full satisfaction. The
dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If
the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and
cancel all transfer restrictions. However, the corporation may again
give notice under subdivision 4 and require deposit or restrict
transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in
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the county in this state in which the last registered office of the constituent
corporation was located. The petition shall name as parties all dissenters who
have demanded payment under subdivision 6 and who have not reached agreement
with the corporation. The corporation shall, after filing the petition, serve
all parties with a summons and copy of the petition under the rules of civil
procedure. Nonresidents of this state may be served by registered or certified
mail or by publication as provided by law. Except as otherwise provided, the
rules of civil procedure apply to this proceeding. The jurisdiction of the court
is plenary and exclusive. The court may appoint appraisers, with powers and
authorities the court deems proper, to receive evidence on and recommend the
amount of the fair value of the shares. The court shall determine whether the
shareholder or shareholders in question have fully complied with the
requirements of this section, and shall determine the fair value of the shares,
taking into account any and all factors the court finds relevant, computed by
any method or combination of methods that the court, in its discretion, sees fit
to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,
wherever located. A dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses.
(a) The court shall determine the costs and expenses of a proceeding under
subdivision 7, including the reasonable expenses and compensation of
any appraisers appointed by the court, and shall assess those costs and
expenses against the corporation, except that the court may assess part
or all of those costs and expenses against a dissenter whose action in
demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and
expenses of any experts or attorneys as the court deems equitable.
These fees and expenses may also be assessed against a person who has
acted arbitrarily, vexatiously, or not in good faith in bringing the
proceeding, and may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the
dissenters, if any.
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APPENDIX E
INVESTMENT POLICIES OF THE EXISTING FUNDS AND THE NEW FUND
<Table>
<Caption>
PAGE
----
Investment Policies of the Existing Funds and the
New Fund........................................ E-2
Whole Loans and Mortgage Participations........... E-2
Mortgage-Backed Securities........................ E-3
Preferred Issues of Real Estate Investment
Trusts.......................................... E-4
Corporate Debt Securities......................... E-5
Use of Ratings.................................... E-5
Hedging........................................... E-5
When-Issued and Forward Commitment Securities..... E-9
Leverage and Borrowing............................ E-9
Repurchase Agreements............................. E-10
Lending of Securities............................. E-10
</Table>
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APPENDIX E
INVESTMENT POLICIES OF THE EXISTING FUNDS AND THE NEW FUND
As discussed in the joint proxy statement/prospectus, the investment
policies, restrictions and strategies of the Existing Funds and the New Fund
(sometimes referred to in this Appendix collectively as "the Funds" or
individually as "a Fund") are substantially similar. See "THE EXISTING FUNDS" in
the joint proxy statement/prospectus for a summary of these investment policies.
This Appendix discusses in greater detail some of the portfolio securities in
which the Funds may invest and some of the investment techniques that the Funds
may use. Additional information also appears in the Statement of Additional
Information included in the New Fund's Registration Statement on Form N-14 (or
SAI) under "Investment Objectives and Policies."
WHOLE LOANS AND MORTGAGE PARTICIPATIONS
USBAM typically will cause a Fund to engage third-party loan servicers to
collect payments, administer any tax and insurance escrows, administer any loan
reserves and monitor other matters in connection with the administration of
whole loans. The third-party loan servicers are typically paid a customary
servicing fee for these services. In some cases, a Fund may take actions with
respect to the administration of a whole loan that USBAM deems appropriate.
These actions may include, but are not limited to, making protective advances to
protect a Fund's interest in collateral (E.G., paying real estate taxes when
due); extending the stated maturity or otherwise modifying the terms of a whole
loan; adding or releasing reserves or other collateral, obligors or guarantors;
and permitting transfers of collateral and assumptions of whole loans.
In evaluating whole loans and mortgage participations, USBAM considers and
analyzes various factors including (if determined by USBAM to be applicable) but
not limited to: (i) the interest rate on the underlying mortgage or installment
sales contract; (ii) the loan-to-value ratio on the underlying mortgages or
installment sales contract; (iii) payment history; (iv) amortization type (I.E.,
fixed rate or adjustable rate); (v) the geographic regions in which the
underlying collateral is located; (vi) prepayment expectations; (vii) the debt
coverage ratio, I.E., the ratio of annual net operating income generated by the
mortgaged property, before payment of any debt service on the mortgage loan, to
the annual debt service on that mortgage loan based on the current mortgage
interest rate; (viii) the age of the property; (ix) the historical and
anticipated level of vacancies and rents on the property and on other comparable
properties located in the same region; (x) the professional expertise of the
obligor and/or any third-party property manager; (xi) third-party environmental
reports on the mortgaged property; (xii) the physical condition of the mortgaged
property, which may be based on third-party engineering evaluations; and
(xiii) the size of reserves for anticipated needs over the term of the loan,
which may include capital replacements, tenant improvements and leasing
commissions and debt service reserves.
USBAM will itself or through third parties hired on its behalf, with respect
to the New Fund's investments in whole loans and mortgage participations, review
to the extent practicable the documents generated in connection with the
underlying loans with a view towards determining, among other things, that:
(i) the New Fund upon purchase or making thereof will acquire valid loans (or
interests therein) and a perfected security interest in the property securing
the loans; (ii) there are no claims to the collateral superior to that of the
New Fund's interest (except for (a) the lien of current real property taxes and
assessments not yet due and payable, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record being generally
acceptable to mortgage lending institutions generally and/or specifically
referred to in a lender's title insurance policy or attorney's title certificate
or opinion delivered to the holder of the loan and which do not adversely affect
the value of the collateral, (c) any prior lien agreed to by the New Fund, and
(d) other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by the respective loan documents or the use, enjoyment, value or marketability
of the related collateral); and (iii) the New Fund's purchase will not give rise
to rights on
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the part of third parties, the exercise of which could adversely affect the New
Fund. It may, however, be impracticable for USBAM to examine prior to purchase
every relevant document within the limited due diligence period afforded by the
financial institution selling the loans, and in some cases the document files
may not be well-maintained and important documents or contracts may be missing.
USBAM will make certain assumptions regarding the rate and severity of defaults
on the mortgages or installment sales contracts underlying whole loans and
mortgage participations purchased by the New Fund and will determine the
acquisition price for these investments accordingly. There can be no assurance,
however, that the actual rate and/or severity of defaults will not be greater
than that anticipated by USBAM.
MORTGAGE-BACKED SECURITIES
There are currently three basic types of mortgage-backed securities
including: (i) those issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities such as Ginnie Mae, Fannie Mae and Freddie Mac;
(ii) those issued by non-governmental issuers that represent interests in, or
are collateralized by, mortgage-backed securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities; and (iii) those
issued by non-governmental issuers that represent an interest in, or are
collateralized by, whole mortgage loans or mortgage-backed securities without a
government guarantee but usually (except in the case of custodial trusts, as
discussed below) with over-collateralization or some other form of private
credit enhancement. Non-governmental issuers referred to in (ii) and
(iii) above include originators of, and investors in, mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of these entities.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The guaranteed mortgage
pass-through securities in which a Fund will invest will include certificates
issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac, which represent
interests in underlying residential mortgage loans. These mortgage pass-through
securities provide for the pass-through to investors of their pro-rata share of
monthly payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of these
securities and the servicer of the underlying mortgage loans. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only the ultimate collection of principal of the underlying
mortgage loans, which may take up to one year.
Ginnie Mae Certificates are direct obligations of the U.S. Government and as
such are backed by the full faith and credit of the United States. Fannie Mae is
a federally chartered and privately owned corporation and Freddie Mac is a
corporate instrumentality of the United States. Fannie Mae and Freddie Mac
Certificates are solely obligations of the issuing entity and are not backed by
the full faith and credit of the United States.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to the Ginnie Mae, Fannie Mae and Freddie
Mac mortgage pass-through securities described above and are issued by
originators of, and investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of these entities. Adjustable rate private mortgage
pass-through securities are backed by pools of conventional adjustable rate
mortgage loans. Private mortgage pass-through securities in which a Fund may
invest also include beneficial interests of custodial trusts comprised solely of
whole loans that a Fund could have purchased directly. Since private mortgage
pass-through securities typically are not guaranteed by an entity having the
credit status of Ginnie Mae, Fannie Mae or Freddie Mac, these securities
generally (except in the case of custodial trusts) are structured with one or
more types of credit enhancement. See "Types of Credit Support" below.
CMOS AND MULTI-CLASS PASS-THROUGH SECURITIES. Collateralized mortgage
obligations (or CMOs) are debt instruments issued by special purpose entities
which are secured by pools of mortgage loans or other mortgage-backed
securities. Multi-class pass-through securities are equity interests in a trust
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composed of mortgage loans or other mortgage-backed securities. Payments of
principal and interest on underlying collateral provide the funds to pay debt
service on the CMO or make scheduled distributions on the multi-class
pass-through security. CMOs and multi-class pass-through securities
(collectively referred to as CMOs unless the context indicates otherwise) may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations. The issuer of a CMO may elect to be treated as a real estate
mortgage investment conduit (or REMIC).
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied to the classes of the series of a CMO in
the order of their respective stated maturities or final distribution dates so
that no payment of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.
TYPES OF CREDIT SUPPORT. To lessen the effect of failures by obligors on
underlying mortgages to make payments, mortgage-backed securities may contain
elements of credit support. This credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of these approaches. The
Funds will not pay any additional fees for this credit support, although the
existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of these securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
PREFERRED ISSUES OF REAL ESTATE INVESTMENT TRUSTS
Real estate investment trusts (or REITs) are publicly traded corporations or
trusts that acquire, hold and manage residential or commercial real estate.
Preferred issues of REITs are equity securities with fixed income
characteristics, typically offering higher yields than the dividends paid on the
common stock of REITs, but without the capital appreciation potential of common
stock of REITs. Preferred shareholders also have priority over common
shareholders upon liquidation of the REIT. REITs generally can be divided into
the following three types:
- Equity REITs, which invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains or
real estate appreciation.
- Mortgage REITs, which invest the majority of their assets in real estate
mortgage loans and derive their income primarily from interest payments.
- Hybrid REITs, which combine the characteristics of equity REITs and
mortgage REITs.
Particular risks associated with investments in REITs include the fact that
equity REITs will be affected by changes in the values of and incomes from the
properties they own, while mortgage REITs may be affected by the credit quality
of the mortgage loans they hold. REITs are dependent on
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specialized management skills which may affect their ability to generate cash
flow for operating purposes and to make distributions to shareholders or
unitholders.
CORPORATE DEBT SECURITIES
The Funds' investments in corporate debt securities may include unregistered
securities that are purchased in private placements and are subject to statutory
or contractual restrictions and delays on resale. Private placements of debt
securities have frequently resulted in higher yields and restrictive covenants
providing greater protection for the purchaser. An issuer is often willing to
create more attractive features when its securities are issued privately because
it has averted the expense and delay involved in a public offering of its
securities.
Unregistered securities are often referred to as "restricted securities."
Unregistered securities may generally be resold only in a privately negotiated
transaction with a limited number of purchasers or in a public offering
registered under the Securities Act. Where registration is required, a Fund
holding such securities may be obligated to pay all or part of the registration
expense, and a considerable period may elapse between the time of the decision
to sell and the time that a Fund may be permitted to sell a security under an
effective registration statement. If during this period adverse market
conditions were to develop, a Fund might obtain a less favorable price than that
which prevailed when it decided to sell. Unregistered securities are, therefore,
unlike securities that are traded in the open market and that can be expected to
be sold immediately if the market is adequate. A limited exception to the
foregoing is that pursuant to Rule 144A under the Securities Act, certain
unregistered securities can be sold without limit to certain qualified
institutional buyers. However, the Funds may not always be able to sell
unregistered securities pursuant to Rule 144A.
USE OF RATINGS
The ratings of fixed income securities by nationally recognized statistical
rating organizations are generally accepted barometers of credit risk. They are,
however, subject to certain limitations from an investor's standpoint. The
rating of an issuer is heavily weighted by past developments; although the
rating incorporates an assessment of future events, future performance of an
issuer may differ greatly from current expectations. There is frequently a lag
between the time a rating is assigned and the time it is updated. In addition,
there may be varying degrees of difference in conditions of securities in each
rating category. Rating agencies determine ratings for mortgage-backed
securities by considering the likelihood of the receipt by the holders of these
securities of all required distributions, the nature of the underlying assets,
the credit quality of the grantor, if any, and the structural, legal and tax
aspects associated with the securities. The ratings do not represent an
assessment of the likelihood that principal prepayments will be made by
mortgagors, which may cause investors to suffer a lower than anticipated yield
or fail to recoup their initial investment.
At the time of making investments, USBAM will consider the ratings of the
securities in which it may invest or, in the case of unrated securities, the
comparability of their credit risk to that of rated securities. USBAM, however,
performs its own investment analysis and does not rely exclusively on these
ratings.
HEDGING
The Funds may engage in various interest rate transactions, consisting of
interest rate swaps, caps and floors, futures and put and call transactions
(collectively, hedging transactions). Any or all of these techniques may be used
at any time. There is no particular strategy that requires use of one technique
rather than another. Use of any hedging transaction is a function of market
conditions. The hedging transactions that the Funds may use are described below.
INTEREST RATE TRANSACTIONS. To preserve a return or spread on a particular
investment or portion of its portfolio, or for other non-speculative purposes, a
Fund may enter into interest rate swaps and the purchase or sale of interest
rate caps and floors. The Funds do not intend to use these transactions for
speculative purposes. Interest rate swaps involve the exchange by a Fund with
another party of their
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respective commitments to pay or receive interest, for example, an exchange of
floating rate payments for fixed rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling the interest rate floor.
The Funds may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, that is, the two payment streams are netted out, with the Funds
receiving or paying, as the case may be, only the net amount of the two
payments. The Funds will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of the
other party thereto is rated at least AA by a nationally recognized statistical
rating organization or, if unrated, determined by USBAM to be of comparable
quality. USBAM monitors the creditworthiness of counterparties to interest rate
transactions. If there is a default by the counter party to an interest rate
transaction, a Fund will have contractual remedies under the agreements related
to the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, USBAM has
determined that the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps.
There is no limit on the amount of interest rate swap transactions that may
be entered into by a Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Therefore, the risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that a Fund is contractually obligated to make. If the counter party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of interest payments that a Fund contractually is entitled to receive. The
aggregate purchase price of caps and floors held by a Fund may not exceed 5% of
a Fund's total assets. The Funds may write (I.E., sell) caps and floors without
limitation, provided that each Fund will maintain in a segregated account cash
or high-quality liquid debt securities having an aggregate net asset value of at
least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to any caps of floors.
OPTIONS ON SECURITIES. In order to reduce fluctuations in net asset value,
the Funds may write (I.E., sell) covered put and call options and, for hedging
purposes, purchase put and call options on the securities in which it may
invest. These options are traded on United States and foreign securities
exchanges and in the over-the-counter markets.
A put option gives the buyer of the option, upon payment of a premium, the
right to deliver a specified amount of a security to the writer of the option on
or before a fixed date at a predetermined price. A call option gives the buyer
of the option, upon payment of a premium, the right to call upon the writer to
deliver a specified amount of a security on or before a fixed date, at a
predetermined price. A call option written by a Fund is "covered" if a Fund owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if a Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by a Fund in cash, U.S. Government securities or other liquid
high-grade debt securities in a segregated account with its custodian. A put
option written by a Fund is "covered" if the Fund maintains cash, U.S.
Government securities or other liquid high-grade debt securities with a value
equal to the exercise price in a segregated account with its custodian, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
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the exercise price of the put written. A Fund will not write puts if, as a
result, more than 50% of such Fund's total assets would be required to be
segregated. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
The Funds may write call options that are not covered for cross-hedging
purposes. A call option written for cross-hedging purposes is designed to
provide a hedge against a decline in the value of another security that a Fund
owns or has the right to acquire. A Fund will write such a call option only when
USBAM expects that price changes in the security on which the option is written
will correlate well with price changes in a security in a Fund's portfolio. The
risk of imperfect correlation, however, always exists. In these circumstances, a
Fund collateralizes the option by maintaining in a segregated account with a
Fund's custodian cash and liquid securities in an amount not less than the
market value of the underlying security, marked to market daily.
In purchasing a call option, a Fund would be in a position to realize a gain
if, during the option period, the price of the security increased by an amount
in excess of the premium paid. A Fund would realize a loss if the price of the
security declined or remained the same or did not increase during the period by
more than the amount of the premium. In purchasing a put option, a Fund would be
in a position to realize a gain if, during the option period, the price of the
security declined by an amount in excess of the premium paid. A Fund would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would be lost by a Fund.
If a put option written by a Fund were exercised, a Fund would be obligated
to purchase the underlying security at the exercise price. If a call option
written by a Fund were exercised, a Fund would be obligated to sell the
underlying security at the exercise price. The risk involved in writing a put
option is that there could be a decrease in the market value of the underlying
security caused by rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then be sold to a
Fund at a higher price than its current value. The risk involved in writing a
call option is that there could be an increase in the market value of the
underlying security caused by declining interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold by a Fund at a lower price than its current market value. These risks
could be reduced by entering into a closing transaction as described in the SAI
under "Investment Objectives and Policies--Other Investment Management
Practices--Hedging." A Fund retains the premium received from writing a put or
call option whether or not the option is exercised.
The exchanges have established position limits governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. Similarly, the Commodities Futures Trading Commission and the Chicago
Board of Trade have established futures position limits for an investor or group
of investors acting in concert. (A discussion of the Funds' ability to invest in
futures contracts and options on futures contracts is set forth below.) The
position limits may restrict a Fund's ability to purchase or write options on a
particular security or to enter into futures contracts. It is possible that a
Fund and other clients of USBAM may be considered to be a group of investors
acting in concert. Thus, the number of options or futures transactions which a
Fund may enter into may be affected by options or futures transactions of other
investment advisory clients of USBAM.
Over-the-counter options are purchased or written by the Funds in privately
negotiated transactions. These options are illiquid and it may not be possible
for a Fund to dispose of an option it has purchased or terminate its obligations
under an option it has written at a time when USBAM believes it would be
advantageous to do so.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund may enter into
contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on financial indices including any index of
securities in which the Fund may invest (or futures contracts) and may purchase
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and write put and call options to buy or sell futures contracts (or options on
futures contracts). A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. The purchaser of a futures contract on an
index agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the index on the
expiration date of the contract (or current contract value) and the price at
which the contract was originally struck. No physical delivery of the fixed
income securities underlying the index is made. Options on futures contracts to
be written or purchased by the Funds will be traded on exchanges or
over-the-counter. These investment techniques will be used only to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of a Fund's portfolio securities or adversely affect
the prices of securities which a Fund intends to purchase at a later date. The
successful use of these instruments relies upon USBAM's experience with respect
to these instruments and usually depends upon USBAM's ability to forecast
interest rate movements correctly. Should interest rates move in an unexpected
manner, the Funds may not achieve the anticipated benefits of futures contracts
or options on futures contracts or may realize losses and would thus be in a
worse position than if these strategies had not been used. For example, if a
Fund has hedged against the possibility of an increase in interest rates which
would adversely affect the price of bonds held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will have offsetting
losses in its futures positions. In addition, in these situations, if a Fund has
insufficient cash, it might have to sell bonds from its portfolio to meet daily
variation margin requirements. These sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the prices of the securities
hedged or used for cover will not be perfect.
Futures contracts and options on futures contracts will be used only for
hedging or for other risk management purposes and not for speculative purposes.
In addition, no Fund will enter into any futures contracts or options on futures
contracts if immediately thereafter the amount of initial margin deposits on all
the futures contracts of a Fund and premiums paid on options on futures
contracts for other than bona fide hedging purposes would exceed 5% of the
market value of the total assets of a Fund. This restriction will not be changed
by a Fund's boards of directors without considering the policies and concerns of
the various applicable federal and state regulatory agencies. For a discussion
of the tax treatment of futures contracts and options on futures contracts, see
"Taxes" in the SAI.
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the option writer could lose amounts substantially in
excess of its initial investment, due to the margin requirements associated with
these positions.
Each Fund may, following written notice to its shareholders, take advantage
of opportunities in the area of options and futures contracts and options on
futures contracts which are not currently contemplated or used by a Fund or
which are not currently available but which may be developed, to the extent such
opportunities are both consistent with a Fund's investment objectives and
legally permissible for the Fund. These opportunities, if they arise, may
involve risks which exceed those involved in the options and futures activities
described above and in the SAI.
EURODOLLAR INSTRUMENTS. The Funds may make investments in Eurodollar
instruments for hedging purposes only. Eurodollar instruments are essentially
U.S. dollar denominated futures contracts or options thereon that are linked to
LIBOR. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Funds intend
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to use Eurodollar futures contracts and options thereon to hedge against changes
in LIBOR, to which many short-term borrowings and floating rate securities are
linked.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Funds may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis in order to hedge against
anticipated changes in interest rates and prices and secure a favorable rate of
return. When these transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, which can be
a month or more after the date of the transaction. At the time a Fund makes the
commitment to purchase securities on a when-issued or forward commitment basis,
it will record the transaction and thereafter reflect the value of these
securities in determining its net asset value. If a Fund disposes of the right
to acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss due to market fluctuation. In some instances, the third-party seller of
when-issued or forward commitment securities may determine prior to the
settlement date that it will be unable to meet its existing transaction
commitments without borrowing securities. If advantageous from a yield
perspective, a Fund may, in that event, agree to resell its purchase commitment
to the third-party seller at the current market price on the date of sale and
concurrently enter into another purchase commitment for these securities at a
later date. As an inducement for a Fund to "roll over" its purchase commitment,
the Fund may receive a negotiated fee.
There is always a risk that the securities may not be delivered and that the
respective Fund may incur a loss or will have lost the opportunity to invest the
amount set aside for the when-issued or forward commitment transaction in the
segregated asset account. Settlements in the ordinary course, which may take
substantially more than five business days for mortgage-related securities, are
not treated by the Funds as when-issued or forward commitment transactions and,
accordingly, are not subject to the foregoing limitations even though some of
the risks described above may be present in these transactions.
LEVERAGE AND BORROWING
Under the Investment Company Act, a Fund generally is not permitted to
borrow unless immediately after the borrowing the value of the Fund's total
assets is at least 300% of the principal amount of the borrowing (I.E., the
principal amount of the borrowing may not exceed 33 1/3% of the Fund's total
assets). In addition, a Fund is not permitted to declare any cash dividend or
other distribution on its common shares unless, at the time of the declaration,
the value of the Fund's total assets, less liabilities other than borrowings, is
at least 300% of the total principal amount of the Fund's borrowings.
Subject to the asset coverage rules described above, the Funds may also
borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends, share repurchases and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
Utilization of leverage, which is a speculative technique, creates special
risk considerations. For example, leveraging may exaggerate changes in the net
asset value of a Fund's shares and in the yield on a Fund's portfolio. Although
the principal of a Fund's borrowings will be fixed, the Fund's assets may change
in value during the time the borrowing is outstanding. Borrowing creates
interest expense for the Funds which can exceed the income from the assets
purchased with borrowed funds. To the extent income derived from securities
purchased with borrowed funds exceeds the interest a Fund will have to pay, the
Fund's net income will be greater than if borrowing were not used. Conversely,
if the income from the assets purchased with borrowed funds is not sufficient to
cover the cost of borrowing, the net income of the Fund will be less than if
borrowing were not used, and therefore the amount available for distribution to
shareholders as dividends will be reduced. A failure to pay dividends or make
distributions could result in a Fund ceasing to qualify as a regulated
investment company under the Code.
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REPURCHASE AGREEMENTS
Each Fund may enter into "repurchase agreements" pertaining to the
securities in which it may invest with securities dealers or member banks of the
Federal Reserve System. Each Fund requires maintenance by its custodian of its
account in the Federal Reserve/Treasury Book Entry System of collateral in an
amount equal to, or in excess of, the resale price. In the event a vendor
defaults on its repurchase obligation to a Fund, the Fund may suffer a loss to
the extent that the proceeds from the sale of the collateral are less than the
repurchase price. In the event of a vendor's bankruptcy, the Fund might be
delayed in, or prevented from, selling the collateral for the Fund's benefit.
LENDING OF SECURITIES
In order to increase income, each Fund may from time to time lend portfolio
securities representing up to 33 1/3% of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. In these
loan arrangements, a Fund will receive collateral in the form of cash, cash
equivalents or liquid securities equal at all times to at least 100% of the
current market value of the loaned securities, including interest on the loaned
securities. The interest accruing on the loaned securities will be paid to the
Fund and the Fund will have the right, on demand, to call back the loaned
securities. USBAM may act as securities lending agent for the Funds and receive
separate compensation for these services, subject to compliance with conditions
contained in an exemptive order that USBAM has received from the SEC. In acting
as securities lending agent, USBAM receives fees equal to 25% of the respective
Fund's income from securities lending transactions and a separate administrative
fee equal to 0.025% of the average weekly net assets of the Fund's securities on
loan.
INVESTMENT RESTRICTIONS
The Existing Funds and the New Fund have adopted investment restrictions
that are fundamental and cannot be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities (defined in the
Investment Company Act as the lesser of (a) more than 50% of the outstanding
shares or (b) 67% or more of the shares represented at a meeting where more than
50% of the outstanding shares are represented). Except with respect to the
investment restrictions regarding borrowing, if a percentage restriction on
investment or use of assets set forth below is adhered to at the time a
transaction is effected, later changes in percentage resulting from changing
market values will not be considered a deviation from policy
THE EXISTING FUNDS
Each Existing Fund may not:
(1) With respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at the time of purchase) in the
outstanding securities of any one issuer, or own more than 10% of the
outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the Untied States Government or any agency or
instrumentality thereof.
(2) Invest 25% or more of the value of its total assets in the securities
of any one issuer or in the securities of issuers conducting their principal
business activities in the same industry, provided that this limitation does not
apply to securities issued or guaranteed by the United States Government or its
agencies or instrumentalities, and provided, further that American Select will
invest more than 25% of its total assets in the real estate industry, which it
defines as including all mortgage-related assets.
(3) Issue senior securities in the form of indebtedness or borrow money
(including on margin if marginable securities are owned), except if after each
borrowing there is asset coverage of at least 300% (including the proceeds of
such senior securities issued and money borrowed), or pledge its assets other
than to secure such issuances or borrowings or in connection with, to the extent
permitted under the Investment Company Act, hedging transactions, reverse
repurchase agreements, when-issued and forward commitment transactions and
similar investment strategies. The Existing Fund's collateral arrangements with
respect to options, futures contracts, and options on futures contracts,
collateral
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requirements with respect to initial and variation margin are not considered by
the Existing Fund to be the issuance of a senior security.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure issuances or borrowings permitted by restriction (3) above (collateral
arrangements with respect to reverse repurchase agreements or to margin for
futures contracts and options are not deemed to be pledges or other encumbrances
for purposes of this restriction).
(5) Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the Existing
Fund may invest consistently with the Existing Fund's investment objectives and
policies or the acquisition of securities subject to repurchase agreements.
(6) Underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities or the sale of its
own shares the Existing Fund may be deemed to be an underwriter. However,
American Select may invest, without limitation, in restricted securities.
(7) Invest for the purpose of exercising control over management of any
company.
(8) Purchase, hold, sell or deal in real estate or interests therein other
than mortgage-related assets; provided, however that the Existing Fund may hold
and sell real estate acquired as a result of the ownership of mortgage-related
assets;
(9) Purchase or sell commodities or commodity contracts except that the
Existing Fund may purchase and sell futures contracts and options on futures
contracts for hedging or for other risk management purposes.
(10) Make any short sale of securities.
(11) Invest more than 25% of its total assets in preferred issues of REITs;
or more than 1% of the Existing Fund's total assets in REIT preferred issues of
any one issuer or its affiliates.
In addition, American Select may not purchase any security or evidence
therein on margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and except
that, with respect to American Select's permissible options and futures
transactions, deposits of initial and variation margin may be made in connection
with the purchase, ownership, holding or sale of futures or options positions.
THE NEW FUND
The investment restrictions of the New Fund are somewhat less limiting than
those of the Existing Funds. The New Fund's fundamental investment restrictions
have been adopted to avoid wherever possible the necessity of shareholder
meetings to approve changes in these restrictions. This change recognizes the
need to react quickly to changes in the law or new investment opportunities in
the securities markets and the cost and time involved in obtaining shareholder
approvals for diversely held investment companies.
The New Fund may not:
(1) Concentrate its investments in a particular industry, except that the
New Fund will concentrate its investments in the real estate industry, which the
New Fund defines as including all mortgage-related assets. Whether the New Fund
is concentrating in an industry shall be determined in accordance with the
Investment Company Act, as interpreted or modified from time to time by any
regulatory authority having jurisdiction.
(2) Borrow money or issue senior securities, except as permitted under the
Investment Company Act (including the issuance of preferred shares), as
interpreted or modified from time to time by any regulatory authority having
jurisdiction.
E-11
<Page>
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, it may
be deemed an underwriter under applicable laws.
(4) Purchase or sell real estate unless as a result of ownership of
securities or other instruments, but this shall not prevent the New Fund from
investing in securities or other instruments backed by real estate or interests
therein or in securities of companies that deal in real estate or mortgages.
(5) Purchase physical commodities or contracts relating to physical
commodities.
(6) Make loans except as permitted under the Investment Company Act, as
interpreted or modified from time to time by any regulatory authority having
jurisdiction.
(7) Invest more than 25% of its total assets in preferred issues of REITs
or more than 1% of the New Fund's total assets in REIT preferred issues of any
one issuer or its affiliates.
For purposes of applying the limitation set forth in subparagraph
(1) above, the SEC would currently consider the New Fund to be concentrated in
an industry if 25% or more of its total assets, based on current market value at
the time of purchase, were invested in that industry. Securities of the U.S.
Government, its agencies or instrumentalities are not considered to represent
industries.
The New Fund will operate as a "diversified" Fund which means that it will
not, with respect to 75% of its total assets (i) invest more than 5% of the
value of its total assets (taken at market value at the time of purchase) in the
outstanding securities of any one issuer, or (ii) own more than 10% of the
outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof.
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- --------------------------------------------------------------------------------
Through and including , 2003 (the 25th day after the offering date
of this joint proxy statement/prospectus), all dealers that effect transactions
in these securities, whether or not participating in this offer, may be required
to deliver a prospectus. This is in addition to the dealers' obligations to
deliver a prospectus when acting as underwriters and with respect to unsold
allotments or subscriptions. We have not authorized any dealer, salesperson or
other person to give you any information or represent anything not contained in
this prospectus. You must not rely on any unauthorized information. This
prospectus does not constitute an offer to sell or buy any securities in any
jurisdiction where it is unlawful. The information in this joint proxy
statement/prospectus is current as of , 2003.
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
FIRST AMERICAN STRATEGIC INCOME PORTFOLIO INC.
---------------------------------------------
JOINT PROXY STATEMENT/PROSPECTUS
---------------------------------------------
, 2003
- --------------------------------------------------------------------------------
<Page>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its articles of
incorporation a provision limiting the liability of its directors and officers
to the corporation and its shareholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty establishment by a
final judgment as being material to the cause of action. First American's
articles of incorporation do contain such a provision which eliminates such
liability to the maximum extent permitted by the MGCL.
First American's articles of incorporation (i) will require First American,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
its directors, whether serving First American, or at its request, any other
entity and (ii) will authorize, to the maximum extent permitted by Maryland law,
to permit itself to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to other officers, employees and
agents, whether serving First American, or at its request, any other entity.
The MGCL requires a corporation (unless its articles of incorporation
provide otherwise, which First American's articles will not) to indemnify a
director or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that
(a) the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money; property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation, or in a suit claiming improper benefit, except for
expenses ordered by a court. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation as authorized by First American's bylaws and
(b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met. To the extent that the foregoing provisions
concerning indemnification apply to actions arising under the Securities Act,
First American has been advised that, in the opinion of the SEC, such provisions
are contrary to public policy and therefore are not enforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed as part of this registration statement:
EXHIBIT
<Table>
2.1 Agreement and Plan of Reorganization, dated as of March 20, 2002, between American
Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.--II,
American Strategic Income Portfolio Inc.--III, American Select Portfolio Inc. and
American Real Estate Finance Corporation (formerly First American Strategic Real
Estate Portfolio Inc.). *
2.2 Amended and Restated Agreement and Plan of Reorganization, dated as of November 21,
2002, between First American Strategic Real Estate Portfolio Inc., American
Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.--II,
American Strategic Income Portfolio Inc.--III, American Select Portfolio Inc. and
First American Strategic Income Portfolio Inc.++
</Table>
II-1
<Page>
<Table>
2.3 Amendment, dated January 23, 2003, to Amended and Restated Agreement and Plan of
Reorganization, dated as of November 21, 2002, between First American Strategic
Real Estate Portfolio Inc., American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc.--II, American Strategic Income Portfolio Inc.--III,
American Select Portfolio Inc. and First American Strategic Income Portfolio Inc.++
2.4 Form of Plan of Merger merging American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc.--II, American Strategic Income Portfolio Inc.--III,
American Select Portfolio Inc. with and into First American Strategic Real Estate
Portfolio Inc.*
3.1 First American Strategic Real Estate Portfolio Inc. Amended Articles of
Incorporation.*
3.2 First American Strategic Real Estate Portfolio Inc. Amended and Restated Bylaws.*
4.1 Form of First American Strategic Real Estate Portfolio Inc. Common Stock
Certificate.**
5.1 Opinion of Clifford Chance US LLP as to the legality of the common stock.**
8.1 Opinion of Ernst & Young LLP as to the qualification of First American Strategic
Real Estate Portfolio Inc. as a REIT following the merger.
8.2 Opinion of Ernst & Young LLP regarding certain tax aspects of the merger.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Clifford Chance US LLP (included as part of its opinion filed as Exhibit
5.1 and incorporated herein by reference).**
23.3 Consent of Friedman, Billings, Ramsey & Co., Inc.
99.1 Consents of persons to become directors.**
99.2 Form of proxy card.
99.3 Form of Consideration Election Form.**
++ Included as an Appendix to the joint proxy statement/prospectus which is a part of
this registration statement.
* Previously filed.
** To be filed by amendment.
</Table>
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
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2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
4. That, for the purpose of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
6. That every prospectus: (i) that is filed pursuant to paragraph
(5) immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
7. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
8. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
9. To supply by means of a post-effective amendment all information
concerning a transaction, and First American being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on April 22, 2003.
FIRST AMERICAN STRATEGIC REAL ESTATE PORTFOLIO INC.
By: /s/ John G. Wenker
-------------------------------------------
Name: John G. Wenker
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- --------- ------------------------------ --------------------
/s/ John G. Wenker President, Chief Executive April 22, 2003
- ---------------------- Officer and Director
By: John G. Wenker (Principal Executive Officer)
/s/ Robert H. Nelson Chief Financial Officer April 22, 2003
- ---------------------- (Principal Financial and
By: Robert H. Nelson Accounting Officer)
</Table>
<Page>
EXHIBIT INDEX
<Table>
2.1 Agreement and Plan of Reorganization, dated as of March 20, 2002, between American
Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.--II,
American Strategic Income Portfolio Inc.--III, American Select Portfolio Inc. and
American Real Estate Finance Corporation (formerly First American Strategic Real
Estate Portfolio Inc.). *
2.2 Amended and Restated Agreement and Plan of Reorganization, dated as of November 21,
2002, between First American Strategic Real Estate Portfolio Inc., American
Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.--II,
American Strategic Income Portfolio Inc.--III, American Select Portfolio Inc. and
First American Strategic Income Portfolio Inc. ++
2.3 Amendment, dated January 23, 2003, to Amended and Restated Agreement and Plan of
Reorganization, dated as of November 21, 2002, between First American Strategic
Real Estate Portfolio Inc., American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc.--II, American Strategic Income Portfolio Inc.--III,
American Select Portfolio Inc. and First American Strategic Income Portfolio Inc.
++
2.4 Form of Plan of Merger merging American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc.--II, American Strategic Income Portfolio Inc.--III,
American Select Portfolio Inc. with and into First American Strategic Real Estate
Portfolio Inc.*
3.1 First American Strategic Real Estate Portfolio Inc. Amended Articles of
Incorporation.*
3.2 First American Strategic Real Estate Portfolio Inc. Amended and Restated Bylaws.*
4.1 Form of First American Strategic Real Estate Portfolio Inc. Common Stock
Certificate.**
5.1 Opinion of Clifford Chance US LLP as to the legality of the common stock.**
8.1 Opinion of Ernst & Young LLP as to the qualification of First American Strategic
Real Estate Portfolio Inc. as a REIT following the merger.
8.2 Opinion of Ernst & Young LLP regarding certain tax aspects of the merger.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Clifford Chance US LLP (included as part of its opinion filed as Exhibit
5.1 and incorporated herein by reference).**
23.3 Consent of Friedman, Billings, Ramsey & Co., Inc.
99.1 Consents of persons to become directors.**
99.2 Form of proxy card.
99.3 Form of Consideration Election Form.**
++ Included as an Appendix to the joint proxy statement/prospectus which is a part of
this registration statement.
* Previously filed.
** To be filed by amendment.
</Table>