<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
========================================================
SMDS
========================================================
SEMI-ANNUAL REPORT
JULY 31, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
July 31, April 30,
1996 1996
----------- -----------
<S> <C> <C>
Total Net Assets $ 104,227,337 $ 112,157,399
Net Asset Value Per Share $ 25.20 $ 25.88
Shares Outstanding 4,136,563 4,333,559
Number of Shareholders 6,547 7,053
Average Size Account $ 15,920 $ 15,902
=====================================================================
</TABLE>
Portfolio Changes For the Quarter Ended July 31, 1996 (unaudited)
Major Purchases Major Sales
Enova Corp./(1)/ Associated Estates Realty Corp./(2)/
Merry Land & Investment Co., Inc./(1)/ Boston Edison Co.
Minnesota Power & Light Co./(1)/ Crown American Realty Trust
Ohio Edison Co./(1)/ General Public Utilities Corp./(2)/
PECO Energy Co./(1)/ Health Care REIT, Inc.
P P & L Resources, Inc./(1)/ Northeast Utilities /(2)/
Oklahoma Gas & Electric Co./(2)/
Orange & Rockland Utilities, Inc.
Public Service Co. of Colorado /(2)/
WPL Holdings, Inc.
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings July 31, 1996 (unaudited)
<TABLE>
<CAPTION>
Market Percent
Value of TNA
----------- --------
<S> <C> <C>
Delmarva Power & Light Co................ $5,775,000 5.5%
Colonial Properties Trust................ 5,568,750 5.3
Central Hudson Gas & Electric Corp....... 5,491,850 5.3
Health Care REIT, Inc.................... 5,312,500 5.1
U.S. West Communications Group Delaware.. 5,163,750 5.0
Puget Sound Power & Light Co............. 5,118,750 4.9
Nevada Power Co.......................... 5,093,750 4.9
National Health Investors, Inc........... 4,889,625 4.7
Rochester Gas & Electric Corp............ 4,843,750 4.7
Orange & Rockland Utilities, Inc......... 4,313,350 4.1
---------- ----
$51,571,075 49.5%
=========== ====
</TABLE>
2
<PAGE>
DEAR SHAREHOLDER:
During the past three months the debate continued as to whether the economy is
growing at an inflationary rate. Each week new data is interpreted and the
interpretation changes. We continue to forecast that the economy will grow at a
modest rate that is non-inflationary. There are enough sectors of weakness in
the economy to offset those sectors of strength. As a result, the U.S. Treasury
bond has offered yields in a range of 7.1%-6.7% for the last three months.
Following the lead of the fixed-income markets, the Dow Jones Utility average
has traded in a very narrow range of 205-220 during the last quarter. This is a
relatively low volatility market; some might call it directionless. Within the
electric utility industry, there have been significant weather patterns that
will effect 1996 earnings. The Northeastern quadrant of the country has been
especially cool in the Summer so air conditioning demand was considerably below
normal and third quarter earnings will be disappointing. Offsetting this was an
unusually hot Summer in the Western and Southwestern states. Utility earnings
from that part of the country should benefit from weather conditions.
The Boards of Directors of the Stratton Funds have determined to place all of
the Funds on the same fiscal year ending December 31, 1996. Our objective in
doing this is to reduce the cost to the Funds' holders of printing and postage
by consolidating the quarterly reports. This will begin in calendar 1997. As a
result, SMDS will have an eleventh month fiscal year rather than its normal
twelve month year ending in January 1997.
As a result of this decision it has been necessary to reposition a number of
Fund portfolio holdings to provide dividends for the current calendar year. Our
turnover ratio has picked-up as a result and is at a more normal 31% for the
first six months. Our expense ratio continues to be held down to 1%. Management
is always concerned about the ability to hold our expenses in check to benefit
the shareholders net income.
During the second fiscal quarter ended July 31, 1996, the Fund's net assets
ended at $104,227,337 and the net asset value per share declined to $25.20. The
average size of an account was $15,920. Total return performance is shown in
graphs and tables on pages 4 and 5. We call your attention to the 15 year
annualized total return performance of 11.46%. Your management and your Board of
Directors continue our commitment to building share value. We thank you for your
continued support and your referral of this Fund. As a 100% no load Fund, we
spend no shareholder money on marketing costs, so obviously your referral is
valuable to us. If you have questions regarding our Fund, please feel free to
call the Director of Shareholder Services, John Grieco at 1-800-634-5726.
Sincerely yours,
James W. Stratton Gerard E. Heffernan
Chairman President
September 6, 1996
<PAGE>
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend Income and Capital Gains Distribution Reinvested)
[LINE GRAPH APPEARS HERE]
[GRAPH APPEARS HERE]
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend Income and Capital Gains Distribution Reinvested)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Investment 9,354 10,808 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084
Reinvested Inc. Divs. 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388
Reinvested Cap. Gains
Distributions -- -- -- -- -- 503 1,043 1,015 1,018 956
----------------------------------------------------------------------------------------------------
Total Value 10,995 13,915 15,046 18,422 24,932 30,567 27,265 28,883 31,392 32,428
====================================================================================================
If Divs. and Distrbs.
We're taken in Cash:
$ Amt. Div. Inc. 924 882 1,013 1,076 1,139 1,197 1,081 1,092 1,076 1,155
$ Amt. Cap. Gains Distrib. -- -- -- -- 263 341 -- -- --
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Investment 14,609 15,701 15,060 13,039 14,383 13,228
Reinvested Inc. Divs. 26,570 31,818 33,590 32,499 39,890 38,576
Reinvested Cap. Gains
Distributions 1,156 1,242 1,192 1,032 1,138 1,047
---------------------------------------------------------
Total Value 42,335 48,761 49,842 46,570 55,411 52,851
=========================================================
If Divs. and Distrbs.
We're taken in Cash: 1,024 1,018 1,024 1,008 1,008 504 * 16,814 TOTAL DIV. INC.
$ Amt. Div. Inc. -- -- -- -- -- * 604 TOTAL CAP. GAINS
---------------------------------------------------------
</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.
4
<PAGE>
PERFORMANCE COMPARISONS
(Price Appreciation Plus Dividends & Capital Gains Distributions Reinvested)
<TABLE>
<CAPTION>
Period Ended Average Annual Aggregate
06/30/96 Total Return Total Return
- ------------ -------------- ------------
<S> <C> <C>
1 year + 12.51% + 12.51%
5 year + 8.88 + 53.03
10 year + 6.88 + 94.48
15 year + 11.46 + 409.34
</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
- ------------------------------------------------------------------------------------------------------------------------------------
1995 27.19 1.92 - + 14.3 + 9.1 + 23.4
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
5
<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 50%.
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.
6
<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.
7
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) July 31, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- --------------
<C> <S> <C>
COMMON STOCKS - 87.3%
Real Estate Commercial - 9.9%
280,000 Crown American Realty Trust....................... $ 2,310,000
165,000 Excel Realty Trust, Inc........................... 3,382,500
166,000 IRT Property Co................................... 1,556,250
339,000 Mid-America Realty Investments, Inc............... 3,051,000
--------------
10,299,750
--------------
Real Estate Diversified - 8.9%
225,000 Colonial Properties Trust......................... 5,568,750
50,000 EastGroup Properties, SBI......................... 1,075,000
75,000 Merry Land & Investment Co., Inc.................. 1,575,000
78,300 Town & Country Trust.............................. 1,047,262
--------------
9,266,012
--------------
Real Estate Health Care - 10.6%
50,000 Health & Retirement Properties Trust.............. 837,500
250,000 Health Care REIT, Inc............................. 5,312,500
153,400 National Health Investors, Inc.................... 4,889,625
--------------
11,039,625
--------------
Telecommunications - 5.0%
170,000 U.S. West Communications Group Delaware........... 5,163,750
--------------
5,163,750
--------------
Utilities - 52.9%
175,000 Boston Edison Co.................................. 3,959,375
184,600 Central Hudson Gas & Electric Corp................ 5,491,850
280,000 Delmarva Power & Light Co......................... 5,775,000
250,000 Eastern Utilities Associates...................... 3,968,750
72,600 Enova Corp........................................ 1,506,450
100,000 Minnesota Power & Light Co........................ 2,762,500
250,000 Nevada Power Co................................... 5,093,750
100,000 Ohio Edison Co.................................... 2,100,000
122,800 Orange & Rockland Utilities, Inc.................. 4,313,350
150,000 PECO Energy Co.................................... 3,525,000
160,000 P P & L Resources, Inc............................ 3,580,000
225,000 Puget Sound Power & Light Co...................... 5,118,750
250,000 Rochester Gas & Electric Corp..................... 4,843,750
100,000 WPL Holdings, Inc................................. 3,150,000
--------------
55,188,525
--------------
Total Common Stocks (cost $96,664,849)............ 90,957,662
--------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) JULY 31, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ------------
<S> <C> <C>
PREFERRED STOCKS - 1.4%
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 - 5.5%
$ 500,000 Dorchester Gas Corp. 8.50% Cv. Sub. Debs. 12/01/05 *...................... 490,460
$ 2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11 .............. 2,436,309
$ 500,000 Liberty Property Ltd. 8.00% Cv. Sub. Debs. 07/01/01 ...................... 502,500
$ 2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03 ................. 2,337,500
------------
Total Convertible Debentures (cost $5,832,732) ........................... 5,766,769
------------
SHORT-TERM NOTES - 6.3%
$ 1,914,000 General Motors Acceptance Corp. 5.20% due 08/01/96 ....................... 1,914,000
$ 2,850,000 General Electric Capital Corp. 5.25% due 08/02/96 ........................ 2,850,000
$ 1,805,000 General Electric Capital Corp. 5.35% due 08/05/96 ........................ 1,805,000
------------
Total Short-Term Notes (cost $6,569,000) ................................. 6,569,000
------------
Total Investments - 100.5% (cost $110,843,911)** ........................ 104,718,431
Liabilities in excess of cash and other assets - (0.5)% ................. (491,094)
------------
NET ASSETS - 100.0% ..................................................... $ 104,227,337
============
</TABLE>
* Fair value as determined by the Board of Directors.
**Aggregate cost for federal income tax purposes is $110,843,911; and net
unrealized depreciation is as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation.................................................... $ 2,186,997
Gross unrealized depreciation.................................................... (8,312,477)
------------
Net unrealized depreciation.................................................. $ (6,125,480)
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1996 (unaudited)
<S> <C>
ASSETS
Investments in securities at market value (identified cost $110,843,911) (Note 1)........................ $ 104,718,431
Cash..................................................................................................... 145
Dividends receivable..................................................................................... 1,006,668
Interest receivable...................................................................................... 152,670
Receivable for investment securities sold................................................................ 183,034
--------------
Total Assets........................................................................................... 106,060,948
--------------
LIABILITIES
Accrued expenses......................................................................................... 22,534
Payable for investment securities purchased.............................................................. 1,811,077
--------------
Total Liabilities...................................................................................... 1,833,611
--------------
NET ASSETS
Applicable to 4,136,563 shares; $1.00 par value; 10,000,000 shares authorized ........................... $ 104,227,337
==============
Net asset value, offering and redemption price per share
($104,227,337/4,136,563 shares)....................................................................... $ 25.20
==============
SOURCE OF NET ASSETS
Paid-in capital.......................................................................................... $ 126,762,775
Accumulated distributions in excess of net investment income............................................. (237,468)
Accumulated net realized loss on investments............................................................. (16,172,490)
Net unrealized depreciation of investments............................................................... (6,125,480)
--------------
Net Assets............................................................................................. $ 104,227,337
==============
==========================================================================================================================
STATEMENT OF OPERATIONS
6 Months Ended July 31, 1996 (unaudited)
INCOME
Dividends................................................................................................ $ 4,207,158
Interest................................................................................................. 350,218
--------------
Total Income........................................................................................... 4,557,376
--------------
EXPENSES
Advisory fees (Note 2)................................................................................... 346,280
Shareholder services fees (Note 2)....................................................................... 93,293
Registration fees (Note 2)............................................................................... 28,470
Custodian fees (Note 2).................................................................................. 20,976
Directors' fees.......................................................................................... 17,973
Administrative services fees (Note 2).................................................................... 15,000
Accounting/Pricing services fees (Note 2)................................................................ 13,000
Printing and postage fees................................................................................ 12,564
Legal fees............................................................................................... 7,211
Miscellaneous fees....................................................................................... 6,675
Taxes other than income taxes............................................................................ 5,100
Audit fees............................................................................................... 700
--------------
Total Expenses......................................................................................... 567,242
--------------
Net Investment Income.................................................................................. 3,990,134
--------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized gain on investments......................................................................... 1,683,564
Net decrease in unrealized appreciation of investments................................................... (11,164,383)
--------------
Net loss on investments................................................................................ (9,480,819)
--------------
Net decrease in net assets resulting from operations................................................. $ (5,490,685)
==============
See accompanying notes to financial statements.
</TABLE>
10
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
6 Months
Ended
July 31, Year Ended
1996 January 31,
(unaudited) 1996
------------- -------------
<S> <C> <C>
OPERATIONS
Net investment income.................................................. $ 3,990,134 $ 9,610,334
Net realized gain on investments....................................... 1,683,564 2,695,575
Net increase (decrease) in unrealized appreciation
of investments....................................................... (11,164,383) 9,893,647
--------------- -------------
Net increase (decrease) in net assets resulting from operations..... (5,490,685) 22,199,556
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.90 and $1.89 per share, respectively)............................ (3,990,134) (9,700,521)
Distributions in excess of net investment income
($.06 and $.03 per share, respectively).............................. (237,468) (133,355)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from the net change
in the number of outstanding shares (a).............................. (15,321,862) (17,164,513)
--------------- -------------
Total Decrease in Net Assets........................................ (25,040,149) (4,798,833)
NET ASSETS AT THE BEGINNING OF THE PERIOD .............................. 129,267,486 134,066,319
--------------- -------------
NET ASSETS AT THE END OF THE PERIOD
(including distributions in excess of net investment
income of $237,468 and $0, respectively)............................. $ 104,227,337 $ 129,267,486
============== =============
(a) A summary of capital share transactions follows:
<CAPTION>
6 Months Ended
July 31, 1996 Year Ended
(unaudited) January 31, 1996
------------------------------ ------------------------------
Shares Value Shares Value
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares issued...................... 149,580 $ 3,916,228 757,154 $ 19,154,193
Shares reinvested from
net investment income............ 94,003 2,474,944 239,595 6,039,536
------------ ------------- ------------ -------------
243,583 6,391,172 996,749 25,193,729
Shares redeemed.................... (825,087) (21,713,034) (1,676,173) (42,358,242)
------------ ------------- ------------ -------------
Net decrease..................... (581,504) $ (15,321,862) (679,424) $ (17,164,513)
============ ============= ============ =============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 (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 $17,856,000 of which
$341,000 expires in 1999, $13,184,000 expires in 2003 and $4,331,000
expires in 2004.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
E. 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.
F. Distributions to Shareholders - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions paid
to shareholders is determined by reference to income as determined for
income tax purposes, after giving effect to temporary differences
between the financial reporting and tax basis of assets and
liabilities, rather than income as determined for financial reporting
purposes. The Fund has made certain investments in real estate
investment trusts ("REITS") which pay dividends to their shareholders
based upon available funds from operations. It is quite common for
these dividends to exceed the REIT's taxable earnings and profits
resulting in the excess portion of such dividends being designated as
a return of capital. The Fund intends to include the gross dividends
from such REITS in its monthly distributions to its shareholders and,
accordingly, a portion of the Fund's distributions will also be
designated as a return of capital.
Note 2. - During the six months ended July 31, 1996, the Fund paid advisory fees
aggregating $346,280 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 $93,293 for
providing shareholder services, $15,000 for certain administrative services and
$13,000 for accounting/pricing services during the six months ended July 31,
1996. 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 $17,073,306 and $33,621,316, respectively, for the six months ended
July 31, 1996.
===============================================================================
12
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
6 Months
Ended Years Ended January 31,
07/31/96 -----------------------------------------------------
(unaudited) 1996 1995 1994 1993 1992
------------ -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $27.40 $24.84 $28.69 $29.91 $27.83 $23.02
--------- ---------------------- -------- ------- -------
Income From Investment Operations
---------------------------------
Net investment income......................... 0.90 1.88 1.94 1.87 1.94 1.97
Net gains (loss) on securities
(both realized and unrealized).............. (2.14) 2.60 (3.87) (1.14) 2.08 4.79
---------- ---------------------- -------- ------- -------
Total from investment operations.......... (1.24) 4.48 (1.93) 0.73 4.02 6.76
---------- ---------------------- -------- ------- -------
Less Distributions
------------------
Dividends (from net investment
income)..................................... (0.90) (1.89) (1.92) (1.94) (1.94) (1.95)
Distributions (in excess of net
investment income).......................... (0.06) (0.03) 0.00 (0.01) 0.00 0.00
---------- ---------------------- -------- ------- -------
Total distributions....................... (0.96) (1.92) (1.92) (1.95) (1.94) (1.95)
---------- ---------------------- -------- ------- -------
Net Asset Value, End of Period................. $25.20 $27.40 $24.84 $28.69 $29.91 $27.83
========== ====================== ======== ======= =======
Total Return................................... -4.62%** 18.98% -6.57% 2.22% 15.18% 30.55%
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (in 000's).......... $104,227 $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to average
net assets.................................. 1.00%* 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net investment
income to average net assets................ 7.05%* 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover rate....................... 31.39%* 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission rate paid.................. $0.0491 N/A N/A N/A N/A N/A
</TABLE>
- ----------------
* Annualized
** Six months only
See accompanying notes to financial statements.
13
<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.
14
<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 or 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.
15
<PAGE>
SMDS STRATTON MONTHLY
DIVIDEND SHARES, INC.
Directors Officers
LYNNE M. CANNON JAMES W. STRATTON
Chairman
JOHN J. LOMBARD, JR GERARD E. HEFFERNAN
President
HENRY A. RENTSCHLER JOHN A. AFFLECK
JOANNE E. KUZMA
FRANK H. REICHEL, III
MERRITT N. RHOAD, JR. Vice President
PATRICIA L. SLOAN
ALEXANDER F. SMITH Secretary and Treasurer
RICHARD W. STEVENS JAMES A. BEERS
CAROL L. ROYCE
Assistant Secretary
JAMES W. STRATTON Assistant Treasurer
Investment Advisor Transfer Agent and Dividend Paying Agent
STRATTON MANAGEMENT COMPANY FUND/PLAN SERVICES, INC.
Plymouth Meeting Executive Campus 2 W. Elm Street, P.O. Box 874
610 W. Germantown Pike, Suite 300 Conshohocken, PA 19428-0874
Plymouth Meeting, PA 19462-1050 Telephones: 610-834-3500 . 800-441-6580
Telephone: 610-941-0255
