<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
================================================================================
SMDS
================================================================================
FIRST QUARTER REPORT
APRIL 30, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
----------- -----------
<S> <C> <C>
Total Net Assets................ $ 112,157,399 $ 129,267,486
Net Asset Value Per Share....... $ 25.88 $ 27.40
Shares Outstanding.............. 4,333,559 4,718,067
Number of Shareholders.......... 7,053 7,477
Average Size Account............ $ 15,902 $ 17,289
</TABLE>
================================================================================
Portfolio Changes For the Quarter Ended April 30, 1996 (unaudited)
Major Purchases Major Sales
Mid-America Realty Investments, Inc. Associated Estates Realty Corp.
Town & Country Trust/(1)/ CINergy Corp./(2)/
Delmarva Power & Light Co.
Liberty Property Ltd.
8.00% Cv. Sub. Debs. 07/01/01
National Health Investors, Inc.
Pacific Telesis Group/(2)/
U.S. West Communications Group DE
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings April 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Market Percent
Value of TNA
---------- --------
<S> <C> <C>
Health Care REIT, Inc. .................. $7,125,400 6.3%
WPL Holdings, Inc. ...................... 6,307,000 5.6
U.S. West Communications Group Delaware.. 5,567,500 5.0
Delmarva Power & Light Co. .............. 5,495,000 4.9
Colonial Properties Trust................ 5,400,000 4.8
Central Hudson Gas & Electric Corp. ..... 5,353,400 4.8
Puget Sound Power & Light Co. ........... 5,343,750 4.8
Rochester Gas & Electric Corp. .......... 5,125,000 4.6
Orange & Rockland Utilities, Inc. ....... 5,118,750 4.6
National Health Investors, Inc. ......... 5,100,550 4.5
------------ ----
$ 55,936,350 49.9%
============ ====
</TABLE>
2
<PAGE>
DEAR SHAREHOLDER:
Interest rates during the last three months have risen, a result of the bond
market's anticipation of a stronger economy. Speculation today centers on
whether the Federal Reserve will raise interest rates in the future to check any
inflationary surges in the economy. Our analysis suggests that while the economy
is growing, it is only at a moderate rate of 2.5%. The nation is unlikely to see
an increase in growth that would become inflationary. Our belief is the bond
markets have anticipated a tighter Federal Reserve policy which is unlikely to
materialize.
As a result of the fear of a stronger economy, investors have chosen to move out
of fixed-income securities and to focus their attention on securities offering
capital appreciation. This is especially true within the mutual fund industry as
flows of new money to growth and aggressive growth funds have picked up
substantially; primarily at the expense outflowing from bond and fixed-income
funds. Our Fund has suffered a net outflow of funds as a result of these trends.
The utility sector was one of a few sectors that declined in the first quarter
of 1996 contrasted with a gain of 5.39% for the S&P 500.
Our portfolio benefitted from the proposed takeover of Pacific Telesis by SBC
Communications. As a result of the sharp increase in price of Pacific Telesis
shares and the relatively long time before this merger gets clearance from all
regulators concerned, we elected to sell the stock and redeploy the proceeds
into higher yielding securities. We also eliminated CINergy from our portfolio,
which was the lowest yielding electric utility in our portfolio. Our turnover
ratio for the most recent quarter was a relatively low 5%; this should pick up
during the current quarter. We have been able to maintain our expense ratio at
0.99% which is an all time low for the Fund. In the real estate investment area
we added one new holding to our portfolio, Town and Country Trust, a REIT that
specializes in garden style apartments.
During the first fiscal quarter ended April 30, 1996, the Fund's net assets
ended at $112,157,399 and the net asset value per share declined to $25.88. The
average size of an account was $15,902. 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 11.96%. 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
June 4, 1996
3
<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 13,585
Reinvested Inc. Divs. 26,570 31,818 33,590 32,499 39,890 38,620
Reinvested Cap. Gains
Distributions 1,156 1,242 1,192 1,032 1,138 1,075
---------------------------------------------------------
Total Value 42,335 48,761 49,842 46,570 55,411 53,280
=========================================================
If Divs. and Distrbs.
We're taken in Cash: 1,024 1,018 1,024 1,008 1,008 252 * 16,310 TOTAL DIV. INC.
$ Amt. Div. Inc. -- -- -- -- -- * 604 TOTAL CAP. GAINS
---------------------------------------------------------
</TABLE>
<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.
4
<PAGE>
PERFORMANCE COMPARISONS
(Price Appreciation Plus Dividends & Capital Gains Distributions Reinvested)
<TABLE>
<CAPTION>
Period Ended Average Annual Aggregate
03/31/96 Total Return Total Return
-------- -------------- ------------
<S> <C> <C>
1 year + 16.49% + 16.49%
5 year + 8.80 + 52.49
10 year + 6.86 + 94.13
15 year + 11.96 + 444.23
</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>
<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 1.84 - + 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>
<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.
8
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) APRIL 30, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- ----------- -------- ----------------
<S> <C> <C>
COMMON STOCKS - 85.4%
Real Estate Commercial - 9.2%
380,000 Crown American Realty Trust ................................. $ 2,850,000
165,000 Excel Realty Trust, Inc. .................................... 3,135,000
166,000 IRT Property Co. ............................................ 1,577,000
339,000 Mid-America Realty Investments, Inc. ........................ 2,796,750
-------------
10,358,750
-------------
Real Estate Diversified - 7.1%
16,000 Associated Estates Realty Corp. ............................. 322,000
225,000 Colonial Properties Trust ................................... 5,400,000
50,000 EastGroup Properties, SBI ................................... 1,100,000
78,300 Town & Country Trust ........................................ 1,096,200
-------------
7,918,200
-------------
Real Estate Health Care - 11.6%
50,000 Health & Retirement Properties Trust ........................ 843,750
309,800 Health Care REIT, Inc. ...................................... 7,125,400
153,400 National Health Investors, Inc. ............................. 5,100,550
-------------
13,069,700
-------------
Telecommunications - 5.0%
170,000 U. S. West Communications Group Delaware .................... 5,567,500
-------------
5,567,500
-------------
Utilities - 52.5%
200,000 Boston Edison Co. ........................................... 4,875,000
184,600 Central Hudson Gas & Electric Corp. ......................... 5,353,400
280,000 Delmarva Power & Light Co. .................................. 5,495,000
250,000 Eastern Utilities Associates ................................ 5,093,750
100,000 General Public Utilities Corp. .............................. 3,175,000
250,000 Nevada Power Co. ............................................ 5,000,000
175,000 Northeast Utilities ......................................... 2,778,125
50,000 Oklahoma Gas & Electric Co. ................................. 1,887,500
150,000 Orange & Rockland Utilities, Inc. ........................... 5,118,750
100,000 Public Service Co. of Colorado .............................. 3,312,500
225,000 Puget Sound Power & Light Co. ............................... 5,343,750
250,000 Rochester Gas & Electric Corp. .............................. 5,125,000
212,000 WPL Holdings, Inc. .......................................... 6,307,000
-------------
58,864,775
-------------
Total Common Stocks (cost $99,812,967) ..................... 95,778,925
-------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) APRIL 30, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- ------------- --------- ------------
<S> <C> <C>
PREFERRED STOCKS - 1.5%
100,000 Psychiatric Group Preferred Depositary Shares .................. $ 1,662,500
-------------
(each depositary share represents 1/10th of a share of
American Health Properties Psychiatric Group Pfd. Stock)
Total Preferred Stocks (cost $1,777,330) ....................... 1,662,500
-------------
<CAPTION>
Principal
Amount
- -------------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 5.2%
$ 500,000 Dorchester Gas Corp. 8.50% Cv. Sub. Debs. 12/01/05 *............ 483,320
$2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11 .... 2,489,489
$ 500,000 Liberty Property Ltd. 8.00% Cv. Sub. Debs. 07/01/01 ............ 525,000
$2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03 ....... 2,312,500
-------------
Total Convertible Debentures (cost $5,832,732) ................. 5,810,309
-------------
SHORT-TERM NOTES - 6.8%
$1,500,000 General Motors Acceptance Corp. 5.05% due 05/02/96 ............. 1,500,000
$1,500,000 General Motors Acceptance Corp. 5.05% due 05/03/96 ............. 1,500,000
$1,540,000 General Electric Capital Corp. 5.20% due 05/06/96 .............. 1,540,000
$1,540,000 General Electric Capital Corp. 5.29% due 05/07/96 .............. 1,540,000
$1,540,000 General Electric Capital Corp. 5.29% due 05/08/96 .............. 1,540,000
-------------
Total Short-Term Notes (cost $7,620,000) ....................... 7,620,000
-------------
Total Investments - 98.9% (cost $115,043,029)** ................ 110,871,734
Cash and other assets, less liabilities - 1.1% ................ 1,285,665
-------------
NET ASSETS - 100.0% ............................................ $ 112,157,399
=============
</TABLE>
* Fair value as determined by the Board of Directors.
**Aggregate cost for federal income tax purposes is $115,043,029; and net
unrealized depreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation................................... $ 3,780,899
Gross unrealized depreciation................................... (7,952,194)
-------------
Net unrealized depreciation.................................. $ (4,171,295)
=============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1996 (unaudited)
<TABLE>
<CAPTION>
<S>
ASSETS <C>
Investments in securities at market value (identified cost $115,043,029) (Note 1)......... $ 110,871,734
Cash...................................................................................... 3,048
Dividends receivable...................................................................... 1,226,355
Interest receivable....................................................................... 74,265
Receivable for securities sold............................................................ 34,239
--------------
Total Assets.......................................................................... 112,209,641
--------------
LIABILITIES
Accrued expenses.......................................................................... 52,242
--------------
Total Liabilities..................................................................... 52,242
--------------
NET ASSETS
Applicable to 4,333,559 shares; $1.00 par value; 10,000,000 shares authorized ............ $ 112,157,399
==============
Net asset value, offering and redemption price per share
($112,157,399 / 4,333,559 shares)...................................................... $ 25.88
==============
SOURCE OF NET ASSETS
Paid-in capital........................................................................... $ 131,812,461
Accumulated distributions in excess of net investment income.............................. (257,226)
Accumulated net realized loss on investments.............................................. (15,226,541)
Net unrealized depreciation of investments................................................ (4,171,295)
--------------
Net Assets............................................................................ $ 112,157,399
==============
STATEMENT OF OPERATIONS
3 Months Ended April 30, 1996 (unaudited)
INCOME
Dividends.................................................................................. $ 2,052,080
Interest................................................................................... 170,878
--------------
Total Income............................................................................ 2,222,958
--------------
EXPENSES
Advisory fees (Note 2)..................................................................... 179,675
Shareholder services fees (Note 2)......................................................... 48,321
Registration fees (Note 2)................................................................. 18,975
Custodian fees (Note 2).................................................................... 10,276
Administrative services fees (Note 2)...................................................... 7,500
Accounting/Pricing services fees (Note 2).................................................. 6,500
Printing and postage fees.................................................................. 6,269
Directors' fees............................................................................ 6,164
Legal fees................................................................................. 3,662
Taxes other than income taxes.............................................................. 3,400
Miscellaneous fees......................................................................... 701
--------------
Total Expenses.......................................................................... 291,443
--------------
Net Investment Income................................................................ 1,931,515
--------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized gain on investments........................................................... 2,629,513
Net decrease in unrealized appreciation of investments..................................... (9,210,198)
--------------
Net loss on investments................................................................. (6,580,685)
--------------
Net decrease in net assets resulting from operations................................. $ (4,649,170)
==============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
3 Months
Ended
April 30, Year Ended
1996 January 31,
(Unaudited) 1996
------------- --------------
<S> <C> <C>
OPERATIONS
Net investment income ...................................... $ 1,931,515 $ 9,610,334
Net realized gain on investments............................ 2,629,513 2,695,575
Net increase (decrease) in unrealized
appreciation of investments............................... (9,210,198) 9,893,647
------------- --------------
Net increase (decrease) in net assets
resulting from operations............................... (4,649,170) 22,199,556
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.45 and $1.89 per share, respectively)................. (1,931,515) (9,700,521)
Distribution in excess of net investment income
($.03 and $.03 per share, respectively)................... (257,226) (133,355)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from the net
change in the number of outstanding shares (a)............ (10,272,176) (17,164,513)
------------- --------------
Total Decrease in Net Assets............................. 17,110,087) (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 $257,226 and $0, respectively)................. $ 112,157,399 $ 129,267,486
============= ==============
</TABLE>
<TABLE>
<CAPTION>
(a) A summary of capitalshare transactions follows:
3 Months Ended
April 30, 1996 Year Ended
(unaudited) January 31, 1996
----------------------------------- --------------------------------------
Shares Value Shares Value
-------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Shares isssued................... 79,783 $ 2,123,861 757,154 $ 19,154,193
Shares reinvested from
net investment income............ 48,340 1,296,691 239,595 6,039,536
--------- -------------- --------- ---------------
128,123 3,420,552 996,749 25,193,729
Shares redeened................... (512,631) (13,692,728 (1,676,173 (42,358,242)
------------- ------------ ----------- ---------------
Net decrease................... (384,508) $ (10,272,176 (679,424) $ (17,164,513)
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
April 30, 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 three months ended April 30, 1996, the Fund paid advisory
fees aggregating $179,675 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1996 (unaudited)
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 $48,321 for
providing shareholder services, $7,500 for certain administrative services and
$6,500 for accounting/pricing services during the three months ended April 30,
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 $1,284,878 and $15,630,719, respectively, for the three months ended
April 30, 1996.
================================================================================
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding thoughout each period presented.
<TABLE>
<CAPTION>
3 Months
Ended Years ended Januaary 31,
04/30/96 ----------------------------------------------------------------
(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 .45 1.88 1.94 1.87 1.94 1.97
Net gains (loss) on securities
(both realized and unrealized)...... (1.49) 2.60 (3.87) (1.14) 2.08 4.79
--------- -------- --------- --------- --------- --------
Total from investment operations.. (1.04) 4.48 (1.93) 0.73 4.02 6.76
--------- -------- --------- --------- --------- --------
Less Distributions
- ------------------
Dividends (from net investment
income)............................... (0.45) (1.89) (1.92) (1.94) (1.94) (1.95)
Distributions (in excess of net
investment income).................... (0.03) (0.03) 0.00 (0.01) 0.00 0.00
--------- -------- --------- --------- --------- --------
Total distributions................. (0.48) (1.92) (1.92) (1.95) (1.94) (1.95)
--------- -------- --------- --------- --------- --------
Net Asset Value, End of Period......... $25.988 $27.40 $24.84 $ 28.69 $29.91 $27.83
========= ======== ========= ========= ========= ========
Total Return........................... -3.85% 18.98% -6.57% 2.22% 15.18% 30.55%
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (in 000's) $112,157 $129,267 $134,066 $165,796 $98,227 $45,566
Ratio of expenses to average
net assets........................... 0.99% * 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net investment
income to average net assets......... 6.58% * 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover rate............... 4.57% * 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission rate paid.......... $0.0502 N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
* Annualized
** Three 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 . 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
ROSE J. RANDALL President
HENRY A. RENTSCHLER JOHN A. AFFLECK
JOANNE E. KUZMA
MERRETT N. RHOAD, JR. FRANK H. REICHEL, III
Vice President
ALEXANDER F. SMITH
PATRICIA L. SLOAN
RICHARD W. STEVENS Secretary and Treasurer
JAMES W. STRATTON JAMES A. BEERS
CAROL L. ROYCE
Assistant Secretary
Assistant Treasurer
Investment Advisor Transfer Agent and Dividend Paying Agent
STRATTON MANAGEMNT 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> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000030137
<NAME> STRATTON MONTHLY DIVIDEND SHARES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-1-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 115,043,029
<INVESTMENTS-AT-VALUE> 110,871,734
<RECEIVABLES> 1,334,859
<ASSETS-OTHER> 3,048
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 112,209,641
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,242
<TOTAL-LIABILITIES> 52,242
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 131,812,461
<SHARES-COMMON-STOCK> 4,333,559
<SHARES-COMMON-PRIOR> 4,718,067
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 257,226
<ACCUMULATED-NET-GAINS> (15,226,541)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,171,295)
<NET-ASSETS> 112,157,399
<DIVIDEND-INCOME> 2,052,080
<INTEREST-INCOME> 170,878
<OTHER-INCOME> 0
<EXPENSES-NET> 291,443
<NET-INVESTMENT-INCOME> 1,931,515
<REALIZED-GAINS-CURRENT> 2,629,513
<APPREC-INCREASE-CURRENT> (9,210,198)
<NET-CHANGE-FROM-OPS> (4,649,170)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,188,741
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 79,783
<NUMBER-OF-SHARES-REDEEMED> 512,631
<SHARES-REINVESTED> 48,340
<NET-CHANGE-IN-ASSETS> (17,110,087)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (17,856,064)
<OVERDISTRIB-NII-PRIOR> 133,355
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 179,675
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 291,443
<AVERAGE-NET-ASSETS> 119,709,203
<PER-SHARE-NAV-BEGIN> 129,267,486
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> (1.49)
<PER-SHARE-DIVIDEND> 0.48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.88
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
