<PAGE>
[LOGO APPEARS HERE]
DEAR FELLOW SHAREHOLDER:
In late March, the Federal Reserve Board initiated a 0.25% increase in interest
rates with the intent of slowing the domestic economy. They perceived inflation
threats in the future and felt that the economy was growing too fast presently.
From their public statements, it is believed that their attention is focused on
employment costs, both wages and fringe benefits. The current tight labor
market has produced an environment for higher wage inflation and the Federal
Reserve is fearful that this will be translated into price inflation as it has
been in the past. To date, there are no signs of such price inflation
occurring.
The first quarter earnings reports have been unusually strong, averaging up 15%
for the Standard & Poor's 500. This is a combination of strong GDP growth plus
continued emphasis on cost cutting. Based upon first quarter reports, the S&P
500 is now selling at about seventeen times estimated 1997 annual earnings of
forty-four dollars. The strong earnings reports are giving management
confidence to continue high levels of capital spending for new production
capacity and cost cutting equipment. It also reinforces their free cash flow
which is available for increased dividends and further stock buybacks.
The markets seemed to adjust to the interest rate increase from the Federal
Reserve in March. It now appears that a second increase to take place in May
has been fairly discounted within the market. Real bond yields have increased
120 basis points over the last four months. One recent survey of institutional
bond managers shows that they were broadly bearish. A contrarian point-of-view
might suggest that we are approaching a buying point in the bond market if such
universal bearishness persists. This would be corroborated if economic activity
level begins to slow down as we expect it will.
In our January outlook for the year we cited our expectation that 1997 would
produce single digit returns for the S&P 500. Our reasoning was two fold, that
historically the first year of presidential terms had shown an average of only
2.7% returns, and that the average of all the years following back-to-back
double digit returns in the market was a -2% return. For the first quarter, the
S&P 500 returned 2.67%. We continue to forecast a positive single digit return
for the S&P 500 for all of 1997. It will be a year in which gains in the stock
market will not come easy and a return to fundamental valuations will produce
significant losses in many of the hyperinflated areas of the over-the-counter
markets. This is the type of year in which stock selection and focus on company
valuation will be all important.
There is a potential negotiated "budget deal" that would include a capital
gains tax cut. This could be passed to be effective later in 1997. The bad news
is that the stock market has generally declined after the effective date of any
capital gains cut. This was true in 1978 and 1981 as investors took advantage
of lower rates by selling stocks.
Sincerely yours,
/s/ James W. Stratton
James W. Stratton
Chairman
May 5, 1997
<PAGE>
FUND HIGHLIGHTS
Stratton Growth Fund
<TABLE>
<CAPTION>
MARCH 31, 1997 December 31, 1996
- -----------------------------------------------------------
<S> <C> <C>
Total Net Assets $44,724,986 $44,801,256
- -----------------------------------------------------------
Net Asset Value Per Share $27.59 $27.00
- -----------------------------------------------------------
Shares Outstanding 1,620,832 1,659,408
- -----------------------------------------------------------
Number of Shareholders 1,211 1,239
- -----------------------------------------------------------
Average Size Account $36,932 $36,159
- -----------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------------
<S> <C>
Commerce Bancorp, Inc. Atlantic Richfield Co. (2)
First Commerce Corp. (1) International Paper Co. (2)
First Hawaiian, Inc. (1) Primex Technologies, Inc. (2)
Fleetwood Enterprises, Inc. (1) Sturm, Ruger & Co., Inc.
Glatfelter (P.H.) Co. Westvaco Corp.
Penney (J.C.) Co. (1)
The Limited, Inc. (1)
Thomas & Betts Corp. (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------------
<S> <C> <C>
CoreStates Financial Corp. $ 2,642,187 5.9%
- ------------------------------------------------------------
Du Pont (E.I.) de Nemours & Co. 2,120,000 4.7
- ------------------------------------------------------------
EG & G, Inc. 2,087,500 4.7
- ------------------------------------------------------------
PNC Bank Corp. 2,000,000 4.5
- ------------------------------------------------------------
Olin Corp. 1,987,500 4.5
- ------------------------------------------------------------
American Express Co. 1,796,250 4.0
- ------------------------------------------------------------
Pitney Bowes, Inc. 1,762,500 4.0
- ------------------------------------------------------------
Carpenter Technology Corp. 1,759,500 3.9
- ------------------------------------------------------------
Mobil Corp. 1,567,500 3.5
- ------------------------------------------------------------
Harris Corp. 1,537,500 3.4
- ------------------------------------------------------------
$19,260,437 43.1%
- ------------------------------------------------------------
</TABLE>
2
<PAGE>
STRATTON GROWTH FUND
[LINE GRAPH APPEARS HERE]
Stratton Growth Fund made some significant changes in its portfolio during the
first quarter of the year. We added to our position in banks and financial
stocks raising the total to 19.3% of assets. We did this through adding two new
names to the portfolio; First Commerce Corp., a regional bank located in
Louisiana and First Hawaiian Inc. In addition, we added to our holdings of
Commerce Bancorp., which is located in the Delaware Valley and New Jersey. We
continue to believe that the banking industry is ripe for further consolidation
and that bank earnings will continue to grow in the interest rate environment
that we envision.
We invested 2% in retailing stocks using both JC Penney and The Limited. We
have not held this industry in the past because of its prolonged earnings
weakness. We do see signs that retailing is improving, especially on the soft
goods side.
To provide funds for these purchases we reduced our holdings in the paper
industry from 10% of the portfolio to 5% and we reduced our position in the
energy industry by 2.4%. The portfolio turnover rate was 10% for the quarter
which is a normal level for this Fund. Our expense ratio improved further to
1.11% on an annualized basis. The total return for the Fund during the first
quarter was 2.19% which trailed the S&P 500 slightly.
Total net assets were $44,724,986. Net asset value per share rose to $27.59.
3
<PAGE>
FUND HIGHLIGHTS
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
MARCH 31, 1997 December 31, 1996
- -----------------------------------------------------------
<S> <C> <C>
Total Net Assets $94,883,884 $103,779,735
- -----------------------------------------------------------
Net Asset Value Per Share $27.14 $27.43
- -----------------------------------------------------------
Shares Outstanding 3,495,466 3,783,660
- -----------------------------------------------------------
Number of Shareholders 5,541 5,838
- -----------------------------------------------------------
Average Size Account $17,124 $17,777
- -----------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- -------------------------------------------------------------------------------
<S> <C>
Gables Residential Trust (1) Atlantic Energy, Inc. (2)
Glimcher Realty Trust Boston Edison Co. (2)
Home Properties of NY, Inc. (1) Crown American Realty Trust (2)
Hospitality Properties Trust (1) Delmarva Power & Light Co. (2)
Jameson Inns, Inc. (1) Eastern Utility Associates (2)
Liberty Property Trust (1) Nevada Power Co. (2)
LTC Properties, Inc. (1) Orange & Rockland Utilities, Inc. (2)
Oasis Residential, Inc. (1) Rochester Gas & Electric Corp. (2)
Universal Health Realty Income
Trust (1) U.S. West Communications Group Delaware (2)
Western Investment Real Estate (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ----------------------------------------------------------------
<S> <C> <C>
Health Care REIT, Inc. $ 4,609,875 4.9%
- ----------------------------------------------------------------
National Health Investors, Inc. 4,581,225 4.8
- ----------------------------------------------------------------
Excel Realty Trust, Inc. 4,418,750 4.7
- ----------------------------------------------------------------
Developers Diversified Realty Corp. 3,397,500 3.6
- ----------------------------------------------------------------
Mid-America Realty Investments, Inc 3,347,625 3.5
- ----------------------------------------------------------------
Merry Land & Investment Co., Inc. 3,075,000 3.2
- ----------------------------------------------------------------
EastGroup Properties, SBI 2,522,475 2.7
- ----------------------------------------------------------------
Equity Inns, Inc. 2,517,500 2.7
- ----------------------------------------------------------------
The Price REIT, Inc. 2,497,500 2.6
- ----------------------------------------------------------------
Glimcher Realty Trust 2,486,250 2.6
- ----------------------------------------------------------------
$33,453,700 35.3%
- ----------------------------------------------------------------
</TABLE>
4
<PAGE>
STRATTON MONTHLY DIVIDEND SHARES
[LINE GRAPH APPEARS HERE]
During the first quarter of 1997, Stratton Monthly Dividend Shares completed
the transition to an all REIT fund. We sold the remaining utility stocks that
were held. We now have 44 companies, including convertible securities, which is
broad diversification within the REIT universe. Our largest single industry
groups are 18.3% in shopping centers; 16.1% in health care real estate; 15.8%
in apartments; and 13.6% in hotels and motels. The remainder of the portfolio
is distributed among a wide variety of other property types of REITs.
As a result, portfolio turnover for the first quarter was somewhat higher than
normal at 18%. We expect turnover to moderate considerably for the rest of the
year as we have completed the conversion from utilities to REITs. Our expense
ratio held at the low level of 1%, on an annual basis. This permitted your fund
to produce a ratio of net income to average net assets of 7.82%.
Historically, REITs have been considered defensive investments. UBS Securities
analyzed REIT price performance over the past three years. During that time,
there were twelve weeks when the S&P 500 declined by more than 2%; REITs
outperformed the S&P 500 in eleven of those twelve weeks; registering an
average decrease of 0.72% while the S&P 500 declined 2.41%. REITs are clearly a
choice for investors concerned about the level of today's market.
UBS took the study one step further and determined that higher yielding REITs
outperformed the industry average in periods of market uncertainty regardless
of the interest rate environment.
The total return for the Fund during the most recent quarter was 0.69%. While
this positive return trailed the S&P 500, it was achieved in a period during
which the Federal Reserve Board raised interest rates. The portfolio clearly
performed much better than it would have if we had maintained our former
diversified portfolio of utility stocks.
Total net assets were $94,883,884. Net asset value per share was $27.14.
5
<PAGE>
FUND HIGHLIGHTS
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARCH 31, 1997 December 31, 1996
- -----------------------------------------------------------
<S> <C> <C>
Total Net Assets $22,471,595 $21,691,076
- -----------------------------------------------------------
Net Asset Value Per Share $34.82 $33.58
- -----------------------------------------------------------
Shares Outstanding 645,457 645,878
- -----------------------------------------------------------
Number of Shareholders 858 874
- -----------------------------------------------------------
Average Size Account $26,191 $24,818
- -----------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ------------------------------------------------------------------------
<S> <C>
Commercial Intertech Corp. (1) A.O. Smith Corp.
Florida Rock Industries, Inc. (1) K2, Inc.
Helix Technology Corp. Kysor Industrial Corp. (2)
Marc, Inc. Merry Land & Investment Co., Inc. (2)
Primex Technologies, Inc. (1) Sturm, Ruger & Co., Inc.
Tasty Baking Co. Winnebago Industries, Inc. (2)
West Co., Inc. (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -------------------------------------------------------------
<S> <C> <C>
A.O. Smith Corp. $ 697,500 3.1%
- -------------------------------------------------------------
Helix Technology Corp. 655,000 2.9
- -------------------------------------------------------------
Excel Industries, Inc. 611,250 2.7
- -------------------------------------------------------------
Marc, Inc. 609,375 2.7
- -------------------------------------------------------------
American Business Products, Inc. 600,000 2.7
- -------------------------------------------------------------
Mississippi Chemical Corp. 596,875 2.7
- -------------------------------------------------------------
Interra Financial, Inc. 590,750 2.6
- -------------------------------------------------------------
Donegal Group, Inc. 590,625 2.6
- -------------------------------------------------------------
Kuhlman Corp. 581,250 2.6
- -------------------------------------------------------------
K2, Inc. 572,125 2.6
- -------------------------------------------------------------
$6,104,750 27.2%
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
STRATTON SMALL-CAP YIELD FUND
[LINE GRAPH APPEARS HERE]
Stratton Small-Cap Yield Fund is comprised of small companies all of which have
market capitalizations under $500 million at the time of purchase. Currently,
the average market capitalization of the stocks in the portfolio is
approximately $300 million. The current number of holdings is 58, which is
similar to the previous twelve months. Our portfolio turnover for the quarter
was lower than normal at 8%.
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. Industrial stocks now make up our largest sector
weighting at 20% with Banking at 19%. Business services are 11% while 10% of
the portfolio is in dividend-paying Technology stocks.
Performance for the quarter was significantly above the Russell 2000 Small-Cap
Index as softness in technology stocks guided the small-cap equity markets
lower. For the quarter, your Fund registered a 4.1% gain versus a 4.4% loss for
the Russell. Our portfolio escaped the many earnings disappointments announced
by computer graphics and networking companies. We were also helped by the
takeover of Kysor Industrial and two small bank holdings. 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.
The Fund's Directors declared the regular first fiscal quarter dividend at the
rate of $0.10 per share payable on March 21 to stockholders of record as of
March 13, 1997.
Total net assets have grown to $22,471,595. Net asset value per share was
$34.82.
7
<PAGE>
STRATTON GROWTH FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SGF is to seek possible growth of capital for its
shareholders' investments with current income from interest and dividends as a
secondary objective. The Fund's investments will normally consist of common
stock and securities convertible into common stock.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
Our in-house research of historical data shows that investing in high yielding
common stocks has produced above-average returns while lowering risk and
preserving capital. For Stratton Management Co., the common stock yield is the
primary screen in sorting out the equity stocks that are available. We then
look at additional yield characteristics such as dividend growth rates and
dividend coverage. Finally, we conduct fundamental analysis of important
characteristics such as the earnings and cash flow outlook, management
strengths, and industry competitive position.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 by more than
50%.
. Approximately 30 companies are held.
. By combining high dividend yield and underlying low price volatility
(Beta), SGF should have the potential to produce good relative performance
in up markets and superior relative performance in down markets.
8
<PAGE>
STRATTON MONTHLY DIVIDEND SHARES
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SMDS is to seek a high rate of return from dividend
and interest income on its investments in common stock and securities
convertible into common stock. The Fund intends to invest at least 25% of its
assets in securities of Real Estate Investment Trusts ( REITs ) and of public
utility companies engaged in the production, transmission or distribution of
electric, energy, gas, water or telephone service.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
SMDS, from 1980 through 11/29/96, was heavily invested in the securities of
public utility companies. In the Fall of 1996, it was the belief of Stratton
Management Company, the Fund's Advisor, supported by a proxy vote of the
Fund's outstanding shares, that the Fund's primary mission of maintaining and
distributing a high level of dividend income would be significantly enhanced
by allowing the Fund to concentrate its assets both in REITs and public
utility companies. Currently, 80% or more of the Fund's assets is invested in
high dividend paying REITs. REITs were designed to provide investors with a
tradable interest in a pool of real estate or real estate related assets.
There are several types of real estate properties that are owned by REITs,
including health care facilities, apartment complexes, shopping malls, office
centers, hotels, and industrial buildings.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The portfolio is comprised of high dividend paying securities.
. Approximately 40 companies are held.
. SMDS is managed to provide a high level of current monthly income, and to
offer the potential for long-term capital appreciation.
9
<PAGE>
STRATTON SMALL-CAP YIELD FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SSCY is to achieve both dividend income and capital
appreciation for its shareholders' investments 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 INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
This all equity mutual fund invests in the common stocks of small but
established dividend paying companies. The initial screen for stock selection
requires that a stock yields greater than the Small Cap average as measured by
the Russell 2000 Index. We then employ a three step process which focuses on a
stock's fundamental valuation, earnings prospects, and, as a confirming
factor, relative price strength. We feel that companies that exhibit
consistent earnings and that regularly increase their dividends have superior
appreciation potential with reasonable levels of risk.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 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), SSCY seeks to produce good relative performance in up markets and
superior relative performance in down markets.
10
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1997 (unaudited)
Stratton Growth Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 93.0%
BANKING/FINANCIAL - 19.3%
Comerica, Inc............................................. 15,000 $ 845,625
Commerce Bancorp, Inc..................................... 31,000 852,500
CoreStates Financial Corp................................. 55,625 2,642,187
First Commerce Corp....................................... 20,000 810,000
First Hawaiian, Inc....................................... 20,000 622,500
PNC Bank Corp............................................. 50,000 2,000,000
Summit Bancorp, Inc....................................... 20,000 875,000
-----------
8,647,812
-----------
BUSINESS SERVICES - 8.0%
American Express Co....................................... 30,000 1,796,250
Pitney Bowes, Inc......................................... 30,000 1,762,500
-----------
3,558,750
-----------
CAPITAL GOODS/TECHNOLOGY - 10.0%
EG & G, Inc............................................... 100,000 2,087,500
Harris Corp............................................... 20,000 1,537,500
Thomas & Betts Corp....................................... 20,000 855,000
-----------
4,480,000
-----------
CHEMICAL - 9.2%
Du Pont (E.I.) de Nemours & Co............................ 20,000 2,120,000
Olin Corp................................................. 50,000 1,987,500
-----------
4,107,500
-----------
CONSUMER PRODUCTS - 10.7%
Hormel Foods Corp......................................... 50,000 1,281,250
Kimberly-Clark Corp....................................... 14,000 1,391,250
The Quaker Oats Co........................................ 40,000 1,460,000
Sturm, Ruger & Co., Inc................................... 40,000 635,000
-----------
4,767,500
-----------
ENERGY - 7.2%
El Paso Energy Corp....................................... 10,000 566,250
Exxon Corp................................................ 10,000 1,077,500
Mobil Corp................................................ 12,000 1,567,500
-----------
3,211,250
-----------
HEALTH CARE - 6.3%
American Home Products Corp............................... 20,000 1,200,000
Pharmacia & Upjohn, Inc................................... 25,000 915,625
SmithKline Beecham PLC ADRs............................... 10,000 700,000
-----------
2,815,625
-----------
INDUSTRIAL - 1.1%
Fleetwood Enterprises, Inc................................ 20,000 500,000
-----------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
INSURANCE/SERVICES - 10.3%
American General Corp.................................... 30,000 $ 1,222,500
Aon Corp................................................. 15,000 918,750
Lincoln National Corp.................................... 20,000 1,070,000
USLife Corp.............................................. 30,000 1,402,500
-----------
4,613,750
-----------
METALS - 3.9%
Carpenter Technology Corp................................ 46,000 1,759,500
-----------
PAPER - 5.1%
Glatfelter (P.H.) Co..................................... 60,000 990,000
Westvaco Corp............................................ 25,000 628,125
Weyerhaeuser Co.......................................... 15,000 669,375
-----------
2,287,500
-----------
RETAILING - 1.9%
The Limited, Inc......................................... 20,000 367,500
Penney (J.C.) Co......................................... 10,000 476,250
-----------
843,750
-----------
Total Common Stocks
(cost $28,032,919)...................................... 41,592,937
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 6.8%
Prudential Funding Corp.
5.40% due 04/02/97..................................... $1,515,000 1,515,000
General Electric Capital Corp.
5.65% due 04/07/97..................................... 1,515,000 1,515,000
-----------
Total Short-Term Notes
(cost $3,030,000)...................................... 3,030,000
-----------
TOTAL INVESTMENTS - 99.8%
(cost $31,062,919*).................................... 44,622,937
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.2%................................ 102,049
-----------
NET ASSETS - 100.0%..................................... $44,724,986
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $31,062,919; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $13,819,630
Gross unrealized depreciation...................................... (259,612)
-----------
Net unrealized appreciation....................................... $13,560,018
===========
</TABLE>
11
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1997 (unaudited)
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 82.4%
REAL ESTATE - 82.4%
APARTMENTS - 15.8%
Berkshire Realty Co., Inc................................ 90,000 $ 978,750
Evans Withycombe Residential, Inc........................ 60,000 1,237,500
Gables Residential Trust................................. 50,000 1,275,000
Home Properties of New York, Inc......................... 50,000 1,181,250
Merry Land & Investment Co., Inc......................... 150,000 3,075,000
Mid-America Apartment Communities, Inc................... 50,000 1,400,000
Oasis Residential, Inc................................... 50,000 1,125,000
Summit Properties, Inc................................... 50,000 1,012,500
Town & Country Trust..................................... 153,300 2,299,500
Walden Residential Properties, Inc. ..................... 60,000 1,447,500
-----------
15,032,000
-----------
DIVERSIFIED - 6.6%
Colonial Properties Trust................................ 75,000 2,175,000
EastGroup Properties, SBI................................ 90,900 2,522,475
Pacific Gulf Properties, Inc............................. 70,000 1,522,500
-----------
6,219,975
-----------
HEALTH CARE - 16.1%
American Health Properties, Inc.......................... 100,000 2,462,500
Health & Retirement Properties Trust..................... 70,000 1,260,000
Health Care REIT, Inc.................................... 194,100 4,609,875
LTC Properties, Inc...................................... 70,000 1,163,750
National Health Investors, Inc........................... 123,400 4,581,225
Universal Health Realty Income Trust..................... 60,000 1,200,000
-----------
15,277,350
-----------
HOTELS/MOTELS - 13.6%
Equity Inns, Inc. ....................................... 190,000 2,517,500
Hospitality Properties Trust............................. 50,000 1,531,250
Innkeepers USA Trust..................................... 160,000 2,340,000
Jameson Inns, Inc........................................ 110,000 1,266,716
RFS Hotel Investors, Inc. ............................... 100,000 1,737,500
Sunstone Hotel Investors, Inc. .......................... 100,000 1,312,500
Winston Hotels, Inc...................................... 170,000 2,188,750
-----------
12,894,216
-----------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
OFFICE/INDUSTRIAL - 4.4%
Commercial Net Lease Realty, Inc.......................... 90,000 $ 1,327,500
Liberty Property Trust.................................... 65,000 1,592,500
TriNet Corporate Realty Trust, Inc........................ 40,000 1,265,000
-----------
4,185,000
-----------
OUTLET CENTERS - 4.1%
Mills Corp................................................ 60,000 1,515,000
Tanger Factory Outlet Centers, Inc........................ 90,000 2,362,500
-----------
3,877,500
-----------
REGIONAL MALLS - 3.5%
Mid-America Realty Investments, Inc....................... 339,000 3,347,625
-----------
SHOPPING CENTERS - 18.3%
Bradley Real Estate, Inc.................................. 70,000 1,338,750
BRE Properties, Inc. ..................................... 10,000 247,500
Developers Diversified Realty Corp........................ 90,000 3,397,500
Excel Realty Trust, Inc................................... 175,000 4,418,750
Glimcher Realty Trust..................................... 130,000 2,486,250
IRT Property Co........................................... 166,000 1,826,000
The Price REIT, Inc....................................... 67,500 2,497,500
Western Investment Real Estate Trust...................... 90,000 1,125,000
-----------
17,337,250
-----------
Total Common Stocks (cost $74,175,987).................... 78,170,916
-----------
PREFERRED STOCKS - 3.0%
Psychiatric Group Preferred Depositary Shares............. 100,000 1,875,000
(each depositary share represents 1/10th of a share of
American Health Properties Psychiatric Group Pfd. Stock)
Rouse Co.
$3.00 Cv. Pfd. Series B.................................. 20,000 980,000
-----------
Total Preferred Stocks (cost $2,771,480).................. 2,855,000
-----------
</TABLE>
12
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1997 (unaudited) (continued)
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 5.6%
Interstate/Johnson Lane, Inc.
7.75% Cv. Sub. Debs. 03/31/11.......................... $2,659,000 $ 2,659,000
Mid-Atlantic Realty Trust
7.625% Cv. Sub. Debs. 09/15/03......................... 2,500,000 2,612,500
-----------
Total Convertible Debentures
(cost $4,842,232)...................................... 5,271,500
-----------
SHORT-TERM NOTES - 8.6%
Chevron Oil Financial Co.
5.50% due 04/01/97..................................... 1,932,000 1,932,000
Prudential Funding Corp.
5.40% due 04/02/97..................................... 2,445,000 2,445,000
American Express Credit Corp.
5.90% due 04/03/97..................................... 3,790,000 3,790,000
-----------
Total Short-Term Notes
(cost $8,167,000)...................................... 8,167,000
-----------
TOTAL INVESTMENTS - 99.6%
(cost $89,956,699*).................................... 94,464,416
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.4%.......... 419,468
-----------
NET ASSETS - 100.0%..................................... $94,883,884
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $89,956,699; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 5,926,921
Gross unrealized depreciation...................................... (1,419,204)
-----------
Net unrealized appreciation....................................... $ 4,507,717
===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1997 (unaudited)
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 92.9%
BANKING/FINANCIAL - 19.3%
Affiliated Community Bancorp............................. 2,000 $ 47,500
American Bank of Connecticut............................. 7,500 232,500
Bankers Corp. (Perth Amboy, NJ).......................... 10,000 248,750
CCB Financial Corp....................................... 4,000 257,000
Centura Banks, Inc. (NC)................................. 8,000 312,000
Colonial BancGroup, Inc.................................. 14,000 322,000
Commerce Bancorp, Inc. (NJ).............................. 12,600 346,500
Eagle Financial Corp..................................... 9,900 279,675
First Essex Bancorp, Inc................................. 20,000 295,000
First Financial Holdings, Inc............................ 9,000 220,500
Firstbank of Illinois Co................................. 4,500 162,000
Medford Savings Bank..................................... 13,000 318,500
Portsmouth Bank Shares, Inc.............................. 20,400 306,000
Reliance Bancorp, Inc.................................... 10,000 236,250
Sterling Bancorp (NY).................................... 6,000 90,000
United Carolina Bancshares Corp.......................... 9,000 385,875
Vermont Financial Services Corp.......................... 7,000 287,000
-----------
4,347,050
-----------
BUSINESS SERVICES - 11.0%
American Business Products, Inc.......................... 25,000 600,000
Interra Financial, Inc................................... 17,000 590,750
Marc, Inc................................................ 37,500 609,375
PMC Capital, Inc......................................... 15,000 202,500
True North Communications, Inc........................... 25,000 468,750
-----------
2,471,375
-----------
CHEMICAL - 5.1%
Mississippi Chemical Corp................................ 25,000 596,875
Primex Technologies, Inc................................. 30,000 555,000
-----------
1,151,875
-----------
CONSUMER DURABLES - 4.6%
K2, Inc.................................................. 23,000 572,125
Sturm, Ruger & Co., Inc.................................. 7,000 111,125
TB Wood's Corp........................................... 27,000 357,750
-----------
1,041,000
-----------
CONSUMER NON-DURABLES - 9.3%
International Multifoods Corp............................ 25,000 512,500
Riviana Foods, Inc. (DE)................................. 25,000 431,250
Tasty Baking Co.......................................... 20,100 341,700
Velcro Industries, N.V................................... 6,000 402,750
West Co., Inc............................................ 15,000 406,875
-----------
2,095,075
-----------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
INDUSTRIAL - 19.6%
A.O. Smith Corp.......................................... 20,000 $ 697,500
Carpenter Technology Corp................................ 12,000 459,000
Cleveland-Cliffs, Inc.................................... 10,000 422,500
Commercial Intertech Corp................................ 12,600 141,750
Excel Industries, Inc.................................... 30,000 611,250
Florida Rock Industries, Inc............................. 10,000 327,500
Kuhlman Corp............................................. 25,000 581,250
Quanex Corp.............................................. 15,000 376,875
Republic Group, Inc...................................... 22,000 335,500
Roanoke Electric Steel Corp.............................. 30,000 442,500
-----------
4,395,625
-----------
INSURANCE/SERVICES - 7.9%
Acordia, Inc............................................. 15,000 487,500
Donegal Group, Inc....................................... 25,000 590,625
Selective Insurance Group, Inc........................... 12,500 518,750
Washington National Corp................................. 6,000 167,250
-----------
1,764,125
-----------
REAL ESTATE - 5.6%
Brandywine Realty Trust.................................. 2,500 50,625
Camden Property Trust.................................... 8,000 218,000
Chateau Properties, Inc.................................. 9,378 242,656
Colonial Properties Trust................................ 8,000 232,000
Innkeepers USA Trust..................................... 20,000 292,500
Sovran Self Storage, Inc................................. 7,000 215,250
-----------
1,251,031
-----------
TECHNOLOGY - 9.6%
Boston Acoustics, Inc.................................... 14,500 362,500
Helix Technology Corp.................................... 20,000 655,000
Kaman Corp. Class A...................................... 12,000 162,000
Shared Medical Systems Corp.............................. 9,000 418,500
Technitrol, Inc.......................................... 30,000 562,500
-----------
2,160,500
-----------
UTILITIES - 0.9%
WICOR, Inc............................................... 6,000 204,000
-----------
Total Common Stocks (cost $15,928,522)................... 20,881,656
-----------
</TABLE>
14
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1997 (unaudited) (continued)
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
--------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 8.9%
General Electric Capital Corp.
5.50% due 04/01/97.................................... $500,000 $ 500,000
American Express Credit Corp.
5.90% due 04/03/97.................................... 750,000 750,000
Prudential Funding Corp.
5.65% due 04/08/97.................................... 750,000 750,000
-----------
Total Short-Term Notes (cost $2,000,000)............... 2,000,000
-----------
TOTAL INVESTMENTS - 101.8%
(cost $17,928,522*)................................... 22,881,656
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -
(1.8%)............................................... (410,061)
-----------
NET ASSETS - 100.0%.................................... $22,471,595
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $17,928,522 and net
unrealized appreciation is as follows:
<TABLE>
<S> <C> <C>
Gross unrealized appreciation................................... $5,099,997
Gross unrealized depreciation................................... (146,863)
----------
Net unrealized appreciation.................................... $4,953,134
==========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1997 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities at value
(cost $31,062,919, $89,956,699, and
$17,928,522, respectively) (Note 1)... $44,622,937 $ 94,464,416 $22,881,656
Cash................................... 21,877 982 82,021
Dividends and interest receivable...... 82,238 553,819 49,652
Prepaid expenses....................... 7,838 690 --
Receivable for investment securities
sold.................................. -- -- 320,239
----------- ------------ -----------
Total Assets......................... 44,734,890 95,019,907 23,333,568
----------- ------------ -----------
LIABILITIES:
Accrued expenses and other
liabilities........................... 9,904 18,798 11,194
Payable for investment securities
purchased............................. -- 117,225 347,670
Payable for capital stock redeemed..... -- -- 503,109
----------- ------------ -----------
Total Liabilities.................... 9,904 136,023 861,973
----------- ------------ -----------
NET ASSETS:
Applicable to 1,620,832, 3,495,466 and
645,457 shares outstanding,
respectively/1/ ...................... $44,724,986 $ 94,883,884 $22,471,595
=========== ============ ===========
Net asset value, offering and
redemption price per share............ $ 27.59 $ 27.14 $ 34.82
=========== ============ ===========
SOURCE OF NET ASSETS:
Paid-in capital........................ $28,815,840 $109,138,187 $16,852,087
Undistributed net investment income ... 235,763 168,724 14,416
Accumulated net realized gain (loss) on
investments........................... 2,113,365 (18,930,744) 651,958
Net unrealized appreciation of
investments........................... 13,560,018 4,507,717 4,953,134
----------- ------------ -----------
Net Assets........................... $44,724,986 $ 94,883,884 $22,471,595
=========== ============ ===========
</TABLE>
- --------
/1/ SGF:$.10 par value, 10,000,000 shares authorized; SMDS: $1.00 par value,
10,000,000 shares authorized; SSCY: $.001 par value, 1,000,000,000 shares
authorized.
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY
---------- ----------- --------
<S> <C> <C> <C>
INCOME:
Dividends.................................. $ 317,220 $ 1,983,649 $154,281
Interest................................... 36,010 215,977 15,204
---------- ----------- --------
Total Income............................. 353,230 2,199,626 169,485
---------- ----------- --------
EXPENSES:
Accounting/Pricing services fees (Note 2).. 5,000 6,000 5,000
Administration services fees (Note 2)...... 7,500 7,500 2,500
Advisory fees (Note 2)..................... 82,021 152,210 59,180
Custodian fees (Note 2).................... 5,708 11,589 2,683
Directors' fees............................ 2,261 4,646 1,093
Legal fees................................. -- 804 193
Miscellaneous fees......................... 585 944 316
Printing and postage fees.................. 3,259 6,911 1,014
Registration fees (Note 2)................. 12,133 15,111 14,380
Shareholder services fees (Note 2)......... 7,102 41,794 3,974
Taxes other than income taxes.............. 981 1,993 450
---------- ----------- --------
Total Expenses........................... 126,550 249,502 90,783
---------- ----------- --------
Net Investment Income.................. 226,680 1,950,124 78,702
---------- ----------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON IN-
VESTMENTS:
Net realized gain (loss) on investments.... 1,369,603 (2,930,530) 352,574
Net increase (decrease) in unrealized ap-
preciation on investments................. (587,407) 1,845,660 420,345
---------- ----------- --------
Net gain (loss) on investments............. 782,196 (1,084,870) 772,919
---------- ----------- --------
Net increase in net assets resulting from
operations.............................. $1,008,876 $ 865,254 $851,621
========== =========== ========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SGF SMDS
----------------------------------------- ------------------------------
3 MONTHS ENDED 7 MONTHS ENDED YEAR ENDED 3 MONTHS ENDED 11 MONTHS ENDED
03/31/97* 12/31/96 05/31/96 03/31/97* 12/31/96
-------------- -------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 226,680 $ 514,358 $ 854,333 $ 1,950,124 $ 6,886,732
Net realized gain
(loss) on invest-
ments................. 1,369,603 749,571 2,277,319 (2,930,530) 1,855,839
Net increase (decrease)
in unrealized
appreciation
(depreciation) of
investments........... (587,407) 1,414,784 6,391,511 1,845,660 (2,376,846)
----------- ----------- ----------- ----------- ------------
Net increase in net
assets resulting from
operations............ 1,008,876 2,678,713 9,523,163 865,254 6,365,725
----------- ----------- ----------- ----------- ------------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.00, $0.58
and $0.54 per share,
respectively, for SGF,
$0.48 and $1.63,
respectively, for
SMDS)................. -- (936,276) (788,687) (1,781,400) (6,886,732)
From realized gains on
investments ($0.00,
$1.210 and $0.945 per
share, respectively,
for SGF).............. -- (1,910,237) (1,357,531) -- --
In excess of net
investment income
($0.13 for SMDS)...... -- -- -- (531,985)
CAPITAL SHARE
TRANSACTIONS: (1,085,146) 2,089,016 3,783,914 (7,979,705) (24,434,759)
----------- ----------- ----------- ----------- ------------
Total increase
(decrease) in net
assets................ (76,270) 1,921,216 11,160,859 (8,895,851) (25,487,751)
NET ASSETS:
Beginning of period.... 44,801,256 42,880,040 31,719,181 103,779,735 129,267,486
----------- ----------- ----------- ----------- ------------
End of period
(including
undistributed net
investment income of
$235,763, $9,083 and
$431,001,
respectively, for SGF,
$168,274 and $0,
respectively, for
SMDS)................. $44,724,986 $44,801,256 $42,880,040 $94,883,884 $103,779,735
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
SSCY
-----------------------------
3 MONTHS ENDED 9 MONTHS ENDED
03/31/97* 12/31/96
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income........................... $ 78,702 $ 310,419
Net realized gain on investments................ 352,574 946,175
Net increase in unrealized appreciation of in-
vestments...................................... 420,345 1,260,568
----------- -----------
Net increase in net assets resulting from
operations..................................... 851,621 2,517,162
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.10 and $0.54, re-
spectively).................................... (64,286) (333,221)
From realized gains on investments ($0.00 and
$1.83, respectively)........................... -- (1,129,636)
CAPITAL SHARE TRANSACTIONS: /2/ (6,816) 1,044,806
----------- -----------
Total increase in net assets.................... 780,519 2,099,111
NET ASSETS:
Beginning of period............................. 21,691,076 19,591,965
----------- -----------
End of period (including undistributed net in-
vestment income of $14,416 and $0, respective-
ly)............................................ $22,471,595 $21,691,076
=========== ===========
</TABLE>
- --------
* Unaudited
See accompanying notes to financial statements.
18
<PAGE>
CAPITAL SHARE TRANSACTIONS
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
-----------------------------------------------------------------------
3 MONTHS ENDED 7 MONTHS ENDED YEAR ENDED
MARCH 31,1997* DECEMBER 31, 1996 MAY 31, 1996
---------------------- ------------------------ ---------------------
SHARES VALUE SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued........... 30,198 $ 860,575 84,152 $ 2,143,395 234,168 $ 5,879,301
Shares reinvested from
net investment income
and capital gains
distributions.......... 6 171 96,302 2,447,768 80,419 1,841,377
-------- ------------ ---------- ------------ -------- -----------
30,204 860,746 180,454 4,591,163 314,587 7,720,678
Shares redeemed......... (68,780) (1,945,892) (98,426) (2,502,147) (156,417) (3,936,764)
-------- ------------ ---------- ------------ -------- -----------
Net increase (de-
crease).............. (38,576) $ (1,085,146) 82,028 $ 2,089,016 158,170 $ 3,783,914
======== ============ ========== ============ ======== ===========
<CAPTION>
SMDS
------------------------------------------------
3 MONTHS ENDED 11 MONTHS ENDED
MARCH 31,1997* DECEMBER 31, 1996
---------------------- ------------------------
SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares issued........... 38,741 $ 1,065,664 238,241 $ 6,238,119
Shares reinvested from
net investment income.. 36,712 1,006,018 165,671 4,298,372
-------- ------------ ---------- ------------
75,453 2,071,682 403,912 10,536,491
Shares redeemed......... (363,647) (10,051,387) (1,338,319) (34,971,250)
-------- ------------ ---------- ------------
Net decrease.......... (288,194) $ (7,979,705) (934,407) $(24,434,759)
======== ============ ========== ============
<CAPTION>
SSCY
------------------------------------------------
3 MONTHS ENDED 9 MONTHS ENDED
MARCH 31,1997* DECEMBER 31, 1996
---------------------- ------------------------
SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares issued........... 70,579 $ 2,516,131 28,881 $ 940,160
Shares reinvested from
net investment income
and capital gains
distributions.......... 1,262 45,291 32,327 1,049,304
-------- ------------ ---------- ------------
71,841 2,561,422 61,208 1,989,464
Shares redeemed......... (72,262) (2,568,238) (28,629) (944,658)
-------- ------------ ---------- ------------
Net increase (de-
crease).............. (421) $ (6,816) 32,579 $ 1,044,806
======== ============ ========== ============
</TABLE>
- --------
*Unaudited
See accompanying notes to financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 (unaudited)
NOTE 1. - Significant Accounting Policies
Stratton Mutual Funds consist of Stratton Growth Fund, Inc. ("SGF"), Stratton
Monthly Dividend Shares, Inc. ("SMDS") and The Stratton Funds, Inc. The
Stratton Funds, Inc. (the "Company") operates as a series, consisting of
Stratton Small-Cap Yield Fund ("SSCY"). The Funds and Company are registered
under the Investment Company Act of 1940, as amended, as open-end management
investment companies. The Funds offer diversified portfolios.
Investments in the Funds normally consist of common stock and securities
convertible into or exchangeable into common stock. Each Fund has specific
investment objectives:
The objective of SGF is to seek possible growth of capital with current income
from interest and dividends as secondary objective.
The objective of SMDS is to seek a high rate of return from dividend and
interest income. It will seek its objective through investment of at least 25%
of assets in securities of real estate investment trusts and of public utility
companies engaged in the production, transmission or distribution of electric,
energy, gas, water or telephone services.
The objective of SSCY is to achieve both dividend income and capital
appreciation through investment in the securities of small-cap companies which
have certain risks associated with them. First and foremost is their greater
earnings and price volatility in comparison to large companies. Earnings risk
is partially due to the undiversified nature of small company business lines.
Due to the inherent risk of investments there can be no assurance that the
objectives of the Funds will be met. The Funds' fiscal years changed to
December 31, commencing with December 31, 1996.
The following is a summary of significant accounting policies consistently
followed by these Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale price
on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last
reported bid and asked prices. Securities traded in the over-the-
counter market are valued at the last sale price, if carried in the
National Market Issues section by NASDAQ; other over-the-counter
securities are valued at the mean between the closing bid and asked
prices obtained from a principal market maker. All other securities
and assets are valued at their fair value as determined in good
faith by the Boards of Directors of the Funds, which may include the
amortized cost method for securities maturing in sixty days or less
and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income to its
shareholders. Therefore, no federal income tax provision is
required. SMDS has a capital loss
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1997 (unaudited)
carryover available to offset future capital gains, if any, of
approximately $16,000,000 of which $11,669,000 expires in 2003 and
$4,331,000 expires in 2004.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
E. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
Distributions to Shareholders - Distributions to shareholders are recorded on
the ex-dividend date. The character of distributions paid to shareholders is
determined by reference to income as determined for income tax purposes, after
giving effect to temporary differences between the financial reporting and tax
basis of assets and liabilities, rather than income as determined for
financial reporting purposes.
SMDS has made certain investments in real estate investment trusts ("REITS")
which pay dividends to their shareholders based upon available funds from
operations. It is quite common for these dividends to exceed the REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends to include the gross
dividends from such REITS in its monthly distributions to its shareholders
and, accordingly, a portion of the Fund's distributions will also be
designated as a return of capital.
NOTE 2. - During the three months ended March 31, 1997, the Funds paid
advisory fees to Stratton Management Company, (the"Advisor") as follows: SGF-
$82,021; SMDS--$152,210; SSCY--$59,180. Management services are provided by
the Advisor under an agreement whereby the Advisor furnishes all investment
advice, office space and facilities to the Funds and pays the salaries of the
Funds' officers and employees, except to the extent that those employees are
engaged in administrative and accounting services activities. In return for
these services, SGF pays to the Advisor a monthly fee of 3/48 of 1% (annually
3/4 of 1%) of the daily net asset value of the Fund for such month. SMDS pays
a monthly fee at an annual rate of 5/8 of 1% of the daily net asset value of
the Fund for such month. The Advisor has voluntarily agreed to waive $15,000
annually of the compensation due it under the agreement with each of these
Funds to offset a portion of the cost of certain administrative
responsibilities delegated to FPS Services, Inc.
SSCY pays a monthly fee 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 under
performed the Russell 2000 by 5.00%. The performance fee adjustment for the
period ended March 31, 1997 caused the advisory fee to increase by $16,336.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1997 (unaudited)
Certain officers and directors of the Funds are also officers and directors of
the Advisor. None of the Funds' officers receive compensation from the Funds.
The Funds' Administrator, Accounting Agent and Transfer Agent, FPS Services,
Inc. ("FPS"), is a wholly-owned subsidiary of FinDaTex, Inc. Certain directors
and officers of the Funds are shareholders of FinDaTex, Inc. FPS received fees
for providing shareholder services, for certain administrative services and
for accounting/pricing services during the three months ended March 31, 1997
as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY
---------- ----------- ----------
<S> <C> <C> <C>
Shareholder Services $7,102 $41,794 $3,974
Administration 7,500 7,500 2,500
Accounting/Pricing 5,000 6,000 5,000
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
FPS, the Custodian reallows a portion of its custody fees to FPS for certain
services delegated to FPS. The amount is not readily determinable. FPS Broker
Services, Inc., a wholly-owned subsidiary of FPS, serves as the Funds'
principal underwriter and receives no fees for services in assisting in sales
of the Funds' shares but does receive an annual fee of $3,000 for each Fund
for its services in connection with the registration of the Funds' shares
under state securities laws.
NOTE 3. - Purchases and sales of investment securities, excluding short-term
notes, for the three months ended March 31, 1997 were as follows:
<CAPTION>
SGF SMDS SSCY
---------- ----------- ----------
<S> <C> <C> <C>
Cost of purchases $4,382,486 $21,546,877 $1,762,145
Proceeds of sales 4,864,246 31,601,876 1,841,295
</TABLE>
22
<PAGE>
FINANCIAL HIGHLIGHTS
Stratton Growth Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
3 MONTHS
ENDED 7 MONTHS YEARS ENDED MAY 31,
03/31/97 ENDED -------------------------------------------
(UNAUDITED) 12/31/96 1996 1995 1994 1993 1992
----------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.140 0.312 0.556 0.537 0.510 0.560 0.640
Net gains on
securities (both
realized and
unrealized).......... 0.450 1.298 5.759 2.978 0.665 1.160 1.320
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations......... 0.590 1.610 6.315 3.515 1.175 1.720 1.960
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... 0.000 (0.580) (0.540) (0.540) (0.510) (0.565) (0.725)
Distributions (from
capital gains)....... 0.000 (1.210) (0.945) (1.275) (0.905) (0.815) (0.435)
------- ------- ------- ------- ------- ------- -------
Total
distributions...... 0.000 (1.790) (1.485) (1.815) (1.415) (1.380) (1.160)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 27.59 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 2.19% 6.40% 29.62% 18.61% 5.92% 8.91% 10.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $44,725 $44,801 $42,880 $31,719 $25,475 $25,315 $25,311
Ratio of expenses to
average net assets... 1.11%/1/ 1.17%/1/ 1.16% 1.31% 1.34% 1.39% 1.35%
Ratio of net
investment income to
average net assets... 1.98%/1/ 2.08%/1/ 2.28% 2.70% 2.51% 2.76% 3.20%
Portfolio turnover
rate................. 10.29% 20.32% 15.41% 42.54% 49.81% 35.34% 59.76%
Average commission
rate paid............ $0.0500 $0.0537 N/A N/A N/A N/A N/A
</TABLE>
- --------
/1/ Annualized
See accompanying notes to financial statements.
23
<PAGE>
FINANCIAL HIGHLIGHTS
Stratton Monthly Dividend Shares
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
3 MONTHS
ENDED 11 MONTHS YEARS ENDED JANUARY 31,
03/31/97 ENDED -----------------------------------------------
(UNAUDITED) 12/31/96 1996 1995 1994 1993 1992
----------- --------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02
------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.53 1.63 1.88 1.94 1.87 1.94 1.97
Net gains (loss) on
securities (both
realized and
unrealized).......... (0.34) 0.16 2.60 (3.87) (1.14) 2.08 4.79
------- -------- -------- -------- -------- ------- -------
Total from
investment
operations......... 0.19 1.79 4.48 (1.93) 0.73 4.02 6.76
------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.48) (1.63) (1.89) (1.92) (1.94) (1.94) (1.95)
Distributions (in
excess of net
investment income)... 0.00 (0.13) (0.03) 0.00 (0.01) 0.00 0.00
------- -------- -------- -------- -------- ------- -------
Total
distributions...... (0.48) (1.76) (1.92) (1.92) (1.95) (1.94) (1.95)
------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 27.14 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
======= ======== ======== ======== ======== ======= =======
TOTAL RETURN............ 0.69% 7.12% 18.98% (6.57%) 2.22% 15.18% 30.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $94,884 $103,780 $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to
average net assets... 1.00%/1/ 1.02%/1/ 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net
investment income to
average net assets... 7.82%/1/ 6.94%/1/ 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover
rate................. 23.80% 69.19% 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission
rate paid............ $0.0495 $ 0.0498 N/A N/A N/A N/A N/A
</TABLE>
- --------
/1/ Annualized
See accompanying notes to financial statements.
24
<PAGE>
FINANCIAL HIGHLIGHTS
Stratton Small-Cap Yield Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
3 MONTHS
ENDED 9 MONTHS YEAR YEAR FOR THE PERIOD
03/31/97 ENDED ENDED ENDED 04/12/93 /1/
(UNAUDITED) 12/31/96 03/31/96 03/31/95 TO 03/31/94
----------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 33.58 $ 31.95 $ 25.88 $ 25.94 $25.00
------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.12 0.53 0.66 0.57 0.43
Net gains (loss) on
securities (both
realized and
unrealized).......... 1.22 3.47 6.07 (0.04) 0.91
------- ------- ------- ------- ------
Total from
investment
operations......... 1.34 4.00 6.73 0.53 1.34
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.10) (0.54) (0.66) (0.59) (0.40)
Distributions (from
capital gains)....... 0.00 (1.83) 0.00 0.00 0.00
------- ------- ------- ------- ------
Total
distributions...... (0.10) (2.37) (0.66) (0.59) (0.40)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................. $ 34.82 $ 33.58 $ 31.95 $ 25.88 $25.94
======= ======= ======= ======= ======
TOTAL RETURN............ 3.98% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $22,472 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets... 1.63%/2/ 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net
investment income to
average net assets... 1.42%/2/ 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................. 8.35% 35.86% 33.50% 30.20% 28.60%/2/
Average commission
rate paid............ $0.0559 $0.0579 N/A N/A N/A
</TABLE>
- --------
/1/ Commencement of operations
/2/ Annualized
See accompanying notes to financial statements.
25
<PAGE>
SHAREHOLDER INFORMATION
MINIMUM INVESTMENT
The minimum amount for the initial purchase of shares of SGF, SMDS or SSCY is
$2,000 each. Subsequent purchases may be made in amounts of $100 or more.
TELEPHONE EXCHANGE
Shares of each Fund may be exchanged for shares of the other Funds, provided
such other shares may legally be sold in the state of the investor's
residence. Each Fund has a distinct investment objective which should be
reviewed before executing any exchange of shares. The sections regarding each
Fund, including those on charges and expenses, should be read prior to seeking
any such exchange. Shares may be exchanged by: (1) written request; or (2)
telephone if a special authorization form has been completed and is on file
with the Transfer Agent in advance. See "How to Redeem Fund Shares--Additional
Information" for a description of the Funds' policy regarding telephone
instructions.
DIVIDENDS AND DISTRIBUTIONS
SMDS declares and pays dividends from net investment income on a monthly
basis. SGF declares and pays dividends from net investment income on a semi-
annual basis. SSCY declares and pays dividends from net investment income
quarterly. Each Fund will make distributions from net realized gains, if any,
once a year. Distributions may be reinvested in additional shares of such
fund, see "Reinvestment of Income Dividends and Capital Gains Distribution" in
the combined Prospectus.
AUTOMATIC INVESTMENT PLAN
Shares of a Fund may be purchased through our "Automatic Investment Plan" (the
"Plan"), (a tear-out application is attached to the back of our Prospectus).
The Plan provides a convenient method by which investors may have monies
debited directly from their checking, savings or bank money market accounts
for investment in a Fund. The minimum investment pursuant to this Plan is $100
per month. The account designated will be debited in the specified amount, on
the date indicated, and Fund shares will be purchased. Only an account
maintained at a domestic financial institution which is an Automated Clearing
House member may be so designated. A Fund may alter, modify or terminate this
Plan at any time.
SHARE PRICE INFORMATION
The daily share price of our Funds can be found in the mutual fund section of
most major daily newspapers as well as The Wall Street Journal and Investor's
Daily, where the Funds are listed under Stratton Funds. The Funds' stock
ticker symbols for SGF, SMDS and SSCY are STRGX, STMDX and STSCX,
respectively.
RETIREMENT PLANS
Stratton Mutual Funds has IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans available at no minimum investment.
26
<PAGE>
SHAREHOLDER INFORMATION (continued)
GENERAL INFORMATION ON THE FUNDS
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Funds' 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
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
Telephone: 610-239-4600 . 800-441-6580
INVESTMENT PORTFOLIO ACTIVITIES
Questions regarding any of our Funds' investment portfolios should be directed
to the Funds' Investment Advisor:
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
ADDITIONAL PURCHASES ONLY TO EXISTING ACCOUNTS SHOULD BE MAILED TO A SEPARATE
LOCK BOX UNIT:
C/O 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 COMBINED PROSPECTUS OF STRATTON MUTUAL FUNDS.
27
