<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON FEBRUARY 27, 1997 REGISTRATION NO.: 2-42379
811-2240
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
---
Pre-Effective Amendment No. [__]
Post-Effective Amendment No. [18]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
---
Amendment No. [18]
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
-------------------------------------------
(Exact Name of Registrant as Specified in Charter)
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
------------------------------------------------------------------
(Address of Principal Executive Offices)
(610) 941-0255
--------------
(Registrant's Telephone Number, including Area Code)
Patricia L. Sloan, Secretary/Treasurer
Stratton Monthly Dividend REIT Shares, Inc.
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
------------------------------------------------------------------
(Name and Address of Agent for Service)
With copies to:
Vernon Stanton, Jr., Esq.
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
(215) 988-2700
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date ) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on April 30, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Page 1
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
CROSS REFERENCE SHEET
[AS REQUIRED BY RULE 481(A)]
PART A
ITEM NO. PROSPECTUS CAPTION
- -------- ------------------
1. Cover Page Cover Page
2. Synopsis Introduction; Fee Table
3. Condensed Financial Information Financial Highlights;
Performance Calculations
4. General Description of Registrant Introduction; Investment
Objectives, Policies,
Restrictions and Risk
Considerations; Description
of Common Stock
5. Management of the Fund Management of the Funds;
Investment Advisor; Service
Providers and Underwriter
5a. Management's Discussion of Fund Performance Inapplicable
6. Capital Stock and Other Securities How to Buy Fund Shares:
Reinvestment of Income
Dividends and Capital Gains
Distributions; Tax Treatment:
Dividends and Distributions;
Description of Common Stock
7. Purchase of Securities Being Offered Service Providers and
Underwriter; Computation of
Net Asset Value; How to Buy
Fund Shares; Exchange
Privilege; Retirement Plans
8. Redemption or Repurchase How to Redeem Fund Shares
9. Legal Proceedings Inapplicable
<PAGE>
STRATTON MUTUAL FUNDS
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Stratton Small-Cap Yield Fund
Stratton Special Value Fund
PROSPECTUS
MAY 1, 1998
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
Stratton Mutual Funds represents four separate funds (each a "Fund" and
collectively the "Funds"). Each of the Funds has distinct investment objectives
and policies. Information concerning the Funds has been combined into this one
Prospectus to aid investors in understanding the similarities and differences
among the Funds.
Stratton Growth Fund, Inc. is a no-load mutual fund seeking as its primary
objective possible growth of capital 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.
Stratton Monthly Dividend REIT Shares, Inc. is a no-load mutual fund seeking as
its objective a high rate of return from dividend and interest income on its
investments in common stock and securities convertible into common stock.
The Stratton Funds, Inc. is a no-load, open-end series management company
currently offering two series of shares:
Stratton Small-Cap Yield Fund seeks to achieve both dividend income and
capital appreciation. The Fund seeks to achieve its objective by investing
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
Standard & Poor's 500 Index (hereinafter referred to as "small-cap
companies").
Stratton Special Value Fund seeks to achieve capital appreciation. The Fund
seeks to achieve its objective by investing 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.
Stratton Special Value Fund has an aggressive investment policy in that it
expects to incur the risk of investing in short positions, and it should not
be considered a complete investment program.
This Prospectus sets forth concisely the information about the Funds that
prospective investors should know before investing. Investors should read this
Prospectus and retain it for future reference.
Additional information about the Funds has been filed with the U.S. Securities
and Exchange Commission ("SEC") and is available upon request and without charge
by calling or writing the Funds at the telephone number or address above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety. The Statement
of Additional Information, material incorporated by reference into this
Prospectus, and any other information regarding the Funds are maintained
electronically with the SEC at its Internet Web sight (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE U.S.
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction........................................................................
Fee Table...........................................................................
Financial Highlights................................................................
Investment Objectives, Policies, Restrictions and Risk Considerations...............
Management of the Funds.............................................................
Investment Advisor..................................................................
Computation of Net Asset Value .....................................................
How to Buy Fund Shares .............................................................
Investing by Mail.................................................................
Investing by Wire.................................................................
Automatic Investment Plan.........................................................
Direct Deposit Program............................................................
Reinvestment of Income Dividends and Capital Gains Distributions..................
Additional Information............................................................
How to Redeem Fund Shares...........................................................
By Written Request................................................................
By Automated Clearing House ("ACH")...............................................
Systematic Cash Withdrawal Plan...................................................
Additional Information............................................................
Exchange Privilege .................................................................
Retirement Plans....................................................................
Tax Treatment: Dividends and Distributions .........................................
Performance Calculations ...........................................................
Description of Common Stock ........................................................
Service Providers and Underwriter...................................................
</TABLE>
- --------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION ABOUT THE ITEMS DISCUSSED IN THIS PROSPECTUS, A COPY
OF THE STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED WITHOUT CHARGE BY
WRITING TO THE FUNDS' DISTRIBUTOR, FPS BROKER SERVICES, INC., 3200 HORIZON
DRIVE, P.O. BOX 61503, KING OF PRUSSIA, PA 19406-0903, OR BY TELEPHONING
800-634-5726.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 2
<PAGE>
INTRODUCTION The securities offered by this Prospectus consist of
shares of common stock of four separate Funds. Each
Fund has distinct investment objectives and policies.
The Funds are no-load, open-end, diversified mutual
funds. The four Funds are identified herein as follows:
Stratton Growth Fund, Inc. ("SGF"); Stratton Monthly
Dividend REIT Shares, Inc. ("SMDS"); Stratton Small-Cap
Yield Fund ("SSCY"); and Stratton Special Value Fund
("SSVF").
Investment SGF seeks as its primary objective possible growth of
Objectives capital 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.
SMDS seeks as its objective a high rate of return from
dividend and interest income on its investments in
common stock and securities convertible into common
stock. Under normal conditions, at least 65% of the
Fund's total assets will be invested in real estate
investment trusts ("REITs").
SSCY seeks to achieve both dividend income and capital
appreciation by investing in equity securities,
primarily common stock and securities convertible into
common stock of small-cap companies.
SSVF seeks as its objective capital appreciation. The
Fund seeks to achieve its objective by investing 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.
The value of each Fund's shares fluctuate because the
value of the securities in which each Fund invests
fluctuates. Each Fund will earn dividend or interest
income to the extent that it receives dividends or
interest from its investments. An investment in any of
the Funds is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that any Fund's
investment objective will be achieved.
How to Buy Fund
Shares The minimum initial investment for each Fund is $2,000.
There is no minimum initial investment requirement for
any retirement plan. Subsequent investments will be
accepted in minimum amounts of $100 or more. The Funds
do not impose any sales load nor bear any fees pursuant
to a Rule 12b-1 Plan. The public offering price for
shares of each Fund is the net asset value per share
next determined after receipt and acceptance of a
purchase order at the transfer agent in proper form
with accompanying check or bank wire arrangement. See
"How to Buy Fund Shares."
How to Redeem
Fund Shares Shares of the Funds may be redeemed at the net asset
value per share next determined after receipt by the
transfer agent of a redemption request in proper form.
Signature guarantees may be required for certain
redemption requests. See "How to Redeem Fund Shares."
Dividends SGF intends to pay semi-annual dividends from its net
investment income. SMDS intends to pay monthly
dividends from its net investment income. SSCY intends
to pay quarterly dividends from its net investment
income. SSVF intends to pay annual dividends from its
net investment income.
Distributions of net capital gains, if any, for each
Fund will be paid annually.
Stratton Management Company (the "Investment Advisor"),
Plymouth Meeting Executive Campus, 610 W. Germantown
Investment Pike, Suite 300, Plymouth Meeting, PA 19462-1050 is the
Management, Investment Advisor for the Funds.
Underwriter and
Servicing Agents FPS Broker Services, Inc. ("FPSB"), 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903 serves
as the Funds' Underwriter. FPS Services, Inc. ("FPS"),
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903 serves as the Funds' Administrator,
Accounting/Pricing Agent and Transfer Agent.
Integrated Voice Shareholders of each Fund can obtain toll-free access
Response (IVR) to account information, as well as some transactions,
System by calling 1 (800) 472-4266. IVR provides share price
and price change for the Funds; gives account balances
and history (i.e., last transaction, latest dividend
distribution, redemptions by check during the last
three months); and allows exchanges of shares.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 3
<PAGE>
FEE TABLE Below is a summary of the Operating Expenses: (1)
incurred by SGF, SMDS and SSCY for its fiscal year
ended December 31, 1997; and (2) estimated to be
incurred by SSVF for the fiscal year ending December
31, 1998. A hypothetical example based on the summary
is also shown.
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
--- ---- ---- ----
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses:
-------------------------------
(as a percentage of average net assets)
Management Fees 0.72%/1/ 0.61%/1/ 1.09%/2/ 0.75%/2/
Other Expenses 0.39% 0.41% 0.53% 1.25%
Total Fund Operating Expenses 1.11% 1.02% 1.62% 2.00%
</TABLE>
Example
The following example illustrates the expenses that a
stockholder would pay on a $1,000 investment, assuming
a 5% annual rate of return and redemption at the end of
each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
SGF $ 11 $ 35 $ 61 $ 135
SMDS $ 10 $ 32 $ 56 $ 125
SSCY $ 16 $ 51 $ 88 $ 192
SSVF $ 20 $ 63 n/a n/a
</TABLE>
/1/ The Investment Advisor has voluntarily agreed to
waive $15,000 annually of the compensation due it
under the agreement with SGF and SMDS to offset a
portion of the cost of certain administrative
responsibilities delegated to FPS.
/2/ This fee represents the basic management fee of
0.75% payable to SSCY and SSVF under the
Investment Advisory Agreement subject to a
performance adjustment. The performance adjustment
is a rolling 24-month comparison to the Frank
Russell 2000 Index ("Russell 2000"), see
"Investment Advisor" for a further discussion. For
the fiscal year ended December 31, 1997 the
Investment Advisor received 1.09% of SSCY's
average net assets. Absent such performance
adjustment, the Investment Advisor would have
received 0.75% of SSCY's average net assets. The
performance adjustment for SSVF has not yet
commenced.
The purpose of this table is to assist investors in
understanding the various costs and expenses that
investors will bear directly or indirectly. The Funds
do not impose any sales load, redemption or exchange
fees, nor do they bear any fees pursuant to a Rule
12b-1 Plan; however, the Transfer Agent currently
charges investors who request redemptions by wire
transfer a fee of $9 for each such payment. For more
complete descriptions of the various costs and
expenses, see "Investment Advisor," "How to Buy Fund
Shares," "How to Redeem Fund Shares," "Retirement
Plans" and "Service Providers and Underwriter A and the
financial statements and related notes which appear in
the Funds' Annual Report to Shareholders.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 4
<PAGE>
FINANCIAL The following information provides financial highlights for
HIGHLIGHTS a share outstanding of SGF, SMDS and SSCY, during the
periods stated. The information for each period ended
presented below has been audited by Tait, Weller & Baker,
certified public accountants, whose report appears in the
Funds' Annual Report to Shareholders dated December 31,
1997. This information should be read in conjunction with
the financial statements and accompanying notes appearing in
the 1997 Annual Report to Shareholders, which are
incorporated by reference into the Statement of Additional
Information. Further information about the performance of
the Funds is available in the Annual Report to Shareholders.
Both the Statement of Additional Information and the Annual
Report to Shareholders may be obtained from the Funds free
of charge by calling 800-634-5726.
Because SSVF commenced investment operations on December 31,
1997, no financial highlights are available.
Stratton Growth Fund, Inc.
<TABLE>
<CAPTION>
Year Ended 7 Months Ended Years Ended May 31,
------------- ------------ ----------------------------------------------------
12/31/97 12/31/96 1996 1995 1994 1993
------------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............. $27.00 $27.18 $22.35 $20.65 $20.89 $20.55
------------- ------------ ----------- ------------ ----------- ------------
Income From Investment Operations
- ---------------------------------
Net investment income...................... 0.550 0.312 0.556 0.537 0.510 0.560
Net gains (loss) on securities
(both realized and unrealized)........... 8.900 1.298 5.759 2.978 0.665 1.160
------------- ------------ ----------- ------------ ----------- ------------
Total from investment operations........ 9.450 1.610 6.315 3.515 1.175 1.720
------------- ------------ ----------- ------------ ----------- ------------
Less Distributions
- ------------------
Dividends (from net investment
income).................................. (0.540) (0.580) (0.540) (0.540) (0.510) (0.565)
Distributions (from capital gains)......... (2.520) (1.210) (0.945) (1.275) (0.905) (0.815)
------------- ------------ ----------- ------------ ----------- ------------
Total Distributions...................... (3.060) (1.790) (1.485) (1.815) (1.415) (1.380)
------------- ------------ ----------- ------------ ----------- ------------
Net Asset Value, End of Year................... $33.39 $27.00 $27.18 $22.35 $20.65 $20.89
============= ============ =========== ============ =========== ============
Total Return................................... 36.06% 6.40% 29.62% 18.61% 5.92% 8.91%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (in 000's)............. $60,177 $44,801 $42,880 $31,719 $25,475 $25,315
Ratio of expenses to average
net assets................................... 1.11% 1.17%/2/ 1.16% 1.31% 1.34% 1.39%
Ratio of net investment
income to average net assets................. 1.87% 2.08%/2/ 2.28% 2.70% 2.51% 2.76%
Portfolio turnover rate........................ 34.40% 20.32% 15.41% 42.54% 49.81% 35.34%
Average commission rate paid................... $0.0509 $0.0537 N/A N/A N/A N/A
<CAPTION>
Years Ended May 31,
----------------------------------------------------------------------
1992 1991/1/ 1990/1/ 1989/1/ 1988/1/
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............. $19.75 $19.66 $21.84 $19.48 $22.24
----------- ------------- ------------ ------------ ------------
Income From Investment Operations
- ---------------------------------
Net investment income...................... 0.64 0.72 0.82 0.55 0.58
Net gains (loss) on securities
(both realized and unrealized)........... 1.32 0.65 0.20 3.83 (1.11)
----------- ------------- ------------ ------------ ------------
Total from investment operations........ 1.96 1.37 1.02 4.38 (0.53)
----------- ------------- ------------ ------------ ------------
Less Distributions
- ------------------
Dividends (from net investment
income).................................. (0.725) (0.82) (0.71) (0.53) (0.70)
Distributions (from capital gains)......... (0.435) (0.46) (2.49) (1.49) (1.53)
----------- ------------- ------------ ------------ ------------
Total Distributions...................... (1.160) (1.28) (3.20) (2.02) (2.23)
----------- ------------- ------------ ------------ ------------
Net Asset Value, End of Year................... $20.55 $19.75 $19.66 $21.84 $19.48
=========== ============= ============ ============ ============
Total Return................................... 10.57% 7.58% 4.94% 24.25% (2.17%)
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (in 000's)............. $25,311 $25,111 $23,407 $20,268 $16,859
Ratio of expenses to average
net assets................................... 1.35% 1.41% 1.38% 1.41% 1.48%
Ratio of net investment
income to average net assets................. 3.20% 3.94% 4.09% 2.79% 2.80%
Portfolio turnover rate........................ 59.76% 56.78% 54.80% 49.85% 34.42%
Average commission rate paid................... N/A N/A N/A N/A N/A
</TABLE>
- ----------------
/1/ Not covered by independent accountants' report
/2/ Annualized
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 5
<PAGE>
Stratton Monthly Dividend REIT Shares, Inc.
<TABLE>
<CAPTION>
Year Ended 11 Months Ended Years Ended January 31
---------- ----------- -----------------------------------------
12/31/97 12/31/96 1996 1995 1994
---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............... $27.43 $27.40 $24.84 $28.69 $29.91
---------- ----------- ---------- ---------- ---------
Income From Investment Operations
- ---------------------------------
Net investment income .......................... 1.54 1.63 1.88 1.94 1.87
Net gains (loss) on securities
(both realized and unrealized) ............... 3.20 0.16 2.60 (3.87) (1.14)
---------- ----------- ---------- ---------- ---------
Total from investment operations ........... 4.74 1.79 4.48 (1.93) 0.73
---------- ----------- ---------- ---------- ---------
Less Distributions
- ------------------
Dividends (from net investment income).......... (1.54) (1.63) (1.89) (1.92) (1.94)
Distributions in excess
of net Investment Income ..................... 0.00 (0.13) (0.03) 0.00 (0.01)
Distributions from net realized gains
from security transactions ................... 0.00 0.00 0.00 0.00 0.00
Distributions from paid-in capital/3/ ........... (0.38) 0.00 0.00 0.00 0.00
---------- ----------- ---------- ---------- ---------
Total distributions .......................... (1.92) (1.76) (1.92) (1.92) (1.95)
---------- ----------- ---------- ---------- ---------
Net Asset Value, End of Year ..................... $30.25 $27.43 $27.40 $24.84 $28.69
========== =========== ========== ========== =========
Total Return ..................................... 18.09% 7.12% 18.98% -6.57% 2.22%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (in 000's) ............... $101,956 $103,780 $129,267 $134,066 $165,798
Ratio of expenses to average net assets .......... 1.02% 1.02% 0.99% 1.08% 0.99%
Ratio of net income to average net asset.......... 5.48% 6.94% 7.42% 7.71% 6.12%
Portfolio turnover rate .......................... 42.47% 69.19% 53.30% 39.50% 19.15%
Average commission rate paid ..................... $0.0505 $0.0498 N/A N/A N/A
<CAPTION>
Years Ended January 31
1993 1992 1991/1/ 1990/1/ 1989/1/
---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............... $27.83 $23.02 $24.50 $24.43 $25.11
---------- ----------- ---------- ---------- ---------
Income From Investment Operations
- ---------------------------------
Net investment income .......................... 1.94 1.97 2.05 2.09 2.10
Net gains (loss) on securities
(both realized and unrealized) ............... 2.08 4.79 (1.33) 0.03 (0.70)
---------- ----------- ---------- ---------- ---------
Total from investment operations ........... 4.02 6.76 0.72 2.12 1.40
---------- ----------- ---------- ---------- ---------
Less Distributions
- ------------------
Dividends (from net investment income).......... (1.94) (1.95) (2.20) (2.05) (2.08)
Distributions in excess
of net Investment Income ..................... 0.00 0.00 0.00 0.00 0.00
Distributions from net realized gains
from security transactions ................... 0.00 0.00 0.00 0.00 0.00
Distributions from paid-in capital/3/ ........... 0.00 0.00 0.00 0.00 0.00
---------- ----------- ---------- ---------- ---------
Total distributions .......................... (1.94) (1.95) (2.20) (2.05) (2.08)
---------- ----------- ---------- ---------- ---------
Net Asset Value, End of Year ..................... $29.91 $27.83 $23.02 $24.50 $24.43
========== =========== ========== ========== =========
Total Return ..................................... 15.18% 30.55% 3.30% 8.69% 5.93%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (in 000's) ............... $98,227 $45,566 $31,178 $33,200 $33,845
Ratio of expenses to average net assets .......... 1.10% 1.23% 1.27% 1.25% 1.21%
Ratio of net income to average net assets......... 6.74% 7.63% 8.79% 8.19% 8.54%
Portfolio turnover rate .......................... 35.94% 43.55% 14.00% 39.10% 15.00%
Average commission rate paid ..................... N/A N/A N/A N/A N/A
- -----------------
</TABLE>
/1/ Not covered by independent accountants' report
/2/ Per share income and expenses and net realized and unrealized gain (loss)
on investments have been computed using the average number of shares
outstanding during the period. These computations had no effect on net
asset value per share.
/3/ Distributions from paid-in capital result from the excess of taxable
capital gains over gains available from book sources.
/4/ Annualized
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
Year 9 Months Year Year For the period
Ended Ended Ended Ended 4/12/93/1/
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>
Net Asset Value, Beginning of Period....... $16.79 $15.98 $12.94 $12.97 $12.50
--------------- -------------- -------------- -------------- -------------
Income From Investment Operations
---------------------------------
Net investment income.................. 0.21 0.26 0.33 0.29 0.22
Net gains (loss) on securities
(both realized and unrealized)....... 6.80 1.74 3.04 (0.02) 0.45
--------------- -------------- -------------- -------------- -------------
Total from investment operations... 7.01 2.00 3.37 0.27 0.67
--------------- -------------- -------------- -------------- -------------
Less Distributions
------------------
Dividends (from net investment
income).............................. (0.20) (0.27) (0.33) (0.30) (0.20)
Distributions (from capital gains)..... (1.13) (0.92) 0.00 0.00 0.00
--------------- -------------- -------------- -------------- -------------
Total distributions................ (1.33) (1.19) (0.33) (0.30) (0.20)
--------------- -------------- -------------- -------------- -------------
Net Asset Value, End of Period............. $22.47 $16.79 $15.98 $12.94 $12.97
=============== ============== ============== ============== =============
Total Return............................... 42.37% 12.84% 26.18% 2.09% 5.51%/2/
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (in 000's)... $39,377 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to average
net assets........................... 1.62% .29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net investment
income to average net assets......... 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover rate................ 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission rate paid........... $0.0548 $0.0579 N/A N/A N/A
- -------------------------
</TABLE>
/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.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 6
6
<PAGE>
INVESTMENT The investment objective of SGF is fundamental and may
OBJECTIVES, POLICIES, not be changed without a vote of a majority of the
RESTRICTIONS AND RISK Fund's shares. The investment objectives of SMDS, SSCY
CONSIDERATIONS and SSVF are not fundamental and may be changed by the
Board of Directors of the applicable Fund. Unless
otherwise stated in this Prospectus or the Statement of
Additional Information, each Fund's investment policies
are not fundamental and may be changed without
shareholder approval. While a non-fundamental policy or
restriction may be changed by the Board of Directors of
the applicable Fund without shareholder approval, the
Funds intend to notify shareholders before making any
change in any such policy or restriction. Fundamental
policies may not be changed without shareholder
approval. A complete list of each Fund's fundamental
investment restrictions appears in the Statement of
Additional Information.
SGF 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. On an overall portfolio basis, the
Investment Advisor will seek appreciation of capital
for the Fund by continuously reviewing both individual
securities and relevant economic and social conditions
so that in the view of the Investment Advisor, the
Fund's portfolio has the greatest possible potential
for capital growth consistent with reasonable risk. The
Fund's investments will normally consist of common
stock and securities convertible into common stock. The
Fund may also invest in REITs. In making its investment
decision, the Investment Advisor examines the
securities of domestic companies, generally those with
dividend payment records, with a view to selecting
those securities which it believes will provide a
greater opportunity for growth and return of capital.
Preferred stocks and debt securities which are not
convertible into common stock will normally not be
purchased. However, when the Investment Advisor
determines that a temporary defensive position is
warranted, it may invest in non-convertible preferred
stocks, debt securities and domestic corporate and
government fixed income obligations without limitation
and to the extent such investments are made, the Fund
will not be achieving growth of capital. The Fund's
relative equity and cash (or cash equivalent) positions
may also be changed as the Fund alters its evaluation
of trends in general securities price levels.
The Fund does not intend to obtain short-term trading
profits. It is anticipated that the Fund's annual
portfolio turnover rate will generally fall within a
30% to 70% range; but the rate of portfolio turnover is
not a limiting factor when the Fund's management deems
changes appropriate and could be less than 30% or
greater than 70% in any particular year, depending upon
market and other considerations.
The following investment restrictions are deemed
fundamental policies:
1. The Fund will not invest more than 5% of the value
of its total assets in the securities of any one
issuer, except for securities of the United States
Government or agencies thereof.
2. The Fund will not invest in more than 10% of any
class of securities of any one issuer (except for
government obligations) or in more than 10% of the
voting securities of any one issuer.
SMDS SMDS' objective is to seek a high rate of return from
dividend and interest income on its investments in
common stock and securities convertible into common
stock. Investment decisions will be made on the basis
of an analysis of fundamentals of individual companies
and on relevant economic and social conditions. The
Fund will invest at least 80% of its assets in common
stock and securities convertible into common stock.
Under normal conditions, at least 65% of the Fund's
total assets will be invested in REITs.
SSCY The investment objective of SSCY is to achieve both
dividend income and capital appreciation. The Fund
seeks to achieve its objective by investing in equity
securities of small-cap companies.
On an overall portfolio basis, the Investment Advisor
will seek to achieve the Fund's objective by
continuously reviewing both individual securities and
relevant economic and social conditions so that in the
view of the Investment Advisor, the Fund has the
greatest possible potential for capital appreciation
consistent with reasonable risk. The Investment Advisor
generally selects companies which pay quarterly
dividends at an above-average rate.
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 7
<PAGE>
Under normal market conditions, it is expected that the
Fund will invest at least 80% of its assets in equity
securities, primarily common stock and securities
convertible into common stock of small-cap companies.
The Fund may also invest in other types of securities
with equity characteristics such as REITs, preferred
stocks, warrants, units and rights. The Fund may invest
in both exchange-listed and over-the-counter
securities. As a matter of fundamental policy which
cannot be changed without the vote of a majority of the
Fund's outstanding shares, the Fund will not invest
more than 25% of its total assets in any one industry.
The Fund will not knowingly invest more than 5% of its
total assets in securities that are illiquid.
Securities having legal or contractual restrictions on
resale and no readily available market, and instruments
that do not provide for payment to the Fund within
seven days after notice are subject to this 5% limit.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not
deemed to be illiquid for the purposes of this
limitation.
Investments in small-cap companies 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 Fund attempts to counteract these concerns about
investing in small-cap companies by using strict
purchase criteria. One of these criteria stipulates
that these companies must have been sound and going
entities for over three years. In addition, these
companies must be established dividend-paying entities.
The dividend requirement helps to reduce share price
volatility of the issues in the Fund and ultimately of
the Fund itself.
SSVF The investment objective of SSVF is to achieve capital
appreciation. The Fund seeks to achieve its objective
by investing 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. 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. The Investment Advisor examines
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. The Fund may also seek to achieve its
objective by investing in companies that are suffering
from market inefficiencies due to less liquidity, and
companies whose share price may have declined relative
to the intrinsic value of its business. The Fund will
pursue a wide array of opportunities among very small
growth companies and mature companies. The Fund will
seek out companies in which there is a large disparity
between its market value and the Investment Advisor's
estimate of its earnings power, assets, or private
market value.
On an overall portfolio basis, the Investment Advisor
will seek to achieve the Fund's objective by
continuously reviewing both individual securities and
relevant economic and social conditions so that in the
view of the Investment Advisor, the Fund has the
greatest possible potential for capital appreciation.
Under normal market conditions, it is expected that the
Fund will invest at least 80% of its assets in equity
securities, primarily common stock and securities
convertible into common stock. The Fund may also invest
in other types of securities with equity
characteristics such as REITs, preferred stocks,
warrants, units and rights. The Fund may invest in both
exchange-listed and over-the-counter securities. The
Fund may engage in short sale transactions, invest in
futures contracts and related options, and purchase and
sell exchange-listed put and call options. As a matter
of fundamental policy which cannot be changed without
the vote of a majority of the Fund's outstanding
shares, the Fund will not invest more than 25% of its
total assets in any one industry.
The Fund will not knowingly invest more than 15% of its
total assets in securities that are illiquid.
Securities having legal or contractual restrictions on
resale and no readily available market, and instruments
that do not provide for payment to the Fund within
seven days after notice are subject to this 15% limit.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not
deemed to be illiquid for the purposes of this
limitation.
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 8
<PAGE>
Risk Short sales are transactions in which SSVF sells a
Considerations of security it does not own in anticipation of a decline
SSVF in the market value of that security. To complete such
a transaction, SSVF must borrow the security to make
Short Sale delivery to the buyer. The Fund then is obligated to
Transactions replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at
such time may be more or less than the price at which
the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender
amounts equal to any dividend which accrues during the
period of the loan. To borrow the security, the Fund
also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the
short position is closed out.
Since short selling can result in profits when stock
prices generally decline, the Fund in this manner, can,
to a certain extent, hedge the market risk to the value
of its other investments and protect its equity in a
declining market. However, the Fund could, at any given
time, suffer both a loss on the purchase or retention
of one security, if that security should decline in
value and a loss on a short sale of another security if
the security sold short should increase in value.
Moreover, to the extent that in a generally rising
market the Fund maintains short positions in securities
rising with the market, the net asset value of the Fund
would be expected to increase to a lesser extent than
the net asset value of an investment company that does
not engage in short sales. Among the factors which
management may consider in making short sales are a
decreasing demand for a company's products, lower
profit margins, lethargic management and a belief that
a disparity exists between the price of the security
and its underlying assets or other values.
No short sale will be effected which will, at the time
of making such short sale transaction and giving effect
thereto, cause the aggregate market value of all
securities sold short to exceed 25% of the value of the
Fund's net assets. The value of the securities of any
one issuer that have been "shorted" by the Fund is
limited to the lesser of 2% of the outstanding value of
the Fund's net assets or 2% of the outstanding
securities of any class of the issuer. In addition, to
secure the Fund's obligation to replace any borrowed
security, it will place in a segregated account, an
amount of cash or U.S. Government securities, at such a
level that (i) the amount deposited in the account plus
the amount deposited with the broker as collateral will
equal the current value of the security sold short and
(ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral
will not be less than the market value of the security
at the time it was sold short; or otherwise cover its
short position in accordance with positions taken by
the SEC.
In addition to the short sales discussed above, the
Fund may also make short sales "against the box", i.e.,
short sales made when the Fund owns securities
identical to those sold short. The Fund may only engage
in short sale transactions in securities listed on one
or more national securities exchange or on NASDAQ.
Futures Contracts SSVF may invest in futures contracts and options on
and Related futures contracts for hedging purposes or to maintain
Options liquidity. However, the Fund may not purchase or sell a
futures contract or purchase a related option unless
immediately after any such transaction the sum of the
aggregate amount of initial margin deposits on its
existing futures positions and the amount of premiums
paid for related options does not exceed 5% of its
total assets.
At maturity, a futures contract obligates the Fund to
take or make delivery of certain securities or the cash
value of a securities index. When the Fund sells a
futures contract, it agrees to sell a specified
underlying instrument at a specified future date. The
Fund may sell a futures contract in order to offset a
decrease in the market value of its portfolio
securities that might otherwise result from a market
decline. The Fund may do so either to hedge the value
of its portfolio of securities as a whole, or to
protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold.
When the Fund purchases a futures contract, it agrees
to purchase a specified underlying instrument at a
specified future date. The Fund may purchase a futures
contract in anticipation of purchases of securities. In
addition, the Fund may utilize futures contracts in
anticipation of changes in the composition of its
portfolio holdings.
The Fund may purchase and sell call and put options on
futures contracts traded on an exchange or board of
trade. When the Fund purchases an option on a futures
contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a
specified exercise price at any
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 9
<PAGE>
time during the option period. When the Fund sells an
option on a futures contract, it becomes obligated to
purchase or sell a futures contract if the option is
exercised. In anticipation of a market advance, the
Fund may purchase call options on futures contracts as
a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of
securities which the Fund intends to purchase.
Similarly, if the market is expected to decline, the
Fund might purchase put options or sell call options on
futures contracts rather than sell futures contracts.
To enter into a futures contract, the Fund must make a
deposit of an initial margin with its custodian in a
segregated account in the name of the futures broker.
Subsequent payments to or from the broker, called
variation margin, will be made on a daily basis as the
price of the underlying security or index fluctuates,
making the long and short positions in the futures
contracts more or less valuable.
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the securities
held by the Fund and the price of futures contracts and
options; (ii) possible lack of a liquid secondary
market for a futures contract and the resulting
inability to close a futures contract when desired;
(iii) losses, which are potentially unlimited, due to
unanticipated market movements; and (iv) the Investment
Advisor's ability to predict correctly the direction of
security prices, interest rates and other economic
factors. Successful use of options and futures by the
Fund is subject to the Investment Advisor's ability to
predict correctly the movements in the direction of the
market. For example, if the Fund uses future contracts
as a hedge against the possibility of a decline in the
market adversely affecting securities held by it and
securities prices increase instead, the Fund will lose
part or all of the benefit of the increased value of
its securities which it has hedged because it will have
approximately equal offsetting losses in its futures
positions. The risk of loss in trading futures
contracts in some strategies can be substantial, due
both to the low margin deposits required, and the
extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement
in a futures contract may result in immediate and
substantial loss or gain to the investor. Thus, a
purchase or sale of a futures contract may result in
losses or gains in excess of the amount invested in the
contract. For further discussion, see "Additional
Information on Investment Objectives and Policies" in
the Statement of Additional Information.
Options SSVF may purchase put and call options listed on a
national securities exchange and issued by the Options
Clearing Corporation to the extent that premiums paid
on all outstanding call options do not exceed 20% of
the Fund's total assets. Purchasing options is a
specialized investment technique that entails a
substantial risk of a complete loss of the amounts paid
as premiums to the writer of the option.
A call option enables the purchaser, in return for the
premium paid, to purchase securities from the writer of
the option at an agreed-upon price during the option
period. The advantage is that the purchaser may hedge
against an increase in the price of securities it
ultimately wishes to buy or may take advantage of a
rise in a particular index. The Fund will only write
call options on a covered basis (options on securities
owned by the Fund). The Fund will receive premium
income from writing call options, which may offset the
cost of purchasing put options and may also contribute
to the Fund's total return. The Fund may lose potential
market appreciation if the Investment Advisor's
judgment is incorrect with respect to interest rates,
security prices or the movement of indices.
A put option enables the purchaser of the option, in
return for the premium paid, to sell the security
underlying the option to the writer at the exercise
price during the option period, and the writer of the
option has the obligation to purchase the security from
the purchaser of the option. The advantage is that the
purchaser can be protected should the market value of
the security decline or should a particular index
decline. The Fund will only write put options on a
covered basis. The Fund will receive premium income
from writing put options, although it may be required,
when the put is exercised, to purchase securities at
higher prices than the current market price.
An option on a securities index gives the purchaser of
the option, in return for the premium paid, the right
to receive cash from the seller equal to the difference
between the closing price of the index and the exercise
price of the option.
Closing transactions essentially let the Fund offset
put options or call options prior to exercise or
expiration. If the Fund cannot effect a closing
transaction, it may have to hold a security it would
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 10
<PAGE>
otherwise sell or deliver a security it might want to
hold. For further discussion, see "Additional
Information on Investment Objectives and Policies" in
the Statement of Additional Information.
Portfolio Turnover SSVF's portfolio turnover rate may vary significantly
from year to year as well as within the year and its
turnover rate could reach or exceed 100%. A 100%
turnover rate would occur, for example, if all the
securities in the Fund's portfolio were replaced in a
period of one year. A greater portfolio turnover rate
reflects a greater number of securities transactions.
High portfolio turnover may also result in the
realization of substantial capital gains, and any
distributions from short-term capital gains are taxable
at ordinary income rates for Federal tax purposes. High
portfolio turnover involves correspondingly greater
brokerage commission and other transaction costs to
SSVF.
Risk Each Fund may invest in REITs. Equity REITs invest
Considerations of directly in real property while mortgage REITs invest
each Fund in mortgages on real property. REITs may be subject to
certain risks associated with the direct ownership of
REITS real estate including declines in the value of real
estate, risks related to general and local economic
conditions, overbuilding and increased competition,
increases in property taxes and operating expenses, and
variations in rental income. Generally, increases in
interest rates will decrease the value of high yielding
securities and increase the costs of obtaining
financing, which could decrease the value of the
portfolio's investments. In addition, equity REITs may
be affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs may
be affected by the quality of credit extended. Equity
and mortgage REITs are dependent upon management skill,
are not diversified and are subject to the risks of
financing projects. REITs are also subject to heavy
cash flow dependency, defaults by borrowers, self
liquidation and the possibility of failing to qualify
for tax-free pass-through of income under the Internal
Revenue Code and to maintain exemption from the
Investment Company Act of 1940, as amended (the "1940
Act").
REITs 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. A
Fund intends to include the gross dividends from such
REITs in its distributions to shareholders and,
accordingly, a portion of the Funds' distributions may
also be designated as a return of capital. For more
information, please see the discussion under "Tax
Treatment: Dividends and Distributions."
Short-Term Although each Fund normally seeks to remain fully
Securities invested in equity securities, a Fund may invest
temporarily up to 100% of its assets in certain
short-term fixed income securities. Such securities may
be used to invest uncommitted cash balances, for
temporary purposes pending investments in other
securities, to maintain liquidity to meet shareholder
redemptions or for temporary defensive measures to
protect against the erosion of its capital base. These
securities include, but are not limited to, obligations
of the U.S. government, its agencies and
instrumentalities, commercial paper, certificates of
deposit, bankers acceptances and repurchase agreements.
When a Fund invests for defensive purposes, it may
affect the attainment of the Fund's investment
objective.
MANAGEMENT The business of each Fund is managed under the
OF THE FUNDS direction of each Fund's Board of Directors.
Information about the directors and officers of the
Funds is included in the Statement of Additional
Information.
INVESTMENT Stratton Management Company (the "Investment Advisor"),
ADVISOR with offices at Plymouth Meeting Executive Campus, 610
W. Germantown Pike, Suite 300, Plymouth Meeting, PA
19462-1050, is the Funds' investment advisor and
manager and is registered as an investment advisor
under the Investment Advisors Act of 1940, as amended.
The Investment Advisor provides investment advisory
services, consisting of portfolio management, for a
variety of individuals and institutions and had
approximately $1.7 billion in assets under management
as of December 31, 1997. By reason of his ownership of
all the Investment Advisor's voting stock, James W.
Stratton may be considered a "controlling person" of
that firm.
Mr. Stratton is the Chief Executive officer of the
Investment Advisor and has been primarily responsible
for the day-to-day investment management of SGF and
SMDS since 1972 and 1980, respectively. Mr. Frank H.
Reichel, III has been primarily responsible for the
day-to-day investment management of SSCY since the
Fund's commencement of operations in April of 1993. Mr.
James Van Dyke Quereau is the designated Portfolio
Manager and will be responsible for the day-to-day
investment management of SSVF. Mr. Quereau has been a
Managing Partner and Director of
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 11
<PAGE>
Research of the Investment Advisor since May 1990, and
has been in the investment management business for 26
years.
Investment Pursuant to Investment Advisory Agreements, Stratton
Advisory Fee Management Company provides an investment program in
accordance with each respective Fund's investment
policies, limitations and restrictions.
For providing investment advisory services, the
Investment Advisor receives: for SGF, a fee at the
annual rate of 0.75% of daily net assets; and for SMDS,
a fee at the annual rate of 0.63% of daily net assets.
The Investment Advisor has voluntarily agreed to waive
$15,000 annually of the advisory fees due it under the
Investment Advisory Agreements with SGF and SMDS to
offset a portion of the fees that the Funds will incur
under certain administration agreements with FPS. See
"Service Providers and Underwriter." During the fiscal
periods ended December 31, 1997, SGF and SMDS paid the
Investment Advisor advisory fees at the effective
annual rates of .72% and .61%, of such Fund's
respective average daily net assets.
For providing investment advisory services for SSCY and
SSVF, the Investment Advisor receives an investment
advisory fee payable monthly at an annual rate of 0.75%
of average daily net assets, subject to a performance
adjustment. The performance adjustment for SSCY is
calculated at the end of each month based upon a
rolling 24-month performance period. 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. The Fund's gross performance
is compared with the performance of the 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 dividends and is reported monthly on a market
capitalization-weighted basis. When the Fund performs
better than the Russell 2000, it pays the Investment
Advisor an incentive fee; less favorable performance
than the Russell 2000 reduces the basic fee. Each 1.00%
of the difference in performance between the Fund and
the Russell 2000 during the performance period is equal
to a 0.10% adjustment to the basic fee. The maximum
annualized performance adjustment rate is +/- 0.50% of
average net assets which would be added to or deducted
from the advisory fee if the Fund outperformed or
underperformed the Russell 2000 by 5.00%. 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 a Fund's average daily net assets for the preceeding
month. Due to the complexities of researching and
investing in small-cap equity securities and special
value securities, the advisory and incentive fees (if
realized) paid by these Funds are higher than those
paid by most other investment companies. Additionally,
a 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. Based on the
foregoing, during the fiscal year ended December 31,
1997, SSCY paid the Investment Advisor a fee at the
effective annual rate of 1.09% of the Fund's average
daily net assets.
COMPUTATION The net asset value per share of each Fund is
OF NET ASSET determined once each business day as of the close of
VALUE regular trading hours (currently 4:00 p.m. Eastern
time) on the New York Stock Exchange ("NYSE"). Such
determination will be made by dividing the value of all
securities and other assets (including dividends
accrued but not collected) less any liabilities
(including accrued expenses), by the total number of
shares outstanding.
Portfolio securities are valued as follows:
1. 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.
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 12
<PAGE>
2. 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.
3. All other securities and assets are valued at
their fair value as determined in good faith by
the Board 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.
Determination of the net asset value may be suspended
when the right of redemption is suspended as provided
under "How to Redeem Fund Shares."
HOW TO BUY Shares of each Fund are offered on a continuous basis
FUND SHARES at the net asset value. The net asset value per share
of each Fund, and hence the purchase price of the
shares, will vary with the value of securities held in
each Fund's portfolio. Purchasers of Fund shares pay no
"sales load"; the full amount of the purchase price
goes toward the purchase of shares of a Fund. Purchases
are made at the net asset value next determined
following receipt of a purchase order by the Transfer
Agent, at the address set forth below, accompanied by
payment for the purchase. The Funds may also from time
to time accept wire purchase orders from broker/dealers
and institutions who have been previously approved by a
Fund.
Orders for shares of a Fund received prior to the close
of regular trading hours on the NYSE are confirmed at
the net asset value determined at the close of regular
trading hours on the NYSE on that day.
Orders received at the address set forth below
subsequent to the close of regular trading hours on the
NYSE will be confirmed at the net asset value
determined at the close of regular trading hours on the
next day the NYSE is open.
Investing by Mail An account may be opened and shares of a Fund purchased
by completing a New Account Application (the
"Application"), which is attached to the back of this
Prospectus, and sending it, together with a check for
the desired amount, payable to "Name of Fund" c/o FPS
Services, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903. The minimum amount for
the initial purchase of shares for each Fund is $2,000.
Subsequent purchases may be made in amounts of $100 or
more. (Note: There are no minimum investment amounts
applied to retirement plans.) After each purchase you
will receive an account statement for the shares
purchased. Once a shareholder's account has been
established, additional purchases may be made by
sending a check made payable to " Name of Fund " c/o
FPS Services, Inc., P.O. Box 412797, Kansas City, MO
64141-2797. Please enclose the stub of your account
statement and include your Fund account number on your
check (as well as the attributable year for retirement
plan investments, if applicable).
Please Note: The Funds will not accept third party
checks for the purchase of shares. Third party checks
are those that are made out to someone other than the
Fund and are endorsed over to the Fund. In order to
ensure receipt of good funds, the Funds reserve the
right to delay sending your redemption proceeds up to
15 days if you recently purchased shares by check. A
$20 fee will be charged to your account for any payment
check returned to the custodian.
Investing by Wire You may also pay for shares by instructing your bank to
wire Federal funds to the Transfer Agent. Federal funds
are monies of member banks within the Federal Reserve
System. Your bank must include the full name(s) in
which your account is registered and your Fund account
number, and should address its wire as follows:
UMB BANK KC NA
ABA # 10-10-00695
For: FPS Services, Inc.
Account # 98-7037-071-9
FBO: "NAME OF FUND"
Account of (exact name(s) of account registration)
Shareholder Account #
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Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 13
<PAGE>
If you are opening a new account by wire transfer, you
must first telephone the Transfer Agent at 800-472-4266
to request an account number and furnish the applicable
Fund with your social security or other tax
identification number. A completed Application with
signature(s) of registrant(s) must be filed with the
applicable Fund immediately subsequent to the initial
wire. Your bank will generally charge a fee for this
wire. The Funds will not be responsible for the
consequences of delays, including delays in the banking
or Federal Reserve wire systems.
Please Note: Your initial Fund account must satisfy the
$2,000 minimum balance requirement in order to
participate in the following programs or plans.
Automatic Shares of a Fund may be purchased through our Automatic
Investment Plan Investment Plan (the "Plan"), an application is
attached to the back of this Prospectus. The Plan
provides a convenient method by which investors may
have monies deducted 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 ("ACH") member may be so
designated. A Fund may alter, modify or terminate this
Plan at any time.
Direct Deposit This program enables a shareholder to purchase
Program additional shares by having certain payments from the
Federal Government only (i.e. federal salary, social
security and certain veterans, military or other
payments) automatically deposited into the
shareholder's account in a Fund. The minimum investment
is $100.
To elect this privilege, a shareholder must complete a
Direct Deposit Enrollment Form for each type of payment
desired. The form may be obtained by contacting the
Transfer Agent, at the address or telephone number
shown below. Death or legal incapacity will terminate a
shareholder's participation in this program. A
shareholder may terminate their participation by
notifying, in writing, the appropriate Federal agency.
In addition, the Funds may terminate participation upon
30 days' notice to the shareholder.
Reinvestment of Any shareholder may at any time request and receive
Income Dividends automatic reinvestment of any Funds' income dividends
and Capital Gains and capital gains distributions, or income dividends
Distributions only, or capital gains distributions only, in
additional shares of a Fund unless the Funds' Board of
Directors determines otherwise. Each Fund will send the
shareholder an account statement reflecting all such
reinvestments. The $100 minimum requirement for
subsequent investments does not apply to the
reinvestment of income dividends and/or capital gain
distributions.
The election to reinvest may be made on the Application
or by writing to "Name of Fund", c/o FPS Services,
Inc., 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903. Any such election will
automatically continue for subsequent dividends, and/or
distributions until written revocation is received by
the applicable Fund. If no election is chosen each Fund
will automatically reinvest dividends and capital gains
distributions.
Additional Shares of a Fund may be purchased or redeemed through
Information certain broker/dealers who may charge a transaction
fee, which would not otherwise be charged if the shares
were purchased directly from a Fund.
Each Fund reserves the right to reject purchases under
circumstances or in amounts considered disadvantageous
to the Fund. Certificates will not be issued unless
requested in writing by the registered
shareholder(s).
Each Fund is required by Federal tax law to withhold
31% of reportable payments (which may include
dividends, capital gains distributions, and
redemptions) paid to shareholders who have not complied
with Internal Revenue Service regulations regarding Tax
Identification Certification. In order to avoid this
withholding requirement, you must certify via signature
on your Application, or on a separate W-9 Form supplied
by the Transfer Agent, that your Social Security or
Taxpayer Identification Number is correct (or you are
waiting for a number to be issued to you), and that you
are currently not subject to backup withholding, or you
are exempt from backup withholding.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 14
<PAGE>
While the Funds provide most shareholder services,
certain special services, such as a request for a
historical transcript of an account, may involve an
additional fee. To avoid having to pay such a fee for
these special services, it is important that you save
your last Year-to-Date Confirmation Statement received
each year.
Please Note: All questions and correspondence on new
and existing accounts (such as purchases or
redemptions, or statements not received) should be
referred directly to the transfer agent, by writing to
FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903, or by calling FPS'
customer service department at 800-472-4266. Please
reference your Fund name and account number.
HOW TO Shareholders may redeem shares of a Fund by mail, by
REDEEM FUND writing directly to the Transfer Agent, and requesting
SHARES liquidation of all or any part of their shares. The
redemption request must be signed exactly as the
By Written Request shareholder's name appears in the registration and must
include the Fund name and account number. If shares are
owned by more than one person, the redemption request
must be signed by all owners exactly as their names
appear in the registration. Shareholders holding stock
certificates must deliver them along with their signed
redemption requests. To protect your account, the
Transfer Agent and the Funds from fraud, signature
guarantees are required for certain redemptions.
Signature guarantees are required for: (1) all
redemptions of $10,000 or more; (2) any redemptions if
the proceeds are to be paid to someone other than the
person(s) or organization in whose name the account is
registered; (3) any redemptions which request that the
proceeds be wired to a bank; (4) requests to transfer
the registration of shares to another owner; and (5)
any redemption if the proceeds are to be sent to an
address other than the address of record. The Transfer
Agent requires that signatures be guaranteed by an
"eligible guarantor institution" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934.
Eligible guarantor institutions include banks, brokers,
dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies
and savings associations. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation
or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature
guarantees. Signature guarantees will be accepted from
any eligible guarantor institution which participates
in a signature guarantee program. The Transfer Agent
cannot accept guarantees from notaries public. In
certain instances, the Funds may require additional
documents, such as certified death certificates or
proof of fiduciary or corporate authority. Please call
FPS to verify required language for all retirement plan
redemption requests or to obtain the Retirement Plan
Withdrawal Form. No redemption shall be made unless a
shareholder's Application is first on file. In
addition, a Fund will not accept redemption requests
until checks (including certified checks or cashier's
checks) received for the shares purchased have cleared,
which can be as long as 15 days.
Redemption requests mailed to the Investment Advisor
must be forwarded to the Transfer Agent and will not be
effected until they are received in good order by the
Transfer Agent. The Transfer Agent cannot accept
redemption requests which specify a particular forward
date for redemption.
By Automated A shareholder may elect to have redemption proceeds,
Clearing House cash distributions or systematic cash withdrawal
payments transferred to his or her bank, savings and
loan association or credit union that is an on-line
member of the ACH system. There are no fees associated
with the use of the ACH service.
Written ACH redemption requests must be received by the
Transfer Agent before 4 p.m. Eastern time to receive
that day's closing net asset value. ACH redemptions
will be sent on the day following the shareholder's
request and funds will be available two days later.
Redemption proceeds (including systematic cash
withdrawals), as well as dividend and capital gains
distributions, may be sent to a shareholder via Federal
Funds wire. However, the Transfer Agent will charge a
$9 fee for each Federal Funds wire transmittal, which
will be deducted from the amount of the payment.
Systematic Cash Each Fund offers a Systematic Cash Withdrawal Plan as
Withdrawal Plan another option which may be utilized by an investor who
wishes to withdraw funds from his or her account on a
regular basis. To participate in this option, an
investor must either own or purchase shares having a
value of $10,000 or more. Automatic payments by check
will be mailed to the investor on either a monthly,
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 15
<PAGE>
quarterly, semi-annual or annual basis in amounts of
$50 or more. All withdrawals are processed on the 25th
of the month or, if such day is not a business day, on
the next business day and paid promptly thereafter.
Please complete the appropriate section on the
Application, indicating the amount of the distribution
and the desired frequency.
An investor should realize that if withdrawals exceed
income dividends and capital gains distributions, the
invested principal will be depleted. Thus, depending on
the size of the withdrawal payments and fluctuations in
the value of the shares, the original investment could
be exhausted entirely. An investor may change or stop
the Plan at any time by written notice to the Funds.
Dividends and capital gains distributions must be
automatically reinvested to participate in this plan.
Stock certificates cannot be issued under the
Systematic Cash Withdrawal Plan.
Additional Due to the relatively high cost of maintaining smaller
Information accounts, the Funds reserve the right to involuntarily
redeem shares in any account for its then current net
asset value (which will be paid to the shareholder
within five business days, or such shorter time period
as may be required by applicable SEC rules) if at any
time the total investment does not have a value of at
least $500. The shareholder will be notified that the
value of his or her account is less than the required
minimum and will be allowed at least 45 days to bring
the value of the account up to at least $500 before the
redemption is processed.
The redemption price will be the net asset value of the
shares to be redeemed as determined at the close of
regular trading hours on the NYSE after receipt at the
address set forth above of a request for redemption in
the form described above and the certificates (if any)
evidencing the shares to be redeemed. No redemption
charge will be made. Payment for shares redeemed is
made within five business days, or such shorter time
period as may be required by applicable SEC rules,
after receipt of the certificates (or of the redemption
request where no certificates have been issued) by
mailing a check to the shareholder's address of record.
Please Note: A $9 fee will be charged to your account
at the time of redemption if instructions to wire
proceeds are given; there is no fee to mail proceeds.
Also, your redemption proceeds may be delayed up to 15
days if you recently purchased shares by check in order
to confirm clearance of check.
The Funds may also from time to time accept telephone
redemption requests from broker/dealers and
institutions who have been approved previously by the
Funds. Neither the Funds nor any of their service
contractors will be liable for any loss or expense or
cost in acting upon any telephone instructions that are
reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the
Funds will use such procedures as are considered
reasonable, including requesting a shareholder to
correctly state his or her Fund account number, the
name in which his or her account is registered, his or
her banking institution, bank account number and the
name in which his or her bank account is registered. To
the extent that a Fund fails to use reasonable
procedures to verify the genuineness of telephone
instructions, it and/or its service contractors may be
liable for any such instructions that prove to be
fraudulent or unauthorized. During times of unusual
market conditions it may be difficult to reach the
Funds by telephone. If the Funds cannot be reached by
telephone, shareholders should follow the procedures
for redeeming by mail as set forth above.
The right of redemption may not be suspended or payment
upon redemption deferred for more than five business
days, or such time shorter time period as may be
required by applicable SEC rules, except: (1) when
trading on the NYSE is restricted as determined by the
SEC or such NYSE is closed for other than weekends and
holidays; (2) when the SEC has by order permitted such
suspension; or (3) when an emergency, as defined by the
rules of the SEC, exists, making disposal of portfolio
securities or valuation of net assets of a Fund not
reasonably practicable. In case of a suspension of the
determination of the net asset value, the right of
redemption is also suspended and unless a shareholder
withdraws his request for redemption, he or she will
receive payment at the net asset value next determined
after termination of the suspension.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 16
<PAGE>
As provided in the Funds' Articles of Incorporation,
payment for shares redeemed may be made either in cash
or in-kind, or partly in cash and partly in-kind.
However, the Funds have elected, pursuant to Rule 18f-1
under the 1940 Act to redeem shares solely in cash up
to the lesser of $250,000 or one percent of the net
asset value of the Fund, during any 90 day period for
any one shareholder. Payments in excess of this limit
will also be made wholly in cash unless the Board of
Directors of such Fund believes that economic
conditions exist which would make such a practice
detrimental to the best interests of the Fund. Any
portfolio securities paid or distributed in-kind will
be in readily marketable securities, and will be valued
as described under "Computation of Net Asset Value."
Subsequent sale of such securities would require
payment of brokerage commissions by the investor.
The value of a shareholder's shares on redemption may
be more or less than the cost of such shares to the
shareholder, depending upon the net asset value of the
Fund's shares at the time of redemption.
EXCHANGE Shares of each Fund may be exchanged for shares of the
PRIVILEGE 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.
The sections regarding each Fund, including those on
charges and expenses, should be read prior to seeking
any such exchange. 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" for a description
of the Funds' policy regarding telephone instructions.
Please Note: Shareholders who have certificated shares
in their possession must surrender these shares to the
Transfer Agent to be held on account in unissued form
prior to taking advantage of the exchange privilege.
When returning certificates for this purpose only,
signature(s) need not be guaranteed. There are no sales
charges involved. Shareholders who engage in frequent
exchange transactions may be prohibited from further
exchanges or otherwise restricted in placing future
orders. The Funds reserve the right to suspend the
telephone exchange privilege at any time. An exchange
for tax purposes constitutes the sale of one fund and
the purchase of another. Consequently, the sale may
involve either a capital gain or loss to the
shareholder for federal income tax purposes.
RETIREMENT Each Fund has available four types of tax-deferred
PLANS retirement plans for its shareholders: Defined
Contribution Plans, for use by both self-employed
individuals and corporations; an Individual Retirement
Account, both Traditional and Roth, for use by certain
eligible individuals with compensation (including
earned income from self-employment), a Simple
Individual Retirement Account, for use by certain small
companies, and a 403(b)(7) Retirement Plan, for use by
employees of schools, hospitals, and certain other
tax-exempt organizations or associations. More detailed
information about how to participate in these plans,
the fees charged by the custodian, and the limits on
contributions can be found in the Statement of
Additional Information. To invest in any of the
tax-deferred retirement plans, please call the Funds
for information and the required separate
application.
TAX During their most recent taxable years, SGF, SMDS and
TREATMENT: SSCY qualified separately as a regulated investment
DIVIDENDS AND company under Subchapter M of the Internal Revenue Code
DISTRIBUTIONS and each Fund, including SSVF, intends to do so qualify
in future years, as long as such qualification is in
the best interest of its shareholders.
Tax Treatment Under Subchapter M of the Internal Revenue Code (the
"Code"), a Fund is not subject to Federal income tax on
such part of its ordinary taxable income or net
realized long-term capital gains that it distributes to
shareholders. Distributions paid by a Fund from net
investment income and short-term capital gains (but not
distributions paid from mid-term or long-term capital
gains) will be taxable as ordinary income to
shareholders, whether received in cash or reinvested in
additional shares of such Fund. Such ordinary income
distributions will qualify for the dividends received
deduction for corporations to the extent of the total
qualifying dividends from domestic corporations
received by a Fund for the year. Shareholders who are
citizens or residents of the United States will be
subject to Federal taxes with respect to mid-term or
long-term realized capital
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 17
<PAGE>
gains as the case may be) which are distributed to
them, whether or not reinvested in the Funds and
regardless of the period of time such shares have been
owned by the shareholders. These distributions do not
qualify for the dividends received deduction. Dividends
attributable to distributions made by a REIT to a Fund
also do not qualify for the dividends received
deduction. In addition, distributions paid by REITs
often include a "return of capital." The Code requires
a REIT to distribute at least 95% of its taxable income
to investors. In many cases, however, because of "non-
cash" expenses such as property depreciation, an equity
REIT's cash flow will exceed its taxable income. The
REIT may distribute this excess cash to offer a more
competitive yield. This portion of the distribution is
deemed a return of capital, and is generally not
taxable to shareholders. However, when shareholders
receive a return of capital, the cost basis of their
shares is decreased by the amount of such return of
capital. This, in turn, affects the capital gain or
loss realized when shares of a Fund are exchanged or
sold. Therefore, a shareholder's original investment in
a Fund will be reduced by the amount of the return of
capital and capital gains included in a distribution if
such shareholder elects to receive distributions in
cash (as opposed to having them reinvested in
additional shares of a Fund). Once a shareholder's cost
basis is reduced to zero, any return of capital is
taxable as a capital gain.
Shareholders will be advised after the end of each
calendar year as to the Federal income tax consequences
of dividends and distributions of the Funds made each
year.
Dividends declared in October, November or December of
any year payable to shareholders of record on a
specified date in such months, will be deemed for
Federal tax purposes to have been received by the
shareholders and paid by such Fund on December 31 of
such year in the event such dividends are paid during
January of the following year.
Prior to purchasing shares of a Fund, the impact of
dividends or capital gains distributions which are
expected to be announced or have been announced, but
not paid, should be carefully considered. Any such
dividends or capital gains distributions paid shortly
after a purchase of shares by an investor prior to the
record date will have the effect of reducing the per
share net asset value of his or her shares by the per
share amount of the dividends or distributions. All or
a portion of such dividends or distributions, although
in effect a return of capital to the shareholder, is
subject to taxes, which may be at ordinary income tax
rates.
A taxable gain or loss may be realized by an investor
upon his or her redemption, transfer or exchange of
shares of a Fund, depending upon the cost of such
shares when purchased and their price at the time of
redemption, transfer or exchange. If a shareholder has
held Fund shares for six months or less and received a
distribution taxable as capital gains attributable to
those shares, any loss he realizes on a disposition of
those shares will be treated as a long-term capital
loss to the extent of the earlier capital gain
distribution.
The information above is only a short summary of some
of the important Federal tax considerations generally
affecting the Funds and their shareholders. Income and
capital gains distributions may also be subject to
state and local taxes. Investors should consult their
tax advisor with respect to their own tax situation.
Dividends and The shareholders of each Fund are entitled to dividends
Distributions and distributions arising from the net investment
income and net realized gains, if any, earned on
investments held by the Fund involved, when declared by
the Board of Directors of such Fund. SGF declares and
pays dividends from net investment income on a
semi-annual basis. SMDS declares and pays dividends
from net investment income on a monthly basis. SSCY
declares and pays dividends from net investment income
quarterly. SSVF declares and pays dividends from net
investment income annually. Each Fund will make
distributions from net realized gains, if any, once a
year, but may make distributions on a more frequent
basis to comply with the distribution requirements of
Subchapter M of the Internal Revenue Code. Any
distribution paid necessarily reduces a Fund's net
asset value per share by the amount of the
distribution. Distributions may be reinvested in
additional shares of such Fund, see "Reinvestment of
Income Dividends and Capital Gains Distributions."
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 18
<PAGE>
PERFORMANCE From time to time, performance information such as
CALCULA- total return for the Funds may be quoted in
TIONS advertisements or in communications to shareholders.
Each Fund's total return may be calculated on an
average annual total return basis, and may also be
calculated on an aggregate total return basis, for
various periods. Average annual total return reflects
the average annual percentage change in value of an
investment in a Fund over the measuring period.
Aggregate total return reflects the total percentage
change in value over the measuring period. Both methods
of calculating total return assume that dividends and
capital gains distributions made by a Fund during the
period are reinvested in such Fund's shares.
The total return of each Fund may be compared to that
of other mutual funds with similar investment
objectives and to bond and other relevant indices or to
rankings prepared by independent services or other
financial or industry publications that monitor the
performance of mutual funds. For example, the total
return of a Fund's shares may be compared to data
prepared by Lipper Analytical Services, Inc., National
Association of Real Estate Investment Trusts and to
indices prepared by Dow Jones & Co., Inc. and Standard
& Poor's Ratings Group.
Performance quotations of each Fund represent such
Fund's past performance, and should not be considered
as representative of future results. The investment
return and principal value of an investment in a Fund
will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original
cost. Any fees charged by broker-dealers, banks or
other financial institutions directly to their customer
accounts in connection with investments in shares of a
Fund will not be included in the Fund's calculations of
total return. Further information about the performance
of each Fund is included in the Fund's most recent
Annual Report which may be obtained without charge by
contacting the Fund at (800) 634-5726.
DESCRIPTION The Funds are each organized as separate Maryland
OF COMMON corporations. SGF was organized on June 21, 1985, as
STOCK successor to a Delaware corporation organized on June
5, 1972; SMDS was organized on March 4, 1985, as
successor to a Delaware corporation organized on
November 10, 1971; and The Stratton Funds, Inc. was
organized on January 5, 1993. SGF's authorized capital
is 10,000,000 shares of common stock, par value $0.10
per share. SMDS' authorized capital is 10,000,000
shares of common stock, par value $1.00 per share. The
Stratton Funds, Inc. is authorized to issue
1,000,000,000 shares of common stock, par value $0.001
per share, and to classify and reclassify any
authorized and unissued shares into one or more series
or classes. At present, the Board of Directors of The
Stratton Funds, Inc. has authorized the issuance of
200,000,000 shares of Class A common stock representing
interests in SSCY and 200,000,000 shares of Class B
common stock representing interests in SSVF.
There are no conversion or preemptive rights in
connection with any shares of the Funds, nor are there
cumulative voting rights. Shares of each Fund are
freely transferable. Each share of a particular Fund
has equal voting, dividend and distribution, and
liquidation rights with other shares of such Fund. When
issued for payment as described in this Prospectus, a
Fund's shares will be fully paid and nonassessable.
Fractional shares of a Fund have proportionately the
same rights as provided for full shares of the
particular Fund.
Each Fund does not presently intend to hold annual
meetings of shareholders except as required by the 1940
Act or other applicable law. Each Fund is a separate
legal entity and holders vote separately as
shareholders of each Fund. Under certain circumstances,
shareholders of a Fund have the right to call a
shareholders meeting of that Fund to consider the
removal of one or more directors.
Investors should be aware that by combining the
Prospectus of each Fund into this one document, there
is the possibility that one Fund may become liable for
any misstatements in the Prospectus about another Fund.
To the extent that a Fund incurs such liability, a
shareholders investment in such Fund could be adversely
affected.
SERVICE Pursuant to arrangements between the Funds, The Bank of
PROVIDERS New York and FPS, The Bank of New York serves as
AND custodian of all securities and cash owned by each
UNDERWRITER Fund. The Bank of New York performs no managerial or
policy-making functions for the Funds. Pursuant to
agreements between The Bank of New York and FPS, FPS
performs certain administrative and record keeping
services. The Bank of New York reallows a portion of
its custody fee to FPS for providing such services.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 19
<PAGE>
FPS also serves as the Transfer Agent, Administrator
and Fund Accounting/Pricing Agent. FPS is a
wholly-owned subsidiary of FinDaTex, Inc. Certain
directors and officers of Stratton Management Company,
the Investment Advisor to the Funds, and certain
directors and officers of each Fund are controlling
shareholders of FinDaTex, Inc.
Administration services include all administrative
services except those relating to the investment
portfolios of the Funds, the distribution of the Funds
and the maintenance of the Funds' financial records.
For these administrative services, SGF, SMDS and SSCY
pays a flat fee of $30,000 and SSVF pays a flat fee of
$10,000.
FPSB acts as underwriter to each Fund pursuant to
separate underwriting agreements. FPSB was paid $3,000
from each Fund for underwriting services in connection
with the registration of the Fund's shares under state
securities laws. FPSB is a wholly-owned subsidiary of
FPS. FPS and FPSB are affiliates of the Investment
Advisor inasmuch as FPSB, FPS and the Investment
Advisor are under common control.
- --------------------------------------------------------------------------------
Combined Stratton Mutual Funds Prospectus Dated May 1, 1998
Page 20
<PAGE>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- -------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Inapplicable
13. Investment Objective and Policies Additional information on
Investment Objectives and
Policies; Investment
Restrictions
14. Management of the Registrant Directors and Officers of the
Funds
15. Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other The Investment Advisor and
Services Other Service Providers
17. Brokerage Allocation Portfolio Transactions and
Brokerage Commissions
18. Capital Stock and Other Securities Covered in Part A
19. Purchase, Redemption and Pricing Additional Purchase and
of Securities Being Offered Redemption Information
20. Tax Status Additional Information
Concerning Taxes
21. Underwriters The Investment Advisor and
Other Service Providers
22. Calculation of Performance Data Additional Information on
Performance Calculations
23. Financial Statements Financial Statements
PART C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Post-Effective Amendment No. 18 to the
Registration Statement.
Page 3
<PAGE>
STRATTON
MUTUAL FUNDS
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Stratton Small-Cap Yield Fund
Stratton Special Value Fund
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
This Statement of Additional Information provides supplementary information
pertaining to shares of common stock in four separate mutual funds: Stratton
Growth Fund, Inc. ("SGF"); Stratton Monthly Dividend REIT Shares, Inc. ("SMDS");
Stratton Small-Cap Yield Fund ("SSCY") and Stratton Special Value Fund ("SSVF")
of The Stratton Funds, Inc. (each a "Fund" and collectively the "Funds").
This Statement of Additional Information is not a Prospectus but should be read
in conjunction with the current Prospectus dated May 1, 1998, and is
incorporated by reference in its entirety into the Prospectus. A copy of the
Prospectus for the Funds may be obtained by contacting the Funds' Distributor,
FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
PA 19406-0903, or by telephoning (800) 634-5726.
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Statement of Additional Information.............................................
Additional Information on Investment Objectives and Polices for SSVF............
Investment Restrictions
SGF....................................................................
SMDS...................................................................
SSCY...................................................................
SSVF...................................................................
Directors and Officers of the Funds.............................................
Compensation Table..............................................................
Control Persons and Principal Holders of Securities.............................
The Investment Advisor and Other Service Providers
The Investment Advisor.................................................
Service Providers and Underwriter......................................
Portfolio Transactions and Brokerage Commissions................................
Retirement Plans
Defined Contribution Plans.............................................
Individual Retirement Account..........................................
Roth IRA...............................................................
403(b)(7) Retirement Plan..............................................
Simple Individual Retirement Account...................................
General Information....................................................
Additional Purchase and Redemption Information..................................
Additional Information Concerning Taxes.........................................
Additional Information on Performance Calculations
Total Return Calculations..............................................
Financial Statements............................................................
</TABLE>
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction with the
Prospectus of the Funds having the same date as this Statement of Additional
Information. Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus. No investment in
shares of the Funds should be made without first reading the Prospectus of the
Funds.
ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVE AND POLICIES FOR SSVF
Futures Contracts
SSVF may enter into contracts for the purchase or sale for future delivery of
securities, including index contracts. While futures contracts provide for the
delivery of securities, deliveries usually do not occur. Contracts are generally
terminated by entering into offsetting transactions.
The Fund may enter into such futures contracts to protect against the adverse
effects of fluctuations in security prices or interest rates without actually
buying or selling the securities underlying the contract. For example, if
interest rates are expected to increase, the Fund might enter into futures
contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the Fund.
If interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the futures contracts to the Fund
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have. Similarly,
when it is expected that interest rates may decline, futures contracts may be
purchased to hedge in anticipation of subsequent purchases of securities at
higher prices. Since the fluctuations in the value of futures contracts should
be similar to those of debt securities, the Fund could take advantage of the
anticipated rise in value of debt securities without actually buying them until
the market had stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy debt securities on the cash market.
A stock index futures contract obligates the seller to deliver, and the
purchaser to receive an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement was made.
Open futures contracts are valued on a daily basis and the Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in the
future.
With respect to options on futures contracts, when the Fund is temporarily not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based, or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Fund is not fully invested, it may
purchase a call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial hedge
against the declining price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings.
The writing of a put option on a futures contract constitutes a partial hedge
against the increasing price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of securities which the Fund intends to purchase.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to purchase or sell stock at a specified
price, options on a stock index future give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the futures contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing price of the futures contract on the expiration date.
3
<PAGE>
If a put or call option which the Fund has written is exercised, the Fund may
incur a loss which will be reduced by the amount of the premium it received.
Depending upon the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The purchase of a
put option on a futures contract is similar in some respects to the purchase of
protective puts on portfolio securities, and for federal tax purposes will be
considered a "short sale". For example, the Fund will purchase a put option on a
futures contract to hedge the Fund's portfolio against the risk of rising
interest rates.
To the extent that market prices move in an unexpected direction, the Fund may
not achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize a loss. For example, if the Fund is hedged against the
possibility of an increase in interest rates that would adversely affect the
price of securities held in its portfolio and interest rates decrease instead,
the Fund would lose part or all of the benefit of the increased value that it
has because it would have offsetting losses in its futures position. In
addition, in such situations, if the Fund had insufficient cash, it may be
required to sell securities from its portfolio to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. The Fund may be required to
sell securities at a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may seek to
close out an option position by writing or buying an offsetting position
covering the same securities or contracts and having the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Options
SSVF may buy put and call options and write covered call and secured put
options. Such options may relate to particular securities, stock indices, or
financial instruments listed on a national securities exchange and issued by the
Options Clearing Corporation. Options trading is a highly specialized activity
that entails greater than ordinary investment risk. Options on particular
securities may be more volatile than the underlying securities, and therefore,
on a percentage basis, an investment in options may be subject to greater
fluctuation than a direct investment in the underlying securities.
The Fund will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, liquid assets, such as cash, U.S. Government
securities or other liquid high-grade debt obligations, in such amount as are
held in a segregated account by its custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if the Fund maintains with its custodian a diversified stock portfolio,
or liquid assets equal to the contract value. A call option is also covered if
the Fund holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written; or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Fund in liquid assets such
as cash, U.S. Government securities and other high-grade debt obligations in a
segregated account with its custodian. The Fund will write put options only if
they are "secured" by liquid assets maintained in a segregated account by the
Funds' custodian in an amount not less than the exercise price of the option at
all times during the option period.
The Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series as the previously written
option. Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. There is no assurance that a liquid secondary market
will exist for any particular option. An option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
(in the case of a covered call option) or liquidate the segregated account (in
the case of a secured put option) until the option expires or the optioned
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the security during such period.
4
<PAGE>
Purchasing Call Options
SSVF may purchase call options to the extent that premiums paid by the Fund do
not aggregate more than 20% of that Fund's total net assets. When the Fund
purchases a call option, in return for a premium paid by the Fund to the writer
of the option, the Fund obtains the right to buy the security underlying the
option at a specified exercise price at any time during the term of the option.
The writer of the call option, who receives the premium upon writing the option,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. The advantage of purchasing call
options is that the Fund may alter portfolio characteristics and modify
portfolio maturities without incurring the cost associated with transactions.
The Fund may, following the purchase of a call option, liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an option
of the same series as the option previously purchased. The Fund will realize a
profit from a closing sale transaction if the price received on the transaction
is more than the premium paid to purchase the original call option; the Fund
will realize a loss from a closing sale transaction if the price received on the
transaction is less than the premium paid to purchase the original call option.
Although the Fund will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by the Fund may expire without any value to the Fund, in which event
the Fund would realize a capital loss that would be characterized as short-term
unless the option was held for more than one year.
Covered Call Writing
SSVF may write covered call options from time to time on such portions of their
portfolios, without limit, as the Advisor determines is appropriate in seeking
to obtain the Fund's investment objective. The advantage to the Fund of writing
covered calls is that the Fund receives a premium that is additional income.
However, if the security rises in value, the Fund may not fully participate in
the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
or upon entering a closing purchase transaction. A closing purchase transaction,
in which the Fund, as writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written, cannot
be effected with respect to an option once the option writer has received an
exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Fund may realize a net gain or loss from a
closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short-term capital
gain in the amount of the premium on the option less the commission paid. Such a
gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised, the
Fund will realize a gain or loss from the sale of the underlying security equal
to the difference between the cost of the underlying security and the proceeds
of the sale of the security plus the amount of the premium on the option less
the commission paid.
The Fund will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, the
Fund would be required to continue to hold a security which it might otherwise
wish to sell or deliver a security it would want to hold. The
5
<PAGE>
exercise price of a call option may be below, equal to or above the current
market value of the underlying security at the time the option is written.
Purchasing Put Options
SSVF may invest up to 20% of their total net assets in the purchase of put
options. The Fund will, at all times during which it holds a put option, own the
security covered by such option. The purchase of the put on substantially
identical securities held will constitute a short sale for tax purposes, the
effect of which is to create short-term capital gain on the sale of the security
and to suspend running of its holding period (and treat it as commencing on the
date of the closing of the short sale) or that of a security acquired to cover
the same if, at the time the put was acquired, the security had not been held
for more than one year.
A put option purchased by the Fund gives it the right to sell one of its
securities for an agreed-upon price up to an agreed date. The Fund intends to
purchase put options in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
the Fund to protect unrealized gains in an appreciated security in their
portfolios without actually selling the security. If the security does not drop
in value, the Fund will lose the value of the premium paid. The Fund may sell a
put option which it has previously purchased prior to the sale of the securities
underlying such option. Such sale will result in a net gain or loss depending
upon whether the amount received on the sale is more or less than the premium
and other transaction costs paid on the put option which is sold.
The Fund may sell a put option purchased on individual portfolio securities.
Additionally, the Fund may enter into closing sale transactions. A closing sale
transaction is one in which the Fund, when it is the holder of an outstanding
option, liquidates its position by selling an option of the same series as the
option previously purchased.
Writing Put Options
SSVF may also write put options on a secured basis, which means that the Fund
will maintain, in a segregated account with its custodian, cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. The amount of cash or U.S.
Government securities held in the segregated account will be adjusted on a daily
basis to reflect changes in the market value of the securities covered by the
put option written by the Fund. Secured put options will generally be written in
circumstances where the Advisor wishes to purchase the underlying security for
the Fund's portfolio at a price lower than the current market price of the
security. In such event, that Fund would write a secured put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. With regard to the writing of put options,
each Fund will limit the aggregate value of the obligations underlying such put
options to 50% of its total net assets.
Following the writing of a put option, the Fund may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
INVESTMENT RESTRICTIONS
A list of the Funds' investment objectives and policies, can be found under
"INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISK CONSIDERATIONS" in the
Funds' Prospectus.
The following investment restrictions are deemed fundamental policies and may be
changed with respect to a Fund only by the approval of the holders of a
"majority" of such Fund's outstanding shares. The term "majority" of a Fund's
outstanding shares means the holders of the lesser of: (1) 67% of such Fund's
shares present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy; or (2) more than 50% of such Fund's
outstanding shares.
SGF WILL NOT:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer, except for securities of the United States
Government or agencies thereof.
2. Invest in more than 10% of any class of securities of any one issuer
(except for government obligations) or in more than 10% of the voting
securities of any one issuer.
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<PAGE>
3. Invest more than 5% of the value of its total assets in securities of
companies which (including operations of their predecessors and of
subsidiaries if the company is a holding company) have not had a record
of at least three years of continuous operations and in equity
securities which are not readily marketable (that is, with a limited
trading market).
4. Borrow money, except from banks for temporary or emergency purposes
(but not for investment purposes), provided that such borrowings shall
not exceed 5% of its total assets (at the lower of cost or market
value).
5. Underwrite the securities of other issuers or invest in securities
under circumstances where, if sold, the Fund might be deemed to be an
underwriter under the Securities Act of 1933.
6. Pledge, mortgage or hypothecate its assets.
7. Invest for purposes of exercising management or control.
8. Invest in securities of other investment companies or in options, puts,
calls, straddles, spreads or similar devices, or engage in arbitrage
transactions or short sales.
9. Purchase securities on margin, but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
10. Make loans to other persons except that this restriction shall not
apply to government obligations, commercial paper or notes or other
evidences of indebtedness which are publicly distributed.
11. Purchase or sell real estate or interests in real estate. This will not
prevent the Fund from investing in publicly-held real estate investment
trusts or marketable securities which may represent indirect interests
in real estate.
12. Purchase or sell commodities or commodity contracts or invest in
interests in oil, gas or other mineral exploration or development
programs.
13. Invest more than 2% of the value of its total assets in warrants. This
restriction does not apply to warrants initially attached to securities
purchased by the Fund. This restriction may be changed or eliminated at
any time by the Board of Directors of the Fund without action by the
Fund's shareholders.
14. Purchase or hold securities of any issuer, if, at the time of purchase
or thereafter, any officer or director of the Fund or its Investment
Advisor owns beneficially more than 1/2 of 1%, and such officers and
directors holding more than 1/2 of 1% together own beneficially more
than 5% of the issuer's securities.
SMDS WILL NOT:
1. Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 5% of the value of its total assets; or
mortgage, pledge or hypothecate its assets to secure any borrowing
except to secure temporary or emergency borrowing and then only in an
amount not exceeding 15% of the value of its total assets.
2. Invest more than 5% of the value of its total assets in securities of
issuers which, with their predecessors, have not had at least three
years of continuous operation.
3. Issue any senior securities (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), except in so far as investment
restriction 1 may be deemed to be an issuance of a senior security.
4. Act as an underwriter or purchase securities which the Fund may not be
free to sell to the public without registration of the securities under
the Securities Act of 1933.
5. Purchase or sell real estate, commodities, or commodity contracts.
7
<PAGE>
6. Invest less than 75% of the value of its total assets in securities
limited in respect to any one issuer to an amount not exceeding 5% of
the value of its total assets, Government securities (as defined in the
1940 Act) cash and cash items. (There is no similar restriction as to
the investment of the balance of the Fund's total assets).
7. Purchase or own 5% or more of the outstanding voting securities of any
electric or gas utility company (as defined in the Public Utility
Holding Company Act of 1935), or purchase or own 10% or more of the
outstanding voting securities of any other issuer.
8. Purchase the securities of an issuer, if, to the Fund's knowledge, one
or more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more
than 0.5% together own beneficially more than 5%, of the outstanding
securities of such issuer.
9. Make loans to other persons, except that the purchase of a portion of
an issue of publicly distributed debt securities (whether or not upon
original issuance) shall not be considered the making of a loan.
10. Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of purchases
or sales of securities.
11. Participate on a joint or a joint-and-several basis in any securities
trading account.
12. Invest in puts, calls or combinations thereof or make short sales.
13. Purchase the securities of other investment companies.
14. Purchase securities which do not have readily available market
quotations.
15. The Fund will invest at least 25% of its assets in securities of real
estate investment trusts ("REITs").
REITs are not considered investment companies, and therefore are not subject to
the restriction in limitation 13 above. The restriction in limitation 5 on the
purchase or sale of real estate does not include investments by the Fund in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
The following investment restrictions can be changed only by the Board of
Directors of SMDS:
1. The Fund will not invest for the purpose of exercising control or
management.
2. The Fund will not invest in warrants, except when acquired as a unit
with other securities.
SSCY WILL NOT:
1. Issue any senior securities (as defined in the Investment Company Act
of 1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total
assets; or mortgage, pledge or hypothecate its assets.
2. Act as an underwriter of securities, except that, in connection with
the disposition of a security, the Fund may be deemed to be an
"Underwriter" as that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate, commodities, or commodity contracts.
4. As to 75% of the total assets of the Fund, purchase the securities of
any one issuer, other than securities issued by the U.S. government,
its agencies or its instrumentalities, if immediately after such
purchase more than 5% of the total assets of the Fund would be invested
in securities of such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any
one issuer.
6. Purchase the securities of an issuer, if, to the Fund's knowledge, one
or more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more
than 0.5% together own beneficially more than 5%, of the outstanding
securities of such issuer.
8
<PAGE>
7. Make loans to other persons, except that the purchase of a portion of
an issue of publicly distributed debt securities (whether or not upon
original issuance) shall not be considered the making of a loan, nor
shall the Fund be prohibited from entering into repurchase agreements
with banks or broker/dealers.
8. Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of purchases
or sales of securities.
9. Purchase the securities of issuers conducting their principal business
activities in the same industry other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities
if, immediately after such purchase, the value of the Fund's
investments in such industry would exceed 25% of the value of the total
assets of the Fund.
10. Invest in puts, calls, straddles or combinations thereof or make short
sales.
11. Purchase the securities of other investment companies, except if they
are acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a Securities and Exchange Commission approved offer
of exchange.
12. Invest for the purpose of exercising control over, or management of,
the issuer.
SSVF Will Not:
1. Issue any senior securities (as defined in the Investment Company Act
of 1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total
assets; or mortgage, pledge or hypothecate its assets, except that this
restriction shall not apply to transactions in options, futures
contracts and options on futures contracts.
2. Act as an underwriter of securities, except that, in connection with
the disposition of a security, the Fund may be deemed to be an
"Underwriter" as that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate.
4. As to 75% of the total assets of the Fund, purchase the securities of
any one issuer, other than securities issued by the U.S. government,
its agencies or its instrumentalities, if immediately after such
purchase more than 5% of the total assets of the Fund would be invested
in securities of such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any
one issuer.
6. Purchase or sell commodities or commodity contracts, except that it may
engage in options transactions and may enter into futures contracts and
options thereon in accordance with its Prospectus.
7. Make loans to other persons, except that the purchase of a portion of
an issue of publicly distributed debt securities (whether or not upon
original issuance) shall not be considered the making of a loan, nor
shall the Fund be prohibited from entering into repurchase agreements
with banks or broker/dealers.
8. Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of purchases
or sales of securities. The Fund may establish margin accounts in
connection with its use of options, futures contracts and options on
futures contracts.
9. Purchase the securities of issuers conducting their principal business
activities in the same industry other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities
if, immediately after such purchase, the value of the Fund's
investments in such industry would exceed 25% of the value of the total
assets of the Fund.
10. Purchase the securities of other investment companies, except if they
are acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a Securities and Exchange Commission approved offer
of exchange.
11. Invest for the purpose of exercising control over, or management of,
the issuer.
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<PAGE>
Real estate investment trusts ("REITs") are not considered investment companies,
and therefore are not subject to the restriction in limitation 11 above. The
restriction in limitation 3 on the purchase or sale of real estate does not
include investments by the Fund in securities secured by real estate or
interests therein or issued by companies or investment trusts which invest in
real estate or interests therein.
* * *
The percentage limitations on investments are applied at the time an investment
is made. An actual percentage in excess of a stated percentage limitation does
not violate the limitation unless such excess exists immediately after an
investment is made and results from the investment. In other words, appreciation
or depreciation of a Fund's investments will not cause a violation of the
limitations. In addition, the limitations will not be violated if a Fund
receives securities by reason of a merger or other form of reorganization.
DIRECTORS AND OFFICERS OF THE FUNDS
The Directors and executive officers of the Funds, their position with the
Funds, their addresses, affiliations, if any, with the Investment Advisor, and
principal occupations during the past five years are set forth below. Each of
the Directors named below is a Director for each of the Funds and each of the
officers named below holds the same position, unless otherwise noted, with each
of the Funds.
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
<S> <C> <C> <C>
James W. Stratton /1,3/ 61 Director/ Mr. Stratton is the Chairman of the Board and Chief
610 W. Germantown Pike Chairman Executive Officer of the Investment Advisor, Stratton
Suite 300 Management Company. He is a Director of Unisource
Plymouth Meeting, PA 19462 Worldwide, Inc. (paper distribution), Amerigas
Propane Ltd. (energy), FinDaTex, Inc. (financial
services), Teleflex, Inc. (aerospace controls and
medical products) and UGI Corp., Inc.
(utility-natural gas).
Lynne M. Cannon/2/ 42 Director Ms. Cannon is a Senior Vice President of
3200 Horizon Drive Relationship Management of FPS Services, Inc. and a
King of Prussia, PA 19406 Director of FPS Broker Services, Inc. She was
formerly employed as Vice President of Mutual Funds
of Independence Capital Management, Inc. (investment
advisor). Prior to Independence Capital, she was
Vice President of AMA Investment Advisors, Inc.
(investment advisor & broker/dealer).
John J. Lombard, Jr. 63 Director Mr. Lombard is a partner in the law firm of Morgan,
2000 One Logan Sq. Lewis & Bockius LLP.
Philadelphia, PA 19103
Douglas J. MacMaster, Jr. 67 Director Mr. MacMaster is a private investor. He was formerly
5 Morris Road Senior Vice President of Merck, Inc. He is a Trustee
Ambler, PA 19002 of Gwynedd Mercy College, a Director of American
Precision Industries, Inc., Marteck Biosciences
Corp., Neose Pharmaceuticals Inc., Oravax, Inc. and
U.S. Bioscience, Inc.
Henry A. Rentschler 69 Director Mr. Rentschler is a private investor. He was
P.O. Box 962 formerly the President of Baldwin-Hamilton Company, a
Paoli, PA 19301 division of Joy Environmental Equipment Co.
(manufacturer of renewal parts for Baldwin locomotives
and diesel engines) and was also formerly a Director
of the Society for Industrial Archeology (which
promotes the study and preservation of the physical
survivals of our technological and industrial past).
Merritt N. Rhoad, Jr./3/ 68 Director Mr. Rhoad is a private investor. He was formerly a
640 Bridle Road senior systems engineer with International Business
Custis Woods Machines Corporation.
Glenside, PA 19038
Alexander F. Smith 69 Director Mr. Smith is a private investor. He was formerly the
Cricket Springs Chairman and Director of Gilbert Associates, Inc.
Geigertown , PA 19523 (engineering/consulting services).
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Richard W. Stevens 64 Director Mr. Stevens is an attorney in private practice. He
One Jenkintown Station was formerly a partner in the law firm of Clark,
115 W. Avenue, Suite 108 Ladner, Fortenbaugh and Young.
Jenkintown, PA 19046
John A. Affleck/3/ 51 Officer
610 W. Germantown Pike Mr. Affleck is President and Director of the
Suite 300 Investment Advisor, Stratton Management Company. He
Plymouth Meeting, PA 19462 is President of Stratton Monthly Dividend REIT
Shares, Inc., Vice President of Stratton Growth Fund,
Inc. and The Stratton Funds, Inc.
Gerard E. Heffernan/3/ 60 Officer Mr. Heffernan is a Senior Vice President and Director
610 W. Germantown Pike of the Investment Advisor, Stratton Management
Suite 300 Company. He is President of Stratton Growth Fund,
Plymouth Meeting, PA 19462 Inc., Vice President of Stratton Monthly Dividend
REIT Shares, Inc. and The Stratton Funds, Inc. He is
Secretary of FinDaTex, Inc.
Frank H. Reichel, III 33 Officer Mr. Reichel is a Vice President, a Director and the
610 W. Germantown Pike Director of Research of the Investment Advisor,
Suite 300 Stratton Management Company. He is President of The
Plymouth Meeting, PA 19462 Stratton Funds, Inc., Vice President of Stratton
Growth Fund, Inc. and Stratton Monthly Dividend REIT
Shares, Inc.
James A. Beers 35 Officer Mr. Beers is a Vice President of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company; prior thereto,
Suite 300 Account Manager of Client Services at FPS Services,
Plymouth Meeting PA 19462 Inc. He is Vice President of the Funds. Mr. Beers
is related to Mr. Stratton by marriage.
Joanne E. Kuzma 43 Officer
610 W. Germantown Pike Mrs. Kuzma is the Director of Trading and a Managing
Suite 300 Partner of the Investment Advisor, Stratton
Plymouth Meeting, PA 19462 Management Company. She is Vice President of
Compliance for the Funds.
Patricia L. Sloan 44 Officer Ms. Sloan is an employee of the Investment Advisor,
610 W. Germantown Pike Stratton Management Company. She is Secretary and
Suite 300 Treasurer of the Funds.
Plymouth Meeting, PA 19462
Carol L. Royce 40 Officer Mrs. Royce is an employee of the Investment Advisor,
610 W. Germantown Pike Stratton Management Company. She is Assistant
Suite 300 Secretary and Assistant Treasurer of the Funds.
Plymouth Meeting PA 19462
</TABLE>
/1/ As defined in the 1940 Act, Mr. Stratton is an "interested person" of the
Funds by reason of his positions with the Investment Advisor and his
indirect ownership, through FinDaTex, Inc., of FPS Services, Inc. ("FPS")
and it's subsidiary FPS Broker Services, Inc. ("FPSB"). FinDaTex, Inc. is
the 100% owner of FPS, the Funds' servicing agent, and FPSB, the Funds'
underwriter.
/2/ Ms. Cannon is an "interested person" of the Funds by reason of her
employment with FPS and FPSB.
/3/ Messrs. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
COMPENSATION TABLE
The officers and Directors of the Funds who are also officers or employees of
the Investment Advisor or FPS receive no direct compensation from the Fund for
services to them. The Directors of the Funds serve in the same capacity for each
Fund and meet concurrently four times a year. In the aggregate, each director
currently receives $1,000 for each meeting attended, and an annual retainer of
$5,000. These fees are divided on a percentage basis between each Fund based on
their relative net assets as of the meeting date. There are no separate audit,
compensation or nominating committees of the Board of Directors.
Set forth are the total fees which were paid to each of the directors who are
not "interested persons" for fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation From Fund and Fund
Name of Director from Fund Complex (1) Paid to Directors
- ---------------- ---------------------- -----------------------------
<S> <C> <C>
James W. Stratton
SGF $0 $0
SMDS $0
SSCY $0
</TABLE>
11
<PAGE>
Lynne M. Cannon
SGF $0 $0
SMDS $0
SSCY $0
John J. Lombard, Jr.
SGF $1,831.02 $6,250.00
SMDS $3,365.78
SSCY $1,053.20
Douglas J. MacMaster, Jr.
SGF $ 522.38 $1,750.00
SMDS $ 887.74
SSCY $ 339.88
Henry A. Rentschler
SGF $1,821.69 $6,250.00
SMDS $3,385.40
SSCY $1,042.91
Merritt N. Rhoad, Jr.
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
Alexander F. Smith
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
Richard W. Stevens
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
(1) The "Fund Complex" consists of SGF, SMDS and The Stratton Funds, Inc.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 6, 1998, beneficial ownership in the Funds by the directors and
officers as a group was as follows:
Fund Number of Shares Percentage
- ---- ---------------- ----------
1. SGF
2. SMDS
3. SSCY
12
<PAGE>
As of April 6, 1998, the following shareholders owned of record or to the best
of knowledge beneficially more than 5% of the outstanding shares of the
respective Fund.
Shares Percent
Name Address Owned Owned
---- ------- ------ -----
1. SGF
2. SMDS
3. SSCY
THE INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
The Investment Advisor
The Investment Advisory Agreements (the "Agreements") require the Investment
Advisor to maintain a continuous review of each Fund's portfolio of investments,
and to manage the investment and reinvestment of each Fund's assets. The
Agreements provide that the Investment Advisor is not required to give the Funds
preferential treatment as compared with the treatment given to any other
customer or investment company. In addition, the Investment Advisor furnishes to
the Funds office space and facilities necessary in connection with the operation
of the Funds. The Funds pay, or arrange for others to pay, all other expenses in
connection with their operations.
The Funds pay the following expenses: (1) the fees and expenses of the Funds'
disinterested directors; (2) interest expenses; (3) taxes; (4) brokerage
commissions and other expenses incurred in acquiring or disposing of portfolio
securities; (5) the expenses of registering shares for sale with the Securities
and Exchange Commission and with various state securities commissions; (6)
accounting and legal costs; (7) insurance premiums; (8) fees and expenses of the
Funds' custodian, administrator, accounting services agent and transfer agent
and any related services; (9) expenses of obtaining quotations of the Funds'
portfolio securities and of pricing the Funds' shares; (10) expenses of
maintaining the Funds' legal existence and of shareholders' meetings; (11)
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and (12) fees and expenses of membership in industry
organizations.
1. SGF - The investment advisory fee payable under the Agreement is payable
monthly, at an annual rate of 3/4 of 1% of the Fund's daily net assets.
During the fiscal years ended May 31, 1995 and 1996, the fees paid to the
Investment Advisor were $189,594 and $266,741, respectively. For the period
June 1, 1996 through December 31, 1996, the fees paid to the Investment
Advisor were $177,939. For the fiscal year ended December 31, 1997, the fee
paid to the Investment Advisor was $366,356.
2. SMDS - The investment advisory fee payable under the Agreement is payable
monthly, at an annual rate of 5/8 of 1% of the Fund's daily net assets.
During the fiscal years ended January 31, 1995 and 1996, the fees paid to
the Investment Advisor were $829,796 and $794,629, respectively. For the
period February 1, 1996 through December 31, 1996, the fees paid to the
Investment Advisor were $606,818. For the fiscal year ended December 31,
1997, the fee paid to the Investment Advisor was $600,138.
3. SSCY - The Investment Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets subject to a
performance adjustment and is responsible for paying its expenses. During
the fiscal years ended March 31, 1995 and 1996, the fees paid to the
Investment Advisor were $76,075 and $126,638, respectively. For the period
April 1, 1996 through December 31, 1996, the fees paid to the Investment
Advisor were $91,179. For the fiscal year ended December 31, 1997, the fee
paid to the Investment Advisor was $312,050.
13
<PAGE>
The performance adjustment for SSCY is 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, 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 dividends and is reported
monthly on market capitalization-weighted basis. When the Fund performs
better than the Russell 2000, it pays the Investment Advisor an incentive
fee; less favorable performance than the Russell 2000 reduces the basic
fee. Each 1.00% of the difference in performance between the Fund and the
Russell 2000 during the performance period is equal to a 0.10% adjustment
to the basic fee. The maximum annualized performance adjustment rate is +/-
0.50% of average net assets which would be added to or deducted from the
advisory fee if the Fund outperformed or under performed 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 a Fund's
average daily net assets for the preceeding month. Due to the complexities
of researching and investing in small-cap equity 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.
4. SSVF - The Investment Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets subject to a
performance adjustment. The performance adjustment will commence at the end
of the month in which the Fund has completed 24 months of operation, if it
has net assets of $20 million or more, at such date, or at the end of any
succeeding month at which it has net assets of $20 million, but in any
event, irrespective of its net assets, at the end of the month in which the
Fund has completed 36 months of operation and will be calculated at the end
of the commencement month and each succeeding month based upon a rolling 24
month performance period. The performance adjustment is added to or
subtracted from the basic investment advisory fee. The Fund's gross
performance is compared with the performance of the Frank Russell 2000, as
discussed above.
Service Providers and Underwriter
FPS is a wholly-owned subsidiary of FinDaTex, Inc. Certain directors and
officers of Stratton Management Company, the Investment Advisor to the Funds,
and certain Directors and officers of each Fund are controlling shareholders of
FinDaTex, Inc. FPSB, the Funds underwriter, is a wholly-owned subsidiary of FPS.
FPS has been engaged by the Fund to provide most of the back office services on
the Fund's behalf. Pursuant to certain agreements, FPS provides the services
commonly and separately referred to as: Fund Administration, Fund Accounting,
Transfer Agency and Custody Administration.
As the Funds' accounting services agent, FPS is responsible for certain
accounting services such as computation of the net asset value of the Funds'
shares and maintenance of the Funds' books and financial records.
1. SGF - For the fiscal year ended May 31, 1996, the Fund paid FPS $20,000 in
fees pursuant to the Accounting Services Agreement. For the period June 1,
1996 through December 31, 1996, the Fund paid FPS $11,667 in fees pursuant
to the Accounting Services Agreement. For the fiscal year ended December
31, 1997, the Fund paid FPS $20,000 in fees pursuant to the Accounting
Services Agreement.
2. SMDS - For the fiscal year ended January 31, 1996, the Fund paid FPS
$26,000 in fees pursuant to the Accounting Services Agreement. For the
period February 1, 1996 through December 31, 1996, the Fund paid FPS
$23,833 in fees pursuant to the Accounting Services Agreement. For the
fiscal year ended December 31, 1997, the Fund paid FPS $26,000 in fees
pursuant to the Accounting Services Agreement.
3. SSCY - For the fiscal year ended March 31, 1996, the Fund paid FPS $20,000
in fees pursuant to the Accounting Services Agreement. For the period April
1, 1996 through December 31, 1996, the Fund paid FPS $15,000 in fees
pursuant to the Accounting Services Agreement. For the fiscal year ended
December 31, 1997, the Fund paid FPS $21,666 in fees pursuant to the
Accounting Services Agreement.
4. SSVF - Pursuant to the Accounting Services Agreement, FPS receives an asset
based fee computed at the annual rate of $25,000 on the first $20 million
of average net assets, .03% of the next $30 million of average net assets,
.02% of the next $50 million of average net assets and .01% of average net
assets over $100 million.
14
<PAGE>
As the Funds' administrative services agent, FPS is responsible for certain
administrative services such as: (1) coordination and monitoring the activities
of any other third party service provider providing services to the Fund (e.g.
the Fund's independent auditors, printers, etc.); (2) providing the Fund with
necessary office space, telephones and other communications facilities and
personnel competent to perform the responsibilities under the Agreement; (3)
maintenance of such books and records of the Fund as may be required by
applicable federal or state law; (4) prepares and, after approval by the Fund,
files and arranges for the distribution of proxy materials and periodic reports
to shareholders of the Fund as required by applicable law; (5) prepares and,
after approval by the Fund, arranges for the filing of such registration
statements and other documents with the U.S. Securities and Exchange Commission
and any other federal or state regulatory authorities as may be required by
applicable law; (6) reviews and submits to the officers of the Fund for their
approval, invoices or other requests for payment of the Fund's expenses and
instructs the Custodian to issue checks in payment thereof, and (7) takes such
other action with respect to the Fund as may be deemed by FPS to appropriately
perform its duties under the Agreement.
1. SGF - For the fiscal year ended May 31, 1996, the Fund paid FPS $30,000 in
fees for administrative services. For the period from June 1, 1996 through
December 31, 1996, the Fund paid FPS $17,500. For the fiscal year ended
December 31, 1997, the Fund paid FPS $30,000 in fees for administrative
services. The Investment Advisor has waived $15,000 annually of the
compensation due it under the Investment Advisory Agreement, to offset a
portion of the fee that the Fund will incur under the Administration
Agreement. This fee waiver can be terminated or reduced by the Investment
Advisor upon 60 days prior written notice to the Fund.
2. SMDS - For the fiscal year ended January 31, 1996, the Fund paid FPS
$30,000 in fees for administrative services. For the period from February
1, 1996 through December 31, 1996, the Fund paid FPS $27,500. For the
fiscal year ended December 31, 1997, the Fund paid FPS $30,000 in fees for
administrative services. The Investment Advisor has waived $15,000 annually
of the compensation due it under the Investment Advisory Agreement, to
offset a portion of the fee that the Fund will incur under the
Administration Agreement. This fee waiver can be terminated or reduced by
the Investment Advisor upon 60 days prior written notice to the Fund.
3. SSCY - For the fiscal year ended March 31, 1996, the Fund paid FPS $10,000
in fees for administrative services. For the period from April 1, 1996
through December 31, 1996, the Fund paid FPS $7,500. For the fiscal year
ended December 31, 1997, the Fund paid FPS $10,833 in fees for
administrative services.
4. SSVF - FPS is entitled to receive a fee payable monthly at the annual rate
of $10,000 per year.
FPS also serves as the Funds' transfer agent and dividend-paying agent. FPS
annually receives $13.00 per account for providing transfer agent and dividend
disbursing agent services.
The Funds' independent auditor is Tait, Weller & Baker. Their offices are
located at 8 Penn Center Plaza, Suite 800, Philadelphia PA 19103. The auditor's
responsibilities are (1) to ensure that all relevant accounting principles are
being followed by the Funds; and (2) to report to the Boards of Directors
concerning the Funds' operations.
The Bank of New York, 48 Wall Street, New York, New York 10286 serves as the
custodian of each Fund's assets pursuant to custodian agreements. Under such
agreements, The Bank of New York (1) maintains a separate account or accounts in
the name of the Funds; (2) holds and transfers portfolio securities on account
of the Funds; (3) accepts receipts and makes disbursements on money on behalf of
the Funds; (4) collects and receives all income and other payments and
distributions on account of the Funds' securities; and (5) makes periodic
reports to the Boards of Directors concerning the Funds' operations.
The Funds have entered into Underwriting Agreements with FPSB. FPSB acts as an
underwriter of the Funds' shares for the purpose of facilitating the
registration of shares. In this regard, FPSB has agreed at its own expense to
qualify as a broker/dealer under all applicable federal or state laws in those
states which the Funds shall from time to time identify to FPSB as states in
which it wishes to offer its shares for sale, in order that state registrations
may be maintained for the Funds.
15
<PAGE>
FPSB is a broker/dealer registered with the Securities and Exchange Commission
and a member in good standing of the National Association of Securities Dealers,
Inc. FPSB is an affiliate of the Investment Advisor inasmuch as both the
Underwriter and the Investment Advisor are under common control.
For the services to be provided under the Underwriting Agreement in facilitating
the registration of Funds shares under state securities laws, FPSB has received
an annual fee of $3,000 from each Fund for providing these services in each of
the last three fiscal years. This fee is included in the net expenses of the
Funds. The Funds shall continue to bear the expense of all filing or
registration fees incurred in connection with the registration of shares of the
Funds under state securities laws. The Funds pay no compensation to FPSB for its
assistance in sales of Funds shares. The Investment Advisor pays certain
out-of-pocket expenses, plus the cost for each employee to be licensed as a
Registered Representative by FPSB.
The Underwriting Agreement may be terminated by either party upon 60 days prior
written notice to the other party, and if so terminated, the pro-rata portion of
the unearned fee will be returned to the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Funds seek to obtain the best price and execution in all purchases and sales
of securities, except when the authorization to pay higher commissions for
research and services, as provided for in the Investment Advisory Agreements, is
exercised. Purchases and sales of over-the-counter securities are ordinarily
placed with primary market makers acting as principals. Consistent with its
obligation to seek the best price and execution, the Funds may place some
purchases and sales of portfolio securities with dealers or brokers who provide
statistical and research information to the Investment Advisor. Statistical and
research services furnished by brokers through whom the Funds effects securities
transactions in accordance with these procedures are ordinarily of general
application and may be used by the Advisor in servicing other accounts as well
as that of the Funds. In addition, not all such services may be used in
connection with the Investment Advisor's activities on behalf of the Funds.
Portfolio transactions are assigned to brokers, and commission rates negotiated,
based on an assessment of the reliability and quality of a broker's services,
which may include research and statistical information such as reports on
specific companies or groups of companies, pricing information, or broad
overviews of the stock market and the economy.
Although investment decisions for the Funds will be made independently from
investment decisions made with respect to other clients advised by the
Investment Advisor, simultaneous transactions may occur on occasion when the
same security is suitable for the investment objectives of more than one client.
When two or more such clients are simultaneously engaged in the purchase or sale
of the same security, to the extent possible the transactions will be averaged
as to price and allocated among the clients in accordance with an equitable
formula. In some cases this system could have a detrimental effect on the price
or quantity of a security available to the Funds. In other cases, however, the
ability of the Funds to participate with other clients of the Investment Advisor
in volume transactions may produce better executions for the Funds.
The Investment Advisory Agreements contain provisions which authorize the
Investment Advisor to recommend and cause the Funds to pay brokerage commissions
in excess of commissions which might be charged by other brokers, where a
determination is made that the amount of commission paid is reasonable in
relation to the brokerage and research services provided by the broker to the
Funds, viewed in terms of the particular transaction or the overall
responsibilities of the Investment Advisor with respect to the Funds. In
addition, the Investment Advisory Agreements recognize that the Investment
Advisor may, at its expense, acquire statistical and factual information, advice
about economic factors and trends and other appropriate information from others
in carrying out its obligations. For SGF, during the fiscal years ended May 31,
1995 and 1996, the period June 1, 1996 through December 31, 1996 and the fiscal
year ended December 31, 1997, no brokerage commissions were paid by the Fund
pursuant to this provision. For SMDS, during the fiscal year ended January 31,
1995 and 1996 and the period February 1, 1996 through December 31, 1996 and the
fiscal year ended December 31, 1997, no brokerage commissions were paid by the
Fund pursuant to this provision. For SSCY, during the fiscal years ended March
31, 1995, 1996 and the period April 1, 1996 through December 31, 1996 and the
fiscal year ended December 31, 1997, no brokerage commissions were paid by the
Fund pursuant to this provision.
1. SGF - During the fiscal year ended May 31, 1996; the period June 1, 1996
through December 31, 1996; and the fiscal year ended December 31, 1997, the
Fund paid $13,398, $24,150 and $46,704 respectively, in brokerage
commissions, substantially all of which were paid to brokers which had
provided research, statistical data or pricing information to the
Investment Advisor. The variation in these commissions from year to year
reflects primarily the amount of total net assets in the Fund and to a
lesser extent the annual turnover rate. For the fiscal year ended May 31,
1996; the period ended December 31, 1996 and the fiscal year ended December
31, 1997, the Fund's portfolio turnover rates were 15.41%, 20.32% and
34.40%, respectively.
16
<PAGE>
2. SMDS - During the fiscal year ended January 31, 1996; the period February
1, 1996 through December 31, 1996; and the fiscal year ended December 31,
1997, the Fund paid $280,842, $337,175 and $184,272 respectively, in
brokerage commissions, substantially all of which were paid to brokers
which had provided research, statistical data or pricing information to the
Investment Advisor. The variation in these commissions from year to year
reflects primarily the amount of total net assets in the Fund and to a
lesser extent the annual turnover rate. For the fiscal year ended January
31, 1996; the period ended December 31, 1996 and the fiscal year ended
December 31, 1997, the Fund's portfolio turnover rates were 53.30 %, 69.19%
and 42.47%, respectively.
3. SSCY - During the fiscal year ended March 31, 1996; the period April 1,
1996 through December 31, 1996; and the fiscal year ended December 31,
1997, the Fund paid $22,378, $29,899 and $41,488 respectively, in brokerage
commissions, substantially all of which were paid to brokers which had
provided research, statistical data or pricing information to the
Investment Advisor. For the fiscal year ended March 31, 1996; the period
ended December 31, 1996 and the fiscal year ended December 31, 1997 the
Fund's portfolio turnover rates were 33.50%, 35.86% and 26.27%,
respectively.
4. SSVF - The Fund commenced investment operations on December 31, 1997,
therefore no brokerage commissions were paid.
Each Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
such Fund as of the close of its most recent fiscal years.
RETIREMENT PLANS
Defined Contribution Plans
The Funds offer a profit sharing and a money purchase plan (the "Defined
Contribution Plans") for use by both self-employed individuals (sole
proprietorships and partnerships) and corporations who wish to use shares of the
Funds as a funding medium for a retirement plan qualified under the Internal
Revenue Code.
The Internal Revenue Code provides certain tax benefits for participants in a
Defined Contribution Plan. For example, amounts contributed to a Defined
Contribution Plan and earnings on such amounts are not taxed until distributed.
However, distributions to a participant from a Defined Contribution Plan before
the participant attains age 59 1/2 will (with certain exceptions) result in an
additional 10% tax on the amount included in the participant's gross income.
Individual Retirement Account
The Funds offer an individual retirement account (the "IRA") for use by
individuals with compensation for services rendered (including earned income
from self-employment) who wish to use shares of the Funds as a funding medium
for individual retirement saving. However, except for rollover contributions, an
individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may only contribute to an IRA for a nonworking spouse who is under
age 70 1/2. The general deductible limit for contributions to an IRA is the
lesser of 100% of compensation or $2,000.
17
<PAGE>
An individual may roll over to the IRA funds (in any amount) that he or she has
received in a qualifying distribution from an employer's retirement plan or IRA.
The individual's IRA assets (and earnings thereon) may generally not be
withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
Roth-IRA
The total amount contributed to a Roth IRA for any taxable year cannot exceed
the lesser of $2,000 or 100 percent of the individual's compensation. If an
individual also maintains a traditional IRA the maximum contribution to the Roth
IRA is reduced by any contributions made to the traditional IRA. The total
annual contribution to all traditional IRAs and Roth IRAs cannot exceed the
lesser of $2,000 or 100 percent of the individual's compensation.
Unless the individual's adjusted gross income is more than $100,000, or is
married and filing a separate tax return, the individual is eligible to roll
over, transfer or convert all or any portion of the existing traditional IRA(s)
into the Roth IRA(s). A separate Roth Conversion IRA should generally be
established to hold conversion amounts. If the Roth IRA is designated as a Roth
Conversion IRA, the only permissible contributions are amounts converted from a
traditional IRA during the same tax year. The amount of the conversion from the
traditional IRA to the Roth IRA will be treated as a distribution for income tax
purposes and is includible in the individual's gross income (except for any
nondeductible contributions). Although the conversion amount is generally
included in income, the 10 percent early distribution penalty will not apply to
rollovers or conversions from a traditional IRA to a Roth IRA, regardless of
whether the individual qualifies for any exceptions to the 10 percent penalty.
Funds distributed from the Roth IRA may be rolled over to a Roth IRA of the
individuals'. A proper Roth IRA to Roth IRA rollover is completed if all or part
of the distribution is rolled over not later than 60 days after the distribution
is received. The individual may not have completed another Roth IRA to Roth IRA
rollover from the distributing Roth IRA during the 12 months preceding the date
the distribution was received. Further, the individual may roll the same dollars
or assets only once every 12 months. Roth IRA assets may not be rolled over to
other types of IRAs (e.g., traditional IRA, Simple IRA).
403(b)(7) Retirement Plan
The Funds offer a plan (the "403(b)(7) Plan") for use by schools, hospitals, and
certain other tax-exempt organizations or associations who wish to use shares of
the Funds as a funding medium for a retirement plan for their employees.
Contributions are made to the 403(b)(7) Plan based on a reduction of the
employee's regular compensation. Such contributions, to the extent they do not
exceed applicable limitations (including a generally applicable limitation of
$9,500 per year), are excludable from the gross income of the employee for
Federal income tax purposes. Assets withdrawn from the 403(b)(7) Plan are
subject to Federal income tax and to the additional 10% tax on early withdrawals
discussed above under "Defined Contribution Plans."
Simple Individual Retirement Account
The Funds offer a plan (the "Simple IRA") for use by companies or tax-exempt
organizations who wish to use shares of the Funds as a funding medium for a
retirement plan for their employees. Contributions are made to the Simple IRAs
based on a reduction of the employee's regular compensation. Such contributions,
to the extent they do not exceed applicable limitations (including a generally
applicable limitation of $6,000 per year), are excludable from the gross income
of the employee for Federal income tax purposes. Assets withdrawn from the
Simple IRA are subject to Federal income tax and
18
<PAGE>
to the additional 10% tax on early withdrawals discussed above under "Defined
Contribution Plans." Also, any distribution to an individual within two years of
initial participation in the plan increases the early withdrawal penalty to 25%.
General Information
In all these Plans, distributions of net investment income and capital gains
will be automatically reinvested in the Funds.
The custodian of the Plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Semper is controlled by certain directors and officers of the
Funds and certain directors and officers of Stratton Management Company. FPS
serves as the fiduciary agent for Semper and in such capacity is responsible for
all record keeping, applicable tax reporting and fee collection in connection
with the plan accounts. Semper is entitled to deduct its fees and administrative
expenses by liquidating shares annually in September, unless the annual
maintenance fee is paid separately to FPS. The annual maintenance fee is
currently $12.00 per plan account. This fee may be amended without notice by
Stratton Management Company, Semper or FPS in the future.
The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution, IRA, Roth IRA, 403(b)(7) or Simple IRA Plans
available for investment in the Funds. Any person who wishes to establish a
retirement plan account may do so by contacting the Funds directly. The complete
Plan documents and applications will be provided to existing or prospective
shareholders upon request, without obligation. Since all these Plans involve
setting aside assets for future years, it is important that investors consider
their needs and whether the investment objective of the Funds as described in
this Statement of Additional Information and in the Prospectus is most likely to
fulfill them. The Funds recommend that investors consult their attorneys or tax
advisors to determine if the retirement programs described herein are
appropriate for their needs.
ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION
The computation of the offering price per share of each Fund based on the value
of each Fund's net assets on December 31, 1997 and each Fund's outstanding
securities on such date is as follows:
SGF SMDS SSCY SSVF
Net Assets $60,177,483 $101,956,224 $39,376,948 $105,000
Outstanding Shares 1,802,433 3,370,941 1,752,053 7,000
Net Asset Value,
Offering Price and
Redemption Price per Share $33.39 $30.25 $22.47 $15.00
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situation.
As stated in the Prospectus, a Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended ("the Code")
for each taxable year. A Fund will not be treated as a regulated investment
company for a taxable year if, among other things, the Fund derives 30% or more
of its gross income from the sale or other disposition of securities and certain
other investments held for less than three months.
Ordinary income of individuals is taxable at a maximum nominal marginal rate of
39.6%; although because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for certain taxpayers may be more than 39.6% in certain
circumstances. Pursuant to the Tax Relief Act of 1997, for capital gains on
securities recognized after July 28, 1997, the maximum tax rate for individuals
is 20% if the property was held more than 18 months; for property held for more
than 12 months, but no longer than 18 months, the maximum rate continues to be
28%. For corporations, long-term capital gains and ordinary income are both
taxable at a maximum nominal
19
<PAGE>
rate of 35%.
A 4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Funds intend to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
If for any fiscal year a Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to Federal income tax at regular corporate rates (without any deduction
for distributions to its shareholders). In such event, dividend distributions
would be taxable as ordinary income to shareholders to the extent of the Fund's
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
The foregoing discussion is based on Federal tax laws and regulations which are
in effect on the date of this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS
From time to time, the Funds' total return may be quoted in advertisements,
shareholder reports or other communications to shareholders.
Total Return Calculations
The Funds compute their average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result.
This calculation can be expressed as follows:
T= [(ERV over P) 1/n - 1 ]
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 investment made at the
beginning of the period.
P = hypothetical initial investment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Funds compute their aggregate total return by determining the aggregate
compounded rate of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
20
<PAGE>
(ERV-P)
A= -------
P
Where: A = aggregate total return.
ERV = ending redeemable value at end of the period
covered by the computation of a hypothetical
$1,000 investment made at the beginning of the
period.
P = hypothetical initial investment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the Funds cannot
necessarily be used to compare an investment in the Funds' shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
1. SGF - Based on the foregoing calculations, the average annual total returns
for the Fund for the one year, five year and ten year periods ended
December 31, 1997 were 36.06%, 19.52% and 16.24%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1997 were 143.93%, and 350.23%, respectively.
2. SMDS - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year, five year and ten year periods ended
December 31, 1997 were 18.09%, 8.20% and 10.74%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1997 were 48.27% and 177.27%, respectively.
3. SSCY - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year period ended December 31, 1997 was
42.37% and from inception was 17.93%. The aggregate total return from
inception to the period ended December 31, 1997 was 117.99%.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for SGF, SMDS and SSCY
contained in such Funds' Annual Report dated December 31, 1997 are incorporated
by reference into this Statement of Additional information and have been audited
by Tait, Weller & Baker, whose reports also appear in the 1997 Annual Report and
are also incorporated by reference herein. No other parts of the Annual Report
are incorporated by reference herein. Such financial statements and notes
thereto have been incorporated herein in reliance on the reports of Tait, Weller
& Baker, independent accountants, given on the authority of said firm as experts
in auditing and accounting, incorporated by reference from such Funds' 1997
Annual Report to Shareholders. Because SSVF commenced investment operations on
December 31, 1997, no financial statements are available.
21
<PAGE>
POST-EFFECTIVE AMENDMENT NO. 18
TO REGISTRATION STATEMENT NO 2-42379
ON
FORM N-1A
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in Part A:
Financial Highlights for STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
Incorporated by reference in Part B:
The audited financial statements and related notes thereto as well
as the auditors report thereon for the fiscal year ended December
31, 1997 are incorporated by reference to the Annual Report to
shareholders as filed with the Securities and Exchange Commission on
February 27, 1998 pursuant to Rule 30b2-1 of the Investment Company
Act of 1940.
(b) Exhibits:
(1) Articles of Incorporation of Registrant, dated March 1, 1985,
are incorporated herein by reference to Exhibit No. 99.1 of
Post-Effective Amendment No. 16 to Registrant's Registration
Statement on Form N-1A (File No.'s. 2-42379/811-2240), filed on
May 30, 1996 ("Post-Effective Amendment No. 16").
(2) By-laws of Registrant, as amended, dated February 28, 1989, are
incorporated herein by reference to Exhibit No. 99.2 of Post-
Effective Amendment No. 16.
(4) Specimen certificate for shares of common stock of Registrant
is filed herein as Exhibit No. 99.4.
(5) Investment Advisory Agreement, dated July 1, 1989, between
Registrant and Stratton Management Company is incorporated
herein by reference to Exhibit No. 99.5 of Post-Effective
Amendment No. 16.
(6) Underwriting Agreements
(a) Underwriting Agreement, dated June 22, 1993, between
Registrant and FPS Broker Services, Inc. (formerly known
as Fund/Plan Broker Services, Inc.) is incorporated by
reference to Exhibit No. 99.6 of Post-Effective Amendment
No. 16.
(b) Amendment to Underwriting Agreement, dated June 25, 1996,
between Registrant and FPS Broker Services, Inc. (formerly
known as Fund/Plan Broker Services, Inc.) is filed herein
as Exhibit 99.6(b).
(8) Custodian Agreements
(a) Custodian Agreement between Registrant and The Bank of New
York, dated November 1, 1994, is incorporated herein by
reference to Exhibit No. 8(a) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement on Form N-
1A(File Nos 2-42379/811-2240), filed May 30, 1995 ("Post-
Effective Amendment No. 15").
<PAGE>
(b) Custody Administration and Agency Agreement between
Registrant and FPS Services, Inc. (formerly known as
Fund/Plan Services, Inc.), dated November 1, 1994, is
incorporated herein by reference to Exhibit No. 99.8(b) of
Post-Effective Amendment No. 15.
(9) (a) Administration Agreement, dated March 1, 1990, between
Registrant and FPS Services, Inc. (formerly known as
Fund/Plan Services, Inc.) is filed herein as Exhibit No.
99.9(a).
(b) Shareholder Services Agreement (formerly known as
Administration Agreement), dated May 31, 1985, between
Registrant and FPS Services, Inc. (formerly known as
Fund/Plan Services, Inc.) is filed herein as Exhibit No.
99.9(b).
Amendment No. 1 to Shareholder Services Agreement
(formerly known as Administration Agreement), dated May
29, 1987, between Registrant and FPS Services, Inc.
(formerly known as Fund/Plan Services, Inc.) is filed
herein as Exhibit No. 99.9(c).
Amendment No. 2 to Shareholder Services Agreement
(formerly known as Administration Agreement), dated May
29, 1987, between Registrant and FPS Services, Inc.
(formerly known as Fund/Plan Services, Inc.) is filed
herein as Exhibit No. 99.9(d).
Amendment to Shareholder Services Agreement (formerly
known as Administration Agreement), dated February 27,
1990, changing title of May 31, 1985 Administration
Agreement to Shareholder Services Agreement is filed
herein as Exhibit No. 99.9(e).
(c) Accounting Services Agreement, dated May 1, 1988, between
Registrant and FPS Services, Inc. (formerly known as
Fund/Plan Services, Inc.) with notice of February 22, 1989
is filed herein as Exhibit No. 99.9(f).
(10) Opinion and Consent of Counsel on the legality of the
securities being issued is filed herewith.
(11) Consent of Independent Auditors is filed herewith.
(14) (a) Form of 403(b)(7) Retirement Plan is incorporated herein
by reference to Exhibit No. 99.14(a) of Post-Effective
Amendment No. 16
(b) Form of Individual Retirement Account (I.R.A.) is filed
herein as Exhibit No. 99.14(b).
(c) Form of Self-Employed Retirement Plan (Defined
Contribution Plans), as amended June 30, 1994, is
incorporated herein by reference to Exhibit No. 99.14(c)
of Post-Effective No. 15.
(17) Financial Data Schedule is filed herewith.
(18) Powers of Attorney are filed herein as Exhibit No. 99.18
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS
TITLE OF CLASS (AS OF APRIL 6, 1998)
-------------- ------------------------
Common Stock
par value $1.00
per share
ITEM 27. INDEMNIFICATION
Section 2-418 of the Corporation and Associations Article of the
Annotated Code of Maryland gives Registrant the power to indemnify its
directors and officers under certain situations. Article VII, Section
3 of Registrant's Articles of Incorporation, incorporated by reference
as Exhibit (1) hereto, and Section 2.12 of Registrant's By-Laws,
incorporated by reference as Exhibit (2) hereto, provide for the
indemnification of Registrant's directors and officers. Each
indemnification must be authorized by the Board of Directors of
Registrant by a majority of a quorum consisting of directors who were
not parties to the action, suit or proceeding, or by independent legal
counsel in a written opinion, or by the shareholders. Notwithstanding
the foregoing, Section 2.12(e) of Registrant's By-Laws provides that
no director or officer of Registrant shall be indemnified against any
liability to Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's duties to the
corporation.
In addition, the aforesaid section of the Corporations and
Associations Article of the Annotated Code of Maryland gives
Registrant the power (a) to purchase and maintain insurance for its
directors and officers against any liability asserted against them and
incurred by them in that capacity or arising out of their status as
such, whether or not Registrant would have the power to indemnify such
directors and officers under such statute, and (b) under certain
circumstances to pay the reasonable expenses incurred by a director or
officer in defending an action, suit or proceeding in advance of the
final disposition of the action, suit or proceeding.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Indemnification of the Registrant's Custodian, Transfer Agent,
Accounting/Pricing Agent and Administrator against certain stated
liabilities is provided for by the following documents:
(a) Article XVII (14) of the Custodian Agreement between the
Registrant and The Bank of New York, incorporated herein by
reference to Exhibit 8(a) of the Post-Effective Amendment No. 15.
(b) Section 26 of the Shareholder Services Agreement, included herein
as Exhibit 99.9(b) through 99.9(e);
(c) Section 10 of the Accounting Services Agreement, included herein
as Exhibit 99.9(f); and
<PAGE>
(d) Section 8 of the Administration Agreement, included herein as
Exhibit No. 99.9(a).
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Stratton Management Company provides investment advisory services
consisting of portfolio management for a variety of individuals and
institutions, and as of December 31, 1997 had approximately $1.7
billion in assets under management. It presently also acts as
investment advisor to two other registered investment companies,
Stratton Growth Fund, Inc. and The Stratton Funds, Inc.
For information as to any other business, vocation or employment of a
substantial nature in which each director or officer of the
Registrant's investment advisor has been engaged for his own account
or in the capacity of director, officer, employee, partner or trustee,
reference is made to Form ADV (File #801-8681) filed by it under the
Investment Advisors Act of 1940, as amended.
ITEM 29. PRINCIPAL UNDERWRITER
(a) FPS Broker Services, Inc. ("FPSB") (formerly known as Fund/Plan Broker
Services, inc.), the principal underwriter for the Registrant's
securities, currently acts as principal underwriter for the following
entities:
The Bjurman Funds
Focus Trust, Inc.
The Govett Funds, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Tax Exempt Bond Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
Matthews International Funds
McM Funds
Metropolitan West Funds
Polynous Trust
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Trust
The Sports Trust Funds
The Stratton Funds, Inc.
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Trainer Wortham First Mutual Funds
(b) The information required by this Item 29 with respect to each
Director, Officer or Partner of FPSB is incorporated herein by
reference to Form BD filed by FPSB with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (Sec File
No. 8-41540)
(c) Not Applicable.
James W. Stratton may be considered a control person of the Underwriter due to
his direct or indirect ownership of FPS Services, Inc., (formerly known as
Fund/Plan Services, Inc.) the parent of FPSB.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All records described in Section 31(a) of the 1940 Act and Rules 17
CAR 270.31a-1 to 31a-3 promulgated thereunder, are maintained by
Stratton Management Company, the Fund's Investment
<PAGE>
Advisor, Plymouth Meeting Executive Campus, 610 W. Germantown Pike,
Suite 300, Plymouth Meeting, Pennsylvania 19462-1050, except for those
maintained by the Fund's Custodian, The Bank of New York, 48 Wall
Street, New York, New York 10286, and FPS Services, Inc. (formerly
known as Fund/Plan Services, Inc.) the Fund's Administrator, Transfer,
Redemption and Dividend Disbursing Agent, Administrator of its
Retirement Plans and Accounting Services Agent, 3200 Horizon Drive,
King of Prussia, Pennsylvania, 19406.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to provide its Annual Report upon request
without charge to any recipient of the Fund's Prospectus.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this Post-
Effective Amendment No. 18 to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the city of Plymouth
Meeting, and the State of Pennsylvania, on the 25th day of February, 1998.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
Registrant
/s/ John A. Affleck
-------------------------------
John A. Affleck, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 18 to the Registration Statement of STRATTON MONTHLY DIVIDEND REIT
SHARES, INC. has been signed below by the following persons in the capacities
and on the date indicated.
Signature Capacity Date
- --------- -------- ----
/s/ James W. Stratton Director and
- ----------------------------- Chairman of the Board
James W. Stratton February 25, 1998
/s/ John A. Affleck President February 25, 1998
- -----------------------------
John A. Affleck
/s/ Patricia L. Sloan Secretary/Treasurer February 25, 1998
- -----------------------------
Patricia L. Sloan
* Lynne M. Cannon Director February 25, 1998
* John J. Lombard, Jr. Director February 25, 1998
* Douglas J. MacMaster, Jr. Director February 25, 1998
* Henry A. Rentschler Director February 25, 1998
* Merritt N. Rhoad, Jr. Director February 25, 1998
* Alexander F. Smith Director February 25, 1998
* Richard W. Stevens Director February 25, 1998
* By:
/s/ William J. Baltrus
- ----------------------
William J. Baltrus
as Attorney-in-Fact and Agent, pursuant to Power of Attorney
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
Exhibit
Number Exhibit
Item 24(b)
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors
(17) Financial Data Schedule for STRATTON MONTHLY DIVIDEND REIT
SHARES, INC.
<PAGE>
EXHIBIT 24(b) 10
Law Offices
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: 215-988-2700
Fax: 215-988-2757
February 25, 1998
Stratton Monthly Dividend REIT Shares, Inc.
610 W. Germantown Pike
Suite 300
Plymouth Meeting, PA 19462-1050
RE: STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
POST-EFFECTIVE AMENDMENT NO. 18 TO REGISTRATION
STATEMENT ON FORM N-1A
(REGISTRATION NO. 2-42379
-----------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Stratton Monthly Dividend REIT Shares,
Inc., A Maryland corporation (the "Fund"), in connection with the preparation
and filing with the Securities and Exchange Commission of Post-Effective
Amendment No. 18 to the Fund's Registration Statement under the Securities Act
of 1933, as amended (the "Registration Statement").
The Fund is an open-end investment company authorized to issue a total
of 10,000,000 shares ("Shares") of common stock, par value $1.00 per share. The
Board of Directors have previously authorized the issuance of Shares to the
public.
We have reviewed the Fund's Articles of Incorporation, its by-laws,
resolutions adopted by its Board of Directors and holders of its Shares, and
such other legal and factual matters as we have deemed appropriate. We assume
that the Shares have been or will be issued against payment therefor pursuant to
and for the consideration provided for in the Registration Statement, and that
the number of outstanding Shares has not and will not exceed the number of
Shares authorized.
This opinion is based exclusively on the Maryland General Corporation
Law and the federal law of the United States of America.
Based upon the foregoing, it is our opinion that all of the Shares
issued by the Fund since January 1, 1997 that were not included in our opinions
dated February 26, 1997 and February 27, 1997, were validly issued, fully paid
and non-assessable by the Fund, and further, that the Shares issued after the
date hereof pursuant to and for the consideration provided for in the
Registration Statement will be, when so issued, validly issued, fully paid and
non-assessable by the Fund.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to Post-Effective Amendment No. 18 to the
Fund's Registration Statement.
Very truly yours,
/s/Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
EXHIBIT 24(b) 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement, (Form N-
1A), and related Statement of Additional Information of Stratton Monthly
Dividend REIT Shares, Inc. and to the inclusion of our report dated January 16,
1998 to the Shareholders and Board of Directors of The Stratton Monthly Dividend
REIT Shares, Inc.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 24, 1998
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<PAGE>
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