<PAGE>
ANNUAL REPORT
DECEMBER 31, 1999
------------
STRATTON
MUTUAL FUNDS
------------
Stability. Strategy. Success
<PAGE>
[LOGO OF FIRST DATA]
DEAR FELLOW SHAREHOLDER:
This has been the most frustrating year in my forty year experience for value
investing. Technology has been everything in 1999 as documented by the NASDAQ
100 Index being up 75%. Momentum investing is in and fundamental analysis is
out. It is the most extreme example of a two tier market that I have seen in my
career.
Value investors have seen large sectors that they typically focus on produce
both absolute and relative price declines in a year when all the popular
averages are up. This is because these value sectors are being used as sources
of cash to fund investment in technology and Internet issues.
At year end, tax loss selling in many of these stocks created further price
distortions setting up extremely oversold conditions in the traditional value
arena. It is hard to plead patience to investors when they can see instant
profits by participating in the frothier sectors of the markets. True
investment values are very substantial in the market sectors in which we have
invested. When the market's attention will come back to these groups is
anyone's guess. It is safe to say that the investor support for these value
industries is inversely correlated with the success of the technology sector.
Over a 24 year period, large capitalization value stocks have produced a
compound annual return of 16.43% compared to the S&P 500 Index return of
16.05%. There were two prior periods 1979-1980 and 1989-1991 when value
significantly underperformed the market. In each case, this was followed by a
period in which value outperformed the S&P 500 Index: 1981-1989 and 1992-1993.
We believe history will repeat and value investing will return to its long-term
total return trend.
If in 2000, the NASDAQ Stock Index repeats its performance of 1999, our value
stocks will continue to languish. If on the other hand, there is a correction
of any significance in the current market leaders, investors will return to
areas of the market that offer good value, less excitement, and perhaps old-
fashioned fundamentals. Value investing has never been more out of favor than
it currently is. This probably is spotlighting the contrarian point-of-view
that it takes courage to adopt and patience to endure, but whose long term
rewards should be very substantial from today's depressed price levels.
Sincerely yours,
/s/ James W. Stratton
James W. Stratton
Chairman
February 14, 2000
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
The full year, 1999, was a disappointing and frustrating one for shareholders
with our value orientation to stock selection. We were penalized by sticking to
a fundamental approach to earnings, dividends and cash flow. The most
successful themes in 1999 focused around the Internet, technology, and price
momentum. You can expect us to maintain our basic valuation approach while
tweaking it a bit to emphasize relative price-to-cash flow valuations.
In the fourth quarter of 1999, there was significant activity in the portfolio.
During the month of October, we eliminated a number of holdings that had
significant losses in them for the purpose of offsetting realized capital
gains. This is an attempt to make our Fund as tax efficient as possible. With
the sale proceeds we added a number of new companies to the portfolio.
We invested 2.4% in the basic materials category using Alcan Aluminium and
Weyerhaeuser Co. and added to our retailing with Federated Department Stores
bringing this industry up to 4.1%. We added a new name in technology, Micron
Technology, a leading producer of memory storage chips. Finally, we added two
names in the energy area; El Paso Energy and USX-Marathon, creating a position
of 3.0% in energy.
The fourth quarter was not a positive one for value stocks. Our portfolio
performance was flat which contrasted dramatically with a 15.0% gain in the
quarter for the NASDAQ Index, which is heavily weighted with technology stocks.
Our portfolio content remains very oriented to value stocks that offer moderate
levels of earnings growth at very reasonable prices in today's market. When the
investor will turn away from technology and price momentum stocks to our type
of value industries and fundamentals is anyone's guess.
Our industry weightings were little changed. Banks and financials remain the
largest industry group with 18.5%, followed closely by insurance with 18.4%,
and health care with 10.1%. Our turnover ratio was 39.81% for the year.
Expenses remain at a relatively low level of 1.13%.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Growth Fund with all dividend income and capital gains distributions
reinvested.
[CHART APPEARS HERE]
Label A B C
- -------------------------------------------------------------------------------
Label Original Share Reinvestment of Capital gains
- -------------------------------------------------------------------------------
1 73-74 0 43 7630
2 75-76 0 458 11280
3 77-78 0 1217 14155
4 79-80 0 2147 14597
5 81-82 0 3703 17299
6 83-84 0 6347 24755
7 85-86 3857 10805 38310
8 87-88 10945 11062 30774
9 89-90 22901 14859 31059
10 91-92 27527 21871 32464
11 93-94 35158 26652 32622
12 95-96 60327 41919 42938
13 5/31/96 - 12/31/96 66844 44981 42654
14 12/31/97 52749 58992 98447
15 12/31/98 53823 63997 116451
16 12/31/99 46177 57713 108613
Average Annual Total Return
for the period ended 12/31/99
1 year............. (9.29)%
5 year............. +16.68
10 year............. +11.61
15 year............. +12.90
20 year............. +13.30
25 year............. +14.48
Past performance is not predictive of future performance.
* Prior to 12/31/96, SGF had a fiscal year-end of 5/31.
2
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $43,865,061 $49,311,050
- ---------------------------------------------------------------
Net Asset Value Per Share $29.23 $29.05
- ---------------------------------------------------------------
Shares Outstanding 1,500,592 1,697,416
- ---------------------------------------------------------------
Number of Shareholders 1,190 1,251
- ---------------------------------------------------------------
Average Size Account $36,861 $39,417
- ---------------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New Holdings Eliminated Holdings
- --------------------------------------------------------------------------
<S> <C>
Alcan Aluminium Ltd. (0.8%*) Delphi Automotive Systems Corp.
El Paso Energy Corp. (1.3%*) Gallagher (Arthur J.) & Co.
Entergy Corp. (0.5%*) General Motors Corp.
Federated Department Stores, Inc. (1.2%*) Heinz (H.J.) Co.
Micron Technology, Inc. (1.1%*) ReliaStar Financial Corp.
USX-Marathon Group (1.7%*) Xerox Corp.
Weyerhaeuser Co. (1.6%*)
Whirlpool Corp. (1.2%*)
</TABLE>
* Percentage of Total Net Assets.
Ten Largest Holdings December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -----------------------------------------------------------
<S> <C> <C>
American General Corp. $ 3,573,713 8.1%
- -----------------------------------------------------------
C&D Technologies, Inc. 2,503,250 5.7
- -----------------------------------------------------------
Commerce Bancorp, Inc. (NJ) 2,284,800 5.2
- -----------------------------------------------------------
Anheuser-Busch Companies, Inc. 2,126,250 4.8
- -----------------------------------------------------------
Pitney Bowes, Inc. 1,932,500 4.4
- -----------------------------------------------------------
Baxter International, Inc. 1,884,375 4.3
- -----------------------------------------------------------
Ford Motor Co. 1,870,312 4.3
- -----------------------------------------------------------
Kimberly-Clark Corp. 1,827,000 4.2
- -----------------------------------------------------------
PNC Bank Corp. 1,780,000 4.1
- -----------------------------------------------------------
First Union Corp. 1,690,238 3.9
- -----------------------------------------------------------
$21,472,438 49.0%
- -----------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
For the second year in a row, REITs had negative total return performance.
Shareholders in SMDS continued to receive a steady stream of monthly
distributions, however. In fact, the Fund declared an additional distribution
of $0.12 in mid-December. SMDS tracked the Morgan Stanley REIT Index throughout
most of 1999, but fell short of the benchmark in late December,--the REIT
market rallied in the last two weeks of the year and the Index finished the
year at -4.55%, while SMDS ended the year down -6.25%. Our portfolio was hurt
by heavy tax loss selling in the lodging and health care sectors.
Where do we go from here? We see the REIT sector like many value-oriented areas
of the market--beaten up from a market perspective, but solid from a business
standpoint. For instance, with the U.S. Economy growing at a healthy rate,
businesses are in fact demanding more space in many real estate sectors--
including office, industrial, and retail. Furthermore, despite concerns over
excessive building in the lodging sector, leisure and business travel are on
the rise. Finally, given the increase in demand for health care services,
prompted by the aging of the U.S. population, health care REITs should, in the
long run, perform well.
Our current goal is to own fundamentally strong companies offering secure
dividend payments. We do not see REITs having a dramatic run-up in price this
year, but we do see a return to historical norms, i.e., earnings growth of 6-7%
and dividend yields of 7-9%. Though the dividend/total return story may not be
exciting to some, we still see value in it. We will continue to invest SMDS in
this area of the market.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Monthly Dividend REIT Shares with all dividend income and capital
gains distributions reinvested.
[CHART APPEARS HERE]
Label A B C
Label Oringinal Shares Reinvestment of Reinvestments of
1 81 9118 583
2 82 9354 1641
3 83 10808 3107
4 84 10667 4379
5 85 11795 6627
6 86 14604 10328
7 87 16320 13744 503
8 88 13184 13041 1043
9 89 12824 15044 1015
10 90 12864 17513 1018
11 91 12084 19388 956
12 92 14609 26570 1156
13 93 15701 31818 1242
14 94 15060 33590 1192
15 95 13039 32499 1032
16 96 14388 39890 1138
17 1/31/96-12/3 14399 43821 1139
18 12/31/97 15879 52959 1257
19 12/31/98 13009 47819 1029
20 12/31/99 11179 45934 884
Average Annual Total Return
for the period ended 12/31/99
1 year............... (6.25)%
5 year...............+ 5.54
10 year...............+ 5.81
15 year...............+ 8.02
Past performance is not predictive of future performance.
*Prior to 12/31/96, SMDS had a fiscal year-end of 1/31.
4
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $59,413,078 $68,035,261
- ---------------------------------------------------------------
Net Asset Value Per Share $21.28 $22.74
- ---------------------------------------------------------------
Shares Outstanding 2,792,429 2,992,020
- ---------------------------------------------------------------
Number of Shareholders 3,372 3,609
- ---------------------------------------------------------------
Average Size Account $17,620 $18,852
- ---------------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eliminated Holdings
- ----------------------------------------
<S> <C>
LTC Properties, Inc.
Tanger Factory Outlet Centers, Inc.
</TABLE>
Ten Largest Holdings December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -------------------------------------------------------------------------
<S> <C> <C>
Liberty Property Trust $ 3,395,000 5.7%
- -------------------------------------------------------------------------
Bradley Real Estate, Inc. Conv. Pfd. Class A 2,581,410 4.3
- -------------------------------------------------------------------------
Colonial Properties Trust 2,492,656 4.2
- -------------------------------------------------------------------------
Gables Residential Trust 2,400,000 4.0
- -------------------------------------------------------------------------
Health Care Property Investors, Inc. 2,327,812 3.9
- -------------------------------------------------------------------------
Mid-Atlantic Realty Trust 2,314,375 3.9
- -------------------------------------------------------------------------
EastGroup Properties, SBI 2,312,500 3.9
- -------------------------------------------------------------------------
Glimcher Realty Trust 2,124,375 3.6
- -------------------------------------------------------------------------
FelCor Lodging Trust, Inc. 2,012,500 3.4
- -------------------------------------------------------------------------
Health Care REIT, Inc. 1,966,250 3.3
- -------------------------------------------------------------------------
$23,926,878 40.2%
- -------------------------------------------------------------------------
</TABLE>
5
<PAGE>
STRATTON SMALL-CAP VALUE FUND
- --------------------------------------------------------------------------------
Dividend paying small-cap stocks recorded a poor year in 1999 on the heels of
an equally disappointing year in 1998. While the Russell 2000 Index came in
with a 21.26% return, your Fund lost 1.98% which was in line with the Russell
2000 Value Index at -1.49%. It was the second year in a row where the average
stock was down for the year. Much like in 1998, we performed in line with the
Russell 2000 Index through the September quarter. However, for the fourth
quarter we recorded a 0.36% advance compared with the 18.44% rise in the
technology laden Russell 2000 Index. For those who need convincing of the
narrowness of the market in 1999, the Russell 2000 technology sector was up
101.3% for the year and 64.8% in the fourth quarter alone.
As you may already know, we have made a decision to relax the dividend
requirement on the Fund which will allow us to purchase low dividend paying
companies in sectors such as technology and oil services. This change is meant
to be a pro-active step which recognizes some of the changes in dividend policy
made by corporate managements in recent years. The Fund, however, will always
be a value fund and will only own those companies which are undervalued
relative to their peers and their future earnings prospects. The Fund will
continue to use the same cash flow valuation methodology used before the
dividend requirement was relaxed and management does not expect the undervalued
nature of the portfolio holdings to change dramatically.
During the quarter we initiated a position in the utility sector to offset some
of the volatility we are seeing in the technology stocks. We added some
severely undervalued new names such as Foster Wheeler and Owens Corning. We
eliminated several positions due to poor earnings prospects--notably Analysts
International, Diagnostic Products and Superior TeleCom. We also trimmed back
on our oversized positions to realize some profits during this volatile market
period.
On December 14, 1999, your Board of Directors approved a change to the name of
the Fund to Stratton Small-Cap Value Fund. References in this report will be to
the Fund's new name.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Small-Cap Value Fund with all dividend and capital gains distributions
reinvested.
[CHART APPEARS HERE]
Label A B C
- ---------------------------------------------------------------------------
Label Original Shares Reinvestment of Reinvestments of
- ---------------------------------------------------------------------------
1 4-93 10000
2 3/31/94 10376 158
3 3/31/95 10352 402
4 3/31/96 12780 789
5 3/31/96-12/3 13432 1067 813
6 12/31/97 17976 1633 2190
7 12/31/98 16088 1626 1995
8 12/31/99 15552 1840 1928
Average Annual Total Return
for the period ended 12/31/99
1 year.............. (1.98)%
3 year.............. + 8.06
5 year.............. +13.05
Since inception
(4/12/93)........... +10.27
Past performance is not predictive of future performance.
* Prior to 12/31/96, SSCV had a fiscal year-end of 3/31.
6
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $36,054,018 $38,913,516
- ---------------------------------------------------------------
Net Asset Value Per Share $19.44 $19.66
- ---------------------------------------------------------------
Shares Outstanding 1,855,051 1,979,384
- ---------------------------------------------------------------
Number of Shareholders 1,296 1,426
- ---------------------------------------------------------------
Average Size Account $27,819 $27,289
- ---------------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New Holdings Eliminated Holdings
- -----------------------------------------------------------------
<S> <C>
Belden, Inc. (1.2*) Analysts International Corp.
Energen Corp. (0.8%*) Callaway Golf Co.
Foster Wheeler Corp. (1.0%*) Diagnostic Products Corp.
Minnesota Power, Inc. (0.9%*) Kimball International Class B
Owens Corning (1.6%*) Superior TeleCom, Inc.
Park Electrochemical Corp. (1.1%*)
</TABLE>
* Percentage of Total Net Assets.
Ten Largest Holdings December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------------------
<S> <C> <C>
Primex Technologies, Inc. $ 1,245,000 3.5%
- ------------------------------------------------------------------
Quixote Corp. 1,220,000 3.4
- ------------------------------------------------------------------
Florida Rock Industries, Inc. 1,205,312 3.4
- ------------------------------------------------------------------
LSI Industries, Inc. 1,189,375 3.3
- ------------------------------------------------------------------
Technitrol, Inc. 1,165,900 3.2
- ------------------------------------------------------------------
Bel Fuse, Inc. Class B 1,160,969 3.2
- ------------------------------------------------------------------
Morrison Management Specialists, Inc. 1,129,875 3.1
- ------------------------------------------------------------------
True North Communications, Inc. 1,117,188 3.1
- ------------------------------------------------------------------
National Data Corp. 1,018,125 2.8
- ------------------------------------------------------------------
Eaton Vance Corp. 988,000 2.7
- ------------------------------------------------------------------
$11,439,744 31.7%
- ------------------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
Stratton Growth Fund seeks, as its primary objective, possible growth of
capital with current income from interest and dividends as a secondary
objective. Studies of historical data show that investing in high yielding
common stocks can produce above-average returns while lowering risk and
preserving capital.
The chart below depicts a hypothetical $10,000 investment in SGF and several
security indices. The U.S. Securities and Exchange Commission requires that
this chart include a "broad-based" index like the S&P 500 Index. However, the
characteristics of the securities held in the SGF portfolio do not directly
compare to the characteristics of the securities that make up the S&P 500
Index. In order to provide a more direct comparison we have also included the
S&P/BARRA Value Index. The member firms of this index are more comparable to
current and historical holdings of the SGF portfolio. Our goal is to provide a
clear picture of the Fund's performance relative to other relevant benchmarks
so that investors can make accurate comparisons to other investment
opportunities.
From an overall equity universe of more than 2,500 companies, Stratton
Management Co. screens down to about 200 companies by selecting stocks with a
market capitalization of over $500 million with attractive valuation
characteristics and strong earnings prospects. Additionally, Stratton
Management Co. reviews common stock yield and yield related characteristics,
such as dividend growth rates and dividend coverage. The next step in the
process involves rigorous fundamental analysis of important parameters such as
earnings, cash flow, relative industry competitive position, and management
strengths. In this manner, SGF's buy candidate list is reduced to less than 40
stocks. These stocks are then available for addition to the Fund. The final
selection of stocks for the portfolio of SGF is made by James W. Stratton, who
has served as portfolio manager for more than 25 years. In his absence, a back-
up manager, Gerard E. Heffernan, serves.
The primary investment characteristics of the portfolio are as follows:
approximately 30 to 40 companies will be held; volatility as measured by the
Beta of the stocks should be below average; the average portfolio yield should
exceed the yield of the S&P 500 Index.
[CHART APPEARS HERE]
Label A B C
- ---------------------------------------------------------
Label SGF S&P 500 S&P/BARRA Val
- ---------------------------------------------------------
1 1989 10000 10000 10000
2 1990 9328 9709 9315
3 1991 11397 12671 11417
4 1992 12162 13633 12618
5 1993 12941 15009 14966
6 1994 13871 15201 14871
7 1995 19097 20906 20372
8 1996 21804 25712 24854
9 1997 29667 34286 32306
10 1998 33066 44082 37047
11 1999 29994 53350 41760
AVERAGE ANNUAL TOTAL RETURN
1 Year 5 Year 10 Year
(9.29)% 16.68% 11.61%
Past performance is not predictive of future performance.
Returns shown include the reinvestment of all dividends and other
distributions. Investment return and principal value will fluctuate, so that
your shares, when redeemed, may be worth more or less than their original
cost.
* The S&P 500 Index is a widely recognized, unmanaged index of 500 common
stocks which are generally representative of the U.S. stock market as a whole.
** The S&P/BARRA Value Index is an unmanaged index comprised of securities in
the S&P 500 Index that have a lower than average price-to-book ratio.
8
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
Under normal conditions, Stratton Monthly Dividend REIT Shares will invest at
least 65% of its assets in the equity securities of Real Estate Investment
Trusts ("REITs"). The remaining 35% of its assets may be invested, though it is
not required, in real estate related companies or in any other U.S. companies.
REITs own income producing commercial real estate properties such as apartment
complexes, health care facilities, shopping centers, regional malls, office
buildings, hotels, industrial buildings, and storage facilities.
The chart below depicts a hypothetical $10,000 investment in SMDS and several
security indices. The U.S. Securities and Exchange Commission requires that
this chart include a "broad-based" index like the S&P 500 Index. However, the
characteristics of the securities held in the SMDS portfolio do not directly
compare to the characteristics of the securities that make up the S&P 500
Index. SMDS must invest at least 65% of the Fund's assets in REITs. Under
normal conditions, 80% of the Fund's assets are invested in REITs. There are no
REITs in the S&P 500 Index. In order to provide a more direct comparison the
NAREIT Equity Index is also included. The goal is to provide a clear picture of
the Fund's performance relative to other relevant benchmarks so that investors
can make accurate comparisons to other investment opportunities. Investors
should remember that a high rate of return from dividend and interest income is
at the forefront of SMDS' investment objective, with growth of capital as a
secondary goal.
From an overall equity universe of more than 2,500 companies, Stratton
Management Co., screens down to about 100 companies by selecting stocks which
possess a dividend yield of at least 6%. The second screen then reduces that
universe to approximately 60 stocks by measuring additional yield
characteristics such as dividend growth rates and dividend coverage of
companies that also operate within the real estate industry. The portfolio
contains approximately 30 to 40 companies that meet these tests. Fundamental
security analysis is applied to those companies on a continuing basis. The
final selection of stocks for the portfolio of SMDS is made by James W.
Stratton, who has served as portfolio manager of the Fund for over nineteen
years. In his absence, John A. Affleck serves as a back-up portfolio manager.
Research and analysis of the Fund's REIT holdings is performed by James A.
Beers, Vice President of Mutual Funds.
The volatility of the portfolio as measured by the Beta of the stocks is
considerably below average when compared to other stock mutual funds. By
combining high dividend yields and lower than average price volatility, the
Fund tries to produce good relative performance in up markets and above average
performance in down markets.
[CHART APPEARS HERE]
Label A B c
- --------------------------------------------------------------------
Label SMDS NAREIT EQUITY S&P 500
- --------------------------------------------------------------------
1 1989 1000 10000 10000
2 1990 9617 8465 9709
3 1991 12993 11486 12671
4 1992 14345 13162 13633
5 1993 15292 15749 15009
6 1994 13437 16249 15201
7 1995 16588 18729 20906
8 1996 18012 25335 25712
9 1997 21269 30467 34286
10 1998 18769 25135 44082
11 1999 17596 23974 53350
AVERAGE ANNUAL TOTAL RETURN
1 Year 5 Year 10 Year
(6.25)% 5.54% 5.81%
Past performance is not predictive of future performance.
Returns shown include the reinvestment of all dividends and other
distributions. Investment return and principal value will fluctuate, so that
your shares, when redeemed, may be worth more or less than their original
cost.
* The NAREIT Equity Index is an unmanaged index comprised of 176 real estate
investment trusts.
** The S&P 500 index is a widely recognized, unmanaged index of 500 common
stock which are generally representative of the U.S. stock market as a
whole.
9
<PAGE>
STRATTON SMALL-CAP VALUE FUND
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
Stratton Small-Cap Value Fund's investment philosophy is to achieve both
dividend income and capital appreciation. Under normal market conditions, the
Fund will invest at least 80% of its assets in common stock and securities
convertible into common stock of small-cap companies. Small capitalization
companies are defined as companies with market capitalizations, at the time of
purchase, that are below the largest capitalization of the largest company in
the Russell 2000 Index. These common stocks, including dividend-paying common
stocks, are of well-established U.S. companies that Stratton Management Co.
believes are undervalued. Value stocks are stocks that appear to be under-
priced based on traditional measures such as lower price-to-earnings ratios and
price-to-book ratios.
Stratton Management Co. employs a three-step process that focuses on a stock's
fundamental valuation, earnings projections and, as a confirming factor,
relative price strength. Fundamental valuation is the largest component of the
process and takes into consideration both a company's valuation relative to its
peers and its valuation relative to its private market value. Stratton
Management Co. believes that undervalued companies with good earnings prospects
have superior appreciation potential with reasonable levels of risk. The
portfolio contains approximately 60 companies that meet these criteria.
Fundamental security analysis is applied to those companies on a continuing
basis. The final decision to buy or sell stocks for the portfolio of SSCV is
made by Frank H. Reichel, III and James W. Stratton.
Securities in the portfolio that Stratton Management Co. may sell are those
stocks with either poor earnings prospects relative to their peers or stocks
that have excessive valuations relative to their peers. The volatility of the
portfolio, as measured by the Standard Deviation and/or Beta of the stocks, is
considerably below that of the average small-cap fund.
[CHART APPEARS HERE]
Label A B
- ----------------------------------------------------------
Label SSCY RUSSELL 2000
- ----------------------------------------------------------
1 4/12/93 10000 10000
2 12/31/93 10754 11663
3 12/31/94 10464 11450
4 12/31/95 13318 14707
5 12/31/96 15311 17133
6 12/31/97 21799 20965
7 12/31/98 19709 20430
8 12/31/99 19320 24774
- ----------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
1 Year 5 Year Since Inception
(1.98)% 13.05% 10.27%
Past performance is not predictive of future performance.
Returns shown include the reinvestment of all dividends and other
distributions. Investment return and principal value will fluctuate, so that
your shares, when redeemed, may be worth more or less than their original
cost.
* The Russell 2000 Index 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. The Russell 2000 is considered an unmanaged index.
10
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 94.4%
Banking/Financial - 18.5%
Amsouth Bancorp.......................................... 20,000 $ 386,250
Comerica, Inc............................................ 22,500 1,050,469
Commerce Bancorp, Inc. (NJ).............................. 56,502 2,284,800
First Union Corp......................................... 51,512 1,690,238
PNC Bank Corp............................................ 40,000 1,780,000
Summit Bancorp, Inc...................................... 30,000 918,750
-----------
8,110,507
-----------
Basic Materials - 2.4%
Alcan Aluminium Ltd...................................... 8,000 329,500
Weyerhaeuser Co.......................................... 10,000 718,125
-----------
1,047,625
-----------
Business Services - 6.0%
Diebold, Inc............................................. 30,000 705,000
Pitney Bowes, Inc........................................ 40,000 1,932,500
-----------
2,637,500
-----------
Capital Goods - 2.4%
Briggs & Stratton Corp................................... 20,000 1,072,500
-----------
Consumer Durables - 7.7%
Armstrong World Industries, Inc.......................... 30,000 1,001,250
Ford Motor Co............................................ 35,000 1,870,312
Whirlpool Corp........................................... 8,000 520,500
-----------
3,392,062
-----------
Consumer Non-Durables - 9.0%
Anheuser-Busch Companies, Inc............................ 30,000 2,126,250
Kimberly-Clark Corp...................................... 28,000 1,827,000
-----------
3,953,250
-----------
Consumer Services - 5.5%
American Express Co...................................... 10,000 1,662,500
H&R Block, Inc........................................... 17,000 743,750
-----------
2,406,250
-----------
Energy - 3.0%
El Paso Energy Corp...................................... 15,000 582,187
USX-Marathon Group....................................... 30,000 740,625
-----------
1,322,812
-----------
Health Care - 10.1%
American Home Products Corp.............................. 35,000 1,380,312
Baxter International, Inc................................ 30,000 1,884,375
Mallinckrodt, Inc........................................ 20,000 636,250
Shared Medical Systems Corp.............................. 10,000 509,375
-----------
4,410,312
-----------
</TABLE>
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
---------- -----------
<S> <C> <C>
Industrial - 5.7%
C&D Technologies, Inc................................... 58,900 $ 2,503,250
-----------
Insurance/Services - 18.4%
American General Corp................................... 47,100 3,573,713
Aon Corp................................................ 33,750 1,350,000
Jefferson-Pilot Corp.................................... 12,500 853,125
Lincoln National Corp................................... 20,000 800,000
Unitrin, Inc............................................ 40,000 1,505,000
-----------
8,081,838
-----------
Retailing - 4.1%
Federated Department Stores, Inc.+...................... 10,000 505,625
The Limited, Inc........................................ 30,000 1,299,375
-----------
1,805,000
-----------
Technology - 1.1%
Micron Technology, Inc.+................................ 6,000 466,500
-----------
Utilities - 0.5%
Entergy Corp............................................ 8,000 206,000
-----------
Total Common Stocks
(cost $25,651,929)..................................... 41,415,406
-----------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM NOTES - 5.0%
U.S. Treasury Bill
2.80%, due 1/06/00 (cost $2,199,144)................... $2,200,000 2,199,144
-----------
Total Investments - 99.4%
(cost $27,851,073*).................................... 43,614,550
Cash and Other Assets
Less Liabilities - 0.6%................................ 250,511
-----------
NET ASSETS - 100.00%.................................... $43,865,061
===========
</TABLE>
- --------
+ Non-income producing security
* Aggregate cost for federal income tax purposes is $27,851,073; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation..................................... $15,924,347
Gross unrealized depreciation..................................... (160,870)
-----------
Net unrealized appreciation...................................... $15,763,477
===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 90.4%
Apartments - 13.0%
Cornerstone Realty Income Trust, Inc..................... 130,000 $ 1,267,500
Gables Residential Trust................................. 100,000 2,400,000
Home Properties of New York, Inc......................... 70,000 1,920,625
Smith (Charles E.) Residential Realty, Inc............... 30,000 1,061,250
Walden Residential Properties, Inc....................... 50,000 1,081,250
-----------
7,730,625
-----------
Diversified - 13.8%
Colonial Properties Trust................................ 107,500 2,492,656
EastGroup Properties, SBI................................ 125,000 2,312,500
Meditrust Corp........................................... 300,000 1,650,000
Pacific Gulf Properties, Inc............................. 85,000 1,721,250
-----------
8,176,406
-----------
Health Care - 8.8%
Health Care Property Investors, Inc...................... 97,500 2,327,812
Health Care REIT, Inc.................................... 130,000 1,966,250
HRPT Properties Trust.................................... 90,000 810,000
Senior Housing Properties Trust.......................... 9,000 111,938
-----------
5,216,000
-----------
Lodging - 16.7%
Equity Inns, Inc......................................... 190,000 1,282,500
FelCor Lodging Trust, Inc................................ 115,000 2,012,500
Hospitality Properties Trust............................. 60,000 1,143,750
Innkeepers USA Trust..................................... 200,000 1,637,500
Jameson Inns, Inc........................................ 160,000 1,130,000
RFS Hotel Investors, Inc................................. 125,000 1,304,688
Winston Hotels, Inc...................................... 175,000 1,421,875
-----------
9,932,813
-----------
Net Lease - 3.9%
Franchise Finance Corp. of America....................... 65,000 1,555,937
Starwood Financial, Inc.................................. 46,000 779,125
-----------
2,335,062
-----------
Office/Industrial - 16.1%
First Industrial Realty Trust, Inc....................... 60,000 1,646,250
Liberty Property Trust................................... 140,000 3,395,000
Mack-Cali Realty Corp.................................... 55,000 1,433,437
ProLogis Trust........................................... 75,000 1,443,750
SL Green Realty Corp..................................... 75,000 1,631,250
-----------
9,549,687
-----------
</TABLE>
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
---------- -----------
<S> <C> <C>
Outlet Centers - 2.1%
Mills Corp.............................................. 68,700 $ 1,228,013
-----------
Regional Malls - 3.6%
Glimcher Realty Trust................................... 165,000 2,124,375
-----------
Shopping Centers - 12.4%
Developers Diversified Realty Corp...................... 80,000 1,030,000
IRT Property Co......................................... 166,000 1,296,875
Mid-Atlantic Realty Trust............................... 230,000 2,314,375
New Plan Excel Realty Trust, Inc........................ 108,000 1,707,750
Western Properties Trust................................ 110,000 1,051,875
-----------
7,400,875
-----------
Total Common Stocks
(cost $64,930,762)..................................... 53,693,856
-----------
PREFERRED STOCKS - 6.1%
Bradley Real Estate, Inc. Conv. Preferred Class A....... 132,380 2,581,410
Kimco Realty Corp. - Depositary Shares Class D.......... 50,000 1,065,625
-----------
Total Preferred Stocks
(cost $4,368,815)...................................... 3,647,035
-----------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM NOTES - 2.4%
American Express Credit Corp.
2.20%, due 01/03/00
(cost $1,399,829)...................................... $1,400,000 1,399,829
-----------
Total Investments - 98.9%
(cost $70,699,406*).................................... 58,740,720
Cash and Other Assets
Less Liabilities - 1.1%................................ 672,358
-----------
NET ASSETS - 100.00%.................................... $59,413,078
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $70,699,406; and net
unrealized depreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation.................................... $ 1,441,469
Gross unrealized depreciation.................................... (13,400,155)
------------
Net unrealized depreciation..................................... $(11,958,686)
============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
- --------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 97.1%
Banking/Financial - 18.2%
American Bank of Connecticut............................. 22,000 $ 532,125
Colonial BancGroup, Inc.................................. 40,000 415,000
Commerce Bancorp, Inc. (NJ).............................. 20,671 835,884
Community Bank Systems, Inc.............................. 17,000 393,125
Conning Corp............................................. 20,800 171,600
Dain Rauscher Corp....................................... 17,000 790,500
Eaton Vance Corp......................................... 26,000 988,000
First Essex Bancorp, Inc................................. 30,000 431,250
First Financial Holdings, Inc............................ 18,000 288,000
Medford Bancorp, Inc..................................... 26,000 432,250
Southwest Securities Group, Inc.......................... 15,620 427,597
United Bankshares, Inc................................... 20,000 477,500
Webster Financial Corp................................... 16,632 391,891
-----------
6,574,722
-----------
Business Services - 7.8%
AAR Corp................................................. 50,000 896,875
Primesource Corp......................................... 90,000 427,500
Schawk, Inc.............................................. 44,300 376,550
True North Communications, Inc........................... 25,000 1,117,188
-----------
2,818,113
-----------
Chemicals - 3.8%
Omnova Solutions, Inc.................................... 15,000 116,250
Primex Technologies, Inc................................. 60,000 1,245,000
-----------
1,361,250
-----------
Consumer Durables - 3.7%
La-Z-Boy, Inc............................................ 25,000 420,312
Polaris Industries, Inc.................................. 25,000 906,250
-----------
1,326,562
-----------
Consumer Non-Durables - 11.1%
Deb Shops, Inc........................................... 40,000 740,000
Glatfelter (P.H.) Co..................................... 20,000 291,250
International Multifoods Corp............................ 30,000 397,500
Owens Corning............................................ 30,000 579,375
Riviana Foods, Inc. (DE)................................. 52,000 923,000
Tasty Baking Co.......................................... 16,575 139,852
Velcro Industries, N.V................................... 76,000 916,750
-----------
3,987,727
-----------
</TABLE>
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
Energy - 6.1%
Mitchell Energy & Development
Corp. Class B........................................... 30,000 $ 646,875
Penn Virginia Corp....................................... 40,000 670,000
Tidewater, Inc........................................... 25,000 900,000
-----------
2,216,875
-----------
Health Care - 5.3%
Morrison Management Specialists, Inc..................... 52,400 1,129,875
Shared Medical Systems Corp.............................. 15,000 764,063
-----------
1,893,938
-----------
Industrial - 19.5%
A.O. Smith Corp.......................................... 30,000 656,250
Commercial Intertech Corp................................ 70,000 892,500
Florida Rock Industries, Inc............................. 35,000 1,205,312
GenCorp, Inc............................................. 15,000 148,125
Greenbrier Companies, Inc................................ 73,000 629,625
Hughes Supply, Inc....................................... 30,000 646,875
LSI Industries, Inc...................................... 55,000 1,189,375
Oshkosh Truck Corp. Class B.............................. 30,000 879,375
Republic Group, Inc...................................... 45,000 680,625
TB Wood's Corp........................................... 12,000 102,000
-----------
7,030,062
-----------
Insurance/Services - 3.3%
Blanch (E.W.) Holdings, Inc.............................. 13,000 796,250
Donegal Group, Inc....................................... 61,299 390,781
-----------
1,187,031
-----------
Real Estate - 0.7%
Pacific Gulf Properties, Inc............................. 13,000 263,250
-----------
Technology - 15.9%
Bel Fuse, Inc. Class B................................... 48,500 1,160,969
Belden, Inc.............................................. 20,000 420,000
Foster Wheeler Corp...................................... 40,000 355,000
National Data Corp....................................... 30,000 1,018,125
Park Electrochemical Corp................................ 15,000 398,438
Quixote Corp............................................. 80,000 1,220,000
Technitrol, Inc.......................................... 26,200 1,165,900
-----------
5,738,432
-----------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999 (continued)
- --------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
Utilities - 1.7%
Energen Corp............................................. 15,000 $ 270,937
Minnesota Power, Inc..................................... 20,000 338,750
-----------
609,687
-----------
Total Common Stocks
(cost $29,652,447)...................................... 35,007,649
-----------
<CAPTION>
Principal
Amount
---------
<S> <C> <C>
SHORT-TERM NOTES - 2.1%
U.S. Treasury Bill
2.75%, due 01/06/00
(cost $749,713)......................................... $750,000 749,714
-----------
Total Investments - 99.2%
(cost $30,402,160*)..................................... 35,757,363
Cash and Other Assets
Less Liabilities - 0.8%................................. 296,655
-----------
NET ASSETS - 100.00%..................................... $36,054,018
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $30,402,160; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation..................................... $ 8,378,461
Gross unrealized depreciation..................................... (3,023,258)
-----------
Net unrealized appreciation...................................... $ 5,355,203
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
SGF SMDS SSCV
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities at value
(cost $27,851,073, $70,699,406, and
$30,402,160, respectively) (Note 1)... $43,614,550 $58,740,720 $35,757,363
Cash................................... 355,451 61,978 318,830
Dividends and interest receivable...... 42,835 670,007 87,074
Receivable for shares sold............. 15,000 31,500 --
Receivable for securities sold......... 752,219 -- --
----------- ----------- -----------
Total Assets......................... 44,780,055 59,504,205 36,163,267
----------- ----------- -----------
LIABILITIES:
Accrued expenses and other
liabilities........................... 37,539 61,117 26,962
Payable for shares redeemed............ 7,930 30,010 82,287
Payable for investment securities
purchased............................. 869,525 -- --
----------- ----------- -----------
Total Liabilities.................... 914,994 91,127 109,249
----------- ----------- -----------
NET ASSETS:
Applicable to 1,500,592, 2,792,429, and
1,855,051 shares outstanding,
respectively/1...................../.. $43,865,061 $59,413,078 $36,054,018
=========== =========== ===========
Net asset value, offering and redemp-
tion price per share.................. $ 29.23 $ 21.28 $ 19.44
=========== =========== ===========
SOURCE OF NET ASSETS:
Paid-in capital........................ $25,456,613 $87,056,440 $30,807,102
Undistributed net investment income.... 8,427 -- 16,103
Accumulated net realized gain (loss) on
investments........................... 2,636,544 (15,684,676) (124,390)
Net unrealized appreciation (deprecia-
tion) of investments.................. 15,763,477 (11,958,686) 5,355,203
=========== =========== ===========
Net Assets........................... $43,865,061 $59,413,078 $36,054,018
=========== =========== ===========
</TABLE>
- --------
/1/SGF: $.10 par value, 10,000,000 shares authorized; SMDS: $1.00 par value,
10,000,000 shares authorized; SSCV: $.001 par value, 200,000,000 shares
authorized.
See accompanying notes to financial statements.
15
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SGF SMDS SSCV
----------- ----------- -----------
<S> <C> <C> <C>
INCOME:
Dividends (net of foreign withholding
tax of $180 for SGF)................. $ 1,170,234 $ 5,317,800 $ 880,735
Interest.............................. 130,697 177,165 68,580
----------- ----------- -----------
Total Income........................ 1,300,931 5,494,965 949,315
----------- ----------- -----------
EXPENSES:
Accounting/Pricing services fees...... 32,643 35,415 31,507
Administration services fees.......... 32,224 40,578 23,881
Advisory fees (Note 2)................ 402,982 431,511 229,118
Audit fees............................ 20,700 23,487 15,400
Custodian fees........................ 16,478 22,585 15,798
Directors' fees....................... 15,135 19,632 11,107
Legal fees............................ 9,919 12,645 7,108
Miscellaneous fees.................... 8,679 10,961 6,018
Printing and postage fees............. 25,249 33,115 17,669
Registration fees..................... 20,813 20,090 23,550
Shareholder services fees............. 37,645 121,837 48,592
Taxes other than income taxes......... 4,225 5,425 3,050
----------- ----------- -----------
Total Expenses...................... 626,692 777,281 432,798
----------- ----------- -----------
Net Investment Income............. 674,239 4,717,684 516,517
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on
investments.......................... 3,251,257 (2,505,510) 1,034,763
Net decrease in unrealized
appreciation on investments.......... (9,385,310) (6,710,730) (2,192,714)
----------- ----------- -----------
Net loss on investments............... (6,134,053) (9,216,240) (1,157,951)
----------- ----------- -----------
Net decrease in net assets resulting
from operations.................... $(5,459,814) $(4,498,556) $ (641,434)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
-------------------------- --------------------------
Year Ended Year Ended Year Ended Year Ended
12/31/99 12/31/98 12/31/99 12/31/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 674,239 $ 998,604 $ 4,717,684 $ 5,360,764
Net realized gain
(loss) on
investments........... 3,251,257 4,896,340 (2,505,510) 3,596,392
Net increase (decrease)
in unrealized
appreciation of
investments........... (9,385,310) 687,299 (6,710,730) (19,590,880)
------------ ------------ ------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ (5,459,814) 6,582,243 (4,498,556) (10,633,724)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income ($0.41 and
$0.59 per share,
respectively, for SGF,
$1.55 and $1.65,
respectively, for
SMDS)................. (665,812) (1,034,331) (4,717,684) (5,360,764)
From realized gains on
investments ($1.33 and
$2.43 per share,
respectively, for
SGF).................. (2,250,632) (4,304,696) -- --
In excess of net
investment income
($0.00 and $0.40 per
share for SMDS)....... -- -- -- (1,299,867)
Return of capital
($0.49 and $0.00 per
share for SMDS)....... -- -- (1,514,708) --
CAPITAL SHARE
TRANSACTIONS:/2/ (11,081,854) 1,902,474 (9,792,276) (4,725,567)
------------ ------------ ------------ ------------
Total increase
(decrease) in net
assets................ (19,458,112) 3,145,690 (20,523,224) (22,019,922)
NET ASSETS:
Beginning of period.... 63,323,173 60,177,483 79,936,302 101,956,224
------------ ------------ ------------ ------------
End of period
(including
undistributed net
investment income of
$8,427 and $0,
respectively, for SGF,
and $0 and $0,
respectively, for
SMDS)................. $ 43,865,061 $ 63,323,173 $ 59,413,078 $ 79,936,302
============ ============ ============ ============
<CAPTION>
SSCV
--------------------------
Year Ended Year Ended
12/31/99 12/31/98
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income.. $ 516,517 $ 388,213
Net realized gain
(loss) on
investments........... 1,034,763 (1,159,153)
Net decrease in
unrealized
appreciation of
investments........... (2,192,714) (4,996,458)
------------ ------------
Net decrease in net
assets resulting from
operations............ (641,434) (5,767,398)
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income ($0.27 and
$0.18 per share,
respectively, for
SSCV)................. (501,810) (410,582)
From realized gains on
investments ($0.00 and
$0.04 per share,
respectively, for
SSCV)................. -- (96,899)
CAPITAL SHARE
TRANSACTIONS:/2/ (5,592,043) 9,687,236
------------ ------------
Total increase
(decrease) in net
assets................ (6,735,287) 3,412,357
NET ASSETS:
Beginning of period.... 42,789,305 39,376,948
------------ ------------
End of period
(including
undistributed net
investment income of
$16,103 and $1,396,
respectively, for
SSCV)................. $ 36,054,018 $ 42,789,305
============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
-----------------------------------------------
Year Ended 12/31/99 Year Ended 12/31/98
---------------------- -----------------------
Shares Value Shares Value
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................. 119,531 $ 3,966,635 318,761 $ 11,325,835
Shares reinvested from net in-
vestment income and capital
gains distributions.......... 82,967 2,568,964 140,694 4,684,002
-------- ------------ --------- ------------
202,498 6,535,599 459,455 16,009,837
Shares redeemed............... (560,493) (17,617,453) (403,301) (14,107,363)
-------- ------------ --------- ------------
Net increase (decrease)..... (357,995) $(11,081,854) 56,154 $ 1,902,474
======== ============ ========= ============
<CAPTION>
SMDS
-----------------------------------------------
Year Ended 12/31/99 Year Ended 12/31/98
---------------------- -----------------------
Shares Value Shares Value
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................. 201,707 $ 4,798,470 373,202 $ 9,611,674
Shares reinvested from net in-
vestment income.............. 164,663 3,826,361 141,500 3,873,947
-------- ------------ --------- ------------
366,370 8,624,831 514,702 13,485,621
Shares redeemed............... (799,368) (18,417,107) (660,216) (18,211,188)
-------- ------------ --------- ------------
Net (decrease).............. (432,998) $ (9,792,276) (145,514) $ (4,725,567)
======== ============ ========= ============
<CAPTION>
SSCV
-----------------------------------------------
Year Ended 12/31/99 Year Ended 12/31/98
---------------------- -----------------------
Shares Value Shares Value
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares issued................. 279,605 $ 5,275,738 1,071,101 $ 24,120,897
Shares reinvested from net
investment income and capital
gains distributions.......... 19,978 383,537 18,664 402,242
-------- ------------ --------- ------------
299,583 5,659,275 1,089,765 24,523,139
Shares redeemed............... (572,731) (11,251,318) (713,619) (14,835,903)
-------- ------------ --------- ------------
Net increase (decrease)..... (273,148) $ (5,592,043) 376,146 $ 9,687,236
======== ============ ========= ============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1999
Note 1. - Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT Shares, Inc. ("SMDS") and The Stratton
Funds, Inc. The Stratton Funds, Inc. (the "Company") operates as a series,
consisting of Stratton Small-Cap Value Fund ("SSCV"). The Funds and Company
are registered under the Investment Company Act of 1940, as amended, as open-
end management investment companies. The Funds offer diversified portfolios.
Investments in the Funds normally consist of common stock and securities
convertible into or exchangeable into common stock. Each Fund has specific
investment objectives:
The objective of SGF is to seek possible growth of capital with current income
from interest and dividends as a secondary objective.
The objective of SMDS is to seek a high rate of return from dividend and
interest income. Under normal conditions, at least 65% of the Fund's total
assets will be in securities of real estate investment trusts.
The objective of SSCV is to achieve both dividend income and capital
appreciation through investment in the securities of small-cap companies which
have certain risks associated with them. First and foremost is their greater
earnings and price volatility in comparison to large companies. Earnings risk
is partially due to the undiversified nature of small company business lines.
Due to the inherent risk of investments there can be no assurance that the
objectives of the Funds will be met.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale price
on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last
reported bid and asked prices. Securities traded in the over-the-
counter market are valued at the last sale price, if carried in the
National Market Issues section by NASDAQ; other over-the-counter
securities are valued at the mean between the closing bid and asked
prices obtained from a principal market maker. All other securities
and assets are valued at their fair value as determined in good
faith by the Boards of Directors of the Funds, which may include the
amortized cost method for securities maturing in sixty days or less
and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income to their
shareholders. Therefore, no federal income tax provision is
required. SMDS has a capital loss carryover available to offset
future capital gains, if any, of approximately $15,684,000 of which
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
December 31, 1999
$7,681,000 expires in 2000, $4,331,000 expires in 2003, $1,167,000
expires in 2005 and $2,505,000 expires in 2007. SSCV has a capital
loss carryover available to offset future capital gains, if any, of
approximately $124,000, which expires in 2006.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
E. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
Distributions to Shareholders - Distributions to shareholders are recorded on
the ex-dividend date. The character of distributions paid to shareholders is
determined by reference to income as determined for income tax purposes, after
giving effect to temporary differences between the financial reporting and tax
basis of assets and liabilities, rather than income as determined for
financial reporting purposes.
SMDS has made certain investments in real estate investment trusts ("REITs")
which pay dividends to their shareholders based upon available funds from
operations. It is quite common for these dividends to exceed the REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends to include the gross
dividends from such REITs in its monthly distributions to its shareholders
and, accordingly, a portion of the Fund's distributions may also be designated
as a return of capital.
Note 2. - During the year ended December 31, 1999, the Funds paid advisory
fees to Stratton Management Company, (the "Advisor") as follows: SGF--
$402,982; SMDS--$431,511; SSCV--$229,118. Management services are provided by
the Advisor under agreements whereby the Advisor furnishes all investment
advice, office space and facilities to the Funds and pays the salaries of the
Funds' officers and employees, except to the extent that those employees are
engaged in administrative and accounting services activities. In return for
these services, SGF pays to the Advisor a monthly fee of 3/48 of 1% (annually
3/4 of 1%) of the daily net asset value of the Fund for such month. SMDS pays
a monthly fee at an annual rate of 5/8 of 1% of the daily net asset value of
the Fund for such month. The Advisor has voluntarily agreed to waive $15,000
annually of the compensation due it under the agreement with each of these
Funds to offset a portion of the cost of certain administrative
responsibilities delegated to PFPC Inc.
SSCV pays a monthly fee at an annual rate of 0.75% of the average daily net
asset value of the Fund for such month, subject to a performance adjustment.
The performance adjustment will be calculated at the end of each month based
upon a rolling 24 month performance period. The performance adjustment is
added to or subtracted from the basic investment advisory fee. The Fund's
gross performance is compared with the performance of the Frank Russell 2000
Index, ("Russell 2000"), a widely recognized unmanaged index of common stock
prices, over a rolling 24-month performance period. The Russell 2000 is
composed of the smallest 2000 stocks in the Frank Russell annual ranking of
3000 common stocks by market capitalization. The Russell 2000 is a widely
recognized common stock index of small to medium size companies. Total return
performance on the Russell 2000 includes dividends and is reported monthly on
a market capitalization-weighted basis. When the Fund performs better
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
December 31, 1999
than the Russell 2000, it pays the Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of the
difference in performance between the Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the basic fee. The
maximum annualized performance adjustment rate is +/- 0.50% of average net
assets which would be added to or deducted from the advisory fee if the Fund
outperformed or under performed the Russell 2000 by 5.00%. The performance fee
adjustment for the year ended December 31, 1999 caused the advisory fee to
decrease by $62,604.
Certain officers and Directors of the Funds are also officers and directors of
the Advisor. None of the Funds' officers receive compensation from the Funds.
Pursuant to an agreement between The Bank of New York (the "Custodian"), and
PFPC Inc., the Custodian reallows a portion of its custody fees to PFPC Inc.
for certain services delegated to PFPC Inc. The amount is not readily
determinable. Effective December 1, 1999, Provident Distributors, Inc. ("PDI")
serves as the Funds' principal underwriter and receives no fees for services
in assisting in sales of the Funds' shares but does receive an annual fee of
$3,000 for each Fund for its services in connection with the registration of
the Funds' shares under state securities laws.
Note 3. - Purchases and sales of investment securities, excluding short-term
notes, for the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCV
----------- ----------- -----------
<S> <C> <C> <C>
Cost of purchases........................... $21,029,098 $ 9,436,657 $16,656,401
Proceeds of sales........................... 33,271,488 17,496,477 22,896,886
</TABLE>
Note 4. - Subsequent Event - On December 14, 1999 the Board of Directors
approved a change to the name of Stratton Small-Cap Yield Fund to Stratton
Small-Cap Value Fund.
21
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Growth Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Years Ended December 31, 7 Months Years Ended May 31,
----------------------------- Ended --------------------
1999 1998 1997 12/31/96 1996 1995
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65
-------- -------- -------- ------- --------- ---------
Income From Investment
Operations
Net investment
income............... 0.416 0.570 0.550 0.312 0.556 0.537
Net gains (losses) on
securities (both
realized and
unrealized).......... (3.516) 3.130 8.900 1.298 5.759 2.978
-------- -------- -------- ------- --------- ---------
Total from
investment
operations......... (3.100) 3.700 9.450 1.610 6.315 3.515
-------- -------- -------- ------- --------- ---------
Less Distributions
Dividends (from net
investment income)... (0.410) (0.590) (0.540) (0.580) (0.540) (0.540)
Distributions (from
capital gains)....... (1.330) (2.430) (2.520) (1.210) (0.945) (1.275)
-------- -------- -------- ------- --------- ---------
Total
distributions...... (1.740) (3.020) (3.060) (1.790) (1.485) (1.815)
-------- -------- -------- ------- --------- ---------
Net Asset Value, End of
Period................. $ 29.23 $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35
======== ======== ======== ======= ========= =========
Total Return............ (9.29%) 11.46% 36.06% 6.40% 29.62% 18.61%
Ratios/Supplemental Data
Net assets, end of
period (in 000's).... $ 43,865 $ 63,323 $ 60,177 $44,801 $ 42,880 $ 31,719
Ratio of expenses to
average net assets... 1.13% 1.07% 1.11% 1.17%/1/ 1.16% 1.31%
Ratio of net
investment income to
average net assets... 1.21% 1.60% 1.87% 2.08%/1/ 2.28% 2.70%
Portfolio turnover
rate................. 39.81% 38.02% 34.40% 20.32% 15.41% 42.54%
</TABLE>
- --------
/1/Annualized
See accompanying notes to financial statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Years Ended December 31, 11 Months Years Ended January 31,
---------------------------- Ended ------------------------
1999 1998 1997 12/31/96 1996 1995
------- ------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69
------- ------- -------- -------- ----------- -----------
Income From Investment
Operations
Net investment income.. 1.550 1.650 1.540 1.630 1.880 1.940
Net gains (losses) on
securities (both
realized and
unrealized)........... (3.010) (5.070) 3.200 0.160 2.600 (3.870)
------- ------- -------- -------- ----------- -----------
Total from investment
operations.......... (1.460) (3.420) 4.740 1.790 4.480 (1.930)
------- ------- -------- -------- ----------- -----------
Less Distributions
Dividends (from net
investment income).... (1.550) (1.650) (1.540) (1.630) (1.890) (1.920)
Distributions (in
excess of net
investment income).... -- (0.400) -- (0.130) (0.030) --
Return of capital...... (0.490) -- (0.380) -- -- --
------- ------- -------- -------- ----------- -----------
Total distributions.. (2.040) (2.050) (1.920) (1.760) (1.920) (1.920)
------- ------- -------- -------- ----------- -----------
Net Asset Value, End of
Period.................. $ 21.28 $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84
======= ======= ======== ======== =========== ===========
Total Return............. (6.25%) (11.75%) 18.09% 7.12% 18.98% (6.57%)
Ratios/Supplemental Data
Net assets, end of
period (in 000's)..... $59,413 $79,936 $101,956 $103,780 $ 129,267 $ 134,066
Ratio of expenses to
average net assets.... 1.09% 1.02% 1.02% 1.02%/1/ 0.99% 1.08%
Ratio of net investment
income to average net
assets................ 6.61% 5.95% 5.48% 6.94%/1/ 7.42% 7.71%
Portfolio turnover
rate.................. 13.94% 18.89% 42.47% 69.19% 53.30% 39.50%
</TABLE>
/1/Annualized
- --------
See accompanying notes to financial statements.
23
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Years Ended December 31, 9 Months Years Ended March 31,
-------------------------------- Ended ----------------------
1999 1998 1997/2/ 12/31/96/2/ 1996/2/ 1995/2/
-------- -------- --------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97
-------- -------- -------- ------- ---------- ----------
Income from Investment
Operations
Net investment
income............... 0.278 0.170 0.210 0.260 0.330 0.290
Net gains (losses) on
securities
(both realized and
unrealized).......... (0.678) (2.310) 6.800 1.740 3.040 (0.020)
-------- -------- -------- ------- ---------- ----------
Total from
investment
operations......... (0.400) (2.140) 7.010 2.000 3.370 0.270
-------- -------- -------- ------- ---------- ----------
Less Distributions
Dividends (from net
investment income)... (0.270) (0.180) (0.200) (0.270) (0.330) (0.300)
Distributions (from
capital gains)....... -- (0.040) (1.130) (0.920) -- --
-------- -------- -------- ------- ---------- ----------
Total
distributions...... (0.270) (0.220) (1.330) (1.190) (0.330) (0.300)
-------- -------- -------- ------- ---------- ----------
Net Asset Value, End of
Period................. $ 19.44 $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94
======== ======== ======== ======= ========== ==========
Total Return............ (1.98%) (9.58%) 42.37% 12.84% 26.18% 2.09%
Ratios/Supplemental Data
Net assets, end of
period (in 000's).... $ 36,054 $ 42,789 $ 39,377 $21,691 $ 19,592 $ 14,058
Ratio of expenses to
average net assets... 1.08% 1.56% 1.62% 1.29%/1/ 1.46% 2.12%
Ratio of net
investment income
to average net
assets............... 1.29% 0.80% 1.09% 2.03%/1/ 2.28% 2.36%
Portfolio turnover
rate................. 43.44% 35.74% 26.27% 35.86% 33.50% 30.20%
</TABLE>
- --------
/1/Annualized
/2/Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997
See accompanying notes to financial statements.
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the Stratton Mutual Funds:
We have audited the accompanying statements of assets and liabilities of
Stratton Growth Fund, Inc., Stratton Monthly Dividend REIT Shares, Inc. and
Stratton Small-Cap Value Fund, a series of shares of The Stratton Funds, Inc.,
including the schedules of investments, as of December 31, 1999, the related
statements of operations for the year then ended, and the statements of
changes in net assets and the financial highlights for each of the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express our
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Stratton Growth Fund, Inc., Stratton Monthly Dividend REIT Shares, Inc., and
Stratton Small-Cap Value Fund, as of December 31, 1999, the results of their
operations for the year then ended, and the changes in their net assets and
the financial highlights for each of the periods indicated thereon, in
conformity with generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, PA
January 21, 2000
25
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
Minimum Investment
The minimum amount for the initial purchase of shares of the Funds is $2,000
each. Subsequent purchases may be made in amounts of $100 or more.
Telephone Exchange
Shares of each Fund may be exchanged for shares of the other Funds, provided
such other shares may legally be sold in the state of the investor's
residence. Each Fund has a distinct investment objective which should be
reviewed before executing any exchange of shares.
Dividends and Distributions
SGF pays semi-annual dividends from net investment income. SMDS pays monthly
dividends from net investment income. SMDS has made certain investments in
REITs which pay dividends to their shareholders based on available funds from
operations. It is quite common for these dividends to exceed a REIT's taxable
earnings and profits resulting in the excess portion of such dividends being
designated as a return of capital. SMDS intends to include the gross dividends
from such REITs in its monthly distributions to its shareholders and,
accordingly, a portion of the Fund's distributions may be reclassified as a
return of capital at the end of the fiscal year. Such information will be
mailed to shareholders on I.R.S. Form 1099DIV. SSCV pays annual dividends from
net investment income. Each Fund makes distributions of capital gains, if any,
at least annually. Dividends and distributions may be reinvested in additional
shares of the Funds.
Automatic Investment Plan
Shares of a Fund may be purchased through our "Automatic Investment Plan" (the
"Plan"), (See item 6 of the New Account Application attached to the back of
the Prospectus). The Plan provides a convenient method by which investors may
have monies debited directly from their checking, savings or bank money market
accounts for investment in a Fund. The minimum investment pursuant to this
Plan is $100 per month. The account designated will be debited in the
specified amount, on the date indicated, and Fund shares will be purchased.
Only an account maintained at a domestic financial institution which is an
Automated Clearing House member may be so designated. A Fund may alter, modify
or terminate this Plan at any time.
Share Price Information
The daily share price of the Funds can be found in the mutual fund section of
most major daily newspapers as well as The Wall Street Journal and Investor's
Daily, where the Funds are listed under Stratton Funds. The Funds' stock
ticker symbols for SGF, SMDS and SSCV are STRGX, STMDX and STSCX,
respectively.
Retirement Plans
Stratton Mutual Funds has Defined Contribution Plans, Individual Retirement
Accounts and 403(b)(7) Retirement Plans available at no minimum investment.
26
<PAGE>
SHAREHOLDER INFORMATION (continued)
- -------------------------------------------------------------------------------
General Information on the Funds
Requests for a Prospectus, financial information, past performance figures and
an application, should be directed to the Funds' 800 number (800-634-5726).
Existing Shareholder Account Services
Shareholders seeking information regarding their accounts and other fund
services, and shareholders executing redemption requests, should call or write
the transfer agent and dividend paying agent:
PFPC Inc.
211 South Gulph Road, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600 . 800-472-4266
Investment Portfolio Activities
Questions regarding any of the Funds' investment portfolios should be directed
to the Funds' Investment Advisor:
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
Additional Purchases ONLY to existing accounts should be mailed to a separate
lock box unit:
c/o PFPC Inc.
P. O. Box 61767, King of Prussia, PA 19406-8767
Distributed by Provident Distributors, Inc., 3200 Horizon Drive, King of
Prussia, PA 19406-0903--Date of first use February 2000. This
report is to be preceded or accompanied by a prospectus.
All indices are unmanaged groupings of stock that
are not available for investment.
27
<PAGE>
DIVIDEND NOTICES
- --------------------------------------------------------------------------------
December 31, 1999
Note the following information is required by section 854(b)(2) of the Internal
Revenue Code.
<TABLE>
<CAPTION>
Percentage of Ordinary Dividend
Income Qualifying for the
70% Corporate Dividend
Received Deduction
-------------------------------
<S> <C>
Stratton Growth Fund, Inc...................... 100%
Stratton Monthly Dividend REIT Shares, Inc..... 0%
Stratton Small-Cap Value Fund.................. 100%
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C> <C>
Lynne M. Cannon James W. Stratton James A. Beers
Chairman Vice President
John J. Lombard, Jr.
John A. Affleck Joanne E. Kuzma
Douglas J. MacMaster, Jr. President, Stratton Monthly Vice President
Dividend REIT Shares
Henry A. Rentschler Patricia L. Sloan
Gerard E. Heffernan Secretary & Treasurer
Merritt N. Rhoad, Jr. President
Stratton Growth Fund Brigid E. Hummel
Richard W. Stevens Assistant Secretary &
Frank H. Reichel, III Treasurer
James W. Stratton President
Stratton Small-Cap Value Fund
</TABLE>
INVESTMENT ADVISOR
Stratton Management Company
Plymouth Meeting Executive Campus, 610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050, Telephone: 610-941-0255
TRANSFER AGENT & DIVIDEND PAYING AGENT
PFPC Inc.
P.O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600, 800-472-4266
INDEPENDENT ACCOUNTANTS
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103-2108
Visit the Stratton Mutual Funds web site at
http://www.strattonmgt.com
STRATTON
Mutual Funds 100% No Load
Stability.Strategy.Success Mutual Fund
Council
