<PAGE>
STRATTON
SMALL-CAP
YIELD FUND
===============================================================================
SSCY
================================================================================
FIRST QUARTER REPORT
JUNE 30, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1996
-------------- --------------
<S> <C> <C>
Total Net Assets........................... $20,318,321 $19,591,965
Net Asset Value Per Share.................. $ 32.52 $ 31.95
Shares Outstanding......................... 624,777 613,299
Number of Shareholders..................... 913 920
Average Size Account....................... $ 22,254 $ 21,296
</TABLE>
================================================================================
PORTFOLIO CHANGES For the Quarter Ended June 30, 1996 (unaudited)
<TABLE>
<S> <C>
MAJOR PURCHASES MAJOR SALES
Acordia, Inc./(1)/ California State Bank (Covina, CA)/(2)/
Excel Industries, Inc./(1)/ Community Bank System, Inc./(2)/
Kaman Corp. Class A/(1)/ IMC Global, Inc./(2)/
Kysor Industrial Corp./(1)/ National Health Investors, Inc./(2)/
Marc, Inc. Sturm, Ruger & Co., Inc.
Medford Savings Bank Washington National Corp.
Republic Group, Inc./(1)/
Ryland Group, Inc.
Schweitzer-Mauduit International, Inc.
Vermont Financial Services Corp./(1)/
/(1)/ New Holdings /(2)/ Eliminations
</TABLE>
TEN LARGEST HOLDINGS June 30, 1996 (unaudited)
<TABLE>
<CAPTION>
MARKET PERCENT
VALUE OF TNA
---------- ---------
<S> <C> <C>
K2, Inc......................................... $678,125 3.3%
Commercial Intertech Corp....................... 643,750 3.2
Technitrol, Inc................................. 594,375 2.9
Helix Technology Corp........................... 581,250 2.9
Shared Medical Systems Corp..................... 578,250 2.8
Schweitzer-Mauduit International, Inc........... 562,500 2.8
True North Communications, Inc.................. 556,250 2.7
American Business Products, Inc................. 546,875 2.7
Kysor Industrial Corp........................... 460,750 2.3
Coca-Cola Bottling Co. Consolidated............. 458,250 2.3
--------- ----
$5,660,375 27.9%
========== ====
</TABLE>
2
<PAGE>
DEAR SHAREHOLDER:
Your Fund completed its first fiscal quarter ending June 30, 1996 with a net
asset value of $32.52 per share. Total net assets have grown to $20,318,321. Our
shareholders numbered 913 at quarter-end with an average account size of
$22,254.
We remain invested in a diversified list of holdings across nine different
industries. The portfolio consists of small companies all of which were less
than $500 million in market value at the time of purchase. The average market
capitalization of the stocks in the portfolio is approximately $300 million We
now have 62 issues in the portfolio. Annualized portfolio turnover for the
quarter was 33.29% which reflects an average holding period of three years.
At the end of the quarter, the portfolio was 93.4% invested in common stocks
with the remaining cash reserves held in commercial paper. Your Fund's industry
mix has stayed primarily the same since last quarter. We continue to favor
financial intermediaries with large weightings in Banks, Insurance and REITs.
The largest industry positions are Banking at 18% and Industrial at 17% of the
total portfolio. Our Technology exposure has grown to 12% primarily through
capital appreciation. REITs are now 8% of total net assets.
Performance for the fiscal quarter trailed the Russell 2000 which rose
significantly in the first part of the quarter as technology stocks continued to
rise. During this quarter, your Fund was up 2.22% versus 5.00% for the Russell
2000. Calendar year-to-date, your Fund is up 4.14% versus the Russell's 10.36%
advance. In the last two months we have started to see some lowering of the
valuations that were being placed on small-cap technology companies. Many small-
cap emerging growth funds are off more than 20% from their highs. We have said
before that small-cap dividend paying stocks will underperform on a relative
basis during a runaway bull market, but should significantly outperform in a
down market. Accordingly, since inception your Fund has outperformed in three
out of four down months for the market.
The economy continued to post uneven growth during the spring months, probably
at a faster pace than the 2.2% GDP advance in the first quarter. The overall
improvement and stronger than expected new employment reports reignited fears of
higher inflation and tighter monetary policy. As a result, the yield on the long
term U. S. Treasury bond rose from just under 6.0% at year end to over 7.2% in
June. Many traditional value oriented, economically sensitive and financial
issues underperformed the general market, while emerging growth and more
speculative areas such as untested new issues led the advances. As the economy
continues to dodge both recession and inflationary bottlenecks, the performance
of the interest rate sensitive and cyclical issues should improve. These sectors
along with selective consumer oriented firms appear to be among the best values
in the stock market. We continue to focus on seeking undervalued companies that
meet our criterion to maximize total return.
The Fund's Directors declared the regular first fiscal quarter dividend at the
rate of $0.14 per share payable on June 21 to stockholders of record as of June
13, 1996. We welcome our new shareholders to the Fund and look forward to your
continued support. Should you have any questions regarding your Fund, you may
contact us at 1-800-578-8261.
Sincerely yours,
James W. Stratton Frank H. Reichel, III
Chairman President
August 1, 1996
3
<PAGE>
STRATTON SMALL-CAP YIELD FUND'S INVESTMENT PROCESS
WHAT IS THE FUND'S OBJECTIVE?
Stratton Small-Cap Yield Fund's objective is to achieve both dividend income and
capital appreciation by investing in dividend paying small capitalization
companies. We attempt to purchase companies whose recent and future earnings
power give them the potential for higher valuations and continued dividend
growth.
WHAT IS THE PHILOSOPHY USED IN MANAGING STRATTON SMALL-CAP YIELD FUND?
This is an all equity mutual fund which invests in the common stocks of small
but established dividend paying companies. The primary criterion for stock
selection centers around the dividend paying ability of the companies. We feel
that companies who regularly increase their dividend have superior appreciation
potential at reasonable levels of risk. Furthermore, given the higher volatility
of small capitalization stocks a diversified portfolio is warranted.
HOW DIVERSIFIED IS THE PORTFOLIO OF THE FUND?
The Fund will normally be invested in ten to fifteen industry groups with no
more than 25% in any one industry. We diversify into a variety of industries
that offer sufficiently high yielding investment opportunities as well as growth
potential. Right now our three largest industries are Consumer Products 20%,
Banking 18% and Industrial 17%. In order to achieve the necessary
diversification within those industries, we envision holding between 50 and 75
securities in total.
WHAT KIND OF VOLATILITY DOES THIS PORTFOLIO HAVE?
The portfolio of Stratton Small-Cap Yield Fund should have one of the lowest
"beta's" (a measure of volatility) of any of its small-cap fund peers. The high
dividend component and the established earnings stream of the securities we own
typically helps to reduce share price fluctuations within the small-cap
universe.
WHAT IS THE TURNOVER RATIO OF THE PORTFOLIO?
We expect turnover to remain relatively low as we continually add to positions
in the portfolio. Because small company stocks are often less frequently traded
than their larger counterparts, we act only when the fundamental earnings
picture has changed dramatically. This avoids incurring the relatively high
transactions costs associated with replacing a position in the portfolio. A good
target for the turnover ratio would be 40% annually.
4
<PAGE>
DOES STRATTON SMALL-CAP YIELD FUND PAY MUCH ATTENTION TO MARKET TIMING?
Because our objective is to produce above-average rates of current income, we
generally remain fully invested at all times in dividend paying securities.
Except during times of large cash inflows to the Fund, our cash position will
vary between 0-10% depending upon available investment opportunities.
WHERE DO YOU OBTAIN THE RESEARCH DATA ON THE COMPANIES THAT YOU OWN OR ARE
CONSIDERING FOR PURCHASE?
The quantitative research is performed in-house by our own staff. Once we have
identified industries and companies of interest, we seek the best regional
analysts in the investment brokerage community to provide us with additional
input. We like to have multiple sources of research. Our professional staff are
portfolio generalists rather than industry specialists.
WHAT QUANTITATIVE DISCIPLINES DO YOU USE IN PURCHASING COMMON STOCKS?
From the overall equity universe of 5,000 companies, we screen down to about 400
companies by focusing on stocks with a market capitalization under $500 million
and those which possess a dividend yield equal to or greater than that on the
S&P 500 average. Our second step reduces the universe to approximately 80 stocks
by screening for additional yield characteristics such as dividend growth rates
and dividend coverage.
HOW DO YOU SELECT COMPANIES WITHIN THE HIGH YIELD UNIVERSE?
Our third review involves fundamental analysis of such important characteristics
as the outlook for earnings and cash flow, management strengths and industry
competitive position. This reduces the Stratton Small-Cap Yield Fund's buy
candidate list to approximately 20 stocks. These stocks are available for
addition to the Fund's portfolio.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500, exceed
savings account yields and be approximately twice the yield of the average
small-cap company.
. Approximately 60 companies are held.
. By combining high dividend yields and underlying low price volatility
(Beta), Stratton Small-Cap Yield seeks to produce good relative performance
in up markets and superior relative performance in down markets.
5
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- --------------
<S> <C> <C>
COMMON STOCKS - 93.4%
BANKING - 17.8%
10,000 Affiliated Community Bancorp ...................... $ 173,750
7,500 American Bank of Connecticut ...................... 184,687
10,000 Bankers Corp. (Perth Amboy, NJ) ................... 175,000
4,000 CCB Financial Corp. ............................... 205,000
8,000 Centura Banks, Inc. (NC) .......................... 294,000
7,000 Colonial BancGroup, Inc. .......................... 234,500
12,000 Commerce Bancorp, Inc. (NJ) ....................... 282,000
9,900 Eagle Financial Corp. ............................. 249,975
20,000 First Essex Bancorp, Inc. ......................... 217,500
9,000 First Financial Holdings, Inc. .................... 162,000
4,500 Firstbank of Illinois Co. ......................... 139,500
15,000 Home Financial Corp. (Hollywood, FL) .............. 195,000
15,000 Interchange Financial Services Corp. .............. 298,125
13,000 Medford Savings Bank .............................. 299,000
10,000 Reliance Bancorp, Inc. ............................ 156,250
9,000 United Carolina Bancshares Corp. .................. 200,250
5,000 Vermont Financial Services Corp. .................. 157,500
-----------
3,624,037
-----------
BUSINESS SERVICES - 7.4%
25,000 American Business Products, Inc. .................. 546,875
10,000 Marc, Inc. ........................................ 217,500
15,000 PMC Capital, Inc. ................................. 191,250
25,000 True North Communications, Inc. ................... 556,250
-----------
1,511,875
-----------
CONSUMER DURABLES - 8.3%
30,000 Jackpot Enterprises, Inc. ......................... 382,500
25,000 K2, Inc. .......................................... 678,125
7,000 Sturm, Ruger & Co., Inc. .......................... 325,500
35,000 Winnebago Industries, Inc. ........................ 288,750
-----------
1,674,875
-----------
CONSUMER NON-DURABLES - 11.3%
13,000 Coca-Cola Bottling Co. Consolidated ............... 458,250
10,000 International Multifoods Corp. .................... 182,500
25,000 Quaker State Corp. ................................ 375,000
25,000 Riviana Foods, Inc. (DE) .......................... 378,125
20,000 Schweitzer-Mauduit International, Inc. ............ 562,500
6,000 Velcro Industries, N.V. ........................... 333,000
-----------
2,289,375
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) JUNE 30, 1996
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ---------- ------------
<S> <C> <C>
COMMON STOCKS - 93.4% (continued)
INDUSTRIAL - 16.9%
12,000 Carpenter Technology Corp. ........................ $ 384,000
10,000 Cleveland-Cliffs, Inc. ............................ 391,250
25,000 Commercial Intertech Corp. ........................ 643,750
20,000 Excel Industries, Inc. ............................ 250,000
25,000 Kuhlman Corp. ..................................... 434,375
19,000 Kysor Industrial Corp. ............................ 460,750
10,000 Lukens, Inc. ...................................... 238,750
15,000 Republic Group, Inc. .............................. 213,750
30,000 Roanoke Electric Steel Corp. ...................... 416,250
-----------
3,432,875
-----------
INSURANCE/SERVICE - 9.3%
5,500 Acordia, Inc. ..................................... 185,625
20,000 Donegal Group, Inc. ............................... 345,000
15,000 Harleysville Group, Inc. (PA) ..................... 442,500
25,000 Hilb, Rogal & Hamilton Co. ........................ 346,875
12,500 Selective Insurance Group, Inc. ................... 406,250
6,000 Washington National Corp. ......................... 154,500
-----------
1,880,750
-----------
REAL ESTATE - 8.4%
8,000 Camden Property Trust ............................. 190,000
8,000 Colonial Properties Trust ......................... 194,000
15,000 Innkeepers USA Trust .............................. 150,000
9,000 Merry Land & Investment Co., Inc. ................. 189,000
9,000 ROC Communities, Inc. ............................. 214,875
25,000 Ryland Group, Inc. ................................ 375,000
7,000 Sovran Self Storage, Inc. ......................... 185,500
8,000 Sun Communities, Inc. ............................. 215,000
-----------
1,713,375
-----------
TECHNOLOGY - 12.1%
14,500 Boston Acoustics, Inc. ............................ 326,250
15,000 Helix Technology Corp. ............................ 581,250
12,000 Kaman Corp. Class A ............................... 121,500
35,000 MacNeal-Schwendler Corp. .......................... 262,500
9,000 Shared Medical Systems Corp. ...................... 578,250
15,000 Technitrol, Inc. .................................. 594,375
-----------
2,464,125
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- ----------- -------- ------------
<S> <C> <C>
COMMON STOCKS - 93.4% (CONTINUED)
UTILITIES - 1.9%
10,000 Lincoln Telecommunications Co. .............................. $ 163,750
6,000 WICOR, Inc. ................................................. 226,500
------------
390,250
------------
Total Common Stocks (Cost $15,908,072)....................... 18,981,537
------------
Principal
Amount
- -----------
SHORT-TERM NOTES - 6.0%
$ 550,000 General Motors Acceptance Corp. 5.25% due 07/02/96........... 550,000
$ 675,000 General Electric Capital Corp. 5.37% due 07/08/96............ 675,000
------------
Total Short-Term Notes (cost $1,225,000)..................... 1,225,000
------------
Total Investments - 99.4% (Cost $17,133,072)*................ 20,206,537
Cash and Other Assets, Less Liabilities - 0.6%............... 111,784
------------
NET ASSETS - 100.0%.......................................... $ 20,318,321
============
</TABLE>
* Aggregate cost for federal income tax purposes is $17,133,072; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation................................ $ 3,581,372
Gross unrealized depreciation................................ (507,907)
Net unrealized appreciation.............................. ------------
$ 3,073,465
============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (unaudited)
<S> <C>
ASSETS
Investments in securities at market value (identified
cost $17,133,072) (Note 1)....................................... $20,206,537
Cash......................................................... 64,904
Dividends and interest receivable............................ 54,327
-----------
Total Assets............................................. 20,325,768
-----------
LIABILITIES
Accrued expenses............................................. 7,447
-----------
Total Liabilities........................................ 7,447
-----------
NET ASSETS
Applicable to 624,777 shares; $0.001 par value; $20,318,321
1,000,000,000 shares authorized ===========
Net asset value, offering and redemption price per share
($20,318,321 divided 624,777 shares)...................... $ 32.52
===========
SOURCE OF NET ASSETS
Paid-in capital.............................................. $16,186,308
Undistributed net investment income.......................... 37,036
Accumulated net realized gain on investments................. 1,021,512
Net unrealized appreciation of investments................... 3,073,465
-----------
Net Assets............................................... $20,318,321
===========
===============================================================================
<CAPTION>
STATEMENT OF OPERATIONS
3 Months Ended June 30, 1996 (unaudited)
<S> <C>
INCOME
Dividends..................................................... $ 157,852
Interest...................................................... 15,310
-----------
Total Income............................................... 173,162
-----------
EXPENSES
Advisory fees (Note 2)........................................ 25,536
Registration fees (Note 2).................................... 13,274
Accounting/Pricing services fees (Note 2)..................... 5,000
Shareholder services fees (Note 2)............................ 3,965
Custodian fees (Note 2)....................................... 2,593
Administrative services fees (Note 2)......................... 2,500
Directors' fees............................................... 1,090
Miscellaneous fees............................................ 685
Printing fees................................................. 650
Taxes other than income taxes................................. 625
-----------
Total Expenses............................................. 55,918
-----------
Net Investment Income................................... 117,244
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments.............................. 522,302
Net decrease in unrealized appreciation of investments........ (198,756)
Net gain on investments.................................... -----------
Net increase in net assets resulting from operations.... 323,546
-----------
$ 440,790
===========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
3 MONTHS
ENDED
JUNE 30, YEAR ENDED
1996 MARCH 31,
OPERATIONS (UNAUDITED) 1996
------------ ------------
<S> <C> <C>
Net investment income.......................................... $ 117,244 $ 384,241
Net realized gain on investments............................... 522,302 970,650
Net increase (decrease) in unrealized appreciation
of investments ............................................... (198,756) 2,474,521
------------ ------------
Net increase in net assets resulting......................... 440,790 3,829,412
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.14 and $0.66 per share, respectively).................... (86,645) (382,442)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from the net change
in the number of outstanding shares (a)..................... 372,211 2,086,829
------------ ------------
Total Increase in Net Assets............................ 726,356 5,533,799
NET ASSETS AT THE BEGINNING OF THE PERIOD....................... 19,591,965 14,058,166
------------ ------------
NET ASSETS AT THE END OF THE PERIOD
(including undistributed net investment income
$37,036 and $6,437, respectively)........................... $ 20,318,321 $ 19,591,965
============ ============
</TABLE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
3 MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) MARCH 31, 1996
----------------------------------- --------------------------------
SHARES VALUE SHARES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares issued.................................... 15,439 $501,032 91,285 $2,692,659
Shares reinvested from
net investment income.......................... 1,844 60,530 9,200 277,894
------------- ------------- ------------- -------------
17,283 561,562 100,485 2,970,553
Shares redeemed.................................. (5,805) (189,351) (30,395) (883,724)
------------- ------------- ------------- -------------
Net increase ................................. 11,478 $372,211 70,090 $2,086,829
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED)
NOTE 1. - Significant Accounting Policies - The Stratton Funds, Inc. (the
"Company") was organized on January 5, 1993 as a Maryland Corporation and is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. As of the date of this
report, the Company offered one investment portfolio, Stratton Small-Cap Yield
Fund (the "Fund"). The Fund's investment objective is to achieve both dividend
income and capital appreciation. The Fund will seek to achieve this objective
through investment in the securities of small-cap companies which have certain
risks associated with them. First and foremost is their greater earnings and
price volatility in comparison to large companies. Earnings risk is partially
due to the undiversified nature of small company business lines. The following
is a summary of significant accounting policies consistently followed by the
Company in the preparation of its 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 Board of Directors of the Fund, 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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
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. Dividends and
distributions to shareholders are recorded on the ex-dividend date.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 (UNAUDITED)
NOTE 2. - During the three months ended June 30, 1996, the Fund paid advisory
fees aggregating $25,536 to Stratton Management Company, (the"Advisor").
Management services are provided by the Advisor under an agreement whereby the
Advisor furnishes all investment advice, office space and facilities to the Fund
and pays the salaries of the Fund's officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, the Fund pays a monthly fee to the
Advisor at an annual rate of 0.75% of the daily net asset value of the Fund for
such month, subject to a performance adjustment. The performance adjustment
will commence at the end of the month in which the Fund has completed 24 months
of operation, if it has net assets of $20 million or more, at such date, or at
the end of any succeeding month at which it has net assets of $20 million, but
in any event, irrespective of its net assets, at the end of the month in which
the Fund has completed 36 months of operation and will be calculated at the end
of the commencement month and each succeeding month based upon a rolling 24
month performance period. The performance adjustment is added to or subtracted
from the basic investment advisory fee.
The Fund's gross performance is compared with the performance of the Frank
Russell 2000 Index, ("Russell 2000"). When the Fund performs better than the
Russell 2000, it pays the Investment Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of the
difference in performance between the Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the basic fee. The maximum
annualized performance adjustment rate is +/- 0.50% of average net assets which
would be added to or deducted from the advisory fee if the Fund outperformed or
underperformed the Russell 2000 by 5.00%. Because of certain undertakings to
comply with various state securities laws, if in any fiscal year the expenses of
the Fund (excluding taxes, brokerage commissions and interest) exceed 2 1/2% of
the first $30 million of the Fund's average net assets, 2% of the next $70
million and 1 1/2% of the remaining, the Advisor shall reimburse the Fund for
such excess. Certain officers and directors of the Fund are also officers and
directors of the Advisor. None of the Fund's officers receive compensation from
the Fund.
The Fund's Transfer Agent, Fund/Plan Services, Inc. ("Fund/Plan"), is a wholly-
owned subsidiary of FinDaTex, Inc. Certain directors and officers of the Fund
are shareholders of FinDaTex, Inc. Fund/Plan received fees of $3,965 for
providing shareholder services, $2,500 for certain administrative services and
$5,000 for accounting/pricing services during the three months ended June 30,
1996. Pursuant to an agreement between The Bank of New York, (the "Custodian"),
and Fund/Plan, the Custodian reallows a portion of its custody fee to Fund/Plan
for certain services delegated to Fund/Plan. The amount is not readily
determinable. Fund/Plan Broker Services, Inc. serves as the Fund's principal
underwriter and receives no fees for services in assisting in sales of the
Fund's shares but does receive an annual fee of $3,000 for its services in
connection with the registration of the Fund's shares under state securities
laws.
NOTE 3. - Purchases and sales of securities, excluding short-term notes,
aggregated $2,056,648 and $1,566,162, respectively, for the three months ended
June 30, 1996.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
3 MONTHS
ENDED YEAR YEAR FOR THE PERIOD
06/30/96 ENDED ENDED 04/12/93*
(UNAUDITED) 03/31/96 03/31/95 TO 03/31/94
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................ $31.95 $25.88 $25.94 $25.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment income.............................. 0.19 0.66 0.57 0.43
Net gains (loss) on securities
(both realized and unrealized).................... 0.52 6.07 (0.04) 0.91
------- ------- ------- -------
Total from investment operations........ 0.71 6.73 0.53 1.34
------- ------- ------- -------
LESS DISTRIBTUIONS
------------------
Dividends (from net investment
income)........................................... (0.14) (0.66) (0.59) (0.40)
Distributions (from capital gains)................. 0.00 0.00 0.00 0.00
------- ------- ------- ------
Total distributions.............................. (0.14) (0.66) (0.59) (0.40)
------- ------- ------- ------
Net Asset Value, End of Period...................... $32.52 $31.95 $25.88 $25.94
======== ======= ======= =======
Total Return........................................ 2.22% *** 26.18% 2.09% 5.51% **
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in 000's)............... $20,318 $19,592 $14,058 $8,257
Ratio of expenses to average
net assets........................................ 1.11% ** 1.46% 2.12% 2.28% **
Ratio of net investment
income to average net assets...................... 2.33% ** 2.28% 2.36% 1.85% **
Portfolio turnover rate............................ 33.29% ** 33.50% 30.20% 28.60% **
Average commission rate paid....................... $0.0670 N/A N/A N/A
</TABLE>
______________
* Commencement of operations
** Annualized
*** Three months only
See accompanying notes to financial statements.
13
<PAGE>
SHAREHOLDER INFORMATION
MINIMUM INVESTMENT
- ------------------
The minimum amount for the initial purchase of shares of Stratton Small-Cap
Yield Fund is $500. This minimum amount will remain in effect until the Fund
reaches 2,000 shareholders, after which time the minimum amount for initial
purchases will be $5,000. Subsequent purchases may be made in amounts of $100 or
more.
TELEPHONE EXCHANGE
- ------------------
Shares of Stratton Small-Cap Yield Fund may be exchanged by telephone for shares
of the other funds managed by Stratton Management Company, Stratton Growth Fund,
Inc. or Stratton Monthly Dividend Shares, Inc., if a special authorization form
has been completed and is on file with the Transfer Agent in advance. Exchanges
will only be permitted when the securities of both funds involved are registered
in the state of the investor's residence. Stratton Small-Cap Yield Fund reserves
the right to suspend the exchange privilege at any time. A Prospectus of
Stratton Growth Fund or Stratton Monthly Dividend Shares should be obtained and
read prior to making any such exchange.
INCOME DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
- -----------------------------------------------
Stratton Small-Cap Yield Fund expects to distribute substantially all of its net
investment income quarterly, in March, June, September and December. The Fund
intends to distribute all of its net realized capital gains annually.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Investors who either own or purchase Stratton Small-Cap Yield Fund shares having
a value of $10,000 or more may elect as another option to withdraw funds on a
regular basis from their account on a monthly, quarterly, semi-annual or annual
basis in amounts of $50 or more.
SHARE PRICE INFORMATION
- -----------------------
The daily share price of Stratton Small-Cap Yield Fund 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 Fund is listed under Stratton Funds as
SmCap or Small Cap Yield. The Fund's stock ticker symbol is STSCX.
RETIREMENT PLANS
- ----------------
Stratton Small-Cap Yield Fund's IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
14
<PAGE>
GENERAL INFORMATION ON SSCY
- ---------------------------
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Fund's "Distributor":
FUND/PLAN BROKER SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874
Telephone: 800-634-5726
EXISTING SHAREHOLDER ACCOUNT SERVICES
- -------------------------------------
Shareholders seeking information regarding their accounts and other Fund
services, and shareholders executing redemption requests, should continue to
call or write our "Transfer Agent and Dividend Paying Agent":
FUND/PLAN SERVICES, INC.
2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874
Telephones: 610-834-3500 . 800-441-6580
INVESTMENT PORTFOLIO ACTIVITIES
- -------------------------------
Questions regarding Stratton Small-Cap Yield Fund's investment portfolio should
be directed to the Fund's "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 FUND/PLAN SERVICES, INC.
P.O. Box 412797, Kansas City, MO 64141-2797
This report is authorized for distribution to shareholders and to others who
have received a copy of the Prospectus of Stratton Small-Cap Yield Fund.
15
<PAGE>
SSCY STRATTON SMALL-CAP
YIELD FUND
DIRECTORS OFFICERS
LYNNE M. CANNON JAMES W. STRATTON
Chairman
JOHN J. LOMBARD, JR
FRANK H. REICHEL, III
HENRY A. RENTSCHLER President
MERRITT N. RHOAD, JR. JOHN A. AFFLECK
GERARD E. HEFFERNAN
ALEXANDER F. SMITH JOANNE E. KUZMA
Vice President
RICHARD W. STEVENS
PATRICIA L. SLOAM
JAMES W. STRATTON Secretary and Treasurer
JAMES A. BEERS
CAROL L. ROYCE
Assistant Secretary
Assistant Treasurer
INVESTMENT ADVISOR TRANSFER AGENT AND DIVIDEND PAYING AGENT
STRATTON MANGEMENT COMPANY FUND/PLAN SERVICES, INC.
Plymouth Meeting Executive 2 W. Elm Street, P.O. Box 874
Campus 610 W. Germantown Conshohocken, PA 19428-3500 . 800-441-6580
Pike, Suite 300 Plymouth
Meeting, PA 19462-1050
Telephone: 610-941-0255
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