<PAGE>
THIRD QUARTER REPORT . SEPTEMBER 30, 1998
[ARTWORK APPEARS HERE]
------------------------------
STRATTON
MUTUAL FUNDS
------------------------------
Stability . Strategy . Success
<PAGE>
DEAR FELLOW SHAREHOLDER:
The third quarter of 1998 was the poorest quarter for stock performance in the
past eight years. This was true both domestically and internationally. There
are multiple causes for the anxiety that produced this sharp decline in world
markets. They were Japan, Russia, the U.S. presidency, hedge funds, global
deflation, and Pacific Rim recession.
The $64 billion question about the U.S. stock market--Is this just another
severe correction in the long-term bull market trend that began in 1982? If
that is the case, then this is another wonderful opportunity to buy depressed
stocks just as every other correction has offered in that long bull market
trend. However, the counter argument is that this could be the start of a
prolonged bear market, something we have not seen since the early 1970s. We
believe that either of two conditions is necessary to produce a long-term bear
market. The first is substantially higher and rising interest rates. In fact,
there are no signs of higher rates on a global basis, just the opposite is
happening.
The other factor that could produce a bear market is for the U.S. economy to
enter a severe recession that will cripple profits. The answer to that is both
yes and no. Yes, we are entering a recession based upon global demand,
especially in demand from the Pacific Rim and Latin America. Those companies
with substantial operations in those areas have already seen their profits
hurt. Yes, earnings will be severely crimped if you are a commodity supplier or
if you are in the business of producing capital goods, most of which went into
Pacific Rim markets over the last few years. The answer is also no. Profits are
unlikely to be reduced, if you are primarily marketing to domestic consumer
demand in the U.S. This is especially true if you are in the services business
or not subject to direct foreign product competition.
Will U.S. consumer demand continue to hold up? We believe that there are
offsetting factors influencing the U.S. consumer. The stock market decline in
the third quarter was clearly negative to confidence. Offsetting that, lower
interest rates have produced increased refinancings of home mortgages, boosting
consumer income and demand. We think the negative wealth effect of the lower
stock market will be offset by the positive impact of refinancings. We believe
that there will be a slowdown in the GDP, but this will not lead the U.S. into
a recession.
We do not believe that we are in a bear market unless the U.S. sinks into total
recession, which we do not foresee at this time. Our investment policy will
continue to emphasize domestic industries such as; banks, insurance, REITs, gas
utilities, consumer services, consumer non-durables, and healthcare. We shall
continue to de-emphasize companies with large foreign exposure, commodity
companies, capital goods companies, and those companies whose domestic
businesses are subject to foreign competition in the U.S. There has been a two
tier market within the S&P 500 since June of 1998; this is starting to correct.
We believe that value stocks are a healthy place to be in this market. Many
value stocks are selling at 30-40% discounts from their high prices for 1998.
Sincerely yours,
/s/ James W. Stratton
James W. Stratton
Chairman
November 3, 1998
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
With the recognition that the recession in Japan and the Pacific Rim countries
would spread to other parts of the world and affect the U.S. economy, we began
a process of eliminating commodity producing stocks from our portfolio in the
third quarter. We sold six of our holdings and five fell into the category of
sensitive to foreign earnings declines. Those five stocks were Cooper
Industries, DuPont, Glatfelter, Springs Industries, and Thomas & Betts. In all
of those cases they were likely to be affected by commodity price deflation
coming from Asia. The other sale that we made was J.C. Penney and that resulted
from disappointment with management's inability to develop the proper profit
margins in the domestic retailing business. We swapped our position in Penney
into The Limited, which seemed to be doing much better in achieving profitable
growth in retailing.
On the purchase side, we focused on domestic brand names such as Anheuser-
Busch, Eastman Kodak, and Quaker State Corp. We also purchased two niche
companies; Diebold, after the price of the stock had declined by almost 50% and
Pall Corp., a manufacturer of filtration systems with a strong emphasis on
healthcare markets. Diebold is a leading manufacturer of automatic teller
machines throughout the world.
At the present time, banking and financial continues to be our largest single
industry with 23.3% of net assets, followed by insurance with 17.5%, business
services 10.7%, and consumer durables 8.1%. We believe the portfolio has been
positioned to reflect the economic slowdown coming from Asia that we
anticipate.
Our expense ratio continues to be reduced with the first nine months showing an
improvement to 1.07%.
Total net assets were $56,854,444. Net asset value per share ended the quarter
at $31.46.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Growth Fund with all dividend income and capital gains distributions
reinvested.
[LINE GRAPH APPEARS HERE]
Average Annual Total Return for the period ended 9/30/98
1 year..................................... + 2.67%
5 year..................................... + 16.84
10 year..................................... + 13.66
15 year..................................... + 12.15
20 year..................................... + 13.18
25 year..................................... + 13.18
Value of Shares
Acquired Through Value of Shares
Reinvestment Acquired Through Total Value
of Capital Gains Reinvestment of of Original
Year Distributions Income Dividends Shares
- ---------------------- ---------------- ---------------- ------------
9/30/1972 $ 10,000 $ 45 $ -
1973-1974 7,630 43 -
1975-1976 11,280 458 -
1977-1978 14,155 1,217 -
1979-1980 14,597 2,147 -
1981-1982 17,299 3,703 -
1983-1884 24,755 6,347 -
1985-1986 38,310 10,805 3,857
1987-1988 30,774 11,062 10,945
1989-1990 31,059 14,859 22,901
1991-1992 32,464 21,871 27,527
1993-1994 32,622 26,652 35,156
1995-1996 42,938 41,919 60,327
05/31/1996-12/31/1996* 42,654 44,981 66,844
12/31/1997 98,447 58,992 52,749
09/30/1998 96,079 57,103 49,700
Past performance is not predictive of future performance.
* Prior to 12/31/96, SGF had a fiscal year-end of 5/31.
2
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Net Assets $56,854,444 $65,887,783
- --------------------------------------------------------------------------------
Net Asset Value Per Share $31.46 $36.14
- --------------------------------------------------------------------------------
Shares Outstanding 1,807,134 1,823,272
- --------------------------------------------------------------------------------
Number of Shareholders 1,402 1,382
- --------------------------------------------------------------------------------
Average Size Account $40,552 $47,676
- --------------------------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------------------------------
<S> <C>
Anheuser-Busch Companies, Inc. (1) Cooper Industries, Inc. (2)
Baxter International, Inc. Du Pont (E.I.) de Nemours & Co. (2)
Diebold, Inc. (1) Glatfelter (P.H.) Co. (2)
Eastman Kodak Co. (1) Kimberly-Clark Corp.
Ford Motor Co. (1) Lincoln National Corp.
Gallagher (Arthur J.) & Co. Ohio Casualty Corp.
The Limited, Inc. (1) Penney (J.C.) Co., Inc. (2)
Pall Corp. (1) Pitney Bowes, Inc.
Quaker State Corp. (1) Springs Industries, Inc. Class A (2)
SAFECO Corp. Thomas & Betts Corp. (2)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS SEPTEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Market Value Percent of TNA
- --------------------------------------------------------------------------------
<S> <C> <C>
First Union Corp. $ 3,368,752 5.9%
- --------------------------------------------------------------------------------
American General Corp. 3,193,750 5.6
- --------------------------------------------------------------------------------
Pitney Bowes, Inc. 2,728,125 4.8
- --------------------------------------------------------------------------------
Commerce Bancorp, Inc. (NJ) 2,648,195 4.7
- --------------------------------------------------------------------------------
Chrysler Corp. 2,393,750 4.2
- --------------------------------------------------------------------------------
PNC Bank Corp. 2,250,000 4.0
- --------------------------------------------------------------------------------
Anheuser-Busch Companies, Inc. 2,160,000 3.8
- --------------------------------------------------------------------------------
Mobil Corp. 1,822,500 3.2
- --------------------------------------------------------------------------------
Baxter International, Inc. 1,785,000 3.1
- --------------------------------------------------------------------------------
American Express Co. 1,707,750 3.0
- --------------------------------------------------------------------------------
$24,057,822 42.3%
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
Despite the turmoil in world financial markets, we maintained a relatively
steady hand on the portfolio. Our turnover ratio for the nine months is only
9.67%. During the quarter, we eliminated two stocks which were at the lower end
of the yield spectrum; Bradley Real Estate, and Kimco Realty Corp. We did
retain the convertible preferred stocks of both of these companies. The common
and convertible preferreds were received in mergers from two companies that we
previously held in our portfolio. We elected to hold the convertible preferreds
because of their much higher income production. The only other stock that was
eliminated was Tower Realty Trust and this was because of concern about poor
management performance.
We added only one new name to the portfolio during the quarter and that was
Meditrust. This is a controversial REIT that formally was extremely well
regarded as an operator of nursing homes and life care communities. Management
became aggressive and enlarged the scope of Meditrust to include hotels and
resort communities. The market did not react well to that and the stock fell
more than 50%. We viewed this to be an outstanding opportunity to buy a very
large REIT with underlying good properties at a depressed price yielding over
15%. The Bass family of Texas has entered this picture and the stock has had
substantial insider buying in the last three months.
Despite the poor relative stock market performance of the REIT industry in the
first nine months of 1998, the fundamentals remain positive for the entire
industry. The average current dividend yield on the stocks in the portfolio is
9.25% with a dividend payout ratio of just under 77% of Funds From Operations
(FFO). We expect FFO growth in 1999 to be about 8% with dividend growth to
shareholders in the 5-6% range. Our portfolio is selling at an average of 8.0x
expected FFO for 1999. This is in contrast to a price-earnings ratio of over 20
for the Standard & Poor's 500 Index.
Total net assets were $87,532,436. Net asset value per share ended the quarter
at $26.23.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Monthly Dividend REIT Shares with all dividend income and capital
gains distributions reinvested.
[LINE GRAPH APPEARS HERE]
Average Annual Total Return for the period ended 9/30/98
1 year..................................... - 6.75%
5 year..................................... + 3.46
10 year..................................... + 8.62
15 year..................................... + 9.78
Value of Shares
Acquired Through Value of Shares
Reinvestment Acquired Through Total Value
of Capital Gains Reinvestment of of Original
Year Distributions Income Dividends Shares
- ---------------------- ---------------- ---------------- ------------
05/31/1980 $ - $ 583 $ 9,113
1981 - 583 9,113
1982 - 1,641 9,354
1983 - 3,107 10,808
1984 - 4,379 10,667
1985 - 6,627 11,795
1986 - 10,328 14,604
1987 503 13,744 16,320
1988 1,043 13,041 13,181
1989 1,015 15,044 12,824
1990 1,018 17,513 12,861
1991 956 19,388 12,084
1992 1,156 26,570 14,609
1993 1,242 31,818 15,701
1994 1,192 33,590 15,060
1995 1,032 32,499 13,039
1996 1,138 39,890 14,383
01/31/96-12/31/96* 1,139 43,821 14,399
12/31/1997 1,257 52,959 15,879
09/30/1998 1,089 49,057 13,769
Past performance is not predictive of future performance.
*Prior to 12/31/96, SMDS had a fiscal year-end of 1/31.
4
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Net Assets $87,532,436 $91,770,344
- --------------------------------------------------------------------------------
Net Asset Value Per Share $26.23 $28.65
- --------------------------------------------------------------------------------
Shares Outstanding 3,336,760 3,203,338
- --------------------------------------------------------------------------------
Number of Shareholders 4,420 4,619
- --------------------------------------------------------------------------------
Average Size Account $19,804 $19,868
- --------------------------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------------------------------
<S> <C>
American Health Properties, Inc. Bradley Real Estate, Inc. (2)
Associated Estates Realty Corp. Colonial Properties Trust
Boykin Lodging Co. Developers Diversified Realty Corp.
First Industrial Realty Trust, Inc. Health Care REIT, Inc.
Kimco Realty Corp. Depositary Shares Class
D Kimco Realty Corp. (2)
LTC Properties, Inc. Liberty Property Trust
Meditrust Corp. (1) Tower Realty Trust, Inc. (2)
Pacific Gulf Properties, Inc.
Storage Trust Realty
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- --------------------------------------------------------------------------------
<S> <C> <C>
Colonial Properties Trust $ 3,875,981 4.4%
- --------------------------------------------------------------------------------
Liberty Property Trust 3,748,088 4.3
- --------------------------------------------------------------------------------
Health Care REIT, Inc. 3,727,500 4.3
- --------------------------------------------------------------------------------
Bradley Real Estate, Inc. Preferred Class A 3,310,335 3.8
- --------------------------------------------------------------------------------
American Health Properties, Inc. 3,172,500 3.6
- --------------------------------------------------------------------------------
Mid-Atlantic Realty Trust 3,105,000 3.5
- --------------------------------------------------------------------------------
Glimcher Realty Trust 2,825,625 3.2
- --------------------------------------------------------------------------------
Gables Residential Trust 2,681,250 3.1
- --------------------------------------------------------------------------------
New Plan Excel Realty Trust, Inc. 2,517,750 2.9
- --------------------------------------------------------------------------------
EastGroup Properties, SBI 2,359,375 2.7
- --------------------------------------------------------------------------------
$31,323,404 35.8%
- --------------------------------------------------------------------------------
</TABLE>
Because of the Fund's large concentration in REITs, some portion of the monthly
dividend to shareholders will be re-classified as a return of capital at year-
end. 1099-DIV forms will be mailed by January 31, 1999 specifying the amount of
taxable income.
5
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
Your Fund slightly outperformed the Russell 2000 for the quarter ended 9/30/98,
- -18.9% versus -20.1%. We outperformed significantly during the August
correction but we did not keep up with the September technology-led rebound
that continued through October. For the trailing twelve months, your Fund is
down -15.5% versus -19.0% for the Russell 2000.
At the end of the quarter, the portfolio was 94% invested with the remaining
cash reserves held in short-term commercial paper. Industrial and Banking
remain our largest sectors at 20% and 18% respectively. Business services are
13% while 8% of the portfolio is in dividend-paying technology stocks.
Currently, the average market capitalization of the stocks in the portfolio is
approximately $430 million. The current number of holdings is 65.
During the quarter, we actively reduced the cyclical exposure of the portfolio.
We sold Carpenter Technology Corp. which produces steel, and Defiance, Inc. and
Excel Industries, Inc. which both make O.E.M. autoparts. Additionally, we
eliminated three of the portfolio's bank positions due to takeovers that had
been announced previously. We deployed the proceeds from these sales into
undervalued companies, all of which have a domestic focus.
We remain somewhat cautious on the outlook for the economy and the stock
market. If the market leadership broadens we expect improved performance from
small-cap value stocks. If on the other hand, the overall market weakens our
defensive, dividend-based investment style should produce strong, relative
performance.
The Fund's Directors declared the regular third fiscal quarter dividend at the
rate of $0.03 per share, payable on September 24 to stockholders of record as
of September 16, 1998. We do not anticipate having to pay a capital gains
distribution in December as we have offset gains taken earlier in the year
during the recent market turmoil.
Total net assets at quarter-end are $42,918,438. Net asset value per share was
$18.48.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Small-Cap Yield Fund with all dividend income and capital gains
distributions reinvested.
[LINE GRAPH APPEARS HERE]
Average Annual Total Return for the period ended 9/30/98
1 year..................................... - 15.47%
3 year..................................... + 12.82
5 year..................................... + 10.74
Value of Shares
Acquired Through Value of Shares
Reinvestment Acquired Through Total Value
of Capital Gains Reinvestment of of Original
Year Distributions Income Dividends Shares
- ---------------------- ---------------- ---------------- ------------
04/12/93 $ - $ - $ 10,000
04/1993 - - 10,000
03/31/1994 - 158 10,376
03/31/1995 - 402 10,352
03/31/1996 - 789 12,780
03/31/96-12/31/96* 813 1,067 13,432
12/31/1997 2,190 1,633 17,976
09/30/1998 1,833 1,457 14,784
Past performance is not predictive of future performance.
* Prior to 12/31/96, SSCY had a fiscal year-end of 3/31.
6
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Net Assets $42,918,438 $55,293,239
- --------------------------------------------------------------------------------
Net Asset Value Per Share $18.48 $22.83
- --------------------------------------------------------------------------------
Shares Outstanding 2,322,749 2,422,063
- --------------------------------------------------------------------------------
Number of Shareholders 1,941 2,011
- --------------------------------------------------------------------------------
Average Size Account $22,112 $27,495
- --------------------------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------------------------------
<S> <C>
Alfa Corp. (1) Boston Acoustics, Inc.
Blanch (E.W.) Holdings, Inc. (1) Carpenter Technology Corp.
Huffy Corp. (1) CCA Prison Realty Trust
LSI Industries, Inc. Defiance, Inc. (2)
Morrison Health Care, Inc. Excel Industries, Inc.
Quixote Corp. (1) Helix Technology Corp. (2)
Resource Bancshares Mortgage Group, Inc. (1) Hunt Corp.
Rollins Truck Leasing Corp. SIS Bancorp, Inc. (2)
Schawk, Inc. Sovereign Bancorp, Inc. (2)
Southwest Securities Group, Inc. (1) Star Banc Corp. (2)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF TNA
- --------------------------------------------------------------------------------
<S> <C> <C>
Boston Acoustics, Inc. $ 1,567,500 3.7%
- --------------------------------------------------------------------------------
American Heritage Life Investment Corp. 1,414,375 3.3
- --------------------------------------------------------------------------------
Eaton Vance Corp. 1,383,750 3.2
- --------------------------------------------------------------------------------
Commercial Intertech Corp. 1,290,625 3.0
- --------------------------------------------------------------------------------
Wackenhut Corp. Class B 1,132,500 2.6
- --------------------------------------------------------------------------------
Riviana Foods, Inc. (DE) 1,093,125 2.6
- --------------------------------------------------------------------------------
Primex Technologies, Inc. 1,067,600 2.5
- --------------------------------------------------------------------------------
Greenbrier Companies, Inc. 1,035,687 2.4
- --------------------------------------------------------------------------------
Florida Rock Industries, Inc. 990,000 2.3
- --------------------------------------------------------------------------------
LSI Industries, Inc. 990,000 2.3
- --------------------------------------------------------------------------------
$11,965,162 27.9%
- --------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON SPECIAL VALUE FUND
- --------------------------------------------------------------------------------
Following a strong first half performance, the Stratton Special Value Fund
experienced a -21.5% total return in the third quarter, bringing the year-to-
date performance to -9.9%. By way of comparison, the Russell 2000 index posted
quarterly and year-to-date returns of -20.5% and -16.2%, respectively. As
mentioned previously, the third quarter of 1998 was an extremely difficult
period for investors in the financial markets. We witnessed a shift from the
benefits of excessive liquidity, to the dangers of excessive leverage in the
form of the near collapse of a $100 billion hedge fund. The largest "nifty one-
hundred" blue chip stocks finally joined the ongoing rout of the broader
market. The stock market correction is providing attractive investment
opportunities, with many smaller issues selling 50% or more below their yearly
highs.
The Fund focuses on under-researched, less well-known companies, which the
Investment Advisor considers to be selling at below average valuations of
estimated future earnings and cash flow. The average market capitalization of
the investments is $307 million and many of the holdings are micro-cap issues,
which tend to be under-researched by Wall Street analysts. As these companies
grow and become more visible, they should realize more generous stock market
valuations. The portfolio appears very undervalued with a price/earnings ratio
of 10.3 times next years estimated earnings, versus a ratio of more than 24 for
the S&P 500 Index. Moreover, the average return on equity in the portfolio
nearly equals the market index at 20%.
At the end of September, the portfolio was 96.6% invested in 60 companies with
the largest concentrations in the Insurance (13.4%), Construction (12.4%),
Consumer Durables (10.8%) and Capital Goods Technology (10.2%) areas. We
believe that these industries should benefit from the current low inflation/low
interest rate environment.
The Fund did not engage in any short sales or options transactions during the
first nine months of the year. Total net assets were $5,838,537 and the net
asset value per share stood at $13.52.
8
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Net Assets $5,838,537 $7,220,520
- --------------------------------------------------------------------------------
Net Asset Value Per Share $13.52 $17.22
- --------------------------------------------------------------------------------
Shares Outstanding 431,930 419,363
- --------------------------------------------------------------------------------
Number of Shareholders 56 50
- --------------------------------------------------------------------------------
Average Size Account $104,260 $144,410
- --------------------------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED SEPTEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------------------------------
<S> <C>
Anchor Gaming (1) Ameron International Corp. (2)
Bel Fuse, Inc. Class A Bell Industries, Inc. (2)
Cracker Barrel Old Country Store, Inc. Boston Acoustics, Inc. (2)
Dawson Geophysical Co. (1) Bush Industries, Inc. (2)
SIFCO Industries, Inc. Giant Cement Holding, Inc. (2)
Stanley Furniture Co., Inc. (1) LandAmerica Financial Group, Inc.
Texas Industries, Inc. Richey Electronics, Inc. (2)
Trenwick Group, Inc. SEACOR SMIT, Inc. (2)
Unico American Corp. Sturm, Ruger & Co., Inc. (2)
Woodhead Industries, Inc. (1) Trimble Navigation, Ltd. (2)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS SEPTEMBER 30, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF TNA
- --------------------------------------------------------------------------------
<S> <C> <C>
Velcro Industries, N.V. $ 167,300 2.9%
- --------------------------------------------------------------------------------
Cracker Barrel Old Country Store, Inc. 166,075 2.8
- --------------------------------------------------------------------------------
Unico American Corp. 161,156 2.8
- --------------------------------------------------------------------------------
Koss Corp. 160,312 2.7
- --------------------------------------------------------------------------------
Donegal Group, Inc. 154,528 2.6
- --------------------------------------------------------------------------------
Valassis Communications, Inc. 152,000 2.6
- --------------------------------------------------------------------------------
SIFCO Industries, Inc. 150,000 2.6
- --------------------------------------------------------------------------------
WD-40 Co. 143,625 2.5
- --------------------------------------------------------------------------------
Duckwall-ALCO Stores, Inc. 140,250 2.4
- --------------------------------------------------------------------------------
NCI Building Systems, Inc. 138,687 2.4
- --------------------------------------------------------------------------------
$1,533,933 26.3%
- --------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SGF is to seek possible growth of capital for its
shareholders' investments with current income from interest and dividends as a
secondary objective. The Fund's investments will normally consist of common
stock and securities convertible into common stock.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
Our in-house research of historical data shows that investing in high yielding
common stocks has produced above-average returns while lowering risk and
preserving capital. For Stratton Management Co., the common stock yield is the
primary screen in sorting out the equity stocks that are available. We then
look at additional yield characteristics such as dividend growth rates and
dividend coverage. Finally, we conduct fundamental analysis of important
characteristics such as the earnings and cash flow outlook, management
strengths, and industry competitive position.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Stocks of companies that pay above average dividends tend to be less volatile
than companies that do not distribute dividends to shareholders. Though stock
prices do vary over time, dividend payouts tend to be very consistent. We find
that companies which consistently strive to increase their dividends tend to
offer the potential of above average returns. Steady, stable growth of
principal and dividend income is what SGF hopes to achieve.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 by more than
50%.
. Approximately 35 companies are held.
. By combining high dividend yield and underlying low price volatility (Beta),
SGF should have the potential to produce good relative performance in up
markets and superior relative performance in down markets.
10
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SMDS 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. In order to achieve these goals, the Fund
invests substantially all of its assets in high income-producing U.S. equity
securities.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
The Fund is managed to provide a high level of monthly income to its
shareholders and, therefore, looks for companies that have strong dividend
payouts. Currently, 80% or more of the Fund is invested in high dividend paying
REIT's. There are several types of real estate properties that are owned by
REIT's, including multifamily apartment complexes, health care facilities,
shopping centers, regional malls, office centers, hotels, and industrial
buildings. The portfolio is diversified across several sectors within the REIT
industry.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Current income is paramount for the SMDS portfolio. The Fund needs higher
yielding securities to maintain its own attractive dividend payout. REITs
satisfy this income requirement, while also offering the potential for dividend
growth and capital appreciation. REITs must distribute 95% of their net
investment income, so, as the earnings of these companies grow, increases in
dividends should follow.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The portfolio is comprised of high dividend paying securities.
. Approximately 40 companies are held.
. SMDS is managed to provide a high level of current monthly income, and to
offer the potential for long-term capital appreciation.
11
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SSCY is to achieve both dividend income and capital
appreciation. In order to achieve these goals, the Fund invests in equity
securities, primarily common stock, and securities convertible into common
stock, of companies with total market capitalizations at the time of investment
of less than $1 billion and which are outside the S&P 500 Index. We attempt to
purchase companies whose recent and future earnings power give them the
potential for higher valuations and continued dividend growth.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
This all equity mutual fund invests in the common stocks of small but
established dividend paying companies. The initial screen for stock selection
requires that a stock yields greater than the Small Cap average as measured by
the Russell 2000 Index. We then employ a three step process which focuses on a
stock's fundamental valuation, earnings prospects, and, as a confirming factor,
relative price strength. We feel that companies that exhibit consistent
earnings and that regularly increase their dividends have superior appreciation
potential with reasonable levels of risk.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Our research has shown that dividends tend to dampen stock price volatility.
Small-cap companies that pay dividends tend to have strong financial
characteristics since the quarterly dividend payout requires managements to
exhibit a high degree of financial discipline. The combination of strong
earnings growth and superior earnings stability are crucial elements in meeting
SSCY'S investment objectives.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 and be
approximately twice the yield of the average small-cap company.
. Approximately 65 companies are held.
. By combining high dividend yields and underlying low price volatility (Beta),
SSCY seeks to produce good relative performance in up markets and superior
relative performance in down markets.
12
<PAGE>
STRATTON SPECIAL VALUE FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SSVF is capital appreciation. The Fund invests in
equity securities, primarily common stock, and securities convertible into or
exchangeable for common stock which represent a value or potential worth which
is not fully recognized by prevailing market prices. These stocks are
considered by the Investment Advisor to be under-researched as measured by the
professional, financial research analysts covering them.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
The investment advisor employs a "value" approach to the Fund's investments,
seeking to identify companies that have experienced fundamental change, are
intrinsically undervalued or are misunderstood by the investment community. We
examine various factors in determining the value characteristics of securities
including, but not limited to, ratios of price to cash flow, price to sales,
price to book, price to revenue and price to earnings. We will also seek out
companies in which there is a large disparity between its market value and our
estimate of its earnings power, assets, or private market value.
WHAT TYPES OF COMPANIES WILL BE CONSIDERED FOR PURCHASE?
The Fund seeks to achieve superior total returns by employing multiple
strategies which include: investing in micro-cap companies, which tend to be
undiscovered and under-researched by Wall Street analysts; investing in under-
valued large cap companies; and participating in initial public offerings.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The Fund strives to exploit developing investment opportunities across both
the large and small cap sectors of the market.
. Portfolio turnover may be above-average as the fund manager will attempt to
respond rapidly to changing market conditions.
. SSVF has an aggressive investment policy and as a result, is designed as one
part of a complete investment program.
13
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 89.5%
BANKING/FINANCIAL - 23.3%
Bank One Corp............................................ 28,160 $ 1,200,320
Comerica, Inc............................................ 22,500 1,233,281
Commerce Bancorp, Inc. (NJ).............................. 66,937 2,648,195
Compass Bancshares, Inc.................................. 20,000 660,000
First Union Corp......................................... 65,812 3,368,752
PNC Bank Corp............................................ 50,000 2,250,000
Summit Bancorp, Inc...................................... 30,000 1,125,000
Union Planters Corp...................................... 15,000 753,750
-----------
13,239,298
-----------
BUSINESS SERVICES - 10.7%
American Express Co...................................... 22,000 1,707,750
Diebold, Inc............................................. 20,000 440,000
Gallagher (Arthur J.) & Co............................... 30,000 1,237,500
Pitney Bowes, Inc........................................ 50,000 2,728,125
-----------
6,113,375
-----------
CAPITAL GOODS/TECHNOLOGY - 2.2%
Harris Corp.............................................. 40,000 1,280,000
-----------
CHEMICAL - 2.5%
Olin Corp................................................ 50,000 1,434,375
-----------
CONSUMER DURABLES - 8.1%
Chrysler Corp............................................ 50,000 2,393,750
Eastman Kodak Co......................................... 10,000 773,125
Ford Motor Co............................................ 15,000 704,063
Rubbermaid, Inc.......................................... 30,000 718,125
-----------
4,589,063
-----------
CONSUMER NON-DURABLES - 5.8%
Anheuser-Busch Companies, Inc............................ 40,000 2,160,000
Kimberly-Clark Corp...................................... 28,000 1,134,000
-----------
3,294,000
-----------
ENERGY - 4.1%
Mobil Corp............................................... 24,000 1,822,500
Quaker State Corp........................................ 36,000 524,250
-----------
2,346,750
-----------
HEALTH CARE - 6.9%
American Home Products Corp.............................. 26,000 1,361,750
Baxter International, Inc................................ 30,000 1,785,000
Shared Medical Systems Corp.............................. 15,000 797,813
-----------
3,944,563
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
INDUSTRIAL - 5.1%
Carpenter Technology Corp............................... 46,000 $ 1,681,875
Fleetwood Enterprises, Inc.............................. 40,000 1,207,500
-----------
2,889,375
-----------
INSURANCE/SERVICES - 17.5%
American General Corp................................... 50,000 3,193,750
Aon Corp................................................ 22,500 1,451,250
HSB Group, Inc.......................................... 22,500 908,437
Jefferson-Pilot Corp.................................... 12,500 756,250
Lincoln National Corp................................... 10,000 822,500
Ohio Casualty Corp...................................... 10,000 387,500
SAFECO Corp............................................. 35,000 1,459,062
Unitrin, Inc............................................ 15,000 962,812
-----------
9,941,561
-----------
RETAILING - 1.2%
The Limited, Inc........................................ 30,000 658,125
-----------
TECHNOLOGY - 0.9%
Pall Corp............................................... 22,000 488,125
-----------
UTILITIES/GAS - 1.2%
El Paso Energy Corp..................................... 20,000 648,750
-----------
Total Common Stocks
(cost $32,596,860)..................................... 50,867,360
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 7.0%
General Motors Acceptance Corp.
5.56% due 10/01/98..................................... $2,200,000 2,200,000
General Electric Capital Corp.
5.20% due 10/06/98..................................... 1,775,000 1,775,000
-----------
Total Short-Term Notes
(cost $3,975,000)...................................... 3,975,000
-----------
TOTAL INVESTMENTS - 96.5%
(cost $36,571,860*).................................... 54,842,360
CASH AND OTHER ASSETS
LESS LIABILITIES - 3.5%................................ 2,012,084
-----------
NET ASSETS - 100.00%.................................... $56,854,444
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $36,571,860; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $19,112,537
Gross unrealized depreciation...................................... (842,037)
-----------
Net unrealized appreciation....................................... $18,270,500
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 86.9%
APARTMENTS - 17.3%
Associated Estates Realty Corp........................... 80,000 $ 1,460,000
Berkshire Realty Co., Inc................................ 150,000 1,565,625
Cornerstone Realty Income Trust, Inc..................... 130,000 1,446,250
Gables Residential Trust................................. 100,000 2,681,250
Home Properties of New York, Inc......................... 85,000 2,231,250
Mid-America Apartment Communities, Inc. ................. 60,000 1,552,500
Town & Country Trust..................................... 153,300 2,347,406
Walden Residential Properties, Inc. ..................... 80,000 1,840,000
-----------
15,124,281
-----------
DIVERSIFIED - 11.0%
Colonial Properties Trust................................ 136,900 3,875,981
EastGroup Properties, SBI................................ 125,000 2,359,375
Meditrust Corp........................................... 100,000 1,706,250
Pacific Gulf Properties, Inc............................. 85,000 1,710,625
-----------
9,652,231
-----------
HEALTH CARE - 12.6%
American Health Properties, Inc.......................... 135,000 3,172,500
Health Care REIT, Inc. .................................. 140,000 3,727,500
HRPT Properties Trust.................................... 90,000 1,451,250
LTC Properties, Inc...................................... 85,000 1,482,188
Universal Health Realty Income Trust..................... 65,000 1,210,625
-----------
11,044,063
-----------
LODGING - 17.3%
Boykin Lodging Co........................................ 110,000 1,656,875
Equity Inns, Inc. ....................................... 190,000 2,196,875
FelCor Lodging Trust, Inc................................ 70,000 1,701,875
Hospitality Properties Trust............................. 60,000 1,785,000
Innkeepers USA Trust..................................... 170,000 2,018,750
Jameson Inns, Inc........................................ 160,000 1,560,000
RFS Hotel Investors, Inc. ............................... 125,000 1,500,000
Sunstone Hotel Investors, Inc............................ 130,000 1,178,125
Winston Hotels, Inc. .................................... 175,000 1,520,312
-----------
15,117,812
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
OFFICE/INDUSTRIAL - 9.0%
Commercial Net Lease Realty, Inc. ........................ 90,000 $ 1,316,250
First Industrial Realty Trust, Inc........................ 60,000 1,530,000
Liberty Property Trust.................................... 157,400 3,748,088
TriNet Corporate Realty Trust, Inc........................ 40,000 1,305,000
-----------
7,899,338
-----------
OUTLET CENTERS - 3.6%
Mills Corp. .............................................. 48,700 1,132,275
Tanger Factory Outlet Centers, Inc........................ 90,000 2,041,875
-----------
3,174,150
-----------
REGIONAL MALLS - 3.3%
Glimcher Realty Trust..................................... 165,000 2,825,625
-----------
SHOPPING CENTERS - 11.2%
Developers Diversified Realty Corp........................ 60,000 1,095,000
IRT Property Co........................................... 166,000 1,680,750
Mid-Atlantic Realty Trust................................. 230,000 3,105,000
New Plan Excel Realty Trust, Inc.......................... 108,000 2,517,750
Western Investment Real Estate Trust...................... 110,000 1,409,375
-----------
9,807,875
-----------
STORAGE CENTERS - 1.6%
Storage Trust Realty...................................... 60,000 1,410,000
-----------
Total Common Stocks
(cost $77,361,177)....................................... 76,055,375
-----------
PREFERRED STOCK - 5.7%
Bradley Real Estate, Inc. Conv. Preferred Class A......... 142,380 3,310,335
Kimco Realty Corp.--Depositary Shares Class D............. 59,300 1,478,794
Psychiatric Group Preferred Depositary Shares............. 100,000 206,250
-----------
Total Preferred Stocks
(cost $6,802,927)........................................ 4,995,379
-----------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 6.8%
American Express Credit Corp.
5.38% due 10/01/98..................................... $1,221,000 $ 1,221,000
General Electric Capital Corp.
5.33% due 10/02/98..................................... 1,266,000 1,266,000
General Electric Capital Corp.
5.38% due 10/05/98..................................... 1,232,000 1,232,000
Ford Motor Credit Co.
5.25% due 10/06/98..................................... 2,200,000 2,200,000
-----------
Total Short-Term Notes
(cost $5,919,000)...................................... 5,919,000
-----------
TOTAL INVESTMENTS - 99.4%
(cost $90,083,104*).................................... 86,969,754
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.6%................................ 562,682
-----------
NET ASSETS - 100.00%.................................... $87,532,436
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $90,083,104; and net
unrealized depreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 4,269,192
Gross unrealized depreciation...................................... (7,382,542)
-----------
Net unrealized depreciation....................................... $(3,113,350)
===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 93.6%
BANKING/FINANCIAL - 17.9%
American Bank of Connecticut............................. 22,000 $ 393,250
Centura Banks, Inc. (NC)................................. 8,000 503,000
Colonial BancGroup, Inc.................................. 30,000 376,875
Commerce Bancorp, Inc. (NJ).............................. 19,687 778,867
Community Bank Systems, Inc.............................. 17,000 485,562
First Essex Bancorp, Inc. ............................... 25,000 415,625
First Financial Holdings, Inc............................ 18,000 306,000
JeffBanks, Inc........................................... 26,666 663,317
Medford Bancorp, Inc..................................... 26,000 419,250
Ocean Financial Corp. ................................... 34,000 510,000
Peoples Heritage Financial Group, Inc.................... 25,346 454,644
Reliance Bancorp, Inc. .................................. 18,000 508,500
Republic Banking Corp. of Florida........................ 30,000 311,250
Resource Bancshares Mortgage Group, Inc.................. 30,000 532,500
Southwest Securities Group, Inc.......................... 14,200 262,700
Vermont Financial Services Corp. ........................ 16,000 344,000
Webster Financial Corp................................... 16,632 405,405
-----------
7,670,745
-----------
BUSINESS SERVICES - 12.8%
Dain Rauscher Corp. ..................................... 19,000 598,500
Eaton Vance Corp......................................... 60,000 1,383,750
Primesource Corp......................................... 90,000 742,500
Rollins Truck Leasing Corp............................... 20,000 223,750
Schawk, Inc. ............................................ 50,000 746,875
True North Communications, Inc. ......................... 30,000 665,625
Wackenhut Corp. Class B.................................. 60,000 1,132,500
-----------
5,493,500
-----------
CHEMICAL - 5.5%
LeaRonal, Inc............................................ 31,800 540,600
Primex Technologies, Inc................................. 31,400 1,067,600
Quaker Chemical Corp. ................................... 49,600 775,000
-----------
2,383,200
-----------
CONSUMER DURABLES - 3.8%
Huffy Corp............................................... 40,000 565,000
Hunt Corp................................................ 13,000 197,438
TB Wood's Corp. ......................................... 60,000 875,625
-----------
1,638,063
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
CONSUMER NON-DURABLES - 8.7%
Guilford Mills, Inc. ..................................... 30,000 $ 446,250
International Multifoods Corp. ........................... 40,000 657,500
Riviana Foods, Inc. (DE).................................. 55,000 1,093,125
Tasty Baking Co........................................... 55,000 811,250
Velcro Industries, N.V.................................... 6,000 717,000
-----------
3,725,125
-----------
HEALTH CARE - 2.8%
Morrison Health Care, Inc................................. 41,000 727,750
Shared Medical Systems Corp............................... 9,000 478,688
-----------
1,206,438
-----------
INDUSTRIAL - 19.7%
A.O. Smith Corp. ......................................... 42,000 824,250
Carpenter Technology Corp................................. 12,000 438,750
Commercial Intertech Corp................................. 70,000 1,290,625
Excel Industries, Inc. ................................... 15,000 187,500
Florida Rock Industries, Inc.............................. 40,000 990,000
Greenbrier Companies, Inc. ............................... 73,000 1,035,687
Kuhlman Corp.............................................. 25,000 810,937
LSI Industries, Inc....................................... 55,000 990,000
Quanex Corp. ............................................. 33,000 653,812
Republic Group, Inc. ..................................... 45,000 599,063
Roanoke Electric Steel Corp............................... 48,000 624,000
-----------
8,444,624
-----------
INSURANCE/SERVICES - 9.5%
Alfa Corp................................................. 20,000 377,500
American Heritage Life Investment Corp. .................. 62,000 1,414,375
Blanch (E.W.) Holdings, Inc. ............................. 13,000 502,937
Donegal Group, Inc. ...................................... 46,666 711,657
Mobile America Corp. (FL)................................. 70,000 498,750
Selective Insurance Group, Inc............................ 30,000 573,750
-----------
4,078,969
-----------
REAL ESTATE - 5.2%
Brandywine Realty Trust................................... 16,000 306,000
CCA Prison Realty Trust................................... 3,500 63,000
Chateau Communities, Inc. ................................ 9,378 261,998
EastGroup Properties, SBI................................. 20,000 377,500
Innkeepers USA Trust...................................... 35,000 415,625
Pacific Gulf Properties, Inc.............................. 10,000 201,250
Parkway Properties, Inc. ................................. 20,000 610,000
-----------
2,235,373
-----------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
TECHNOLOGY - 7.7%
Boston Acoustics, Inc. ................................. 60,000 $ 1,567,500
Marc, Inc............................................... 37,500 515,625
Quixote Corp............................................ 58,000 725,000
Technitrol, Inc......................................... 25,000 500,000
-----------
3,308,125
-----------
Total Common Stocks
(cost $36,417,042)..................................... 40,184,162
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 5.3%
American Express Credit Corp.
5.50% due 10/02/98..................................... $1,125,000 1,125,000
General Electric Capital Corp.
5.35% due 10/02/98..................................... 1,125,000 1,125,000
-----------
Total Short-Term Notes
(cost $2,250,000)...................................... 2,250,000
-----------
TOTAL INVESTMENTS - 98.9%
(cost $38,667,042*).................................... 42,434,162
CASH AND OTHER ASSETS
LESS LIABILITIES - 1.1%................................ 484,276
-----------
NET ASSETS - 100.00%.................................... $42,918,438
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $38,667,042; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 6,961,303
Gross unrealized depreciation...................................... (3,194,183)
-----------
Net unrealized appreciation....................................... $ 3,767,120
===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
COMMON STOCKS - 96.6%
AUTOMOTIVE - 5.3%
Featherlite, Inc.*........................................ 12,000 $ 96,000
Motorcar Parts & Accessories, Inc.*....................... 8,000 93,000
Safety Components International, Inc.*.................... 9,000 119,250
----------
308,250
----------
BANKING/FINANCIAL - 0.8%
Hanmi Bank................................................ 3,225 48,375
----------
BUSINESS SERVICES - 3.5%
Gallagher (Arthur J.) & Co. .............................. 1,200 49,500
Valassis Communications, Inc.*............................ 3,800 152,000
----------
201,500
----------
CAPITAL GOODS - 1.0%
Chicago Rivet & Machine Co. .............................. 2,300 58,363
----------
CAPITAL GOODS/TECHNOLOGY - 10.2%
Bel Fuse, Inc. Class A*................................... 6,250 96,094
Bel Fuse, Inc. Class B*................................... 3,250 47,125
Hummingbird Communications, Ltd.*......................... 3,600 73,575
Percon, Inc.*............................................. 10,000 63,750
SIFCO Industries, Inc..................................... 12,000 150,000
Specialty Equipment Companies, Inc.*...................... 5,200 103,350
Woodhead Industries, Inc. ................................ 6,000 63,000
----------
596,894
----------
CONSTRUCTION - 12.4%
Crossman Communities, Inc.*............................... 5,800 116,725
Dominion Homes, Inc.*..................................... 4,500 47,250
Drew Industries, Inc.*.................................... 10,000 122,500
Engle Homes, Inc.......................................... 7,000 99,531
M/I Schottenstein Homes, Inc.............................. 6,400 118,400
NCI Building Systems, Inc.*............................... 7,000 138,687
Texas Industries, Inc..................................... 3,200 80,400
----------
723,493
----------
CONSUMER DURABLES - 10.8%
American Woodmark Corp. .................................. 3,500 88,812
Ballantyne of Omaha, Inc.*................................ 9,000 73,687
Callaway Golf Co.......................................... 5,500 59,469
Cannondale Corp.*......................................... 4,000 37,375
Coast Distribution System*................................ 20,000 60,000
Decorator Industries, Inc................................. 3,750 28,125
Stanley Furniture Co., Inc................................ 6,500 112,937
Velcro Industries, N.V.................................... 1,400 167,300
----------
627,705
----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
CONSUMER NON-DURABLES - 5.2%
Koss Corp.*................................................ 15,000 $ 160,312
WD-40 Co................................................... 6,000 143,625
----------
303,937
----------
ENERGY - 2.3%
Dawson Geophysical Co.*.................................... 7,000 81,375
Ultramar Diamond Shamrock Corp. ........................... 2,300 52,325
----------
133,700
----------
ENTERTAINMENT - 4.0%
Anchor Gaming*............................................. 1,500 85,875
Churchill Downs, Inc. ..................................... 2,000 61,000
Jackpot Enterprises, Inc................................... 9,000 89,438
----------
236,313
----------
INDUSTRIAL - 6.3%
Carpenter Technology Corp.................................. 1,600 58,500
Cascade Corp............................................... 7,700 102,506
Lufkin Industries, Inc. ................................... 3,500 91,000
Raven Industries, Inc...................................... 7,000 117,250
----------
369,256
----------
INSURANCE/SERVICES - 13.4%
Acceptance Insurance Companies, Inc.*...................... 3,500 72,844
Donegal Group, Inc. ....................................... 10,133 154,528
LandAmerica Financial Group, Inc........................... 2,000 102,500
Mobile America Corp. (FL).................................. 13,000 92,625
Motor Club of America...................................... 7,000 89,688
Trenwick Group, Inc........................................ 3,800 110,675
Unico American Corp........................................ 13,500 161,156
----------
784,016
----------
METALS - 8.1%
Lindberg Corp. ............................................ 7,000 88,375
Northwest Pipe Co.*........................................ 5,000 92,500
Penn Engineering & Manufacturing Corp. .................... 4,200 83,212
RMI Titanium Co. .......................................... 6,300 126,788
Special Metals Corp.*...................................... 8,000 83,000
----------
473,875
----------
REAL ESTATE - 1.4%
Sunstone Hotel Investors, Inc.............................. 9,000 81,563
----------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
RETAILING - 5.7%
Cracker Barrel Old Country Store, Inc..................... 7,300 $ 166,075
Duckwall-ALCO Stores, Inc.*............................... 11,000 140,250
Hampshire Group, Ltd.*.................................... 1,500 27,563
----------
333,888
----------
TECHNOLOGY - 2.4%
Esterline Technologies Corp.*............................. 7,000 137,375
----------
TELECOMMUNICATIONS - 3.8%
Applied Signal Technology, Inc.*.......................... 8,500 104,656
Hickory Tech Corp......................................... 5,100 59,925
Vertex Communications Corp.*.............................. 3,000 55,125
----------
219,706
----------
Total Common Stocks
(cost $6,715,626)........................................ 5,638,209
----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C>
SHORT-TERM NOTES - 3.1%
(cost $180,000)
General Electric Capital Corp.
5.35% due 10/05/98....................................... $180,000 180,000
----------
TOTAL INVESTMENTS - 99.7%
(cost $6,895,626**)...................................... 5,818,209
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.3%.................................. 20,328
----------
NET ASSETS - 100.00%...................................... $5,838,537
==========
</TABLE>
- --------
* non-income producing
** Aggregate cost for federal income tax purposes is $6,895,626; and net
unrealized depreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 119,770
Gross unrealized depreciation...................................... (1,197,187)
-----------
Net unrealized depreciation....................................... $(1,077,417)
===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF*
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities
at value (cost
$36,571,860,
$90,083,104, $38,667,042
and $6,895,626,
respectively) (Note 1).. $54,842,360 $ 86,969,754 $42,434,162 $ 5,818,209
Cash..................... 163,037 7,423 96,272 17,979
Dividends and interest
receivable.............. 84,146 583,646 64,815 2,349
Receivable for securities
sold.................... 2,425,419 -- 559,206 --
Prepaid expenses......... 2,803 -- -- --
----------- ------------ ----------- -----------
Total Assets........... 57,517,765 87,560,823 43,154,455 5,838,537
----------- ------------ ----------- -----------
LIABILITIES:
Accrued expenses and
other liabilities....... 25,708 28,387 38,167 --
Payable for investment
securities purchased.... 637,613 -- 197,850 --
----------- ------------ ----------- -----------
Total Liabilities...... 663,321 28,387 236,017 --
----------- ------------ ----------- -----------
NET ASSETS:
Applicable to 1,807,134,
3,336,760, 2,322,749 and
431,930 shares
outstanding,
respectively/1......./.. $56,854,444 $ 87,532,436 $42,918,438 $ 5,838,537
=========== ============ =========== ===========
Net asset value, offering
and redemption price per
share................... $ 31.46 $ 26.23 $ 18.48 $ 13.52
=========== ============ =========== ===========
SOURCE OF NET ASSETS:
Paid-in capital.......... $34,883,640 $102,441,748 $39,988,519 $ 6,798,747
Undistributed net
investment income
(loss).................. 333,526 1,172,355 12,718 (29,381)
Accumulated net realized
gain (loss) on
investments............. 3,366,778 (12,968,317) (849,919) 146,588
Net unrealized
appreciation
(depreciation) of
investments............. 18,270,500 (3,113,350) 3,767,120 (1,077,417)
----------- ------------ ----------- -----------
Net Assets............. $56,854,444 $ 87,532,436 $42,918,438 $ 5,838,537
=========== ============ =========== ===========
</TABLE>
- --------
/1/SGF: $.10 par value, 10,000,000 shares authorized; SMDS: $1.00 par value,
10,000,000 shares authorized; SSCY: $.001 par value, 200,000,000 shares
authorized; SSVF: $.001 par value, 200,000,000 shares authorized.
* Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
21
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF*
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
INCOME:
Dividends............... $ 1,052,271 $ 6,373,113 $ 765,559 $ 41,598
Interest................ 235,813 168,978 109,225 7,539
----------- ------------ ----------- -----------
Total Income.......... 1,288,084 6,542,091 874,784 49,137
----------- ------------ ----------- -----------
EXPENSES:
Accounting/Pricing
services fees (Note
2)..................... 15,000 20,000 16,240 14,583
Administration services
fees (Note 2).......... 22,500 23,000 20,000 6,667
Advisory fees (Note 2).. 343,337 423,907 399,475 24,752
Audit fees.............. 16,500 14,483 14,000 500
Custodian fees (Note
2)..................... 19,520 26,597 19,937 8,963
Directors' fees......... 11,604 16,577 9,221 743
Insurance fees.......... 1,276 1,777 1,070 140
Legal fees.............. 3,450 4,865 1,471 190
Miscellaneous fees...... 3,264 4,775 2,493 192
Printing and postage
fees................... 16,298 29,037 13,289 1,402
Registration fees (Note
2)..................... 26,294 28,640 30,817 19,215
Shareholder services
fees (Note 2).......... 25,234 100,963 30,738 846
Taxes other than income
taxes.................. 3,531 5,000 2,825 325
----------- ------------ ----------- -----------
Total Expenses........ 507,808 699,621 561,576 78,518
----------- ------------ ----------- -----------
Net Investment
Income (Loss)...... 780,276 5,842,470 313,208 (29,381)
----------- ------------ ----------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments......... 3,376,807 3,807,241 (833,249) 146,588
Net decrease in
unrealized appreciation
on investments......... (6,190,988) (17,456,274) (8,777,255) (1,077,417)
----------- ------------ ----------- -----------
Net loss on
investments............ (2,814,181) (13,649,033) (9,610,504) (930,829)
----------- ------------ ----------- -----------
Net decrease in net
assets resulting from
operations........... $(2,033,905) $ (7,806,563) $(9,297,296) $ (960,210)
=========== ============ =========== ===========
</TABLE>
- --------
* Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
-------------------------- ---------------------------
9 MONTHS ENDED YEAR ENDED 9 MONTHS ENDED YEAR ENDED
09/30/98* 12/31/97 09/30/98* 12/31/97
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 780,276 $ 951,531 $ 5,842,470 $ 5,390,680
Net realized gain
(loss) on
investments........... 3,376,807 4,397,086 3,807,241 (775,344)
Net increase (decrease)
in unrealized
appreciation of
investments........... (6,190,988) 10,314,063 (17,456,274) 11,680,867
----------- ----------- ------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ (2,033,905) 15,662,680 (7,806,563) 16,296,203
----------- ----------- ------------ ------------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.27 and
$0.54 per share,
respectively, for SGF,
$1.44 and $1.54,
respectively, for
SMDS)................. (482,477) (924,887) (4,670,115) (5,390,680)
From realized gains on
investments ($0.59 and
$2.52, per share,
respectively, for
SGF).................. (1,054,303) (4,096,574) -- --
Return of capital
($0.38 per share for
SMDS)................. -- -- -- (1,315,783)
CAPITAL SHARE TRANSAC-
TIONS:/2/ 247,646 4,735,008 (1,947,110) (11,413,251)
----------- ----------- ------------ ------------
Total increase
(decrease) in net
assets................ (3,323,039) 15,376,227 (14,423,788) (1,823,511)
NET ASSETS:
Beginning of period.... 60,177,483 44,801,256 101,956,224 103,779,735
----------- ----------- ------------ ------------
End of period
(including
undistributed net
investment income of
$333,526 and $35,727,
respectively, for SGF,
undistributed net
investment income of
$1,172,355 and $0,
respectively, for
SMDS)................. $56,854,444 $60,177,483 $ 87,532,436 $101,956,224
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
SSCY SSVF
-------------------------- -------------------------
9 MONTHS ENDED YEAR ENDED 9 MONTHS ENDED YEAR ENDED
09/30/98* 12/31/97 09/30/98* 12/31/97**
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................. $ 313,208 $ 311,167 $ (29,381) $ --
Net realized gain (loss)
on investments......... (833,249) 1,579,761 146,588 --
Net increase (decrease)
in unrealized
appreciation of
investments............ (8,777,255) 8,011,586 (1,077,417) --
----------- ----------- ---------- --------
Net increase (decrease)
in net assets resulting
from operations........ (9,297,296) 9,902,514 (960,210) --
----------- ----------- ---------- --------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.14 and
$0.20/3/ per share,
respectively, for
SSCY).................. (324,255) (287,402) -- --
From realized gains on
investments ($0.04 and
$1.13/3/ per share,
respectively, for
SSCY).................. (96,899) (1,798,916) -- --
CAPITAL SHARE
TRANSACTIONS:/2/ 13,259,940 9,869,676 6,693,747 105,000
----------- ----------- ---------- --------
Total increase in net
assets................. 3,541,490 17,685,872 5,733,537 105,000
NET ASSETS:
Beginning of period..... 39,376,948 21,691,076 105,000 --
----------- ----------- ---------- --------
End of period (including
undistributed net
investment income of
$12,718 and $23,765,
respectively, for SSCY,
net investment loss of
$29,381 and $0,
respectively, for
SSVF).................. $42,918,438 $39,376,948 $5,838,537 $105,000
=========== =========== ========== ========
</TABLE>
- --------
* Unaudited
** Fund commenced operations on December 31, 1997.
/3/Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997.
See accompanying notes to financial statements.
23
<PAGE>
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
--------------------------------------
9 MONTHS ENDED
09/30/98* YEAR ENDED 12/31/97
----------------------- -----------------------
SHARES VALUE SHARES VALUE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................ 297,369 $ 10,609,458 237,474 $ 7,625,883
Shares reinvested from net
investment income and
capital gains
distributions............... 37,892 1,332,668 140,717 4,398,631
--------- ------------ --------- ------------
335,261 11,942,126 378,191 12,024,514
Shares redeemed.............. (330,560) (11,694,480) (235,166) (7,289,506)
--------- ------------ --------- ------------
Net increase............... 4,701 $ 247,646 143,025 $ 4,735,008
========= ============ ========= ============
<CAPTION>
SMDS
--------------------------------------
9 MONTHS ENDED
09/30/98* YEAR ENDED 12/31/97
----------------------- -----------------------
SHARES VALUE SHARES VALUE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................ 340,916 $ 8,809,228 346,467 $ 9,958,751
Shares reinvested from net
investment income........... 92,605 2,643,069 134,590 3,765,100
--------- ------------ --------- ------------
433,521 11,452,297 481,057 13,723,851
Shares redeemed.............. (467,702) (13,399,407) (893,776) (25,137,102)
--------- ------------ --------- ------------
Net decrease............... (34,181) $ (1,947,110) (412,719) $(11,413,251)
========= ============ ========= ============
<CAPTION>
SSCY
--------------------------------------
9 MONTHS ENDED
09/30/98* YEAR ENDED 12/31/97
----------------------- -----------------------
SHARES VALUE SHARES VALUE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................ 991,615 $ 22,650,434 333,827 $ 12,981,282
Shares issued from stock
split....................... -- -- 864,479 --
Shares reinvested from net
investment income and
capital gains
distributions............... 15,118 334,211 39,255 1,672,816
--------- ------------ --------- ------------
1,006,733 22,984,645 1,237,561 14,654,098
Shares redeemed.............. (436,037) (9,724,705) (131,386) (4,784,422)
--------- ------------ --------- ------------
Net increase............... 570,696 $ 13,259,940 1,106,175 $ 9,869,676
========= ============ ========= ============
<CAPTION>
SSVF
--------------------------------------
9 MONTHS ENDED
09/30/98* YEAR ENDED 12/31/97**
----------------------- -----------------------
SHARES VALUE SHARES VALUE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................ 427,551 $ 6,735,693 7,000 $ 105,000
Shares reinvested from net
investment income and
capital gains
distributions............... -- -- -- --
--------- ------------ --------- ------------
427,551 6,735,693 7,000 105,000
Shares redeemed.............. (2,621) (41,946) -- --
--------- ------------ --------- ------------
Net increase............... 424,930 $ 6,693,747 7,000 $ 105,000
========= ============ ========= ============
</TABLE>
- --------
* Unaudited
** Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
September 30, 1998 (unaudited)
NOTE 1. -- Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT Shares, Inc. ("SMDS") and The Stratton
Funds, Inc. The Stratton Funds, Inc. (the "Company") operates as a series,
consisting of Stratton Small-Cap Yield Fund ("SSCY") and Stratton Special
Value Fund ("SSVF"), which began operations on December 31, 1997. The Funds
and Company are registered under the Investment Company Act of 1940, as
amended, as open-end management investment companies. The Funds offer
diversified portfolios.
Investments in the Funds normally consist of common stock and securities
convertible into or exchangeable into common stock. Each Fund has specific
investment objectives:
The objective of SGF is to seek possible growth of capital with current income
from interest and dividends as a secondary objective.
The objective of SMDS is to seek a high rate of return from dividend and
interest income. Under normal conditions, at least 65% of the Fund's total
assets will be in securities of real estate investment trusts.
The objective of SSCY is to achieve both dividend income and capital
appreciation through investment in the securities of small-cap companies which
have certain risks associated with them. First and foremost is their greater
earnings and price volatility in comparison to large companies. Earnings risk
is partially due to the undiversified nature of small company business lines.
The objective of SSVF is to achieve capital appreciation through investment in
securities which represent a value or potential worth which is not fully
recognized by prevailing market prices.
Due to the inherent risk of investments there can be no assurance that the
objectives of the Funds will be met.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale price
on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last
reported bid and asked prices. Securities traded in the over-the-
counter market are valued at the last sale price, if carried in the
National Market Issues section by NASDAQ; other over-the-counter
securities are valued at the mean between the closing bid and asked
prices obtained from a principal market maker. All other securities
and assets are valued at their fair value as determined in good
faith by the Boards of Directors of the Funds, which may include the
amortized cost method for securities maturing in sixty days or less
and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
September 30, 1998 (unaudited)
to their shareholders. Therefore, no federal income tax provision is
required. SMDS has a capital loss carryover available to offset future
capital gains, if any, of approximately $16,775,000 of which $11,277,000
expires in 2003, $4,331,000 expires in 2004 and $1,167,000 expires in 2005.
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.
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.
SMDS 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 nine months ended September 30, 1998, the Funds paid
advisory fees to Stratton Management Company, (the "Advisor") as follows: SGF -
$343,337; SMDS - $423,907; SSCY - $399,475; SSVF - $24,752. Management services
are provided by the Advisor under agreements whereby the Advisor furnishes all
investment advice, office space and facilities to the Funds and pays the
salaries of the Funds' officers and employees, except to the extent that those
employees are engaged in administrative and accounting services activities. In
return for these services, SGF pays to the Advisor a monthly fee of 3/48 of 1%
(annually 3/4 of 1%) of the daily net asset value of the Fund for such month.
SMDS pays a monthly fee 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 with each of
these Funds to offset a portion of the cost of certain administrative
responsibilities delegated to First Data Investor Services Group, Inc.
("Investor Services Group"), a wholly-owned subsidiary of First Data
Corporation.
SSCY pays a monthly fee at an annual rate of 0.75% of the daily net asset value
of the Fund for such month, subject to a performance adjustment. The performance
adjustment will be calculated at the end of each month based upon a rolling 24
month performance period. The performance adjustment is added to or subtracted
from the basic investment advisory fee. The Fund's gross performance is compared
with the performance of the Frank Russell 2000 Index, ("Russell 2000"), a widely
recognized unmanaged index of common stock prices, over a rolling 24-month
performance period. The Russell 2000 is composed of the smallest 2000 stocks in
the Frank Russell annual ranking of 3000 common stocks by market capitalization.
The Russell 2000 is a widely recognized common stock index of small to medium
size companies. Total return performance on the Russell 2000 includes
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
September 30, 1998 (unaudited)
dividends and is reported monthly on a market capitalization-weighted basis.
When the Fund performs better than the Russell 2000, it pays the Advisor an
incentive fee; less favorable performance than the Russell 2000 reduces the
basic fee. Each 1.00% of the difference in performance between the Fund and
the Russell 2000 during the performance period is equal to a 0.10% adjustment
to the basic fee. The maximum annualized performance adjustment rate is +/-
0.50% of average net assets which would be added to or deducted from the
advisory fee if the Fund outperformed or under performed the Russell 2000 by
5.00%. The performance fee adjustment for the nine months ended September 30,
1998 caused the advisory fee to increase by $115,138.
SSVF pays a monthly fee at an annual rate of 0.75% of the daily net asset
value of the Fund for such month, subject to a performance adjustment. The
performance adjustment for SSVF will commence at the end of the month in which
the Fund has completed 24 months of operation, if it has net assets of $20
million or more, at such date, or at the end of any succeeding month at which
it has net assets of $20 million, but in any event, irrespective of its net
assets, at the end of the month in which the Fund has completed 36 months of
operation and will be calculated at the end of the commencement month and each
succeeding month based upon a rolling 24 month performance period. The
performance adjustment is added to or subtracted from the basic investment
advisory fee. Pursuant to the performance adjustment, the Fund's gross
performance is compared with the performance of the Russell 2000. When the
Fund performs better than the Russell 2000, it pays the Investment Advisor an
incentive fee; less favorable performance than the Russell 2000 reduces the
basic fee. Each 1.00% of the difference in performance between a Fund and the
Russell 2000 during the performance period is equal to a 0.10% adjustment to
the basic fee. The maximum annualized performance adjustment rate is +/- 0.50%
of average net assets which would be added to or deducted from the advisory
fee if a Fund outperformed or underperformed the Russell 2000 by 5.00%. The
effect of this performance fee adjustment is that the advisory fee may never
be greater than 1.25% or less than 0.25% of the Fund's average daily net
assets for the preceding month. Due to the complexities of researching and
investing in special value securities, the advisory and incentive fees (if
realized) paid by the Fund are higher than those paid by most other investment
companies. Additionally, the Fund's incentive fee of plus or minus 0.50% is
greater than that of other mutual funds with similar objectives which pay
incentive fees.
Certain officers and Directors of the Funds are also officers and directors of
the Advisor. None of the Funds' officers receive compensation from the Funds.
Effective February 23, 1998, FPS Services, Inc. ("FPS"), a wholly-owned
subsidiary of FinDaTex, Inc., was acquired by Investor Services Group. Certain
Directors and officers of the Funds are shareholders of FinDaTex, Inc. Prior
to that, FPS received fees for providing shareholder services, for certain
administrative services and for accounting/pricing services as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
------ ------- ------ ------
<S> <C> <C> <C> <C>
Shareholder Services............................... $7,135 $27,170 $7,639 $ 336
Administration..................................... 5,000 5,000 5,000 1,666
Accounting/Pricing................................. 3,333 4,333 3,333 3,333
</TABLE>
Pursuant to an agreement between The Bank of New York (the "Custodian"), and
Investor Services Group, the Custodian reallows a portion of its custody fees
to Investor Services Group for certain services delegated to
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
September 30, 1998 (unaudited)
Investor Services Group. The amount is not readily determinable. FPS Broker
Services, Inc., a wholly-owned subsidiary of FinDaSub (formerly FPS), serves
as the Funds' principal underwriter and receives no fees for services in
assisting in sales of the Funds' shares but does receive an annual fee of
$3,000 for each Fund for its services in connection with the registration of
the Funds' shares under state securities laws.
NOTE 3. - Purchases and sales of investment securities, excluding short-term
notes, for the nine months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cost of purchases................. $14,762,012 $8,554,958 $23,212,793 $9,970,012
Proceeds of sales................. 15,162,260 17,536,675 10,381,272 3,400,974
</TABLE>
NOTE 4. - Stock Split
A two-for-one stock split effected in the form of a dividend was issued to
shareholders of record of SSCY as of the close of business on December 17,
1997, payable December 18, 1997.
28
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Growth Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
9 MONTHS YEAR 7 MONTHS YEARS ENDED MAY 31,
ENDED ENDED ENDED ----------------------------------
09/30/98* 12/31/97 12/31/96 1996 1995 1994 1993
-------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.430 0.550 0.312 0.556 0.537 0.510 0.560
Net gains (losses) on
securities (both
realized and
unrealized).......... (1.505) 8.900 1.298 5.759 2.978 0.665 1.160
------- ------- ------- ------- ------- ------- -------
Total from investment
operations.......... (1.075) 9.450 1.610 6.315 3.515 1.175 1.720
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.270) (0.540) (0.580) (0.540) (0.540) (0.510) (0.565)
Distributions (from
capital gains)....... (0.590) (2.520) (1.210) (0.945) (1.275) (0.905) (0.815)
------- ------- ------- ------- ------- ------- -------
Total distributions.. (0.860) (3.060) (1.790) (1.485) (1.815) (1.415) (1.380)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 31.46 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ (3.48)% 36.06% 6.40% 29.62% 18.61% 5.92% 8.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $56,854 $60,177 $44,801 $42,880 $31,719 $25,475 $25,315
Ratio of expenses to
average net assets... 1.07%/1/ 1.11% 1.17%/1/ 1.16% 1.31% 1.34% 1.39%
Ratio of net
investment income to
average net assets... 1.65%/1/ 1.87% 2.08%/1/ 2.28% 2.70% 2.51% 2.76%
Portfolio turnover
rate................. 26.16% 34.40% 20.32% 15.41% 42.54% 49.81% 35.34%
Average commission
rate paid............ N/R $0.0509 $0.0537 N/A N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Annualized
See accompanying notes to financial statements.
29
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
9 MONTHS YEAR 11 MONTHS YEARS ENDED JANUARY 31,
ENDED ENDED ENDED --------------------------------------
09/30/98* 12/31/97 12/31/96 1996 1995 1994 1993
--------- -------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 1.791 1.540 1.630 1.880 1.940 1.870 1.940
Net gains (losses) on
securities (both
realized and
unrealized).......... (4.371) 3.200 0.160 2.600 (3.870) (1.140) 2.080
------- -------- -------- -------- -------- -------- -------
Total from investment
operations.......... (2.580) 4.740 1.790 4.480 (1.930) 0.730 4.020
------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (1.440) (1.540) (1.630) (1.890) (1.920) (1.940) (1.940)
Distributions (in
excess of net
investment income)... -- -- (0.130) (0.030) -- (0.010) --
Return of capital..... -- (0.380) -- -- -- -- --
------- -------- -------- -------- -------- -------- -------
Total distributions.. (1.440) (1.920) (1.760) (1.920) (1.920) (1.950) (1.940)
------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 26.23 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91
======= ======== ======== ======== ======== ======== =======
TOTAL RETURN............ (8.82)% 18.09% 7.12% 18.98% (6.57)% 2.22% 15.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $87,532 $101,956 $103,780 $129,267 $134,066 $165,798 $98,227
Ratio of expenses to
average net assets... 1.00%/1/ 1.02% 1.02%/1/ 0.99% 1.08% 0.99% 1.10%
Ratio of net
investment income to
average net assets... 8.39%/1/ 5.48% 6.94%/1/ 7.42% 7.71% 6.12% 6.74%
Portfolio turnover
rate................. 9.67% 42.47% 69.19% 53.30% 39.50% 19.15% 35.94%
Average commission
rate paid............ N/R $ 0.0505 $ 0.0498 N/A N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Annualized
See accompanying notes to financial statements.
30
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
9 MONTHS YEAR 9 MONTHS YEAR YEAR 04/12/93/1
ENDED ENDED ENDED ENDED ENDED /
09/30/98* 12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ TO 03/31/94/3/
--------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97 $12.50
------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.132 0.210 0.260 0.330 0.290 0.220
Net gains (losses) on
securities (both
realized and
unrealized).......... (3.942) 6.800 1.740 3.040 (0.020) 0.450
------- ------- ------- ------- ------- ------
Total from
investment
operations......... (3.810) 7.010 2.000 3.370 0.270 0.670
------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.140) (0.200) (0.270) (0.330) (0.300) (0.200)
Distributions (from
capital gains)....... (0.040) (1.130) (0.920) -- -- --
------- ------- ------- ------- ------- ------
Total distribu-
tions.............. (0.180) (1.330) (1.190) (0.330) (0.300) (0.200)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................. $ 18.48 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $12.97
======= ======= ======= ======= ======= ======
TOTAL RETURN............ (17.09)% 42.37% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $42,918 $39,377 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets... 1.48%/2/ 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net
investment income to
average net assets... 0.82%/2/ 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................. 22.16% 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission
rate paid............ N/R $0.0548 $0.0579 N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Commencement of operations
/2/Annualized
/3/Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997
See accompanying notes to financial statements.
31
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Special Value Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout the period presented.
<TABLE>
<CAPTION>
9 MONTHS
ENDED
09/30/98*
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $15.00/1/
INCOME FROM INVESTMENT OPERATIONS
Net investment loss............................................. (0.068)
Net losses on securities (both realized and unrealized)......... (1.412)
------
Total from investment operations.............................. (1.480)
------
NET ASSET VALUE, END OF PERIOD.................................... $13.52
======
TOTAL RETURN...................................................... (9.87)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)............................ $5,839
Ratio of expenses to average net assets......................... 1.81 %/2/
Ratio of net investment loss to average net assets.............. (0.68)%/2/
Portfolio turnover rate......................................... 59.44 %
</TABLE>
- --------
* Unaudited
/1/Commencement of operations 12/31/97
/2/Annualized
See accompanying notes to financial statements.
32
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT
The minimum amount for the initial purchase of shares of the Funds is $2,000
each. Subsequent purchases may be made in amounts of $100 or more.
TELEPHONE EXCHANGE
Shares of each Fund may be exchanged for shares of the other Funds, provided
such other shares may legally be sold in the state of the investor's
residence. Each Fund has a distinct investment objective which should be
reviewed before executing any exchange of shares. Shares may be exchanged by:
(1) written request; or (2) telephone, if a special authorization form has
been completed and is on file with the transfer agent in advance. See "How to
Redeem Fund Shares--Additional Information" in the Prospectus for a
description of the Funds' policy regarding telephone instructions.
DIVIDENDS AND DISTRIBUTIONS
SGF first declares and pays semi-annual dividends from net investment income.
SMDS declares and pays monthly dividends from net investment income. SSCY
declares and pays quarterly dividends from net investment income. SSVF
declares and pays annual dividends from net investment income. Each Fund will
make distributions of net realized gains, if any, once a year. Distributions
may be reinvested in additional shares of such Fund, see "How to Buy Fund
Shares--Reinvestment of Income Dividends and Capital Gains Distributions" in
the Prospectus.
AUTOMATIC INVESTMENT PLAN
Shares of a Fund may be purchased through our "Automatic Investment Plan" (the
"Plan"), (See item 6 of the New Account Application attached to the back of
the Prospectus). The Plan provides a convenient method by which investors may
have monies debited directly from their checking, savings or bank money market
accounts for investment in a Fund. The minimum investment pursuant to this
Plan is $100 per month. The account designated will be debited in the
specified amount, on the date indicated, and Fund shares will be purchased.
Only an account maintained at a domestic financial institution which is an
Automated Clearing House member may be so designated. A Fund may alter, modify
or terminate this Plan at any time.
SHARE PRICE INFORMATION
The daily share price of the Funds 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 Funds are listed under Stratton Funds. The Funds' stock
ticker symbols for SGF, SMDS and SSCY are STRGX, STMDX and STSCX,
respectively. A symbol has not yet been assigned to SSVF.
RETIREMENT PLANS
Stratton Mutual Funds has Defined Contribution Plans, Individual Retirement
Accounts and 403(b)(7) Retirement Plans available at no minimum investment.
33
<PAGE>
SHAREHOLDER INFORMATION (continued)
- -------------------------------------------------------------------------------
GENERAL INFORMATION ON THE FUNDS
Requests for a Prospectus, financial information, past performance figures and
an application, should be directed to the Funds' 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 call or write
the transfer agent and dividend paying agent:
FIRST DATA INVESTOR SERVICES GROUP, INC.
3200 Horizon Drive, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600 . 800-472-4266
INVESTMENT PORTFOLIO ACTIVITIES
Questions regarding any of the Funds' investment portfolios should be directed
to the Funds' 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 FIRST DATA INVESTOR SERVICES GROUP, 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 COMBINED PROSPECTUS OF STRATTON MUTUAL FUNDS.
34
<PAGE>
- ------------------------------
STRATTON
MUTUAL FUNDS
- ------------------------------
Stability . Strategy . Success
DIRECTORS
Lynne M. Cannon
John J. Lombard, Jr.
Douglas J. MacMaster, Jr.
Henry A. Rentschler
Merritt N. Rhoad, Jr.
Richard W. Stevens
James W. Stratton
OFFICERS
James W. Stratton
Chairman
John A. Affleck
President, Stratton Monthly Dividend REIT Shares
Gerard E. Heffernan
President, Stratton Growth Fund
Frank H. Reichel, III
President, The Stratton Funds, Inc.
Portfolio Manager, Stratton Small-Cap Yield Fund
James Van Dyke Quereau
Vice President
Portfolio Manager, Stratton Special Value Fund
James A. Beers
Vice President
Joanne E. Kuzma
Vice President
Patricia L. Sloan
Secretary & Treasurer
Carol L. Royce
Assistant Secretary & Treasurer
INVESTMENT ADVISOR
Stratton Management Company
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
TRANSFER AGENT
& DIVIDEND
PAYING AGENT
First Data Investor Services Group, Inc.
3200 Horizon Drive, P.O. box 61503
King of Prussia, PA 19406-0903
Telephone: 610-239-4600
800-472-4266
CUSTODIAN
BANK
The Bank of New York
48 Wall Street
New York, NY 10286
Visit the Stratton Mutual Funds
web site at http://www.strattonmgt.com
MEMBER OF
- ----------------
100% NO-LOAD(TM)
MUTUAL FUND
COUNCIL
- ----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> STRATTON GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 36,572
<INVESTMENTS-AT-VALUE> 54,842
<RECEIVABLES> 2,510
<ASSETS-OTHER> 165
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,517
<PAYABLE-FOR-SECURITIES> 637
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26
<TOTAL-LIABILITIES> 663
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,884
<SHARES-COMMON-STOCK> 1,807
<SHARES-COMMON-PRIOR> 1,802
<ACCUMULATED-NII-CURRENT> 333
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,367
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,270
<NET-ASSETS> 56,854
<DIVIDEND-INCOME> 1,052
<INTEREST-INCOME> 236
<OTHER-INCOME> 0
<EXPENSES-NET> 508
<NET-INVESTMENT-INCOME> 780
<REALIZED-GAINS-CURRENT> 3,377
<APPREC-INCREASE-CURRENT> (6,191)
<NET-CHANGE-FROM-OPS> (2,034)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 482
<DISTRIBUTIONS-OF-GAINS> 1,054
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 297
<NUMBER-OF-SHARES-REDEEMED> 330
<SHARES-REINVESTED> 38
<NET-CHANGE-IN-ASSETS> (3,323)
<ACCUMULATED-NII-PRIOR> 36
<ACCUMULATED-GAINS-PRIOR> 1,044
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 343
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 508
<AVERAGE-NET-ASSETS> 62,131
<PER-SHARE-NAV-BEGIN> 33.39
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> (1.505)
<PER-SHARE-DIVIDEND> 0.27
<PER-SHARE-DISTRIBUTIONS> 0.59
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 31.46
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> STRATTON MONTHLY DIVIDEND REIT SHARES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 90,083
<INVESTMENTS-AT-VALUE> 86,970
<RECEIVABLES> 583
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,560
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28
<TOTAL-LIABILITIES> 28
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 102,441
<SHARES-COMMON-STOCK> 3,337
<SHARES-COMMON-PRIOR> 3,371
<ACCUMULATED-NII-CURRENT> 1,172
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,968)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,113)
<NET-ASSETS> 87,532
<DIVIDEND-INCOME> 6,373
<INTEREST-INCOME> 169
<OTHER-INCOME> 0
<EXPENSES-NET> 700
<NET-INVESTMENT-INCOME> 5,842
<REALIZED-GAINS-CURRENT> 3,807
<APPREC-INCREASE-CURRENT> (17,456)
<NET-CHANGE-FROM-OPS> (7,807)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,670
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 341
<NUMBER-OF-SHARES-REDEEMED> 468
<SHARES-REINVESTED> 93
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16,776)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 424
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 700
<AVERAGE-NET-ASSETS> 93,116
<PER-SHARE-NAV-BEGIN> 30.25
<PER-SHARE-NII> 1.791
<PER-SHARE-GAIN-APPREC> (4.371)
<PER-SHARE-DIVIDEND> 1.440
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.23
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> STRATTON SMALL-CAP YIELD FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 38,667
<INVESTMENTS-AT-VALUE> 42,434
<RECEIVABLES> 624
<ASSETS-OTHER> 96
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,154
<PAYABLE-FOR-SECURITIES> 198
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38
<TOTAL-LIABILITIES> 236
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,988
<SHARES-COMMON-STOCK> 2,323
<SHARES-COMMON-PRIOR> 1,752
<ACCUMULATED-NII-CURRENT> 13
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (850)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,767
<NET-ASSETS> 42,918
<DIVIDEND-INCOME> 766
<INTEREST-INCOME> 109
<OTHER-INCOME> 0
<EXPENSES-NET> 562
<NET-INVESTMENT-INCOME> 313
<REALIZED-GAINS-CURRENT> (833)
<APPREC-INCREASE-CURRENT> (8,777)
<NET-CHANGE-FROM-OPS> (9,297)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 324
<DISTRIBUTIONS-OF-GAINS> 97
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 992
<NUMBER-OF-SHARES-REDEEMED> 436
<SHARES-REINVESTED> 15
<NET-CHANGE-IN-ASSETS> 3,541
<ACCUMULATED-NII-PRIOR> 24
<ACCUMULATED-GAINS-PRIOR> 80
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 399
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 562
<AVERAGE-NET-ASSETS> 49,563
<PER-SHARE-NAV-BEGIN> 22.47
<PER-SHARE-NII> 0.132
<PER-SHARE-GAIN-APPREC> (3.942)
<PER-SHARE-DIVIDEND> 0.14
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.48
<EXPENSE-RATIO> 1.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> STRATTON SPECIAL VALUE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 6,896
<INVESTMENTS-AT-VALUE> 5,818
<RECEIVABLES> 3
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,839
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,799
<SHARES-COMMON-STOCK> 432
<SHARES-COMMON-PRIOR> 7
<ACCUMULATED-NII-CURRENT> (29)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 146
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,077)
<NET-ASSETS> 5,839
<DIVIDEND-INCOME> 42
<INTEREST-INCOME> 7
<OTHER-INCOME> 0
<EXPENSES-NET> 78
<NET-INVESTMENT-INCOME> (29)
<REALIZED-GAINS-CURRENT> 146
<APPREC-INCREASE-CURRENT> (1,077)
<NET-CHANGE-FROM-OPS> (960)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 428
<NUMBER-OF-SHARES-REDEEMED> 3
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,734
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 78
<AVERAGE-NET-ASSETS> 5,454
<PER-SHARE-NAV-BEGIN> 15.00
<PER-SHARE-NII> (0.068)
<PER-SHARE-GAIN-APPREC> (1.412)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.52
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
