<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
- ------------------------------------------------------------------------
[SMDS LOGO APPEARS HERE]
- ------------------------------------------------------------------------
ANNUAL REPORT
JANUARY 31, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
January 31, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Total Net Assets............ $ 129,267,486 $ 126,441,836
Net Asset Value Per Share... $ 27.40 $ 26.26
Shares Outstanding.......... 4,718,067 4,815,721
Number of Shareholders...... 7,477 7,822
Average Size Account........ $ 17,289 $ 16,165
- --------------------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended January 31, 1996
Major Purchases Major Sales
Crown American Realty Trust American Health Properties, Inc./(2)/
Eastern Utilities Associates/(1)/ Central & South West Corp./(2)/
Health & Retirement Properties New York State Electric & Gas Corp./(2)/
Trust/(1)/
U.S. West Communications Oklahoma Gas & Electric Co.
Group Delaware/(1)/
WPL Holdings, Inc.
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings January 31, 1996
<TABLE>
<CAPTION>
Market Percent
Value of TNA
----------- --------
<S> <C> <C>
CINergy Corp............................. $6,847,500 5.3%
Delmarva Power & Light Co................ 6,787,500 5.3
WPL Holdings, Inc........................ 6,678,000 5.2
U.S. West Communications Group Delaware.. 6,673,750 5.2
Health Care REIT, Inc.................... 6,467,075 5.0
Eastern Utilities Associates............. 5,937,500 4.6
Pacific Telesis Group.................... 5,900,000 4.6
Boston Edison Co......................... 5,875,000 4.5
Rochester Gas & Electric Corp............ 5,750,000 4.4
Central Hudson Gas & Electric Corp....... 5,745,675 4.4
---------- -----
$ 62,662,000 48.5%
============ =====
</TABLE>
3
<PAGE>
DEAR SHAREHOLDER:
THE ECONOMY
We continue to believe that the economy will exhibit a very modest growth rate
through the next several quarters. What a difference one year makes. The fourth
quarter of 1994 showed a very strong real GDP growth of 4.6%. The fourth quarter
of 1995 showed barely any growth at all. A number of sectors are actually down,
especially retail trade and autos. Price competition is growing in consumer
products such as PC's and industrial materials such as paper and plastics. There
seem to be a number of offsetting trends in the U. S. economy. The continued
budget battle taking place in Washington has drained investor and consumer
confidence and created additional uncertainties that are translated into
deferred purchasing decisions.
The world economy looks equally fragile with a pronounced slowdown in Europe,
especially Germany and an inability for Japan to stimulate its economy out of a
three year recession. These two powerhouses of foreign economic growth are
limping along as well. In this environment, worldwide inflation does not look
like a serious threat. In fact, most industrial commodity prices are heading
downward. The concern of most governments is stimulating growth rather than
protecting against inflation.
MONETARY POLICY
The year 1995 was a transition year. The last increase in Federal Reserve
interest rates took place in February of 1995 followed by five months of neutral
policy. Starting in July, the Federal Reserve began a campaign of lowering
interest rates in 1/4% increments. A second reduction took place in November
and most recently, a third reduction in January of 1996. We believe that further
reductions are necessary and will take place before the economy is effectively
stimulated. This is a presidential election year and the Fed will probably err
on the side of monetary ease during this period.
The positive effects of interest rate reductions are felt first and foremost in
the bond and equity markets. There is a substantial lag effect before they are
translated into increases in consumer confidence and consumer spending power. We
believe that the amount of interest rate reductions to date is not significant
enough to propel the economy upward. We still have a very flat yield curve,
which means short-term interest rates are too high in relation to their
historical patterns and in relation to long-term interest rates.
ELECTRIC UTILITY INDUSTRY
The electric utility industry has progressed significantly during 1995. There
have been a number of key mergers and consolidations within the industry. One
prominent utility analyst believes that there will be fifty companies serving
the electric utility industry by the year 2000, down from 150 today. These
mergers will be among geographically adjacent companies and will be generally
friendly acquisitions.
Electric utilities are facing intensified price competition, but they appear to
be absorbing this competition in a positive fashion. Many of the companies have
accelerated a process of downsizing their personnel and reducing operating costs
across the board. Some are still hindered by commitments made to high cost power
generation during the 1980s. These commitments are either to nuclear power
plants that are uneconomic on a fully costed basis or to purchase power
contracts from third party non-utility generators. Regulatory authorities are
4
<PAGE>
caught in a bind. The utilities would like to abrogate some of these contracts,
write-off some of the unusual capital costs and recover some of those costs from
the rate payers. To the extent that competition means lower cost of power for
large industrial users, the offset is higher cost of power for the small retail
users. However, retail users are the voters who help to determine who is on a
utility commission. The cost cannot be shifted from industrial to retail and so
they must be eliminated out of the system. Continued significant employment
reduction is one way of doing that. Mergers and consolidations permit very
substantial savings of scale, primarily through work force reductions.
THE REIT INDUSTRY
The REIT industry did not have a good 1995 as measured by stock market total
return performance. It lagged badly the S&P 500 and also the electric utility
indices. We believe that the REIT industry offers significant value and is at
historically high values when compared to all other income indexes, such as long
U.S. Treasury bonds or the utility index. We have roughly 24% of our portfolio
invested in REITs and they are spread among commercial, health care, and
diversified properties. We own ten different companies operating in all of the
regions of the United States. These managements are entrepreneurial in nature
and do not have their performance hindered by regulatory commissions. Long-term
we believe that the REIT industry will surpass the utility industry in
performance and today it offers a great haven of value in a period of time when
most stocks look very high in historical terms.
PORTFOLIO HOLDINGS
During the quarter, we added Health & Retirement Properties Trust, a nursing
home REIT bringing that industry up to 23.7% of net assets. We continue to
believe that REIT's will show more rapid dividend growth rate than electric
utilities. Our portfolio turnover for the full year was 53.3%. Our expense ratio
dropped to 0.99% including all fees.
During the fourth fiscal quarter ended January 31, 1996, the Fund's net assets
rose to $129,267,486 and the net asset value per share rose to $27.40. The
average size of an account rose to $17,289. Total return performance is shown in
graphs and tables on pages 6 through 8. We call your attention to the 15 year
annualized total return performance of 12.11%. Your management and your board of
directors continue to be committed to building shareholder value. We thank you
for your continued support. 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
March 7, 1996
5
<PAGE>
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.
[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> <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
Reinvested Inc. Divs. $ 583 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 $ 9,696 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. $ 593 924 882 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>
Initial Investment 14,609 15,701 15,060 13,039 14,383
Reinvested Inc. Divs. 26,570 31,818 33,590 32,499 39,890
Reinvested Cap. Gains
Distributions 1,156 1,242 1,192 1,032 1,138
------------------------------------------------
Total Value 42,335 48,761 49,842 46,570 55,411
================================================
If Divs. and Distrbs.
We're taken in Cash: 1,024 1,018 1,024 1,008 1,008 * 16,310 TOTAL DIV. INC.
$ Amt. Div. Inc. -- -- -- -- -- * 604 TOTAL CAP. GAINS
-------------------------------------------------
</TABLE>
6
<PAGE>
PERFORMANCE COMPARISONS
(Price Appreciation Plus Dividends & Capital Gains Distributions Reinvested)
<TABLE>
<CAPTION>
Period Ended Average Annual Aggregate
12/31/95 Total Return Total Return
------------ -------------- ------------
<S> <C> <C>
1 year + 23.45% + 23.45%
5 year + 11.52 + 72.48
10 year + 8.72 + 130.80
15 year + 12.11 + 455.72
</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 Distributions 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.
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 (01/31/86 - 01/31/96)
[GRAPH OF STRATTON MONTHLY DIVIDEND SHARES APPEARS HERE]
Average Annual Total Return
1 Year 5 Year 10 Year
18.99% 11.31% 8.31%
<TABLE>
<CAPTION>
SMDS DOW JONES
UTILITIES
<S> <C> <C>
1986 $10,000 $10,000
1987 $12,260 $13,722
1988 $10,936 $12,569
1989 $11,585 $13,754
1990 $12,591 $17,305
1991 $13,007 $17,116
1992 $16,980 $18,323
1993 $19,558 $20,997
1994 $19,992 $22,146
1995 $18,679 $20,273
1996 $22,225 $25,814
</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 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.
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 JANUARY 31, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- -------- --------------
<S> <C> <C>
COMMON STOCKS - 90.0%
Real Estate Commercial - 8.2%
380,000 Crown American Realty Trust .................... $ 2,945,000
165,000 Excel Realty Trust, Inc. ....................... 3,444,375
166,000 IRT Property Co. ............................... 1,577,000
324,000 Mid-America Realty Investments, Inc. ........... 2,632,500
--------------
10,598,875
--------------
Real Estate Diversified - 5.6%
30,000 Associated Estates Realty Corp. ................ 648,750
225,000 Colonial Properties Trust ...................... 5,540,625
50,000 EastGroup Properties, SBI ...................... 1,081,250
--------------
7,270,625
--------------
Real Estate Health Care - 9.9%
50,000 Health & Retirement Properties Trust ........... 837,500
309,800 Health Care REIT, Inc. ......................... 6,467,075
163,400 National Health Investors, Inc. ................ 5,433,050
--------------
12,737,625
--------------
Telecommunications - 9.7%
200,000 Pacific Telesis Group .......................... 5,900,000
190,000 U. S. West Communications Group Delaware ....... 6,673,750
--------------
12,573,750
--------------
Utilities - 56.6%
200,000 Boston Edison Co. .............................. 5,875,000
184,600 Central Hudson Gas & Electric Corp. ............ 5,745,675
220,000 CINergy Corp. .................................. 6,847,500
300,000 Delmarva Power & Light Co. ..................... 6,787,500
250,000 Eastern Utilities Associates ................... 5,937,500
100,000 General Public Utilities Corp. ................. 3,400,000
250,000 Nevada Power Co. ............................... 5,437,500
175,000 Northeast Utilities ............................ 4,134,375
50,000 Oklahoma Gas & Electric Co. .................... 2,100,000
150,000 Orange & Rockland Utilities, Inc. .............. 5,250,000
100,000 Public Service Co. of Colorado ................. 3,600,000
225,000 Puget Sound Power & Light Co. .................. 5,625,000
250,000 Rochester Gas & Electric Corp. ................. 5,750,000
212,000 WPL Holdings, Inc. ............................. 6,678,000
--------------
73,168,050
--------------
Total Common Stocks (cost $111,029,295) ........ 116,348,925
--------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS JANUARY 31, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- ------- --------------
<S> <C> <C>
PREFERRED STOCKS - 1.2%
100,000 Psychiatric Group Preferred Depositary Shares ............................ $ 1,500,000
(each depositary share represents 1/10th of a share of --------------
American Health Properties Psychiatric Group Pfd. Stock)
Total Preferred Stocks (cost $1,777,330) ................................. 1,500,000
<CAPTION> --------------
Principal
Amount
- ----------------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 4.9%
$ 500,000 Dorchester Gas Corp. 8.50% Cv. Sub. Debs. 12/01/05 *...................... 476,180
$2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11 .............. 2,446,280
$1,000,000 Liberty Property Ltd. 8.00% Cv. Sub. Debs. 07/01/01 ...................... 1,103,750
$2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03 ................. 2,303,125
--------------
Total Convertible Debentures (cost $6,332,732) ........................... 6,329,335
--------------
SHORT-TERM NOTES - 2.1%
$ 900,000 Associates Corp. of North America 5.75% due 02/01/96 ..................... 900,000
$ 900,000 Associates Corp. of North America 5.60% due 02/02/96 ..................... 900,000
$ 900,000 Associates Corp. of North America 5.35% due 02/05/96 ..................... 900,000
--------------
Total Short-Term Notes (cost $2,700,000) ................................. 2,700,000
--------------
Total Investments - 98.2% (cost $121,839,357)**........................... 126,878,260
Cash and other assets, less liabilities - 1.8% ........................... 2,389,226
--------------
NET ASSETS - 100.0% ...................................................... $ 129,267,486
==============
* Fair value as determined by the Board of Directors.
** Aggregate cost for federal income tax purposes is $121,839,357; and net unrealized appreciation
is as follows:
Gross unrealized appreciation............................................. $ 9,261,239
Gross unrealized depreciation............................................. (4,222,336)
--------------
Net unrealized appreciation............................................. $ 5,038,903
==============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at market value (identified cost $121,839,357) (Note 1)........... $ 126,878,260
Cash ....................................................................................... 824,150
Dividends receivable........................................................................ 1,409,701
Interest receivable......................................................................... 157,041
Receivable for capital stock sold........................................................... 145,163
-------------
Total Assets.............................................................................. 129,414,315
-------------
LIABILITIES
Accrued expenses........................................................................... 48,097
Payable for investment securities purchased................................................ 40,615
Payable for capital stock redeemed......................................................... 58,117
-------------
Total Liabilities........................................................................ 146,829
-------------
NET ASSETS
Applicable to 4,718,067 shares; $1.00 par value; 10,000,000 shares authorized.............. $ 129,267,486
=============
Net asset value, offering and redemption price per share
($129,267,486/4,718,067 shares).......................................................... $ 27.40
=============
SOURCE OF NET ASSETS
Paid-in capital............................................................................ $ 142,084,637
Accumulated net realized loss on investments............................................... (17,856,054)
Net unrealized appreciation of investments................................................. 5,038,903
-------------
Net Assets............................................................................... $ 129,267,486
=============
============================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
Year Ended January 31, 1996
<TABLE>
<CAPTION>
INCOME
<S> <C>
Dividends.................................................................................. $ 9,890,053
Interest................................................................................... 1,008,716
------------
Total Income............................................................................. 10,898,769
------------
EXPENSES
Advisory fees (Note 2)..................................................................... 794,629
Shareholder services fees (Note 2)......................................................... 228,235
Custodian fees (Note 2).................................................................... 43,709
Printing and postage fees.................................................................. 36,804
Registration fees ((Note 2)................................................................ 35,091
Directors' fees............................................................................ 32,155
Administrative services fees (Note 2)...................................................... 30,000
Accounting/Pricing services fees (Note 2).................................................. 26,000
Miscellaneous fees......................................................................... 24,098
Legal fees................................................................................. 18,909
Audit fees................................................................................. 18,805
------------
Total Expenses........................................................................... 1,288,435
------------
Net Investment Income.................................................................. 9,610,334
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments........................................................... 2,695,575
Net increase in unrealized appreciation of investments..................................... 9,893,647
------------
Net gain on investments.................................................................. 12,589,222
------------
Net increase in net assets resulting from operations................................... $ 22,199,556
============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended January 31,
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income.............................................................. $ 9,610,334 $ 10,426,589
Net realized gain (loss) on investments............................................ 2,695,575 (17,833,712)
Net increase (decrease) in unrealized appreciation (depreciation)
of investments................................................................... 9,893,647 (3,842,840)
------------ ------------
Net increase (decrease) in net assets resulting from operations................. 22,199,556 (11,249,963)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($1.89 and $1.92 per share, respectively)........................................ (9,700,521) (10,336,402)
Distributions in excess of net investment income
($.03 and $.00 per share, respectively).......................................... (133,355) --
CAPITAL SHARE TRANSACTIONS
Net decreases in net assets derived from the net change
in the number of outstanding shares (a).......................................... (17,164,513) (10,145,399)
------------ ------------
Total Decrease in Net Assets.................................................... (4,798,833) (31,731,764)
NET ASSETS AT THE BEGINNING OF THE YEAR............................................. 134,066,319 165,798,083
------------ ------------
NET ASSETS AT THE END OF THE YEAR
(including undistributed net investment
income of $0 and $90,187, respectively).......................................... $ 129,267,486 $ 134,066,319
============ ============
</TABLE>
<TABLE>
<CAPTION>
(a) A summary of capital share transactions follows:
Years Ended January 31,
--------------------------------------------------------------------
1996 1995
---------------------------------- --------------------------------
Shares Value Shares Value
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares issued.................................. 757,154 $ 19,154,193 1,506,670 $ 37,662,221
Shares reinvested from
net investment income...................... 239,595 6,039,536 252,999 6,370,235
------------ --------------- ------------ ---------------
996,749 25,193,729 1,759,669 44,032,456
Shares redeemed................................ (1,676,173) (42,358,242) (2,141,485) (54,177,855)
------------ --------------- ------------ ---------------
Net decrease............................... (679,424) $ (17,164,513) (381,816) $ (10,145,399)
============ =============== ============ ===============
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
January 31, 1996
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.
Note 2. - During the year ended January 31, 1996, the Fund paid advisory fees
aggregating $794,629 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 $228,235 for
providing shareholder services, $30,000 for certain administrative services and
$26,000 for accounting/pricing services during the year ended January 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 $64,986,748 and $73,396,301, respectively, for the year ended January
31, 1996.
16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Stratton Monthly Dividend Shares,
Inc.
We have audited the accompanying statement of assets and liabilities of
Stratton Monthly Dividend Shares, Inc., including the schedule of investments,
as of January 31, 1996, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Stratton Monthly Dividend Shares, Inc. as of January 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
Philadelphia, PA
February 9, 1996 TAIT, WELLER & BAKER
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each year presented.
<TABLE>
<CAPTION>
Years Ended January 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................ $24.84 $28.69 $29.91 $27.83 $23.02
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
---------------------------------
Net investment income........................... 1.88 1.94 1.87 1.94 1.97
Net gains (loss) on securities
(both realized and unrealized)................ 2.60 (3.87) (1.14) 2.08 4.79
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 4.48 (1.93) 0.73 4.02 6.76
---------- ---------- ---------- ---------- ----------
Less Distributions
------------------
Dividends (from net investment
income)....................................... (1.89) (1.92) (1.94) (1.94) (1.95)
Distributions (in excess of net
investment income)............................ (0.03) 0.00 (0.01) 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total distributions......................... (1.92) (1.92) (1.95) (1.94) (1.95)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year...................... $27.40 $24.84 $28.69 $29.91 $27.83
========== ========== ========== ========== ==========
Total Return...................................... 18.98% -6.57% 2.22% 15.18% 30.55%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (in 000's).............. $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to average
net assets.................................... 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net investment
income to average net assets.................. 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover rate......................... 53.30% 39.50% 19.15% 35.94% 43.55%
</TABLE>
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 LOGO APPEARS HERE]
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
Independent Accountants
TAIT, WELLER & BAKER
2 Penn Center Plaza, Suite 700
Philadelphia, PA 19102-1707
