<PAGE>
THIRD
QUARTER
REPORT
September 30, 2000
[LOGO OF STRATON MUTUAL FUNDS]
<PAGE>
DEAR FELLOW SHAREHOLDER:
The value style of our three portfolios performed well in the third quarter.
Since the Stock Market turned toward Value and away from Technology on March
10, 2000, 299 of the S&P 500 companies have outperformed the S&P Index; 54 of
72 technology companies have under-performed the Index. Defensive industry
sectors continue to outperform the S&P 500 average. The best performing sectors
in the nine months of 2000 were Utilities (+48%), Health Care (+21%),
Financials (+21%), and Energy (+11%). Reflecting the Federal Reserve Open
Market Committee's interest rate policy producing a slowdown in the economy,
the weakest sectors were Basic Materials (-31%), Communication Services (-25%),
Consumer Cyclicals (-23%), and Technology (-11%).
The Fed was neutral in the third quarter. Evidence continues to mount that the
economy is slowing both domestically and globally. The impact of higher energy
prices is the same as a tax increase to consumers; it draws spendable income
out of their pockets. The decline in the highly visible Technology sectors of
the world stock markets is also affecting confidence; the Fed has to watch that
their targeted "soft landing" does not develop into a "hard landing." Clearly,
there is a heavy amount of debt owed by both consumers and businesses; dealing
with excess debt can depress future spending plans.
Energy price increases became the number one economic concern during the third
quarter. In September, prices for crude oil spiked up to $37 per barrel and
natural gas rose to $5.50 per million cubic feet. This will have a depressing
effect on consumers this winter as heating bills may rise 40% to 60% if we have
a return to normal weather. The outlook for the Energy industry is very
positive long-term and this has not yet been reflected in their stock prices.
At the end of the quarter, the Federal Government authorized the release of 30
million barrels of oil from the Strategic Petroleum Reserves; while this may
help cool the psychology of rising oil prices, it does not address the lack of
growth in either refining capacity or natural gas production.
The number of early warnings of disappointing earnings by corporations
increased this quarter. Management blamed their problems on four different
factors:
. Higher energy prices
. Higher interest rates
. A lower exchange rate for the Euro into Dollars
. A slowdown in capital spending and retailer inventories
Earnings shortfalls are the natural results of a slowing economy resulting from
a tighter Fed policy. The Stock Market has "zero tolerance" for any company
that misses its earnings forecast.
The relative performance of the Stratton Mutual Funds in the quarter has
attracted additional investments and new investors. We welcome you, and invite
you to speak with our management team when you have questions concerning our
investment policies. You can also find more information about our Funds on our
web site, www.strattonmgt.com.
-------------------
Sincerely yours,
/s/ James W. Stratton
James W. Stratton
Chairman
November 6, 2000
<PAGE>
STRATTON GROWTH FUND
-------------------------------------------------------------------------------
The third quarter 2000 provided relatively good performances for the Stratton
Growth Fund. We are benefiting significantly from the shift toward the value
sector of the Stock Market and away from the high price-to-earnings ratio,
high expectations technology areas of NASDAQ. The trends that were put in
place on March 10, 2000 are clearly benefiting the Fund and its portfolio.
Our activity during the quarter was limited to four sales of holdings and no
new purchases. As a result, our portfolio is led by 20.0% in the Banking and
Financial area and another 15.7% in Insurance and Services. Combining these,
we have 35.7% in the Financial Services industry. We have been building up our
position in energy and it represented 10.5% of the portfolio at the quarter
end. Since then, we have increased it significantly above that level.
Technology remains 16.0% of our portfolio with Health Care at 9.6%.
The turnover rate in our portfolio is about 40% annualized. Our expense ratio
remained at a low 1.23%.
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.
[GRAPH]
Original Reinvestment of Capital
Share Income Dividends gains
73-74 - 43 7,630
75-76 - 458 11,280
77-78 - 1,217 14,155
79-80 - 2,147 14,597
81-82 - 3,703 17,299
83-84 - 6,347 24,755
85-86 3,857 10,805 38,310
87-88 10,945 11,062 30,774
89-90 22,901 14,859 31,059
91-92 27,527 21,871 32,464
93-94 35,156 26,652 32,622
95-96 60,327 41,919 42,938
5/31/96-12/31/96* 66,844 44,981 42,654
12/31/97 52,749 58,992 98,447
12/31/98 53,823 63,997 116,451
12/31/99 46,177 57,713 108,613
9/30/00 51,611 65,712 135,305
2
<PAGE>
FUND HIGHLIGHTS
--------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
-----------------------------------------------------------
<S> <C> <C>
Total Net Assets $43,444,697 $43,704,293
-----------------------------------------------------------
Net Asset Value Per Share $32.67 $28.99
-----------------------------------------------------------
Shares Outstanding 1,329,882 1,507,669
-----------------------------------------------------------
Number of Shareholders 987 1,022
-----------------------------------------------------------
Average Size Account $44,017 $42,763
-----------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
Eliminated Holdings
--------------------------------------------------------------------------------
H&R Block, Inc.
Summit Bancorp, Inc.
The Hertz Corp. Class A
Whirlpool Corp.
Ten Largest Holdings September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
---------------------------------------------------------
<S> <C> <C>
C&D Technologies, Inc. $ 6,117,650 14.1%
---------------------------------------------------------
American General Corp. 3,673,800 8.4
---------------------------------------------------------
Commerce Bancorp, Inc. (NJ) 3,452,090 7.9
---------------------------------------------------------
PNC Financial Services Group 2,600,000 6.0
---------------------------------------------------------
Penn Virginia Corp. 2,080,000 4.8
---------------------------------------------------------
The Coastal Corp 1,853,125 4.3
---------------------------------------------------------
Baxter International, Inc. 1,596,250 3.7
---------------------------------------------------------
Pitney Bowes, Inc. 1,577,500 3.6
---------------------------------------------------------
IKON Office Solutions, Inc. 1,575,000 3.6
---------------------------------------------------------
Kimberly-Clark Corp. 1,562,750 3.6
---------------------------------------------------------
$26,088,165 60.0%
---------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
--------------------------------------------------------------------------------
For the three months ended September 30, 2000, SMDS kept pace with The Morgan
Stanley REIT Index ("RMS") with a total return of 7.01%, versus 7.81% for the
Index. Year-to-date, the RMS is up 22.16%, with SMDS close behind at 19.50%.
Over the same time period, the S&P 500 Index is down 1.44%.
During the third quarter, we sold several holdings whose yields had declined
due to a strong rise in their prices. We recycled the proceeds of these sales
into some new names that have higher yields and, we believe, exhibit better
value. We added to our Health Care REIT sector exposure by taking positions in
Healthcare Realty Trust, Inc. and Nationwide Health Properties Inc. Both
companies offer stable dividends and are beginning to recover from a
particularly painful period surrounding the struggling nursing home industry.
Though there are still challenges facing this sector, we felt that the stocks
of this group had been particularly battered, and that in the near term the
dividend payments were very attractive. We expect that Congress will become
more favorable to the nursing home industry by expanding Medicare
reimbursements.
We also acquired shares of Shurgard Storage Centers, Inc. which gives the Fund
exposure to the Self-Storage sector. Shurgard has been making great strides in
developing a storage center presence in Europe over the last several years.
Shurgard's foray into the European markets has been driven by the fact that
there is very little self-storage in Europe, and that the company is
particularly strong in development and property management. Domestically, the
company is a solid performer, and its 9.0% dividend yield is extremely
attractive for a fund like SMDS.
Our largest sector weightings currently are Lodging at 17.7%; Office/Industrial
at 16.1%; Health Care at 14.1%; and Apartments at 13.4%. Despite concerns of a
possible slowdown in consumer spending, our retail REITs have continued to meet
earnings expectations. As we approach the holiday season, our hope is that
retailers and the malls themselves will show solid sales numbers and that the
REITs will continue to provide stable cash flow to the Fund.
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.
[GRAPH]
Original Reinvestment of Reinvestments of
Shares Income Dividends Capital Gains
81 9,113 583 -
82 9,354 1,641 -
83 10,808 3,107 -
84 10,667 4,379 -
85 11,795 6,627 -
86 14,604 10,328 -
87 16,320 13,744 503
88 13,181 13,041 1,043
89 12,824 15,044 1,015
90 12,861 17,513 1,018
91 12,084 19,388 956
92 14,609 26,570 1,156
93 15,701 31,818 1,242
94 15,060 33,590 1,192
95 13,039 32,499 1,032
96 14,383 39,890 1,138
1/31/96-12/31/96* 14,399 43,821 1,139
12/31/97 15,879 52,959 1,257
12/31/98 13,008 47,819 1,029
12/31/99 11,170 45,934 884
9/30/00 12,499 55,807 989
4
<PAGE>
FUND HIGHLIGHTS
--------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
-----------------------------------------------------------
<S> <C> <C>
Total Net Assets $58,953,133 $61,303,920
-----------------------------------------------------------
Net Asset Value Per Share $23.81 $22.71
-----------------------------------------------------------
Shares Outstanding 2,475,699 2,699,921
-----------------------------------------------------------
Number of Shareholders 3,002 3,092
-----------------------------------------------------------
Average Size Account $19,638 $19,827
-----------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New Holdings Eliminated Holdings
-------------------------------------------------------------------------------
<S> <C>
Healthcare Realty Trust, Inc.
(2.7%*) Franchise Finance Corp. of America
Nationwide Health Properties, Inc.
(3.5%*) Pacific Gulf Properties, Inc.
Shurgard Storage Centers, Inc.
(1.9%*) Post Properties, Inc.
ProLogis Trust
Smith (Charles E.) Residential Realty, Inc.
</TABLE>
* Percentage of Total Net Assets.
Ten Largest Holdings September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
-----------------------------------------------------------------
<S> <C> <C>
Liberty Property Trust $ 3,300,000 5.6%
-----------------------------------------------------------------
Mack-Cali Realty Corp. 3,100,625 5.3
-----------------------------------------------------------------
Gables Residential Trust 2,718,750 4.6
-----------------------------------------------------------------
Mid-Atlantic Realty Trust 2,716,875 4.6
-----------------------------------------------------------------
FelCor Lodging Trust, Inc. 2,659,375 4.5
-----------------------------------------------------------------
Mills Corp. 2,531,944 4.3
-----------------------------------------------------------------
Glimcher Realty Trust 2,464,688 4.2
-----------------------------------------------------------------
Health Care Property Investors, Inc. 2,370,000 4.0
-----------------------------------------------------------------
Colonial Properties Trust 2,311,875 3.9
-----------------------------------------------------------------
Health Care REIT, Inc. 2,307,500 3.9
-----------------------------------------------------------------
$26,481,632 44.9%
-----------------------------------------------------------------
</TABLE>
Special Note - REITs typically have some component of return of capital in
their dividend distributions. The exact amount of taxability of dividends is
often difficult for these companies to determine until late January. Our
auditors then must determine the Fund's own taxability of its distributions
before we can send the Fund's 1099DIV Forms to shareholders. This year, like
most REIT funds, SMDS will file an extension with the Internal Revenue Service
that will allow for a mailing date after the traditional January 31st deadline.
1099DIV Forms will not be available until early February. We hope that
shareholders can plan their tax return filing with this in mind.
5
<PAGE>
STRATTON SMALL-CAP VALUE FUND
--------------------------------------------------------------------------------
Stratton Small-Cap Value Fund had an excellent third quarter, gaining 11.9% in
value for the three-month period. This was a quarter in which we reduced the
number of holdings in our portfolio to forty-five as we eliminated a number of
our smaller positions.
Strategically we have chosen to build up our energy holdings. At the end of the
quarter they represented 18.6% of the portfolio. Since then, we have continued
to add to our energy positions. Financial Services remains the largest single
industry at 21.6% of the portfolio. Technology has grown to 14.7% of the
portfolio with a well-diversified list of companies. The only new holding added
to the portfolio during the quarter was HS Resources, Inc., an oil and gas
production company. We believe that the long-term outlook for energy prices
should continue to be quite strong. The cash flows generated from the
production side of the energy business will be attractive over the next several
years, especially in domestic natural gas production.
The turnover ratio on an annualized basis is approximately 40%. Our expense
ratio is down to 0.9% on a twelve-month average. The portfolio should continue
to benefit from the market shifting focus toward value oriented stocks that
took place on March 10, 2000.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Small-Cap Value Fund with all dividend income and capital gains
distributions reinvested.
[GRAPH]
Original Reinvestment of Reinvestments of
Shares Income Dividends Capital Gains
Apr-93 10,000 - -
3/31/94 10,376 158 -
3/31/95 10,352 402 -
3/31/96 12,780 789 -
3/31/96-12/31/96* 13,432 1,067 813
12/31/97 17,976 1,633 2,190
12/31/98 16,088 1,626 1,995
12/31/99 15,552 1,840 1,928
9/30/00 17,728 2,097 2,198
6
<PAGE>
FUND HIGHLIGHTS
--------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
-----------------------------------------------------------
<S> <C> <C>
Total Net Assets $36,848,834 $34,005,198
-----------------------------------------------------------
Net Asset Value Per Share $22.16 $19.80
-----------------------------------------------------------
Shares Outstanding 1,662,556 1,717,170
-----------------------------------------------------------
Number of Shareholders 1,028 1,090
-----------------------------------------------------------
Average Size Account $35,845 $31,197
-----------------------------------------------------------
</TABLE>
Portfolio Changes For the Quarter Ended September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New Holdings Eliminated Holdings
----------------------------------------------------------
<S> <C>
HS Resources, Inc. (2.3%*) American Bank of Connecticut
Brightpoint, Inc.
CONMED Corp.
First Financial Holdings, Inc.
Foster Wheeler Corp.
LSI Industries, Inc.
Owens Corning
Pacific Gulf Properties, Inc.
Primesource Corp.
Republic Group, Inc.
Schawk, Inc.
</TABLE>
* Percentage of Total Net Assets.
Ten Largest Holdings September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
------------------------------------------------------------------------
<S> <C> <C>
Bel Fuse, Inc. Class B $ 1,540,000 4.2%
------------------------------------------------------------------------
Penn Virginia Corp. 1,406,600 3.8
------------------------------------------------------------------------
Mitchell Energy & Development Corp. Class A 1,389,750 3.8
------------------------------------------------------------------------
InFocus Corp. 1,325,000 3.6
------------------------------------------------------------------------
Basin Exploration, Inc. 1,170,000 3.2
------------------------------------------------------------------------
Tidewater, Inc. 1,137,500 3.1
------------------------------------------------------------------------
Eaton Vance Corp. 1,020,000 2.7
------------------------------------------------------------------------
Quixote Corp. 1,005,000 2.7
------------------------------------------------------------------------
Florida Rock Industries, Inc. 985,938 2.7
------------------------------------------------------------------------
Dain Rauscher Corp. 930,000 2.5
------------------------------------------------------------------------
$11,909,788 32.3%
------------------------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON GROWTH FUND
--------------------------------------------------------------------------------
What is the Fund's investment objective?
The primary objective of SGF is to seek possible growth of capital with current
income from interest and dividends as a secondary objective. The Fund's
investments will normally consist of common stocks, and securities convertible
into common stock.
What is the investment philosophy used in managing the Fund?
The advisor focuses on common stocks of companies with strong cash flow.
Companies often share excess cash flow by paying above-average dividends to
shareholders. The advisor looks at characteristics such as strong dividend
growth rates and healthy dividend coverage when selecting potential buy
candidates. The investment advisor believes that companies which consistently
strive to increase their dividends tend to offer the potential of above-average
returns. Fundamental analysis is conducted on other important characteristics
such as the earnings outlook, management strengths, and industry competitive
position.
Why are value stocks so important to the Fund's portfolio?
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. The
investment advisor believes that undervalued companies with good earnings
prospects have superior appreciation potential with reasonable levels of risk.
What are the primary investment characteristics of the portfolio?
. Average gross portfolio yield will normally exceed the current yield of
the S&P 500 by more than 30%.
. Approximately 35 companies are held.
. By combining below average valuation with low price volatility (beta),
SGF should have the potential to produce good relative performance in up
markets and above average relative performance in down markets.
8
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
--------------------------------------------------------------------------------
What is the Fund's investment objective?
The primary objective of SMDS is to seek a high rate of return from dividend
and interest income on investments in common stock and securities convertible
into common stock. In order to achieve this goal, the Fund invests
substantially all of its assets in high income-producing U.S. equity
securities. Under normal conditions, the Fund will invest at least 65% of its
total assets in the equity securities of real estate investment trusts
("REITs").
What is the investment philosophy used in managing the Fund?
The Fund is managed to provide a high level of monthly income to its
shareholders and therefore looks for companies that have strong dividend
payouts. Currently, 80% or more of the Fund is invested in high dividend paying
REITs. There are several types of real estate properties that are owned by
REITs, including multifamily apartment complexes, health care facilities,
shopping centers, regional malls, office centers, hotels, and industrial
buildings. The portfolio is diversified across several sectors within the REIT
industry.
Why are dividend paying companies so important to the Fund's portfolio?
Current income is paramount for the SMDS portfolio. The Fund needs higher
yielding securities to maintain its own attractive dividend payout. REITs
satisfy this income requirement, while also offering the potential for dividend
growth and capital appreciation. REITs must distribute 95% of their net
investment income, so, as the earnings of these companies grow, increases in
dividends should follow.
What are the primary investment characteristics of the portfolio?
. The portfolio is comprised of high dividend paying securities.
. Approximately 40 companies are held.
. SMDS is managed to provide a high level of current monthly income, and
to offer the potential for dividend growth and capital appreciation.
There are risks involved with any investment. This Fund is concentrated in REIT
securities, which means it may be subject to a greater risk of loss than a non-
concentrated mutual fund.
9
<PAGE>
STRATTON SMALL-CAP VALUE FUND
--------------------------------------------------------------------------------
What is the Fund's investment objective?
The primary objective of SSCV is to achieve both dividend income and capital
appreciation. The Fund seeks to achieve this objective by investing its assets
in common stock and securities convertible into common stock of small
capitalization companies. In selecting stocks for the Fund to buy, small
capitalization companies are defined as companies with market capitalizations,
at the time of purchase, that are below the market 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 the
investment advisor believes are undervalued.
What is the investment philosophy used in managing the Fund?
The advisor attempts to purchase companies whose recent and future earnings
power give them the potential for higher valuations and continued dividend
growth. A three-step process is employed 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.
Why are value stocks so important to the Fund's portfolio?
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. The
investment advisor believes that undervalued companies with good earnings
prospects have superior appreciation potential with reasonable levels of risk.
What are the primary investment characteristics of the portfolio?
. Fundamental valuation parameters such as price-to-earnings and price-to-
cash flow should be at a significant discount to the average small-cap
company. The Fund currently trades at approximately one-half the P/E of
the Russell 2000 Index.
. Approximately 45 companies are held.
. By combining discounted valuations with lower than average betas (low
price volatility), SSCV seeks to produce strong relative performance in
up markets and above average relative performance in down markets.
There are risks involved with any investment. This Fund is invested in small-
cap stocks which tend to have a higher degree of market risk than large-cap
stocks due to lack of liquidity, earnings risk, and price volatility.
10
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
---------- -----------
<S> <C> <C>
COMMON STOCKS - 94.4%
Banking/Financial - 20.0%
AmSouth Bancorp......................................... 50,000 $ 625,000
Comerica, Inc........................................... 22,500 1,314,844
Commerce Bancorp, Inc. (NJ)............................. 59,327 3,452,090
First Union Corp. ...................................... 21,512 692,417
PNC Financial Services Group............................ 40,000 2,600,000
-----------
8,684,351
-----------
Basic Materials - 1.1%
Georgia-Pacific Group................................... 20,000 470,000
-----------
Business Services - 5.5%
Diebold, Inc............................................ 30,000 796,875
Pitney Bowes, Inc....................................... 40,000 1,577,500
-----------
2,374,375
-----------
Consumer Non-Durables - 6.5%
Anheuser-Busch Companies, Inc........................... 30,000 1,269,375
Kimberly-Clark Corp..................................... 28,000 1,562,750
-----------
2,832,125
-----------
Consumer Services - 2.9%
American Express Co..................................... 21,000 1,275,750
-----------
Distribution - 3.6%
IKON Office Solutions, Inc.............................. 400,000 1,575,000
-----------
Energy - 10.5%
Penn Virginia Corp...................................... 80,000 2,080,000
The Coastal Corp........................................ 25,000 1,853,125
USX-Marathon Group...................................... 22,000 624,250
-----------
4,557,375
-----------
Health Care - 9.6%
American Home Products Corp............................. 26,000 1,470,625
Baxter International, Inc. ............................. 20,000 1,596,250
Tenet Healthcare Corp.+................................. 30,000 1,091,250
-----------
4,158,125
-----------
Insurance/Services - 15.7%
American General Corp................................... 47,100 3,673,800
Aon Corp................................................ 33,750 1,324,688
Jefferson-Pilot Corp. .................................. 12,500 848,437
Lincoln National Corp................................... 20,000 962,500
-----------
6,809,425
-----------
Retailing - 3.0%
The Limited, Inc........................................ 60,000 1,323,750
-----------
Technology - 16.0%
C&D Technologies, Inc. ................................. 107,800 $ 6,117,650
Electronic Data Systems Corp. .......................... 20,000 830,000
-----------
6,947,650
-----------
Total Common Stocks
(cost $20,178,659)..................................... 41,007,926
-----------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM NOTES - 5.3%
Ford Motor Credit Co.
6.38%, due 10/02/00.................................... $1,150,000 1,149,593
-----------
General Electric Capital Corp. 6.40%, due 10/04/00...... 1,150,000 1,149,182
-----------
Total Short-Term Notes
(cost $2,298,775)...................................... 2,298,775
-----------
Total Investments - 99.7%
(cost $22,477,434*).................................... 43,306,701
Cash and Other Assets
Less Liabilities - 0.3%................................ 137,996
-----------
NET ASSETS - 100.00%.................................... $43,444,697
===========
</TABLE>
--------
+ Non-income producing security
* Aggregate cost for federal income tax purposes is $22,477,434; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation.................................. $21,701,139
Gross unrealized depreciation.................................. (871,872)
-----------
Net unrealized appreciation................................... $20,829,267
===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 93.9%
Apartments - 13.4%
Cornerstone Realty Income Trust, Inc. ................... 130,000 $ 1,381,250
Gables Residential Trust................................. 100,000 2,718,750
Home Properties of New York, Inc. ....................... 40,000 1,195,000
Summit Properties, Inc. ................................. 59,000 1,419,687
United Dominion Realty Trust, Inc. ...................... 110,000 1,196,250
-----------
7,910,937
-----------
Diversified - 8.8%
Colonial Properties Trust................................ 90,000 2,311,875
EastGroup Properties, SBI................................ 90,000 2,002,500
Meditrust Corp. ......................................... 300,000 881,250
-----------
5,195,625
-----------
Health Care - 14.1%
Health Care Property Investors, Inc. .................... 80,000 2,370,000
Health Care REIT, Inc. .................................. 130,000 2,307,500
Healthcare Realty Trust, Inc. ........................... 75,000 1,584,375
Nationwide Health Properties, Inc. ...................... 130,000 2,071,875
-----------
8,333,750
-----------
Lodging - 17.7%
FelCor Lodging Trust, Inc. .............................. 115,000 2,659,375
Hospitality Properties Trust............................. 60,000 1,402,500
Innkeepers USA Trust..................................... 200,000 2,050,000
Jameson Inns, Inc. ...................................... 160,000 1,220,000
RFS Hotel Investors, Inc. ............................... 125,000 1,578,125
Winston Hotels, Inc. .................................... 175,000 1,509,375
-----------
10,419,375
-----------
Net Lease - 1.7%
iStar Financial, Inc. ................................... 46,000 1,032,125
-----------
Office/Industrial - 16.1%
First Industrial Realty Trust, Inc. ..................... 70,000 2,152,500
HRPT Properties Trust.................................... 90,000 630,000
Liberty Property Trust................................... 120,000 3,300,000
Mack-Cali Realty Corp. .................................. 110,000 3,100,625
SL Green Realty Corp. ................................... 10,000 280,625
-----------
9,463,750
-----------
Regional Malls - 8.5%
Glimcher Realty Trust.................................... 165,000 2,464,688
Mills Corp. ............................................. 133,700 2,531,944
-----------
4,996,632
-----------
</TABLE>
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
Shopping Centers - 11.7%
Developers Diversified Realty Corp. ................. 95,000 $ 1,223,125
IRT Property Co. .................................... 166,000 1,452,500
Mid-Atlantic Reatly Trust............................ 230,000 2,716,875
New Plan Excel Realty Trust, Inc. ................... 108,000 1,478,250
-----------
6,870,750
-----------
Storage - 1.9%
Shurgard Storage Centers, Inc. ...................... 50,000 1,128,125
-----------
Total Common Stocks
(cost $60,824,291).................................. 55,351,069
-----------
PREFERRED STOCKS - 1.7%
Kimco Realty Corp. - Depositary Shares Class D (cost
$1,047,537)......................................... 40,000 1,030,000
-----------
<CAPTION>
Principal
Amount
---------
<S> <C> <C>
SHORT-TERM NOTES - 3.0%
American Express Credit Corp.
6.46%, due 10/03/00................................. $883,000 882,525
American Express Credit Corp.
6.45%, due 10/02/00................................. 873,000 872,687
-----------
Total Short-Term Notes
(cost $1,755,212)................................... 1,755,212
-----------
Total Investments - 98.6%
(cost $63,627,040*)................................. 58,136,281
Cash and Other Assets
Less Liabilities - 1.4%............................. 816,852
-----------
NET ASSETS - 100.00%................................. $58,953,133
===========
</TABLE>
--------
* Aggregate cost for federal income tax purposes is $63,627,040; and net
unrealized depreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation..................................... $ 3,383,282
Gross unrealized depreciation..................................... (8,874,041)
-----------
Net unrealized depreciation...................................... $(5,490,759)
===========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 2000 (unaudited)
--------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
Market
Number of Value
Shares (Note 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 87.7%
Autos & Transportation - 4.6%
AAR Corp. ............................................... 45,000 $ 514,687
A.O. Smith Corp. ........................................ 25,000 314,062
Polaris Industries, Inc. ................................ 25,000 881,250
-----------
1,709,999
-----------
Consumer Discretionary & Services - 4.8%
Deb Shops, Inc. ......................................... 40,000 475,000
IKON Office Solutions, Inc. ............................. 150,000 590,625
True North Communications, Inc. ......................... 20,000 715,000
-----------
1,780,625
-----------
Energy - 18.6%
Basin Exploration, Inc.+................................. 60,000 1,170,000
Energen Corp. ........................................... 30,000 892,500
HS Resources, Inc.+...................................... 25,000 840,625
Mitchell Energy & Development Corp. Class A.............. 30,000 1,398,750
Penn Virginia Corp. ..................................... 54,100 1,406,600
Tidewater, Inc. ......................................... 25,000 1,137,500
-----------
6,845,975
-----------
Financial Services - 21.6%
Avis Group Holdings, Inc. Class A+....................... 21,500 636,937
Blanch (E.W.) Holdings, Inc. ............................ 13,000 269,750
Colonial BancGroup, Inc. ................................ 50,000 518,750
Commerce Bancorp, Inc. (NJ).............................. 14,704 855,589
Community Bank Systems, Inc.............................. 25,000 648,500
Dain Rauscher Corp. ..................................... 10,000 930,000
Donegal Group, Inc. ..................................... 61,299 444,418
Eaton Vance Corp. ....................................... 20,000 1,020,000
First Essex Bancorp, Inc. ............................... 25,000 528,125
National Data Corp. ..................................... 20,000 656,250
Southwest Securities Group, Inc. ........................ 17,182 502,574
United Bankshares, Inc. ................................. 20,000 392,500
Webster Financial Corp. ................................. 20,000 538,750
-----------
7,942,143
-----------
Health Care - 5.3%
Henry Schein, Inc.+...................................... 32,000 $ 638,000
Morrison Management Specialists, Inc. ................... 30,000 886,500
Respironics, Inc.+....................................... 25,000 417,188
-----------
1,941,688
-----------
Materials & Processing - 11.9%
Florida Rock Industries, Inc. ........................... 25,000 985,937
Glatfelter (P.H.) Co. ................................... 20,000 242,500
Hughes Supply, Inc. ..................................... 30,000 588,600
Primex Technologies, Inc. ............................... 30,000 871,875
Quixote Corp. ........................................... 60,000 1,005,000
SLI, Inc. ............................................... 30,000 219,375
Velcro Industries, N.V. ................................. 43,000 462,250
-----------
4,375,537
-----------
Producer Durables - 3.7%
Belden, Inc. ............................................ 20,000 472,500
Technitrol, Inc. ........................................ 9,000 909,000
-----------
1,381,500
-----------
Technology - 14.7%
Anixter International Inc.+.............................. 20,000 582,500
Bel Fuse, Inc. Class B................................... 40,000 1,540,000
The BISYS Group, Inc.+................................... 10,000 773,125
InFocus Corp.+........................................... 25,000 1,325,000
Park Electrochemical Corp. .............................. 15,000 834,375
Pioneer-Standard Electronics, Inc. ...................... 27,000 366,188
-----------
5,421,188
-----------
Utilities - 2.5%
ALLETE................................................... 20,000 442,500
Price Communications Corp.+.............................. 25,000 489,063
-----------
931,563
-----------
Total Common Stocks
(cost $23,028,389)...................................... 32,330,218
-----------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SCHEDULE OF INVESTMENTS September 30, 2000 (unaudited) (continued)
--------------------------------------------------------------------------------
Stratton Small-Cap Value Fund
<TABLE>
<CAPTION>
Market
Principal Value
Amount (Note 1)
---------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 12.0%
American Express Credit Corp. 6.43%, due 10/05/00....... $1,345,000 $ 1,343,799
Ford Motor Credit Co.
6.40%, due 10/10/00.................................... 1,250,000 1,247,777
General Electric Capital Corp.
6.41%, due 10/03/00.................................... 1,820,000 1,819,028
-----------
Total Short-Term Notes
(cost $4,410,604)...................................... 4,410,604
-----------
Total Investments - 99.7%
(cost $27,438,993*).................................... 36,740,822
Cash and Other Assets
Less Liabilities - 0.3%................................ 108,012
-----------
NET ASSETS - 100.00%.................................... $36,848,834
===========
</TABLE>
--------
+ Non-income producing security
* Aggregate cost for federal income tax purposes is $27,438,993; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $11,194,267
Gross unrealized depreciation...................................... (1,892,438)
-----------
Net unrealized appreciation....................................... $ 9,301,829
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
September 30, 2000 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCV
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities at value
(cost $22,477,434, $63,627,040, and
$27,438,993, respectively) (Note 1)... $43,306,701 $ 58,136,281 $36,740,822
Cash................................... 146,282 1,597 94,048
Dividends and interest receivable...... 18,122 433,419 31,096
Receivable for shares sold............. 1,029 -- --
Receivable for securities sold......... -- 426,298 --
----------- ------------ -----------
Total Assets......................... 43,472,134 58,997,595 36,865,966
----------- ------------ -----------
LIABILITIES:
Accrued expenses and other
liabilities........................... 27,437 44,462 17,132
----------- ------------ -----------
Total Liabilities.................... 27,437 44,462 17,132
----------- ------------ -----------
NET ASSETS:
Applicable to 1,329,882, 2,475,699, and
1,662,556 shares outstanding,
respectively/1/....................... $43,444,697 $ 58,953,133 $36,848,834
=========== ============ ===========
Net asset value, offering and
redemption price per share............ $ 32.67 $ 23.81 $ 22.16
=========== ============ ===========
SOURCE OF NET ASSETS:
Paid-in capital........................ $21,430,086 $ 79,681,435 $27,074,076
Undistributed net investment income
(loss)................................ 103,468 (117,067) 336,925
Accumulated net realized gain (loss) on
investments........................... 1,081,876 (15,120,476) 136,004
Net unrealized appreciation
(depreciation) of investments......... 20,829,267 (5,490,759) 9,301,829
----------- ------------ -----------
Net Assets........................... $43,444,697 $ 58,953,133 $36,848,834
=========== ============ ===========
</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
--------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCV
---------- ----------- ----------
<S> <C> <C> <C>
INCOME:
Dividends.................................. $ 611,514 $ 4,223,458 $ 444,873
Interest................................... 81,503 125,121 100,999
---------- ----------- ----------
Total Income............................. 693,017 4,348,579 545,872
---------- ----------- ----------
EXPENSES:
Accounting/Pricing services fees........... 21,989 28,473 21,802
Administration services fees............... 19,889 28,571 19,235
Advisory fees (Note 2)..................... 214,035 272,850 70,530
Audit fees................................. 14,964 18,267 16,300
Custodian fees............................. 8,649 14,063 8,697
Directors' fees............................ 12,187 17,569 10,244
Legal fees................................. 5,126 7,270 4,264
Miscellaneous fees......................... 3,752 5,329 3,190
Printing and postage fees.................. 12,551 19,510 11,059
Registration fees.......................... 19,352 20,761 20,952
Shareholder services fees.................. 34,295 93,621 36,702
Taxes other than income taxes.............. 2,350 3,475 2,075
---------- ----------- ----------
Total Expenses........................... 369,139 529,759 225,050
---------- ----------- ----------
Net Investment Income.................. 323,878 3,818,820 320,822
---------- ----------- ----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments........... 1,084,179 564,200 260,394
Net increase in unrealized appreciation on
investments............................... 5,065,790 6,467,927 3,946,626
---------- ----------- ----------
Net gain on investments.................... 6,149,969 7,032,127 4,207,020
---------- ----------- ----------
Net increase in net assets resulting from
operations.............................. $6,473,847 $10,850,947 $4,527,842
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
--------------------------- ---------------------------
9 Months Ended Year Ended 9 Months Ended Year Ended
09/30/00* 12/31/99 09/30/00* 12/31/99
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 323,878 $ 674,239 $ 3,818,820 $ 4,717,684
Net realized gain
(loss) on invest-
ments................. 1,084,179 3,251,257 564,200 (2,505,510)
Net increase (decrease)
in unrealized appreci-
ation of investments.. 5,065,790 (9,385,310) 6,467,927 (6,710,730)
----------- ------------ ----------- ------------
Net increase (decrease)
in net assets result-
ing from operations... 6,473,847 (5,459,814) 10,850,947 (4,498,556)
----------- ------------ ----------- ------------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.15 and
$0.41 per share,
respectively, for SGF,
$1.44 and $1.55 per
share, respectively,
for SMDS)............. (228,837) (665,812) (3,935,887) (4,717,684)
From realized gains on
investments ($1.73 and
$1.33 per share,
respectively, for
SGF).................. (2,638,847) (2,250,632) -- --
Return of capital
($0.00 and $0.49 per
share, respectively,
for SMDS)............. -- -- -- (1,514,708)
CAPITAL SHARE TRANSAC-
TIONS:/2/ (4,026,527) (11,081,854) (7,375,005) (9,792,276)
----------- ------------ ----------- ------------
Total (decrease) in net
assets................ (420,364) (19,458,112) (459,945) (20,523,224)
NET ASSETS:
Beginning of period.... 43,865,061 63,323,173 59,413,078 79,936,302
----------- ------------ ----------- ------------
End of period (includ-
ing undistributed net
investment income
(loss) of $103,468 and
$8,427, respectively,
for SGF, and
($117,067) and $0, re-
spectively, for
SMDS)................. $43,444,697 $ 43,865,061 $58,953,133 $ 59,413,078
=========== ============ =========== ============
<CAPTION>
SSCV
---------------------------
9 Months Ended Year Ended
09/30/00* 12/31/99
-------------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income.. $ 320,822 $ 516,517
Net realized gain on
investments........... 260,394 1,034,763
Net increase (decrease)
in unrealized appreci-
ation of investments.. 3,946,626 (2,192,714)
----------- ------------
Net increase (decrease)
in net assets result-
ing from operations... 4,527,842 (641,434)
----------- ------------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.00 and
$0.27 per share,
respectively, for
SSCV)................. -- (501,810)
From realized gains on
investments ($0.00 and
$0.00 per share,
respectively, for
SSCV)................. -- --
CAPITAL SHARE TRANSAC-
TIONS:/2/ (3,733,026) (5,592,043)
----------- ------------
Total increase (de-
crease) in net as-
sets.................. 794,816 (6,735,287)
NET ASSETS:
Beginning of period.... 36,054,018 42,789,305
----------- ------------
End of period (includ-
ing undistributed net
investment income of
$336,925 and $16,103,
respectively, for
SSCV)................. $36,848,834 $ 36,054,018
=========== ============
</TABLE>
--------
* Unaudited
See accompanying notes to financial statements.
17
<PAGE>
CAPITAL SHARE TRANSACTIONS
--------------------------------------------------------------------------------
/2/A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
--------------------------------------
9 Months Ended 09/30/00* Year Ended 12/31/99
------------------------- ----------------------
Shares Value Shares Value
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares issued............... 357,119 $ 11,060,195 119,531 $ 3,966,635
Shares reinvested from net
investment income and
capital gains
distributions.............. 86,980 2,569,376 82,967 2,568,964
----------- ------------ -------- ------------
444,099 13,629,571 202,498 6,535,599
Shares redeemed............. (614,809) (17,656,098) (560,493) (17,617,453)
----------- ------------ -------- ------------
Net (decrease)............ (170,710) $ (4,026,527) (357,995) $(11,081,854)
=========== ============ ======== ============
<CAPTION>
SMDS
--------------------------------------
9 Months Ended 09/30/00* Year Ended 12/31/99
------------------------- ----------------------
Shares Value Shares Value
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares issued............... 780,158 $ 17,579,313 201,707 $ 4,798,470
Shares reinvested from net
investment income.......... 112,514 2,455,600 164,663 3,826,361
----------- ------------ -------- ------------
892,672 20,034,913 366,370 8,624,831
Shares redeemed............. (1,209,402) (27,409,918) (799,368) (18,417,107)
----------- ------------ -------- ------------
Net (decrease)............ (316,730) $ (7,375,005) (432,998) $ (9,792,276)
=========== ============ ======== ============
<CAPTION>
SSCV
--------------------------------------
9 Months Ended 09/30/00* Year Ended 12/31/99
------------------------- ----------------------
Shares Value Shares Value
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares issued............... 87,340 $ 1,808,280 279,605 $ 5,275,738
Shares reinvested from net
investment income and
capital gains
distributions.............. -- -- 19,978 383,537
----------- ------------ -------- ------------
87,340 1,808,280 299,583 5,659,275
Shares redeemed............. (279,834) (5,541,306) (572,731) (11,251,318)
----------- ------------ -------- ------------
Net (decrease)............ (192,494) $ (3,733,026) (273,148) $ (5,592,043)
=========== ============ ======== ============
</TABLE>
--------
* Unaudited
See accompanying notes to financial statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
September 30, 2000 (unaudited)
Note 1. - Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT Shares, Inc. ("SMDS") and The Stratton
Funds, Inc. (the "Company") which operates as a series, consisting of Stratton
Small-Cap Value Fund ("SSCV"). The Funds 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 common stocks and other equity 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.
Certain risks associated with investing in small-cap stocks include 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)
-------------------------------------------------------------------------------
September 30, 2000 (unaudited)
$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 nine months ended September 30, 2000, the Funds paid
advisory fees to Stratton Management Company, (the "Advisor") as follows:
SGF - $214,035; SMDS - $272,850; SSCV - $70,530. 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 SGF and
SMDS 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") over a rolling 24-month performance period. The Russell
2000 is composed of the smallest 2000 stocks in the Frank Russell annual
ranking of 3000 common stocks by market capitalization. The Russell 2000 is a
widely recognized common stock index of small to medium size companies. Total
return performance on the Russell 2000 includes dividends and is reported
monthly on a market capitalization-weighted basis. When the Fund performs
better than the Russell 2000, it pays the Advisor an
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
-------------------------------------------------------------------------------
September 30, 2000 (unaudited)
incentive fee; less favorable performance than the Russell 2000 reduces the
basic fee. Each 1.00% of the difference in performance between the Fund and
the Russell 2000 during the performance period is equal to a 0.10% adjustment
to the basic fee. The maximum annualized performance adjustment rate is +/-
0.50% of average net assets which would be added to or deducted from the
advisory fee if the Fund outperformed or under performed the Russell 2000 by
5.00%. The performance fee adjustment for the nine months ended September 30,
2000 caused the advisory fee to decrease by $124,208.
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. 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
$5,000 for each Fund for its services in connection with the registration of
the Funds' shares under state securities laws.
Note 3. - Purchases and sales of investment securities, excluding short-term
notes, for the nine months ended September 30, 2000 were as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCV
----------- ----------- -----------
<S> <C> <C> <C>
Cost of purchases........................... $12,030,668 $11,339,803 $ 9,997,072
Proceeds of sales........................... 18,588,117 19,331,752 16,881,525
</TABLE>
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 Years Ended May
9 Months 31, 7 Months 31,
Ended -------------------------- Ended ----------------
09/30/00* 1999 1998 1997 12/31/96 1996 1995
--------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 29.23 $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65
------- ------- ------- ------- ------- ------- -------
Income From Investment
Operations
Net investment
income............... 0.219 0.416 0.570 0.550 0.312 0.556 0.537
Net gains (losses) on
securities (both
realized and
unrealized).......... 5.101 (3.516) 3.130 8.900 1.298 5.759 2.978
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations......... 5.320 (3.100) 3.700 9.450 1.610 6.315 3.515
------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends (from net
investment income)... (0.150) (0.410) (0.590) (0.540) (0.580) (0.540) (0.540)
Distributions (from
capital gains)....... (1.730) (1.330) (2.430) (2.520) (1.210) (0.945) (1.275)
------- ------- ------- ------- ------- ------- -------
Total
distributions...... (1.880) (1.740) (3.020) (3.060) (1.790) (1.485) (1.815)
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period................. $ 32.67 $ 29.23 $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35
======= ======= ======= ======= ======= ======= =======
Total Return............ 18.88% (9.29%) 11.46% 36.06% 6.40% 29.62% 18.61%
Ratios/Supplemental Data
Net assets, end of
period (in 000's).... $43,445 $43,865 $63,323 $60,177 $44,801 $42,880 $31,719
Ratio of expenses to
average net assets... 1.23%/1/ 1.13% 1.07% 1.11% 1.17%/1/ 1.16% 1.31%
Ratio of net
investment income to
average net assets... 1.08%/1/ 1.21% 1.60% 1.87% 2.08%/1/ 2.28% 2.70%
Portfolio turnover
rate................. 31.38% 39.81% 38.02% 34.40% 20.32% 15.41% 42.54%
</TABLE>
--------
* Unaudited
/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>
9 Months Years Ended December 31, 11 Months Years Ended January 31,
Ended ---------------------------- Ended ------------------------
09/30/00* 1999 1998 1997 12/31/96 1996 1995
--------- ------- ------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 21.28 $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69
------- ------- ------- -------- -------- ----------- -----------
Income From Investment
Operations
Net investment income..... 1.393 1.550 1.650 1.540 1.630 1.880 1.940
Net gains (losses) on
securities (both realized
and unrealized).......... 2.577 (3.010) (5.070) 3.200 0.160 2.600 (3.870)
------- ------- ------- -------- -------- ----------- -----------
Total from investment
operations............. 3.970 (1.460) (3.420) 4.740 1.790 4.480 (1.930)
------- ------- ------- -------- -------- ----------- -----------
Less Distributions
Dividends (from net
investment income)....... (1.440) (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..... (1.440) (2.040) (2.050) (1.920) (1.760) (1.920) (1.920)
------- ------- ------- -------- -------- ----------- -----------
Net Asset Value, End of
Period..................... $ 23.81 $ 21.28 $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84
======= ======= ======= ======== ======== =========== ===========
Total Return................ 19.50% (6.25%) (11.75%) 18.09% 7.12% 18.98% (6.57%)
Ratios/Supplemental Data
Net assets, end of period
(in 000's)............... $58,953 $59,413 $79,936 $101,956 $103,780 $ 129,267 $ 134,066
Ratio of expenses to
average net assets....... 1.17%/1/ 1.09% 1.02% 1.02% 1.02%/1/ 0.99% 1.08%
Ratio of net investment
income to average net
assets................... 8.42%/1/ 6.61% 5.95% 5.48% 6.94%/1/ 7.42% 7.71%
Portfolio turnover rate... 19.83% 13.94% 18.89% 42.47% 69.19% 53.30% 39.50%
</TABLE>
--------
* Unaudited
/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
9 Months 31, 9 Months Years Ended March 31,
Ended --------------------------- Ended ----------------------
09/30/00* 1999 1998 1997/2/ 12/31/96/2/ 1996/2/ 1995/2/
--------- ------- ------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 19.44 $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97
------- ------- ------- ------- ------- ---------- ----------
Income from Investment
Operations
Net investment
income............... 0.194 0.278 0.170 0.210 0.260 0.330 0.290
Net gains (losses) on
securities
(both realized and
unrealized).......... 2.526 (0.678) (2.310) 6.800 1.740 3.040 (0.020)
------- ------- ------- ------- ------- ---------- ----------
Total from
investment
operations......... 2.720 (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................. $ 22.16 $ 19.44 $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94
======= ======= ======= ======= ======= ========== ==========
Total Return............ 13.99% (1.98%) (9.58%) 42.37% 12.84% 26.18% 2.09%
Ratios/Supplemental Data
Net assets, end of
period (in 000's).... $36,849 $36,054 $42,789 $39,377 $21,691 $ 19,592 $ 14,058
Ratio of expenses to
average net assets... 0.88%/1/ 1.08% 1.56% 1.62% 1.29%/1/ 1.46% 2.12%
Ratio of net
investment income to
average net assets... 1.26%/1/ 1.29% 0.80% 1.09% 2.03%/1/ 2.28% 2.36%
Portfolio turnover
rate................. 31.41% 43.44% 35.74% 26.27% 35.86% 33.50% 30.20%
</TABLE>
--------
* Unaudited
/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>
SHAREHOLDER INFORMATION
-------------------------------------------------------------------------------
Minimum Investment
The minimum amount for the initial purchase of shares of the Funds is $2,000
each for non-retirement accounts. There is no minimum for retirement accounts.
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 including The Wall Street Journal and Investor's
Business 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.
25
<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' toll free number 1-800-634-
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 . 1-800-472-4266
Investment Portfolio Activities
Questions regarding any of the Funds' investment portfolios should be directed
to the Funds' Investment Advisor:
STRATTON MANAGEMENT COMPANYPlymouth Meeting Executive Campus610 W. Germantown
Pike, Suite 300Plymouth Meeting, PA 19462-1050Telephone: 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 November 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.
26
<PAGE>
DIRECTORS
Lynne M. Cannon Merritt N. Rhoad, Jr.
John J. Lombard, Jr. Richard W. Stevens
Douglas J. MacMaster, Jr. James W. Stratton
Henry A. Rentschler
OFFICERS
James W. Stratton
Chairman
Stratton Mutual Funds
President
Stratton Small-Cap Value Fund
John A. Affleck
President
Stratton Growth Fund
James A. Beers
President, Stratton Monthly
Dividend REIT Shares
Gerald M. Van Horn
Vice President
Stratton Small-Cap Value Fund
Joanne E. Kuzma
Vice President
Patricia L. Sloan
Secretary & Treasurer
Brigid E. Hummel
Assistant Secretary &
Treasurer
INVESTMENT ADVISOR
Stratton Management Company
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050, Telephone: 610-941-0255
TRANSFER AGENT & DIVIDEND PAYING AGENT
PFPC Inc.
P.O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600, 1-800-472-4266
CUSTODIAN BANK
The Bank of New York
48 Wall Street, New York, NY 10286
Visit the Stratton Mutual Funds web site at
http://www.strattonmgt.com
STRATTON
MUTUAL FUNDS
Stability . Strategy . Success
