<PAGE>
AMERICAN
STRATEGIC
INCOME
PORTFOLIO III
* * *
ANNUAL REPORT
1996
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUALIZED TOTAL RETURNS . . . .1
PRESIDENT'S LETTER . . . . . . . . . . .2
PORTFOLIO MANAGERS' LETTER . . . . . . .5
MANAGING RISK. . . . . . . . . . . . . .10
FINANCIAL STATEMENTS AND NOTES . . . . .11
INVESTMENTS IN SECURITIES. . . . . . . .25
INDEPENDENT AUDITORS' REPORT . . . . . .33
FEDERAL TAX INFORMATION. . . . . . . . .34
SHAREHOLDER UPDATE . . . . . . . . . . .35
AMERICAN STRATEGIC INCOME PORTFOLIO III
American Strategic Income Portfolio III is a diversified, closed-end investment
management company. The fund's primary objective is to provide a high level of
current income; its secondary objective is to seek capital appreciation. To
realize its objectives, 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 asset-backed
securities, U.S. government securities, corporate debt securities, municipal
obligations, unregistered securities, mortgage-backed securities and mortgage
servicing rights. The fund may borrow, including through the use of reverse
repurchase agreements, and may purchase securities through the dollar-roll
program. Use of certain of these investments and investment techniques may cause
the fund's net asset value to fluctuate to a greater extent than would be
expected from interest rate movements alone. As with other mutual funds, there
can be no assurance the fund will achieve its objectives. Since the fund's
inception on March 25, 1993, it has been rated Af by Standard & Poor's Ratings
Group (S&P).* Fund shares trade on the New York Stock Exchange under the symbol
CSP.
* THE FUND IS RATED Af, WHICH MEANS THE FUND'S INVESTMENTS HAVE AN OVERALL
CREDIT QUALITY OF A. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL
FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN
ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING
DEFINITIONS FOR AN EXPLANATION OF A.
THE FUND HAS ALSO BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS
THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL
STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE RATINGS ARE
AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
CALL FOR MORE INFORMATION
If you would like to be put on our mailing list to receive quarterly fund
summaries for American Strategic Income Portfolio III (CSP), call our Mutual
Fund Services Department at 1 800 866-7778. In addition, beginning in August,
you can call that same number and listen to portfolio manager commentaries for
the fund, which will be updated monthly.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
PERIODS ENDED MAY 31, 1996
[GRAPH]
THE AVERAGE ANNUALIZED TOTAL RETURN FIGURES FOR AMERICAN STRATEGIC INCOME
PORTFOLIO III ARE BASED ON THE CHANGE IN ITS NET ASSET VALUE (NAV), ASSUME ALL
DISTRIBUTIONS WERE REINVESTED AND DO NOT REFLECT SALES CHARGES. NAV-BASED
PERFORMANCE IS USED TO MEASURE INVESTMENT MANAGEMENT RESULTS.
TOTAL RETURNS BASED ON THE CHANGE IN MARKET PRICE FOR THE ONE-YEAR, THREE-YEAR
AND SINCE INCEPTION PERIODS ENDED MAY 31, 1996, WERE 3.20%, -3.04% AND
- -1.89%, RESPECTIVELY. THESE FIGURES ALSO ASSUME REINVESTED DISTRIBUTIONS AND DO
NOT REFLECT SALES CHARGES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
MARKET VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
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 FIGURES.
THE LIPPER CLOSED-END U.S. MORTGAGE FUNDS AVERAGE REPRESENTS THE AVERAGE
ANNUALIZED TOTAL RETURN, WITH DIVIDENDS REINVESTED, OF SIMILAR CLOSED-END MUTUAL
FUNDS AS CHARACTERIZED BY LIPPER ANALYTICAL SERVICES.
THE SINCE INCEPTION NUMBERS FOR THE LEHMAN INDEX AND LIPPER AVERAGE ARE
CALCULATED FROM THE MONTH END CLOSEST TO THE FUND'S INCEPTION THROUGH
MAY 31, 1996.
1
<PAGE>
PRESIDENT'S LETTER
[PHOTO]
WILLIAM H. ELLIS
PRESIDENT, PIPER CAPITAL MANAGEMENT
July 19, 1996
Dear Shareholders:
On June 21, 1996, Piper Jaffray Companies announced it had reached an agreement
in principle to settle a class action lawsuit brought on behalf of shareholders
of American Strategic Income Portfolio III and seven other Piper Capital closed-
end funds. We believe this settlement is a timely and reasonable resolution to
this issue that will benefit shareholders. The settlement, if approved by the
court, would result in payment to eligible fund investors by Piper Jaffray
Companies and Piper Capital Management of $15.5 million, less attorney's fees,
over a four-year schedule. Investors who acquired shares during the alleged
class period (the fund's inception through May 1, 1995) would be eligible to
submit claims to recover losses regardless of whether they are current
shareholders in the funds.
Under the agreement in principle, American Strategic Income Portfolio III would
also offer to repurchase up to 10% of its outstanding shares from current
shareholders at net asset value. The repurchase offer would be made as soon as
possible after the effective date of the settlement, which follows final court
approval. This could take many months.
The repurchase offer was considered carefully by the fund's board of directors
and was approved because they considered it to be in shareholders' best
interest. Existing shareholders, many of whom we believe are class members,
would have an opportunity to sell at least a portion of their shares at net
asset value less a small repurchase fee. Currently, the fund is trading at a
significant discount to net asset value. Shares that are repurchased by the fund
would be retired, reducing
2
<PAGE>
PRESIDENT'S LETTER
the number of fund shares outstanding. In the event that holders of more than
10% of shares subscribe to the offer, the fund may only be able to accept a
prorated portion of shares tendered for repurchase.
We expect that the settlement agreement will be presented to the court for
preliminary approval this fall. If preliminary court approval is given, notices
of the settlement will be mailed to all known class members. Legal notices also
will be published in major newspapers at approximately the same time. The next
step is for final court approval to be given and an effective date to be
established.
Class members can expect to learn more about the settlement proposal via mail
and/or newspaper advertising in late 1996 or early 1997 or by contacting Steve
Berman, Hagens & Berman, counsel for the plaintiffs, at 206 623-7292.
Unrelated to the settlement, since we last reported to you the fund's Dividend
Committee reduced the monthly dividend from 9.625 cents per share to 8.25 cents
per share. This reduction was part of Piper Capital's effort to bring the fund's
dividends in line with its earnings. Because the fund's dividends exceeded
earnings by 25 cents per share during the year, it was necessary to rely on the
fund's dividend reserve to pay these dividends, which reduced the fund's net
asset value by that same amount. As of June 30, the dividend reserve for this
fund was 10.3 cents per share. We do not currently anticipate any need for
further dividend reductions in the next 12 months based on current fund
earnings.
PREMIUM VS. DISCOUNT
The underlying value of a fund's securities and other assets, minus its
liabilities, is the fund's "net asset value." Closed-end funds may trade in the
market at a price that is equal to, above, or below this net asset value. Shares
are trading at a "premium" when investors purchase or sell shares in the market
at a price that is greater than the shares' net asset value. Conversely, when
investors purchase or sell shares in the market at a price that is lower than
the shares' net asset value, they are said to be trading at a "discount."
3
<PAGE>
PRESIDENT'S LETTER
Despite the dividend cuts, the fund continues to generate an attractive income
stream, especially given market conditions and yields on comparable investments.
For example, you are receiving a 9.66% current annualized yield (based on the
fund's July dividend rate) at the June 30 market price of $10.25 compared to a
6.89% yield for the Lehman Brothers Mutual Fund Government/Mortgage Index, the
fund's unmanaged benchmark which excludes any fees or expenses. Keep in mind
that past performance does not guarantee future results, and these rates will
fluctuate.
Thank you for your investment in the fund. We remain committed to providing you
with quality service and look forward to helping you achieve your financial
goals.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President, Piper Capital Management
4
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
[PHOTO]
JOHN WENKER
[PHOTO]
DAVID STEELE
JOHN WENKER, (TOP)
IS PRIMARILY RESPONSIBLE FOR THE MANAGEMENT OF AMERICAN STRATEGIC INCOME
PORTFOLIO III. HE HAS 10 YEARS OF FINANCIAL EXPERIENCE.
DAVID STEELE, (BOTTOM)
ASSISTS WITH THE MANAGEMENT OF AMERICAN STRATEGIC INCOME PORTFOLIO III. HE HAS
17 YEARS OF FINANCIAL EXPERIENCE.
RUSS KAPPENMAN,
(NOT PICTURED)
ASSISTS WITH THE MANAGEMENT OF AMERICAN STRATEGIC INCOME PORTFOLIO III. HE HAS
10 YEARS OF FINANCIAL EXPERIENCE.
July 19, 1996
Dear Shareholders:
FOR THE YEAR ENDED MAY 31, 1996, AMERICAN STRATEGIC INCOME PORTFOLIO III HAD A
NET ASSET VALUE TOTAL RETURN OF 8.17%.* This compares to a 4.35% return for the
Lehman Brothers Mutual Fund Government/Mortgage Index and a 5.44% return for the
Lipper Closed-End U.S. Mortgage Funds Average during this same period. As of May
31, the fund's market price was $10.25 and its net asset value was $12.25 per
share. For the year ended May 31, the fund's total return based on its market
price was 3.20%.* While the fund continues to trade at a discount to net asset
value, we believe its reduced net asset value volatility and stability of
earnings could help improve the fund's market price over time.
THE FUND'S FAVORABLE NET ASSET VALUE PERFORMANCE COMPARED TO THE BENCHMARKS WAS
PRIMARILY DUE TO THE PRICE STABILITY OF OUR MORTGAGE LOANS AS INTEREST RATES
INCREASED. After falling sharply in 1995, interest rates began to rise in 1996
due to signs of stronger economic growth and fears of renewed inflationary
pressures. The most significant inflationary sign was the government's release
of a higher-than-expected employment report in early March. While bonds, in
general, were negatively affected by the increase in rates, the higher rate
environment gave us the opportunity to purchase mortgages at historically
attractive yields.
* ALL RETURNS ABOVE INCLUDE REINVESTED DISTRIBUTIONS BUT NOT SALES CHARGES. 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.
5
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
DURING THE PERIOD, WE REMAINED FOCUSED ON STABILIZING THE FUND'S INCOME STREAM.
Our most significant strategic move to help us work toward this goal was to
eliminate our allocation to subordinated mortgages and use the proceeds to
purchase higher-yielding mortgage loan products. On balance, the higher-yielding
mortgages produced more income than the subordinated mortgages and performed
relatively well compared to other mortgage products.
PORTFOLIO COMPOSITION
MAY 31, 1996
[PIE CHART]
THE FUND'S TOTAL ASSETS ARE LARGELY CONCENTRATED IN MORTGAGE LOANS. As of May
31, 41% of the fund's total assets were invested in single-family (home) loans,
31% in multifamily (apartment) loans and 20% in Treasury securities. (See
portfolio composition chart on this page.) We intend to maintain the fund's
investments in mortgage loans and Treasuries near these levels. The greater
concentration in mortgage loans is consistent with our strategy of focusing on
securities that may involve more credit risk and moving away from those that are
more sensitive to changing interest rates. During the year, we also began making
investments in commercial mortgage loans due to the opportunities in this market
sector. As of May 31, 5% of the fund's total assets were invested in commercial
loans.
6
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
WE CONTINUED TO BORROW IN THE FUND THROUGH REVERSE REPURCHASE AGREEMENTS AND
INVESTED THE PROCEEDS IN TREASURY SECURITIES OR NEW MORTGAGE LOANS. The
Treasuries and mortgage loans acted as collateral for the reverse repurchase
agreements, which were 20% of the fund's total assets as of May 31. While
borrowing can potentially increase the fund's earnings, it can also increase the
fund's net asset value volatility.
DURING THE YEAR, WE SUCCESSFULLY MANAGED THE RISKS INVOLVED WITH MORTGAGE LOANS.
We believe we are better able to manage and analyze credit risk and loss on
loans for moderately valued homes than for higher valued homes. As of May 31,
the fund held 2,936 single-family loans on properties which, on average, had a
value of approximately $73,000. The average balance remaining on these loans was
approximately $58,000. Through May 31, we have kept our cumulative foreclosure
losses from our single-family loans to less than three cents per share since the
fund's inception. We follow a similar philosophy when purchasing multifamily
loans. We believe that smaller loans spread out in several states are less
likely to cause losses in the fund. On May 31, we had 52 multifamily loans with
an average loan balance of approximately $2,450,000. Through May 31, there have
been no realized foreclosure losses to the fund from our investments in
multifamily loans. However, in June 1996, we took possession of one multifamily
property. Although we conduct extensive risk analysis on loans we purchase,
delinquent loans are an inherent risk in the fund. We consider a loan delinquent
when a borrower has missed two or more payments. As of May 31, mortgage loans
representing 5% of total net assets were delinquent. Because delinquent loans
require a high level of attention, we place them with loan servicers who work
hard to convey to borrowers
7
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
GEOGRAPHICAL DISTRIBUTION
MAY 31, 1996
[MAP]
PERCENTAGES REFLECT PRINCIPAL VALUE OF WHOLE LOANS AND REAL ESTATE OWNED.
SHADED AREAS WITHOUT VALUES INDICATE STATES IN WHICH THE FUND HAS INVESTED LESS
THAN 0.50% OF ITS ASSETS.
that their first responsibility each month is to make their payments. If it
becomes necessary to put a loan in foreclosure, our loan servicers will proceed
with the process as quickly as possible.
THE FUND IS INVESTED IN MORTGAGE LOANS BACKED BY PROPERTIES LOCATED THROUGHOUT
THE COUNTRY. We attempt to buy mortgage loans in many parts of the country to
diversify the risks presented by any one area. The greatest concentration of
loans is in Texas and California. These states have more loans due to their
large populations. Moreover, the adverse economic conditions experienced by
these states a few years ago enabled us to purchase loans at what we believe are
attractive prices.
8
<PAGE>
AMERICAN STRATEGIC INCOME PORTFOLIO III
LOOKING AHEAD, WE BELIEVE THE FUND'S NET ASSET VALUE AND EARNINGS SHOULD BE MORE
CONSISTENT THAN IN THE PAST. We believe we have reduced interest rate risk and
focused the fund's investments where we feel we can currently add the most value
- -- in the mortgage loan area. We feel this increased focus on mortgage loans
will allow the fund to provide more consistent income levels. We hope this will
attract more investors to the fund, which, in turn, could reduce the current
discount of market price to net asset value. The efforts of the fund's
management team continue to be dedicated to reaching the fund's objectives and
helping you achieve your financial goals.
We would like to express our sincere appreciation to you, our valued
shareholders, for your investment in American Strategic Income Portfolio III. We
look forward to continuing our relationship with you and helping you meet your
investment goals.
Sincerely,
/s/ John Wenker
John Wenker
Portfolio Manager
9
<PAGE>
MANAGING RISK
MANAGING THE RISKS OF MORTGAGE-RELATED ASSETS
All funds that invest in mortgage-related securities are subject to certain
risks. Following is a brief summary of some of the primary risks associated with
mortgage-related assets. It does not include all risks related to mortgage
securities.
Among these risks is PREPAYMENT RISK in which principal payments are prepaid at
unexpected rates. Prepayment rates are influenced by changes in interest rates
and a variety of other factors. If the fund buys a mortgage loan at a premium, a
faster-than-anticipated prepayment rate will reduce the fund's yield and a
slower-than-anticipated prepayment rate will increase its yield. If a mortgage
loan is purchased at a discount, the opposite will occur. There is also the
chance that proceeds from prepaid loans will have to be reinvested in lower-
yielding investments (REINVESTMENT RISK).
Like all fixed income investments, the prices of securities in the fund are
sensitive to changing interest rates - otherwise known as INTEREST RATE RISK.
When rates increase, the value of these securities decreases. Conversely, when
rates decline, the value of these securities rises. However, mortgage-related
assets may benefit less from declining interest rates than other fixed income
securities because of prepayment risk.
The fund's mortgage loans are subject to some unique risks such as credit risk
and real estate risk. Since the fund's mortgage loans generally aren't backed by
any government guarantee or private credit enhancement, they face CREDIT RISK.
This is the risk of loss arising from default if the borrower fails to make
payments on the loan. This risk may be greater during periods of declining or
stagnant real estate values. Mortgage loans are also subject to REAL ESTATE
RISKS including property risk (the risk that the physical condition and value of
the property will decline) and the legal risk of holding any mortgage loan.
To date, we have successfully managed the unique risks of mortgage loans through
extensive risk analysis. We review the loan's legal documents and the borrower's
mortgage payment history; assess the local market and property value; and obtain
a physical assessment of the property. As part of our strategy to manage the
real estate risk of the fund's multifamily (apartment) loans, we perform a
detailed inspection of each property; study the competing properties in the
area; interview property managers; and obtain engineering and environmental
reports from experts.
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (including a
repurchase agreement of $1,425,000) (note 2) ......... $ 401,698,080
Real estate owned (identified cost: $1,741,660) (note
2) ..................................................... 1,555,174
Cash in bank on demand deposit ........................... 2,203,341
Mortgage security paydowns receivable .................... 17,460
Accrued interest receivable .............................. 3,712,180
-----------------
Total assets ......................................... 409,186,235
-----------------
LIABILITIES:
Reverse repurchase agreements payable .................... 81,000,000
Accrued investment management fee ........................ 155,884
Accrued administrative fee ............................... 55,559
Accrued interest ......................................... 352,977
Other accrued expenses ................................... 21,065
-----------------
Total liabilities .................................... 81,585,485
-----------------
Net assets applicable to outstanding capital stock ....... $ 327,600,750
-----------------
-----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 26,742,546 shares ................ $ 267,425
Additional paid-in capital ............................... 377,887,728
Undistributed net investment income ...................... 3,168,968
Accumulated net realized loss on investments ............. (57,409,849)
Unrealized appreciation of investments ................... 3,686,478
-----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 327,600,750
-----------------
-----------------
Net asset value per share of outstanding capital stock ... $ 12.25
-----------------
-----------------
* Investments in securities at identified cost ........... $ 397,825,116
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $4,595,188) ....... $ 30,761,452
-----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 2,048,406
Administrative fee ....................................... 668,299
Custodian, accounting and transfer agent fees ............ 203,063
Reports to shareholders .................................. 108,812
Mortgage servicing fees .................................. 948,254
Directors' fees .......................................... 19,979
Audit and legal fees ..................................... 86,035
Federal excise taxes (note 2) ............................ 68,255
Other expenses ........................................... 149,413
-----------------
Total expenses ....................................... 4,300,516
Less expenses paid indirectly ............................ (14,143)
-----------------
Total net expenses ................................... 4,286,373
-----------------
Net investment income ................................ 26,475,079
-----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (1,906,796)
Net realized gain on closed or expired option contracts
written (note 5) ....................................... 450,547
-----------------
Net realized loss on investments ....................... (1,456,249)
Net change in unrealized appreciation or depreciation of
investments ............................................ 1,032,738
-----------------
Net loss on investments ................................ (423,511)
-----------------
Net increase in net assets resulting from
operations ....................................... $ 26,051,568
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest income ........................................ $ 30,761,452
Net expenses ............................................. (4,286,373)
----------------
Net investment income ................................ 26,475,079
----------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest and mortgage security
paydowns receivable .................................. 349,871
Net amortization of bond discount and premium .......... (99,419)
Change in accrued fees and expenses .................... (18,115)
----------------
Total adjustments .................................... 232,337
----------------
Net cash provided by operating activities ............ 26,707,416
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 483,484,172
Purchases of investments ................................. (480,603,234)
Net sales of short-term securities ....................... 2,290,000
Net premiums received from option contracts written ...... 138,047
----------------
Net cash provided by investing activities ............ 5,308,985
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements .......... 6,000,000
Retirement of fund shares ................................ (3,690,423)
Distributions paid to shareholders ....................... (33,239,613)
----------------
Net cash used by financing activities ................ (30,930,036)
----------------
Net increase in cash ..................................... 1,086,365
Cash at beginning of year ................................ 1,116,976
----------------
Cash at end of year ................................ $ 2,203,341
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ 4,551,076
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
5/31/96 5/31/95
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 26,475,079 31,467,846
Net realized loss on investments ......................... (1,456,249) (40,932,927)
Net change in unrealized appreciation or depreciation of
investments ............................................ 1,032,738 40,650,149
----------------- -----------------
Net increase in net assets resulting from operations ... 26,051,568 31,185,068
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (33,239,613) (34,841,094)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 326,200 and 381,000 shares,
respectively (note 7) .................................. (3,576,221) (4,157,498)
----------------- -----------------
Total decrease in net assets ......................... (10,764,266) (7,813,524)
Net assets at beginning of year ............................ 338,365,016 346,178,540
----------------- -----------------
Net assets at end of year ................................ $ 327,600,750 338,365,016
----------------- -----------------
----------------- -----------------
Undistributed net investment income ...................... $ 3,168,968 9,832,556
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<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 investment management 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 asset-backed securities, U.S. government securities,
corporate debt securities, municipal obligations, unregistered
securities and mortgage servicing rights. The fund may borrow,
including through the use of reverse repurchase agreements, and
may purchase securities through the sale-forward (dollar-roll)
program. Fund shares are listed on the New York Stock Exchange
under the symbol CSP.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN SECURITIES
The fund's mortgage related investments such as whole loans,
participation mortgages and mortgage servicing rights are
initially valued at cost and their values are subsequently
monitored and adjusted pursuant to a pricing model designed to
reflect 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 projected rate and severity of defaults, the
delinquency profile, the expected yield at purchase, changes in
prevailing interest rates and changes in the real or perceived
liquidity of whole loans, participation mortgages or mortgage
servicing rights as the case may be. Certain elements of the
pricing model involve subjective judgment. Additionally, certain
other factors will be considered in the determination of the
valuation of investments in multifamily properties, including
but not limited to, results of annual inspections of the
multifamily property by the adviser or a servicing agent
retained by the adviser, reviews of annual unaudited financial
statements of the multifamily property, monitoring of local and
other economic conditions and their impact on local real estate
values and analyses of rental vacancy rates at the multifamily
property. Subjective adjustments to the valuation of such
investments in multifamily properties may be made based upon the
adviser's analysis of such information. The actual values that
may be realized upon the sale of whole loans, participation
mortgages and mortgage servicing rights can only be determined
in negotiations between the fund and third parties.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The values of other fixed income securities are determined using
pricing services or prices quoted by independent brokers.
Exchange-listed options are valued at the last sales price and
open financial futures contracts are valued at the last
settlement price. When market quotations for other fixed income
securities are not readily available, such securities are valued
at fair value according to methods selected in good faith by the
board of directors.
Securities transactions are accounted for on the date the
securities are purchased and sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium, is accrued
daily. Costs associated with acquiring whole loans,
participation mortgages and mortgage servicing rights are
capitalized and included in the cost basis of the loans
purchased.
OPTIONS TRANSACTIONS
For hedging purposes, the fund may buy and sell put and call
options, write covered call options on portfolio securities, and
write cash-secured puts. The risk in writing a call option is
that the fund gives up the opportunity for profit if the market
price of the security increases. The risk in writing a put
option is that the fund may incur a loss if the market price of
the security decreases and the option is exercised. The risk of
buying an option is that the fund pays a premium whether or not
the option is exercised. The fund also has the additional risk
of not being able to enter into a closing transaction if a
liquid secondary market does not exist. The fund also may write
over-the-counter options where the completion of the obligation
is dependent upon the credit standing of the other party.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The fund will realize a gain or loss
upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on the sale of a written call
option, the purchase cost of a written put option, or the cost
of a security for purchased put and call options is adjusted by
the amount of premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts
and
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
related options. Risks of entering into futures contracts and
related options include the possibility there may be an illiquid
market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the fund
each day. The variation margin payments are equal to the daily
changes in the contract value and are recorded as unrealized
gains and losses. The fund recognizes a realized gain or loss
when the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular investment or
portion of its portfolio or for other non-speculative purposes,
the fund may enter into various hedging transactions, such as
interest rate swaps and the purchase of interest rate caps and
floors. Interest rate swaps involve the exchange of commitments
to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a contractually based notional principal amount
from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based notional
principal amount from the party selling the interest rate floor.
If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were
not used. Even if the forecasts are correct, there is risk that
the positions may correlate imperfectly with the asset or
liability being hedged. Other risks of entering into these
transactions are that a liquid secondary market may not always
exist or that the other party to the transaction may not
perform.
For interest rate swaps, caps and floors, the fund accrues
weekly, as an increase or decrease to interest income, the
current net amount
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
due to or owed by the fund. Interest rate swaps, caps and floors
are valued from prices quoted by independent brokers. These
valuations represent the present value of all future cash
settlement amounts based on implied forward interest rates.
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.
At May 31, 1996, loans representing 5.2% of net assets were
considered by the fund to be delinquent as to the timely monthly
payment of principal and interest. A loan is considered
delinquent when a borrower has missed two or more payments. The
fund does not record past due interest as income until received.
The fund may incur certain costs and delays in the event of
foreclosure and 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 suffer a loss.
Real estate acquired through foreclosure, if any, is recorded at
estimated fair value. On May 31, 1996, the fund owned 17 homes
with an aggregate value of $1,555,174, or 0.5% of net assets.
The fund recognized net realized losses of $534,196 on real
estate sold during the year ended May 31, 1996. Additionally,
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.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a forward-commitment or when-issued basis can take
place
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 maintains, in a segregated account with its
custodian, assets with a market value equal to the amount of its
purchase commitments. The purchase of securities on a
when-issued 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, 1996, the fund had no outstanding when-issued or forward
commitments.
In connection with its ability to purchase securities on a
when-issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities for
delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future
date. As an inducement to "roll over" its purchase commitments,
the fund receives negotiated fees. For the year ended May 31,
1996, the fund earned no such fees.
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. However, the fund incurred federal excise
taxes of $68,255, or $0.003 per share, on income retained during
the 1995 excise tax year.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
losses deferred due to "wash sale" and "straddle" transactions,
the timing of recognition of income on certain collateralized
mortgage-backed securities, and the non-deductibility of excise
tax payments made. 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
(losses) were recorded by the fund.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, a reclassification adjustment
has been made to increase undistributed net investment income by
$100,946, increase accumulated net realized losses on
investments by $32,691 and decrease additional paid-in-capital
by $68,255.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed 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 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 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
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities. Management is also required to make
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported results of operations
during the reporting period. Actual results could differ from
those estimates.
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(3) EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and the
administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee in an amount equal to an
annualized rate of 0.20% of the fund's average weekly net assets
and 4.50% of the daily gross income accrued by the fund during
the month (i.e., investment income, including amortization of
discount and premium, other than gains from the sale of
securities or gains from options and futures contracts, less
interest on money borrowed by the 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 its fee, the
adviser provides investment advice and conducts the management
and investment activity of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.20% of
the fund's average weekly net assets. For its fee, the
administrator will provide regulatory, reporting and
record-keeping services for the fund.
When acquiring whole loans and participation mortgages, the fund
enters into mortgage servicing agreements with mortgage
servicers. For a fee, mortgage servicers maintain loan records,
such as insurance and taxes and the proper allocation of
payments between principal and interest.
In addition to the investment management, administrative and
mortgage servicing fees, the fund is responsible for paying most
other operating expenses, including: outside directors' fees and
expenses; custodian fees; registration fees; printing and
shareholder reports; transfer agent fees and expenses; legal,
auditing and accounting services; insurance; interest; fees to
outside parties retained to assist in conducting due diligence;
taxes and other miscellaneous expenses.
Expenses paid indirectly represent a reduction of custodian fees
for earnings on cash balances maintained by the fund.
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(4) INVESTMENT SECURITY TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the
year ended May 31, 1996 aggregated $480,702,653 and
$476,308,985, respectively. Included in proceeds from sales are
$3,900,658 million from sales of real estate owned.
During the year ended May 31, 1996, no brokerage commissions
were paid to Piper Jaffray Inc., an affiliated broker.
(5) OPTION CONTRACTS WRITTEN
The number of contracts and premium amounts associated with call
option contracts written for the year ended May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premium
Contracts Amount
------------- -----------
<S> <C> <C>
Balance at 5/31/95......................... 800 $ 312,500
Opened................................... 2,345 1,300,078
Closed or Expired........................ (3,145) (1,612,578)
------ -----------
Balance at 5/31/96......................... -- $ --
------ -----------
------ -----------
</TABLE>
(6) CAPITAL LOSS CARRYOVER
For federal income tax purposes, the fund had capital loss
carryovers of $57,409,849 as of May 31, 1996, which, if not
offset by subsequent capital gains, will expire in the years
2003 through 2005. It is unlikely the board of directors will
authorize a distribution of any net realized capital gains until
the available capital loss carryover has been offset or expires.
(7) RETIREMENT OF FUND SHARES
The fund's board of directors has approved a plan to discontinue
the share repurchase plan effective February 6, 1996. Pursuant
to the plan, the fund had cumulatively repurchased and retired
707,200 shares as of February 5, 1996, which represents 2.6% of
the shares originally issued.
(8) PENDING LITIGATION
An amended complaint purporting to be a class action was filed
on September 7, 1995, in the United States District Court for
the Western District of Washington against the fund, seven other
closed-end investment companies for which Piper Capital
Management Incorporated acts as investment adviser, Piper
Jaffray Companies Inc., Piper Jaffray Inc., Piper Capital
Management Incorporated and certain individuals. The named
plaintiffs and defendants in this putative class action have
reached an agreement-in-principle on a
22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
proposed settlement and are negotiating the terms of a
definitive settlement agreement. If approved by the Court, a
definitive settlement agreement consistent with the terms of the
agreement-in-principle would provide $15.5 million to class
members in payments by Piper Jaffray Companies Inc. and Piper
Capital Management Incorporated scheduled during the next four
years. The agreement stipulates, among other things, that CSP
would offer to repurchase up to 10 percent of its outstanding
shares from current shareholders at net asset value. The
repurchase offer would occur after the effective date of the
settlement following Court approval.
23
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) 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 Year Year Period
Ended Ended Ended Ended
5/31/96 5/31/95 5/31/94 5/31/93(f)
------- ------- ------- -------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ............. $ 12.50 12.61 14.04 14.07
------- ------- ------- -------
Operations:
Net investment income ............................ 0.99 1.18 1.37 0.19
Net realized and unrealized loss on
investments .................................... -- (0.01) (1.52) (0.11)
------- ------- ------- -------
Total from operations ......................... 0.99 1.17 (0.15) 0.08
------- ------- ------- -------
Distributions to shareholders:
From net investment income ....................... (1.24) (1.28) (1.07) (0.11)
In excess of net realized gains on investments ... -- -- (0.21) --
------- ------- ------- -------
Total distributions to shareholders ........... (1.24) (1.28) (1.28) (0.11)
------- ------- ------- -------
Net asset value, end of period ............... $ 12.25 12.50 12.61 14.04
------- ------- ------- -------
------- ------- ------- -------
Per-share market value, end of period ........ $ 10.25 11.13 12.75 15.38
------- ------- ------- -------
------- ------- ------- -------
SELECTED INFORMATION
Total return, net asset value (a) .................. 8.17% 10.03% (1.78)% 0.54%
Total return, market value (b) ..................... 3.20% (2.42)% (9.52)% 3.23%
Net assets at end of period (in millions) ........ $ 328 338 346 384
Ratio of expenses to average weekly net assets
(c)(h) ........................................... 1.29% 1.29% 1.19% 1.01%(g)
Ratio of net investment income to average weekly net
assets ........................................... 7.92% 9.48% 9.57% 7.46%(g)
Portfolio turnover rate (excluding short-term
securities) ...................................... 121% 49% 155% 2%
Amount of borrowings outstanding at end of period
(in millions) (d) .............................. $ 81 75 159 15
Per-share amount of borrowings outstanding at end of
period ......................................... $ 3.03 2.77 5.79 0.55
Per-share amount of net assets, excluding
borrowings, at end of period ................... $ 15.28 15.27 18.40 14.59
Asset coverage ratio (e) ........................... 504% 551% 317% 2,659%
</TABLE>
(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(B) BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(C) INCLUDES 0.02%, 0.09%, AND 0.06% FROM FEDERAL EXCISE TAXES IN FISCAL YEARS
1996, 1995 AND 1994, RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE
RATIO REFLECTS THE EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND.
PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
(D) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE NOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
(E) REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
(F) COMMENCEMENT OF OPERATIONS WAS MARCH 25, 1993.
(G) ADJUSTED TO AN ANNUAL BASIS.
(H) THE RATIO OF EXPENSES TO AVERAGE WEEKLY NET ASSETS EXCLUDES INTEREST
EXPENSE THAT HAS BEEN PRESENTED NET OF THE RELATED INTEREST INCOME IN THE
FINANCIAL STATEMENTS. IF INTEREST EXPENSE HAD BEEN INCLUDED IN TOTAL
EXPENSES, THE RATIOS OF EXPENSES TO AVERAGE WEEKLY NET ASSETS WOULD HAVE
BEEN: 2.66%, 3.55%, 2.13% AND 1.06% FOR FISCAL 1996, 1995, 1994 AND 1993,
RESPECTIVELY.
24
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO III
MAY 31, 1996
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (25.8%):
U.S. Government Treasury Securities (24.4%):
U.S. Treasury Note, 5.13%, 4/30/98 ................. $ 81,500,000(b) 79,922,975
-----------
U.S. Agency Mortgage-Backed Securities (1.4%):
Fixed Rate (1.4%):
6.50%, FNMA, 1/1/11 .................................. 4,842,528 4,651,781
-----------
Total U.S. Government and Agency Securities
(cost: $85,655,602) ............................... 84,574,756
-----------
PRIVATE MORTGAGE-BACKED SECURITIES (0.0%):
Subordinated Fixed Rate (0.0%)
8.86%, First Gibralter, Series 1992-MM, Class B,
10/25/21
(cost: $860,479) .................................... 2,537,649(f) 39,651
-----------
WHOLE LOANS AND PARTICIPATION MORTGAGES (D,E,F) (96.4%):
Commercial Loans (5.8%):
Airport Plaza Offices, 8.88%, 5/1/01 ................. 750,000 750,000
Commerce Center, 8.88%, 5/1/01 ....................... 1,950,000 1,950,000
Golden Estates Mobile Home Park, 10.75%, 12/10/96 .... 1,526,155 1,526,155
John Brown Office Building, 8.90%, 6/1/03 ............ 4,125,000 4,125,000
Merrill Lynch / Northern Trust Building, 9.05%,
6/1/03 .............................................. 3,800,000 3,800,000
Pacific Shores Mobile Home Park, 11.12%, 12/1/09 ..... 2,425,178 2,510,059
Paseo Verde Plaza, 8.63%, 5/1/01 ..................... 1,850,000 1,821,880
Sweetwater Shoals Mobile Home Park, 8.25%, 3/10/96 ... 307,698 307,698
Turf Manor, 8.25%, 1/1/06 ............................ 2,392,682 2,284,772
-----------
19,075,564
-----------
Multifamily Loans (39.3%):
Ambassador House Apartments, 10.13%, 12/1/01 ......... 2,382,371 2,465,754
Ashley Square Apartments, 8.31%, 6/1/99 .............. 962,724 986,889
Berryhill Apartments, 9.06%, 9/1/01 .................. 1,583,468 1,638,889
Briarwood Apartments, 10.24%, 12/1/01 ................ 992,828 1,027,577
Champlin Drive Apartments, 10.00%, 7/15/08 ........... 2,213,670 2,213,670
Concord Apartments, 9.68%, 5/1/01 .................... 2,075,213 2,146,185
Crane Zion I, 10.00%, 9/1/08 ......................... 2,657,949 2,443,186
Crestridge Apartments, 8.00%, 1/1/03 ................. 1,844,125 1,773,495
El Camino Apartments, 10.65%, 2/1/02 ................. 4,772,601 4,939,642
El Toro Blanco Apartments, 10.05%, 1/1/02 ............ 1,341,262 1,388,206
Essex II, 10.00%, 8/1/08 ............................. 2,066,092 1,857,623
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Everhard Road Apartments, 9.31%, 9/1/01 ............ $ 492,033 509,254
Falls Apartments, 10.00%, 7/1/03 ..................... 3,930,778 4,068,355
Faronia Square Apartments, 10.40%, 1/1/02 ............ 3,576,692 3,701,876
Geneva Village Apartments, 9.50%, 11/1/04 ............ 1,378,869 1,413,341
Grand Forks Multifamily, 9.94%, 12/1/01 .............. 2,418,334 2,502,975
Harpers Ferry Apartments, 10.56%, 12/1/01 ............ 1,827,663 1,891,632
Hidden Pines Apartments, 9.43%, 6/1/99 ............... 2,132,805 2,186,338
Huntington Hills Apartments, 8.75%, 11/1/05 .......... 1,406,188 1,397,047
Jeanne Manor Apartments, 10.32%, 8/1/01 .............. 1,576,544 1,631,723
Johanson Arms Apartments, 9.35%, 6/1/04 .............. 2,050,000 2,050,000
Johnson/Wilson Apartments, 10.00%, 9/1/18 ............ 799,035 651,453
Karrington of Bexley Apartments, 9.42%, 11/1/01 ...... 3,965,844 4,104,649
Kingstown Colony Apartments, 9.98%, 11/1/01 .......... 1,785,462 1,847,953
Lake Conway Woods, 9.61%, 8/1/01 ..................... 2,973,163 3,077,224
Maple Village Apartments, 9.50%, 11/1/04 ............. 1,440,895 1,476,918
Mapleview Apartments, 9.63%, 5/1/02 .................. 3,729,427 3,838,699
Marina Del Ray Apartments, 10.00%, 1/1/02 ............ 3,852,696 3,987,540
Meadowview Apartments, 9.50%, 11/1/04 ................ 1,022,462 1,048,024
Mission Village Apartments, 9.06%, 9/1/01 ............ 2,207,497 2,284,760
Oak Grove Apartments, 10.05%, 12/2/01 ................ 903,345 934,962
Ocean Cove Apartments, 9.44%, 10/1/04 ................ 3,072,281 3,179,810
Palm Court Apartments, 10.00%, 9/1/98 ................ 6,894,950 7,136,273
Parkway Village Apartments, 9.50%, 11/1/04 ........... 992,405 1,017,215
Regency Manor Apartments, 10.30%, 1/1/00 ............. 5,289,795 5,474,938
Riverbrook Apartments, 10.38%, 1/1/02 ................ 2,076,335 2,149,007
Rose Park Apartments, 9.50%, 11/1/04 ................. 901,342 923,876
Royal Court Apartments, 9.31%, 9/1/01 ................ 1,790,678(c) 1,316,148
Shelter Island Apartments, 10.00%, 10/1/01 ........... 12,888,816 13,339,925
Shenandoah Woods Apartments, 9.43%, 6/1/99 ........... 2,907,921 2,980,910
Southlake Villa Apartments, 9.50%, 11/1/04 ........... 1,514,665 1,559,499
Studio One Apartments, 9.43%, 6/1/99 ................. 888,669 910,974
The Timbers Apartments, 9.43%, 6/1/99 ................ 2,715,376 2,783,532
Timberlea Terrace Apartments, 10.00%, 11/1/08 ........ 887,000 771,247
Twin Lakes Apartments, 9.80%, 11/1/01 ................ 3,569,826 3,691,200
Valley Manor Apartments, 8.45%, 11/1/02 .............. 3,408,033 3,361,343
Victoria Gardens Apartments, 9.06%, 9/1/01 ........... 1,386,095 1,434,608
Village Green Apartments, 10.00%, 8/1/08 ............. 934,661 967,374
Westree Apartments, 10.00%, 9/1/03 ................... 3,337,731 3,454,552
Westree II Apartments, 13.00%, 10/1/96 ............... 1,000,000 1,000,000
Winchester House Apartments, 8.17%, 2/1/03 ........... 1,846,203 1,788,232
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
26
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
Windswept Village Apartments, 9.43%, 6/1/99 ........ $ 2,043,938 2,095,241
-----------
128,821,743
-----------
Single Family Loans (51.2%):
Arbor, 9.27%, 8/16/17 ................................ 5,258,066 5,258,066
Barclays, 9.04%, 6/7/25 .............................. 4,323,763 4,192,753
Bayview Financial, 5.72%, 2/21/20 .................... 1,228,017 1,052,656
Delaware II, 8.85%, 11/27/07 ......................... 9,507,852(b) 9,196,945
Delta Funding, 10.50%, 5/1/22 ........................ 1,681,289 1,698,102
Fairbanks IV, 7.99%, 4/3/19 .......................... 3,720,045 3,187,707
Federal Mortgage, 8.52%, 12/15/20 .................... 4,190,487(b) 3,770,181
First Boston II, 9.54%, 7/31/09 ...................... 4,054,942(b) 3,800,697
First Boston III, 9.20%, 2/1/13 ...................... 4,759,340(b) 4,360,031
First Boston IV, 9.29%, 3/1/12 ....................... 4,022,387(b) 3,878,788
First Boston V, 8.46%, 5/26/16 ....................... 4,356,087 4,308,170
Greenwich, 9.29%, 4/16/05 ............................ 3,460,354 3,448,934
Kidder Peabody I, 10.02%, 9/1/10 ..................... 6,298,656(b) 6,032,223
Kidder Peabody II, 10.15%, 5/1/13 .................... 1,594,288(b) 1,585,838
Knutson III, 9.07%, 4/1/15 ........................... 2,202,305(b) 2,194,597
Maryland National, 9.73%, 9/1/19 ..................... 2,265,141(b) 2,196,960
Meridian IV, 8.36%, 8/16/16 .......................... 9,422,466 9,063,924
Meridian V, 8.44%, 10/6/17 ........................... 6,238,108 6,186,956
Minneapolis Employees Retirement Fund, 8.56%,
2/10/14 ............................................. 6,332,491 5,867,940
Mortgage Access, 9.26%, 9/30/19 ...................... 1,086,329(b) 1,064,059
Nomura, 10.05%, 12/16/23 ............................. 39,605,243(b) 39,469,833
Nomura III, 8.62%, 12/29/17 .......................... 22,929,511 20,907,800
Norwest II, 7.78%, 11/27/22 .......................... 8,569,797 8,141,089
Norwest IV, 8.31%, 2/23/25 ........................... 8,823,364 8,770,424
President Homes 93-6A, Sales Inventory, 8.62%,
11/1/22 ............................................. 144,934 149,282
President Homes 93-6C, Sales Inventory, 8.63%,
8/1/23 .............................................. 110,590 109,406
President Homes 93-6E, Sales Inventory, 9.61%,
11/1/22 ............................................. 172,044 177,206
President Homes 93-6F, Sales Inventory, 8.68%,
11/1/22 ............................................. 246,876 209,474
President Homes 94 1B, Sales Inventory, 8.89%,
11/18/23 ............................................ 191,337 197,077
Sears Mortgage, 8.14%, 10/1/17 ....................... 974,751 948,043
Shearson Lehman, 9.68%, 6/1/17 ....................... 5,592,201(b) 5,608,419
The Crossings, 10.75%, 10/1/11 ....................... 706,589 727,786
-----------
167,761,366
-----------
Total Whole Loans and Participation Mortgages
(cost: $309,884,035) .............................. 315,658,673
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
27
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN STRATEGIC INCOME PORTFOLIO III
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
SHORT-TERM SECURITIES (0.4%):
Repurchase agreement with State Street in a joint
trading account, collateralized by U.S. government
agency securities, acquired on 5/31/96, accrued
interest at repurchase date of $627, 5.28%, 6/3/96
(cost: $1,425,000) ................................ $ 1,425,000 1,425,000
-----------
Total Investments in Securities
(cost: $397,825,116) (g) ......................... $ 401,698,080
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON MAY 31, 1996, SECURITIES VALUED AT $84,946,570 WERE PLEDGED AS
COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME OF BROKER
ACQUISITION ACCRUED AND DESCRIPTION
AMOUNT DATE RATE* DUE INTEREST OF COLLATERAL
- ------------ ---------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$ 75,000,000 5/1/96 5.39% 6/3/96 $ 347,943 (1)
1,000,000 5/29/96 6.25% 6/3/96 521 (2)
1,500,000 5/30/96 6.25% 6/3/96 521 (3)
1,500,000 5/30/96 6.25% 6/3/96 521 (4)
2,000,000 5/22/96 6.25% 6/3/96 3,471 (5)
- ------------ ---------
$ 81,000,000 $ 352,977
- ------------ ---------
- ------------ ---------
</TABLE>
<TABLE>
<S> <C> <C>
*INTEREST RATE IS AS OF MAY 31, 1996. RATES ARE BASED ON THE LONDON
INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY.
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) NOMURA;
U.S. TREASURY NOTE, 5.13%, 4/30/98, $76,530,000 PAR
(2) NOMURA;
FEDERAL MORTGAGE, 8.52%, 12/15/20, $118,651 PAR
FIRST BOSTON III, 9.20%, 2/1/13, $236,998 PAR
FIRST BOSTON IV, 9.29%, 3/1/12, $243,545 PAR
KIDDER PEABODY I, 10.02%, 9/1/10, $124,562 PAR
KIDDER PEABODY II, 10.15%, 5/1/13, $231,564 PAR
MORTGAGE ACCESS, 9.26%, 9/30/19, $121,659 PAR
NOMURA, 10.05%, 12/16/23, $746,950 PAR
SHEARSON LEHMAN, 9.68%, 6/1/17, $124,835 PAR
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C> <C>
(3) NOMURA;
DELAWARE II, 8.85%, 11/27/07, $235,918 PAR
FIRST BOSTON IV, 9.29%, 3/1/12, $201,783 PAR
MARYLAND NATIONAL, 9.73%, 9/1/19, $203,125 PAR
NOMURA, 10.05%, 12/16/23, $1,977,591 PAR
(4) NOMURA;
DELAWARE II, 8.85%, 11/27/07, $306,702 PAR
FEDERAL MORTGAGE, 8.52%, 12/15/20, $100,898 PAR
FIRST BOSTON II, 9.54%, 7/31/09, $202,345 PAR
FIRST BOSTON III, 9.20%, 2/1/13, $99,696 PAR
FIRST BOSTON IV, 9.29%, 3/1/12, $104,190 PAR
KNUTSON III, 9.07%, 4/1/15, $105,298 PAR
MARYLAND NATIONAL, 9.73%, 9/1/19, $103,110 PAR
NOMURA, 10.05%, 12/16/23, $804,147 PAR
SHEARSON LEHMAN, 9.68%, 6/1/17, $99,209 PAR
(5) NOMURA;
FEDERAL MORTGAGE, 8.52%, 12/15/20, $609,813 PAR
MARYLAND NATIONAL, 9.73%, 9/1/19, $274,819 PAR
MORTGAGE ACCESS, 9.26%, 9/30/19, $184,086 PAR
NOMURA, 10.05%, 12/16/23, $2,540,073 PAR
(C) MULTIFAMILY LOAN REPRESENTING TOTAL MARKET VALUE OF $1,316,148, OR 0.4% OF
NET ASSETS ARE IN DEFAULT ON PRINCIPAL AND INTEREST PAYMENTS. INTEREST IS
CURRENTLY NOT BEING ACCRUED ON THIS LOAN.
(D) INTEREST RATE AND MATURITY DATE DISCLOSED ON SINGLE FAMILY LOANS REPRESENT
THE WEIGHTED AVERAGE COUPON AND WEIGHTED AVERAGE MATURITY FOR THE
UNDERLYING MORTGAGE LOANS AS OF MAY 31, 1996. INTEREST RATES ON
MULTIFAMILY AND COMMERCIAL LOANS ARE THE RATES IN EFFECT ON MAY 31, 1996.
(E) FOR INVESTMENT SCHEDULE PRESENTATION, DIRECT MORTGAGE PURCHASES ARE
SUMMARIZED BY THE INSTITUTION FROM WHICH THEY WERE PURCHASED FOR SINGLE
FAMILY LOANS AND BY THE NAME OF PROPERTY FOR MULTIFAMILY AND COMMERCIAL
LOANS. TOTAL NUMBER OF LOANS AND GENERAL GEOGRAPHICAL LOCATION ASSOCIATED
WITH EACH LOAN GROUP ARE AS FOLLOWS:
COMMERCIAL LOANS:
AIRPORT PLAZA OFFICES - 1 COMMERCIAL LOAN LOCATED IN ALBUQUERQUE,
NEW MEXICO.
COMMERCE CENTER - 1 COMMERCIAL LOAN LOCATED IN ALBUQUERQUE, NEW
MEXICO.
GOLDEN ESTATES MOBILE HOME PARK - 1 COMMERCIAL LOAN LOCATED IN
DOUGLASVILLE, GEORGIA.
JOHN BROWN OFFICE BUILDING - 1 COMMERCIAL LOAN LOCATED IN HOUSTON,
TEXAS.
MERRILL LYNCH/NORTHERN TRUST BUILDING - 1 COMMERCIAL LOAN LOCATED IN
FORT LAUDERDALE, FLORIDA.
PASEO VERDE PLAZA - 1 COMMERCIAL LOAN LOCATED IN PHOENIX, ARIZONA.
PACIFIC SHORES MOBILE HOME PARK - 1 COMMERCIAL LOAN LOCATED IN
NEWPORT, OREGON.
SWEETWATER SHOALS MOBILE HOMES - 1 COMMERCIAL LOAN LOCATED IN
AUSTELL, GEORGIA.
TURF MANOR - 1 COMMERCIAL LOAN LOCATED IN PHOENIX, ARIZONA.
MULTIFAMILY LOANS:
AMBASSADOR HOUSE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN OKLAHOMA
CITY, OKLAHOMA.
ASHLEY SQUARE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
BERRYHILL APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN OREGON CITY,
OREGON.
BRIARWOOD APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN GREELEY,
COLORADO.
CHAMPLIN DRIVE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN CHAMPLIN,
MINNESOTA.
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C> <C>
CONCORD APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MIDWEST CITY,
OKLAHOMA.
CRANE ZION I - 1 MULTIFAMILY LOAN LOCATED IN ZION, ILLINOIS.
CRESTRIDGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN KNOXVILLE,
TENNESSEE.
EL CAMINO APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN PHOENIX,
ARIZONA.
EL TORO BLANCO APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN COLORADO
SPRINGS, COLORADO.
ESSEX II - 1 MULTIFAMILY LOAN LOCATED IN ROCHESTER, MINNESOTA.
EVERHARD ROAD APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN NORTH
CANTON, OHIO.
FALLS APARTMENTS - 1 MULTIFAMILY LOAN IN COLORADO SPRINGS, COLORADO.
FARONIA SQUARE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MEMPHIS,
TENNESSEE.
GENEVA VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN WEST
JORDAN, UTAH.
GRAND FORKS MULTIFAMILY - 1 MULTIFAMILY LOAN LOCATED IN GRAND FORKS,
NORTH DAKOTA.
HARPER'S FERRY APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN LAFAYETTE,
LOUISIANA.
HIDDEN PINES APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
HUNTINGTON HILLS APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MANKATO,
MINNESOTA.
JEANNE MANOR APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN PORTLAND,
OREGON
JOHNSON/WILSON APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN ST. PAUL,
MINNESOTA.
JOHANSON ARMS APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN KINGSBURG,
CALIFORNIA.
KARRINGTON OF BEXLEY APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN
BEXLEY, OHIO.
KINGSTOWN COLONY APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN
MARYVILLE, TENNESSEE.
LAKE CONWAY WOODS - 1 MULTIFAMILY LOAN LOCATED IN ORLANDO, FLORIDA.
MAPLE VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN AMERICAN
FORK, UTAH.
MAPLEVIEW APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MERCHANTVILLE,
NEW JERSEY.
MARINA DEL RAY APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN GRAPEVINE,
TEXAS.
MEADOWVIEW APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN WEST JORDAN,
UTAH.
MISSION VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN TUCSON,
ARIZONA.
OAK GROVE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MINNEAPOLIS,
MINNESOTA.
OCEAN COVE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN SEMINOLE,
PINNELLAS CITY, FLORIDA.
PALM COURT APARTMENTS - 1 MULTIFAMILY LOAN IN LOS ANGELES,
CALIFORNIA.
PARKWAY VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN WEST
JORDAN, UTAH.
REGENCY MANOR APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN GRAND
ISLAND, NEW YORK.
RIVERBROOK APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN TAMPA,
FLORIDA.
ROSE PARK APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN VERNAL, UTAH.
ROYAL COURT APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN MIAMI BEACH,
FLORIDA.
SHELTER ISLAND APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN LAS VEGAS,
NEVADA.
SHENANDOAH WOODS APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
SOUTH LAKE VILLA APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN SALT
LAKE CITY, UTAH.
STUDIO ONE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
THE TIMBERS APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HOUSTON,
TEXAS.
TIMBERLEA TERRACE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN
WACONIA, MINNESOTA.
TWIN LAKES APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN WARR ACRES,
OKLAHOMA.
VALLEY MANOR APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN HASTINGS,
MINNESOTA.
VICTORIA GARDENS APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN
VICTORIA, TEXAS.
VILLAGE GREEN APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN FAIRBAULT,
MINNESOTA.
WESTREE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN COLORADO SPRINGS,
COLORADO.
WESTREE APARTMENTS II - 1 MULTIFAMILY LOAN LOCATED IN COLORADO
SPRINGS, COLORADO.
WINDSWEPT VILLAGE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN
HOUSTON, TEXAS.
WINCHESTER HOUSE APARTMENTS - 1 MULTIFAMILY LOAN LOCATED IN VIRGINIA
GARDENS, FLORIDA.
SINGLE FAMILY LOANS:
ARBOR - 56 LOANS LOCATED IN NEW YORK, NEW YORK.
</TABLE>
30
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
<TABLE>
<S> <C> <C>
BARCLAYS - 25 LOANS LOCATED THROUGHOUT THE MIDWESTERN UNITED STATES.
BAYVIEW FINANCIAL - 12 LOANS LOCATED IN MARYLAND.
DELAWARE II - 241 LOANS LOCATED IN TEXAS.
DELTA FUNDING - SENIOR DEBT SECURITY COLLATERALIZED BY A POOL OF
NON- PERFORMING WHOLE LOANS LOCATED THROUGHOUT THE UNITED STATES.
FAIRBANKS IV - 38 LOANS LOCATED THROUGHOUT THE UNITED STATES.
FEDERAL MORTGAGE - 51 LOANS LOCATED IN CONNECTICUT.
FIRST BOSTON II - 91 LOANS LOCATED THROUGHOUT THE UNITED STATES,
PRIMARILY IN TEXAS.
FIRST BOSTON III - 112 LOANS LOCATED PRIMARILY IN TEXAS AND FLORIDA.
FIRST BOSTON IV - 96 LOANS LOCATED PRIMARILY IN TEXAS, OKLAHOMA, AND
MASSACHUSETTS.
FIRST BOSTON V - 41 LOANS LOCATED THROUGHOUT THE UNITED STATES.
GREENWICH - 38 LOANS LOCATED IN COLORADO.
KIDDER PEABODY I - 168 LOANS LOCATED THROUGHOUT THE UNITED STATES.
KIDDER PEABODY II - 20 LOANS LOCATED PRIMARILY IN ARIZONA AND
COLORADO.
KNUTSON III - 31 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MARYLAND NATIONAL - 29 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MERIDIAN IV - 126 LOANS LOCATED THROUGHOUT THE MIDWESTERN UNITED
STATES.
MERIDIAN V - 83 LOANS LOCATED THROUGHOUT THE UNITED STATES.
MINNEAPOLIS EMPLOYEES RETIREMENT FUND - 153 LOANS LOCATED IN
MINNESOTA.
MORTGAGE ACCESS - 7 LOANS LOCATED IN NEW JERSEY.
NOMURA - 897 LOANS LOCATED PRIMARILY IN CALIFORNIA AND TEXAS.
NOMURA III - 338 LOANS LOCATED THROUGHOUT THE MIDWESTERN UNITED
STATES.
NORWEST II - 73 LOANS LOCATED THROUGHOUT THE MIDWESTERN UNITED
STATES.
NORWEST IV - 57 LOANS LOCATED THROUGHTOUT THE MIDWESTERN UNITED
STATES..
PRESIDENT HOMES, SALES INVENTORY - 8 LOANS LOCATED THROUGHOUT THE
MIDWESTERN UNITED STATES.
SEARS MORTGAGE - 14 LOANS LOCATED THROUGHOUT THE MIDWESTERN UNITED
STATES.
SHEARSON LEHMAN - 119 LOANS LOCATED THROUGHOUT THE UNITED STATES.
THE CROSSINGS - 12 LOANS LOCATED IN MINNEAPOLIS, MINNESOTA.
(F) 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.
(G) ON MAY 31, 1996, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING REAL
ESTATE OWNED, FOR FEDERAL INCOME TAX PURPOSES WAS $399,566,776. THE
AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN
SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 9,288,268
GROSS UNREALIZED DEPRECIATION ...... (5,601,790)
-----------
NET UNREALIZED APPRECIATION .... $ 3,686,478
-----------
-----------
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN STRATEGIC INCOME PORTFOLIO INC. III:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of American Strategic Income
Portfolio Inc. III as of May 31, 1996, 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 years in the two-year period then ended and the financial
highlights presented in note 9 to the financial statements. These financial
statements and the financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. Investment securities held in custody are confirmed to us by 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 the financial highlights referred
to above present fairly, in all material respects, the financial position of
American Strategic Income Portfolio Inc. III as of May 31, 1996, and the results
of its operations and its cash flows, the changes in its net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 19, 1996
32
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION
The following 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 adviser on how to report
these distributions at the state and local levels.
INCOME DISTRIBUTIONS
(TAXABLE AS ORDINARY DIVIDENDS, NONE QUALIFYING FOR DEDUCTION BY CORPORATIONS)
<TABLE>
<CAPTION>
Payable Date Per Share
- ------------------------------------------------ -----------
<S> <C>
June 28, 1995..................................$ 0.10625
July 26, 1995................................... 0.10625
August 23, 1995................................. 0.10625
September 27, 1995.............................. 0.10625
October 25, 1995................................ 0.10625
November 22, 1995............................... 0.10625
December 27, 1995............................... 0.10625
January 11, 1996................................ 0.10625
February 21, 1996............................... 0.09625
March 27, 1996.................................. 0.09625
April 24, 1996.................................. 0.09625
May 29, 1996.................................... 0.09625
-----------
$ 1.24000
-----------
-----------
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend Reinvestment
Plan. It's a convenient and economical way to buy additional shares of the fund
by automatically reinvesting dividends and capital gains. The plan is
administered by Investors Fiduciary Trust Company (IFTC), 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 IFTC at 1-800-543-1627. 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 IFTC 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, IFTC
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 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
satisfy the dividend reinvestment requirement, IFTC 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.
By participating in the dividend reinvestment plan, you may receive benefits not
available to shareholders who elect not to participate. For example, if the
market price plus commissions of the fund's shares is 5% or more above the NAV,
you will receive shares at a discount of up to 5% from the current market value.
However, if the market price plus commissions is below the NAV, you will receive
distributions in shares with a NAV greater than the value of any cash
distributions you would have received.
There is no direct charge for reinvestment of dividends and capital gains, since
IFTC fees are paid for by the fund. However, if fund shares are purchased in the
open
34
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
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.
IFTC maintains accounts for plan participants holding shares in certificate
form. You will receive a monthly statement detailing total dividend and capital
gain distributions, date of investment, shares acquired, price per share, and
total shares held in your account, both certificate-form shares and unissued
shares acquired through the plan.
TAX INFORMATION
Distributions invested in additional shares of the fund are subject to income
tax, just as they would be 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.
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 IFTC. 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 the record date for such dividend or distribution. The plan may also be
amended or terminated by IFTC with at least 90 days written notice to
participants in the plan.
Any question about the plan should be directed to your investment professional
or to Investors Fiduciary Trust Company, P.O. Box 419432, Kansas City,
Missouri 64141, 1-800-543-1627.
35
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC.,
USL PRODUCTS, INC., KIEFER BUILT, INC., OF
COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT,
P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY
COMPANIES INC., PIPER CAPITAL MANAGEMENT
INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL,
RELIASTAR FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL
EQUITY FUNDS
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
John G. Wenker, PRESIDENT
Russ K. Kappenman, SENIOR VICE PRESIDENT AND
ASSISTANT SECRETARY
Robert H. Nelson, SENIOR VICE PRESIDENT AND
TREASURER
David M. Steele, SENIOR VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Amy Konicke, VICE PRESIDENT
Julene R. Melquist, VICE PRESIDENT
Daniel W. Schroer, VICE PRESIDENT AND ASSISTANT
SECRETARY
Susan S. Miley, SECRETARY
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
TRANSFER AND Investors Fiduciary Trust Company
RECORD KEEPING 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
AGENT
CUSTODIAN First Trust
180 EAST FIFTH STREET, ST. PAUL, MN 55101
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
LEGAL COUNSEL Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
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PIPER CAPITAL ----------------
MANAGEMENT Bulk Rate
U.S. Postage
PIPER CAPITAL MANAGEMENT INCORPORATED PAID
222 SOUTH NINTH STREET Permit No. 3008
MINNEAPOLIS, MN 55402-3804 Mpls., MN
----------------
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
[LOGO] 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
In an effort to reduce costs to our shareholders, we have
implemented a process to reduce duplicate mailings of
the fund's shareholder reports. This householding
process should allow us to mail one report to each
address where one or more registered shareholders with
the same last name reside. If you would like to have
additional reports mailed to your address, please call our
Shareholder Services area at 1 800 866-7778, or mail
your request to:
Piper Capital Management
Attn: Communications Department
222 South Ninth Street
Minneapolis, MN 55402-3804
#11530 8/96 158-96
