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OMB APPROVAL
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OMB Number: 3235-0570
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7444
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American Strategic Income Portfolio Inc. III
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
800 Nicollet Mall Minneapolis, MN 55402
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Joseph M. Ulrey III 800 Nicollet Mall Minneapolis, MN 55402
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(Name and address of agent for service)
Registrant's telephone number, including area code: 800-677-3863
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Date of fiscal year end: May 31, 2004
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Date of reporting period: May 31, 2004
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Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
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Item 1. Report to Shareholders
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[FIRST AMERICAN (TM) LOGO]
[GRAPHIC]
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III
CSP
MAY 31, 2004
ANNUAL REPORT
<Page>
[FIRST AMERICAN (TM) LOGO]
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III
PRIMARY INVESTMENTS
American Strategic Income Portfolio Inc. III (the "Fund") invests in
mortgage-related assets that directly or indirectly represent a participation in
or are secured by and payable from mortgage loans. The Fund may also invest in
U.S. government securities, corporate debt securities, and preferred stock
issued by real estate investment trusts. The Fund borrows through the use of
reverse repurchase agreements and revolving credit facilities. Use of borrowing
and certain other investments and investment techniques may cause the Fund's net
asset value ("NAV") to fluctuate to a greater extent than would be expected from
interest-rate movements alone.
FUND OBJECTIVE
High level of current income. Its secondary objective is to seek capital
appreciation. As with other investment companies, there can be no assurance this
Fund will achieve its objectives.
OUR IMAGE-GEORGE WASHINGTON
HIS RICH LEGACY AS PATRIOT AND LEADER IS WIDELY RECOGNIZED AS EMBODYING THE
SOUND JUDGMENT, RELIABILITY, AND STRATEGIC VISION THAT ARE CENTRAL TO OUR BRAND.
FASHIONED IN A STYLE REMINISCENT OF AN 18TH CENTURY ENGRAVING, THE ILLUSTRATION
CONVEYS THE SYMBOLIC STRENGTH AND VITALITY OF WASHINGTON, WHICH ARE ATTRIBUTES
THAT WE VALUE AT FIRST AMERICAN.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
TABLE OF CONTENTS
<Table>
2 Fund Overview
7 Financial Statements
11 Notes to Financial Statements
24 Schedule of Investments
34 Report of Independent Registered Public Accounting Firm
35 Federal Income Tax Information
36 Shareholder Update
</Table>
<Page>
[CHART]
AVERAGE ANNUALIZED TOTAL RETURNS
Based on NAV for the period ended May 31, 2004
<Table>
<Caption>
AMERICAN STRATEGIC INCOME LEHMAN BROTHERS MUTUAL FUND
PORTFOLIO INC. III GOVERNMENT/MORTGAGE INDEX
One Year 8.31% (0.39%)
Five Year 9.23% 6.46%
Ten Year 9.00% 7.10%
</Table>
The average annualized total returns for the Fund are based on the change in its
NAV and assume reinvestment of distributions at NAV. NAV-based performance is
used to measure investment management results. - Average annualized total
returns based on the change in market price for the one-year, five-year, and
ten-year periods ended May 31, 2004, were 3.49%, 9.52%, and 9.20%, respectively.
Market price returns assume that all distributions have been reinvested at
actual prices pursuant to the Fund's dividend reinvestment plan and reflect any
broker commissions or sales charges on reinvested dividends. - PLEASE REMEMBER,
YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF PRINCIPAL NOR
STABILITY OF INCOME IS GUARANTEED. Past performance does not guarantee future
results. The investment return and principal value of an investment will
fluctuate so that fund shares, when sold, may be worth more or less than their
original cost. Closed-end funds, such as this Fund, often trade at discounts to
NAV. Therefore, you may be unable to realize the full NAV of your shares when
you sell. - The Fund uses the Lehman Brothers Mutual Fund Government/Mortgage
Index as a benchmark. Although we believe this is the most appropriate benchmark
available, it is not a perfect match. The benchmark index is comprised of U.S.
government securities while the Fund is comprised primarily of nonsecuritized,
illiquid whole loans. This limits the ability of the Fund to respond quickly to
market changes. - The Lehman Brothers Mutual Fund Government/Mortgage Index is
comprised of all U.S. government agency and Treasury securities and agency
mortgage-backed securities. Developed by Lehman Brothers for comparative use by
the mutual fund industry, this index is unmanaged and does not include any fees
or expenses in its total return calculations.
1
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FUND OVERVIEW
FOR THE FISCAL YEAR ENDED MAY 31, 2004, THE FUND HAD A TOTAL RETURN OF 8.31%,
BASED ON ITS NAV. The Fund's benchmark, the Lehman Brothers Mutual Fund
Government/Mortgage Index, had a return of (0.39%) during the period.
THE FUND'S OUTPERFORMANCE RELATIVE TO ITS BENCHMARK IS DUE, IN PART, TO THE FAIR
VALUE PRICING MODEL USED FOR CERTAIN FUND SECURITIES. The Fund is primarily
composed of nonsecuritized mortgage loans that do not trade in any organized
market. Since market quotations are not readily available for these securities,
they are valued according to a pricing model. The Fund's pricing model for these
mortgage loans contains a maximum price level of 105. By comparison, the Fund's
benchmark is comprised of securities that generally have no ceiling, or "cap,"
on how much they can appreciate, or "floor" on how much they can depreciate.
AT THE BEGINNING OF THIS FISCAL YEAR A MAJORITY OF THE FUND'S SECURITIES WERE
PRICED AT THE MAXIMUM LEVEL ALLOWED BY THE PRICING MODEL. As Treasury rates rose
over the course of this fiscal year, the value of the benchmark securities
deteriorated. The value of the Fund's securities also deteriorated, but in many
cases not by enough to push pricing levels below the price caps in the pricing
model. As of May 31, 2004, 69.3% of the Fund's multifamily and commercial loan
portfolio were priced at the maximum level allowed by the pricing model.
[CHART]
PORTFOLIO COMPOSITION
As a percentage of total assets on May 31, 2004
<Table>
Short-Term Securities 1%
U.S. Government Agency Mortgage-Backed Securities 6%
Commercial Loans 18%
Multifamily Loans 75%
</Table>
[SIDENOTE]
FUND MANAGEMENT
JOHN WENKER is primarily responsible for the management of the Fund. He has 21
years of financial experience.
CHRIS NEUHARTH, CFA, is responsible for the management of the mortgage-backed
securities portion of the Fund. He has 23 years of financial experience.
RUSS KAPPENMAN is responsible for the acquisition and management of the whole
loans portion of the Fund. He has 18 years of financial experience.
2
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IN ADDITION, THE FUND'S DURATION WAS SHORTER THAN THE BENCHMARK DURATION
THROUGHOUT THE FISCAL YEAR. This led to more NAV stability in the Fund relative
to the benchmark in the rising interest-rate environment experienced in the
fiscal year.
The Fund also benefited from higher interest income than the benchmark and
prepayment penalties from certain loans that paid off during the fiscal year.
REAL ESTATE MARKETS WERE FUNDAMENTALLY WEAKER WITH DEMAND FOR MULTIFAMILY UNITS
AND COMMERCIAL SPACE DECREASING OVER THE REPORTING PERIOD. Typically, real
estate markets are a lagging indicator of the economy, taking longer to weaken
and longer to recover than the overall economy. Recent economic strength should
lead to stabilization of conditions in the commercial real estate markets.
Historically, healthy job growth has been a leading indicator of demand for real
estate space.
THE FUND CURRENTLY HAS ONE MULTIFAMILY LOAN IN DEFAULT WITH A PRINCIPAL BALANCE
OF $6,790,000, REPRESENTING 2.4% OF THE FUND'S ASSETS AS OF MAY 31, 2004. There
are no commercial loans in default.
DURING THE PERIOD, THE FUND PAID A CONSISTENT MONTHLY DIVIDEND OF 8.75 CENTS PER
SHARE. In addition the Fund paid a special dividend of 7.25 cents per share in
January 2004. The dividend reserve for this Fund was at approximately 4.4 cents
per share as of May 31, 2004. Generally, we believe that the lower interest-rate
environment makes it more likely that loans will prepay and that reinvestment
will be at lower rates. During the reporting period, 25 loans in the portfolio
paid off with a weighted average coupon of 8.29%. We added 49 loans with a
weighted average coupon of 6.28%. During the fiscal year, the Fund paid out
$1.1225 per share in dividends (excluding the special dividend) resulting in an
annualized distribution rate of 8.75% based on the May 31, 2004, market price.
Please keep in mind that the Fund's distribution rate and dividend reserve
levels will fluctuate.
3
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THE FUND CONTINUED TO UTILIZE LEVERAGE (OR BORROWING) DURING THE PERIOD. LOW
SHORT-TERM INTEREST RATES ALLOWED THE FUND TO BORROW AT ATTRACTIVE RATES. The
borrowed money was then invested in higher-yielding mortgage investments, which
added to the income levels in the Fund. While the use of leverage has resulted
in more income for shareholders, it does increase interest-rate risk in the Fund
and will increase the volatility of the Fund's NAV and market price.
WE BELIEVE THAT THE REAL ESTATE MARKETS WILL CONTINUE TO POSE CHALLENGES AND
THAT THE LOW INTEREST-RATE ENVIRONMENT MAY MEAN CONTINUED LOAN PREPAYMENTS. The
weaker real estate markets could lead to increased levels of default. However,
we continue to diligently manage the credit risk in the Fund and feel that its
current credit profile is acceptable. We believe that as the U.S. economy
improves there should be increased demand for space and that occupancy levels
should rise.
AS YOU ARE PROBABLY AWARE, THE BOARD OF DIRECTORS FOR THE FUND, AS WELL AS
AMERICAN STRATEGIC INCOME PORTFOLIO INC., AMERICAN STRATEGIC INCOME PORTFOLIO
INC. II, AND AMERICAN SELECT PORTFOLIO INC. (COLLECTIVELY, THE "EXISTING
FUNDS"), HAS APPROVED A PROPOSAL TO REORGANIZE THESE FOUR FUNDS INTO THE FIRST
AMERICAN STRATEGIC REAL ESTATE PORTFOLIO, INC., A SPECIALTY FINANCE COMPANY THAT
WOULD ELECT TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST ("REIT").
DELINQUENT LOAN PROFILE
The tables below show the percentages of single family, multifamily, and
commercial loans in the portfolio that are 30, 60, 90, or 120 or more days
delinquent as of May 31, 2004, based on the value outstanding.
SINGLE FAMILY LOANS
<Table>
Current 100.0%
30 Days 0.0%
60 Days 0.0%
90 Days 0.0%
120+ Days 0.0%
</Table>
MULTIFAMILY AND COMMERCIAL LOANS
<Table>
Current 98.0%
30 Days 0.0%
60 Days 0.0%
90 Days 2.0%
120+ Days 0.0%
</Table>
4
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Shareholders of the Existing Funds who do not wish to receive shares of the REIT
will have the option, subject to certain limitations, of electing to exchange
their shares for shares of First American Strategic Income Portfolio Inc., a
newly formed closed-end management investment company with investment policies,
restrictions, and strategies substantially similar to those of the Existing
Funds. This transaction is subject to review by the Securities and Exchange
Commission, approval by the Fund's shareholders, and certain other conditions.
There is no assurance that the transaction will be completed.
THANK YOU FOR YOUR INVESTMENT IN THE FUND AND YOUR TRUST DURING THIS DIFFICULT
ECONOMIC ENVIRONMENT. If you have any questions about the Fund, please call us
at 800.677.FUND.
Sincerely,
/s/ Mark Jordahl
Mark Jordahl
Chief Investment Officer
U.S. Bancorp Asset Management, Inc.
/s/ John Wenker
John Wenker
Managing Director, Head of Real Estate
U.S. Bancorp Asset Management, Inc.
5
<Page>
GEOGRAPHICAL DISTRIBUTION
We attempt to buy mortgage loans in many parts of the country to help avoid the
risks of concentrating in one area. These percentages reflect the market of
whole loans and participation mortgages as of May 31, 2004. Shaded areas without
values indicate states in which the Fund has invested less than 0.50% of its
assets.
[GRAPHIC]
VALUATION OF WHOLE LOAN INVESTMENTS
The 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 are not readily available. These
investments are valued at "fair value" according to procedures adopted by the
Fund's board of directors. Pursuant to these procedures, whole loan and
participation mortgage investments are initially valued at cost and their values
are subsequently monitored and adjusted pursuant to a pricing model designed by
U.S. Bancorp Asset Management, Inc., 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 and participation
mortgages, 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 investments. Changes
in prevailing interest rates, real or perceived liquidity, yield spreads, and
creditworthiness 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 and participation mortgages are determined no less frequently than
weekly.
6
<Page>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES May 31, 2004
<Table>
ASSETS:
Investments in unaffiliated securities, at value* (note 2) $ 335,893,016
Investment in affiliated money market fund, at value** (note 3) 2,222,237
Cash in bank on demand deposit 935,396
Receivable for accrued interest 1,029,606
Other assets 525,487
--------------
Total assets 340,605,742
--------------
LIABILITIES:
Payable for reverse repurchase agreements (note 2) 75,376,881
Payable for investment management fees (note 3) 131,393
Payable for administrative fees (note 3) 56,128
Payable for interest expense 97,547
Payable for reorganization expenses (notes 3 and 6) 168,009
Payable for other expenses 2,000
--------------
Total liabilities 75,831,958
--------------
Net assets applicable to outstanding capital stock $ 264,773,784
==============
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital $ 264,477,299
Undistributed net investment income 946,558
Accumulated net realized loss on investments (4,347,283)
Unrealized appreciation of investments 3,697,210
--------------
Total-representing net assets applicable to capital stock $ 264,773,784
==============
*Investments in unaffiliated securities, at cost $ 332,195,806
==============
**Investment in affiliated money market fund, at cost $ 2,222,237
==============
NET ASSET VALUE AND MARKET PRICE OF CAPITAL STOCK:
Net assets outstanding $ 264,773,784
Shares outstanding (authorized 1 billion shares of $0.01
par value) 21,356,023
Net asset value per share $ 12.40
Market price per share $ 12.00
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<Page>
STATEMENT OF OPERATIONS For the Year Ended May 31, 2004
<Table>
INVESTMENT INCOME:
Interest $ 26,570,854
Dividends 20,133
Dividends from affiliated money market fund 44,791
--------------
Total investment income 26,635,778
--------------
EXPENSES (NOTE 3):
Investment management fees 1,648,910
Administrative fees 667,587
Interest expense 1,468,121
Custodian fees 53,407
Transfer agent fees 28,724
Exchange listing and registration fees 25,563
Reports to shareholders 73,832
Mortgage servicing fees 242,705
Directors' fees 33,089
Audit and legal fees 144,901
Financial advisory and accounting fees 35,507
Other expenses 62,604
--------------
Total expenses 4,484,950
--------------
Net investment income 22,150,828
--------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS (NOTE 4):
Net realized gain on investments 1,064,894
Net change in unrealized appreciation or depreciation of
investments (1,875,575)
--------------
Net loss on investments (810,681)
--------------
Net increase in net assets resulting from operations $ 21,340,147
==============
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<Page>
STATEMENT OF CASH FLOWS For the Year Ended May 31, 2004
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 21,340,147
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchases of investments (163,757,361)
Proceeds from paydowns and sales of investments 148,638,311
Net purchases of short-term securities (355,676)
Net amortization of bond discount and premium 19,128
Net unrealized depreciation of investments 1,875,575
Net realized gain on investments (1,064,894)
Decrease in accrued interest receivable 475,544
Increase in other assets (290,795)
Decrease in accrued fees and expenses (30,940)
--------------
Net cash provided by operating activities 6,849,039
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements 12,871,241
Distributions paid to shareholders (23,799,845)
--------------
Net cash used in financing activities (10,928,604)
--------------
Net decrease in cash (4,079,565)
Cash at beginning of period 5,014,961
--------------
Cash at end of period $ 935,396
==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,446,920
==============
Noncash financing activities resulting from reinvested
dividends $ 160,455
==============
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
5/31/04 5/31/03
-------------- --------------
OPERATIONS:
Net investment income $ 22,150,828 $ 22,887,497
Net realized gain on investments 1,064,894 356,292
Net change in unrealized appreciation or depreciation of
investments (1,875,575) (1,541,973)
-------------- --------------
Net increase in net assets resulting from operations 21,340,147 21,701,816
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2):
From net investment income (23,960,300) (22,410,463)
-------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 2):
Proceeds from 12,731 shares issued from reinvested dividends 160,455 --
-------------- --------------
Total decrease in net assets (2,459,698) (708,647)
Net assets at beginning of period 267,233,482 267,942,129
-------------- --------------
Net assets at end of period $ 264,773,784 $ 267,233,482
============== ==============
Undistributed net investment income $ 946,558 $ 2,756,030
============== ==============
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Strategic Income Portfolio Inc. III (the "Fund") is registered under
the Investment Company Act of 1940 (as amended) as a diversified, closed-end
management investment company. The Fund emphasizes investments in
mortgage-related assets that directly or indirectly represent a participation in
or are secured by and payable from mortgage loans. It may also invest in U.S.
government securities, corporate debt securities, and preferred stock issued by
real estate investment trusts. In addition, the Fund may borrow using reverse
repurchase agreements and revolving credit facilities. Fund shares are listed on
the New York Stock Exchange under the symbol CSP.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATIONS
Security valuations for the Fund's investments (other than whole loans) are
furnished by independent pricing services that have been approved by the Fund's
board of directors. Investments in equity securities that are traded on a
national securities exchange are stated at the last quoted sales price if
readily available for such securities on each business day. For securities
traded on the Nasdaq national market system, the Fund utilizes the Nasdaq
Official Closing Price which compares the last trade to the bid/ask price of a
security. If the last trade is within the bid/ask range, then that price will be
the closing price. If the last trade is outside the bid/ask range, and falls
above the ask, the ask price will be the closing price. If the last trade is
below the bid, the bid will be the closing price. Other equity securities traded
in the over-the-counter market and listed equity securities for which no sale
was reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity are valued by an independent pricing
service. The pricing service may employ methodologies that utilize actual market
transactions, broker-dealer supplied valuations, or
11
<Page>
other formula driven valuation techniques. These techniques generally consider
such factors as yields or prices of bonds of comparable quality, type of issue,
coupon, maturity, ratings, and general market conditions. Securities for which
prices are not available from an independent pricing service but where an active
market exists are valued using market quotations obtained from one or more
dealers that make markets in the securities or from a widely-used quotation
system. When market quotations are not readily available, securities are valued
at fair value as determined in good faith by procedures established and approved
by the Fund's board of directors. Some of the factors which may be considered by
the board of directors in determining fair value are fundamental analytical data
relating to the investment; the nature and duration of any restrictions on
disposition; trading in similar securities of the same issuer or comparable
companies; information from broker-dealers; and an evaluation of the forces that
influence the market in which the securities are purchased or sold. If events
occur that materially affect the value of securities (including non-U.S.
securities) between the close of trading in those securities and the close of
regular trading on the New York Stock Exchange, the securities will be valued at
fair value. As of May 31, 2004, the Fund held fair valued securities with a
value of $316,915,848 or 119.7% of net assets. Debt obligations with 60 days or
less remaining until maturity may be valued at their amortized cost which
approximates market value. Security valuations are performed once a week and at
the end of each month.
The Fund's investments in whole loans (single family, multifamily, and
commercial) and participation mortgages are generally not traded in any
organized market and therefore market quotations are not readily available.
12
<Page>
These investments are valued at fair value according to procedures adopted by
the Fund's board of directors. Pursuant to these procedures, whole loan
investments are initially valued at cost and their values are subsequently
monitored and adjusted using a U.S. Bancorp Asset Management, Inc. ("USBAM")
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 or participation mortgages, 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 investments. Changes in
prevailing interest rates, real or perceived liquidity, yield spreads, and
creditworthiness are factored into the pricing model each week.
Certain mortgage loan information is received once a month. This information
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 and participation mortgages are
determined no less frequently than weekly. Although we believe the pricing model
to be reasonable and appropriate, the actual values that may be realized upon
the sale of whole loans and participation mortgages can only be determined in a
negotiation between the Fund and third parties.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on the trade date of the security
purchase or sale. Dividend income is recorded on the ex-dividend date. Interest
income, including
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<Page>
accretion of bond discounts and amortization of premiums, is recorded on an
accrual basis. Security gains and losses are determined on the basis of
identified cost, which is the same basis used for federal income tax purposes.
WHOLE LOANS AND PARTICIPATION MORTGAGES
Whole loans and participation mortgages may bear a greater risk of loss arising
from a default on the part of the borrower of the underlying loans than do
traditional mortgage-backed securities. This is because whole loans and
participation mortgages, unlike most mortgage-backed securities, generally are
not backed by any government guarantee or private credit enhancement. Such risk
may be greater during a period of declining or stagnant real estate values. In
addition, the individual loans underlying whole loans and participation
mortgages may be larger than the loans underlying mortgage-backed securities.
With respect to participation mortgages, the Fund generally will not be able to
unilaterally enforce its rights in the event of a default, but rather will be
dependent on the cooperation of the other participation holders.
At May 31, 2004, a loan representing 2.4% of net assets was 90 days delinquent
as to the timely monthly payment of principal and interest. This delinquency
relates solely to a multifamily whole loan and represents 2.5% of total
multifamily value outstanding at May 31, 2004. The Fund does not record past due
interest as income until received. The Fund may incur certain costs and delays
in the event of a foreclosure. Also, there is no assurance that the subsequent
sale of the property will produce an amount equal to the sum of the unpaid
principal balance of the loan as of the date the borrower went into default, the
accrued unpaid interest and all of the foreclosure expenses. In this case, the
Fund may
14
<Page>
suffer a loss. At May 31, 2004, no single family or commercial loans were
delinquent.
Real estate acquired through foreclosure, if any, is recorded at estimated fair
value. The Fund may receive rental or other income as a result of holding real
estate. In addition, the Fund may incur expenses associated with maintaining any
real estate owned. The Fund did not own any real estate during the fiscal year
ended May 31, 2004.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of a portfolio-eligible security
by the Fund, coupled with an agreement to repurchase the security at a specified
date and price. Reverse repurchase agreements may increase volatility of the
Fund's net asset value and involve the risk that interest costs on money
borrowed may exceed the return on securities purchased with that borrowed money.
Reverse repurchase agreements are considered to be borrowings by the Fund, and
are subject to the Fund's overall restriction on borrowing under which it must
maintain asset coverage of at least 300%. For the fiscal year ended May 31,
2004, the weighted average borrowings outstanding were $73,338,472 and the
weighted average interest rate was 1.77%.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by the Fund on a
when-issued or forward-commitment basis can take place a month or more after the
transaction date. During this period, such securities do not earn interest, are
subject to market fluctuation, and may increase or decrease in value prior to
their delivery. The Fund segregates, with its custodian, assets with a market
value equal to the amount of its purchase commitments. The purchase of
securities on a when-issued
15
<Page>
or forward-commitment basis may increase the volatility of the Fund's net asset
value if the Fund makes such purchases while remaining substantially fully
invested. As of May 31, 2004, the Fund had no outstanding when-issued or
forward-commitment securities.
FEDERAL TAXES
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and not be subject to federal
income tax. Therefore, no income tax provision is required. The Fund also
intends to distribute its taxable net investment income and realized gains, if
any, to avoid the payment of any federal excise taxes.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily because of the timing of recognition of
income on certain collateralized mortgage-backed securities. The character of
distributions made during the year from net investment income or net realized
gains may differ from its ultimate characterization for federal income tax
purposes. In addition, due to the timing of dividend distributions, the fiscal
year in which amounts are distributed may differ from the year that the income
or realized gains or losses were recorded by the Fund.
Due to permanent book-to-tax differences, primarily relating to expiring capital
loss carryovers, the following reclassifications have been made on the Statement
of Asset and Liabilities:
<Table>
<Caption>
ACCUMULATED NET ADDITIONAL
REALIZED LOSS PAID IN CAPITAL
--------------- ---------------
$ 34,006,114 $ (34,006,114)
</Table>
16
<Page>
The tax character of distributions paid during the fiscal years ended May 31,
2004 and 2003, were as follows:
<Table>
<Caption>
2004 2003
-------------- --------------
Distributions paid from ordinary income $ 23,960,300 $ 22,410,463
============== ==============
</Table>
At May 31, 2004, the components of accumulated earnings on a tax basis were as
follows:
<Table>
Undistributed ordinary income $ 946,558
Accumulated capital and post-October losses (1,649,210)
Unrealized appreciation 999,137
--------------
Accumulated earnings $ 296,485
==============
</Table>
The Fund incurred a loss of $707,847 for tax purposes from November 1, 2003 to
May 31, 2004. As permitted by the Internal Revenue Code, the Fund intends to
elect to defer and treat this loss as arising in the fiscal year ending May 31,
2005.
The difference between book basis and tax basis unrealized appreciation and
accumulated realized losses at May 31, 2004, is attributable to a one-time tax
election whereby the Fund marked appreciated securities to market creating
capital gains that were used to reduce capital loss carryovers and increase tax
cost basis.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are declared and paid on a monthly
basis. Any net realized capital gains on sales of securities for the Fund are
distributed to shareholders at least annually. These distributions are recorded
as of the close of business on the ex-dividend date. Such distributions are
payable in cash or, pursuant to the Fund's dividend reinvestment plan,
reinvested in additional shares of the Fund's capital stock. Under the plan,
Fund shares will be purchased in the open market unless the market price plus
commissions exceeds the net asset value by 5% or more. If, at the close of
business on
17
<Page>
the dividend payment date, the shares purchased in the open market are
insufficient to satisfy the dividend reinvestment requirement, the Fund will
issue new shares at a discount of up to 5% from the current market price.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain broker-dealers, the Fund,
along with other affiliated registered investment companies, may transfer
uninvested cash balances into a joint trading account, the daily aggregate
balance of which is invested in repurchase agreements secured by U.S. government
or agency obligations. Securities pledged as collateral for all individual and
joint repurchase agreements are held by the Fund's custodian bank until maturity
of the repurchase agreement. Provisions for all agreements ensure that the daily
market value of the collateral is in excess of the repurchase amount, including
accrued interest, to protect the Fund in the event of a default.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from these estimates.
(3) EXPENSES
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
Pursuant to an investment advisory agreement (the "Agreement"), USBAM, a
subsidiary of U.S. Bank National Association ("U.S. Bank"), manages the Fund's
assets and furnishes related office facilities, equipment, research, and
personnel. The Agreement provides USBAM with a monthly investment management fee
equal to an annualized rate of 0.20% of the Fund's average weekly net assets and
4.50% of the daily gross
18
<Page>
income accrued by the Fund during the month (i.e., investment income, including
accretion of bond discounts and amortization of premiums, other than gains from
the sale of securities or gains from options and futures contracts less interest
on money borrowed by the Fund). The monthly investment management fee shall not
exceed in the aggregate 1/12 of 0.725% of the Fund's average weekly net assets
during the month (approximately 0.725% on an annual basis). For the fiscal year
ended May 31, 2004, the effective investment management fee incurred by the Fund
was 0.62%. For its fee, USBAM provides investment advice, and in general,
conducts the management and investment activities of the Fund.
Pursuant to a co-administration agreement (the "Co-Administration Agreement"),
USBAM serves as co-administrator for the Fund (U.S. Bancorp Fund Services, LLC,
a subsidiary of U.S. Bancorp, is also co-administrator but currently has no
functional responsibilities related to the Fund) and provides administrative
services, including legal and shareholder services, to the Fund. Under this
agreement, USBAM receives a monthly administrative fee equal to an annualized
rate of 0.25% of the Fund's average weekly net assets. For its fee, USBAM
provides numerous services to the Fund including, but not limited to, handling
the general business affairs, financial and regulatory reporting, and other
services. Separate from the Co-Administration Agreement, USBAM (from its own
resources) has retained SEI Investments, Inc. as a sub-administrator to perform,
among other services, net asset value calculations.
The Fund may invest in money market funds that are series of First American
Funds, Inc. ("FAF"), subject to certain limitations. In order to avoid the
payment of duplicative
19
<Page>
investment advisory fees to USBAM, which acts as the investment adviser to both
the Fund and the related money market funds, USBAM will reimburse the Fund an
amount equal to that portion of the investment advisory fee received from the
related money market funds that is attributable to the assets of the Fund. For
financial statement purposes, this reimbursement is recorded as investment
income.
CUSTODIAN FEES
U.S. Bank serves as the Fund's custodian pursuant to a custodian agreement with
the Fund. The fee for the Fund is equal to an annual rate of 0.02% of average
weekly net assets. These fees are computed weekly and paid monthly.
MORTGAGE SERVICING FEES
The Fund enters into mortgage servicing agreements with mortgage servicers for
whole loans and participation mortgages. For a fee, mortgage servicers maintain
loan records, such as insurance and taxes and the proper allocation of payments
between principal and interest.
PROPOSED REORGANIZATION EXPENSES
As discussed in Note 6, the Fund has taken certain steps to reorganize along
with certain other similar entities managed by USBAM. As set forth below,
certain costs and expenses incurred in connection with the proposed
reorganization of the Fund (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
reorganization) shall be borne by the Fund, American Strategic Income Portfolio
Inc., American Strategic Income
20
<Page>
Portfolio Inc. II, and American Select Portfolio Inc. (collectively, the
"Existing Funds"). 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. 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 reorganization.
Additionally, costs and expenses incurred in connection with the legal
representation of USBAM's interests with respect to the reorganization and
related matters will be borne by USBAM. The current estimated costs and expenses
related to the reorganization are $6,500,000. Based on the net asset values of
the Existing Funds as of May 31, 2004, the Fund would bear approximately 40% of
the total expenses of the reorganization allocated to the Existing Funds. During
the fiscal year ended May 31, 2004, the Fund incurred $117,800 in reorganization
expenses.
OTHER FEES AND EXPENSES
In addition to the investment management, administrative, and custodian fees,
the Fund is responsible for paying most other operating expenses, including:
outside directors' fees and expenses, registration fees, printing and
shareholder reports, transfer agent fees and expenses, legal, auditing and
accounting services, insurance, interest, expenses related to real estate owned,
taxes, and other miscellaneous expenses.
(4) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from paydowns and sales of securities and real
estate, other than temporary investments in short-term securities, for the
fiscal year ended May 31, 2004, aggregated $163,738,233 and $148,638,311,
respectively. Included in proceeds from paydowns and sales are $1,081,419 from
prepayment penalties.
21
<Page>
(5) CAPITAL LOSS CARRYOVER
For federal income tax purposes, the Fund had capital loss carryovers at May 31,
2004, which, if not offset by subsequent capital gains, will expire on the
Fund's fiscal year-ends as indicated below.
<Table>
<Caption>
CAPITAL LOSS
CARRYOVER EXPIRATION
--------------- ----------
$ 871,623 2005
69,740 2008
---------------
$ 941,363
===============
</Table>
(6) PROPOSED REORGANIZATION
A combined proxy statement/registration statement, last amended on April 22,
2003, has been filed with the Securities and Exchange Commission ("SEC") in
which it is proposed that the Fund, along with American Strategic Income
Portfolio Inc. ("ASP"), American Strategic Income Portfolio Inc. II ("BSP"), and
American Select Portfolio Inc. ("SLA"), reorganize into First American Strategic
Real Estate Portfolio Inc., a specialty real estate finance company that would
elect to be taxed as a real estate investment trust ("REIT"). Shareholders of
the Fund, ASP, BSP, and SLA who do not wish to receive shares of the REIT will
have the option, subject to certain limitations, of electing to exchange their
shares for shares in First American Strategic Income Portfolio Inc., a newly
formed closed-end management investment company with investment policies,
restrictions and strategies substantially similar to those of the Fund, ASP,
BSP, and SLA. This transaction is subject to review by the SEC, approval by the
Fund's shareholders, and certain other conditions. There is no assurance that
the transaction will be completed.
(7) INDEMNIFICATIONS
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
22
<Page>
(8) FINANCIAL HIGHLIGHTS
Per-share data for a share of capital stock outstanding throughout each period
and selected information for each period are as follows:
<Table>
<Caption>
YEAR ENDED MAY 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
PER-SHARE DATA
Net asset value, beginning of period $ 12.52 $ 12.55 $ 12.37 $ 11.67 $ 12.25
---------- ---------- ---------- ---------- ----------
Operations:
Net investment income 1.04 1.07 1.08 1.02 1.00
Net realized and unrealized gains
(losses) on investments (0.04) (0.05) 0.15 0.70 (0.53)
---------- ---------- ---------- ---------- ----------
Total from operations 1.00 1.02 1.23 1.72 0.47
---------- ---------- ---------- ---------- ----------
Distributions to shareholders:
From net investment income (1.12) (1.05) (1.05) (1.02) (1.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 12.40 $ 12.52 $ 12.55 $ 12.37 $ 11.67
========== ========== ========== ========== ==========
Market value, end of period $ 12.00 $ 12.67 $ 12.43 $ 11.88 $ 10.56
========== ========== ========== ========== ==========
SELECTED INFORMATION
Total return, net asset value (a) 8.31% 8.44% 10.29% 15.28% 3.99%
Total return, market value (b) 3.49% 11.01% 14.04% 23.05% (2.20)%
Net assets at end of period (in millions) $ 265 $ 267 $ 268 $ 264 $ 249
Ratio of expenses to average weekly
net assets including interest
expense 1.68% 2.85% 2.30% 3.43% 3.55%
Ratio of expenses to average weekly
net assets excluding interest
expense 1.13% 1.71% 1.15% 1.16% 1.21%
Ratio of net investment income to
average weekly net assets 8.32% 8.55% 8.68% 8.44% 8.30%
Portfolio turnover rate (excluding
short-term securities) 44% 20% 42% 23% 28%
Amount of borrowings outstanding at
end of period (in millions) $ 75 $ 63 $ 99 $ 72 $ 76
Per-share amount of borrowings
outstanding at end of period $ 3.53 $ 2.93 $ 4.66 $ 3.39 $ 3.54
Per-share amount of net assets,
excluding borrowings, at end of period $ 15.93 $ 15.45 $ 17.21 $ 15.76 $ 15.21
Asset coverage ratio (c) 451% 527% 369% 465% 430%
</Table>
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(c) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
23
<Page>
SCHEDULE OF INVESTMENTS
AMERICAN STRATEGIC INCOME PORTFOLIO III May 31, 2004
<Table>
<Caption>
DATE PAR
DESCRIPTION OF SECURITY ACQUIRED VALUE COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO NET ASSETS)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (b) -- 7.1%
FIXED RATE -- 7.1%
FHLMC, 5.50%, 1/1/18 $ 8,031,918 $ 8,298,569 $ 8,192,556
FHLMC, 9.00%, 7/1/30 964,004 989,822 1,047,149
FNMA, 6.00%, 10/1/16 703,311 707,472 731,444
FNMA, 5.50%, 2/1/17 1,229,611 1,226,428 1,258,433
FNMA, 5.50%, 6/1/17 797,681 801,999 813,388
FNMA, 5.00%, 9/1/17 1,079,821 1,082,919 1,079,486
FNMA, 5.00%, 11/1/17 1,971,546 1,982,801 1,970,935
FNMA, 6.50%, 6/1/29 2,165,459 2,150,576 2,248,006
FNMA, 7.50%, 4/1/30 379,842 366,911 405,124
FNMA, 7.50%, 5/1/30 450,373 435,071 480,350
FNMA, 8.00%, 5/1/30 121,823 120,267 131,303
FNMA, 8.00%, 6/1/30 490,189 483,925 528,331
--------------- ---------------
Total U.S. Government
Agency Mortgage-Backed
Securities 18,646,760 18,886,505
--------------- ---------------
PRIVATE MORTGAGE-BACKED SECURITY (e) -- 0.0%
FIXED RATE -- 0.0%
First Gibralter,
Series 1992-MM, Class B,
8.79%, 10/25/21 07/30/93 394,296 189,047 --
--------------- ---------------
WHOLE LOANS AND PARTICIPATION MORTGAGES (c,d,e) -- 119.8%
COMMERCIAL LOANS -- 23.6%
1155 Market Street,
12.88%, 5/1/09 04/02/04 1,800,000 1,800,000 1,854,000
4295/4299 San Felipe
Associates LP,
9.33%, 8/1/06 11/01/02 5,104,290 5,104,290 5,257,419
8324 East Hartford Drive I,
5.15%, 5/1/09 04/08/04 3,800,000 3,800,000 3,819,342
8324 East Hartford Drive II,
13.88%, 5/1/09 04/08/04 475,000 475,000 484,500
Academy Spectrum,
7.98%, 5/1/09 12/18/02 5,195,447(b) 5,195,447 5,455,220
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
24
<Page>
<Table>
<Caption>
DATE PAR
DESCRIPTION OF SECURITY ACQUIRED VALUE COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
CUBB Properties Mobile
Home Park,
8.03%, 11/1/07 11/04/97 $ 2,446,634 $ 2,446,634 $ 2,544,499
Duncan Office Building,
7.88%, 6/1/08 05/19/98 634,865 634,865 666,608
France Avenue Business Park II,
7.40%, 10/1/12 09/12/02 4,539,433(b) 4,539,433 4,766,405
Holiday Village Shopping Center,
7.15%, 11/1/07 11/12/02 4,803,434(b) 4,803,434 5,043,605
Indian Street Shoppes,
7.88%, 2/1/09 01/27/99 2,179,662(b) 2,179,662 2,288,646
Jackson Street Warehouse,
8.53%, 7/1/07 06/30/98 2,806,230(b) 2,806,230 2,918,480
Jefferson Office Building,
7.38%, 12/1/13 11/05/98 872,548 872,548 916,176
Kimball Professional
Office Building,
7.88%, 7/1/08 07/02/98 2,130,499(b) 2,130,499 2,237,024
Lake Pointe Corporate Center,
8.57%, 7/1/07 07/07/97 3,542,245(b) 3,542,245 3,683,935
LAX Air Freight Center,
7.90%, 1/1/08 12/29/97 3,101,479(b) 3,101,479 3,225,538
NCGR Office Building,
5.20%, 6/1/09 05/28/04 4,400,000(b) 4,400,000 4,400,000
North Austin Business Center,
9.05%, 5/1/07 04/10/97 2,784,233(b) 2,784,233 2,895,602
Pacific Shores Mobile
Home Park II,
11.00%, 10/1/06 09/27/96 559,075 556,271 587,029
Pilot Knob Service Center,
8.95%, 7/1/07 06/20/97 1,373,057(b) 1,373,057 1,427,979
Rockwall Technology Building I,
7.40%, 11/1/06 10/16/02 3,800,000(b) 3,800,000 3,914,000
Rockwall Technology Building II,
9.58%, 11/1/06 10/16/02 1,100,000 1,100,000 894,104
Shoppes at Jonathan's Landing,
7.95%, 5/1/10 04/12/00 2,887,602(b) 2,887,602 3,031,982
--------------- ---------------
60,332,929 62,312,093
--------------- ---------------
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
25
<Page>
<Table>
<Caption>
DATE PAR
DESCRIPTION OF SECURITY ACQUIRED VALUE COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
MULTIFAMILY LOANS -- 95.8%
2600 Van Ness I,
5.40%, 10/1/06 09/03/03 $ 4,670,000(b) $ 4,670,000 $ 4,763,400
2600 Van Ness II,
13.38%, 10/1/06 09/03/03 250,000 250,000 247,055
2975 Van Ness I,
5.40%, 10/1/06 09/03/03 3,080,000(b) 3,080,000 3,141,600
2975 Van Ness II,
13.38%, 10/1/06 09/03/03 200,000 200,000 197,644
411 15th Avenue I,
5.38%, 10/1/06 09/03/03 2,345,000(b) 2,345,000 2,391,900
411 15th Avenue II,
13.38%, 10/1/06 09/03/03 150,000 150,000 146,361
50 Joice I,
5.38%, 10/1/06 09/03/03 1,825,000(b) 1,825,000 1,861,500
50 Joice II,
13.38%, 10/1/06 09/03/03 125,000 125,000 121,968
655 Stockton I,
5.40%, 10/1/06 09/03/03 3,965,000(b) 3,965,000 4,044,300
655 Stockton II,
13.38%, 10/1/06 09/03/03 275,000 275,000 268,329
676 Geary I,
5.43%, 10/1/06 09/03/03 6,050,000(b) 6,050,000 6,171,000
676 Geary II,
13.38%, 10/1/06 09/03/03 350,000 350,000 341,510
691 O'Farrell I,
5.40%, 10/1/06 09/03/03 4,175,000 4,175,000 4,258,500
691 O'Farrell II,
13.38%, 10/1/06 09/03/03 300,000 300,000 290,851
709 Geary I,
5.40%, 10/1/06 09/03/03 4,870,000 4,870,000 4,967,400
709 Geary II,
13.38%, 10/1/06 09/03/03 350,000 350,000 339,326
755 O'Farrell I,
5.40%, 10/1/06 09/03/03 3,225,000(b) 3,225,000 3,289,500
755 O'Farrell II,
13.38%, 10/1/06 09/03/03 300,000 300,000 292,722
840 California I,
5.40%, 10/1/06 09/03/03 4,300,000(b) 4,300,000 4,386,000
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
26
<Page>
<Table>
<Caption>
DATE PAR
DESCRIPTION OF SECURITY ACQUIRED VALUE COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
840 California II,
13.38%, 10/1/06 09/03/03 $ 250,000 $ 250,000 $ 243,935
845 California I,
5.43%, 10/1/06 09/03/03 7,600,000(b) 7,600,000 7,752,000
845 California II,
13.38%, 10/1/06 09/03/03 525,000 525,000 512,264
Ambassador House Apartments,
8.10%, 2/1/10 01/05/00 3,362,979(b) 3,362,979 3,531,128
Barclay Square Apartments,
5.43%, 12/31/04 08/21/01 8,800,000(b) 8,800,000 8,800,000
Barclay Square Apartments II,
5.38%, 12/31/04 06/11/03 600,000 600,000 600,000
Bellewood Apartments,
9.13%, 12/1/05 06/13/01 1,968,651 1,968,651 1,855,169
Brays Village Apartments,
9.88%, 4/1/05 03/15/02 1,394,000 1,394,000 1,330,722
Chateau Club Apartments I,
5.18%, 6/1/07 05/18/04 6,000,000 6,000,000 6,180,000
Chateau Club Apartments II,
11.88%, 6/1/07 05/18/04 500,000 500,000 506,530
Clearwater Creek Apartments,
9.93%, 3/1/08 02/18/03 8,920,000 8,920,000 8,920,000
Cleary Court Apartments,
5.68%, 4/1/07 03/17/04 15,070,000 15,070,000 14,267,364
Concorde Apartments,
6.28%, 5/1/10 04/30/03 4,900,000(b) 4,900,000 5,145,000
Country Place Village I,
6.93%, 3/1/05 02/06/02 10,300,000(b) 10,300,000 10,403,000
Country Place Village II,
9.88%, 3/1/05 02/06/02 2,300,000 2,300,000 1,939,900
Country Villa Apartments,
6.90%, 9/1/13 08/29/03 2,584,147(b) 2,584,147 2,713,354
Flint Ridge on the
Lake Apartments I,
5.43%, 1/1/07 12/19/03 5,840,000(b) 5,840,000 6,015,200
Flint Ridge on the
Lake Apartments II,
13.88%, 1/1/07 12/19/03 500,000 500,000 515,000
Geneva Village Apartments I,
7.00%, 1/1/14 12/24/03 1,530,787 1,530,787 1,607,327
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
27
<Page>
<Table>
<Caption>
DATE PAR
DESCRIPTION OF SECURITY ACQUIRED VALUE COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
Geneva Village Apartments II,
9.88%, 1/1/13 12/24/03 $ 73,276 $ 73,276 $ 76,940
Grand Courtyards,
9.93%, 2/10/09 01/26/04 7,215,000 7,215,000 7,188,857
Hartford Apartments,
14.88%, 6/1/05 06/24/02 2,290,000 2,290,000 2,211,119
Hidden Ridge I,
5.43%, 8/1/06 07/23/03 13,232,000(b) 13,232,000 13,628,960
Hidden Ridge II,
9.90%, 8/1/06 07/23/03 2,648,000 2,648,000 2,205,838
Lions Park Apartments I,
5.20%, 4/1/09 03/25/04 3,545,966 3,545,966 3,605,130
Lions Park Apartments II,
11.88%, 4/1/09 03/25/04 99,971 99,971 104,970
Meadowview Apartments I,
7.00%, 1/1/14 12/24/03 1,111,055 1,111,055 1,166,605
Meadowview Apartments II,
9.88%, 1/1/13 12/24/03 73,276 73,276 76,940
Meridian,
8.93%, 9/1/04 08/22/01 8,521,312 8,521,312 8,521,312
Meridian Pointe Apartments,
8.73%, 2/1/12 03/07/97 1,120,460 1,120,460 1,176,483
Mirror Woods Apartments,
5.58%, 8/1/06 07/30/03 8,004,000(b) 8,004,000 8,244,120
Northaven Terrace Apartments,
7.43%, 6/1/07 05/07/02 6,739,909(b) 6,739,909 7,076,904
Pacific Avenue Apartments I,
5.43%, 4/1/07 03/18/04 7,100,000 7,100,000 7,242,000
Pacific Avenue Apartments II,
11.88%, 4/1/07 03/18/04 1,550,000 1,550,000 1,442,514
Parkway Village Apartments I,
7.00%, 1/1/14 12/24/03 1,061,301 1,061,301 1,114,367
Parkway Village Apartments II,
9.88%, 1/1/13 12/24/03 73,276 73,276 76,940
Riverbend Village Apartments,
5.58%, 8/1/06 07/30/03 8,800,000(b) 8,800,000 9,064,000
Riverbrook Apartments I,
8.55%, 3/1/10 03/01/00 2,924,353(b) 2,924,353 3,070,571
Riverbrook Apartments II,
10.88%, 3/1/10 02/13/01 315,677 315,677 331,461
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
28
<Page>
<Table>
<Caption>
PAR
DATE VALUE/
DESCRIPTION OF SECURITY ACQUIRED SHARES COST VALUE (a)
- ----------------------------------- -------- --------------- --------------- ---------------
Shelter Island Apartments,
7.63%, 12/1/08 11/04/98 $ 12,686,127(b) $ 12,686,127 $ 13,320,433
The Colony Apartments,
5.58%, 8/1/06 07/30/03 9,296,000(b) 9,296,000 9,574,880
Tulsa Apartment Portfolio I,
9.93%, 3/1/07 02/27/03 6,790,000(f) 6,790,000 6,323,994
Tulsa Apartment Portfolio II,
9.93%, 3/1/07 02/27/03 6,130,000 6,130,000 5,452,983
Warwick West Apartments II,
9.90%, 7/1/04 06/27/01 2,856,000 2,856,000 2,613,655
Westchase Apartments,
5.68%, 8/1/06 08/12/03 6,700,000(b) 6,700,000 6,901,000
WesTree Apartments,
8.90%, 11/1/10 10/12/00 4,655,967(b) 4,655,967 4,888,765
Willamette Oaks,
9.15%, 12/1/05 06/13/01 2,559,246 2,559,246 2,533,103
--------------- ---------------
251,922,736 253,593,603
--------------- ---------------
SINGLE FAMILY LOAN -- 0.4%
Arbor,
9.27%, 8/16/17 02/16/96 1,010,152 1,012,472 1,010,152
--------------- ---------------
Total Whole Loans and
Participation Mortgages 313,268,137 316,915,848
--------------- ---------------
PREFERRED STOCK -- 0.0%
REAL ESTATE INVESTMENT TRUST -- 0.0%
Archstone Community Trust,
Series D 04/23/01 3,525 91,862 90,663
--------------- ---------------
Total Investments in
Unaffiliated Securities 332,195,806 335,893,016
--------------- ---------------
AFFILIATED MONEY MARKET FUND (g) -- 0.8%
First American Prime
Obligations Fund, Class Z 2,222,237 2,222,237 2,222,237
--------------- ---------------
Total Investments in
Securities (h) -- 127.7% $ 334,418,043 $ 338,115,253
=============== ===============
</Table>
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS.
29
<Page>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 IN
NOTES TO FINANCIAL STATEMENTS.
(b) ON MAY 31, 2004, SECURITIES VALUED AT $214,353,436 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
<Table>
<Caption>
NAME OF
BROKER
ACQUISITION ACCRUED AND DESCRIPTION
AMOUNT DATE RATE DUE INTEREST OF COLLATERAL
- ------------- ------------- ---------- ---------- ------------- -----------------------
$ 17,376,881 5/12/04 1.10%* 6/11/04 $ 10,619 (1)
51,500,000 5/03/04 1.98%** 6/01/04 81,935 (2)
6,500,000 5/18/04 1.98%** 6/01/04 4,993 (2)
- ------------- -------------
$ 75,376,881 $ 97,547
============= =============
</Table>
* RATE IS A NEGOTIATED FIXED RATE.
** INTEREST RATE AS OF MAY 31, 2004. RATES ARE BASED ON THE LONDON INTERBANK
OFFERED RATE (LIBOR) AND RESET MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY:
FHLMC, 5.50%, 1/1/18, $8,031,918 PAR
FHLMC, 9.00%, 7/1/30, $964,004 PAR
FNMA, 6.00%, 10/1/16, $703,311 PAR
FNMA, 5.50%, 2/1/17, $1,229,611 PAR
FNMA, 5.50%, 6/1/17, $797,681 PAR
FNMA, 5.00%, 9/1/17, $1,079,821 PAR
FNMA, 5.00%, 11/1/17, $1,971,546 PAR
FNMA, 6.50%, 6/1/29, $2,165,459 PAR
FNMA, 7.50%, 4/1/30, $379,842 PAR
FNMA, 7.50%, 5/1/30, $450,373 PAR
FNMA, 8.00%, 5/1/30, $121,823 PAR
FNMA, 8.00%, 6/1/30, $490,189 PAR
(2) MORGAN STANLEY:
2600 VAN NESS I, 5.40%, 10/1/06, $4,670,000 PAR
2975 VAN NESS I, 5.40%, 10/1/06, $3,080,000 PAR
411 15TH AVENUE I, 5.38%, 10/1/06, $2,345,000 PAR
50 JOICE I, 5.38%, 10/1/06, $1,825,000 PAR
655 STOCKTON I, 5.40%, 10/1/06, $3,965,000 PAR
676 GEARY I, 5.43%, 10/1/06, $6,050,000 PAR
755 O'FARRELL I, 5.40%, 10/1/06, $3,225,000 PAR
840 CALIFORNIA I, 5.40%, 10/1/06, $4,300,000 PAR
845 CALIFORNIA I, 5.43%, 10/1/06, $7,600,000 PAR
ACADEMY SPECTRUM, 7.98%, 5/1/09, $5,195,447 PAR
AMBASSADOR HOUSE APARTMENTS, 8.10%, 2/1/10, $3,362,979 PAR
BARCLAY SQUARE APARTMENTS, 5.43%, 12/31/04, $8,800,000 PAR
CONCORDE APARTMENTS, 6.28%, 5/1/10, $4,900,000 PAR
COUNTRY PLACE VILLAGE I, 6.93%, 3/1/05, $10,300,000 PAR
COUNTRY VILLA APARTMENTS, 6.90%, 9/1/13, $2,584,147 PAR
FLINT RIDGE ON THE LAKE APARTMENTS I, 5.43%, 1/1/07, $5,840,000 PAR
FRANCE AVENUE BUSINESS PARK II, 7.40%, 10/1/12, $4,539,433 PAR
HIDDEN RIDGE I, 5.43%, 8/1/06, $13,232,000 PAR
30
<Page>
HOLIDAY VILLAGE SHOPPING CENTER, 7.15%, 11/1/07, $4,803,434 PAR
INDIAN STREET SHOPPES, 7.88%, 2/1/09, $2,179,662 PAR
JACKSON STREET WAREHOUSE, 8.53%, 7/1/07, $2,806,230 PAR
KIMBALL PROFESSIONAL OFFICE BUILDING, 7.88%, 7/1/08, $2,130,499 PAR
LAKE POINTE CORPORATE CENTER, 8.57%, 7/1/07, $3,542,245 PAR
LAX AIR FREIGHT CENTER, 7.90%, 1/1/08, $3,101,479 PAR
MIRROR WOODS APARTMENTS, 5.58%, 8/1/06, $8,004,000 PAR
NCGR OFFICE BUILDING, 5.20%, 6/1/09, $4,400,000 PAR
NORTH AUSTIN BUSINESS CENTER, 9.05%, 5/1/07, $2,784,233 PAR
NORTHAVEN TERRACE APARTMENTS, 7.43%, 6/1/07, $6,739,909 PAR
PILOT KNOB SERVICE CENTER, 8.95%, 7/1/07, $1,373,057 PAR
RIVERBEND VILLAGE APARTMENTS, 5.58%, 8/1/06, $8,800,000 PAR
RIVERBROOK APARTMENTS I, 8.55%, 3/1/10, $2,924,353 PAR
ROCKWALL TECHNOLOGY BUILDING I, 7.40%, 11/1/06, $3,800,000 PAR
SHELTER ISLAND APARTMENTS, 7.63%, 12/1/08, $12,686,127 PAR
SHOPPES AT JONATHAN'S LANDING, 7.95%, 5/1/10, $2,887,602 PAR
THE COLONY APARTMENTS, 5.58%, 8/1/06, $9,296,000 PAR
WESTCHASE APARTMENTS, 5.68%, 8/1/06, $6,700,000 PAR
WESTREE APARTMENTS, 8.90%, 11/1/10, $4,655,967 PAR
THE FUND HAS ENTERED INTO A LENDING AGREEMENT WITH MORGAN STANLEY. THE AGREEMENT
PERMITS THE FUND TO ENTER INTO REVERSE REPURCHASE AGREEMENTS UP TO $60,000,000
USING WHOLE LOANS AS COLLATERAL. THE FUND PAYS A FEE OF 0.15% TO MORGAN STANLEY
ON ANY UNUSED PORTION OF THE $60,000,000 LENDING AGREEMENT.
(c) INTEREST RATES ON COMMERCIAL AND MULTIFAMILY LOANS ARE THE RATES IN EFFECT
MAY 31, 2004. 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 MAY 31, 2004.
(d) 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. THE GEOGRAPHICAL LOCATION
OF THE MORTGAGED PROPERTIES AND, IN THE CASE OF SINGLE FAMILY, THE NUMBER OF
LOANS, ARE PRESENTED BELOW.
COMMERCIAL LOANS:
1155 MARKET STREET - SAN FRANCISCO, CA
4295/4299 SAN FELIPE ASSOCIATES LP - HOUSTON, TX
8324 EAST HARTFORD DRIVE I - SCOTTSDALE, AZ
8324 EAST HARTFORD DRIVE II - SCOTTSDALE, AZ
ACADEMY SPECTRUM - COLORADO SPRINGS, CO
CUBB PROPERTIES MOBILE HOME PARK - NEW YORK, NY
DUNCAN OFFICE BUILDING - OLYMPIA, WA
FRANCE AVENUE BUSINESS PARK II - BROOKLYN PARK, MN
HOLIDAY VILLAGE SHOPPING CENTER - PARK CITY, UT
INDIAN STREET SHOPPES - STUART, FL
JACKSON STREET WAREHOUSE - PHOENIX, AZ
JEFFERSON OFFICE BUILDING - OLYMPIA, WA
KIMBALL PROFESSIONAL OFFICE BUILDING - GIG HARBOR, WA
LAKE POINTE CORPORATE CENTER - MINNEAPOLIS, MN
LAX AIR FREIGHT CENTER - INGLEWOOD, CA
NCGR OFFICE BUILDING - SANTA FE, NM
NORTH AUSTIN BUSINESS CENTER - AUSTIN, TX
PACIFIC SHORES MOBILE HOME PARK II - NEWPORT, OR
PILOT KNOB SERVICE CENTER - MENDOTA HEIGHTS, MN
ROCKWALL TECHNOLOGY BUILDING I - ROCKWALL, TX
ROCKWALL TECHNOLOGY BUILDING II - ROCKWALL, TX
SHOPPES AT JONATHAN'S LANDING - JUPITER, FL
31
<Page>
MULTIFAMILY LOANS:
2600 VAN NESS I - SAN FRANCISCO, CA
2600 VAN NESS II - SAN FRANCISCO, CA
2975 VAN NESS I - SAN FRANCISCO, CA
2975 VAN NESS II - SAN FRANCISCO, CA
411 15TH AVENUE I - SAN FRANCISCO, CA
411 15TH AVENUE II - SAN FRANCISCO, CA
50 JOICE I - SAN FRANCISCO, CA
50 JOICE II - SAN FRANCISCO, CA
655 STOCKTON I - SAN FRANCISCO, CA
655 STOCKTON II - SAN FRANCISCO, CA
676 GEARY I - SAN FRANCISCO, CA
676 GEARY II - SAN FRANCISCO, CA
691 O'FARRELL I - SAN FRANCISCO, CA
691 O'FARRELL II - SAN FRANCISCO, CA
709 GEARY I - SAN FRANCISCO, CA
709 GEARY II - SAN FRANCISCO, CA
755 O'FARRELL I - SAN FRANCISCO, CA
755 O'FARRELL II - SAN FRANCISCO, CA
840 CALIFORNIA I - SAN FRANCISCO, CA
840 CALIFORNIA II - SAN FRANCISCO, CA
845 CALIFORNIA I - SAN FRANCISCO, CA
845 CALIFORNIA II - SAN FRANCISCO, CA
AMBASSADOR HOUSE APARTMENTS - OKLAHOMA CITY, OK
BARCLAY SQUARE APARTMENTS - HOUSTON, TX
BARCLAY SQUARE APARTMENTS II - HOUSTON, TX
BELLEWOOD APARTMENTS - ISSAQUAH, WA
BRAYS VILLAGE APARTMENTS - HOUSTON, TX
CHATEAU CLUB APARTMENTS I - ATHENS, GA
CHATEAU CLUB APARTMENTS II - ATHENS, GA
CLEARWATER CREEK APARTMENTS - RICHARDSON, TX
CLEARY COURT APARTMENTS - PLANTATION, FL
CONCORDE APARTMENTS - CHATTANOOGA, TN
COUNTRY PLACE VILLAGE I - CLEARWATER, FL
COUNTRY PLACE VILLAGE II - CLEARWATER, FL
COUNTRY VILLA APARTMENTS - WEST LAFAYETTE, IN
FLINT RIDGE ON THE LAKE APARTMENTS I - HILLSBOROUGH, NC
FLINT RIDGE ON THE LAKE APARTMENTS II - HILLSBOROUGH, NC
GENEVA VILLAGE APARTMENTS I - WEST JORDAN, UT
GENEVA VILLAGE APARTMENTS II - WEST JORDAN, UT
GRAND COURTYARDS - GRAND PRAIRIE, TX
HARTFORD APARTMENTS - ATLANTA, GA
HIDDEN RIDGE I - IRVING, TX
HIDDEN RIDGE II - IRVING, TX
LIONS PARK APARTMENTS I - ELK RIVER, MN
LIONS PARK APARTMENTS II - ELK RIVER, MN
MEADOWVIEW APARTMENTS I - WEST JORDAN, UT
MEADOWVIEW APARTMENTS II - WEST JORDAN, UT
MERIDIAN - PHOENIX, AZ
MERIDIAN POINTE APARTMENTS - KALISPELL, MT
MIRROR WOODS APARTMENTS - FEDERAL WAY, WA
NORTHAVEN TERRACE APARTMENTS - DALLAS, TX
PACIFIC AVENUE APARTMENTS I - SAN FRANCISCO, CA
PACIFIC AVENUE APARTMENTS II - SAN FRANCISCO, CA
32
<Page>
PARKWAY VILLAGE APARTMENTS I - WEST JORDAN, UT
PARKWAY VILLAGE APARTMENTS II - WEST JORDAN, UT
RIVERBEND VILLAGE APARTMENTS - LAS VEGAS, NV
RIVERBROOK APARTMENTS I - TAMPA, FL
RIVERBROOK APARTMENTS II - TAMPA, FL
SHELTER ISLAND APARTMENTS - LAS VEGAS, NV
THE COLONY APARTMENTS - FEDERAL WAY, WA
TULSA APARTMENT PORTFOLIO I - TULSA, OK
TULSA APARTMENT PORTFOLIO II - TULSA, OK
WARWICK WEST APARTMENTS II - OKLAHOMA CITY, OK
WESTCHASE APARTMENTS - AUSTELL, GA
WESTREE APARTMENTS - COLORADO SPRINGS, CO
WILLAMETTE OAKS - EUGENE, OR
SINGLE FAMILY LOANS:
ARBOR - 10 LOANS, NEW YORK
(e) 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 AND ARE CONSIDERED TO BE ILLIQUID. THESE SECURITIES ARE FAIR
VALUED IN ACCORDANCE WITH THE BOARD APPROVED VALUATION PROCEDURES. ON MAY
31, 2004, THE TOTAL MARKET VALUE OF FAIR VALUED SECURITIES WAS $316,915,848
OR 119.7% OF NET ASSETS. SEE NOTE 2 IN NOTES TO FINANCIAL STATEMENTS.
(f) SECURITY IS IN DEFAULT.
(g) INVESTMENT IN AFFILIATED SECURITY. THIS MONEY MARKET FUND IS ADVISED BY U.S.
BANCORP ASSET MANAGEMENT, INC., WHICH ALSO SERVES AS ADVISOR FOR THE FUND.
SEE NOTE 3 IN NOTES TO FINANCIAL STATEMENTS.
(h) ON MAY 31, 2004, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL INCOME
TAX PURPOSES WAS $337,116,116. THE DIFFERENCE BETWEEN THE COST FOR FEDERAL
INCOME TAX AND BOOK PURPOSES IS DUE TO A ONE-TIME MARK TO MARKET ELECTION
MADE PURSUANT TO SECTION 311 OF THE TAXPAYER RELIEF ACT OF 1997. THE
AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN
SECURITIES, BASED ON THIS COST WERE AS FOLLOWS:
<Table>
GROSS UNREALIZED APPRECIATION $ 5,033,464
GROSS UNREALIZED DEPRECIATION (4,034,327)
------------
NET UNREALIZED APPRECIATION $ 999,137
============
</Table>
ABBREVIATIONS:
FHLMC-FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA-FEDERAL NATIONAL MORTGAGE ASSOCIATION
33
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III
We have audited the accompanying statement of assets and liabilities of American
Strategic Income Portfolio Inc. III, including the schedule of investments as of
May 31, 2004, and the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included examination or confirmation of securities owned as of May 31, 2004,
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
American Strategic Income Portfolio Inc. III at May 31, 2004, the results of its
operations and its cash flows for the year then ended, changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 1, 2004
34
<Page>
FEDERAL INCOME TAX INFORMATION (Unaudited)
The following per-share information describes the federal tax treatment of
distributions made during the fiscal year. Distributions for the calendar year
will be reported to you on Form 1099-DIV. Please consult a tax advisor on how to
report these distributions at the state and local levels.
INCOME DISTRIBUTIONS (TAXABLE AS ORDINARY DIVIDENDS, NONE QUALIFYING FOR
DEDUCTION BY CORPORATIONS OR QUALIFYING AS QUALIFIED DIVIDEND INCOME)
<Table>
<Caption>
PAYABLE DATE AMOUNT
- ------------ ----------
June 25, 2003 $ 0.0875
July 23, 2003 0.0875
August 27, 2003 0.0875
September 24, 2003 0.0875
October 29, 2003 0.0875
November 19, 2003 0.0875
December 17, 2003 0.0875
January 9, 2004 0.1600
February 25, 2004 0.0875
March 24, 2004 0.0875
April 28, 2004 0.0875
May 26, 2004 0.0875
----------
Total $ 1.1225
==========
</Table>
35
<Page>
SHAREHOLDER UPDATE (Unaudited)
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend Reinvestment
Plan, which is a convenient and economical way to buy additional shares of the
Fund by automatically reinvesting dividends and capital gains. The plan is
administered by EquiServe, the plan agent.
ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions will begin with
the next distribution paid, provided your request is received at least 10 days
before the record date for that distribution.
If your shares are in certificate form, you may join the plan directly and have
your distributions reinvested in additional shares of the Fund. To enroll in
this plan, call EquiServe at 800-426-5523. If your shares are registered in your
brokerage firm's name or another name, ask the holder of your shares how you may
participate.
Banks, brokers, or nominees, on behalf of their beneficial owners who wish to
reinvest dividend and capital gains distributions, may participate in the plan
by informing EquiServe at least 10 days before each share's dividend and/or
capital gains distribution.
PLAN ADMINISTRATION
Beginning no more than 5 business days before the dividend payment date,
EquiServe will buy shares of the Fund on the New York Stock Exchange ("NYSE") or
elsewhere on the open market only when the price of the Fund's shares on the
NYSE plus commissions is at less than a 5% premium over the fund's most recently
calculated net asset value ("NAV") per share. If, at the close of business on
the dividend payment date, the shares purchased in the open market are
insufficient to
36
<Page>
satisfy the dividend reinvestment requirement, EquiServe will accept payment of
the dividend, or the remaining portion, in authorized but unissued shares of the
Fund. These shares will be issued at a per-share price equal to the higher of
(a) the NAV 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.
There is no direct charge for reinvestment of dividends and capital gains, since
EquiServe fees are paid for by the Fund. However, if fund shares are purchased
in the open market, each participant pays a pro rata portion of the brokerage
commissions. Brokerage charges are expected to be lower than those for
individual transactions because shares are purchased for all participants in
blocks. As long as you continue to participate in the plan, distributions paid
on the shares in your account will be reinvested.
EquiServe maintains accounts for plan participants holding shares in certificate
form and will furnish written confirmation of all transactions, including
information you need for tax records. Reinvested shares in your account will be
held by EquiServe in noncertificated form in your name.
TAX INFORMATION
Distributions invested in additional shares of the Fund are subject to income
tax, to the same extent as if received in cash. When shares are issued by the
Fund at a discount from market value, shareholders will be treated as having
received distributions of an amount equal to the full market value of those
shares. Shareholders, as required by the Internal Revenue Service, will receive
Form 1099 regarding the federal tax status of the prior year's distributions.
37
<Page>
PLAN WITHDRAWAL
If you hold your shares in certificate form, you may terminate your
participation in the plan at any time by giving written notice to EquiServe. If
your shares are registered in your brokerage firm's name, you may terminate your
participation via verbal or written instructions to your investment
professional. Written instructions should include your name and address as they
appear on the certificate or account.
If notice is received at least 10 days before the record date, all future
distributions will be paid directly to the shareholder of record.
If your shares are issued in certificate form and you discontinue your
participation in the plan, you (or your nominee) will receive an additional
certificate for all full shares and a check for any fractional shares in your
account.
PLAN AMENDMENT/TERMINATION
The Fund reserves the right to amend or terminate the plan. Should the plan be
amended or terminated, participants will be notified in writing at least 90 days
before such amendment or termination is effected. The plan may also be amended
or terminated by EquiServe with at least 90 days written notice to participants
in the plan.
Any questions about the plan should be directed to your investment professional
or to EquiServe LP, P.O. Box 43010, Providence, RI 02940-3010, 800-426-5523.
HOW TO OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICIES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without charge
upon request by calling 800.677.FUND; (2) at firstamericanfunds.com; and (3) on
the U.S. Securities and Exchange Commission's website at sec.gov.
38
<Page>
(This page has been left blank intentionally.)
<Page>
DIRECTORS AND OFFICERS OF THE FUND
INDEPENDENT DIRECTORS
<Table>
<Caption>
POSITION(S)
HELD WITH
NAME, ADDRESS, AND YEAR OF BIRTH FUND TERM OF OFFICE AND LENGTH OF TIME SERVED
- ---------------------------------------------------------------------------------------------------------------------------------
Benjamin R. Field III Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since September 2003.
Minneapolis, MN 55440-1329 (1938)
Mickey P. Foret Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since September 2003.
Minneapolis, MN 55440-1329 (1945)
Roger A. Gibson Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since August 1998.
Minneapolis, MN 55440-1329 (1946)
Victoria J. Herget Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since September 2003.
Minneapolis, MN 55440-1329 (1952)
Leonard W. Kedrowski Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since August 1998.
Minneapolis, MN 55440-1329 (1941)
Richard K. Riederer Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since August 2001.
Minneapolis, MN 55440-1329 (1944)
Joseph D. Strauss Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since August 1998.
Minneapolis, MN 55440-1329 (1940)
</Table>
40
<Page>
<Table>
<Caption>
OTHER
NUMBER OF PORTFOLIOS IN DIRECTORSHIPS
PRINCIPAL OCCUPATION(S) FUND COMPLEX HELD BY
NAME, ADDRESS, AND YEAR OF BIRTH DURING PAST FIVE YEARS OVERSEEN BY DIRECTOR DIRECTOR*
- -----------------------------------------------------------------------------------------------------------------------------------
Benjamin R. Field III Retired; Senior Financial Advisor, First American Funds None
P.O. Box 1329 Bemis Company, Inc. from May 2002 Complex: twelve
Minneapolis, MN 55440-1329 (1938) through June 2004; Senior Vice registered investment
President, Chief Financial Officer companies, including
and Treasurer, Bemis, through April sixty-one portfolios
2002.
Mickey P. Foret Consultant to Northwest Airlines, First American Funds ADC
P.O. Box 1329 Inc. since 2002; Executive Vice Complex: twelve Telecommunications, Inc.
Minneapolis, MN 55440-1329 (1945) President and Chief Financial registered investment
Officer, Northwest Airlines, companies, including Champion Airlines, Inc.
through 2002. sixty-one portfolios
MAIR Holdings, Inc.
URS Corporation
Roger A. Gibson Vice President, Cargo-United First American Funds None
P.O. Box 1329 Airlines, since July 2001; Vice Complex: twelve
Minneapolis, MN 55440-1329 (1946) President, North America-Mountain registered investment
Region, United Airlines, prior to companies, including
July 2001. sixty-one portfolios
Victoria J. Herget Investment consultant and First American Funds None
P.O. Box 1329 non-profit board member since 2001; Complex: twelve
Minneapolis, MN 55440-1329 (1952) Managing Director of Zurich Scudder registered investment
Investments through 2001. companies, including
sixty-one portfolios
Leonard W. Kedrowski Owner, Executive and Management First American Funds None
P.O. Box 1329 Consulting, Inc., a management Complex: twelve
Minneapolis, MN 55440-1329 (1941) consulting firm; Board member, GC registered investment
McGuiggan Corporation (DBA Smyth companies,including
Companies), a label printer; former sixty-one portfolios
Chief Executive Officer, Creative
Promotions International, LLC, a
promotional award programs and
products company, through October
2003; Advisory Board member,
Designer Doors, manufacturer of
designer doors, through 2002.
Richard K. Riederer Retired; Director, President, and First American Funds None
P.O. Box 1329 Chief Executive Officer, Weirton Complex: twelve
Minneapolis, MN 55440-1329 (1944) Steel, through 2001. registered investment
companies, including
sixty-one portfolios
Joseph D. Strauss Owner and President, Excensus TM First American Funds None
P.O. Box 1329 LLC, a consulting firm, since 2001; Complex: twelve
Minneapolis, MN 55440-1329 (1940) Owner and President, Strauss registered investment
Management Company, a Minnesota companies,including
holding company for various sixty-one portfolios
organizational management business
ventures; Owner, Chairman, and
Chief Executive Officer, Community
Resource Partnerships, Inc., a
strategic planning, operations
management, government relations,
transportation planning, and public
relations organization; attorney at
law.
</Table>
41
<Page>
<Table>
<Caption>
POSITION(S)
HELD WITH
NAME, ADDRESS, AND YEAR OF BIRTH FUND TERM OF OFFICE AND LENGTH OF TIME SERVED
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia L. Stringer Chair; Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 Director meeting of shareholders. Chair term three years, assuming reelection
Minneapolis, MN 55440-1329 (1944) as a director. Chair of CSP's board since 1998; current term expires
September 2006. Director of CSP since August 1998.
James M. Wade Director Directors serve for a one-year term that expires at the next annual
P.O. Box 1329 meeting of shareholders. Director of CSP since August 2001.
Minneapolis, MN 55440-1329 (1943)
</Table>
OFFICERS
<Table>
<Caption>
POSITION(S)
HELD WITH
NAME, ADDRESS, AND YEAR OF BIRTH FUND TERM OF OFFICE AND LENGTH OF TIME SERVED
- ---------------------------------------------------------------------------------------------------------------------------------
Thomas S. Schreier, Jr. President Re-elected by the Board annually; President of CSP since February
U.S. Bancorp Asset Management, Inc. 2001.
800 Nicollet Mall
Minneapolis, MN 55402 (1962)**
John G. Wenker Senior Vice Re-elected by the Board annually; Senior Vice President of CSP since
U.S. Bancorp Asset Management, Inc. President May 2001.
800 Nicollet Mall
Minneapolis, Minnesota 55402 (1953)**
Mark S. Jordahl Vice Re-elected by the Board annually; Vice President-Investments of CSP
U.S. Bancorp Asset Management, Inc. President- since September 2001.
800 Nicollet Mall Investments
Minneapolis, MN 55402 (1960)**
Jeffery M. Wilson Vice Re-elected by the Board annually; Vice President-Administration of CSP
U.S. Bancorp Asset Management, Inc. President- since March 2000.
800 Nicollet Mall Administration
Minneapolis, MN 55402 (1956)**
Russell J. Kappenman Vice Re-elected by the Board annually; Vice President and Assistant
U.S. Bancorp Asset Management, Inc. President- Secretary of CSP since May 2001.
800 Nicollet Mall and
Minneapolis, Minnesota 55402 (1964)** Assistant
Secretary
Julene R. Melquist Vice Re-elected by the Board annually; Vice President of CSP since May
U.S. Bancorp Asset Management, Inc. President 2001.
800 Nicollet Mall
Minneapolis, Minnesota 55402 (1966)**
Joseph M. Ulrey III Treasurer Re-elected by the Board annually; Treasurer of CSP since December
U.S. Bancorp Asset Management, Inc. 2003.
800 Nicollet Mall
Minneapolis, MN 55402 (1958)**
</Table>
42
<Page>
<Table>
<Caption>
OTHER
NUMBER OF PORTFOLIOS IN DIRECTORSHIPS
PRINCIPAL OCCUPATION(S) FUND COMPLEX HELD BY
NAME, ADDRESS, AND YEAR OF BIRTH DURING PAST FIVEYEARS OVERSEEN BY DIRECTOR DIRECTOR*
- --------------------------------------------------------------------------------------------------------------------------------
Virginia L. Stringer Owner and President, Strategic Management First American Funds None
P.O. Box 1329 Resources, Inc., a management consulting firm; Complex: twelve
Minneapolis, MN 55440-1329 (1944) Executive Consultant for State Farm Insurance registered investment
Company. companies, including
sixty-one portfolios
James M. Wade Owner and President, Jim Wade Homes, a First American Funds None
P.O. Box 1329 homebuilding company, since 1999. Complex: twelve
Minneapolis, MN 55440-1329 (1943) registered investment
companies,including
sixty-one portfolios
</Table>
<Table>
<Caption>
NAME, ADDRESS, AND YEAR OF BIRTH PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------------------
Thomas S. Schreier, Jr. Chief Executive Officer of U.S. Bancorp Asset Management, Inc. since May 2001;
U.S. Bancorp Asset Management, Inc. Chief Executive Officer of First American Asset Management from December 2000
800 Nicollet Mall through May 2001 and of Firstar Investment & Research Management Company from
Minneapolis, MN 55402 (1962)** February 2001 through May 2001; Senior Managing Director and Head of Equity
Research of U.S. Bancorp Piper Jaffray from October 1998 through December 2000;
prior to October 1998, Senior Airline Equity Analyst and a Director in the
Equity Research Department, CreditSuisse First Boston.
John G. Wenker Managing Director of U.S. Bancorp Asset Management, Inc. since May 2001;
U.S. Bancorp Asset Management, Inc. Managing Director of First American Asset Management from 1998 to May 2001;
800 Nicollet Mall Managing Director of the Fixed Income Department at Piper Jaffray Inc. from 1992
Minneapolis, Minnesota 55402 (1953)** to 1998.
Mark S. Jordahl Chief Investment Officer of U.S. Bancorp Asset Management, Inc. since September
U.S. Bancorp Asset Management, Inc. 2001; President and Chief Investment Officer, ING Investment
800 Nicollet Mall Management-Americas, September 2000 to June 2001; Senior Vice President and
Minneapolis, MN 55402 (1960)** Chief Investment Officer, ReliaStar Financial Corp., anuary 1998 to September
2000.
Jeffery M. Wilson Senior Vice President of U.S. Bancorp Asset Management, Inc. since May 2001;
U.S. Bancorp Asset Management, Inc. prior thereto, Senior Vice President of First American Asset Management.
800 Nicollet Mall
Minneapolis, MN 55402 (1956)**
Russell J. Kappenman Managing Director of U.S. Bancorp Asset Management, Inc. since May 2001; Vice
U.S. Bancorp Asset Management, Inc. President of First American Asset Management from 1998 to May 2001; tax manager
800 Nicollet Mall and fixed-income analyst with Piper Jaffray Inc. through 1998.
Minneapolis, Minnesota 55402 (1964)**
Julene R. Melquist Vice President of U.S. Bancorp Asset Management, Inc. since May 2001; analyst
U.S. Bancorp Asset Management, Inc. with First American Asset Management from 1998 to May 2001; Assistant Vice
800 Nicollet Mall President with Piper Capital Management Inc. through 1998.
Minneapolis, Minnesota 55402 (1966)**
Joseph M. Ulrey III Senior Managing Director, Fund Treasury, since December 2003, and Senior
U.S. Bancorp Asset Management, Inc. Managing Director, Risk Management and Quantitative Products, since May 2001,
800 Nicollet Mall U.S. Bancorp Asset Management, Inc.; from May 2001 through December 2001, Senior
Minneapolis, MN 55402 (1958)** Managing Director, Securities Lending and Money Market Funds, U.S. Bancorp Asset
Management, Inc.; prior thereto, Senior Managing Director, Securities Lending
and Money Market Funds, First American Asset Management.
</Table>
43
<Page>
<Table>
<Caption>
POSITION(S)
HELD WITH
NAME, ADDRESS, AND YEAR OF BIRTH FUND TERM OF OFFICE AND LENGTH OF TIME SERVED
- --------------------------------------------------------------------------------------------------------
James D. Alt Secretary Re-elected by the Board annually; Secretary of
50 South Sixth Street, Suite 1500 CSP since June 2002; Assistant Secretary of
Minneapolis, MN 55402 (1951) CSP from September 1999 to June 2002.
Michael J. Radmer Assistant Re-elected by the Board annually; Assistant
50 South Sixth Street, Suite 1500 Secretary Secretary of CSP since March 2000; Secretary
Minneapolis, MN 55402 (1945) of CSP from September 1999 to March 2000.
Kathleen L. Prudhomme Assistant Re-elected by the Board annually; Assistant
50 South Sixth Street, Suite 1500 Secretary Secretary of CSP since September 1999.
Minneapolis, MN 55402 (1953)
Richard J. Ertel Assistant Re-elected by the Board annually; Assistant
U.S. Bancorp Asset Management, Inc. Secretary Secretary of CSP since June 2003.
800 Nicollet Mall
Minneapolis, MN 55402 (1967)**
</Table>
*Includes only directorships in a company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act or subject to the
requirements of Section 15(d) of the Securities Exchange Act, or any company
registered as an investment company under the Investment Company Act.
**Messrs. Schreier, Wenker, Jordahl, Wilson, Kappenman, Ulrey, and Ertel and
Ms. Melquist are each officers of U.S. Bancorp Asset Management, Inc., which
serves as investment advisor for the Fund.
44
<Page>
<Table>
<Caption>
NAME, ADDRESS, AND YEAR OF BIRTH PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------
James D. Alt Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm.
50 South Sixth Street, Suite 1500
Minneapolis, MN 55402 (1951)
Michael J. Radmer Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm.
50 South Sixth Street, Suite 1500
Minneapolis, MN 55402 (1945)
Kathleen L. Prudhomme Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm.
50 South Sixth Street, Suite 1500
Minneapolis, MN 55402 (1953)
Richard J. Ertel Disclosure Counsel, U.S. Bancorp Asset Management, Inc.
U.S. Bancorp Asset Management, Inc. since May 2003; Associate Counsel, Hartford Life and
800 Nicollet Mall Accident Insurance Company from April 2001 through May 2003;
Minneapolis, MN 55402 (1967)** Attorney and Law Clerk, Fortis Financial Group, through
March 2001.
</Table>
45
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<Page>
BOARD OF DIRECTORS
VIRGINIA STRINGER
Chairperson of American Strategic Income Portfolio Inc. III
Owner and President of Strategic Management Resources, Inc.
BENJAMIN FIELD III
Director of American Strategic Income Portfolio Inc. III
Retired; former Senior Financial Advisor, Senior Vice President, Chief Financial
Officer, and Treasurer of Bemis Company, Inc.
MICKEY FORET
Director of American Strategic Income Portfolio Inc. III
Consultant to, and formerly Executive Vice President and Chief Financial Officer
of, Northwest Airlines, Inc.
ROGER GIBSON
Director of American Strategic Income Portfolio Inc. III
Vice President of Cargo-United Airlines
VICTORIA HERGET
Director of American Strategic Income Portfolio Inc. III
Investment Consultant; former Managing Director of Zurich Scudder Investments
LEONARD KEDROWSKI
Director of American Strategic Income Portfolio Inc. III
Owner and President of Executive and Management Consulting, Inc.
RICHARD RIEDERER
Director of American Strategic Income Portfolio Inc. III
Retired; former President and Chief Executive Officer of Weirton Steel
JOSEPH STRAUSS
Director of American Strategic Income Portfolio Inc. III
Owner and President of Strauss Management Company
JAMES WADE
Director of American Strategic Income Portfolio Inc. III
Owner and President of Jim Wade Homes
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III'S BOARD OF DIRECTORS IS COMPRISED
ENTIRELY OF INDEPENDENT DIRECTORS.
<Page>
[FIRST AMERICAN (TM) LOGO]
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III
2004 ANNUAL REPORT
U.S. Bancorp Asset Management, Inc., is a wholly owned subsidiary of U.S. Bank
National Association, which is a wholly owned subsidiary of U.S. Bancorp.
[RECYCLED SYMBOL] This document is printed on paper containing 10%
postconsumer waste.
7/2004 0254-04 CSP-AR
<Page>
ITEM 2--CODE OF ETHICS - Did registrant adopt a code of ethics, as of the end of
the period covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party? If not, why not?
Briefly describe any amendments or waivers that occurred during the period.
State here if code of ethics/amendments/waivers are on website and give website
address. State here if fund will send code of ethics to shareholders without
charge upon request.
RESPONSE: The registrant has adopted a code of ethics (designated as the "Code
of Ethical Conduct") that applies to its principal executive officer and
principal financial officer. The registrant undertakes to furnish a copy of such
Code of Ethical Conduct to any person upon request, without charge, by calling
1-800-677-3863.
ITEM 3--AUDIT COMMITTEE FINANCIAL EXPERT - Did the registrant's board of
directors determine that the registrant either: (i) has at least one audit
committee financial expert serving on its audit committee; or (ii) does not have
an audit committee financial expert serving on its audit committee? If yes,
disclose name of financial expert and whether he/she is "independent," (fund
may, but is not required, to disclose name/independence of more than one
financial expert) If no, explain why not.
RESPONSE: The registrant's Board of Directors has determined that Leonard
Kedrowski, Benjamin Field, and Mickey Foret, members of the registrant's Audit
Committee, are each an "audit committee financial expert" and are "independent,"
as these terms are defined in this Item. This designation will not increase the
designees' duties, obligations or liability as compared to their duties,
obligations and liability as members of the Audit Committee and of the Board of
Directors.
ITEM 4--PRINCIPAL ACCOUNTANT FEES AND SERVICES - Only disclosed annually.
(a) Audit Fees - Disclose aggregate fees billed for each of the last two fiscal
years for professional services rendered by the principal accountant for
the audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years.
RESPONSE: Ernst & Young LLP ("E&Y") billed the registrant audit fees
totaling $60,437 in the fiscal year ended May 31, 2004 and $76,280 in the
fiscal year ended May 31, 2003, including fees associated with the annual
audit, SEC Rule 17f-2 security count filings and filings of the
registrant's annual reports on Form N-CSR.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the last two
fiscal years for assurance and related services by the principal accountant
that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a)
of this Item. Registrants shall describe the nature of the services
comprising the fees disclosed under this category.
<Page>
RESPONSE: Ernst & Young LLP ("E&Y") billed the registrant audit-related
fees totaling $7,352 in the fiscal year ended May 31, 2004 and $47,881 in
the fiscal year ended May 31, 2003, for services provided in connection
with the proposed reorganization.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant for
tax compliance, tax advice, and tax planning. Registrants shall describe
the nature of the services comprising the fees disclosed under this
category.
RESPONSE: E&Y billed the registrant fees of $11,836 in the fiscal year
ended May 31, 2004 and $145,301 in the fiscal year ended May 31, 2003 for
tax services, including tax compliance, tax advice and tax planning. Tax
compliance, tax advice and tax planning services primarily relate to
preparation of original and amended tax returns, timely RIC qualification
reviews, tax distribution analysis and planning, and tax services provided
in connection with the proposed reorganization.
(d) All Other Fees - Disclose aggregate fees billed in each of the last two
fiscal years for products and services provided by the principal
accountant, other than the services reported in paragraphs (a) through (c)
of this Item. Registrants shall describe the nature of the services
comprising the fees disclosed under this category.
RESPONSE: There were no fees billed by E&Y for other services to the
registrant during the fiscal years ended May 31, 2003 and 2004.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
pursuant to paragraph (c)(7) of Rule 2-01 of Regulation S-X.
RESPONSE: Set forth below are the audit committee's pre-approval policies
and procedures pursuant to paragraph (c)(7) of Rule 2-01 of Regulation S-X:
AUDIT COMMITTEE POLICY REGARDING PRE-APPROVAL OF SERVICES PROVIDED BY THE
INDEPENDENT AUDITOR
The Audit Committee of the First American Funds has responsibility for
ensuring that all services performed by the independent audit firm for the
funds do not impair the firm's independence. This review is intended to
provide reasonable oversight without removing management from its
responsibility for day-to-day operations. In this regard, the Audit
Committee should:
- Understand the nature of the professional services expected to be
provided and their impact on auditor independence and audit
quality
<Page>
- Examine and evaluate the safeguards put into place by the Company
and the auditor to safeguard independence
- Meet quarterly with the partner of the independent audit firm
- Consider approving categories of service that are not deemed to
impair independence for a one-year period
It is important that a qualitative rather than a mere quantitative
evaluation be performed by the Committee in discharging its
responsibilities.
POLICY FOR AUDIT AND NON-AUDIT SERVICES PROVIDED TO THE FUNDS
On an annual basis, the Audit Committee of the First American Funds
("Committee") will review and consider whether to pre-approve the financial
plan for audit fees as well as categories of audit-related and non-audit
services that may be performed by the Fund's independent audit firm
directly for the Funds. At least annually the Committee will receive a
report from the independent audit firm of all audit and non-audit services,
which were approved during the year.
The engagement of the independent audit firm for any non-audit service
requires the written pre-approval of the Treasurer of the Funds and all
non-audit services performed by the independent audit firm will be
disclosed in the required SEC periodic filings.
In connection with the Audit Committee review and pre-approval
responsibilities, the review by the Audit Committee will consist of the
following:
AUDIT SERVICES
The categories of audit services and related fees to be reviewed and
considered for pre-approval annually by the Committee or its delegate
include the following:
- Annual Fund financial statement audits
- Seed audits (related to new product filings, as required)
- SEC and regulatory filings and consents
AUDIT-RELATED SERVICES
In addition, the following categories of audit-related services are deemed
to be consistent with the role of the independent firm and, as such, will
be considered for pre-approval by the Committee or its delegate, on an
annual basis.
- Accounting consultations
<Page>
- Fund merger support services
- Other accounting related matters
- Agreed Upon Procedure Reports
- Attestation Reports
- Other Internal Control Reports
Notwithstanding any annual pre-approval of these categories of services,
individual projects with an estimated fee in excess of $25,000 are subject
to pre-approval by the Audit Committee Chair or its delegate on a
case-by-case basis. Individual projects with an estimated fee in excess of
$50,000 are subject to pre-approval by the Audit Committee or its delegate
on a case-by-case basis.
TAX SERVICES
The following categories of tax services are deemed to be consistent with
the role of the independent audit firm and, as such, will be considered for
pre-approval by the Committee or its delegate, on an annual basis.
- Tax compliance services related to the filing or amendment of the
following:
- Federal, state and local income tax compliance, and
- Sales and use tax compliance
- Timely RIC qualification reviews
- Tax distribution analysis and planning
- Tax authority examination services
- Tax appeals support services
- Accounting methods studies
- Fund merger support services
- Tax consulting services and related projects
Notwithstanding any annual pre-approval of these categories of services,
individual projects with an estimated fee in excess of $25,000 are subject
to pre-approval by the Audit Committee Chair or its delegate on a
case-by-case basis. Individual projects
<Page>
with an estimated fee in excess of $50,000 are subject to pre-approval by
the Audit Committee or its delegate on a case-by-case basis.
OTHER NON-AUDIT SERVICES
The SEC auditor independence rules adopted in response to the
Sarbanes-Oxley Act specifically allow certain non-audit services. Because
of the nature of these services, none of these services may be commenced by
the independent firm without the prior approval of the Audit Committee. The
Committee may delegate this responsibility to one or more of the Committee
members, with the decisions presented to the full Committee at the next
scheduled meeting.
PROSCRIBED SERVICES
In accordance with SEC rules on independence, the independent audit firm is
prohibited from performing services in the following categories of
non-audit services:
- Management functions
- Accounting and bookkeeping services
- Internal audit services
- Financial information systems design and implementation
- Valuation services supporting the financial statements
- Actuarial services supporting the financial statements
- Executive recruitment
- Expert services (e.g., litigation support)
- Investment banking
POLICY FOR PRE-APPROVAL OF NON-AUDIT SERVICES PROVIDED TO OTHER ENTITIES
WITHIN THE INVESTMENT COMPANY COMPLEX
The Audit Committee of the First American Funds is also responsible for
pre-approving certain non-audit services provided to U.S. Bancorp Asset
Management, U.S. Bank N.A., Quasar Distributors, U.S. Bancorp Fund
Services, LLC and any other entity under common control with U.S. Bancorp
Asset Management that provides ongoing services to the Funds. The only
non-audit services provided to these entities which require pre-approval
are those services that relate directly to the operations and financial
reporting of the Funds.
<Page>
Although the Audit Committee is not required to pre-approve all services
provided to U.S. Bancorp Asset Management and affiliated service providers,
the Audit Committee will annually receive a report from the independent
audit firm on the aggregate fees for all services provided to U.S. Bancorp
and affiliates.
(e)(2) Disclose the percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee pursuant
to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
RESPONSE: All of the services described in paragraphs (b) through (d) of
Item 4 that were provided to the registrant on or after May 6, 2003, the
effective date of SEC rules relating to the pre-approval of non-audit
services, were pre-approved by the audit committee.
(f) If greater than 50%, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's full-time,
permanent employees.
RESPONSE: All services performed on the engagement to audit the
registrant's financial statements for the most recent fiscal year end were
performed by the principal accountant's full-time, permanent employees.
(g) Disclose the aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for each of the last two fiscal years of the registrant.
RESPONSE: The aggregate non-audit fees billed by E&Y to the registrant, the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the adviser that provides ongoing services to the
registrant, totaled $32,238 in the fiscal year ended May 31, 2004 and
$366,882 in the fiscal year ended May 31, 2003, including services provided
prior to May 6, 2003, the effective date of SEC rules relating to the
pre-approval of non-audit services.
(h) Disclose whether the registrant's audit committee has considered whether
the provision of non-audit services that were rendered to the registrant's
investment adviser (not including any Subadvisor whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity
<Page>
controlling, controlled by, or under common control with the investment
adviser that provides ongoing services to the registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's independence.
RESPONSE: The registrant's audit committee has determined that the
provision of non-audit services to the registrant's investment adviser, and
any entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant, that
were not pre-approved and that were rendered on or after May 6, 2003 (the
effective date of SEC rules relating to the pre-approval of non-audit
services), is compatible with maintaining E&Y's independence.
ITEM 5--AUDIT COMMITTEE OF LISTED REGISTRANTS
(a) If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act (17 CFR 240.10A-3), state whether or not the registrant has a
separately-designated standing audit committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). If
the registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee as specified in Section 3(a)(58)(B) of the
Exchange Act (15 U.S.C. 78c(a)(58)(B)), so state.
(b) If applicable, provide the disclosure required by Rule 10A-3(d) under the
Exchange Act (17 CFR 240.10A-3(d)) regarding an exemption from the listing
standards for audit committees.
RESPONSE: The registrant has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities and
Exchange Act of 1934, as amended. Leonard Kedrowski (Chair), Benjamin Field and
Mickey Foret are the members of the registrant's audit committee.
ITEM 6--SCHEDULE OF INVESTMENTS (applicable for periods ending on or after July
9, 2004) - File Schedule I - Investments in securities of unaffiliated issuers
as of the close of the reporting period as set forth in Section 210.12-12 of
Regulation S-X [17 CFR 210.12-12], unless the schedule is included as part of
the report to shareholders filed under Item 1 of this Form.
RESPONSE: Not applicable for periods ending before July 9, 2004.
ITEM 7--DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES - For closed-end funds that contain voting
securities in their portfolio, describe the policies and procedures that it uses
to determine how to vote proxies relating to those portfolio securities.
<Page>
RESPONSE:
GENERAL PRINCIPLES
U.S. Bancorp Asset Management, Inc. ("USBAM") is the investment manager for the
First American family of mutual funds and for other separately managed accounts.
As such, USBAM has been delegated the authority to vote proxies with respect to
the investments held in client accounts, unless the client has specifically
retained such authority in writing. It is USBAM's duty to vote proxies in the
best interests of clients in a timely and responsive manner. In voting proxies,
USBAM also seeks to maximize total investment return for clients.
In the event of a sub-adviser, USBAM delegates proxy voting to the sub-adviser
who is responsible for developing and enforcing policies, which are reviewed
regularly by USBAM.
USBAM's Investment Policy Committee, comprised of the firm's most senior
investment professionals, is charged with oversight of the proxy voting policies
and procedures. The Investment Policy Committee is responsible for (1) approving
the proxy voting policies and procedures, (2) overseeing the proxy voting
process, and (3) reviewing the proxy voting record on a regular basis.
POLICIES AND PROCEDURES
POLICIES. The Investment Policy Committee, after reviewing and concluding that
such policies are reasonably designed to vote proxies in the best interests of
clients, has approved and adopted the proxy voting policies of Institutional
Shareholder Services ("ISS"), a leading national provider of proxy voting
administrative and research services. As a result, such policies set forth
USBAM's positions on recurring proxy issues and criteria for addressing
non-recurring issues. A summary of these policies is attached. These policies
are reviewed periodically and therefore are subject to change. Even though it
has adopted ISS's policies, USBAM maintains the fiduciary responsibility for all
proxy voting decisions. In extraordinary situations, the Investment Policy
Committee may decide to override a standard policy position for a particular
vote, depending on the specific factual circumstances.
PROCEDURES. Responsibility for certain administrative aspects of proxy voting
rests with USBAM's Proxy Voting Administration Committee, which reports to the
Investment Policy Committee. The Proxy Voting Administration Committee also
supervises the relationship with an outside firm that assists with the process,
ISS. This firm apprises USBAM of shareholder meeting dates, forward proxy voting
materials, provide USBAM with research on proxy proposals and voting
recommendations and cast the actual proxy votes. ISS also serves as USBAM's
proxy voting record keeper and generates reports on how proxies were voted.
CONFLICTS OF INTEREST. As an affiliate of U.S. Bancorp, a large, multi-service
financial institution, USBAM recognizes that there are numerous situations
wherein it may have a perceived or real conflict of interest in voting the
proxies of issuers or proxy proponents (e.g., a special interest group) who are
clients or potential clients of some part of the U.S. Bancorp enterprise.
Directors and officers of such companies also may have personal or familial
relationships with the U.S. Bancorp enterprise and its employees that could give
rise to conflicts of interest.
Although USBAM strongly believes that, regardless of such real or perceived
conflicts of interest, it will vote proxies in its clients' best interests. By
adopting ISS's policies and generally deferring to ISS's recommendations, USBAM
believes the risk related to conflicts will be minimized.
To further minimize this risk, the Investment Policy Committee has also reviewed
ISS's conflict avoidance policy and has concluded that it adequately addresses
both the actual and perceived conflicts of interest the proxy voting service may
face.
In the event the Investment Policy Committee determines (i) it is in clients'
best interests to override a standard policy (ii) ISS faces a material conflict
of interest with respect to a specific vote or (iii) ISS
<Page>
abstains from voting on a matter, the Investment Policy Committee will direct
ISS how to vote. Before doing so, however, the Proxy Voting Administration
Committee will confirm that USBAM and the Investment Policy Committee face no
material conflicts of the nature discussed above.
If the Proxy Voting Administration Committee concludes a material conflict does
exist, it will recommend a course of action designed to address the conflict to
the Investment Policy Committee. Such actions could include, but are not limited
to:
- Obtaining instructions from the affected clients on how to vote
the proxy;
- Disclosing the conflict to the affected clients and seeking their
consent to permit USBAM to vote the proxy;
- Voting in proportion to the other shareholders;
- Recusing an Investment Policy Committee member from all
discussion or consideration of the matter, if the material
conflict is due to such person's actual or potential conflict of
interest; or
- Following the recommendation of a different independent third
party.
In addition to all of the above, members of the Investment Policy Committee and
the Proxy Voting Administration Committee must notify USBAM's Chief Compliance
Officer of any direct, indirect or perceived improper influence made by any
employee, officer or director within the U.S. Bancorp enterprise or First
American Fund complex with regard to how USBAM should vote proxies. The Chief
Compliance Officer will investigate the allegations and will report the findings
to the USBAM Chief Executive Officer and the General Counsel. If it is
determined that improper influence was attempted, appropriate action shall be
taken. Such appropriate action may include disciplinary action, notification of
the appropriate senior managers within the U.S. Bancorp enterprise, or
notification of the appropriate regulatory authorities. In all cases, the
Investment Policy Committee shall not consider any improper influence in
determining how to vote proxies and will vote in the best interests of clients.
REVIEW AND REPORTS
On a regular basis, the Proxy Voting Administration Committee will review the
proxy voting record to assess a number of matters. The review will include:
- Monitor proxy votes cast to ensure they are consistent with USBAM
policy.
- Ensure proxy votes are cast in a timely manner.
- Ensure proxy statements are sent to and received by ISS in a
timely manner.
The Proxy Voting Administration Committee will prepare a report on this review
for submission to the Investment Policy Committee. Such report will also review
all identified conflicts and how they were addressed. These reports will include
all funds and accounts, including those that are sub-advised.
The Investment Policy Committee will review the report of the Proxy Voting
Administration Committee, as well as ISS's proxy voting policies and conflict of
interest policies. The purpose of this review is to ensure USBAM is voting
proxies in a timely and responsive manner in the best interests of clients. With
respect to the review of votes cast on behalf of investments by the First
American family of mutual funds, such review will also be reported to the Board
of Directors of the First American Funds.
VOTE DISCLOSURE TO SHAREHOLDERS
The actual proxy voting records of the First American Funds will be filed with
the U.S. Securities Exchange Commission and will be available to shareholders
after June 30, 2004. Such records will be available on the First American Funds'
website at www.firstamericanfunds.com and on the SEC's website at www.sec.gov.
Additionally, shareholders can receive, on request, the voting records for the
First American Fund mutual funds by calling a toll free number (1-800-677-3863).
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USBAM's separately managed account clients will be able to access their voting
records, as well as the proxy voting policy, via the website
www.am.usbancorp.com. Each separate account client will receive an ID that will
restrict access to his or her specific accounts. Additionally, clients can
contact their relationship manager for more information on USBAM's policies and
the proxy voting record for their account.
The information that will be available includes, name of issuer; ticker/CUSIP;
shareholder meeting date; description of item and USBAM's vote.
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ISS PROXY VOTING GUIDELINES SUMMARY
The following is a concise summary of ISS's proxy voting policy guidelines.
1. AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply:
- - An auditor has a financial interest in or association with the company, and
is therefore not independent
- - Fees for non-audit services are excessive, or
- - There is reason to believe that the independent auditor has rendered an
opinion, which is neither accurate nor indicative of the company's
financial position.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: independence of the board and key board committees,
attendance at board meetings, corporate governance provisions and takeover
activity, long-term company performance, responsiveness to shareholder
proposals, any egregious board actions, and any excessive non-audit fees or
other potential auditor conflicts.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions
of chairman and CEO be held separately. Because some companies have governance
structures in place that counterbalance a combined position, certain factors
should be taken into account in determining whether the proposal warrants
support. These factors include the presence of a lead director, board and
committee independence, governance guidelines, company performance, and annual
review by outside directors of CEO pay.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
3. SHAREHOLDER RIGHTS
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative voting.
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Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy. If the
dissidents agree, the policy remains in place. If the dissidents will not agree,
the confidential voting policy is waived. Vote FOR management proposals to adopt
confidential voting.
4. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the factors that include the long-term financial performance,
management's track record, qualifications of director nominees (both slates),
and an evaluation of what each side is offering shareholders.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also
recommend voting for reimbursing proxy solicitation expenses.
5. POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its poison pill for
shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals
to redeem a company's poison pill and management proposals to ratify a poison
pill.
6. MERGERS AND CORPORATE RESTRUCTURINGS
Vote CASE-BY-CASE on mergers and corporate restructurings based on such features
as the fairness opinion, pricing, strategic rationale, and the negotiating
process.
7. REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
8. CAPITAL STRUCTURE
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
- - It is intended for financing purposes with minimal or no dilution to
current shareholders
- - It is not designed to preserve the voting power of an insider or
significant shareholder
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9. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE
basis. Our methodology for reviewing compensation plans primarily focuses on the
transfer of shareholder wealth (the dollar cost of pay plans to shareholders
instead of simply focusing on voting power dilution). Using the expanded
compensation data disclosed under the SEC's rules, ISS will value every award
type. ISS will include in its analyses an estimated dollar cost for the proposed
plan and all continuing plans. This cost, dilution to shareholders' equity, will
also be expressed as a percentage figure for the transfer of shareholder wealth,
and will be considered long with dilution to voting power. Once ISS determines
the estimated cost of the plan, we compare it to a company-specific dilution
cap.
Vote AGAINST equity plans that explicitly permit repricing or where the company
has a history of repricing without shareholder approval.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
- - Historic trading patterns
- - Rationale for the repricing
- - Value-for-value exchange
- - Option vesting
- - Term of the option
- - Exercise price
- - Participation
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis.
Vote FOR employee stock purchase plans where all of the following apply:
- - Purchase price is at least 85 percent of fair market value
- - Offering period is 27 months or less, and
- - Potential voting power dilution (VPD) is ten percent or less.
Vote AGAINST employee stock purchase plans where any of the opposite conditions
obtain.
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
10. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public safety,
environment and energy, general corporate issues, labor standards and human
rights, military business, and workplace diversity.
In general, vote CASE-BY-CASE. While a wide variety of factors goes into each
analysis, the overall principal guiding all vote recommendations focuses on how
the proposal will enhance the economic value of the company.
ITEM 8--PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS (applicable for periods ending on or after
June 15, 2004)
(a) If the registrant is a closed-end management investment company, in the
following tabular format, provide the information specified in paragraph
(b) of this Item with
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respect to any purchase made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange
Act (17 CFR 240.10b-18(a)(3)), of shares or other units of any class of the
registrant's equity securities that is registered pursuant to Section 12 of
the Exchange Act (15 U.S.C. 781).
(b) The table shall include the following information for each class of
securities for each month included in the period covered by the report:
(1) The total number of shares (or units) purchased (column (a));
(2) The average price paid per share (or unit) (column (b));
(3) The number of shares (or units) purchased as part of publicly announced
repurchase plans or programs (column (c)); and
(4) The maximum number (or approximate dollar value) of shares (or units)
that may yet be purchased under the plans or programs (column (d)).
RESPONSE: Not applicable for periods ending before June 15, 2004.
ITEM 9--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Describe any
material changes to the procedures by which shareholders may recommend nominees
to the registrant's board of directors, where those changes were implemented
after the registrant last provided disclosure in response to the requirements of
Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item.
RESPONSE: The registrant's Board of Directors has adopted the following
procedures by which shareholders may recommend nominees to the registrant's
board of directors. The Governance Committee of the registrant's Board of
Directors will consider shareholder recommendations for director nominees in
connection with each annual shareholders meeting of the registrant and any
special shareholders meeting which is called for the purpose of electing
directors. There are no differences in the manner in which the Governance
Committee evaluates nominees for director based on whether the nominee is
recommended by a shareholder.
A shareholder who wishes to recommend a director nominee should submit his or
her recommendation in writing to the Chair of the Board (Virginia Stringer) or
the Chair of the Governance Committee (Richard Riederer), in either case at
First American Funds, P.O. Box 1329, Minneapolis, Minnesota 55440-1329. At a
minimum, the recommendation should include:
- the name, address, and business, educational, and/or other pertinent
background of the person being recommended;
- a statement concerning whether the person is "independent" within the
meaning of New York Stock Exchange listing standards and is not an
"interested person" as defined in the Investment Company Act of 1940;
- any other information that the registrant would be required to include
in a proxy statement concerning the person if he or she was nominated;
and
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- the name and address of the person submitting the recommendation,
together with the number of shares held in the registrant by such
person and the period for which the shares have been held.
The recommendation also can include any additional information which the person
submitting it believes would assist the Governance Committee in evaluating the
recommendation. In order for the Governance Committee to consider a
shareholder's recommended nominee for election at the annual shareholders
meeting in a given year, the recommendation should be submitted to the
Governance Committee no later than May 31 in that year.
ITEM 10--CONTROLS AND PROCEDURES
(a) Disclose the conclusions of the registrant's principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, about the effectiveness of the registrant's disclosure
controls and procedures (as defined in Rule 30a-3(c) under the Act (17 CFR
270.30a-3(c))) based on their evaluation of these controls and procedures
as of a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph.
RESPONSE: The registrant's Principal Executive Officer and Principal
Financial Officer have evaluated the registrant's disclosure controls and
procedures within 90 days of the date of this filing and have concluded
that the registrant's disclosure controls and procedures were effective, as
of that date, in ensuring that information required to be disclosed by the
registrant in this Form N-CSR was recorded, processed, summarized and
reported timely. Notwithstanding this conclusion, the registrant's
Principal Executive Officer and Principal Financial Officer seek continuous
improvements to the registrant's disclosure controls and procedures.
(b) Disclose any change in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(c) under the Act (17 CFR 270.30a-3(c)))
that occurred during the registrant's last fiscal half-year (the
registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
RESPONSE: There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal half-year that have materially affected, or are reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
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ITEM 11 - EXHIBITS
11(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request without
charge.
RESPONSE: As referenced in the registrant's response to Item 2 above, the
registrant's code of ethics (designated as the "Code of Ethical Conduct") is
available to shareholders upon request, without charge, by calling
1-800-677-3863.
11(b) - Attach certifications (4 in total pursuant to Sections 302 and 906 for
PEO/PFO).
RESPONSE: Attached hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
American Strategic Income Portfolio Inc. III
By: /s/ Thomas S. Schreier, Jr.
---------------------------
Thomas S. Schreier, Jr.
President
Date: August 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Thomas S. Schreier, Jr.
---------------------------
Thomas S. Schreier, Jr.
President
Date: August 6, 2004
By: /s/ Joseph M. Ulrey III
-----------------------
Joseph M. Ulrey III
Treasurer
Date: August 6, 2004