<PAGE>
STRATTON
SMALL-CAP
YIELD FUND
- ----------------------------------------------------------
SSCY
- -----------------------------------------------------------
ANNUAL REPORT
MARCH 31, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Total Net Assets........... $19,591,965 $18,490,841
Net Asset Value Per Share.. $ 31.95 $ 31.52
Shares Outstanding......... 613,299 586,635
Number of Shareholders..... 920 921
Average Size Account....... $ 21,296 $ 20,077
</TABLE>
- --------------------------------------------------------------------------------
PORTFOLIO CHANGES For the Quarter Ended March 31, 1996
MAJOR PURCHASES MAJOR SALES
Camden Property Trust Acme-Cleveland Corp./(2)/
Community Bank System, Inc. Owosso Corp./(2)/
Helix Technology Corp. Technitrol, Inc.
Home Financial Corp. (Hollywood, FL) Vigoro Corp. (The)/(2)/
Innkeepers USA Trust/(1)/ WD-40 Co./(2)/
Riviana Foods, Inc. (DE)
Ryland Group, Inc./(1)/
Schweitzer-Mauduit International, Inc.
Sovran Self Storage, Inc.
Sun Communities, Inc.
/(1)/ New Holdings /(2)/ Eliminations
TEN LARGEST HOLDINGS March 31, 1996
<TABLE>
<CAPTION>
MARKET PERCENT
VALUE OF TNA
---------- --------
<S> <C> <C>
Anthony Industries, Inc........... $ 662,500 3.4%
True North Communications, Inc.... 625,000 3.2
American Business Products, Inc... 565,625 2.9
Shared Medical Systems Corp....... 542,250 2.8
Sturm, Ruger & Co., Inc........... 500,500 2.5
MacNeal-Schwendler Corp........... 498,750 2.5
Commercial Intertech Corp......... 471,875 2.4
Carpenter Technology Corp......... 462,000 2.4
Selective Insurance Group, Inc.... 450,000 2.3
Roanoke Electric Steel Corp....... 446,250 2.3
---------- ----
$5,224,750 26.7%
========== ====
</TABLE>
<PAGE>
DEAR SHAREHOLDER:
Your Fund completed its third fiscal year ended March 31, 1996 with a net asset
value per share of $31.95. Total net assets have grown to $19,591,965. Our
number of shareholder accounts totaled 920 at quarter-end with an average
account size of $21,296.
The Fund is comprised of small companies all of which had market capitalizations
under $500 million at the time of purchase. The average market capitalization of
the stocks in the portfolio is approximately $300 million. The current number of
holdings is now 60 which has remained stable for the last twelve months. Our
portfolio turnover for the year was 34%.
At the end of the quarter, the portfolio was 93% invested with the remaining
cash reserves held in short-term commercial paper. Your Fund's industry mix has
remained primarily the same. Banking is our largest industry sector at 19%
followed by industrial and technology at 14% and 11% respectively. Our
technology exposure, while value based, is helping to increase the average
earnings growth rate of the companies in our portfolio.
Following a slowdown in 1995, recent gauges of consumer confidence, durable
goods orders, and the purchasing managers index point to some acceleration of
economic growth. With the successful "soft landing" and the check and balance
relationship between the fixed-income markets and the pulse of the economy, we
may well experience a prolonged period of sustainable growth. The Federal
Reserve has been following the market, allowing bond investors to determine
interest rates. Changes in inflation expectations are immediately reflected in
the general level of interest rates, thereby, correcting perceived imbalances.
The increased volatility of the bond market acts as a speed trap for the
economy. The equity markets are benefiting from the increasing likelihood of an
extended, multi-year earnings recovery, as opposed to a boom-bust cycle.
Performance for the quarter was below the Russell 2000 Small-Cap Index as rising
interest rates hurt the financial sector of the small-cap equity market. For the
quarter, your Fund registered a 1.9% gain versus a 5.1% gain for the Russell
2000. We continue to aggressively look for new undervalued purchase candidates
which we hope will provide strong performance within the value-based parameters
required by the Fund. Also of note is the significantly lower expense ratio of
1.46% for the year ended March 31, 1996 which helps improve the total return to
the shareholder.
The Fund's Directors declared the regular fiscal fourth quarter dividend at the
rate of $0.16 per share payable on March 22 to stockholders of record as of
March 14, 1996. We welcome all of 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
April 24, 1996
<PAGE>
COMPARISON OF CHANGE IN VLUE OF $10,000 INVESTMENT IN
STRATTON SMALL-CAP YIELD FUND AND THE RUSSELL 2000
PERFORMANCE SINCE INCEPTION (4/12/93 - 3/31/96)
[GRAPH OF STRATTON SMALL-CAP YIELD FUND APPERS HERE]
Average Annual Total Return
1 Year Since Inception
26.18% 10.81%
SSCY RUSS 2000
4/12/93 $10,000 $10,000
6/30/93 $10,132 $10,453
9/30/93 $10,850 $11,367
12/31/93 $10,754 $11,666
3/31/94 $10,534 $11,356
6/30/94 $10,529 $10,914
9/30/94 $10,749 $11,671
12/31/94 $10,464 $11,453
3/31/95 $10,754 $11,981
6/30/95 $11,465 $13,104
9/30/95 $12,587 $14,399
12/31/95 $13,318 $14,710
3/31/96 $13,569 $15,466
<PAGE>
DISCUSSION OF INVESTMENT PROCESS AND PERFORMANCE
Stratton Small-Cap Yield Fund's investment philosophy is to achieve total
investment returns through both dividend income and capital appreciation with
investments in dividend-paying small-cap common stocks. Under normal market
conditions, the Fund will invest at least 80% of its assets in equity
securities. The Fund may not invest more than 25% in any one industry. The Fund
may invest up to 10% of total net assets in Real Estate Investment Trusts.
From an overall equity universe of 5,000 companies, using a computer, Stratton
Management screens down to about 300 companies by selecting stocks which possess
a dividend yield of at least 2.5% and a capitalization of less than $500
million. Our second screen then reduces that universe to approximately 80 stocks
by measuring additional security characteristics such as earnings momentum and
dividend growth potential. The portfolio contains approximately sixty companies
that meet these tests. Fundamental security analysis is applied to those
companies on a continuing basis. The final selection of stocks for the portfolio
of Stratton Small-Cap Yield is made by Frank H. Reichel, III and James W.
Stratton.
The volatility of the portfolio, as measured by the Standard Deviation and/or
Beta of the stocks, is considerably below that of the average small-cap fund. By
combining above average dividend yields and lower than average price/earnings
ratios, the Fund tries to produce good performance in up markets and strong
relative performance in down markets.
For the Fund's third fiscal year, performance was below that of the Frank
Russell 2000 Index (26.18% vs. 29.04%). Our performance was hindered by our
strict value approach which did not allow us to keep up with the 39% gain
recorded by the Russell 2000 technology sector. However the financial sector was
up over 30% and was the greatest contributor to the Fund's strong fiscal year
performance. Conditions relating to the Fund's performance for the past quarter
and our outlook for the next twelve months are presented in the President's
letter on page 3.
<PAGE>
SCHEDULE OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------- -------- -----------
<S> <C> <C>
COMMON STOCKS - 92.7%
BANKING - 19.1%
10,000 Affiliated Community Bancorp.......................... $ 176,250
7,500 American Bank of Connecticut.......................... 191,250
10,000 Bankers Corp. (Perth Amboy, NJ)....................... 168,750
11,300 California State Bank (Covina, CA).................... 161,025
4,000 CCB Financial Corp.................................... 201,000
8,000 Centura Banks, Inc. (NC).............................. 294,000
7,000 Colonial BancGroup, Inc............................... 254,625
9,345 Commerca Bancorp, Inc. (NJ)........................... 194,055
8,000 Community Bank System, Inc............................ 248,000
9,900 Eagle Financial Corp.................................. 235,125
20,000 First Essex Bancorp, Inc.............................. 215,000
9,000 First Financial Holdings, Inc......................... 186,750
4,500 Firstbank of Illinois Co.............................. 138,375
15,000 Home Financial Corp. (Hollywood, FL).................. 221,250
12,600 Interchange Financial Services Corp................... 255,150
10,000 Medford Savings Bank.................................. 222,500
10,000 Reliance Bancorp, Inc................................. 161,250
9,000 United Carolina Bancshares Corp....................... 220,500
-----------
3,744,855
-----------
BUSINESS SERVICES - 7.1%
25,000 American Business Products, Inc....................... 565,625
15,000 PMC Capital, Inc...................................... 200,625
25,000 True North Communications, Inc........................ 625,000
-----------
1,391,250
-----------
CONSUMER DURABLES - 9.2%
25,000 Anthony Industries, Inc............................... 662,500
30,000 Jackpot Enterprises, Inc.............................. 337,500
13,000 Sturm, Ruger & Co., Inc............................... 500,500
35,000 Winnebago Industries, Inc............................. 301,875
-----------
1,802,375
-----------
CONSUMER NON-DURABLES - 10.6%
13,000 Coca-Cola Bottling Co. Consolidated.................. 438,750
10,000 International Multifoods Corp........................ 191,250
25,000 Quaker State Corp.................................... 350,000
25,000 Riviana Foods, Inc. (DE)............................. 359,375
15,000 Schweitzer-Mauduit International, Inc................ 412,500
6,000 Velcro Industries, N.V............................... 319,500
-----------
2,071,375
-----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------- -------- -----------
<S> <C> <C>
COMMON STOCKS - 92.7% (CONTINUED)
INDUSTRIAL - 14.3%
12,000 Carpenter Technology Corp............................. $ 462,000
10,000 Cleveland-Cliffs, Inc................................. 442,500
25,000 Commercial Intertech Corp............................. 471,875
9,600 IMC Glogal, Inc....................................... 350,400
25,000 Kuhlman Corp.......................................... 375,000
10,000 Lukens, Inc........................................... 248,750
30,000 Roanoke Electric Steel Corp........................... 446,250
-----------
2,796,775
-----------
INSURANCE/SERVICES - 10.2%
20,000 Donegal Group, Inc.................................... 380,000
15,000 Harleysville Group, Inc. (PA)......................... 401,250
25,000 Hilb, Rogal & Hamilton Co............................. 343,750
12,500 Selective Insurance Group, Inc........................ 450,000
16,000 Washington National Corp.............................. 428,000
-----------
2,003,000
-----------
REAL ESTATE - 9.0%
8,000 Camden Property Trust................................. 185,000
8,000 Colonial Properties Trust............................. 189,000
15,000 Innkeepers USA Trust.................................. 140,625
9,000 Merry Land & Investment Co., Inc...................... 195,750
6,000 National Health Investors, Inc........................ 195,000
9,000 ROC Communities, Inc.................................. 211,500
15,000 Ryland Group, Inc..................................... 241,875
7,000 Sovran Self Storage, Inc.............................. 189,875
8,000 Sun Communities, Inc.................................. 218,000
-----------
1,766,625
-----------
TECHNOLOGY - 11.2%
14,500 Boston Acoustics, Inc................................ 264,625
15,000 Helix Technology Corp................................ 421,875
35,000 MacNeal-Schwendler Corp.............................. 498,750
2,000 Marc, Inc............................................ 33,750
9,000 Shared Medical Systems Corp.......................... 542,250
15,000 Technitrol, Inc...................................... 435,000
-----------
2,196,250
-----------
UTILITIES - 2.9%
10,000 Lincoln Telecommunications Co........................ 192,500
6,000 WICOR, Inc........................................... 202,500
-----------
395,000
-----------
TOTAL COMMON STOCKS (Cost $14,895,284)............... 18,167,505
-----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES SECURITY (NOTE 1)
- --------- -------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 6.9%
$670,000 General Electric Capital Corp. 5.20% due 04/03/96..... $ 670,000
$670,000 General Motors Acceptance Corp. 5.16% due 04/09/96.... 670,000
-----------
Total Short-Term Notes (cost $1,340,000).............. 1,340,000
-----------
TOTAL INVESTMENTS - 99.6% (COST $16,235,284)*......... 19,607,505
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.4%........ 84,460
-----------
NET ASSETS - 100.0%................................... $19,591,965
===========
* Aggregate cost for federal income tax purposes is $16,236,284; and net
unrealized appreciation is as follows:
Gross unrealized appreciation......................... $ 3,451,846
Gross unrealized depreciation......................... (179,625)
-----------
Net unrealized appreciation......................... $ 3,272,221
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value (identified cost
$16,235,284) (Note 1).......................................... $19,507,505
Cash............................................................ 60,065
Dividends and interest receivable............................... 62,371
-----------
Total Assets.................................................. 19,629,941
-----------
LIABILITIES
Payable for securities purchased................................ 33,750
Accrued expenses................................................ 4,226
-----------
Total Liabilities............................................. 37,976
-----------
NET ASSETS
Applicable to 613,299 shares; $0.001 par value; 1,000,000,000
shares authorized.............................................. $19,591,965
===========
Net asset value, offering and redemption price per share
($19,591,965 + 613,299 shares)................................. $ 31.95
===========
SOURCE OF NET ASSETS
Paid-in capital................................................. $15,814,097
Undistributed net investment income............................. 6,437
Accumulated net realized gain on investments..................... 499,210
Net unrealized appreciation of investments...................... 3,272,221
-----------
Net Assets.................................................... $19,591,965
===========
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1996
INCOME
Dividends....................................................... $ 575,956
Interest........................................................ 53,804
-----------
Total Income.................................................. 629,760
-----------
EXPENSES
Advisory fees (Note 2)......................................... 126,638
Shareholder services fees (Note 2).............................. 25,073
Registration fees (Note 2)...................................... 22,445
Accounting/Pricing services fees (Note 2)....................... 20,000
Custodian fees (Note 2)......................................... 13,696
Audit fees...................................................... 10,515
Administrative services fees (Note 2)........................... 10,000
Printing fees................................................... 7,109
Directors' fees................................................. 4,304
Legal fees...................................................... 2,941
Miscellaneous fees.............................................. 2,598
Taxes other than income taxes................................... 200
-----------
Total Expenses................................................. 245,519
-----------
Net Investment Income....................................... 384,241
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................................ 970,650
Net increase in unrealized appreciation of investments.......... 2,474,521
-----------
Net gain on investments....................................... 3,445,171
-----------
Net increase in net assets resulting from operations........ $ 3,829,412
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income.............................. $ 384,241 $ 239,809
Net realized gain (loss) on investments............ 970,650 (401,356)
Net increase in unrealized appreciation of
investments....................................... 2,474,521 637,467
----------- -----------
Net increase in net assets resulting from
operations...................................... 3,829,412 475,920
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.66 and $0.59 per share, respectively)......... (382,442) (243,457)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from the net
change in the number of outstanding shares (a).... 2,086,829 5,569,039
----------- -----------
Total increase in Net Assets..................... 5,533,799 5,801,502
NET ASSETS AT THE BEGINNING OF THE YEAR.............. 14,058,166 8,256,664
----------- -----------
NET ASSETS AT THE END OF THE YEAR
(including undistributed net investment income
$6,437 and $4,638, respectively)................... $19,591,965 $14,058,166
=========== ===========
</TABLE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-----------------------------------------------------
1996 1995
-------------------------- -------------------------
SHARES VALUE SHARES VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Shares issued............. 91,285 $2,692,659 250,270 $6,220,670
Shares reinvested from
net investment income.... 9,200 277,894 6,320 161,497
-------- ---------- ------- ----------
100,485 2,970,553 256,590 6,382,167
Shares redeemed........... (30,395) (883,724) (31,707) (813,128)
-------- ---------- ------- ----------
Net increase............ 70,090 $2,086,829 224,883 $5,569,039
======== ========== ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 2. - During the year ended March 31, 1996, the Fund paid advisory fees
aggregating $126,638 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 $25,073 for
providing shareholder services, $10,000 for certain administrative services and
$20,000 for accounting/pricing services during the year ended March 31, 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 $6,619,088 and $5,303,673, respectively, for the year ended March 31,
1996.
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Year Year For the Period
Ended Ended 04/12/93*
03/31/96 03/31/95 to 03/31/94
--------- --------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $ 25.88 $ 25.94 $ 25.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................................... 0.66 0.57 0.43
Net gain (loss) on securities (both realized and unrealized).. 6.07 (0.04) 0.91
--------- --------- ---------
Total from investment operations............................ 6.73 0.53 1.34
--------- --------- ---------
LESS DISTRIBUTIONS
Dividends (from net investment income)........................ (0.66) (0.59) (0.40)
Distributions (from capital gains)............................ 0.00 0.00 0.00
--------- --------- ---------
Total distributions......................................... (0.66) (0.59) (0.40)
--------- --------- ---------
NET ASSET VALUE, END OF PERIOD................................. $ 31.95 $ 25.88 $ 25.94
========= ========= =========
TOTAL RETURN................................................... 26.18% 2.09% 5.51%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).......................... $ 19,592 $ 14,058 $ 8,257
Ratio of expenses to average net assets....................... 1.46% 2.12% 2.28%**
Ratio of net investment income to average net assets.......... 2.28% 2.36% 1.85%**
Portfolio turnover rate....................................... 33.50% 30.20% 28.60%**
</TABLE>
/*/ Commencement of operations
/**/ Annualized
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Stratton Funds, Inc.
We have audited the accompanying statement of assets and liabilities of
Stratton Small-Cap Yield Fund, a series of The Stratton Funds, Inc., including
the schedule of investments, as of March 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the two years in the period then ended and for the period April 12,
1993, (commencement of operations) to March 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Stratton Small-Cap Yield Fund as of March 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the two years in the period then ended and for the period April 12, 1993,
(commencement of operations) to March 31, 1994, in conformity with generally
accepted accounting principles.
Philadelphia, PA
April 10, 1996 TAIT, WELLER & BAKER
14
<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
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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
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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.
<PAGE>
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":
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
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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":
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
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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 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.
<PAGE>
SSCY STRATTON SMALL-CAP
YIELD FUND
DIRECTORS INVESTMENT ADVISOR
LYNNE M. CANNON STRATTON MANAGEMENT COMPANY
JOHN J. LOMBARD, JR. Plymouth Meeting Executive Campus
ROSE J. RANDALL 610 W. Germantown Pike, Suite 300
HENRY A. RENTSCHLER Plymouth Meeting, PA 19462-1050
MERRITT N. RHOAD, JR. Telephone: 610-941-0255
ALEXANDER F. SMITH
RICHARD W. STEVENS
JAMES W. STRATTON
OFFICERS TRANSFER AGENT AND DIVIDEND PAYING AGENT
JAMES W. STRATTON FUND/PLAN SERVICES, INC.
Chairman 2 W. Elm Street, P.O. Box 874
Conshohocken, PA 19428-0874
FRANK H. REICHEL, III Telephones: 610-834-3500 . 800-441-6580
President
JOHN A. AFFLECK
GERARD E. HEFFERNAN
JOANNE E. KUZMA
Vice President
PATRICIA L. SLOAN
Secretary and Treasurer INDEPENDENT ACCOUNTANTS
JAMES A. BEERS TAIT, WELLER & BAKER
CAROL L. ROYCE 2 Penn Center Plaza, Suite 700
Assistant Secretary Philadelphia, PA 19102-1707
Assistant Treasurer
