<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
================================================================================
SMDS
================================================================================
THIRD QUARTER REPORT
OCTOBER 31, 1995
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1995 1995
---------- -----------
<S> <C> <C>
Total Net Assets................ $ 126,441,836 $ 124,664,823
Net Asset Value Per Share....... $ 26.26 $ 25.04
Shares Outstanding.............. 4,815,721 4,977,790
Number of Shareholders.......... 7,822 8,236
Average Size Account............ $ 16,165 $ 15,137
</TABLE>
==========================================================================
PORTFOLIO CHANGES FOR THE QUARTER ENDED OCTOBER 31, 1995 (UNAUDITED)
MAJOR PURCHASES MAJOR SALES
Central & South West Corp./(1)/ Allegheny Power System, Inc./(2)/
Central Hudson Gas & Electric Corp. American Health Properties, Inc.
CINergy Corp. IES Industries, Inc./(2)/
Interstate/Johnson Lane, Inc. National Health Investors, Inc.
7.75% Cv. Sub. Debs. 03/31/11 Niagara Mohawk Power Corp./(2)/
Nevada Power Co. Ohio Edison Co./(2)/
Northeast Utilities/(1)/ P P & L Resources, Inc./(2)/
Orange & Rockland Utilities, Inc. Texas Utilities Co./(2)/
Puget Sound Power & Light Co.
Rochester Gas & Electric Corp.
WPL Holdings, Inc./(1)/
/(1)/ New Holdings /(2)/ Eliminations
TEN LARGEST HOLDINGS OCTOBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET PERCENT
VALUE OF TNA
---------- ---------
<S> <C> <C>
Oklahoma Gas & Electric Co........... $ 7,200,000 5.7%
Delmarva Power & Light Co............ 6,600,000 5.2
CINergy Corp......................... 6,242,500 4.9
Pacific Telesis Group................ 6,075,000 4.8
Rochester Gas & Electric Corp........ 5,875,000 4.6
Health Care REIT, Inc................ 5,808,750 4.6
New York State Electric & Gas Corp... 5,681,250 4.5
Central Hudson Gas & Electric Corp... 5,653,375 4.5
Colonial Properties Trust............ 5,625,000 4.5
Central & South West Corp............ 5,617,500 4.4
------------ ----
$ 60,378,375 47.7%
============ ====
</TABLE>
3
<PAGE>
DEAR SHAREHOLDER:
THE ECONOMY
We continue to believe that the Federal Reserve Board will be successful in
delivering a "soft landing" to the economy. We expect growth in real GDP to
approximate 2% for the next four quarters. Certainly, there are a number of
sectors of the economy, notably autos and retail trade, that are doing poorer
than that. Offsetting this is growth in business services, exports, and capital
spending.
As a result of this outlook, we expect lower short-term interest rates. Recent
experience has shown that inflation is not an important concern. The current
inflation rate as measured by the CPI (Consumer Price Index) is running around
2.7% and measured by the CPD (Consumption Price Deflator) is running at 1.7%. We
believe that the Fed has established a program of lower interest rates but has
prolonged the most recent reduction awaiting some resolution of the Federal
Budget deficit issue. We expect to see interest rates drop by at least a quarter
of 1% by early 1996. Interest rates are an important ingredient in determining
the outlook for interest sensitive stocks such as utilities and REITs that
dominate the portfolio of SMDS.
THE REIT INDUSTRY
Real Estate Investment Trusts represent about 24% of the portfolio of your Fund.
They are divided into three major sectors: Health Care 11%, Commercial 7.7% and
Diversified 5.8%. Through the end of October 1995, the Morgan Stanley REIT Index
showed a total return of only 4.8%. This compares to the S&P Utility Index of
25.7% and the S&P 500 Index of 29.7%.
The premium dividend return of REITs over U.S. Treasuries has never been as
great as it is now. The Morgan Stanley REIT Index was yielding 171 basis points
greater than a ten-year U. S. Treasury. We continue to believe that REITs offer
better dividend growth than utility stocks. The poor recent price performance
compared to the utility index suggests that the REITs today are a source of
great investment value when other popular market indexes are hitting record
highs.
For the last five years, the number of REITs available has risen substantially.
Now there are more than two hundred companies of institutional investment appeal
to select from. Many of them operate in sectors of the real estate industry
focused either by type of property or geographic location. Long term, we think
these stocks offer entrepreneurial style management, freedom from oppressive
regulation and attractive external conditions. The wave of overbuilding that
took place in the late 80's and early 90's has ceased. Demand for space in most
categories is rapidly catching up with the supply of new space. Longer term, we
think the real estate industry is significantly undervalued and represents a
major contrarian position in our portfolio today.
4
<PAGE>
PORTFOLIO HOLDINGS
During the past fiscal quarter, we added three new securities to our portfolio,
Central & South West Corporation, Northeast Utilities and WPL Holdings. In
addition, we added to seven existing holdings within the portfolio. Our
portfolio turnover for the first nine months rose to 52% on an annualized basis,
and our ratio of annualized expenses to average net assets remained at 1.00%.
Our portfolio mix continues to be comparable to prior periods with 60.9% in
electric utility stocks.
At the end of the third fiscal quarter on October 31, 1995, the Fund's net
assets were $126,441,836 and the net asset value per share rose to $26.26. The
average size of an account rose to $16,165. Your management and board of
directors continue to be committed to building shareholder value. We thank our
shareholders for your continued enthusiastic support and for your referrals of
new shareholders. As a 100% no-load fund, with no sale charges of any kind, your
positive support is our primary marketing asset. Building assets is in every
shareholder's interest, as it will help to reduce further our annual expense
ratio. If you have any questions regarding our Fund, please feel free to call
the Director of Shareholder Services at 1-800-634-5726.
Sincerely yours,
James W. Stratton Gerard E. Heffernan
Chairman President
November 28, 1995
5
<PAGE>
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend Income and Capital Gains Distribution Reinvested)
[GRAPH OF STRATTON MONTHLY DIVIDEND SHARES APPEARS HERE]
<TABLE>
<CAPTION>
Fiscal Year Ended 1/31
----------------------------------------------------------------------------------------------------------
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Investment $9,113 9,354 10,808 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084 14,609
Reinvested Inc. Divs. $ 583 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388 26,570
Reinvested Cap. Gains
Distributions $ - - - - - - 503 1,043 1,015 1,018 956 1,156
----------------------------------------------------------------------------------------------------------
Total Value $9,696 10,995 13,915 15,046 18,422 24,932 30,567 27,265 28,883 31,392 32,428 42,335
==========================================================================================================
If Divs. abd Distribs.
Were Taken in Cash:
$ Amt. Div. Inc. $ 593 924 882 1,013 1,076 1,139 1,197 1,081 1,092 1,076 1,155 1,024
$ Amt. Cap. Gains Distrib. $ - - - - - - 263 341 - - - -
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended 1/31
-------------------------------------
1993 1994 1995 1996
-------------------------------------
<S> <C> <C> <C> <C>
Initial Investment 15,701 15,060 13,039 13,785
Reinvested Inc. Divs. 31,818 33,590 32,499 37,282
Reinvested Cap. Gains
Distributions 1,242 1,192 1,032 1,091
-------------------------------------
Total Value 48,761 49,842 46,570 52,158
=====================================
If Divs. abd Distribs.
Were Taken in Cash:
$ Amt. Div. Inc. 1,018 1,024 1,008 756
$ Amt. Cap. Gains Distrib. - - - -
-------------------------------------
</TABLE>
NOTE: If dividend income and capital gains distributions were taken in cash, the
results would be as shown above under "value of original shares."
Performance quotations represent past performance, and should not be considered
as representative of future results. The investment return and principal value
of an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
6
<PAGE>
PERFORMANCE COMPARISONS
(Price Appreciation Plus Dividends & Capital Gains Distributions Reinvested)
<TABLE>
<CAPTION>
PERIOD ENDED AVERAGE ANNUAL AGGREGATE
09/30/95 TOTAL RETURN TOTAL RETURN
- ------------ -------------- ------------
<S> <C> <C>
1 year + 16.88% + 16.88%
5 year + 11.63 + 73.35
10 year + 9.61 + 150.36
15 year + 11.83 + 435.01
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Stratton Monthly Dividend Shares Total Investment Return
Period Per Share Data Dividends & Capital Gains Reinvested
- -----------------------------------------------------------------------------------------------------------------------
Year Ended Net Asset Income Capital Gains Capital Income Total
December 31 Value Dividends Distrubutions Return Return Return
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/31/80 (inception) $19.05 - - - - -
- -----------------------------------------------------------------------------------------------------------------------
1980 17.76 $0.985 - - 6.8% + 5.2 % - 1.6 %
- -----------------------------------------------------------------------------------------------------------------------
1981 18.21 1.755 - + 2.5 + 10.8 + 13.3
- -----------------------------------------------------------------------------------------------------------------------
1982 20.06 1.67 - + 10.2 + 10.5 + 20.7
- -----------------------------------------------------------------------------------------------------------------------
1983 20.49 1.92 - + 2.1 + 9.8 + 11.9
- -----------------------------------------------------------------------------------------------------------------------
1984 22.42 2.04 - + 9.4 + 11.8 + 21.2
- -----------------------------------------------------------------------------------------------------------------------
1985 26.62 2.16 - + 18.7 + 11.2 + 29.9
- -----------------------------------------------------------------------------------------------------------------------
1986 29.21 2.28 $0.50 + 9.7 + 10.8 + 20.5
- -----------------------------------------------------------------------------------------------------------------------
1987 23.44 2.09 0.65 - 19.8 + 8.4 - 11.4
- -----------------------------------------------------------------------------------------------------------------------
1988 23.63 2.08 - + 0.8 + 9.0 + 9.8
- -----------------------------------------------------------------------------------------------------------------------
1989 25.88 2.05 - + 9.5 + 9.3 + 18.8
- -----------------------------------------------------------------------------------------------------------------------
1990 22.66 2.20 - - 12.4 + 8.6 - 3.8
- -----------------------------------------------------------------------------------------------------------------------
1991 28.31 1.95 - + 24.9 + 10.2 + 35.1
- -----------------------------------------------------------------------------------------------------------------------
1992 29.16 1.94 - + 3.0 + 7.4 + 10.4
- -----------------------------------------------------------------------------------------------------------------------
1993 29.17 1.95 - - + 6.6 + 6.6
- -----------------------------------------------------------------------------------------------------------------------
1994 23.78 1.92 - - 18.5 + 6.4 - 12.1
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The average annual total return is computed by determining the average annual
compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment. This is done
by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and taking the root of the quotient equal to the number of
years (or fractional portion thereof) covered by the computation and subtracting
one from the result.
The aggregate total return is computed by determining the aggregate compounded
rate of return during specified periods that likewise equates the initial amount
invested to the ending redeemable value of such investment.
All dividends and capital gains distributions have been reinvested on the
reinvestment dates during the period. There are no sales charges, 12b-1, or
redemption fees of any kind in Stratton Monthly Dividend Shares, Inc.
Performance quotations represent past performance, and should not be considered
as representative of future results. The investment return and principal value
of an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
7
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
STRATTON MONTHLY DIVIDEND SHARES AND THE DOW JONES UTILITY INDEX*
TEN YEAR PERFORMANCE (10/31/85 - 10/31/95)
[GRAPH OF STRATTON MONTHLY DIVIDEND SHARES APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C>
1 Year 5 Year 10 Year
17.07% 11.61% 9.17%
</TABLE>
<TABLE>
<CAPTION>
SMDS DOW JONES
UTILITIES
<S> <C> <C>
1985 $10,000 $10,000
1986 $13,390 $14,200
1987 $11,651 $13,365
1988 $12,936 $14,949
1989 $15,153 $18,864
1990 $13,887 $19,639
1991 $18,244 $20,939
1992 $20,955 $22,734
1993 $24,144 $26,286
1994 $20,542 $21,154
1995 $24,048 $26,737
</TABLE>
*THE DOW JONES UTILITY INDEX IS AN UNMANAGED INDEX
<PAGE>
DISCUSSION OF INVESTMENT PROCESS AND PERFORMANCE
Stratton Monthly Dividend Shares' objective is to seek a high rate of return
from dividend and interest income on its investments in common stocks and
securities convertible into common stocks. The Fund will invest at least 80% of
its assets in equity securities. The Fund must invest at least 25% of its
assets in securities of public utility companies engaged in the production,
transmission or distribution of electric, energy, gas, water or telephone
services. The Fund may invest in Real Estate Investment Trusts.
From an overall equity universe of more than 2,500 companies, Stratton
Management through computer techniques screens down to about 100 companies by
selecting stocks which possess a dividend yield of at least 6%. Our second
screen then reduces that universe to approximately 60 stocks by measuring
additional yield characteristics such as dividend growth rates and dividend
coverage. The portfolio contains approximately thirty to forty companies that
meet these tests. Fundamental security analysis is applied to those companies
on a continuing basis. The final selection of stocks for the portfolio of
Stratton Monthly Dividend Shares is made by James W. Stratton, who has served as
portfolio manager for fifteen years. In his absence a back-up portfolio
manager, Gerard E. Heffernan serves.
The volatility of the portfolio as measured by the Beta of the stocks is
considerably below average when compared to other stock mutual funds. By
combining high dividend yields and lower than average price volatility, the Fund
tries to produce good relative performance in up markets and superior relative
performance in down markets.
The Fund is likely to experience superior relative performance in periods that
accompany declining interest rates. The Fund is likely to be affected
negatively in performance in periods of rising interest rates. Conditions
relating to the Fund's performance over the past twelve months and our outlook
for the next twelve months, are presented in the President's letter on pages 4
and 5.
9
<PAGE>
STRATTON MONTHLY DIVIDEND SHARES
(QUESTIONS AND ANSWERS)
WHAT IS THE FUND'S GOAL AND INVESTMENT STRATEGY?
SMDS seeks to provide a high level of current monthly income and to offer the
potential for long-term capital appreciation. In order to achieve these goals,
the Fund invests substantially all of its assets in high income-producing U.S.
equity securities. The Fund normally remains fully invested at all times and
- ------
its annual portfolio turnover rate ranges from 20% to 40%.
WHO SHOULD INVEST?
SMDS is intended for the income-oriented stock investor. The Fund may be
particularly helpful to "retired individuals" needing a steady stream of income
to meet living expenses and also wanting moderate long-term growth to help
offset inflation.
HOW DIVERSIFIED IS THE PORTFOLIO OF THE FUND?
The portfolio normally holds between 30 to 40 investment positions comprised of
the following types of securities:
UTILITY STOCKS - At least 25% of the Fund's portfolio will be invested in
--------------
equity securities of public utility companies. In the past, the generally
durable and gradually rising dividends of electric utility stocks have
played a major role in helping SMDS achieve its high income objective.
However, past performance is no guarantee of future results.
HIGH DIVIDEND COMMON STOCKS - In order to broaden portfolio
---------------------------
diversification, the Fund will attempt to invest in high dividend paying
stocks outside of the utility industry. In the past, higher yielding
equity REITs (Real Estate Investment Trusts) have comprised the most
significant portion of the non-utility investments.
CONVERTIBLE SECURITIES - Portfolio and industry diversification are
----------------------
broadened further with convertible preferred stocks and convertible bonds.
Convertible securities offer higher yields than their issuer's underlying
common stock but still have similar growth potential.
WHAT HAS BEEN THE AVERAGE "INCOME RETURN" OF THE FUND?
SMDS' primary investment goal is to produce an attractive current income return
regardless of the changes occurring in the financial markets. Since inception,
the Fund has consistently produced positive annual income returns ranging from
--------
5.2% to 11.8%. Of course, past performance is no guarantee of future results.
10
<PAGE>
WHAT HAS BEEN THE "CAPITAL RETURN" PATTERN OF THE FUND?
The Fund's share price is generally linked to the movement of utility stocks,
which like bonds, are most sensitive to changes in interest rates. Not
surprisingly, SMDS has experienced its highest capital returns during periods of
declining interest rates. Conversely, during periods of rising interest rates
the Fund's shares have been vulnerable to price declines.
HOW VOLATILE IS THE FUND?
SMDS is considered to be a relatively "low-risk" investment by many independent
mutual fund rating services because in the past its relative share price
volatility has been well below that of the general stock market (S&P 500). In
addition, the conservative nature of its security holdings and yield-based
investment process should help reduce capital depreciation during broad stock
market declines. The Fund's portfolio "beta" (a measure of relative volatility)
is among the lowest among stock mutual funds.
WHO IS THE FUND'S INVESTMENT ADVISOR?
Stratton Management Company in Plymouth Meeting, Pennsylvania has been the
Investment Advisor to the Fund since 1980. James W. Stratton, the chief
investment officer, is a nationally recognized proponent of yield-based
investing with over 30 years of investment management experience. Mr. Stratton
holds a B.S. in Geophysics from Penn State University and an M.B.A. from The
Harvard Business School.
WHAT IS THE BEST APPROACH FOR INVESTING IN SMDS?
Ideally, SMDS should be part of a soundly balanced investment program that
includes stock, bond and money market investments. Instead of attempting to
"time" the market, we recommend a long-term dollar-cost-averaging approach.
---------------------
Dollar-cost-averaging requires a continuous investment in securities regardless
of fluctuating price levels. Although this strategy does not assure a profit or
protect against losses in a declining market, it can help lower the average cost
of your shares. This can increase your return if the stock price moves higher.
-------------------------------------------------------------
For dollar-cost-averaging to be successful, investors must have the financial
ability to continue making purchases over an extended market cycle. In
addition, one must be temperamentally well suited for investing during periods
of declining share prices.
WHAT ARE THE ADVANTAGES OF REINVESTING DIVIDENDS?
Having the Fund's monthly dividends automatically reinvested enables you to
purchase additional shares at regular intervals, similar to dollar-cost-
averaging. Monthly dividend reinvestment helps systematically accumulate shares
and may improve the wealth building affects of a continuous investment strategy.
11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (UNAUDITED) OCTOBER 31,1995
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------- -------- ----------------
<S> <C> <C>
COMMON STOCKS - 90.2%
REAL ESTATE COMMERCIAL - 7.7%
330,000 Crown American Realty Trust................................$ 2,516,250
165,000 Excel Realty Trust, Inc. .................................. 3,114,375
166,000 IRT Property Co. .......................................... 1,577,000
324,000 Mid-America Realty Investments, Inc. ...................... 2,551,500
---------------
9,759,125
---------------
REAL ESTATE DIVERSIFIED - 5.8%
30,000 Associated Estates Realty Corp. ........................... 615,0000
225,000 Colonial Properties Trust ................................. 5,625,000
50,000 EastGroup Properties, SBI ................................. 1,050,000
---------------
7,290,000
---------------
REAL ESTATE HEALTH CARE - 11.0%
154,400 American Health Properties, Inc. .......................... 3,184,500
309,800 Health Care REIT, Inc. .................................... 5,808,750
163,400 National Health Investors, Inc. ........................... 4,902,000
---------------
13,895,250
---------------
TELECOMMUNICATIONS - 4.8%
200,000 Pacific Telesis Group ..................................... 6,075,000
---------------
UTILITIES - 60.9%
200,000 Boston Edison Co. ......................................... 5,475,000
210,000 Central & South West Corp. ................................ 5,617,500
184,600 Central Hudson Gas & Electric Corp. ....................... 5,653,375
220,000 CINergy Corp. ............................................. 6,242,500
300,000 Delmarva Power & Light Co. ................................ 6,600,000
100,000 General Public Utilities Corp. ............................ 3,125,000
250,000 Nevada Power Co. .......................................... 5,468,750
225,000 New York State Electric & Gas Corp. ....................... 5,681,250
175,000 Northeast Utilities ....................................... 4,331,250
180,000 Oklahoma Gas & Electric Co. ............................... 7,200,000
150,000 Orange & Rockland Utilities, Inc. ......................... 5,268,750
100,000 Public Service Co. of Colorado ............................ 3,412,500
225,000 Puget Sound Power & Light Co. ............................. 5,118,750
250,000 Rochester Gas & Electric Corp. ............................ 5,875,000
65,000 WPL Holdings, Inc. ........................................ 1,982,500
---------------
77,052,125
---------------
Total Common Stocks (cost $111,290,336) ................... 114,071,500
---------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (UNAUDITED) OCTOBER 31,1995
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------- -------- --------------
<S> <C> <C>
PREFERRED STOCKS - 1.1%
100,000 Psychiatric Group Preferred Depositary Shares ......................$ 1,425,000
--------------
(each depositary share represents 1/10th of a share of
American Health Properties Psychiatric Group Pfd. Stock)
Total Preferred Stocks (cost $1,777,330) ........................... 1,425,000
--------------
PRINCIPAL
AMOUNT
- ----------
CONVERTIBLE DEBENTURES - 4.7%
$ 500,000 Dorchester Gas Corp. 8.50% Cv. Sub. Debs. 12/01/05 *................ 469,040
$ 2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11 ........ 2,313,330
$ 1,000,000 Liberty Property Ltd. 8.00% Cv. Sub. Debs. 07/01/01 ................ 1,035,000
$ 2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03 ........... 2,087,500
--------------
Total Convertible Debentures (cost $6,332,732) ..................... 5,904,870
--------------
SHORT-TERM NOTES - 2.9%
$ 1,180,000 Ford Motor Credit Company 5.71% due 11/01/95 ....................... 1,180,000
$ 1,000,000 Ford Motor Credit Company 5.72% due 11/02/95 ....................... 1,000,000
$ 1,525,000 Ford Motor Credit Company 5.78% due 11/03/95 ....................... 1,525,000
--------------
Total Short-Term Notes (cost $3,705,000) ........................... 3,705,000
--------------
TOTAL INVESTMENTS - 98.9% (COST $123,105,398)**..................... 125,106,370
CASH AND OTHER ASSETS, LESS LIABILITIES - 1.1%...................... 1,335,466
--------------
NET ASSETS - 100.0%.................................................$ 126,441,836
==============
* Fair value as determined by the Board of Directors.
**Aggregate cost for federal income tax purposes is $123,105,398; and net unrealized appreciation
is as follows:
Gross unrealized appreciation.......................................$ 7,925,801
Gross unrealized depreciation....................................... (5,924,829)
--------------
Net unrealized appreciation.......................................$ 2,000,972
==============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities at market value (identified cost $123,105,398) (Note 1)..$ 125,106,370
Cash............................................................................... 115,097
Dividends receivable............................................................... 1,202,932
Interest receivable................................................................ 88,552
--------------
Total Assets................................................................... 126,512,951
--------------
LIABILITIES
Payable for securities purchased................................................... 27,410
Accrued expenses................................................................... 36,570
Other liabilities.................................................................. 7,135
--------------
Total Liabilities.............................................................. 71,115
--------------
NET ASSETS
Applicable to 4,815,721 shares; $1.00 par value; 10,000,000 shares authorized .....$ 126,441,836
==============
Net asset value, offering and redemption price per share
($126,441,836 / 4,815,721 shares)...............................................$ 26.26
==============
SOURCE OF NET ASSETS
Paid-in capital....................................................................$ 144,803,625
Accumulated distributions in excess of net investment income....................... (217,911)
Accumulated net realized loss on investments....................................... (20,144,850)
Net unrealized appreciation of investments......................................... 2,000,972
--------------
Net Assets.....................................................................$ 126,441,836
==============
====================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
9 Months Ended October 31, 1995 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
INCOME
Dividends...........................................................................$ 7,402,925
Interest............................................................................ 821,336
--------------
Total Income..................................................................... 8,224,261
--------------
EXPENSES
Advisory fees (Note 2).............................................................. 598,302
Shareholder services fees (Note 2).................................................. 175,968
Custodian fees (Note 2)............................................................. 32,617
Registration fees (Note 2).......................................................... 31,841
Printing and postage fees........................................................... 30,219
Directors' fees..................................................................... 25,716
Administrative services fees (Note 2)............................................... 22,500
Accounting/Pricing services fees (Note 2)........................................... 19,500
Legal fees.......................................................................... 14,415
Miscellaneous fees.................................................................. 11,531
Audit fees.......................................................................... 11,143
Taxes other than income taxes....................................................... 5,887
--------------
Total Expenses................................................................... 979,639
--------------
Net Investment Income......................................................... 7,244,622
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments.................................................... 406,779
Net increase in unrealized appreciation of investments.............................. 6,855,716
--------------
Net gain on investments.......................................................... 7,262,495
--------------
Net increase in net assets resulting from operations..........................$ 14,507,117
==============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
9 Months
Ended
October 31, Year Ended
1995 January 31,
(unaudited) 1995
-------------- -------------
<S> <C> <C>
OPERATIONS
Net investment income...............................................$ 7,244,622 $ 10,426,589
Net realized gain (loss) on investments............................. 406,779 (17,833,712)
Net increase (decrease) in unrealized appreciation (depreciation)
of investments..................................................... 6,855,716 (3,842,840)
-------------- -------------
Net increase (decrease) in net assets resulting from operations... 14,507,117 (11,249,963)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($1.38 and $1.92 per share, respectively).......................... (7,244,622) (10,336,402)
Distributions in excess of net investment income
($.06 and $.00 per share, respectively)............................ (308,098) --
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from the net change
in the number of outstanding shares (a)............................ (14,578,880) (10,145,399)
-------------- -------------
Total Decrease in Net Assets...................................... (7,624,483) (31,731,764)
NET ASSETS AT THE BEGINNING OF THE PERIOD............................ 134,066,319 165,798,083
-------------- -------------
NET ASSETS AT THE END OF THE PERIOD
(including distributions in excess of net investment
income of $217,911 and undistributed net
investment income of $90,187, respectively)...... .................$ 126,441,836 $ 134,066,319
============== =============
</TABLE>
<PAGE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
9 Months Ended
October 31, 1995 Year Ended
(unaudited) January 31, 1995
----------------------------- --------------------------------
Shares Value Shares Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares issued............... 620,279 $ 15,470,260 1,506,670 $ 37,662,221
Shares reinvested from
net investment income.... 188,397 4,679,590 252,999 6,370,235
------------ ------------ ------------ -------------
808,676 20,149,850 1,759,669 44,032,456
Shares redeemed............. (1,390,446) (34,728,730) (2,141,485) (54,177,855)
------------ ------------ ------------ -------------
Net decrease............. (581,770) $(14,578,880) (381,816) $ (10,145,399)
============ ============ ============ =============
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995 (UNAUDITED)
NOTE 1. - Significant Accounting Policies. Stratton Monthly Dividend Shares,
Inc. (the "Fund") is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Fund's
objective is to seek a high rate of return from dividend and interest income on
its investments in common stock and securities convertible into common stock.
It will seek its objective through investment of at least 25% of assets in
public utility companies engaged in the production, transmission or distribution
of electric, energy, gas, water or telephone services. Due to the inherent risk
of any type of investment, however, there can be no assurance that the objective
of the Fund will be achieved. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A. Security valuation - Investments in securities traded on a national
securities exchange are valued at the last reported sales price on the
primary exchange on which they are traded on the valuation date. Securities
not listed or not traded are valued at the mean of the bid and ask price.
Illiquid securities and other securities for which market valuations are
not available are valued by or at the direction of the Board of Directors.
Short-term money market instruments which have a maturity of 60 days or
less are valued at amortized cost which approximates market value.
B. Determination of gains or losses on sales of securities - Gains or losses
on the sale of securities are calculated for accounting and tax purposes on
the identified cost basis.
C. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required. The
Fund has a capital loss carryover available to offset future capital gains,
if any, of approximately $13,525,000 of which $341,000 expires in 1999 and
$13,184,000 expires in 2003.
D. Other - Security transactions are accounted for on the date the securities
are purchased or sold. Interest income is recorded on the accrual basis and
dividend income on the ex-dividend date. Dividends and distributions to
shareholders are recorded on the ex-dividend date.
The Fund's dividends from net investment income are based on estimates of
earnings for the fiscal year. At October 31, 1995, dividends from net
investment income exceed current net investment income. It is anticipated
that dividends from net investment income will not exceed net investment
income at fiscal year end.
NOTE 2. - During the nine months ended October 31, 1995, the Fund paid advisory
fees aggregating $598,302 to Stratton Management Company, (the"Advisor").
Management services are provided by the Advisor under an agreement whereby the
Advisor furnishes all investment advice, office space and facilities to the Fund
and pays the salaries of the Fund's officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, the Fund pays a monthly fee to the
Advisor at an annual rate of 5/8 of 1% of the daily net asset value of the Fund
for such month. The Advisor has voluntarily agreed to waive $15,000 annually of
the compensation due it under the agreement to offset a significant portion of
the cost of certain administrative responsibilities delegated to Fund/Plan
Services, Inc. Because of certain undertakings to comply with various state
securities laws, if in any fiscal year the expenses of the Fund (excluding
taxes, brokerage commissions and interest) exceed 2 1/2% of the first $30
million of the Fund's average net assets, 2% of the next $70 million and 1 1/2%
of the remaining, the Advisor shall reimburse the Fund for such excess. Certain
officers and directors of the Fund are also officers and directors of the
Advisor. None of the Fund's officers receives compensation from the Fund.
The Fund's Transfer Agent, Fund/Plan Services, Inc. ("Fund/Plan"), is a wholly-
owned subsidiary of FinDaTex, Inc. Certain directors and officers of the Fund
are shareholders of FinDaTex, Inc. Fund/Plan received fees of $175,968 for
providing shareholder services, $22,500 for certain administrative services and
$19,500 for accounting/pricing services during the nine months ended October 31,
1995. Pursuant to an agreement between The Bank of New York, (the "Custodian"),
and Fund/Plan, the Custodian reallows a portion of its custody fee to Fund/Plan
for certain services delegated to Fund/Plan. The amount is not readily
determinable. Fund/Plan Broker Services, Inc. serves as the Fund's principal
underwriter and receives no fees for services in assisting in sales of the
Fund's shares but does receive an annual fee of $3,000 for its services in
connection with the registration of the Fund's shares under state securities
laws.
NOTE 3. - Purchases and sales of securities, excluding short-term notes,
aggregated $47,412,399 and $60,248,365, respectively, for the nine months ended
October 31, 1995.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
9 MONTHS
ENDED
10/31/95 YEARS ENDED JANUARY 31,
--------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
----------- ----------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02 $ 24.50
---------- ----------- ---------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment income............................. 1.38 1.94 1.87 1.94 1.97 2.05
Net gains (loss) on securities
(both realized and unrealized)................... 1.48 (3.87) (1.14) 2.08 4.79 (1.33)
---------- ----------- ---------- --------- -------- --------
Total from investment operations............... 2.86 (1.93) 0.73 4.02 6.76 0.72
---------- ----------- ---------- --------- -------- --------
LESS DISTRIBUTIONS
------------------
Dividends (from net investment
income).......................................... (1.38) (1.92) (1.94) (1.94) (1.95) (2.20)
Distributions (in excess of net
investment income)............................... (0.06) 0.00 (0.01) 0.00 0.00 0.00
Total distributions............................. ---------- ----------- ---------- --------- -------- --------
(1.44) (1.92) (1.95) (1.94) (1.95) (2.20)
---------- ----------- ---------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD..................... $ 26.26 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02
========== =========== ========== ========= ======== ========
TOTAL RETURN....................................... 12.00% ** -6.57% 2.22% 15.18% 30.55% 3.30%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in 000's).............. $ 126,442 $134,066 $165,798 $98,227 $45,566 $31,178
Ratio of expenses to average
net assets....................................... 1.00% * 1.08% 0.99% 1.10% 1.23% 1.27%
Ratio of net investment
income to average net assets..................... 7.43% * 7.71% 6.12% 6.74% 7.63% 8.79%
Portfolio turnover rate........................... 52.06% * 39.50% 19.15% 35.94% 43.55% 14.00%
</TABLE>
_________________
* Annualized
** Nine months only
See accompanying notes to financial statements .
17
<PAGE>
SHAREHOLDER INFORMATION
MINIMUM INVESTMENT
- ------------------
The minimum amount for the initial purchase of shares of Stratton Monthly
Dividend Shares is $2,000. Subsequent purchases may be made in amounts of $100
or more.
TELEPHONE EXCHANGE
- ------------------
Shares of Stratton Monthly Dividend Shares may be exchanged by telephone for
shares of the other funds managed by Stratton Management Company, Stratton
Growth Fund, Inc. or Stratton Small-Cap Yield Fund, if a special authorization
form has been completed and is on file with the Transfer Agent in advance.
Exchanges will only be permitted when the securities of both funds involved are
registered in the state of the investor's residence. Stratton Monthly Dividend
Shares reserves the right to suspend the exchange privilege at any time. A
Prospectus of Stratton Growth Fund or Stratton Small-Cap Yield Fund should be
obtained and read prior to making any such exchange.
INCOME DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
- -----------------------------------------------
Stratton Monthly Dividend Shares expects to make monthly distributions of all
net investment income, and an annual distribution of any net realized capital
gains.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Investors who either own or purchase shares of Stratton Monthly Dividend Shares
having a value of $10,000 or more may elect as another option to withdraw funds
on a regular basis from their account on a monthly, quarterly, semi-annual or
annual basis in amounts of $50 or more.
SHARE PRICE INFORMATION
- -----------------------
The daily share price of Stratton Monthly Dividend Shares can be found in the
mutual fund section of most major daily newspapers as well as The Wall Street
Journal and Investor's Daily, where the Fund is listed under Stratton Funds as
Dividend or Monthly Dividend. The Fund's stock ticker symbol is STMDX.
RETIREMENT PLANS
- ----------------
Stratton Monthly Dividend Shares' IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
18
<PAGE>
GENERAL INFORMATION ON SMDS
- ---------------------------
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Fund's "Distributor":
FUND/PLAN BROKER SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874
Telephone: 800-634-5726
EXISTING SHAREHOLDER ACCOUNT SERVICES
- -------------------------------------
Shareholders seeking information regarding their accounts and other Fund
services, and shareholders executing redemption requests, should continue to
call or write our "Transfer Agent and Dividend Paying Agent":
FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874
Telephones: 610-834-3500 . 800-441-6580
INVESTMENT PORTFOLIO ACTIVITIES
- -------------------------------
Questions regarding Stratton Monthly Dividend Shares' investment portfolio
should be directed to the Fund's "Investment Advisor":
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
ADDITIONAL PURCHASES ONLY to existing accounts should be mailed to a separate
- -------------------------
lock box unit:
C/O FUND/PLAN SERVICES, INC.
P.O. Box 412797, Kansas City, MO 64141-2797
This report is authorized for distribution to shareholders and to others who
have received a copy of the Prospectus of Stratton Monthly Dividend Shares,
Inc.
19
<PAGE>
SMDS STRATTON MONTHLY
DIVIDEND SHARES, INC.
DIRECTORS
LYNNE M. CANNON
JOHN J. LOMBARD, JR.
ROSE J. RANDALL
HENRY A. RENTSCHLER
MERRITT N. RHOAD, JR.
ALEXANDER F. SMITH
RICHARD W. STEVENS
JAMES W. STRATTON
OFFICERS
JAMES W. STRATTON
Chairman
GERARD E. HEFFERNAN
President
JOHN A. AFFLECK
JOANNE E. KUZMA
FRANK H. REICHEL, III
Vice President
PATRICIA L. SLOAN
Secretary and Treasurer
JAMES A. BEERS
CAROL L. ROYCE
Assistant Secretary
Assistant Treasurer
INVESTMENT ADVISOR
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
TRANSFER AGENT AND DIVIDEND PAYING AGENT
FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874
Conshohocken, PA 19428-0874
Telephones: 610-834-3500 . 800-441-6580
