<PAGE>
STRATTON
SMALL-CAP
YIELD FUND
================================================================================
SSCY
================================================================================
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- -------------
<S> <C> <C>
Total Net Assets........... $20,435,759 $20,318,321
Net Asset Value Per Share.. $ 32.76 $ 32.52
Shares Outstanding......... 623,891 624,777
Number of Shareholders..... 893 913
Average Size Account....... $ 22,884 $ 22,254
</TABLE>
================================================================================
Portfolio Changes For the Quarter Ended September 30, 1996 (unaudited)
Major Purchases Major Sales
Acordia, Inc. Affiliated Community Bancorp
A.O. Smith Corp./(1)/ Commercial Intertech Corp./(2)/
Donegal Group, Inc. Harleysville Group, Inc. (PA)/(2)/
Excel Industries, Inc. Hilb, Rogal & Hamilton Co./(2)/
Innkeepers USA Trust Lincoln Telecommunications Co./(2)/
International Multifoods Corp. Quaker State Corp./(2)/
Inter-Regional Financial Group, Inc./(1)/ Sun Communities, Inc./(2)/
Portsmouth Bank Shares, Inc./(1)/
Sturm, Ruger & Co., Inc.
Vermont Financial Services Corp.
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Market Percent
Value of TNA
---------- ---------
<S> <C> <C>
Schweitzer-Mauduit International, Inc... $ 670,000 3.3%
K2, Inc................................. 653,125 3.2
Sturm, Ruger & Co., Inc................. 588,750 2.9
True North Communications, Inc.......... 578,125 2.8
American Business Products, Inc......... 556,250 2.7
Kysor Industrial Corp................... 537,500 2.6
Shared Medical Systems Corp............. 513,000 2.5
Excel Industries, Inc................... 510,000 2.5
A.O. Smith Corp......................... 497,500 2.4
Coca-Cola Bottling Co. Consolidated..... 494,000 2.4
---------- ----
$5,598,250 27.3%
========== ====
</TABLE>
2
<PAGE>
DEAR SHAREHOLDER:
Your Fund completed its second fiscal quarter ended September 30, 1996 with a
net asset value per share of $32.76. Total net assets have grown to $20,435,759.
Our number of shareholder accounts totaled 893 at quarter-end with an average
account size of $22,884. The combination of a lower management fee and increased
average account size has benefited shareholders through a much lower annualized
expense ratio of 1.13%.
The portfolio continues to be invested in a diversified list of holdings
representing nine different industries. The Fund is comprised of small companies
all of which had market capitalizations under $500 million at the time of
purchase. The median market capitalization of the stocks in the portfolio is
approximately $250 million. The current number of holdings is now 59. Portfolio
turnover for the first six months was 42% on an annualized basis.
At the end of the quarter, the portfolio was 92% invested with the remaining
cash reserves held in commercial paper. New purchases were made in the financial
services and auto parts sectors along with several additions made to holdings in
other industries. Banking remains our largest industry weighting at 20%,
followed by consumer products companies at 19%. Industrial companies make up the
next largest group at 17%. Lower yielding technology issues are 10% of the Fund,
while REITs are just under 8% of total net assets.
Third quarter real GDP growth of only 2.2% suggests that the economy is slowing,
accompanied by weak consumer spending and a spike in inventory levels. Fourth
quarter growth is likely to be even smaller as the second and third quarter
inventory rebuilding is not likely to be repeated. Inflation remains in check
with only a 1.6% rise in the GDP price deflator. If wages do not rise
dramatically from here, we could be in for a favorable market for the interest
sensitive sectors of the market. Lastly, with the November elections only a week
away, we are not expecting any surprises at the national level. Assuming the
Republicans keep the House or the Senate, there should be a stable political
platform to help the market.
Performance for the quarter was 1.30%, better than the Russell 2000's 0.34%
advance. Fiscal year-to-date your Fund is up 3.54% compared with a 5.36% rise
for the Russell 2000 Index. During the month of July when the Russell 2000
dropped 8.73% your value oriented Fund performed as expected dropping 4.03% or
less than half as much. We remain committed to our dividend-based style of value
investing and look forward to continued strong relative performance in volatile
market environments.
The Fund's Directors declared the regular fiscal second quarter dividend at the
rate of $0.18 per share payable on September 23 to stockholders of record as of
September 13, 1996. We appreciate your continued support and welcome our new
shareholders to the Fund. As a 100% no-load fund, referrals by our existing
shareholders are an important source of new business to us. Should you have any
questions, you may contact us at 1-800-578-8261.
Sincerely yours,
James W. Stratton Frank H. Reichel, III
Chairman President
November 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 Banking 20%, Consumer
Products 19% 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 an overall universe of 6,000 companies, we screen down to about 1,000
companies by focusing on dividend paying stocks with market capitalizations
under $500 million. Our second step reduces the universe to approximately 150
stocks by screening for dividend coverage and ranking companies on
characteristics such as historical earnings and dividend growth rates.
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>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (unaudited) SEPTEMBER 30, 1996
Market
Number of Value
Shares Security (Note 1)
- --------- -------- --------
<C> <S> <C>
COMMON STOCKS - 92.0%
Banking - 19.7%
2,000 Affiliated Community Bancorp .................... $ 40,750
7,500 American Bank of Connecticut .................... 195,938
10,000 Bankers Corp. (Perth Amboy, NJ) ................. 182,500
4,000 CCB Financial Corp. ............................. 219,000
8,000 Centura Banks, Inc. (NC) ........................ 309,000
7,000 Colonial BancGroup, Inc. ........................ 244,125
12,000 Commerce Bancorp, Inc. (NJ) ..................... 316,500
9,900 Eagle Financial Corp. ........................... 269,775
20,000 First Essex Bancorp, Inc. ....................... 240,000
9,000 First Financial Holdings, Inc. .................. 180,000
4,500 Firstbank of Illinois Co. ....................... 143,437
15,000 Home Financial Corp. (Hollywood, FL) ............ 221,250
15,000 Interchange Financial Services Corp. ............ 322,500
13,000 Medford Savings Bank ............................ 302,250
15,000 Portsmouth Bank Shares, Inc. .................... 193,125
10,000 Reliance Bancorp, Inc. .......................... 187,500
9,000 United Carolina Bancshares Corp. ................ 209,250
7,000 Vermont Financial Services Corp. ................ 239,750
----------
4,016,650
----------
Business Services - 9.4%
25,000 American Business Products, Inc. ................ 556,250
12,200 Inter-Regional Financial Group, Inc. ............ 394,975
10,000 Marc, Inc. ...................................... 195,000
15,000 PMC Capital, Inc. ............................... 204,375
25,000 True North Communications, Inc. ................. 578,125
----------
1,928,725
----------
Consumer Durables - 8.9%
30,000 Jackpot Enterprises, Inc. ....................... 303,750
25,000 K2, Inc. ........................................ 653,125
30,000 Sturm, Ruger & Co., Inc. ........................ 588,750
35,000 Winnebago Industries, Inc. ...................... 280,000
----------
1,825,625
----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (unaudited) SEPTEMBER 30, 1996
Market
Number of Value
Shares Security (Note 1)
----------- -------- -------------
<C> <S> <C>
COMMON STOCKS - 92.0% (continued)
Consumer Non-Durables - 10.5%
13,000 Coca-Cola Bottling Co. Consolidated ............................... $ 494,000
15,000 International Multifoods Corp. .................................... 243,750
25,000 Riviana Foods, Inc. (DE) .......................................... 400,000
20,000 Schweitzer-Mauduit International, Inc. ............................ 670,000
6,000 Velcro Industries, N.V. ........................................... 331,500
------------
2,139,250
------------
Industrial - 17.2%
20,000 A.O. Smith Corp. .................................................. 497,500
12,000 Carpenter Technology Corp. ........................................ 420,000
10,000 Cleveland-Cliffs, Inc. ............................................ 400,000
30,000 Excel Industries, Inc. ............................................ 510,000
25,000 Kuhlman Corp. ..................................................... 365,625
20,000 Kysor Industrial Corp. ............................................ 537,500
10,000 Lukens, Inc. ...................................................... 182,500
15,000 Republic Group, Inc................................................ 215,625
30,000 Roanoke Electric Steel Corp........................................ 390,000
------------
3,518,750
------------
Insurance/Services - 7.3%
15,000 Acordia, Inc. ..................................................... 455,625
25,000 Donegal Group, Inc. ............................................... 450,000
12,500 Selective Insurance Group, Inc. ................................... 418,750
6,000 Washington National Corp. ......................................... 173,250
------------
1,497,625
------------
Real Estate - 7.9%
8,000 Camden Property Trust ............................................. 205,000
8,000 Colonial Properties Trust ......................................... 210,000
20,000 Innkeepers USA Trust .............................................. 225,000
9,000 Merry Land & Investment Co., Inc. ................................. 192,375
9,000 ROC Communities, Inc. ............................................. 219,375
25,000 Ryland Group, Inc. ................................................ 371,875
7,000 Sovran Self Storage, Inc. ......................................... 183,750
------------
1,607,375
------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (unaudited) SEPTEMBER 30, 1996
Market
Number of Value
Shares Security (Note 1)
----------- -------- -------------
<C> <S> <C>
COMMON STOCKS - 92.0% (continued)
Technology - 10.0%
14,500 Boston Acoustics, Inc. ............................................ $ 286,375
15,000 Helix Technology Corp. ............................................ 427,500
12,000 Kaman Corp. Class A ............................................... 127,500
35,000 MacNeal-Schwendler Corp. .......................................... 284,375
9,000 Shared Medical Systems Corp. ...................................... 513,000
15,000 Technitrol, Inc. .................................................. 416,250
-------------
2,055,000
-------------
Utilities - 1.1%
6,000 WICOR, Inc. ....................................................... 218,250
-------------
Total Common Stocks (cost $15,995,645)............................. 18,807,250
-------------
<CAPTION>
Principal
Amount
- ------------
<C> <S> <C>
SHORT-TERM NOTES - 7.6%
$ 770,000 Ford Motor Credit Corp. 5.36% due 10/03/96......................... 770,000
$ 770,000 Associates Corp. of North America 5.29% due 10/08/96............... 770,000
-------------
Total Short-Term Notes (cost $1,540,000)........................... 1,540,000
-------------
Total Investments - 99.6% (cost $17,535,645)*...................... 20,347,250
Cash and Other Assets, Less Liabilities - 0.4%..................... 88,509
-------------
NET ASSETS - 100.0%................................................ $ 20,435,759
=============
</TABLE>
* Aggregate cost for federal income tax purposes is $17,535,645; and net
unrealized appreciation is as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation...................................... $ 3,328,332
Gross unrealized depreciation...................................... (516,727)
-------------
Net unrealized appreciation.................................... $ 2,811,605
=============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at market value (identified cost
$17,535,645) (Note 1).......................................... $ 20,347,250
Cash............................................................ 96,594
Dividends and interest receivable............................... 48,540
------------
Total Assets................................................ 20,492,384
------------
LIABILITIES
Accrued expenses................................................ 2,075
Payable for investment securities purchased..................... 54,550
------------
Total Liabilities........................................... 56,625
------------
NET ASSETS
Applicable to 623,891 shares; $0.001 par value; 1,000,000,000
shares authorize............................................... $ 20,435,759
============
Net asset value, offering and redemption price per share
($20,435,759 + 623,891 shares)............................... $ 32.76
============
SOURCE OF NET ASSETS
Paid-in capital................................................. $ 16,163,483
Accumulated undistributed net investment income................. 37,583
Accumulated net realized gain on investments.................... 1,423,088
Net unrealized appreciation of investments...................... 2,811,605
------------
Net Assets.................................................. $ 20,435,759
============
</TABLE>
================================================================================
STATEMENT OF OPERATIONS
6 Months Ended September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
INCOME
<S> <C>
Dividends........................................................ $ 303,446
Interest......................................................... 39,801
------------
Total Income.................................................. 343,247
------------
EXPENSES
Advisory fees (Note 2)........................................... 48,679
Registration fees (Note 2)....................................... 21,122
Audit fees....................................................... 11,500
Shareholder services fees (Note 2)............................... 8,383
Accounting/Pricing services fees (Note 2)........................ 8,333
Custodian fees (Note 2).......................................... 5,183
Administrative services fees (Note 2)............................ 4,167
Directors' fees.................................................. 2,194
Miscellaneous fees............................................... 1,638
Printing and postage fees........................................ 1,457
Taxes other than income taxes.................................... 625
Legal fees....................................................... 340
------------
Total Expenses................................................ 113,621
------------
Net Investment Income...................................... 229,626
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments................................. 923,878
Net decrease in unrealized appreciation of investments........... (460,616)
------------
Net gain on investments....................................... 463,262
------------
Net increase in net assets resulting from operations....... $ 692,888
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
6 Months
Ended
September 30, Year Ended
1996 March 31,
(unaudited) 1996
--------------- ------------
<S> <C> <C>
OPERATIONS
Net investment income................................................ $ 229,626 $ 384,241
Net realized gain on investments..................................... 923,878 970,650
Net increase (decrease) in unrealized appreciation
of investments.................................................... (460,616) 2,474,521
--------------- ------------
Net increase in net assets resulting from operations............. 692,888 3,829,412
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.32 and $0.66 per share, respectively)......................... (198,480) (382,442)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from the net change
in the number of outstanding shares (a)........................... 349,386 2,086,829
--------------- ------------
Total Increase in Net Assets..................................... 843,794 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
of $37,583 and $6,437, respectively).............................. $ 20,435,759 $ 19,591,965
=============== ============
</TABLE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
6 Months Ended
September 30, 1996 Year Ended
(unaudited) March 31, 1996
------------------------------ ------------------------------
Shares Value Shares Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Shares issued..................... 22,305 $ 717,536 91,285 $ 2,692,659
Shares reinvested from
net investment income......... 4,248 138,717 9,200 277,894
----------- ---------- ----------- -----------
26,553 856,253 100,485 2,970,553
Shares redeemed................... (15,961) (506,867) (30,395) (883,724)
----------- ---------- ----------- -----------
Net increase.................. 10,592 $ 349,386 70,090 $ 2,086,829
=========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 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)
September 30, 1996 (unaudited)
Note 2. - During the six months ended September 30, 1996, the Fund paid advisory
fees aggregating $48,679 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 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"). 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%. 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 $8,383 for
providing shareholder services, $4,167 for certain administrative services and
$8,333 for accounting/pricing services during the six months ended September 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 $4,114,323 and $3,937,840, respectively, for the six months ended
September 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>
6 Months
Ended Year Year For the Period
09/30/96 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......................... 0.37 0.66 0.57 0.43
Net gains (loss) on securities
(both realized and unrealized).............. 0.76 6.07 (0.04) 0.91
Total from investment operations.......... 1.13 6.73 0.53 1.34
Less Distributions
------------------
Dividends (from net investment
income)..................................... (0.32) (0.66) (0.59) (0.40)
Distributions (from capital gains)............ 0.00 0.00 0.00 0.00
Total distributions....................... (0.32) (0.66) (0.59) (0.40)
Net Asset Value, End of Period................ $32.76 $31.95 $25.88 $25.94
Total Return.................................. 3.54%*** 26.18% 2.09% 5.51%**
Ratios/Supplemental Data
------------------------
Net assets, end of period (in 000's).......... $20,436 $19,592 $14,058 $8,257
Ratio of expenses to average
net assets.................................. 1.13%** 1.46% 2.12% 2.28%**
Ratio of net investment
income to average net assets................ 2.29%** 2.28% 2.36% 1.85%**
Portfolio turnover rate....................... 42.42%** 33.50% 30.20% 28.60%**
Average commission rate paid.................. $0.0623 N/A N/A N/A
- -------------------
</TABLE>
* Commencement of operations
** Annualized
*** Six 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
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Stratton Small-Cap Yield Fund's IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
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General Information on SSCY
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Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Fund's "Distributor":
FPS BROKER SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 800-634-5726
Existing Shareholder Account Services
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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":
FPS SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903
Telephones: 610-239-4600 * 800-441-6580
Investment Portfolio Activities
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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
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lock box unit:
C/O FPS 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.
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[LOGO OF STRATTON SMALL-CAP YIELD FUND APPEARS HERE]
STRATTON SMALL-CAP
YIELD FUND
Directors Officers
LYNNE M. CANNON JAMES W. STRATTON
Chairman
JOHN J. LOMBARD, JR. FRANK H. REICHEL, III
President
HENRY A. RENTSCHLER JOHN A. AFFLECK
GERARD E. HEFFERNAN
JOANNE E. KUZMA
MERRITT N. RHOAD, JR. Vice President
PATRICIA L. SLOAN
ALEXANDER F. SMITH Secretary and Treasurer
JAMES A. BEERS
RICHARD W. STEVENS CAROL L. ROYCE
Assistant Secretary
Assistant Treasurer
JAMES W. STRATTON
Investment Advisor Transfer Agent and Dividend Paying Agent
STRATTON MANAGEMENT COMPANY FPS SERVICES, INC.
Plymouth Meeting Executive Campus 3200 Horizon Drive, P.O. Box 61503
610 W. Germantown Pike, Suite 300 King of Prussia, Pa 19406-0903
Plymouth Meeting, PA 19462-1050 Telephones: 610-239-4600 * 800-441-6580
Telephone: 610-941-0255
