<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MARCH 1, 1999 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. [20]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
--
Amendment No. [20]
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:
Jeffrey A. Dalke, Esq.
Drinker Biddle & Reath LLP
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)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) 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
Title of Securities Being Registered: Shares of Common Stock
<PAGE>
STRATTON MUTUAL FUNDS
STRATTON GROWTH FUND, INC.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
STRATTON SMALL-CAP YIELD FUND
STRATTON SPECIAL VALUE FUND
PROSPECTUS
__________, 1999
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
The Securities and Exchange Commission has not approved or disapproved
these securities nor has it passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
PAGE
Fund Summaries...........................................
Fee Table................................................
Financial Highlights.....................................
Investment Policies and Risk Considerations..............
Investment Advisor.......................................
Pricing Fund Shares......................................
How to Buy Fund Shares...................................
How to Redeem Fund Shares................................
Exchange Privilege.......................................
Retirement Plans.........................................
Tax Treatment: Dividends and Distributions...............
- --------------------------------------------------------------------------------
<PAGE>
FUND SUMMARIES This Prospectus offers shares of the
following 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").
Stratton Growth Fund
Investment Objectives Growth of capital with current income
from interest and dividends as a
secondary goal.
Principal Strategy The fund normally invests in common
stocks of well-established U.S.
companies with excellent dividend
records, in the opinion of the
adviser. Stock of companies that pay
above average dividends tend to be
less volatile than companies that do
not pay dividends. The adviser
believes that companies which
consistently strive to increase their
dividends tend to offer the potential
of above average returns. The fund
also may invest in securities
convertible into common stock and
Real Estate Investment Trust ("REIT")
securities.
In picking stocks for the fund, the
fund's adviser initially reviews
common stock yield. The adviser then
reviews additional yield
characteristics such as dividend
growth rates and dividend coverage.
Fundamental analysis is also
employed, focusing on important
characteristics such as earnings and
cash flow outlook, management
strengths, and industry competitive
position. The adviser continuously
reviews economic and social
conditions so that the fund's
portfolio has the greatest possible
potential for capital growth,
consistent with reasonable levels of
risk. SGF hopes to achieve steady,
stable growth of principal and
dividend income.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund
include:
. Stock market risk, or the risk that
the price of securities held by the
fund will rise or fall due to various
conditions or circumstances which may
be unpredictable.
. Loss of part or all of your money
invested in the fund.
. The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and
performance table provide some
indication of the risks of investing
in the fund by showing changes in the
fund's performance from year to year
and showing how the fund's average
annual returns compare with those of
a broad measure of market
performance. Both tables assume
reinvestme nt of dividends and
distributio ns. As with all mutual
funds, past performan ce is not a
prediction of future performan ce.
[First Data Annual Returns' bar chart and performance table logo appears here]
(SGF)
1998 11.46%
1997 30.60%
1996 14.17%
1995 37.68%
1994 7.19%
1993 6.41%
1992 6.71%
1991 22.18%
1990 -6.72%
1989 23.79%
<PAGE>
During the ten years ended December 31, 1998, the highest return for a quarter
was 15.47% for the quarter end December 31, 1998, and the lowest return was -
12.95% for the quarter ended September 30, 1998.
PERFORMANCE TABLE
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Growth Fund 11.46% 20.64% 15.14%
S & P 500* 28.58% 24.05% 19.22%
S & P/BARRA Value** 14.67% 19.87% 16.67%
</TABLE>
-----------------
*The S&P 500 Index is an unmanaged index comprised of 500 widely held
common stocks listed on the New York Stock Exchange, the American
Stock Exchange and NASDAQ.
**The S&P/BARRA Value index is __________________.
Suitability The fund may be a suitable investment for you if you:
. Desire an investment that focuses on growth and income.
. Are investing for retirement or other long-term goals.
. Can tolerate performance that varies from year to year.
<PAGE>
Stratton Monthly
Dividend REIT
Shares
Investment Objective A high rate of return from dividend and
interest income on investments in common
stock and securities convertible into
common stock. The fund's investment
objective is not fundamental and may be
changed without shareholder approval.
Principal Strategy The fund invests at least 65% of its
total assets in common stocks and
other equity securities of REITs.
REITs were created to enable
investors to participate in the
benefits of owning income producing
real estate. REITs own many
different types of properties, such
as apartment complexes, office
buildings, hotels, health care
facilities, shopping centers, and
shopping malls.
The fund is managed to provide a high
level of monthly income to its
shareholders and therefore looks for
companies that have strong dividend
payouts. The fund needs higher
yielding securities to maintain its
own attractive dividend payout.
REITs satisfy this income
requirement, while also offering the
potential for dividend growth and
capital appreciation. Investment
decisions will be made on the basis
of an analysis of fundamentals of
individual companies and on relevant
economic and social conditions.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund
include:
. The cyclical nature of the real
estate industry, which subjects the
real estate and real estate related
securities held by the fund to any
market or economic condition that may
affect the value of real estate (up
or down).
. REIT securities may be more volatile
in price then the securities of large
market capitalization companies.
. The fund is concentrated in REIT
securities, which means it may be
subject to a greater risk of loss
than a non-concentrated mutual fund.
. Loss of part or all of your money
invested in the fund.
. The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and
performance table provide some
indication of the risks of investing
in the fund by showing changes in the
fund's performance from year to year
and showing how the fund's average
annual returns compare with those of
a broad measure of market
performance. Both tables assume
reinvestment of dividends and
distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
<PAGE>
(SMDS)
[First Data Annual Returns' bar chart and performance table logo appears here]
1998 -11.75%
1997 18.09%
1996 8.58%
1995 23.45%
1994 -12.13%
1993 6.60%
1992 10.41%
1991 35.10%
1990 -3.83%
1989 18.77%
During the ten years ended December 31, 1998, the highest return for a
quarter was 11.70% for the quarter ended March 31, 1991, and the
lowest return for a quarter was -7.26% for the quarter ended June 30,
1994.
PERFORMANCE TABLE
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Monthly Divident REIT Shares -11.75% 4.18% 8.35%
S & P 500* 28.58% 24.05% 19.22%
NAREIT Equity** -16.62% 10.63% 11.21%
</TABLE>
-----------------
*The S&P 500 Index is an unmanaged index comprised of 500 widely held
common stocks listed on the New York Stock Exchange, the American
Stock Exchange and NASDAQ.
**The NAREIT Index is
Suitability The fund may be a suitable investment for you if you:
. Desire an investment that focuses on growth and income.
. Are investing for retirement or other long-term goals.
. Can tolerate performance that varies from year to year.
<PAGE>
Stratton Small-Cap
Yield Fund
Investment Objective Capital appreciation and dividend
income.
The fund's investment objective is not
fundamental and may be changed without
shareholder approval.
Principal Strategy Under normal market conditions, the fund
invests at least 80% of its assets in
common stock and securities convertible
into common stock of small-cap
companies. The fund invests in dividend-
paying companies with total market
capitalizations at the time of purchase
of less than $1 billion, and which are
outside the S&P 500. The fund normally
invests in common stocks of well-
established U.S. companies. Generally,
small company stocks are considered more
volatile than large company stocks
because they have limited product lines
and financial resources and may
experience more abrupt price movements.
However, the fund strives to temper that
volatility by investing in stocks of
small but established dividend-paying
companies. The investment adviser
generally selects companies that pay
quarterly dividends at an above-average
rate. Small-cap companies that pay
dividends tend to have strong financial
characteristics, since the quarterly
dividend payout requires management to
exhibit a high degree of financial
discipline.
The initial screen for stock selection
is a yield that is greater than the
small-cap average, as measured by the
Russell 2000 Index. The fund's adviser
then employs a three-step process that
focuses on a stock's fundamental
valuation, earnings prospects, and, as a
confirming factor, relative price
strength. The adviser believes that
companies that exhibit consistent
earnings and that regularly increase
their dividends have superior
appreciation potential, with reasonable
levels of risk.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund include:
. Stock market risk, or the risk that
the price of securities held by the
fund will rise or fall due to various
conditions or circumstances which may
be unpredictable.
. Small-cap stocks tend to have a
higher degree of market risk than
large-cap stocks, due to lack of
liquidity and other reasons.
. Loss of part or all of your
investment in the fund.
. The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and performance
table provide some indication of the
risks of investing in the fund by
showing changes in the fund's
performance from year to year and
showing how the fund's average annual
returns compare with those of a broad
measure of market performance. Both
tables assume reinvestment of dividends
and distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
<PAGE>
(SSCY)
[First Data Annual Returns' bar chart and performance table logo appears here]
1998 -9.58%
1997 42.37%
1996 14.96%
1995 27.27%
1994 -2.69%
During the five years ended December 31, 1998, the highest return for
a quarter was 16.72% for the quarter ended September 30, 1997, and the
lowest return for a quarter was -18.92% for the quarter ended
September 30, 1998.
PERFORMANCE TABLE
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Small-Cap Yield Fund -9.58% 1.04% NA
Russell 2000* -2.55% 11.86% 12.92%
---------------------
</TABLE>
* The Russell 2000 Index is
Suitability The fund may be a suitable investment for you if you:
. Desire an investment that focuses on growth, but with some
income.
. Are investing for retirement or other long-term goals.
. Are willing to accept more market risk in return for the
potentially higher returns that may come from investing in
small-cap companies.
. Can tolerate performance that varies from year to year.
<PAGE>
Stratton Special
Value Fund
Investment Objective Capital appreciation.
The fund's investment objective is not
fundamental and may be changed without
shareholder approval.
Principal Strategy Under normal market conditions, the fund
will invest at least 80% of its assets
in common stock and securities
convertible into common stock. The fund
invests primarily in common stock that
presents a value or potential worth
which is not fully recognized by
prevailing market prices. The fund's
adviser believes that these stocks often
are under-researched by financial
analysts. The adviser also looks for
stocks of companies that have
experienced some fundamental change, and
are intrinsically undervalued or are
misunderstood by the investment
community. The fund employs several
strategies to attempt to achieve
superior returns, including:
. investing in micro-cap companies;
. investing in under-valued large-cap
companies;
. participating in initial public
offerings;
. utilizing options, futures contracts,
and short sales.
The fund may have an above average
turnover of the stocks in the portfolio,
which may present certain tax
consequences. See "Investment Policies
and Risk Considerations--Portfolio
Turnover."
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund include:
. The fund has an aggressive investment
policy and is not intended to
represent a complete investment
program.
. Stock market risk, or the risk that
the price of securities held by the
fund will rise or fall due to various
conditions or circumstances which may
be unpredictable.
. The use of options, futures and short
sales may prevent the fund from
making a gain if markets move in the
opposite direction of the hedge.
. Loss of part or all of your
investment in the fund.
. The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and performance
table provide some indication of the
risks of investing in the fund by
showing changes in the fund's
performance from year to year and
showing how the fund's average annual
returns compare with those of a broad
measure of market performance. Both
tables assume reinvestment of dividends
and distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
[First Data Annual Returns' bar chart and performance table logo appears here]
(SSVF)
1998 - 2.67%
<PAGE>
During the one year ended December 31, 1998, the highest return for a
quarter was 12.47% for the quarter ended March 31, 1998, and the
lowest return for a quarter was -21.49% for the quarter ended
September 30, 1998.
PERFORMANCE TABLE
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Special Value Fund -2.67% NA NA
Russell 2000* -2.55% 11.85% 12.92%
--------------------
</TABLE>
*The Russell 2000 Index is
Suitability The fund may be a suitable investment for you if you:
. Desire an investment that focuses on out of favor investments
or a value oriented approach.
. Hold it in a tax favored account in which short and long-term
capital gains can accumulate without current taxation.
. Are investing for retirement or other long-term goals.
. Can tolerate performance that varies from year to year.
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
SGF SMDS SSCY SSVF
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
- -----------------------------------------
(as a percentage of average net assets)
Management Fees 0.73%/1/ 0.61%/1/ 1.09%/2/ 0.75%/2/
Other Expenses 0.34% 0.41% 0.47% 1.32%
-------- -------- -------- --------
Total Fund Operating Expenses 1.07% 1.02% 1.56% 2.07%
</TABLE>
EXAMPLE
The following example illustrates the expenses that you would pay on a $10,000
investment, assuming (1) a 5% annual rate of return, (2) redemption at the end
of each time period, (3) all distributions are reinvested; and (4) each fund's
operating expenses remain the same:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
SGF $109 $340 $ 590 $1306
SMDS $104 $325 $ 563 $1248
SSCY $159 $493 $ 850 $1856
SSVF $210 $649 $1114 $2400
</TABLE>
/1/ The investment advisor voluntarily has agreed to waive annually $15,000 of
its compensation from SGF and SMDS to offset a portion of the cost of
certain administrative responsibilities delegated to Investor Services
Group.
/2/ This fee represents the basic management fee of 0.75% payable to SSCY and
SSVF, 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, 1998 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 the fee table is to help you understand the various costs and
expenses you will bear directly or indirectly. In addition to the above fees,
the funds' transfer agent charges $9 for each redemption by wire transfer. A
more complete description of the various costs and expenses of the funds is
contained throughout this prospectus, in the Statement of Additional Information
and in the financial statements and related notes which appear in the funds'
Annual Report to Shareholders.
The example should not be considered a representation of past or future expenses
or performance. Actual expenses may be more or less than those shown.
<PAGE>
FINANCIAL The financial highlights tables are intended to help you
HIGHLIGHTS understand each fund's financial performance during the periods
stated. Certain information reflects financial results for a
single fund share. "Total return" shows how much your investment
in a fund would have increased (or decreased) during each
period, assuming you had reinvested all dividends and
distributions. These figures have been audited by Tait, Weller &
Baker, certified public accountants, whose report, along with
the funds' financial statements is incorporated by reference
into the Statement of Additional Information and is included in
the funds' Annual Report to Shareholders dated December 31,
1998, which may be obtained free of charge by calling 800-634-
5726.
STRATTON GROWTH FUND, INC.
<TABLE>
<CAPTION>
YEAR YEAR 7 MONTHS
ENDED ENDED ENDED YEARS ENDED MAY 31,
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/98 12/31/97 12/31/96 1996 1995 1994
---------- ---------- ---------- --------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89
---------- ---------- ---------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.570 0.550 0.312 0.556 0.537 0.510
Net gains on securities (both realized
and unrealized)........................ 3.130 8.900 1.298 5.759 2.978 0.665
---------- ---------- ---------- --------- -------- --------
Total from investment operations..... 3.700 9.450 1.610 6.315 3.515 1.175
---------- ---------- ---------- --------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net investment income)... (0.590) (0.540) (0.580) (0.540) (0.540) (0.510)
Distributions (from capital gains)....... (2.430) (2.520) (1.210) (0.945) (1.275) (0.905)
---------- ---------- ---------- --------- -------- --------
Total distributions.................. (3.020) (3.060) (1.790) (1.485) (1.815) (1.415)
---------- ---------- ---------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD............ $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65
========== ========== ========== ========= ======== ========
TOTAL RETURN..............................
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)..... $ 63,323 $ 60,177 $ 44,801 $42,880 $31,719 $25,475
Ratio of expenses to average net assets.. 1.07% 1.11% 1.17% /1/ 1.16% 1.31% 1.34%
Ratio of net investment income to
average net assets..................... 1.60% 1.87% 2.08% /1/ 2.28% 2.70% 2.51%
Portfolio turnover rate.................. 38.02% 34.40% 20.32% 15.41% 42.54% 49.81%
Average commission rate paid............. N/R $ 0.0509 $ 0.0537 N/A N/A N/A
</TABLE>
__________________
/1/ Annualized
STRATON MONTHLY DIVIDEND REIT SHARES, INC.
<TABLE>
<CAPTION>
YEAR YEAR 7 MONTHS
ENDED ENDED ENDED YEARS ENDED JANUARY 31,
---------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/98 12/31/97 12/31/96 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 1.650 1.540 1.630 1.880 1.940 1.870
Net gains on securities (both realized
and unrealized)........................ (4.070) 3.200 0.160 2.600 (3.870) (1.140)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations..... (3.420) (4.740 1.790 4.480 (1.930) 0.730
---------- ---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends (from net investment income)... (1.650) (1.540) (1.630) (1.890) (1.920) (1.940)
Distributions (in excess of net
investment income)..................... (0.400) -- (0.130) (0.030) -- (0.010)
Return of capital........................ -- (0.380) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions.................. (2.050) (1.920) (1.760) (1.920) (1.920) (1.950)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD............ $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69
========== ========== ========== ========== ========== ==========
TOTAL RETURN (11.75%) 18.09% 7.12% 18.98% (6.57%) 2.22%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR YEAR 7 MONTHS
ENDED ENDED ENDED YEARS ENDED JANUARY 31,
---------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/98 12/31/97 12/31/96 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)..... $ 79,936 $ 101,956 $ 103,780 $129,267 $134,066 $165,798
Ratio of expenses to average net assets.. 1.02% 1.02% 1.02% /1/ 0.99% 1.08% 0.99%
Ratio of net investment income to
average net assets..................... 5.95% 5.48% 6.94% /1/ 7.42% 7.71% 6.12%
Portfolio turnover rate.................. 18.89% 42.47% 69.19% 53.30% 39.50% 19.15%
Average commission rate paid............. N/R $ 0.0505 $ 0.0498 N/A N/A N/A
</TABLE>
__________________
/1/ Annualized
STRATTON SMALL-CAP YIELD FUND
<TABLE>
<CAPTION>
YEAR YEAR 7 MONTHS YEAR YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED ENDED 04/12/93/1/
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/98 12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ TO 03/31/94/3/
---------- ---------- ---------- ----------- ----------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97 $ 12.50
---------- ---------- ---------- ----------- ----------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.170 0.210 0.260 0.330 0.290 0.220
Net gains on securities (both
realized and unrealized)......... (2.310) 6.800 1.740 3.040 (0.020) 0.450
---------- ---------- ---------- ----------- ----------- -------------
Total from investment
operations................... (2.140) 7.010 2.000 3.370 0.270 0.670
---------- ---------- ---------- ----------- ----------- -------------
LESS DISTRIBUTIONS
Dividends (from net investment
income).......................... (0.180) (0.200) (0.270) (0.330) (0.300) (0.200)
Distributions (from capital
gains)........................... (0.040) (1.130) (0.920) -- -- --
---------- ---------- ---------- ----------- ----------- -------------
Total distributions............ (0.220) (1.330) (1.190) (0.330) (0.300) (0.200)
---------- ---------- ---------- ----------- ----------- -------------
NET ASSET VALUE, END OF PERIOD...... $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97
========== ========== ========== =========== =========== =============
TOTAL RETURN........................ (9.58%) 42.37% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 42,789 $ 39,377 $ 21,691 $ 19,592 $ 14,058 $ 8,257
Ratio of expenses to average net
assets........................... 1.56% 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net investment income to
average net assets............... 0.80% 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover rate............ 35.74% 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission rate paid....... N/R $ 0.0548 $ 0.0579 N/A N/A N/A
</TABLE>
__________________
/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
STRATTON SPECIAL VALUE FUND
YEAR
ENDED
12/31/98
--------
NET ASSET VALUE, BEGINNING OF PERIOD...................... $15.00/1/
-----
INCOME FROM INVESTMENT OPERATIONS
Net investment loss...................................... (0.120)
Net losses on securities
(both realized and unrealized)........................ (0.280)
-----
Total from investment operations...................... (0.400)
-----
NET ASSET VALUE, END OF PERIOD............................ $14.60
-----
<PAGE>
TOTAL RETURN (2.67%)
<PAGE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
<S> <C>
Net assets, end of period (in 000's).......................... $ 6,383
Ratio of expenses to average net assets....................... 2.07%/2/
Ratio of net investment loss to average net assets............ (0.91%)/2/
Portfolio turnover rate....................................... 78.06%
</TABLE>
- ----------------------------
/1/ Commencement of operations 12/31/97
/2/ Annualized
INVESTMENT Unless otherwise stated in this
POLICIES Prospectus or the Statement of
AND RISK Additional Information, each fund's
CONSIDER-ATIONS investment policies are not
fundamental and may be changed
without shareholder approval.
However, the funds intend to notify
shareholders before making any change
in any 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.
Risk Considerations Investments in small-cap companies
for SSCY 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.
Risk Considerations for SSVF
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.
Short Sale Short sales are transactions in which
Transactions SSVF sells a security it does not own
in anticipation of a decline in the
market value of that security. To
complete such a transaction, SSVF
must borrow the security to make
delivery to the buyer. The fund then
is obligated to 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
the lender any dividend amounts which
accrue 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 if stock prices decline, the
fund 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 also 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,
in a rising market, the net asset
value of the fund may not increase to
the extent of the net asset value of
an investment company that does not
engage in short sales. Among the
<PAGE>
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, at
the time of the transaction, will 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 Related and options on futures contracts for
Options hedging purposes or to maintain
liquidity. However, the fund may not
purchase or sell a futures contract or
purchase a related option unless
immediately after any such transaction
the total initial margin deposits on
existing futures positions and the
amount of premiums paid for related
options does not exceed 5% of the fund's
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 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.
<PAGE>
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
futures 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 "Information
on Investment Objectives and Policies"
in the Statement of Additional
Information.
Options SSVF may buy put and call options and d
may write (i.e., sell) 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. Purchasing options is a
specialized activity, which involves
investment techniques and risks
different from those associated with
ordinary portfolio securities
transactions.
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 (i.e. sell) 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.
The fund may buy call options to the
extent that premiums paid by the fund do
not aggregate more than 20% of its total
assets. The fund may write covered call
options without limit. The fund may
invest up to 20% of its total assets in
put options. With regard to writing put
options, the fund will limit the
aggregate value of the obligations
underlying such put options to 50% of
its total assets.
<PAGE>
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 otherwise sell or
deliver a security it might want to
hold. For further discussion, see
"Information on Investment Objectives
and Policies" in the Statement of
Additional Information.
Risk Considerations for each Fund Each fund may invest in REITs. Equity
REITS REITs invest directly in real property
while mortgage REITs invest in mortgages
on real property. REITs may be subject
to certain risks associated with the
direct ownership of 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."
Temporary Investments Although each fund normally seeks to
remain fully invested in equity
securities, each 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
temporarily to maintain liquidity to
meet shareholder redemptions, or as a
defensive measure to protect capital.
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, the fund may not achieve its
investment objective.
For temporary defensive purposes, SGF
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.
Year 2000 The Funds could be adversely affected
Compliance if the computer systems used by their
service providers do not properly
process and calculate date-related
information after December 31, 1999. The
Year 2000 issue affects virtually all
companies and organizations. While Year
2000-related computer problems could
have a negative effect on the Funds,
Stratton Management and First Data
Investor Services Group, Inc. Are
working to avoid such problems and to
obtain assurances from the Funds' other
service providersthat they are taking
similar steps. Companies, organizations,
governmental entities and securities in
which the Funds invest could be affected
by the Year 2000 issue, but at this time
the Funds cannot predict the degree of
impact. To the extent the effect is
negative,a Fund's returns could be
reduced.
INVESTMENT ADVISOR Stratton Management Company, with
offices at Plymouth Meeting Executive
Campus, 610 W. Germantown Pike, Suite
300, Plymouth Meeting, PA 19462-1050, is
the funds'
<PAGE>
investment advisor and manager and is a
registered investment advisor. Stratton
Management provides investment advisory
services for a variety of individuals
and institutions, and had approximately
$2.2 billion in assets under management
as of December 31, 1998.
James W. Stratton is the Chief Executive
officer of Stratton Management 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 that
fund's commencement of operations in
April of 1993. Mr. James Van Dyke
Quereau has been primarily responsible
for the day-to-day investment management
of SSVF since the fund's commencement of
operations in January of 1998. Mr.
Quereau has been a Managing Partner and
Director of Research of the investment
advisor since May 1990, and has been in
the investment management business for
26 years.
Pursuant to Investment Advisory
Agreements, Stratton Management Company
provides an investment program in
accordance with each respective fund's
investment policies, limitations and
restrictions.
Investment Advisory Fee For its advisory services, the
investment advisor receives an annual
fee of 0.75% of daily net assets of
SGF and an annual fee of 0.63% of
daily net assets of SMDS. The
investment advisor voluntarily has
agreed to waive annually $15,000 of
its fees from SGF and SMDS to offset
a portion of the fees that those
funds will incur under administration
agreements with Investor Services
Group. See the Statement of
Additional Information for a detailed
description of those fees. During
the fiscal year ended December 31,
1998, SGF and SMDS paid the
investment advisor fees at the
effective annual rates of .73% and
.61%, of each fund's respective
average daily net assets.
For its advisory services to SSCY and
SSVF, the investment advisor receives
a fee, payable monthly at an annual
rate of 0.75% of average daily net
assets, plus/minus a performance fee
adjustment.
The performance fee adjustment for
SSCY is calculated at the end of each
month based upon the Fund's
performance during the last rolling
24-month period. The performance
adjustment for SSVF begins at one of
the following points: 1) the end of
the month in which the fund has
completed 24 months of operation and
has assets of $20 million or more, or
2) at the end of any succeeding month
at which it has net assets of $20
million, or 3) at the end of the
month in which SSVF has completed 36
months of operation, regardless of
net assets. The performance fee
adjustment for SSVF is calculated at
the end of each month based upon the
Fund's performance during the
previous rolling 24-month period.
A fund's gross performance is
compared with the performance of the
Russell 2000 Index, over a rolling 24
month period. The Russell 2000 is a
widely recognized unmanaged common
stock index of small to medium size
companies. When a fund performs
better than the Index, it pays the
advisor additional fees. If a fund
lags the Index, the advisor is paid
less than the basic fee. Each 1.00%
of the difference in performance
between a fund and the Index during
the performance period is equal to a
0.10% adjustment to the basic fee.
The end result is that if the adviser
manages the fund in such a way as to
outperform the benchmark index, the
adviser is paid more for its efforts.
Most important, however, is the fact
that if the adviser does not perform
as well as the benchmark index, the
adviser is paid less, and in this
way, penalized for poor performance.
The maximum annualized performance
adjustment rate is +/- 0.50% of
average net assets which would be
added to or deducted from the
advisory fee if a fund outperformed
or underperformed the Index 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 preceding
month. During the fiscal year ended
December
<PAGE>
31, 1998, SSCY paid the investment
advisor a fee at the effective annual
rate of 1.09% of The fund's average
daily net assets.
PRICING FUND Fund share pricing is based upon net
SHARES asset value. The net asset value per
share of each fund is determined once
each business day as of the close of
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.
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 FUND SHARES
Purchase Price You pay no sales charge to invest in any
of the funds. Shares of all funds are
sold at the net asset value per share
(NAV) next determined after receipt of
the order by First Data Investor
Services Group, Inc. on a continuous
basis.
Time of Requests All requests received by First Data
Investor Services Group before 4:00 p.m.
Eastern Standard Time will be executed
the same day, at that day's closing
share price. Orders received after 4:00
p.m. Eastern Standard Time will be
executed the following day, at that
day's closing share price. Shares will
not be priced on days when the New York
Stock Exchange is closed.
Stock exchange closings Shares of the funds will not be priced
and are not available for purchase on
the following days on which the New York
Stock Exchange is closed for trading:
New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Retirement plans Each fund has available four types of
tax-deferred retirement plans: (1)
Defined Contribution Plans, for use by
both self-employed individuals and
corporations; (2) an Individual
Retirement Account, both Traditional and
Roth, for use by certain eligible
individuals with compensation (including
earned income from self-employment); (3)
a Simple Individual Retirement Account
and Profit Sharing/Money Purchase
Pension Plan for use by certain small
companies; and (4) 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
<PAGE>
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, disclosure
statement and custodial agreement.
General Information Shares of a fund may be repurchased or
redeemed through broker/dealers who may
charge a transaction fee. This fee would
not otherwise be charged if the shares
were purchased directly from a fund. The
funds may accept wire purchase orders
from broker/dealers and institutions
that previously have been approved by a
fund.
The funds reserve the right to reject
any purchase order. Share
certificates are issued only upon
shareholder request.
The funds do not accept third party
checks for the purchase of shares.
The funds reserve the right to delay
sending redemption proceeds up to 15
days if you recently purchased shares
by check. A $20 fee is charged to
your account for any purchase check
returned to the custodian.
Shareholder inquiries should be
directed to the funds' transfer
agent, First Data Investor Services
Group, Inc., 3200 Horizon Drive, P.O.
Box 61503, King of Prussia, PA
19406-0903, phone number
1-800-472-4266. Certain special
shareholder services, such as a
request for a historical transcript
of your account, may involve an
additional fee.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
HOW TO BUY SHARES
- ------------------------------------------------------- -------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ------------------------------------------------------- -------------------------------------------------------
BY MAIL BY MAIL
- ------------------------------------------------------- -------------------------------------------------------
Complete the application. Please make check payable to the name of the fund
you are investing in and write your account number
Mail the application and your check to: on the check.
FIRST DATA INVESTOR SERVICES GROUP
3200 HORIZON DRIVE Mail your check and the stub from your last
P.O. BOX 61503 account
KING OF PRUSSIA, PA 19406=0903 statement to:
Please make check payable to the name of the fund FIRST DATA INVESTOR SERVICES GROUP
you wish to invest in. P.O. BOX 412797
KANSAS CITY, MISSOURI 64141-2797
Minimum initial investment for the funds:
$2,000 for non-retirement accounts Minimum additional investments for the funds:
No minimum investment for retirement accounts.
$100 for non-retirement accounts
No minimum for retirement accounts
- ------------------------------------------------------- -------------------------------------------------------
BY WIRE BY WIRE
- ------------------------------------------------------- -------------------------------------------------------
For new accounts, call (800) 472-4266. An account Follow instructions under TO OPEN AN ACCOUNT -
number will be assigned to you. - By Wire.
Call your bank with instructions to transmit federal Minimum additional investment: same as "By Mail"
funds to: above.
- UMB Bank, NA, ABA #10-10-00695
- For: First Data Investor Services Group
- Account #98-7037-071-9
- The fund name
- Name(s) of account registration
- Shareholder account number
Your bank may charge a wire fee.
Minimum investment: same as "By Mail" above.
Mail your completed application to First Data
Investor Services Group at the address above.
- ------------------------------------------------------- -------------------------------------------------------
BY AUTOMATIC INVESTMENT BY AUTOMATIC INVESTMENT
- ------------------------------------------------------- -------------------------------------------------------
Complete the application and return it with your initial Call 472-4266 to request an application.
investment. The minimum investment for this plan is
$100. Complete and return the application along with any
other required materials.
Subsequent investments will be drawn from your
bank account and invested into the fund(s). Subsequent investments will be drawn from your
bank account and invested into the fund(s).
*Requires $2,000 initial minimum balance.
</TABLE>
<PAGE>
HOW TO
REDEEM FUND
SHARES
Timing of Requests Shares are redeemed at the net asset value next
determined at the close of regular trading hours on
the NYSE after receipt of a request for redemption
in the form described below, and the certificates
(if any) evidencing the shares to be redeemed.
There is no redemption charge. However, the
transfer agent will charge a $9 fee for wiring
redemption proceeds. 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 your address of
record.
Telephone Redemptions The funds may also 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. 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.
Redeeming recently If you wish to redeem shares that were recently
purchased shares purchased by check, the funds may delay mailing of
your redemption check for up to 15 business days
after your redemption request to allow the purchase
check to clear. If you are considering redeeming
shares soon after purchase, you should purchase by
bank wire or certified check to avoid delay.
Signature guarantees The funds may require additional documentation, or
signature guarantees on any redemptions in amounts
of $10,000 or more in value, if proceeds are to be
paid to someone other than the account holder, when
redemption proceeds are to be wired to a bank,
requests to transfer share registration, or when
redemption proceeds are to be sent to an address
other than the account holder's. A signature
guarantee helps protect against fraud. You can
obtain one from most banks or securities dealers,
but not from a notary public. Please call (800)
472-4266 for information on obtaining a signature
guarantee.
Accounts with low balances If your account falls below $500, the fund may ask
you to increase your balance. If it is still below
$500 after 45 days, the fund may close your account
and send you the proceeds.
HOW TO REDEEM SHARES
- -------------------------------------- --------------------------------------
TO REDEEM OR CLOSE AN ACCOUNT TO REDEEM OR CLOSE AN ACCOUNT
- -------------------------------------- --------------------------------------
BY MAIL BY AUTOMATED CLEARING HOUSE
- -------------------------------------- --------------------------------------
<PAGE>
Write a letter of instruction that includes:
- The fund name, your account number, the name(s) in which the account is
registered and the dollar value or number of shares you wish to sell.
- Include all signatures and any additional documents that may be required.
- Mail your request and any applicable stock certificates you hold to:
FIRST DATA INVESTOR SERVICES GROUP
P.O. BOX 61503
KING OF PRUSSIA, PA 19406-0903
- A check will be mailed to the name(s) and address in which the account is
registered.
Redemption proceeds may be transferred to banks that are on-line members of ACH.
There B are no service fees. Written ACH redemption requests should be sent to
First Data InvestorC Services Group at the address under"BY Mail." ACH
redemptions are sent the day following receipt of your request, and funds are
available two days later.
- --------------------------------------
BY SYSTEMATIC CASH WITHDRAWAL PLAN
- --------------------------------------
Complete the appropriate part of the application and specify the amount and
frequency of withdrawals you would like (monthly minimum is $50). Be sure to
maintain an account balance of$10,000 or more.
EXCHANGE You can exchange fund shares for shares of the
PRIVILEGE other Stratton funds, provided such other shares
may legally be sold in your state. Each fund has a
distinct investment objective, which should be
reviewed before executing any exchange of shares.
You also should read the additional information
about a fund, including its expenses, before
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.
PLEASE NOTE: Shareholders who have certificated
shares must surrender these certificates to the
transfer agent to be held on account in unissued
form before 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
PLANS
TAX Each fund contemplates declaring as dividends each
TREATMENT: year all or substantially all of its taxable
DIVIDENDS AND DISTRIBUTIONS income, including its net capital gain (the excess
of long-term capital gain over short-term capital
loss). Distributions attributable to the net
capital gain of a fund will be taxable to you as
long-term capital gain, regardless of how long you
have held your shares. Other fund distributions
will generally be taxable as ordinary income.
(However, if a fund's distributions exceed its net
income and gain -- as may be the case particularly
for SMDS, because REIT distributions often include
a nontaxable return of capital - that excess will
Tax Treatment generally result in a nontaxable return of capital
to you.)
The tax treatment to you of fund distributions will
be the same regardless whether they are paid in
cash or reinvested in additional shares. Any
dividends declared in October, November or December
and paid in January will be deemed for tax purposes
to have been paid to you on December 31. You will
be notified annually of the amount and tax status
of all distributions to you.
<PAGE>
You should note that if you purchase shares shortly
before a taxable distribution, the purchase price
will reflect the amount of the upcoming
distribution, but you will be taxable on the entire
amount of the distribution received, even though,
as an economic matter, the distribution simply
constitutes a return of capital. This is known as
"buying into a dividend."
You will recognize taxable gain or loss on a sale,
exchange or redemption of your shares, including an
exchange for shares of another fund, based on the
difference between you r tax basis in the shares
and the amount you receive for them. (To aid in
computing your tax basis, you generally should
retain your account statements for the periods
during which you held shares.) Any loss realized on
shares held for six months or less will be treated
as long-term capital loss to the extent of any
capital gain dividends that were received on the
shares.
The one major exception to these tax principles is
that distributions on, and sales, exchanges and
redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
Also, dividends paid to shareholders that are
corporations will be eligible for the 70%
dividends-received deduction to the extent the
dividends are attributable to qualifying dividends
received by the fund from domestic corporations.
You will also generally be subject to any
applicable state and local income taxes on fund
distributions and redemptions. State income taxes
generally will not apply, however, to fund
distributions attributable to interest on federal
securities, if any.
The foregoing is only a summary of certain tax
considerations under current law, which may be
subject to change in the future. You should consult
your tax adviser for further information regarding
federal, state, local and/or foreign tax
consequences relevant to your specific situation.
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 by 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.
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
Distributions dividends 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 and 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 so as
to avoid incurring any fund level income or excise
taxes. 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."
<PAGE>
The Statement of Additional Information (SAI) contains additional
information about the funds. The Statement of Additional Information is
incorporated by reference in to this Prospectus in its entirety. Additional
information about a fund's investments is available in the fund's annual and
semi-annual reports to shareholders. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected each fund's performance during the last fiscal year.
To obtain an SAI, annual report or semi-annual report for the funds, without
charge, call 1-800-472-4266. This number may also be used to make shareholder
inquiries.
Information about the funds (including the SAI) can be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. (telephone 800-SEC-0330),
or by mail by sending your request, along with a duplicating fee, to the SEC's
Public Reference Section, Washington, D.C. 20549-6009. Reports and other
information about the funds are available on the SEC's internet website at
http://www.sec.gov.
SGF's Investment Company Act File No. is 811-2297
SMDS' Investment Company Act File No. is 811-2240
The Stratton Funds, Inc. Investment Company Act File No. is 811-7434
<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, 1999
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, 1999, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into the Prospectus. The Funds' audited financial statements and financial
highlights included in their annual report to shareholders are incorporated by
reference into this Statement of Additional Information. A copy of the Funds'
Prospectus and, annual report are available, without charge, upon request, by
contacting the Funds' Distributor, First Data Distributors, Inc., 4400 Computer
Drive, Westborough, MA 01581, 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
-----------------
PAGE
----
HISTORY OF THE FUNDS................................. 1
INVESTMENT POLICIES AND RISKS........................ 1
Futures Contracts............................... 1
Options......................................... 3
INVESTMENT RESTRICTIONS......................... 5
SGF............................................. 6
SMDS............................................ 7
SSCY............................................ 8
SSVF............................................ 9
MANAGEMENT OF THE FUNDS.............................. 10
Directors and Officers.......................... 10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.. 13
INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS....... 14
Investment Advisor.............................. 14
Service Providers and Underwriter............... 15
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS..... 17
PURCHASE AND REDEMPTION INFORMATION..................
RETIREMENT PLANS..................................... 18
Defined Contribution Plans...................... 18
Individual Retirement Account................... 19
Roth-IRA........................................ 19
403(b)(7) Retirement Plan....................... 19
Simple Individual Retirement Account............ 20
General Information............................. 20
INFORMATION CONCERNING TAXES......................... 20
Taxation of Certain Financial Instruments....... 21
DESCRIPTION OF COMMON STOCK.......................... 22
PERFORMANCE CALCULATIONS............................. 23
FINANCIAL STATEMENTS................................. 25
<PAGE>
HISTORY OF THE FUNDS
This Statement of Additional Information pertains to the following separate
funds incorporated under the laws of the State of Maryland:
<TABLE>
<CAPTION>
NAME OF FUND DATE OF INCORPORATION
- ------------ ---------------------
<S> <C>
Stratton Growth Funds, Inc. (SGF) June 21, 1985*
Stratton Monthly Dividend REIT Shares, Inc. (SMDS) March 4, 1985 **
The Stratton Funds, Inc. January 5, 1993
</TABLE>
* As successor to a Delaware corporation organized on June 5, 1972.
** As successor to a Delaware corporation organized on November 10, 1971.
On December 10, 1997, the Fund changed its name from Stratton Monthly
Dividend Shares, Inc.
The Stratton Funds, Inc. consists of the following separate series described in
this Statement of Additional Information:
Stratton Small-Cap Yield Fund (SSCY)
Stratton Special Value Fund (SSVF)
Prior to December 31, 1996, the fiscal year ends for SGF, SMDS and SSCY were May
31, January 31 and March 31, respectively. As of December 31, 1996 the Funds
changed to a December 31 fiscal year end. For the fiscal year ended December 31,
1996, financial information covered shortened periods of 7, 11 and 9 months,
respectively.
CLASSIFICATION:
The Funds are classified as open-end management investment companies. The Funds
are diversified, which means that, with respect to 75% of each Fund's total
assets, the Fund will not invest more than 5% of their respective assets in the
securities of any single issuer (other than securities issued by the U.S.
Government or its agencies or instrumentalities).
INVESTMENT POLICIES AND RISKS
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.
<PAGE>
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 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 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.
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
<PAGE>
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.
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
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 its portfolio, without limit, as Stratton Management Company,
the Investment 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.
-3-
<PAGE>
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 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, 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. 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
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 its total 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. 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 its portfolio 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.
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 Investment 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
-4-
<PAGE>
pay. With regard to the writing of put options, the Fund will limit the
aggregate value of the obligations underlying such put options to 50% of its
total 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
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.
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.
-5-
<PAGE>
12. Purchase or sell commodities or commodity contracts or invest in interests
in oil, gas or other mineral exploration or development programs.
13. 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.
14. 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.
The Fund will not 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.
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 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.
6. 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, it
agencies or its instrumentalities, if immediately thereafter such purchase
more than 5% of the total assets of the Fund would be invested in
securities of such issuer.
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.
-6-
<PAGE>
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.
The Fund will invest at least 25% of its assets in REITs, and thus will be
concentrated. 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.
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.
-7-
<PAGE>
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.
-8-
<PAGE>
11. Invest for the purpose of exercising control over, or management of, the
issuer.
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.
* * *
-9-
<PAGE>
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.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The business of each Fund is managed under the direction of the Board of
Directors of SMDS, SGF AND THE STRATTON FUNDS, INC. (collectively, the
"Companies"). The Directors and executive officers of the Companiess, their
positions with the Companies, 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
Companies and each of the officers named below holds the same position, unless
otherwise noted, with each of the Companies.
<TABLE>
<CAPTION>
Position with
NAME AND ADDRESS Age Registrants Principal Occupation during last 5 years
<S> <C> <C> <C>
James W. Stratton/1,3/ 62 Director/ Mr. Stratton is the Chairman of the Board
610 W. Germantown Pike Chairman and Chief Executive Officer of the
Suite 300 Investment Advisor, Stratton Management
Plymouth Meeting, PA 19462 Company. He is a Director of Unisource
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/ 43 Director Ms. Cannon is a Senior Vice President of
3200 Horizon Drive Relationship Management of First Data
King of Prussia, PA 19406 Investor Services Group, Inc. She was
formerly a 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. 64 Director Mr. Lombard is a partner in the law firm of
2000 One Logan Sq. Morgan, Lewis & Bockius LLP.
Philadelphia, PA 19103
Douglas J. MacMaster, Jr. 68 Director Mr. MacMaster is a private investor. He was
5 Morris Road formerly Senior Vice President of Merck,
Ambler, PA 19002 Inc. He is a Director of American Precision
Industries, Inc., Marteck Biosciences Corp.,
Neose Pharmaceuticals Inc., Oravax, Inc.,
U.S. Bioscience, Inc., and Flamel
Technologies, S.A.
Henry A. Rentschler 70 Director Mr. Rentschler is a private investor. He
P.O. Box 962 was formerly the President of
Paoli, PA 19301 Baldwin-Hamilton Company, a 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/ 69 Director Mr. Rhoad is a private investor.
640 Bridle Road
Custis Woods
Glenside, PA 19038
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Position with
NAME AND ADDRESS Age Registrants Principal Occupation during last 5 years
<S> <C> <C> <C>
Richard W. Stevens 65 Director Mr. Stevens is an attorney in private
One Jenkintown Station practice.
115 W. Avenue, Suite 108
Jenkintown, PA 19046
John A. Affleck/3/ 52 Officer Mr. Affleck is President and Director of the
610 W. Germantown Pike Investment Advisor, Stratton Management
Suite 300 Company. He is President of Stratton
Plymouth Meeting, PA 19462 Monthly Dividend REIT Shares, Inc., Vice
President of Stratton Growth Fund, Inc. and
The Stratton Funds, Inc.
Gerard E. Heffernan/3/ 61 Officer Mr. Heffernan is a Senior Vice President and
610 W. Germantown Pike Director of the Investment Advisor, Stratton
Suite 300 Management Company. He is President of
Plymouth Meeting, PA 19462 Stratton Growth Fund, Inc., Vice President
of Stratton Monthly Dividend REIT Shares,
Inc. and The Stratton Funds, Inc. He is
Secretary of FinDaTex, Inc.
James Van Dyke Quereau 50 Officer Mr. Quereau is a Vice President, a Director
610 W. Germantown Pike and the Director of Qualitative Research of
Suite 300 the Investment Advisor, Stratton Management
Plymouth Meeting, PA 19462 Company. He is Vice President of the Funds
and Portfolio Manager of Stratton Special
Value Fund.
Frank H. Reichel, III 34 Officer Mr. Reichel is a Vice President, a Director
610 W. Germantown Pike and the Director of Quantitative Research of
Suite 300 the Investment Advisor, Stratton Management
Plymouth Meeting, PA 19462 Company. He is President of The Stratton
Funds, Inc., Vice President of Stratton
Growth Fund, Inc. and Stratton Monthly
Dividend REIT Shares, Inc. and Portfolio
Manager of Stratton Small-Cap Yield Fund.
James A. Beers 36 Officer Mr. Beers is a Vice President of the
610 W. Germantown Pike Investment Advisor, Stratton Management
Suite 300 Company; prior thereto, Account Manager of
Plymouth Meeting PA 19462 Client Services at FPS Services, Inc. He is
Vice President of the Funds. Mr. Beers is
related to Mr. Stratton by marriage.
Joanne E. Kuzma 44 Officer Mrs. Kuzma is the Director of Trading and a
610 W. Germantown Pike Managing Partner of the Investment Advisor,
Suite 300 Stratton Management Company. She is Vice
Plymouth Meeting, PA 19462 President of Compliance for the Funds.
Patricia L. Sloan 45 Officer Ms. Sloan is an employee of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company. She
Suite 300 is Secretary and Treasurer of the Funds.
Plymouth Meeting, PA 19462
Carol L. Royce 41 Officer Mrs. Royce is an employee of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company. She
Suite 300 is Assistant Secretary and Assistant
Plymouth Meeting PA 19462 Treasurer of the Funds.
</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.
2 Ms. Cannon is an "interested person" of the Funds by reason of her
affiliation with First Data Distributors, Inc., the Funds' distributor.
3 Messrs. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
The officers and Directors of the Companies who are also officers or employees
of the Investment Advisor receive no direct compensation from the Funds for
services to them. The Directors of the Companies serve in the same capacity for
each Company 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
-11-
<PAGE>
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, 1998:
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation FUND AND FUND COMPLEX (1)
NAME OF DIRECTOR from Fund Paid to Directors
- ---------------- ---------------------- -------------------------
<S> <C> <C>
James W. Stratton
SGF $ 0 $ 0
SMDS $ 0
SSCY $ 0
SSVF $ 0
Lynne M. Cannon $ 0
SGF $ 0
SMDS $ 0
SSCY $ 0
SSVF $ 0
John J. Lombard, Jr.
SGF $2,768,73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
Douglas J. MacMaster, Jr.
SGF $2,456.96 $8,000.00
SMDS $3,425.46
SSCY $1,882.76
SSVF $ 234.82
Henry A. Rentschler
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
Merritt N. Rhoad, Jr.
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
Alexander F. Smith /(2)/
SGF $1,726.14 $5,750.00
SMDS $2,477.21
SSCY $1,384.22
SSVF $ 162.43
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation FUND AND FUND COMPLEX (1)
NAME OF DIRECTOR from Fund Paid to Directors
- ---------------- ---------------------- -------------------------
<S> <C> <C>
Richard W. Stevens
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
- -----------------------------------------------------------------------------------
</TABLE>
(1) The "Fund Complex" consists of SGF, SMDS and THE STRATTON FUNDS, INC.
(2) Mr. Smith deceased
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 16, 1999, 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
4. SSVF
As of February 16, 1999, the following shareholders owned of record, or were
known by the Funds to own beneficially, more than 5% of the outstanding shares
of the respective Fund.
SHARES PERCENT
NAME AND ADDRESS OWNED OWNED
---------------- ----- -----
1. SGF NONE
2. SMDS Charles Schwab & Co., Inc. 279,761 8.77%
Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
Boston & Company 222,842 6.98%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
-13-
<PAGE>
3. SSCY Boston & Company 482,922 23.73%
CUST TJU Employee Pension Plan
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Boston & Company 240,000 11.79%
CUST Thomas Jefferson University
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Charles Schwab & Co., Inc. 213,261 10.48%
SPL CSTY a/c FBO Customers
Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
4. SSVF Saxon & Company 100,469 29.67%
FBO T/A Teleflex Stratton
P.O. Box 7780-1888
Philadelphia, PA
James W. Stratton Profit
Sharing Plan 80,226 18.28%
FBO James W. Stratton
535 Skippack Pike
Blue Bell, PA
James W. Stratton and 66,052 15.05%
John A. Affleck and
Gerard E. Heffernan
TRST Stratton Management Co. 401k
Profit Sharing Plan
610 W. Germantown Pike, Ste 300
Plymouth Meeting, PA 19462-1050
Union National Bank & Trust Co. 24,024 5.47%
TRST Univest & Co.
14 N. Main Street/Trust Department
P.O. Box 197
Souderton, PA 18964-0197
INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
INVESTMENT ADVISOR
-14-
<PAGE>
Stratton Management Company is owned solely by James W. Stratton. Other persons
who are affiliated with both the Funds and with Stratton Management are listed
under the Directors and officers table under "Management of the Funds."
The amount of advisory fees paid by each Fund for the last three fiscal years is
as follows:
1. SGF - During the fiscal year ended May 31, 1996, the fees paid to the
Investment Advisor totaled $266,741. For the period June 1, 1996 through
December 31, 1996, the fees paid to the Investment Advisor were $177,939.
For the fiscal years ended December 31, 1997 and 1998, the fees paid to the
Investment Advisor were $366,356 and $453,119, respectively.
2. SMDS - During the fiscal year ended January 31, 1996, the fees paid to the
Investment Advisor totaled $794,629. For the period February 1, 1996
through December 31, 1996, the fees paid to the Investment Advisor were
$606,818. For the fiscal years ended December 31, 1997 and 1998, the fees
paid to the Investment Advisor were $600,138 and $548,380, respectively.
3. SSCY - During the fiscal year ended March 31, 1996, the fees paid to the
Investment Advisor totaled $126,638.
For the period April 1, 1996 through December 31, 1996, the fees paid to
the Investment Advisor were $91,179. For the fiscal years ended December
31, 1997 and 1998, the fees paid to the Investment Advisor were $312,050
and $526,297, respectively.
4. SSVF - For the fiscal year ended December 31, 1998, the Fund paid the
Investment Advisor advisory fees totaling $43,822.
The performance adjustment for SSCY and SSVF 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. Pursuant to the performance adjustment, a 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 a Fund performs better than the Russell
2000, it pays the Investment Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of the
difference in performance between a Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the basic fee. The
maximum annualized performance adjustment rate is +/- 0.50% of average net
assets which would be added to or deducted from the advisory fee if a Fund
outperformed or 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 preceding month.
PERFORMANCE FEE SCHEDULE FOR SSCY AND SSVF
+: 1.25%
1.15%
1.05%
0.95%
0.85%
Basic Fee: 0.75%
0.65%
0.55%
-15-
<PAGE>
0.45%
0.35%
-: 0.25%
SERVICE PROVIDERS AND UNDERWRITER
First Data Investor Services Group, Inc. ("Investor Services Group"), a wholly-
owned subsidiary of First Data Corporation, has been engaged by the Funds to
provide most of the back office services on the Funds' behalf. Pursuant to
certain agreements, Investor Services Group provides the services commonly and
separately referred to as: Fund Administration, Fund Accounting, Transfer Agency
and Custody Administration. Effective February 23, 1998, FPS Services, Inc.
("FPS"), a wholly-owned subsidiary of FinDaTex, Inc. was acquired by Investor
Services Group. Certain Directors and officers of the Funds are shareholders of
FinDaTex, Inc. FPS formerly provided these services.
As the Funds' accounting services agent, Investor Services Group 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. For the fiscal year ended December 31, 1998, the Fund
paid FPS or Investor Services Group $526,297 for accounting services.
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. For the fiscal year ended
December 31, 1998, the Fund paid FPS or Investor Services Group $43,822 for
accounting services.
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. For the fiscal year ended December 31,
1998, the Fund paid FPS or Investor Services Group $27,364 for accounting
services.
4. SSVF - Pursuant to the Accounting Services Agreement, Investor Services
Group 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. For the fiscal year
ended December 31, 1998, the Fund paid FPS or Investor Services Group
$25,000 for accounting services.
As the Funds' administrative services agent, Investor Services Group is
responsible for certain administrative services such as: (1) coordinate and
monitor the activities of any other third party service provider providing
services to the Funds (e.g. the Funds' independent auditors, printers, etc.);
(2) provide the Funds with necessary office space, telephones and other
communications facilities and personnel competent to perform the
responsibilities under the Agreement; (3) maintain such books and records of the
Funds as may be required by applicable Federal or state law; (4) prepares and,
after approval by the Funds, files and arranges for the distribution of proxy
materials and periodic reports to shareholders of the Funds as required by
applicable law; (5) prepares and, after approval by the Funds, arranges for the
filing of such registration statements and other documents with the U.S.
Securities and Exchange Commission and any other Federal
-16-
<PAGE>
or state regulatory authorities as may be required by applicable law; (6)
reviews and submits to the officers of the Funds for their approval, invoices or
other requests for payment of the Funds' expenses and instructs the Custodian to
issue checks in payment thereof, and (7) takes such other action with respect to
the Funds as may be deemed by Investor Services Group 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. For the fiscal year ended December 31, 1998, the Fund paid FPS
or Investor Services Group $30,000 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. For the fiscal year ended December 31, 1998, the
Fund paid FPS or Investor Services Group $30,500 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. For the fiscal year ended December 31, 1998, the
Fund paid FPS or Investor Services Group $30,000 for administrative
services.
4. SSVF - Investor Services Group is entitled to receive a fee payable monthly
at the annual rate of $10,000 per year. For the fiscal year ended December
31, 1998, the Fund paid FPS or Investor Services Group $10,000 for
administrative services.
Investor Services Group also serves as the Funds' transfer agent and dividend-
paying agent. Investor Services Group annually receives $13.00 per account for
providing transfer agent and dividend disbursing agent services.
The Funds' independent auditor is Tait, Weller & Baker, 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.
-17-
<PAGE>
First Data Distributors, Inc. ("FDDI"), 4400 Computer Drive, Westborough, MA
01581, serves as underwriter for the Funds. FDDI, a wholly-owned subsidiary of
Investor Services Group, acts as underwriter for the limited purposes of
facilitating the qualification of shares of each Fund under state securities
laws, assisting with the sale of each Fund's shares, and licensing of the
Investment Advisors' sales representatives.
Until December 31, 1998, FPS Broker Services, Inc. ("FPSB") served as the Funds'
underwriter. FPSB was an affiliate of the Investment Advisor inasmuch as both
FPSB and the Investment Advisor were under common control.
For the services to be provided in facilitating the qualification of each Fund's
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. FDDI will be paid according to the same fee schedule.
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 Investment 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 pay on behalf of the Funds 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.
1. SGF - During the fiscal year ended May 31, 1996; the period June 1, 1996
through December 31, 1996; and the fiscal years ended December 31, 1997 and
1998, the Fund paid $13,398, $24,150, $46,704 and $47,812 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
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years ended December 31, 1997 and 1998, the Fund's portfolio turnover rates
were 15.41%, 20.32%, 34.40% and 38.02%, respectively.
2. SMDS - During the fiscal year ended January 31, 1996; the period February
1, 1996 through December 31, 1996; and the fiscal years ended December 31,
1997 and 1998, the Fund paid $280,842, $337,175, $184,272 and $64,746,
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
years ended December 31, 1997 and 1998, the Fund's portfolio turnover rates
were 53.30 %, 69.19%, 42.47% and 18.89%, respectively.
3. SSCY - During the fiscal year ended March 31, 1996; the period April 1,
1996 through December 31, 1996; and the fiscal years ended December 31,
1997 and 1998, the Fund paid $22,378, $29,899, $41,488 and $74,069,
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 and 1998 the Fund's portfolio turnover rates were 33.50%,
35.86%, 26.27% and 35.94%, respectively.
4. SSVF - During the fiscal year ended December 31, 1998, the Fund paid
$14,963 in brokerage commissions. For the fiscal year ended December 31,
1998, the Fund's portfolio turnover rate was 78.06%.
PURCHASE AND REDEMPTION INFORMATION
Please call Investor Services Group at 800-472-4266 to verify required language
for all retirement plan redemption requests or to obtain the Retirement Plan
Withdrawal Form. No redemption shall be made unless your 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.
All withdrawals under the Systematic Cash Withdrawal Plan 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.
If withdrawals under the Systematic Cash Withdrawal Plan exceed income dividends
and capital gains distributions, your invested principal will be depleted.
Thus, depending on the size of withdrawal payments and fluctuations in the value
of your shares, your original investment could be exhausted entirely. You may
change or stop the plan at any time by written notice to the funds. Dividends
and capital gains distributions must be reinvested automatically to participate
in this plan. Stock certificates cannot be issued under the Systematic Cash
Withdrawal Plan.
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 the 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 you withdraw
your
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request for redemption, you will receive payment at the net asset value next
determined after termination of the suspension.
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 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 your shares on redemption may be more or less than the cost of such
shares to you depending upon the net asset value of the fund's shares at the
time of redemption.
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. 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
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<PAGE>
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
individual. 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 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
Distributions of net investment income and capital gains on retirement plan
shares will be reinvested automatically 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.
Investor Services Group 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 Investor
Services Group. The annual maintenance fee is currently $12.00 per plan
account. This fee may be amended upon 30 days notice by Stratton Management
Company, Semper or Investor Services Group in the future.
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<PAGE>
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.
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.
Each Fund intends to qualify as a regulated investment company (a "RIC") under
Subchapter M of the Internal Revenue Code, as amended ("the Code") for each
taxable year. As a RIC, each Fund is exempt from Federal income and excise tax
on its income and gains that it distributes to shareholders.
To maintain its RIC status, each Fund must satisfy certain distribution
requirements and certain requirements with respect to the source of its income
for a taxable year and the diversification of its investments. Complying with
these tests may limit somewhat the Fund's freedom in pursuing its investment
objectives.
SMDS has a capital loss carryover available to offset future capital gains, if
any, of approximately $13,179,000, of which $7,681,000 expires in 2000,
$4,331,000 expires in 2003 and $1,167,000 expires in 2005. SSCY and SSVF have
capital loss carryovers available to offset future capital gains, if any, of
approximately $1,159,000 and $36,000, respectively, which expire in 2006.
A 4% nondeductible excise tax is imposed on RICs 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 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 RICs, 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.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Certain statutory rules govern the Federal income tax treatment of certain
financial investments that may be held by SSVF. These rules may affect the
amount of income or gain that the Fund must distribute to its shareholders.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Generally, futures
contracts and options on futures contracts held by the Fund (collectively, the
"Instruments") at the close of its taxable year are treated for Federal income
tax purposes as sold for their fair market value on the last business day of
such year, a process known as "marking-to-market." Forty percent of any gain or
loss resulting from such constructive sales will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the period the Fund has held the
Instruments ("the 40-60 rule"). The amount of any capital gain or loss actually
realized by the Fund in a subsequent sale or other disposition of those
Instruments is adjusted to reflect any capital gain or loss taken into account
by the Fund in a prior year as a result of the constructive sale of the
Instruments. With respect to certain Instruments, deductions for interest and
carrying charges may not be allowed.
With respect to futures contracts to sell that are properly identified as such,
the Fund may make an election that will exempt (in whole or in part) those
identified futures contracts from being treated for Federal income tax purposes
as sold on the last business day of the Fund's taxable year, but gains and
losses will be subject to such short sales, wash sales, loss deferral rules and
the requirement to capitalize interest and carrying charges. Under temporary
regulations, the Fund would be allowed (in lieu of the foregoing) to elect to
either (1) offset gains or losses from positions which are part of a mixed
straddle to which such treatment applies, or (2) establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40-60 rule will apply
to the net gain or loss attributable to the futures contracts, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
OPTIONS. When the Fund writes an option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included as a deferred
credit in the liability section of the Fund's statement of assets and
liabilities. The amount of the deferred credit will be subsequently marked-to-
market to reflect the current value of the option written. The current value of
the traded option is the last sale price or, in the absence of a sale price, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold), and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security from its portfolio and
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired call options
written by the Fund and net gains from closing purchase transactions are treated
as short-term capital gains for Federal income tax purposes, and losses on
closing purchase transactions are treated as short-term capital losses.
The foregoing discussion is based on Federal tax laws and regulations that are
in effect on the date of this Statement of Additional Information. These laws
and regulations may be changed by legislative or administrative action.
DESCRIPTION OF COMMON STOCK
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 its
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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. SGF, SMDS and THE
STRATTON FUNDS, INC. are each a separate legal entity and the shareholders of
each will vote separately. Under certain circumstances, shareholders have the
right to call a shareholders meeting to consider the removal of one or more
directors.
Rule 18f-2 under the Investment Company Act of 1940 provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as THE STRATTON FUNDS, INC. shall not be deemed to
have been effectively acted upon unless approved by a majority of the
outstanding shares of the Fund affected by the matter. A Fund affected by a
matter unless it is clear that the interests of the Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any
change in fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the Rule also provides that the ratification of independent
public accountants and the election of directors may be effectively acted upon
by shareholders of THE STRATTON FUNDS, INC. voting without regard to a Fund.
Investors should be aware that by combining the Prospectus of each Fund into 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.
PERFORMANCE CALCULATIONS
From time to time, the Funds' total return may be quoted in advertisements,
shareholder reports or other 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.
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.
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This calculation can be expressed as follows:
ERV
T=[(-----)1/n-1]
P
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:
(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, 1998 were 11.46%,20.64% and 15.14%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1998 were 155.51%, and 308.48%, respectively.
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<PAGE>
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, 1998 were -11.75%, 4.18% and 8.35%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1998 were 18.53% and 122.92%, respectively.
3. SSCY - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year and five year periods ended December
31, 1998 were -9.58% and 1.04%, respectively. The aggregate total return
for the five year period ended December 31, 1998 was 83.27%.
4. SSVF - Based on the foregoing calculations, the average annual total return
for the Fund for the one year period ended December 31, 1998 was -2.67%.
The aggregate total return from inception to the period ended December 31,
1998 was -2.67%.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for SGV, SMDS, SSCY and SSVF
contained in such Funds' Annual Report dated December 31, 1998 are incorporated
by reference into this Statement of Additional information and have been audited
by Tait, Weller & Baker, whose reports also appear in the 1998 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, incorporating by reference from such Funds' 1998
Annual Report to Shareholders.
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POST-EFFECTIVE AMENDMENT NO. 20
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
TO REGISTRATION STATEMENT NO 2-42379
ON
FORM N-1A
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation
(i) 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 Nos. 2-42379/811-2240), filed on
May 30, 1996 ("Post-Effective Amendment No. 16").
(ii) Amendment to Articles of Incorporation, dated January 19,
1998, are incorporated herein by reference to Exhibit 99.1 of
Post-Effective Amendment No. 19 to Registrant's Registration
Statement on Form N-1A, (File Nos. 2-42379/811-2240), filed on
April 15, 1998 ("Post-Effective Amendment No. 19").
(b) 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.
(c) Instruments Defining Rights of Security Holders.
(i) Specimen certificate for shares of common stock of Registrant
is incorporated herein by reference to Exhibit No. 99.4 of
Post-Effective Amendment No. 17 to Registrant's Registration
Statement on Form N-1A (File Nos. 2-42379/811-2240), filed on
March 12, 1997 ("Post-Effective Amendment No. 17").
(ii) Section 4. of the By-Laws, Exhibit (b) above, define the
rights of security holders.
(d) 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.
(e) Underwriting Agreement, dated January 1, 1999, between Registrant
and First Data Distributors, Inc. is filed herewith.
(f) None.
(g) Custodian Agreements
(i) Custodian Agreement, dated November 1, 1994, between
Registrant and The Bank of New York is incorporated herein by
reference to Exhibit No. 99.8(a) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement on Form N-1A
(File Nos 2-42379/811-2240), filed on May 30, 1995 ("Post-
Effective Amendment No. 15").
(ii) Custody Administration and Agency Agreement, dated November 1,
1994, between Registrant and FPS Services, Inc. (formerly
known as Fund/Plan Services, Inc.) is incorporated herein by
reference to Exhibit No. 99.8(b) of Post-Effective Amendment
No. 15.
<PAGE>
(h) (i) Administration Agreement, dated March 1, 1990, between
Registrant and FPS Services, Inc. (formerly known as Fund/Plan
Services, Inc.) is incorporated herein by reference to Exhibit
No. 99.9(a) of Post-Effective Amendment No.17.
(ii) 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 incorporated herein by reference to Exhibit
No. 99.9(b) of Post-Effective Amendment No. 17.
(iii) Amendment to Shareholder Services Agreement (formerly known as
Administration Agreement), dated December 11, 1985, between
Registrant and FPS Services, Inc. (formerly known as Fund/Plan
Services, Inc.) is incorporated herein by reference to Exhibit
No. 99.9(c) of Post-Effective Amendment No. 17.
(iv) 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 incorporated herein by reference
to Exhibit No. 99.9(d) of Post-Effective Amendment No. 17.
(v) 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 incorporated herein by reference
to Exhibit No. 99.9(e) of Post-Effective Amendment No. 17.
(vi) Amendment to Shareholder Services Agreement (formerly known as
Administration Agreement), dated February 27, 1990, between
Registrant and FPS Services, Inc. (formerly known as Fund/Plan
Services, Inc.) is incorporated herein by reference to Exhibit
No. 99.9(f) of Post-Effective Amendment No. 17.
(vii) Accounting Services Agreement, dated May 1, 1988, between
Registrant and FPS Services, Inc. (formerly known as Fund/Plan
Services, Inc.) is incorporated herein by reference to Exhibit
No. 99.9(g) of Post-Effective Amendment No. 17.
(i) Opinion and Consent of Counsel on the legality of the securities
being issued is incorporated herein by reference to Exhibit No.
99.10 of Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A (File Nos. 2-42379/811-2240),
filed on February 27, 1998 ("Post-Effective Amendment No. 18").
(j) Consent of Independent Auditors is filed herewith.
(k) 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, 1998 are incorporated by reference to the Annual Report to
Shareholders as filed with the Securities and Exchange Commission on
February 25, 1999 pursuant to Rule 30b2-1 of the Investment Company
Act of 1940 (File Nos. 2-423791/811-2240).
<PAGE>
(l) None.
(m) None.
(n) Financial Data Schedule filed herewith.
(o) None.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
ITEM 25. 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 (a) hereto, and Section 2.12 of Registrant's
By-Laws, incorporated by reference as Exhibit (b) 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:
<PAGE>
(a) Article XVII (14) of the Custodian Agreement between the
Registrant and The Bank of New York is incorporated herein by
reference to Exhibit No. 8(a) of Post-Effective Amendment No.
15.
(b) Section 26 of the Shareholder Services Agreement is incorporated
herein by reference to Exhibit No. 99.9(b) through 99.9(f) of
Post-Effective Amendment No. 17;
(c) Section 10 of the Accounting Services Agreement is incorporated
herein by reference to Exhibit No. 99.9(g) of Post-Effective
Amendment No. 17; and
(d) Section 8 of the Administration Agreement is incorporated herein
by reference to Exhibit No. 99.9(a) of Post-Effective Amendment
No. 17.
ITEM 26. 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, 1998 had approximately $2.2
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 27. PRINCIPAL UNDERWRITER
(a) First Data Distributors, Inc., the principal underwriter for the
Registrant's securities, currently acts as principal underwriter for
the following entities:
The Galaxy Fund
Galaxy Fund II
The Galaxy VIP Fund
Alleghany Funds (f/k/a CT&T Funds)
Wilshire Target Funds, Inc.
The Potomac Funds
Panorama Trust
First Choice Funds Trust
Undiscovered Managers Fund
LKCM Funds
BT Insurance Funds Trust
ABN AMRO Funds (f/k/a Rembrandt Funds)
IBJ Funds Trust
ICM Series Trust
Forward Funds, Inc.
Light Index Funds, Inc.
WorldWide Index Funds
Weiss, Peck & Greer Funds Trust
Weiss, Peck & Greer International Fund
WPG Growth Fund
WPG Growth and Income Fund
WPG Tudor Fund
<PAGE>
RWB/WPG U.S. Large Stock Fund
Tomorrow Funds Retirement Trust
The Govett Funds, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Trust Tax Exempt Bond Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
Matthews International Funds
McM Funds
Metropolitan West Funds
Smith Breeden Series Fund
Smith Breeden Trust
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 First Data Distributors, Inc. is
incorporated herein by reference to Form BD filed with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-45467)
(c) Not applicable.
ITEM 28. 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 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 First Data Investor Services
Group, 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 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. 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. 20 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Plymouth
Meeting, and the State of Pennsylvania on the 1/st/ day of March, 1999.
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. 20 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 March 1, 1999
- -------------------------------
James W. Stratton
/s/ Lynne M. Cannon Director March 1, 1999
- -------------------------------
Lynne M. Cannon
/s/ John J. Lombard, Jr. Director March 1, 1999
- -------------------------------
John J. Lombard, Jr.
/s/ Douglas J. MacMaster, Jr. Director March 1, 1999
- -------------------------------
Douglas J. MacMaster, Jr.
/s/ Henry A. Rentschler Director March 1, 1999
- -------------------------------
Henry A. Rentschler
/s/ Merritt N. Rhoad, Jr. Director March 1, 1999
- -------------------------------
Merritt N. Rhoad, Jr.
/s/ Richard W. Stevens Director March 1, 1999
- -------------------------------
Richard W. Stevens
/s/ Patricia L. Sloan Treasurer March 1, 1999
- -------------------------------
Patricia L. Sloan
/s/ John A. Affleck President March 1, 1999
- -------------------------------
John A. Affleck
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
Exhibit
Number Exhibit
23(e) Undertaking Agreement
23(j) Consent of Independent Auditors
27 Financial Data Schedule
<PAGE>
Exhibit 23(e)
UNDERWRITING AGREEMENT
This Agreement, dated as of January 1, 1999, is made by and between
Stratton Monthly Dividend REIT Shares, Inc. a Maryland corporation (the "Fund")
operating as an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "Act"), Stratton Management
Company (the "Company"), a registered investment advisor duly organized and
existing as a corporation under the laws of the Commonwealth of Pennsylvania,
and First Data Distributors, Inc. ("FDDI"), a corporation duly organized and
existing under the laws of the Commonwealth of Massachusetts (collectively, the
"Parties").
WITNESSETH THAT:
WHEREAS, the Company has been appointed investment advisor to the Fund; and
WHEREAS, FDDI is a broker-dealer registered with the U.S. Securities and
Exchange Commission (the "SEC") and a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Parties are desirous of entering into an agreement providing
for the distribution by FDDI of the shares of the Fund (the "Shares").
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and in exchange of good and valuable consideration, the
sufficiency and receipt of which is hereby acknowledged, the Parties hereto,
intending to be legally bound, do hereby agree as follows:
1. Appointment
-----------
The Fund hereby appoints FDDI as its principal agent for the distribution
of the Shares, and FDDI hereby accepts such appointment under the terms of
this Agreement. The Fund agrees that it will not sell any Shares to any
person except to fill orders for the Shares received through FDDI,
provided, however, that the foregoing exclusive right shall not apply to:
(a) Shares issued or sold in connection with the merger or consolidation of
any other investment company with the Fund or the acquisition by purchase
of otherwise of all or substantially all of the assets of any investment
company or substantially all of the outstanding shares of any such company
by the Fund; (b) Shares which may be offered by the Fund to its
stockholders for reinvestment of cash distributed from capital gains or net
investment income of the Fund; or (c) Shares which may be issued to
shareholders of other funds who exercise any exchange privilege set forth
in the Fund's Prospectus. Notwithstanding any other provision hereof, the
Fund may terminate, suspend, or withdraw the offering of the Shares
whenever, in their sole discretion, they deem such action to be desirable.
-1-
<PAGE>
2. Sale and Repurchase of Shares
-----------------------------
(a) FDDI is hereby granted the right, as agent for the Fund, to sell
Shares to the public against orders received at the public offering
price as defined in the Fund's Prospectus and Statement of Additional
Information.
(b) FDDI will also have the right to take, as agent for the Fund, all
actions which, in FDDI's judgment, and subject to the Fund's
reasonable approval, are necessary to carry into effect the
distribution of the Shares.
(c) FDDI will act as agent for the Fund in connection with the repurchase
of Shares by the Fund upon the terms set forth in the Fund's
Prospectus and Statement of Additional Information.
(d) The net asset value of the Shares shall be determined in the manner
provided in the then current Prospectus and Statement of Additional
Information relating to the Shares, and when determined shall be
applicable to all transactions as provided in the Prospectus. The net
asset value of the Shares shall be calculated by the Fund or by
another entity on behalf of the Fund. FDDI shall have no duty to
inquire into, or liability for, the accuracy of the net asset value
per Share as calculated.
(e) On every sale, FDDI shall promptly pay to the Fund the applicable net
asset value of the Shares.
(f) Upon receipt of purchase instructions, FDDI will transmit such
instructions to the Fund or its transfer agent for registration of the
Shares purchased.
(g) Nothing in this Agreement shall prevent FDDI or any affiliated person
(as defined in the Act) of FDDI from acting as underwriter for any
other person, firm or corporation (including other investment
companies), or in any way limit or restrict FDDI or such affiliated
person from buying, selling or trading any securities for its or their
own account or for the account of others for whom it or they may be
acting, provided, however, that FDDI expressly agrees that it will not
for its own account purchase any Shares of the Fund except for
investment purposes, and that it will not for its own account dispose
of any such Shares except by redemption of such Shares with the Fund,
and that it will not undertake in any activities which, in its
judgment, will adversely affect the performance of its obligations to
the Fund under this Agreement.
-2-
<PAGE>
3. Rules of Sale of Shares
-----------------------
FDDI does not agree to sell any specific number of Shares and serves only
in the capacity of Statutory Underwriter. The Fund reserves the right to
terminate, suspend or withdraw the sale of its Shares for any reason deemed
adequate by it, and the Fund reserves the right to refuse at any time or
times to sell any of its Shares to any person for any reason deemed
adequate by it.
4. Rules of NASD, etc.
-------------------
(a) FDDI will conform tot he Conduct Rules of the NASD and the securities
laws of any jurisdiction in which it directly or indirectly sells any
Shares.
(b) FDDI will require each dealer with whom FDDI has a selling agreement
to conform to the applicable provisions of the Prospectus, with
respect to the public offering price of the Shares, and FDDI shall not
withhold the placing of purchase orders so as to make a profit
thereby.
(c) The Fund and the Company agree to furnish FDDI sufficient copies of
any and all: agreements, plans, communications with the public or
other materials which the Fund or the Company intend to use in
connection with any sales of Shares, in adequate time for FDDI to file
and clear such materials with the proper authorities before they are
put in use. FDDI and the Fund or the Company may agree that any such
material does not need to be filed subsequent to distribution. In
addition, the Fund and the Company agree not to use any such materials
until so filed and cleared for use, if required, by appropriate
authorities as well as by FDDI.
(d) FDDI, at its own expense, will qualify as a dealer or broker, or
otherwise, under all applicable state or federal laws required in
order that the Shares may be sold in such states as may be mutually
agreed upon by the Parties.
(e) FDDI shall remain registered with the SEC and a member of the NASD for
the term of this Agreement.
(f) FDDI shall not, in connection with any sale or solicitation of a sale
of the Shares, make or authorize any representative, service
organization, broker or dealer to make any representations concerning
the Shares, except those contained in the Prospectus offering the
Shares and in communications with the public or sales materials
approved by FDDI as information supplemental to such Prospectus.
Copies of the Prospectus will be supplied by the Fund or the Company
to FDDI in reasonable quantities upon request.
-3-
<PAGE>
(g) FDDI shall only be authorized to make representations in respect of
the Fund consistent with the then current Prospectus, Statement of
Additional Information, and other written information provided by the
Fund or its agents to be used explicitly with respect to the sale of
Shares.
5. Records to be Supplied by the Fund
----------------------------------
The Fund shall furnish to FDDI copies of all information, financial
statements and other papers which FDDI may reasonably request for use in
connection with the underwriting of the Shares including, but not limited
to, one certified copy of all financial statements prepared for the Fund by
its independent public accountants.
6. Expenses
--------
(a) The Fund will bear the following expenses:
(i) preparation, setting in type, and printing of sufficient copies
of the Prospectus and Statement of Additional Information for
distribution to shareholders, and the cost of distribution of
same to the shareholders;
(ii) preparation, printing and distribution of reports and other
communications to shareholders;
(iii) registration of the Shares under the federal securities laws;
(iv) qualification of the Shares for sale in the jurisdictions as
directed by the Fund;
(v) maintaining facilities for the issue and transfer of the Shares;
(vi) supplying information, prices and other data to be furnished by
the Fund under this Agreement; and
(vii) any original issue taxes or transfer taxes applicable to the sale
or delivery of the Shares or certificates therefor.
(b) The Company will pay all other expenses incident to the sale and
distribution of the Shares sold hereunder.
(c) FDDI agrees to pay all of its own expenses in performing its
obligations hereunder.
-4-
<PAGE>
7. Term and Compensation
---------------------
(a) The term of this Agreement shall commence on the date on hereinabove
first written (the "Effective Date").
(b) This Agreement shall remain in effect for one (1) year from the
Effective Date. This Agreement shall continue thereafter for periods
not exceeding one (1) year, if approved at least annually (i) by a
vote of a majority of the outstanding voting securities of the Fund,
or (ii) by a vote of a majority of the Board Members of the Fund who
are not parties to this Agreement (other than as Board Members of the
Fund) or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval.
(c) Fees payable to FDDI shall be paid by the Company as set forth in
Schedule "B" attached and shall be fixed for the one (1) year period
commencing on the Effective Date of this Agreement. Thereafter, the
fee schedule will be subject to annual review and adjustment.
(d) This Agreement (i) may be terminated at any time without the payment
of any penalty, either by a vote of the Directors of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund
with respect to the Fund, on sixty (60) days' written notice to FDDI;
and (ii) may be terminated by FDDI on sixty (60) days' written notice
to the Fund with respect to the Fund.
(e) This Agreement shall automatically terminate in the event of its
assignment, as defined in the Act.
8. Indemnification of FDDI by the Company and the Fund
---------------------------------------------------
FDDI is responsible for its own conduct and the employment, control, and
conduct of its agents and employees and for injury to such agents or
employees or to others caused by it, its agents or employees.
Notwithstanding the above, the Company will indemnify and hold FDDI
harmless for the actions of the Company's employees registered with the
NASD as registered representatives of FDDI, and the Company hereby
undertakes to maintain compliance with all NASD and SEC rules and
regulations concerning any activities of such employees. FDDI shall have
the right, in its sole discretion, to refuse to register any individual as
its representative.
9. Liability of FDDI
-----------------
(a) FDDI, its directors, officers, employees, shareholders and agents
shall not be liable for any error of judgment or mistake of law or for
any loss
-5-
<PAGE>
suffered by the Fund in connection with the performance of this
Agreement, except a loss resulting from a breach of FDDI's obligations
pursuant to Section 4 of this Agreement (including breach of the Rules
of NASD), a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of FDDI in the
performance of its obligations and duties or by reason of its reckless
disregard of its obligations and duties under this Agreement. FDDI
agrees to indemnify and hold harmless the Fund and each person who has
been, is, or may hereafter be a Director, officer, or employee of the
Fund against expenses, including reasonable counsel fees, reasonably
incurred by any of them in connection with any claim or in connection
with any action, suit, or proceeding to which any of them may be a
party, which arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact, on the part of
FDDI or any agent of employee of FDDI or any of the persons for whose
acts FDDI is responsible or is alleged to be responsible unless such
misrepresentation or omission was made in reliance upon written
information furnished to FDDI by the Fund. FDDI also agrees to
indemnify and hold harmless the Fund and each such person in
connection with any claim or in connection with any action, suit, or
proceeding which arises out of or is alleged to arise out of FDDI's
failure to exercise reasonable care and diligence with respect to its
services rendered in connection with the purchase and sale of Shares.
With respect to the foregoing, the Fund shall have the right to
participate in the defense of any action, suit or proceeding and to
retain its own counsel, and the reasonable fees and expenses of such
counsel shall be borne by FDDI, which shall pay such fees, costs and
expenses at least quarterly. The foregoing rights of indemnification
shall be in addition to any other rights to which the Fund or any such
person shall be entitled to as a matter of law.
(b) The Fund agrees to indemnify and hold harmless FDDI against any and
all liability, loss, damages, costs of expenses (including reasonable
counsel fees) which FDDI may incur or be required to pay hereafter, in
connection with any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or legislative body, in
which FDDI may be involved as a party or otherwise or with which FDDI
may be threatened, by reason of the offer or sale of the Fund's Shares
by persons other than FDDI or its representatives, prior to the
execution of this Agreement. If a claim is made against FDDI as to
which FDDI may seek indemnity under the Section, FDDI shall notify the
Fund promptly after any written assertion of such claim threatening to
institute an action or proceeding with respect thereto and shall
notify the Fund promptly of any action commenced against FDDI within
10 days time after FDDI shall have been served with a summons or other
legal process, giving information as to the nature and basis of the
claim. Failure to notify the Fund shall not,
-6-
<PAGE>
however, relieve the Fund from any liability which it may have on
account of the indemnity under this Section 9(b) if the Fund has not
been prejudiced in any material respect by such failure. The Fund
shall have the sole right to control the settlement of any such
action, suit or proceeding subject to FDDI approval, which shall not
be unreasonably withheld. FDDI shall have the right to participate in
the defense of an action or proceeding and to retain its own counsel,
and the reasonable fees and expenses of such counsel shall be borne by
the Fund (which shall pay such fees, costs and expenses at least
quarterly) if:
(i) FDDI has received an opinion of counsel stating that the
use of counsel chosen by the Fund to represent FDDI would
present such counsel with a conflict of interest:
(ii) the defendants in, or targets of, any such action or
proceeding include both FDDI and the Fund, and legal
counsel to FDDI shall have reasonably concluded that there
are legal defenses available to it which are different
from or additional to those available to the Fund or which
may be adverse to or inconsistent with defenses available
to the Fund (in which case the Fund shall not have the
right to direct the defense of such action on behalf of
FDDI); or
(iii) the Fund shall authorize FDDI to employ separate counsel
at the expense of the Fund.
(c) Any person, even though also a director, officer, employee,
shareholder or agent of FDDI who may be or become an officer,
director, trustee, employee or agent of the Fund, shall be deemed,
when rendering services to the Fund or acting on any business of the
Fund (other than services or business in connection with FDDI's duties
hereunder), to be rendering such services to or acting solely for the
Fund and not as a director, officer, employee, shareholder or agent,
or one under the control or direction of FDDI even though receiving a
salary from FDDI.
(d) The Fund agrees to indemnify and hold harmless FDDI, and each person
who controls FDDI within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "Securities Act"), or Section 20 of the
Securities Exchange Act of 1934, s amended (the "Exchange Act"),
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigative, legal and other
expenses incurred in connection therewith) to which they, or any of
them, may become subject under the Act, the Securities Act, the
Exchange Act or other federal or state law or regulations, at common
law or otherwise insofar as such losses, claims, damages or
liabilities (or actions, suits or proceedings in respect thereof)
-7-
<PAGE>
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in a Prospectus, Statement of
Additional Information, supplement thereto, sales literature (or other
written information) prepared by the Fund and furnished by the Fund to
FDDI for FDDI's use hereunder, disseminated by the Fund or which arise
out of or are based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading.
Such indemnity, and any indemnity provided by Section 9(b) above,
shall not, however, inure to the benefit of FDDI (or any person
controlling FDDI) on account of any losses, claims, damages or
liabilities (or actions, suits or proceedings in respect thereof)
arising from the sale of the Shares of the Fund to any person by FDDI
(i) if such untrue statement or omission or alleged untrue statement
or omission was made in the Prospectus, Statement of Additional
Information, or supplement, sales or other literature, in reliance
upon and in conformity with information furnished in writing to the
Fund by FDDI specifically for use therein or (ii) if such losses,
claims, damages or liabilities arise out of or are based upon an
untrue statement or omission or alleged untrue statement or omission
found in any Prospectus, Statement of Additional Information,
supplement, sales or other literature, subsequently corrected, but
negligently distributed by FDDI and a copy of the corrected Prospectus
was not delivered to such person at or before the confirmation of the
sale to such person
(e) FDDI shall not be responsible for any damages, consequential or
otherwise, which the Company or the Fund may experience, due to the
disruption of the distribution of Shares caused by any action or
inaction of any registered representative or affiliate of FDDI or of
FDDI itself.
(f) Notwithstanding anything in this Agreement to the contrary, in no
event shall any party to this Agreement, its affiliates or any of its
or their directors, trustees, officers, employees, agents or
subcontractors be liable for lost profits, exemplary, punitive,
special, incidental, indirect or consequential damages.
10. Amendments
----------
No provision of this Agreement may be amended or modified in any manner
whatsoever, except by a written agreement properly authorized and executed
by the Parties.
-8-
<PAGE>
11. Section Headings
----------------
Section and paragraph headings are for convenience only and shall not be
construed as part of this Agreement.
12. Reports
-------
FDDI shall prepare reports for the Board of the Fund, on a quarterly basis,
showing such information as, from time to time, shall be reasonably
requested by the Board.
13. Severability
------------
If any part, term or provision of this Agreement is held by any court to be
illegal, in conflict with any law or otherwise invalid, the remaining
portion or portions shall be considered severable and not affected, and the
rights and obligations of the Parties shall be construed and enforced as if
the Agreement did not contain the particular part, term or provision held
to be illegal or invalid provided that the basic agreement is not thereby
substantially impaired.
14. Governing Law
-------------
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts and the exclusive venue of any action arising under this
Agreement shall be the City of Boston, Commonwealth of Massachusetts.
15. Authority to Execute
--------------------
The Parties represent and warrant to each other that the execution and
delivery of this Agreement by the undersigned officer of each Party has
been duly and validly authorized; and, when duly executed, this Agreement
will constitute a valid and legally binding and enforceable obligation of
each Party.
-9-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed
by their duly authorized officer, of the day and year first above written.
FIRST DATA DISTRIBUTORS, INC.
_____________________________
By:
Title:
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
_____________________________
By:
Title:
STRATTON MANAGEMENT COMPANY
_____________________________
By:
Title:
-10-
<PAGE>
SCHEDULE A
UNDERWRITER SERVICES
1. Underwriter services include:
-----------------------------
A) Literature review, recommendations and submission to the NASD
B) Initial NASD Licensing and Transfers of Registered Representatives
. U-4 Form and Fingerprinting Submission to NASD
. Supplying Series 6 and 63 written study material
. Registration for Exam Preparation classes
. Renewals and Termination of Representatives
C) Written supervisory procedures and manuals for Registered
Representatives
D) Ongoing compliance updates for Representatives regarding sales
practices, written correspondence and other communications with the public.
E) NASD Continuing Education Requirement
-11-
<PAGE>
SCHEDULE B
FEE SCHEDULE
This Fee Schedule is fixed for a period of one (1) year from the Effective Date
as that term is defined in the Agreement.
1. Statutory Underwriter Services
------------------------------
A) The Fund agrees to pay FDDI $3,000 per series per annum for the
services performed under this Agreement.
B) The Company agrees to pay FDDI $2.00 per kit for inquiry/fulfillment
with a $1,500 per month minimum for all funds managed by the Company.
C) FDDI agrees register certain employees of the Company as its
representatives as follows, such fee to be paid by the Company:
Up to 10 States $2,000 per Representative per Year
All 50 States $4,000 per Representative per Year
-12-
<PAGE>
EXHIBIT 23(j)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Registration Statement on Form
N-1A of Stratton Monthly Dividend REIT Shares, Inc. to the use of our report
dated January 15, 1999 on the financial statements and financial highlights.
Such financial statements and financial highlights are incorporated by reference
in the Statement of Additional Information, which is part of such Registration
Statement.
/s/TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000030137
<NAME> STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 84,520
<INVESTMENTS-AT-VALUE> 79,272
<RECEIVABLES> 744
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 80,018
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82
<TOTAL-LIABILITIES> 82
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,363
<SHARES-COMMON-STOCK> 3,225
<SHARES-COMMON-PRIOR> 3,371
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,300
<ACCUMULATED-NET-GAINS> (13,179)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (5,248)
<NET-ASSETS> 79,936
<DIVIDEND-INCOME> 6,058
<INTEREST-INCOME> 225
<OTHER-INCOME> 0
<EXPENSES-NET> 922
<NET-INVESTMENT-INCOME> 5,361
<REALIZED-GAINS-CURRENT> 3,596
<APPREC-INCREASE-CURRENT> (19,591)
<NET-CHANGE-FROM-OPS> (10,634)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,361
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 1,300
<NUMBER-OF-SHARES-SOLD> 373
<NUMBER-OF-SHARES-REDEEMED> 660
<SHARES-REINVESTED> 142
<NET-CHANGE-IN-ASSETS> (22,020)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16,776)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 922
<AVERAGE-NET-ASSETS> 90,486
<PER-SHARE-NAV-BEGIN> 30.25
<PER-SHARE-NII> 1.65
<PER-SHARE-GAIN-APPREC> (5.07)
<PER-SHARE-DIVIDEND> 1.65
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0.40
<PER-SHARE-NAV-END> 24.78
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
