<PAGE>
STRATTON
SMALL-CAP
YIELD FUND
================================================================================
SSCY
================================================================================
THIRD QUARTER REPORT
DECEMBER 31, 1995
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ -------------
<S> <C> <C>
Total Net Assets........... $18,490,841 $17,030,179
Net Asset Value Per Share.. $ 31.52 $ 30.04
Shares Outstanding......... 586,635 566,957
Number of Shareholders..... 921 951
Average Size Account....... $ 20,077 $ 17,908
</TABLE>
- --------------------------------------------------------------------------------
PORTFOLIO CHANGES For the Quarter Ended December 31, 1995 (unaudited)
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
<S> <C>
Bankers Corp. (Perth Amboy, NJ)/(1)/ Blair Corp./(2)/
Camden Property Trust/(1)/ Developers Diversified Realty Corp./(2)/
Coca-Cola Bottling Co. Consolidated/(1)/ Knape & Vogt Manufacturing Co./(2)/
Commercial Intertech Corp. Manufactured Home Communities, Inc./(2)/
Harleysville Group, Inc. (PA) New England Business Service, Inc./(2)/
Helix Technology Corp./(1)/
MacNeal-Schwendler Corp.
Riviana Foods, Inc. (DE)/(1)/
Schweitzer-Manduit International, Inc./(1)/
Winnebago Industries, Inc.
/(1)/ New Holdings /(2)/ Eliminations
</TABLE>
TEN LARGEST HOLDINGS December 31, 1995 (unaudited)
<TABLE>
<CAPTION>
MARKET PERCENT
VALUE OF TNA
---------- --------
<S> <C> <C>
Vigoro Corp. (The)................ $741,000 4.0%
American Business Products, Inc... 712,500 3.9
Anthony Industries, Inc........... 575,000 3.1
Technitrol, Inc................... 568,750 3.1
MacNeal-Schwendler Corp........... 560,000 3.0
Roanoke Electric Steel Corp....... 498,750 2.7
Carpenter Technology Corp......... 493,500 2.7
Shared Medical Systems Corp....... 489,375 2.6
Harleysville Group, Inc. (PA)..... 485,625 2.6
True North Communications, Inc.... 462,500 2.5
--------- ----
$5,587,000 30.2%
========== ====
</TABLE>
2
<PAGE>
DEAR SHAREHOLDER:
Your Fund completed its third fiscal quarter on December 31, 1995 ending with a
net asset value of $31.52. Helped by a strong market and additions to accounts,
total net assets have grown to $18,490,841. Our number of shareholder accounts
totaled 921 at calendar year-end with an average account size of $20,077.
We remain invested in a diversified list of holdings across 10 different
industries. Your portfolio is comprised of small companies all of which were
under $500 million in market value at the time of purchase. The average market
capitalization of the stocks in the portfolio is approximately $300 million. We
have added several new positions to the portfolio bringing the total number of
issues in the Fund to 60. Our annualized portfolio turnover fiscal year-to-date
is 35%.
At the end of the quarter the portfolio was 95% invested with most of the
remaining cash reserves held in commercial paper. Our industry mix has stayed
primarily the same since last quarter with Banking, our largest single industry,
at 19% of total net assets. We added to the noncyclical sectors of the portfolio
as we became more cautious about the economic outlook. Industrial Companies now
comprise 18% of net assets. Consumer Products are 17% of the portfolio.
Technology and Insurance are the next largest at 12% and 11%, respectively. We
hold 6% in REITs which help provide additional income stability to the
portfolio.
Your Fund outperformed the Russell 2000 for the quarter returning 5.81% as
compared with the Russell's 2.17% return. Fiscal year-to-date your Fund has also
beat the Russell index recording a 23.85% gain versus 22.78%. Performance has
been helped along by a strong showing from our financial holdings in the banking
and insurance sectors. We were also aided by another corporate takeover.
Fertilizer manufacturer Vigoro Corp. agreed to be acquired by another fertilizer
concern, IMC Global, Inc.
The economy struggled through the fourth quarter as GDP growth appears to have
slowed significantly. Despite waning consumer confidence and slightly higher
unemployment, we remain optimistic about the stock market near term. The primary
reason for our optimism is our outlook for lower interest rates. Subdued
inflation fears and recent easing moves by the Federal Reserve Board could push
long-term interest rates below 6%. Two other factors are positively affecting
the stock market. Demand for stocks has grown as companies have replaced defined
benefit plans with defined contribution plans such as 401(k)'s. From the supply
side, in this economic cycle, companies have avoided making large capacity
additions and instead bought other companies or in many cases bought back their
own stock thus reducing the outstanding supply of equities. Given this positive
environment, your portfolio is fully invested to maximize total return to the
shareholder while owning only established dividend-paying entities.
The Fund's Directors declared the third quarterly dividend at the rate of $0.26
per share payable on December 22 to stockholders of record as of December 15,
1995. We welcome all of our new shareholders to the Fund and look forward to
your continued support. As a 100% no load fund, referrals by our existing
shareholders are an important part of growing the Fund's assets. Should you have
any questions regarding your Fund you may contact us at 1-800-578-8261.
Sincerely yours,
James W. Stratton Frank H. Reichel, III
Chairman President
February 6, 1996
3
<PAGE>
STRATTON SMALL-CAP YIELD FUND'S INVESTMENT PROCESS
WHAT IS THE FUND'S OBJECTIVE?
Stratton Small-Cap Yield Fund's objective is to achieve both dividend income and
capital appreciation by investing in dividend paying small capitalization
companies. We attempt to purchase companies whose recent and future earnings
power give them the potential for higher valuations and continued dividend
growth.
WHAT IS THE PHILOSOPHY USED IN MANAGING STRATTON SMALL-CAP YIELD FUND?
This is an all equity mutual fund which invests in the common stocks of small
but established dividend paying companies. The primary criterion for stock
selection centers around the dividend paying ability of the companies. We feel
that companies who regularly increase their dividend have superior appreciation
potential at reasonable levels of risk. Furthermore, given the higher
volatility of small capitalization stocks a diversified portfolio is warranted.
HOW DIVERSIFIED IS THE PORTFOLIO OF THE FUND?
The Fund will normally be invested in ten to fifteen industry groups with no
more than 25% in any one industry. We diversify into a variety of industries
that offer sufficiently high yielding investment opportunities as well as growth
potential. Right now our three largest industries are Banking 19%, Industrial
18% and Consumer Products 17%. In order to achieve the necessary
diversification within those industries, we envision holding between 50 and 75
securities in total.
WHAT KIND OF VOLATILITY DOES THIS PORTFOLIO HAVE?
The portfolio of Stratton Small-Cap Yield Fund should have one of the lowest
"beta's" (a measure of volatility) of any of its small-cap fund peers. The high
dividend component and the established earnings stream of the securities we own
typically helps to reduce share price fluctuations within the small-cap
universe.
WHAT IS THE TURNOVER RATIO OF THE PORTFOLIO?
We expect turnover to remain relatively low as we continually add to positions
in the portfolio. Because small company stocks are often less frequently traded
than their larger counterparts, we act only when the fundamental earnings
picture has changed dramatically. This avoids incurring the relatively high
transactions costs associated with replacing a position in the portfolio. A
good target for the turnover ratio would be 40% annually.
4
<PAGE>
DOES STRATTON SMALL-CAP YIELD FUND PAY MUCH ATTENTION TO MARKET TIMING?
Because our objective is to produce above-average rates of current income, we
generally remain fully invested at all times in dividend paying securities.
Except during times of large cash inflows to the Fund, our cash position will
vary between 0-10% depending upon available investment opportunities.
WHERE DO YOU OBTAIN THE RESEARCH DATA ON THE COMPANIES THAT YOU OWN OR ARE
CONSIDERING FOR PURCHASE?
The quantitative research is performed in-house by our own staff. Once we have
identified industries and companies of interest, we seek the best regional
analysts in the investment brokerage community to provide us with additional
input. We like to have multiple sources of research. Our professional staff are
portfolio generalists rather than industry specialists.
WHAT QUANTITATIVE DISCIPLINES DO YOU USE IN PURCHASING COMMON STOCKS?
From the overall equity universe of 5,000 companies, we screen down to about 400
companies by focusing on stocks with a market capitalization under $500 million
and those which possess a dividend yield equal to or greater than that on the
S&P 500 average. Our second step reduces the universe to approximately 80
stocks by screening for additional yield characteristics such as dividend growth
rates and dividend coverage.
HOW DO YOU SELECT COMPANIES WITHIN THE HIGH YIELD UNIVERSE?
Our third review involves fundamental analysis of such important characteristics
as the outlook for earnings and cash flow, management strengths and industry
competitive position. This reduces the Stratton Small-Cap Yield Fund's buy
candidate list to approximately 20 stocks. These stocks are available for
addition to the Fund's portfolio.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500, exceed
savings account yields and be approximately twice the yield of the average
small-cap company.
. Approximately 60 companies are held.
. By combining high dividend yields and underlying low price volatility
(Beta), Stratton Small-Cap Yield seeks to produce good relative performance
in up markets and superior relative performance in down markets.
5
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ---------- -------- ------------
<S> <C> <C>
COMMON STOCKS - 95.1%
BANKING - 19.0%
10,000 Affiliated Community Bancorp ..................... $ 173,750
7,500 American Bank of Connecticut ..................... 204,375
10,000 Bankers Corp. (Perth Amboy, NJ) .................. 162,500
11,300 California State Bank (Covina, CA) ............... 149,725
4,000 CCB Financial Corp. .............................. 222,000
8,000 Centura Banks, Inc. (NC) ......................... 281,000
7,000 Colonial BancGroup, Inc. ......................... 225,750
8,900 Commerce Bancorp, Inc. (NJ) ...................... 196,913
6,500 Community Bank System, Inc. ...................... 208,000
9,900 Eagle Financial Corp. ............................ 259,875
20,000 First Essex Bancorp, Inc. ........................ 227,500
9,000 First Financial Holdings, Inc. ................... 173,250
4,500 Firstbank of Illinois Co. ........................ 138,937
5,000 Home Financial Corp. (Hollywood, FL) ............. 77,500
12,000 Interchange Financial Services Corp. ............. 252,000
10,000 Medford Savings Bank ............................. 215,000
10,000 Reliance Bancorp, Inc. ........................... 146,250
6,000 United Carolina Bancshares Corp. ................. 202,500
------------
3,516,825
------------
BUSINESS SERVICES - 7.4%
25,000 American Business Products, Inc. ................. 712,500
15,000 PMC Capital, Inc. ................................ 189,375
25,000 True North Communications, Inc. .................. 462,500
------------
1,364,375
------------
CONSUMER PRODUCTS - 17.0%
25,000 Anthony Industries, Inc. ......................... 575,000
13,000 Coca-Cola Bottling Co. Consolidated .............. 455,000
10,000 International Multifoods Corp. ................... 201,250
30,000 Jackpot Enterprises, Inc. ........................ 348,750
15,000 Riviana Foods, Inc. (DE) ......................... 198,750
5,000 Schweitzer-Manduit International, Inc. ........... 115,625
13,000 Sturm, Ruger & Co., Inc. ......................... 355,875
6,000 Velcro Industries, N.V. .......................... 367,500
6,000 WD-40 Co. ........................................ 246,000
35,000 Winnebago Industries, Inc. ....................... 271,250
------------
3,135,000
------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (UNAUDITED) DECEMBER 31, 1995
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- ------------
<S> <C> <C>
COMMON STOCKS - 95.1% (continued)
ENERGY - 1.7%
25,000 Quaker State Corp. ............................... $ 315,625
-----------
INDUSTRIAL - 17.8%
12,000 Carpenter Technology Corp. ....................... 493,500
10,000 Cleveland-Cliffs, Inc. ........................... 410,000
25,000 Commercial Intertech Corp. ....................... 453,125
25,000 Kuhlman Corp. .................................... 312,500
10,000 Lukens, Inc. ..................................... 287,500
10,000 Owosso Corp. ..................................... 88,750
30,000 Roanoke Electric Steel Corp. ..................... 498,750
12,000 Vigoro Corp. (The) ............................... 741,000
-----------
3,285,125
-----------
INSURANCE/SERVICES - 11.2%
20,000 Donegal Group, Inc. .............................. 375,000
15,000 Harleysville Group, Inc. (PA) .................... 485,625
25,000 Hilb, Rogal & Hamilton Co. ....................... 334,375
12,500 Selective Insurance Group, Inc. .................. 443,750
16,000 Washington National Corp. ........................ 442,000
-----------
2,080,750
-----------
REAL ESTATE - 6.1%
5,000 Camden Property Trust ............................ 119,375
7,000 Colonial Properties Trust ........................ 178,500
8,000 Merry Land & Investment Co., Inc. ................ 189,000
5,000 National Health Investors, Inc. .................. 165,625
8,000 ROC Communities, Inc. ............................ 192,000
5,000 Sovran Self Storage, Inc. ........................ 131,875
6,000 Sun Communities, Inc. ............................ 158,250
-----------
1,134,625
-----------
TECHNOLOGY - 12.7%
10,000 Acme-Cleveland Corp. ............................. 187,500
14,500 Boston Acoustics, Inc. ........................... 348,000
5,000 Helix Technology Corp. ........................... 197,500
35,000 MacNeal-Schwendler Corp. ......................... 560,000
9,000 Shared Medical Systems Corp. ..................... 489,375
25,000 Technitrol, Inc. ................................. 568,750
-----------
2,351,125
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- -----------
<S> <C> <C>
COMMON STOCKS - 95.1% (continued)
TELECOMMUNICATIONS - 1.1%
10,000 Lincoln Telecommunications Co. ................... $ 211,250
-----------
UTILITIES - 1.1%
6,000 WICOR, Inc. ...................................... 193,500
-----------
TOTAL COMMON STOCKS (COST $14,059,642)............ 17,588,200
------------
PRINCIPAL
AMOUNT
- -----------
SHORT-TERM NOTES - 4.2%
$ 775,000 Ford Motor Credit Co. 5.85% due 01/03/96.......... 775,000
------------
Total Short-Term Notes (cost $775,000)............ 775,000
------------
TOTAL INVESTMENTS - 99.3% (cOST $14,834,642)*..... 18,363,200
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.7%.... 127,641
------------
NET ASSETS - 100.0%............................... $ 18,490,841
============
* Aggregate cost for federal income tax purposes is $14,834,642; and net
unrealized appreciation is as follows:
Gross unrealized appreciation..................... $ 3,690,614
Gross unrealized depreciation..................... (162,056)
------------
Net unrealized appreciation..................... $ 3,528,558
============
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value (identified cost $14,834,642) (Note 1).... $ 18,363,200
Cash................................................................................ 64,781
Dividends and interest receivable................................................... 63,845
------------
Total Assets...................................................................... 18,491,826
------------
LIABILITIES
Accrued expenses.................................................................... 985
------------
Total Liabilities................................................................. 985
------------
NET ASSETS
Applicable to 586,635 shares; $0.001 par value; 1,000,000,000 shares authorized..... $ 18,490,841
============
Net asset value, offering and redemption price per share
($18,490,841 / 586,635 shares).................................................... $ 31.52
============
SOURCE OF NET ASSETS
Paid-in capital..................................................................... $ 14,976,897
Undistributed net investment income................................................. 5,646
Accumulated net realized loss on investments........................................ (20,260)
Net unrealized appreciation of investments.......................................... 3,528,558
------------
Net Assets........................................................................ $ 18,490,841
============
========================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
9 MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<S> <C>
INCOME
Dividends........................................................................... $ 426,635
Interest............................................................................ 39,544
------------
Total Income...................................................................... 466,179
------------
EXPENSES
Advisory fees (Note 2).............................................................. 90,691
Registration fees (Note 2).......................................................... 19,830
Shareholder services fees (Note 2).................................................. 16,619
Accounting/Pricing services fees (Note 2)........................................... 15,000
Audit fees.......................................................................... 10,515
Custodian fees (Note 2)............................................................. 8,073
Administrative services fees (Note 2)............................................... 7,500
Printing fees....................................................................... 6,104
Directors' fees..................................................................... 2,404
Legal fees.......................................................................... 1,271
Miscellaneous fees.................................................................. 1,246
Taxes other than income taxes....................................................... 1,110
------------
Total Expenses.................................................................... 180,363
------------
Net Investment Income........................................................... 285,816
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments.................................................... 451,180
Net increase in unrealized appreciation of investments.............................. 2,730,858
------------
Net gain on investments........................................................... 3,182,038
------------
Net increase in net assets resulting from operations............................ $ 3,467,854
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
9 Months
Ended
December 31, Year Ended
1995 March 31,
OPERATIONS (unaudited) 1995
-------------- --------------
<S> <C> <C>
Net investment income........................................... $ 285,816 $ 239,809
Net realized gain (loss) on investments......................... 451,180 (401,356)
Net increase in unrealized appreciation
of investments................................................. 2,730,858 637,467
------------ ------------
Net increase in net assets resulting from operations.......... 3,467,854 475,920
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.50 and $0.59 per share, respectively)..................... (284,808) (243,457)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from the net change
in the number of outstanding shares (a)........................ 1,249,629 5,569,039
------------ ------------
Total Increase in Net Assets................................ 4,432,675 5,801,502
NET ASSETS AT THE BEGINNING OF THE PERIOD......................... 14,058,166 8,256,664
------------ ------------
NET ASSETS AT THE END OF THE PERIOD
(including undistributed net investment income
$5,646 and $4,638, respectively)............................. $ 18,490,841 $ 14,058,166
============ ============
</TABLE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
9 MONTHS ENDED
DECEMBER 31, 1995 YEAR ENDED
(UNAUDITED) MARCH 31, 1995
------------------------- -------------------------
Shares Value Shares Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares issued........................ 57,431 $1,634,340 250,270 $6,220,670
Shares reinvested from
net investment income.............. 6,975 207,913 6,320 161,497
---------- ----------- ---------- -----------
64,406 1,842,253 256,590 6,382,167
Shares redeemed...................... (20,980) (592,624) (31,707) (813,128)
---------- ----------- ---------- -----------
Net increase....................... 43,426 $1,249,629 224,883 $5,569,039
========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 (UNAUDITED)
NOTE 1. - Significant Accounting Policies - The Stratton Funds, Inc. (the
"Company") was organized on January 5, 1993 as a Maryland Corporation and is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. As of the date of this
report, the Company offered one investment portfolio, Stratton Small-Cap Yield
Fund (the "Fund"). The Fund's investment objective is to achieve both dividend
income and capital appreciation. The Fund will seek to achieve this objective
through investment in the securities of small-cap companies which have certain
risks associated with them. First and foremost is their greater earnings and
price volatility in comparison to large companies. Earnings risk is partially
due to the undiversified nature of small company business lines. The following
is a summary of significant accounting policies consistently followed by the
Company in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. Security valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale
price on the exchange where the securities are principally traded
or, if there has been no sale on that date, at the mean between the
last reported bid and asked prices. Securities traded in the over-
the-counter market are valued at the last sale price, if carried in
the National Market Issues section by NASDAQ; other over-the-
counter securities are valued at the mean between the closing bid
and asked prices obtained from a principal market maker. All other
securities and assets are valued at their fair value as determined
in good faith by the Board of Directors of the Fund, which may
include the amortized cost method for securities maturing in sixty
days or less and other cash equivalent investments.
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
$223,364, of which $21,018 expires in 2002 and $202,346 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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 (UNAUDITED)
NOTE 2. - During the nine months ended December 31, 1995, the Fund paid advisory
fees aggregating $90,691 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 0.75% of the daily net asset value of the Fund for
such month, subject to a performance adjustment. The performance adjustment
will commence at the end of the month in which the Fund has completed 24 months
of operation, if it has net assets of $20 million or more, at such date, or at
the end of any succeeding month at which it has net assets of $20 million, but
in any event, irrespective of its net assets, at the end of the month in which
the Fund has completed 36 months of operation and will be calculated at the end
of the commencement month and each succeeding month based upon a rolling 24
month performance period. The performance adjustment is added to or subtracted
from the basic investment advisory fee.
The Fund's gross performance is compared with the performance of the Frank
Russell 2000 Index, ("Russell 2000"). When the Fund performs better than the
Russell 2000, it pays the Investment Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of the
difference in performance between the Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the basic fee. The maximum
annualized performance adjustment rate is +/- 0.50% of average net assets which
would be added to or deducted from the advisory fee if the Fund outperformed or
underperformed the Russell 2000 by 5.00%. 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 receive 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 $16,619 for
providing shareholder services, $7,500 for certain administrative services and
$15,000 for accounting/pricing services during the nine months ended December
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 $5,028,158 and $4,038,833, respectively, for the nine months ended
December 31, 1995.
12
<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 YEAR FOR THE PERIOD
12/31/95 ENDED 04/12/93*
(UNAUDITED) 03/31/95 TO 03/31/94
------------- ------------ --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $25.88 $25.94 $25.00
------------- ------------ --------------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment income......................... 0.50 0.57 0.43
Net gains (loss) on securities
(both realized and unrealized)............... 5.64 (0.04) 0.91
------------- ------------ --------------
Total from investment operations............ 6.14 0.53 1.34
------------- ------------ --------------
LESS DISTRIBUTIONS
------------------
Dividends (from net investment
income)...................................... (0.50) (0.59) (0.40)
Distributions (from capital gains)............ 0.00 0.00 0.00
------------- ------------ --------------
Total distributions......................... (0.50) (0.59) (0.40)
------------- ------------ --------------
NET ASSET VALUE, END OF PERIOD................. $31.52 $25.88 $25.94
============= ============ ==============
TOTAL RETURN................................... 23.85% ** 2.09% 5.51% ***
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in 000's).......... $18,491 $14,058 $8,257
Ratio of expenses to average
net assets................................... 1.48% *** 2.12% 2.28% ***
Ratio of net investment
income to average net assets................. 2.35% *** 2.36% 1.85% ***
Portfolio turnover rate....................... 35.29% *** 30.20% 28.60% ***
</TABLE>
_______________________
* Commencement of operations
** Nine months only
*** Annualized
See accompanying notes to financial statements.
13
<PAGE>
SHAREHOLDER INFORMATION
MINIMUM INVESTMENT
- ------------------
The minimum amount for the initial purchase of shares of Stratton Small-Cap
Yield Fund is $500. This minimum amount will remain in effect until the Fund
reaches 2,000 shareholders, after which time the minimum amount for initial
purchases will be $5,000. Subsequent purchases may be made in amounts of $100 or
more.
TELEPHONE EXCHANGE
- ------------------
Shares of Stratton Small-Cap Yield Fund may be exchanged by telephone for shares
of the other funds managed by Stratton Management Company, Stratton Growth Fund,
Inc. or Stratton Monthly Dividend Shares, Inc., 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 Small-Cap Yield Fund
reserves the right to suspend the exchange privilege at any time. A Prospectus
of Stratton Growth Fund or Stratton Monthly Dividend Shares should be obtained
and read prior to making any such exchange.
INCOME DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
- -----------------------------------------------
Stratton Small-Cap Yield Fund expects to distribute substantially all of its net
investment income quarterly, in March, June, September and December. The Fund
intends to distribute all of its net realized capital gains semi-annually.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Investors who either own or purchase Stratton Small-Cap Yield Fund 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 Small-Cap Yield Fund 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
SmCap or Small Cap Yield. The Fund's stock ticker symbol is STSCX.
RETIREMENT PLANS
- ----------------
Stratton Small-Cap Yield Fund's IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
14
<PAGE>
GENERAL INFORMATION ON SSCY
- ---------------------------
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 Small-Cap Yield Fund's 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 Small-Cap Yield Fund.
15
<PAGE>
SSCY STRATTON SMALL-CAP
YIELD FUND
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS OFFICERS
LYNNE M. CANNON JAMES W. STRATTON
Chairman
JOHN J. LOMBARD, JR.
FRANK H. REICHEL, III
ROSE J. RANDALL President
JOHN A. AFFLECK
HENRY A. RENTSCHLER GERARD E. HEFFERNAN
JOANNE E. KUZMA
MERRITT N. RHOAD, JR. Vice President
PATRICIA L. SLOAN
ALEXANDER F. SMITH Secretary and Treasurer
JAMES A. BEERS
RICHARD W. STEVENS 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
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000030137
<NAME> THE STRATTON FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STRATTON SMALL-CAP YIELD FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 14,834,642
<INVESTMENTS-AT-VALUE> 18,363,200
<RECEIVABLES> 63,845
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<OTHER-ITEMS-ASSETS> 64,781
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