<PAGE>
STRATTON
MONTHLY
DIVIDEND
SHARES, INC.
- --------------------------------------------------------------------------------
SMDS
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
December 31, October 31,
1996 1996
------------ ------------
<S> <C> <C>
Total Net Assets $103,779,735 $100,888,737
Net Asset Value Per Share $ 27.43 $ 25.79
Shares Outstanding 3,783,660 3,912,574
Number of Shareholders 5,838 6,113
Average Size Account $ 17,777 $ 16,504
- ----------------------------------------------------------------
</TABLE>
Portfolio Changes For the Two Months* Ended December 31, 1996
Major Purchases Major Sales
American Health Properties, Inc./(1)/ Atlantic Energy, Inc.
Developers Diversified Realty Corp./(1)/ Consolidated Edison Co. of NY,
Inc./(2)/
Equity Inns, Inc./(1)/ Dominion Resources, Inc. VA/(2)/
Glimcher Realty Trust/(1)/ Enova Corp./(2)/
Innkeepers USA Trust/(1)/ Houston Industries, Inc./(2)/
Merry Land & Investment Co., Inc./(1)/ Minnesota Power & Light Co./(2)/
Pacific Gulf Properties, Inc./(1)/ Ohio Edison Co./(2)/
Sunstone Hotel Investors, Inc./(1)/ PECO Energy Co./(2)/
Tanger Factory Outlet Centers, Inc./(1)/ P P & L Resources, Inc./(2)/
Winston Hotels, Inc./(1)/ Western Resources, Inc./(2)/
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings December 31, 1996
<TABLE>
<CAPTION>
Market Percent
Value of TNA
----------- --------
<S> <C> <C>
U.S. West Communications Group Delaware.. $5,482,500 5.3%
Nevada Power Co.......................... 5,125,000 4.9
Rochester Gas & Electric Corp............ 4,781,250 4.6
Health Care REIT, Inc.................... 4,755,450 4.6
Boston Edison Co......................... 4,703,125 4.5
National Health Investors, Inc........... 4,673,775 4.5
Excel Realty Trust, Inc.................. 4,440,625 4.3
Eastern Utilities Associates............. 4,343,750 4.2
Developers Diversified Realty Corp....... 3,341,250 3.2
Merry Land & Investment Co., Inc......... 3,225,000 3.1
----------- ----
$44,871,725 43.2%
=========== ====
</TABLE>
*Shortened period due to change in fiscal year end.
Note: On 11/29/96, at the special meeting of shareholders of the Fund, the
shareholders voted to approve the proposal to change the industry concentration
policy of the Fund from the utility industry to the REIT and utility industries.
The results of that vote are as follows: 2,441,982, For; 74,418 Against; and
46,680, Abstain.
1
<PAGE>
DEAR SHAREHOLDER:
The Board of Directors of Stratton Funds determined to change the fiscal year of
all Funds to end on December 31. Therefore, you are receiving an annual report
from Stratton Monthly Dividend Shares which reflects these eleven months ending
on December 31, 1996. The primary reason for this change was to permit all of
the Funds' reports to be printed and mailed together in the future. This should
save significant shareholder expense in printing and postage and reduce the
expense ratio of the Funds. In the future, you will receive a combined quarterly
report starting with the March 31, 1997 quarter.
The year 1996 was a positive one for Stratton Monthly Dividend Shares. Our total
return was 8.58%. Total assets were $103,779,735. The Fund's net asset value per
share closed at $27.43 as of December 31, 1996. During those eleven months, the
Fund paid eleven monthly distributions of $0.16 per share.
Portfolio activity during the first eleven months has been at an unusually high
level; our annual realized turnover rate was 69%. The primary reason was the
shift in portfolio emphasis from electric utilities toward REITs in the
portfolio. At the time of this writing we have raised our ownership in REITs to
71.4% of the Fund's assets and lowered our ownership of electric utilities to
7.4%. The average yield on the REIT portfolio is 7.8% which is satisfactory in
meeting the current needs of our regular SMDS dividend payout. Our annualized
expense ratio for the eleven month period remained at a low level of 1.02%.
We maintain our forecast that the economy will grow in a moderate fashion for
the next twelve months. The growth rate in GDP should be between 1.5%-3% fueled
by continuation of moderate growth in consumer spending together with continued
business spending for information processing equipment. This combination of
moderate growth and no external shocks to the economic system should produce
interest rates that range between 6%-7%, reflecting a low inflation level and no
unusual demand for debt funding. Low levels of interest rates should be
beneficial to the REIT industry.
Our average annual total return for fifteen years has been 11.80% as shown on
page 5. The table on page 3 shows that a $10,000 investment in the Fund at the
beginning of our management activity in 1981 would have grown to $59,359 by
December 31, 1996 if you reinvested all dividends and capital gains
distributions. We welcome new investors to the Fund and hope that you will
continue to recommend this Fund to your friends and associates. As a 100% No
Load Fund, with no sales charges, it is through your active support that our
Fund becomes known to a broader circle of investors.
Sincerely yours,
James W. Stratton Gerard E. Heffernan
Chairman President
February 11, 1997
2
<PAGE>
ILLUSTRATION OF AN ASSUMED $10,000 INVESTMENT
IN STRATTON MONTHLY DIVIDEND SHARES, INC.
(With all Dividend income and Capital Gains Distribution Reinvested)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Investment $9,113 9,354 10,808 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084 14,609
Reinvested Inc. Div 583 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388 26,570
Reinvested Cap. Gains
Distribution $ - - - - - - 503 1,043 1,015 1,018 956 1,156
-----------------------------------------------------------------------------------------------------------
Total Value $9,696 10,995 13,915 15,046 18,422 24,932 30,567 27,265 28,883 31,392 32,428 42,335
===========================================================================================================
$ Div. and Distrib
Were Taken in Cash
$ Amt Div Inc. $ 500 924 682 1,013 1,075 1,139 1,197 1,081 1,092 1,076 1,156 1,024
$ Amt Cap Gain Distrib $ - - - - - - 263 341 - - - -
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Initial Investment 15,701 15,060 13,039 14,383 14,399
Reinvested Inc. Div 31,818 33,590 32,499 39,890 43,821
Reinvested Cap. Gains
Distribution 1,242 1,192 1,032 1,138 1,139
---------------------------------------------
Total Value 48,761 49,842 46,570 55,411 59,359
=============================================
$ Div. and Distrib
Were Taken in Cash
$ Amt Div Inc. 1,018 1,024 1,008 1,008 924 = 17,234 TOTAL DIV INC
$ Amt Cap Gain Distrib - - - - - =
---------------------------------------------
</TABLE>
3
<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
12/31/96 Total Return Total Return
------------ -------------- ------------
<S> <C> <C>
1 year + 8.58% + 8.58%
5 year + 6.75 + 38.63
10 year + 7.60 + 108.03
15 year + 11.80 + 432.77
</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 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
- ------------------------------------------------------------------------------------------------------------------
1996 27.43 1.92 - + 0.9 + 7.7 + 8.6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
STRATTON MONTHLY DIVIDEND SHARES AND THE DOW JONES UTILITY INDEX *
TEN YEAR PERFORMANCE (12/31/86 - 12/31/96)
[GRAPH OF STRATTON MONTHLY DIVIDEND SHARES APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Return
1 Year 5 Year 10 Year
<S> <C> <C>
8.58% 6.75% 7.60%
</TABLE>
<TABLE>
<CAPTION>
SMDS DOW JONES
UTILITIES
<S> <C> <C>
1986 $10,000 $10,000
1987 $8,860 $9,198
1988 $9,724 $10,659
1989 $11,550 $14,460
1990 $11,108 $13,802
1991 $15,006 $15,563
1992 $16,568 $16,302
1993 $17,662 $17,882
1994 $15,520 $15,152
1995 $19,158 $20,058
1996 $20,803 $21,922
</TABLE>
* The Dow Jones Utility Average is an unmanaged index of common stocks issued
by electric and gas utilities.
7
<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 common stock and securities convertible into, or exchangeable for,
common stock. The Fund will invest at least 25% of its assets in securities of
real estate investment trusts and of public utility companies engaged in the
production, transmission or distribution of electric, energy, gas, water or
telephone services.
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 fifty 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 sixteen 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 page 2.
8
<PAGE>
STRATTON MONTHLY DIVIDEND SHARES
(Questions and Answers)
What is the Fund's goal and investment strategy?
SMDS is managed 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.
------
Who should invest?
SMDS is ideally suited for the income-oriented stock investor. The Fund may be
particularly attractive to "retired individuals" needing a steady stream of
income to meet living expenses and also wanting moderate long-term growth to
help offset inflation.
What types of stocks are in the SMDS portfolio?
SMDS, from 1980 through 11/29/96, was heavily invested in the securities of
public utility companies. In the Fall of 1996, it was the belief of Stratton
Management Company, the Fund's Advisor, supported by a proxy vote of the Fund's
outstanding shares, that the Fund's primary mission of maintaining and
distributing a high level of dividend income would be significantly enhanced by
allowing the Fund to concentrate its assets both in Real Estate Investment
Trusts and public utility companies. The management of the Fund will attempt to
seek out the best opportunities in high dividend paying stocks. The portfolio
normally holds 30 to 50 investment positions comprised of the following types of
securities:
Real Estate Investment Trusts - Currently, 60% or more of the Fund is invested
-----------------------------
in high dividend paying REITs. Equity REITs invest directly in real property,
while mortgage REITs invest in mortgages on real property. There are several
types of real estate properties that are owned by REITs, including health care
facilities, regional malls, office centers, hotels and industrial buildings.
Utility Stocks - Utilities have had a history of paying much higher dividends
--------------
than most industrial stocks. With the advent of competition in the previously
regulated and monopolistic electric utility industry, however, the monopoly
status that this industry has enjoyed in the past is being eroded. This is
good for consumers as it should produce price competition and lower rates.
What is good for consumers, however, is not necessarily good for investors, as
this competition will most likely produce lower rates of return on equity.
Currently, that portion of the portfolio allocated to public utilities is less
than 25%.
9
<PAGE>
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 is a REIT?
A Real Estate Investment Trust or REIT (pronounced "reet") is an investment
vehicle that was established by the Real Estate Investment Trust Act in 1960.
REITs were designed to provide investors with a tradable interest in a pool of
real estate or real estate related assets. REITs are required to derive at
least 75% of their gross income from real estate investments, either in rental
income or in interest income from holding mortgages. In addition, REITs must
pay out 95% of their net taxable income to shareholders as dividends.
What is Return of Capital?
REITs pay dividends to their shareholders based upon funds available for
distribution ("FAD"). It is quite common for these dividends to exceed a REIT's
taxable earnings and profits because net taxable income does not include noncash
items like depreciation. This often results in the excess portion of those
dividends being designated as a return of capital. For income tax purposes, the
portion of total dividends designated as a return of capital is not taxed as
income.
Alternatively, an investor's cost basis in shares of the Fund should be reduced
by the amount of the return of capital. When an investor sells those shares,
this reduction of cost basis serves to increase the amount taxed at the current
capital gains tax rate. SMDS 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 may also be designated as a return of
capital. Shareholders will be notified as to the tax status of dividend
distributions at the end of each calender year with an I.R.S. Form 1099DIV. In
1996, no part of the SMDS dividend distributions was a return of capital.
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.
10
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ---------------
<S> <C> <C>
COMMON STOCKS - 87.3%
Real Estate Apartments - 7.5%
50,000 Evans Withycombe Residential, Inc. ................................ $ 1,050,000
150,000 Merry Land & Investment Co., Inc. ................................. 3,225,000
40,000 Mid-America Apartment Communities, Inc. ........................... 1,155,000
78,300 Town & Country Trust .............................................. 1,145,137
50,000 Walden Residential Properties, Inc. ............................... 1,243,750
---------------
7,818,887
---------------
Real Estate Diversified - 5.9%
75,000 Colonial Properties Trust ......................................... 2,278,125
90,900 EastGroup Properties, SBI ......................................... 2,488,388
70,000 Pacific Gulf Properties, Inc. ..................................... 1,365,000
---------------
6,131,513
---------------
Real Estate Health Care - 12.7%
100,000 American Health Properties, Inc. ................................. 2,387,500
70,000 Health & Retirement Properties Trust .............................. 1,356,250
194,100 Health Care REIT, Inc. ............................................ 4,755,450
123,400 National Health Investors, Inc. ................................... 4,673,775
---------------
3,172,975
---------------
Real Estate Hotels/Motels - 8.7%
165,000 Equity Inns, Inc. ................................................. 2,145,000
160,000 Innkeepers USA Trust .............................................. 2,220,000
60,000 RFS Hotel Investors, Inc. ......................................... 1,185,000
100,000 Sunstone Hotel Investors, Inc. .................................... 1,312,500
155,000 Winston Hotels, Inc. .............................................. 2,111,875
---------------
8,974,375
---------------
Real Estate Outlet Centers - 3.2%
50,000 Mills Corp. ....................................................... 1,193,750
80,000 Tanger Factory Outlet Centers, Inc. ............................... 2,170,000
---------------
3,363,750
---------------
Real Estate Regional Malls - 5.1%
280,000 Crown American Realty Trust ....................................... 2,100,000
339,000 Mid-America Realty Investments, Inc. .............................. 3,220,500
---------------
5,320,500
---------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ---------------
<S> <C> <C>
COMMON STOCKS - 87.3% (continued)
Real Estate Shopping Centers - 14.4%
60,000 Bradley Real Estate, Inc. ......................................... $ 1,080,000
90,000 Developers Diversified Realty Corp. ............................... 3,341,250
175,000 Excel Realty Trust, Inc. .......................................... 4,440,625
70,800 Glimcher Realty Trust ............................................. 1,557,600
166,000 IRT Property Co. .................................................. 1,909,000
67,500 The Price Reit, Inc. ............................................. 2,598,750
---------------
14,927,225
---------------
Real Estate Office/Industrial - 2.1%
70,000 Commercial Net Lease Realty, Inc. ................................. 1,111,250
30,000 TriNet Corporate Realty Trust, Inc. ............................... 1,065,000
---------------
2,176,250
---------------
Telecommunications - 5.3%
170,000 U. S. West Communications Group Delaware .......................... 5,482,500
---------------
Utilities - 22.4%
115,000 Atlantic Energy, Inc. ............................................. 1,969,375
175,000 Boston Edison Co. ................................................. 4,703,125
50,000 Delmarva Power & Light Co. ........................................ 1,018,750
250,000 Eastern Utilities Associates ...................................... 4,343,750
250,000 Nevada Power Co. .................................................. 5,125,000
35,300 Orange & Rockland Utilities, Inc. ................................. 1,266,388
250,000 Rochester Gas & Electric Corp. .................................... 4,781,250
---------------
23,207,638
---------------
Total Common Stocks (cost $88,155,667) ............................ 90,575,613
---------------
PREFERRED STOCKS - 1.5%
100,000 Psychiatric Group Preferred Depositary Shares ..................... 1,587,500
---------------
(each depositary share represents 1/10th of a share of
American Health Properties Psychiatric Group Pfd. Stock)
Total Preferred Stocks (cost $1,777,330) .......................... 1,587,500
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ---------------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 5.1%
$2,659,000 Interstate/Johnson Lane, Inc. 7.75% Cv. Sub. Debs. 03/31/11 ....... $ 2,599,172
$2,500,000 Mid-Atlantic Realty Trust 7.625% Cv. Sub. Debs. 09/15/03 .......... 2,675,000
---------------
Total Convertible Debentures (cost $4,842,231) .................... 5,274,172
SHORT-TERM NOTES - 5.3%
$1,300,000 General Electric Capital Corp. 5.90% due 01/02/97 ................. 1,300,000
$1,600,000 General Motors Acceptance Corp. 5.98% due 01/03/97 ................ 1,600,000
$1,100,000 Ford Motor Credit Corp. 5.90% due 01/06/97......................... 1,100,000
---------------
$1,550,000 Ford Motor Credit Corp. 5.80% due 01/07/97......................... 1,550,000
---------------
Total Short-Term Notes (cost $5,550,000) .......................... 5,550,000
---------------
Total Investments - 99.2% (cost $100,325,228)*..................... 102,987,285
Cash and other assets, less liabilities - 0.8%... ................. 792,450
---------------
NET ASSETS - 100.0%................................................ $ 103,779,735
===============
</TABLE>
*Aggregate cost for federal income tax purposes is $100,325,228; and net
unrealized appreciation is as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation...................................... $ 7,272,068
Gross unrealized depreciation...................................... (4,610,011)
---------------
Net unrealized appreciation.................................... $ 2,662,057
===============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value (identified cost $100,325,228) (Note 1)..... $ 102,987,285
Cash.................................................................................. 4,382
Dividends receivable.................................................................. 720,067
Interest receivable................................................................... 112,744
Prepaid expenses...................................................................... 2,583
Receivable for capital stock sold..................................................... 8,120
Receivable for investment securities sold............................................. 1,446,476
-------------
Total Assets...................................................................... 105,281,657
-------------
LIABILITIES
Accrued expenses...................................................................... 47,725
Payable for capital stock redeemed.................................................... 47,258
Payable for investment securities purchased........................................... 1,406,939
-------------
Total Liabilities................................................................. 1,501,922
-------------
NET ASSETS
Applicable to 3,783,660 shares; $1.00 par value; 10,000,000 shares authorized ........ $ 103,779,735
=============
Net asset value, offering and redemption price per share
($103,779,735 / 3,783,660 shares).................................................. $ 27.43
=============
SOURCE OF NET ASSETS
Paid-in capital....................................................................... $ 117,117,892
Accumulated net realized loss on investments.......................................... (16,000,214)
Net unrealized appreciation of investments............................................ 2,662,057
-------------
Net Assets........................................................................ $ 103,779,735
=============
- ---------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
11 Months Ended December 31, 1996
<TABLE>
<S> <C>
INCOME
Dividends.............................................................................. $ 7,205,738
Interest............................................................................... 689,394
-------------
Total Income........................................................................ 7,895,132
-------------
EXPENSES
Advisory fees (Note 2)................................................................. 606,818
Shareholder services fees (Note 2)..................................................... 166,834
Custodian fees (Note 2)................................................................ 40,026
Registration fees (Note 2)............................................................. 31,256
Printing and postage fees.............................................................. 29,037
Administrative services fees (Note 2).................................................. 27,500
Directors' fees........................................................................ 27,424
Accounting/Pricing services fees (Note 2).............................................. 23,833
Audit fees............................................................................. 19,605
Miscellaneous fees..................................................................... 18,131
Legal fees............................................................................. 14,400
Taxes other than income taxes.......................................................... 3,536
Total Expenses...................................................................... 1,008,400
-------------
Net Investment Income............................................................ 6,886,732
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments....................................................... 1,855,839
Net decrease in unrealized appreciation of investments................................. (2,376,846)
-------------
Net loss on investments............................................................. (521,007)
-------------
Net increase in net assets resulting from operations............................. $ 6,365,725
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
11 Months
Ended Year Ended
December 31, January 31,
1996 1996
--------------- -------------
<S> <C> <C>
OPERATIONS
Net investment income......................................... $ 6,886,732 $ 9,610,334
Net realized gain on investments.............................. 1,855,839 2,695,575
Net increase (decrease) in unrealized appreciation
of investments............................................... (2,376,846) 9,893,647
------------- -------------
Net increase in net assets resulting from operations....... 6,365,725 22,199,556
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($1.63 and $1.89 per share, respectively).................... (6,886,732) (9,700,521)
Distributions in excess of net investment income
($.13 and $.03 per share, respectively)...................... (531,985) (133,355)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets derived from the net change
in the number of outstanding shares (a)...................... (24,434,759) (17,164,513)
------------- -------------
Total Decrease in Net Assets................................ (25,487,751) (4,798,333)
NET ASSETS AT THE BEGINNING OF THE PERIOD ..................... 129,267,486 134,066,319
------------- -------------
NET ASSETS AT THE END OF THE PERIOD ........................... $103,779,735 $129,267,486
============ ============
</TABLE>
15
<PAGE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
11 Months Ended Year Ended
December 31, 1996 January 31, 1996
-------------------------- ----------------------------
Shares Value Shares Value
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares issued................... 238,241 $ 6,238,119 757,154 $ 19,154,193
Shares reinvested from
net investment income......... 165,671 4,298,372 239,595 6,039,536
---------- ------------- ---------- --------------
403,912 10,536,491 996,749 25,193,729
Shares redeemed................. (1,338,319) (34,971,250) (1,676,173) (42,358,242)
---------- ------------- ---------- --------------
Net decrease................ (934,407) $ (24,434,759) (679,424) $ (17,164,513)
========== ============= ========== ==============
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 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
securities of real estate investment trusts and of 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 Fund has changed its fiscal and tax year end from January
31 to December 31, commencing with December 31, 1996. 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 $16,000,000 of which $11,669,000 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 eleven months ended December 31, 1996, the Fund paid
advisory fees aggregating $606,818 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 portion of the cost of certain administrative responsibilities
delegated to FPS Services, Inc. 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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
The Fund's Administrator, Accounting Agent and Transfer Agent, FPS Services,
Inc. ("FPS"), is a wholly-owned subsidiary of FinDaTex, Inc. Certain directors
and officers of the Fund are shareholders of FinDaTex, Inc. FPS received fees
of $166,834 for providing shareholder services, $27,500 for certain
administrative services and $23,833 for accounting/pricing services during the
eleven months ended December 31, 1996. Pursuant to an agreement between The Bank
of New York, (the "Custodian"), and FPS, the Custodian reallows a portion of its
custody fee to FPS for certain services delegated to FPS. The amount is not
readily determinable. FPS Broker Services, Inc., a wholly-owned subsidiary of
FPS, 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 $70,941,106 and $96,572,200, respectively, for the eleven months
ended Decemer 31, 1996.
- --------------------------------------------------------------------------------
18
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
11 Months Years Ended January 31,
Ended --------------------------------------------------------------------------
12/31/96 1996 1995 1994 1993 1992 1991 1990 1989
--------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $27.40 $24.84 $28.69 $29.91 $27.83 $23.02 $24.50 $24.43 $25.11
------ ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment Operations
---------------------------------
Net investment income...................... 1.63 1.88 1.94 1.87 1.94 1.97 2.05 2.09 2.10
Net gains (loss) on securities
(both realized and unrealized)........... 0.16 2.60 (3.87) (1.14) 2.08 4.79 (1.33) 0.03 (0.70)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations....... 1.79 4.48 (1.93) 0.73 4.02 6.76 0.72 2.12 1.40
------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
------------------
Dividends (from net investment
income).................................. (1.63) (1.89) (1.92) (1.94) (1.94) (1.95) (2.20) (2.05) (2.08)
Distributions (in excess of net
investment income)....................... (0.13) (0.03) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.................... (1.76) (1.92) (1.92) (1.95) (1.94) (1.95) (2.20) (2.05) (2.08)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Period........... $27.43 $27.40 $24.84 $28.69 $29.91 $27.83 $23.02 $24.50 $24.43
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return............................. 7.12% 18.98% -6.57% 2.22% 15.18% 30.55% 3.30% 8.69% 5.93%
Ratios/Supplemental Data
------------------------
Net assets, end of period (in 000's)....... $103,780 $129,267 $134,066 $165,798 $98,227 $45,566 $31,178 $33,200 $33,845
Ratio of expenses to average
net assets............................... 1.02%* 0.99% 1.08% 0.99% 1.10% 1.23% 1.27% 1.25% 1.21%
Ratio of net investment
income to average net assets............. 6.94%* 7.42% 7.71% 6.12% 6.74% 7.63% 8.79% 8.19% 8.54%
Portfolio turnover rate.................... 69.19% 53.30% 39.50% 19.15% 35.94% 43.55% 14.00% 39.10% 15.00%
Average commission rate paid............... $0.0498 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------------
* Annualized
See accompanying notes to financial statements.
19
<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 December 31, 1996, and the related statement of operations for the eleven
months then ended, the statement of changes in net assets for the eleven months
then ended and for the year ended January 31, 1996, and the financial highlights
for the eleven months then ended and for each of the five years ended January
31, 1996. 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
December 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 December 31, 1996, the results of
its operations for the eleven months then ended, the changes in its net assets
for the eleven months then ended and for the year ended January 31, 1996, and
the financial highlights for the eleven months then ended and for each of the
five years ended January 31, 1996, in conformity with generally accepted
accounting principles.
Philadelphia, PA
January 13, 1997 TAIT, WELLER & BAKER
20
<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.
21
<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":
FPS BROKER SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
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":
FPS SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
Telephones: 610-239-4600 . 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 FPS 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.
22
<PAGE>
SMDS STRATTON MONTHLY
DIVIDEND SHARES, INC.
Directors Investment Advisor
LYNNE M. CANNON STRATTON MANGEMENT COMPANY
JOHN J. LOMBARD, JR. Plymouth Meeting Executive Campus
HENRY A. RENTSCHLER 610 W. Germantown Pike, Suie 300
MERRITT N. RHOAD, JR. Plymouth Meeting, PA 19462-1050
ALEXANDER F. SMITH Telephone: 610-941-0255
RICHARD W. STEVENS
JAMES W. STRATTON
Officers Transfer Agent and Dividend Paying Agent
JAMES W. STRATTON FPS SERVICES, INC.
Chairman 3200 Horizon Drive, P.O. Box 61503
King of Prussia, PA 19406-0903
GERARD E. HEFFERNAN Telephones: 610-239-4600 . 800-441-6580
President
JOHN A. AFFLECK
JOANNE E. KUZMA
FRANK H. REICHEL, III
Vice President
PATRICIA L. SLOAN
Secretary and Treasurer
Independent Accountants
JAMES A. BEERS
CAROL L. ROYCE TAIT, WELLER & BAKER
Assistant Secretary 2 Penn Center Plaza, Suite 700
Assistant Treasurer Philadelphia, PA 19102-1707
23
