<PAGE>
DEAR FELLOW SHAREHOLDER:
Overall economic growth appears to have slowed in the second quarter,
reflecting less vibrant retail sales, housing starts and auto production.
Business capital spending on advanced technology and production systems is
robust, growing at more than twice the rate of the Gross Domestic Product
(GDP), and generating valuable productivity gains. These operating efficiencies
have offset the potential inflationary effects of a tight labor market. While
the unemployment rate is at the lowest level in twenty-five years, recent
inflation readings are also matching the low rates experienced in the 1960s.
The slower growth signals and declining inflation reports have tempered earlier
fears of an extended credit tightening by the Federal Reserve. In May and early
July, the Fed left rates unchanged. We believe that the combination of isolated
Fed policy adjustments and the self-policing role of the financial markets will
continue to guide the economy on a prolonged expansion with momentum rotating
among economic sectors.
As interest rate fears abated and the flow of corporate earnings reports were
better than expected, the stock market rebounded sharply from the March decline
with the S&P 500 posting a second quarter return of 17.4%. While the growth
prospects for a restructured Corporate America in expanding world markets are
very favorable, the market valuations of estimated earnings are also quite
high. The total value of the equity markets relative to the GDP is at an all
time high, while the dividend yield on the S&P 500 is the lowest on record. We
believe that this has increased the relative attraction of value stocks,
particularly in the small cap area, considering the excessive valuations and
risks of disappointment in the high growth large cap areas.
The S&P 500 is up 100% over the last three years. The strongest move was 104%
in 1955-56; the 1986-87 market gained only 80%. At the peak of every market
excess in valuation, you will hear, "it's different this time--the old
valuation standards do not apply." Believing that creates the excesses in
valuation; each generation has to relearn lessons the hard way. We have always
told you we are not market timers and we focus on stock selection. Market
timing is currently out of fashion in Wall Street and indexation is the current
vogue in investments. Active management of equities entails making judgements
about valuation levels; indexation replaces those judgements with a relatively
mechanical process. The markets always seem to have a way of disproving simple
mechanical systems of investing over a period of time. A by-product of
indexation has been a disproportionate gain in the S&P 500 compared to the
broader market averages. We believe that we have entered a rarefied atmosphere
of large cap stock valuation that is similar to the 1972-73 "nifty fifty"
market.
There is no way to tell when this atmosphere will change; certainly the short-
term factors, such as relatively low interest rates, positive corporate
earnings, and strong cash flows into equity mutual funds continue currently. It
is also futile to attempt to guess what will change the bullish psychology; it
is likely to be an event that no one is talking about today. We believe it is
time to take a step in the counter direction by lowering portfolio equity
ratios. As an initial step, we have increased cash reserves to 10% of the
portfolio for both Stratton Growth Fund and Stratton Small- Cap Yield. Because
of the highly defensive nature of the REIT securities in Stratton Monthly
Dividend, we do not feel compelled to increase cash reserves beyond their
present level of 6%.
We welcome all of our new shareholders to the Funds and hope that you will
refer your friends and associates to us. It is only through your referrals that
we become known to a broader base of potential investors.
Sincerely yours,
/s/ James W. Stratton
---------------------
James W. Stratton
Chairman
July 14, 1997
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
The second quarter ending June 30, was an extraordinarily strong one for the
stock market. The S&P 500 gained 20% for the first six months of this year.
Your Fund has been able to stay relatively close to the S&P throughout this
period. It did that by being heavily invested in banking which is 22.6% of
assets, insurance which is 12.1%, and consumer products which is 10.1%. The
rest of our portfolio is broadly diversified. By the very nature of our value
investment style, we were not able to participate in the technology sector
which was one of the market leaders in the first six months.
During the past three months, we added five new stocks to the portfolio:
Chrysler, HSB Group, Jostens, Union Planters and Unitrin. Chrysler is selling
at a very low multiple of only seven times expected 1998 earnings, half the
ratio of the S&P 500. HSB Group is the parent company for Hartford Steam
Boiler, a speciality industrial insurance company. Jostens is the leading
supplier of yearbooks and class rings; it is also substantially reducing its
shares outstanding through buybacks. Union Planters is a major regional bank in
Tennessee and a candidate for a takeover. Unitrin is a mid-size insurance
company that holds large interests in several industrial companies.
During the quarter, one of our portfolio companies was acquired. US Life was
acquired by another company in our portfolio, American General for stock. This
enlarged our total holding to over 6% in American General; we elected to pare
that back to 5% of the portfolio.
The continued growth of assets has permitted us to reduce our expense level in
the Fund to 1.10% which is a new all time low. Our portfolio turnover rate at
23.4% also is low for a growth and income fund.
Total net assets were $50,523,314. Net asset value per share rose to $30.80.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Growth Fund with all dividend income and capital gains distributions
reinvested.
[GRAPH APPEARS HERE]
Average Annual Total Return
for the period ending 6/30/97
1 year...................... +27.23%
5 year...................... +17.43
10 year...................... +12.49
15 year...................... +15.33
20 year...................... +13.54
6/30/97 $179,958
Total Value of Investment
<TABLE>
<CAPTION>
Value of Shares
Value of Shares Acquired Through
Total Value Acquired Through Reinvestment of
of Original Reinvestment of Capital Gains
Shares Income Dividends Distributions
------ ---------------- -------------
<S> <C> <C> <C>
1973-1974 7,630 43
1975-1976 11,280 458
1977-1978 14,155 1,217
1979-1980 14,597 2,147
1981-1982 17,299 3,703
1983-1984 24,755 6,347
1985-1986 38,310 10,805 3,857
1987-1988 30,774 11,062 10,945
1989-1990 31,059 14,859 22,901
1991-1992 32,464 21,871 27,527
1993-1994 32,622 26,652 35,156
1995-1996 42,938 41,919 60,327
5/31/96-12/31/96* 42,654 44,981 66,844
6/30/97 48,657 52,445 78,856
</TABLE>
Past performance is not predictive of future performance.
*Prior to 12/31/96, SGF had a fiscal year-end of 5/31.
2
<PAGE>
FUND HIGHLIGHTS
- -------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
JUNE 30, 1997 March 31, 1997
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $50,523,314 $44,724,986
- -------------------------------------------------------
Net Asset Value Per Share $30.80 $27.59
- -------------------------------------------------------
Shares Outstanding 1,640,500 1,620,832
- -------------------------------------------------------
Number of Shareholders 1,205 1,211
- -------------------------------------------------------
Average Size Account $41,928 $36,932
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1997
(UNAUDITED)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ---------------------------------------------------------
<S> <C>
Chrysler Corp. (1) American General Corp.
Commerce Bancorp, Inc. EG & G, Inc. (2)
Fleetwood Enterprises, Inc. Hormel Foods Corp. (2)
HSB Group, Inc. (1) Pharmacia & Upjohn, Inc. (2)
Jostens, Inc. (1) Sturm, Ruger & Co., Inc. (2)
Thomas & Betts Corp. Westvaco Corp. (2)
Union Planters Corp. (1)
Unitrin, Inc. (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1997 (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------------
<S> <C> <C>
CoreStates Financial Corp. $ 2,989,844 5.9%
- ------------------------------------------------------------
American General Corp. 2,540,634 5.0
- ------------------------------------------------------------
Du Pont (E.I.) de Nemours & Co. 2,515,000 5.0
- ------------------------------------------------------------
American Express Co. 2,235,000 4.4
- ------------------------------------------------------------
Pitney Bowes, Inc. 2,137,500 4.2
- ------------------------------------------------------------
Carpenter Technology Corp. 2,104,500 4.2
- ------------------------------------------------------------
PNC Bank Corp. 2,081,250 4.1
- ------------------------------------------------------------
Commerce Bancorp, Inc. 1,976,250 3.9
- ------------------------------------------------------------
Olin Corp. 1,953,125 3.9
- ------------------------------------------------------------
The Quaker Oats Co. 1,795,000 3.6
- ------------------------------------------------------------
$22,328,103 44.2%
- ------------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND SHARES
- --------------------------------------------------------------------------------
During the first six months of 1997, the NAREIT Index provided a total return
of 5.97% compared to 20.61% for the S&P 500 Index. This significant under
performance suggests to many observers that either the broad general market is
likely to retreat or the NAREIT Index is likely to catch-up over the next six
months. For the twelve month period ended June 30, the NAREIT Index matched the
S&P 500 in performance.
In our portfolio we made minor adjustments in the sale of two holdings and had
one convertible bond issue called. We added to a number of our existing
positions; in general, the second quarter showed relatively low turnover
compared to earlier quarters. Our largest industry concentrations remain 18.9%
in shopping centers, 16.9% in health care, 16.7% in apartments, and 15.2% in
hotels/motels.
One factor effecting REIT securities has been a substantial rise of new public
equity offerings in the first six months of 1997. The industry raised $12
billion during the past six months in new equity offerings which compares to
$12 billion for all of 1996. We expect the flow of new equity offerings to slow
down considerably in the second half of 1997.
The REIT industry is receiving additional attention in the investment
community. Standard & Poor's has announced that it will create a 100 REIT Index
which should be available by the end of this summer. This index will then
provide the opportunity for options trading on the REIT industry and for asset
allocation firms to consider REITs as one other asset category for a
diversified portfolio. We think this index draws both attention and investment
funds into the industry and that should be positive for REIT stock prices.
The continued flow of second quarter earnings reports has been very positive
and has been coupled with modest dividend increases among a number of our
holdings. The industry continues to lower its payout ratio by raising dividends
at a slower rate than funds from operations are growing.
Total net assets were $95,957,343. Net asset value per share was $27.94.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Monthly Dividend Shares with all dividend income and capital gains
distributions reinvested.
[GRAPH APPEARS HERE]
Average Annual Total Return
for the period ending 6/30/97
1 year...................... +14.25%
5 year...................... + 7.60
10 year...................... + 8.07
15 year...................... +12.15
6/30/97 $62,634
Total Value of Investment
<TABLE>
<CAPTION>
Value of Shares
Value of Shares Acquired Through
Total Value Acquired Through Reinvestment of
of Original Reinvestment of Capital Gains
Shares Income Dividends Distribution
------ ---------------- ------------
<S> <C> <C> <C>
1981 9,119 583
1982 9,354 1,641
1983 10,808 3,107
1984 10,667 4,379
1985 11,796 6,627
1986 14,604 10,328
1987 16,320 13,744 503
1988 13,181 13,041 1,043
1989 12,824 15,044 1,015
1990 12,861 17,513 1,018
1991 12,084 19,388 956
1992 14,608 26,570 1,156
1993 15,701 31,818 1,242
1994 15,060 33,590 1,192
1995 13,039 32,499 1,032
1996 14,383 39,890 1,138
1/31/96-12/31/96* 14,399 43,821 1,139
6/30/97 14,667 46,807 1,160
</TABLE>
Past performance is not predictive of future performance.
*Prior to 12/31/96, SMDS had a fiscal year-end of 1/31.
4
<PAGE>
FUND HIGHLIGHTS
- -------------------------------------------------------
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
JUNE 30, 1997 March 31, 1997
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $95,957,343 $94,883,884
- -------------------------------------------------------
Net Asset Value Per Share $27.94 $27.14
- -------------------------------------------------------
Shares Outstanding 3,434,764 3,495,466
- -------------------------------------------------------
Number of Shareholders 5,339 5,541
- -------------------------------------------------------
Average Size Account $17,973 $17,124
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1997
(UNAUDITED)
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ---------------------------------------------------------------
<S> <C>
Cornerstone Realty
Income Trust, Inc. (1) BRE Properties, Inc. (2)
Gables Residential Trust Interstate/Johnson Lane, Inc.
Home Properties of New
York, Inc. 7.750% Cv. Sub. Debs. 03/31/11 (2)
Jameson Inns, Inc. Merry Land & Investment Co., Inc. (2)
Liberty Property Trust
Oasis Residential, Inc.
Sunstone Hotel
Investors, Inc.
Universal Health Realty
Income Trust
Walden Residential
Properties, Inc.
Western Investment Real
Estate Trust
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1997 (UNAUDITED)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -----------------------------------------------------------------
<S> <C> <C>
National Health Investors, Inc. $ 4,843,450 5.0%
- -----------------------------------------------------------------
Health Care REIT, Inc. 4,719,056 4.9
- -----------------------------------------------------------------
Excel Realty Trust, Inc. 4,615,625 4.8
- -----------------------------------------------------------------
Developers Diversified Realty Corp. 3,600,000 3.8
- -----------------------------------------------------------------
Mid-America Realty Investments, Inc. 3,284,063 3.4
- -----------------------------------------------------------------
EastGroup Properties, SBI 2,744,044 2.9
- -----------------------------------------------------------------
Glimcher Realty Trust 2,681,250 2.8
- -----------------------------------------------------------------
Winston Hotels, Inc. 2,560,625 2.7
- -----------------------------------------------------------------
Equity Inns, Inc. 2,541,250 2.7
- -----------------------------------------------------------------
Gables Residential Trust 2,525,000 2.6
- -----------------------------------------------------------------
$34,114,363 35.6%
- -----------------------------------------------------------------
</TABLE>
5
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
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 $380 million. The current number of holdings is 57, one less than
the quarter ended March 31, 1997. Our portfolio turnover year-to-date is
slightly below average at 13.5%.
At the end of the quarter, the portfolio was 94.8% invested with the remaining
cash reserves held in short-term commercial paper. Your Fund's industry mix has
remained primarily the same. Industrial stocks still make up our largest sector
weighting at 24% with Banking at 19%. Consumer stocks are 15% of the portfolio
while 12% is in business services. Other important sector weights include
technology stocks at 9% and REITS at 5%.
Performance for the quarter was slightly below the Russell 2000 Small-Cap Index
as technology stocks rebounded. Your Fund managed a 15.1% return versus the
16.2% return for the Russell. Year to date your Fund is up 19.6% compared to
the Russell 2000 gain of 10.2%. 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 second fiscal quarter ordinary income
dividend at the rate of $0.11 per share payable on June 30 to stockholders of
record as of June 13, 1997.
Total net assets have grown to $27,434,369. Net asset value per share was
$39.49.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Small-Cap Yield Fund with all dividend income and capital gains
distributions reinvested.
[GRAPH APPEARS HERE]
Average Annual Total Return
for the period ending 6/30/1997
1 Year........................ +32.07%
3 Year........................ +20.27
6/30/97 $18,318
Total Value of Investment
<TABLE>
<CAPTION>
Value of Shares
Value of Shares Aquired Through
Total Value Aquired Through Reinvestment of
of Original Reinvestment of Capital Gains
Shares Income Dividends Distributions
------ ---------------- -------------
<S> <C> <C> <C>
4/93 10,000
3/31/94 10,376 (158)
3/31/95 10,352 402
3/31/96 12,780 789
3/31/96-12/31/96* 13,432 1,067 813
6/30/97 15,796 1,356 1,166
</TABLE>
Past performance is not predictive of future performance.
*Prior to 12/31/96, SSCY had a fiscal year-end of 3/31.
6
<PAGE>
FUND HIGHLIGHTS
- -------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
JUNE 30, 1997 March 31, 1997
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $27,434,369 $22,471,595
- -------------------------------------------------------
Net Asset Value Per Share $39.49 $34.82
- -------------------------------------------------------
Shares Outstanding 694,761 645,457
- -------------------------------------------------------
Number of Shareholders 916 858
- -------------------------------------------------------
Average Size Account $29,950 $26,191
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ---------------------------------------------------------------------
<S> <C>
Commercial Intertech Corp. Acordia, Inc.
Community Bank Systems, Inc. (1) Bankers Corp. (Perth Amboy, NJ) (2)
Eaton Vance Corp. (1) Kaman Corp. Class A (2)
Florida Rock Industries, Inc. PMC Capital, Inc. (2)
Guilford Mills, Inc. (1) Sterling Bancorp (NY) (2)
Morrison Health Care, Inc. (1) Sturm, Ruger & Co., Inc. (2)
Quanex Corp. Washington National Corp. (2)
Republic Group, Inc.
TB Wood's Corp.
West Co., Inc.
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------
<S> <C> <C>
Technitrol, Inc. $ 821,250 3.0%
- ------------------------------------------------------
Helix Technology Corp. 810,000 3.0
- ------------------------------------------------------
Kuhlman Corp. 806,250 2.9
- ------------------------------------------------------
Quanex Corp. 767,188 2.8
- ------------------------------------------------------
Marc, Inc. 731,250 2.7
- ------------------------------------------------------
K2, Inc. 728,813 2.7
- ------------------------------------------------------
Interra Financial, Inc. 721,437 2.6
- ------------------------------------------------------
A.O. Smith Corp. 711,250 2.6
- ------------------------------------------------------
Republic Group, Inc. 644,000 2.3
- ------------------------------------------------------
Primex Technologies, Inc. 641,250 2.3
- ------------------------------------------------------
$7,382,688 26.9%
- ------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON GROWTH FUND
- -------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SGF is to seek possible growth of capital 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.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Stocks of companies that pay above average dividends tend to be less volatile
than companies that do not distribute dividends to shareholders. Though stock
prices do vary over time, dividend payouts tend to be very consistent. We find
that companies which consistently strive to increase their dividends tend to
offer the potential of above average returns. Steady, stable growth of
principal and dividend income is what SGF hopes to achieve.
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. In order to achieve these goals, the Fund
invests substantially all of its assets in high income-producing U.S. equity
securities.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
The Fund is managed to provide a high level of monthly income to its
shareholders and, therefore, looks for companies that have strong dividend
payouts. Currently, 80% or more of the Fund is invested in high dividend
paying REITs. There are several types of real estate properties that are owned
by REITs, including multifamily apartment complexes, health care facilities,
shopping centers, regional malls, office centers, hotels, and industrial
buildings. The portfolio is diversified across several sectors within the REIT
industry.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Current income is paramount for the SMDS portfolio. The Fund needs higher
yielding securities to maintain its own attractive dividend payout. REITs
satisfy this income requirement, while also offering the potential for
dividend growth and capital appreciation. REITs must distribute 95% of their
net investment income, so, as the earnings of these companies grow, increases
in dividends should follow.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The portfolio is comprised of high dividend paying securities.
. Approximately 40 companies are held.
. SMDS is managed to provide a high level of current monthly income, and to
offer the potential for 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.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Our research has shown that dividends tend to dampen stock price volatility.
Small-cap companies that pay dividends tend to have strong financial
characteristics since the quarterly dividend payout requires managements to
exhibit a high degree of financial discipline. The combination of strong
earnings growth and superior earnings stability are crucial elements in
meeting SSCY's investment objectives.
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 June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 92.7%
BANKING/FINANCIAL - 22.6%
Comerica, Inc............................................ 15,000 $ 1,020,000
Commerce Bancorp, Inc.................................... 51,000 1,976,250
CoreStates Financial Corp................................ 55,625 2,989,844
First Commerce Corp...................................... 20,000 880,000
First Hawaiian, Inc. .................................... 20,000 682,500
PNC Bank Corp. .......................................... 50,000 2,081,250
Summit Bancorp, Inc. .................................... 20,000 1,002,500
Union Planters Corp. .................................... 15,000 778,125
-----------
11,410,469
-----------
BUSINESS SERVICES - 8.7%
American Express Co. .................................... 30,000 2,235,000
Pitney Bowes, Inc. ...................................... 30,000 2,137,500
-----------
4,372,500
-----------
CAPITAL GOODS/TECHNOLOGY - 6.5%
Harris Corp. ............................................ 20,000 1,680,000
Thomas & Betts Corp. .................................... 30,000 1,576,875
-----------
3,256,875
-----------
CHEMICAL - 8.8%
Du Pont (E.I.) de Nemours & Co. ......................... 40,000 2,515,000
Olin Corp. .............................................. 50,000 1,953,125
-----------
4,468,125
-----------
CONSUMER PRODUCTS - 10.1%
Chrysler Corp. .......................................... 50,000 1,640,625
Jostens, Inc............................................. 10,000 263,750
Kimberly-Clark Corp...................................... 28,000 1,393,000
The Quaker Oats Co....................................... 40,000 1,795,000
-----------
5,092,375
-----------
ENERGY - 6.8%
El Paso Energy Corp...................................... 10,000 550,000
Exxon Corp. ............................................. 20,000 1,230,000
Mobil Corp. ............................................. 24,000 1,677,000
-----------
3,457,000
-----------
HEALTH CARE - 4.8%
American Home Products Corp.............................. 20,000 1,530,000
SmithKline Beecham PLC ADRs.............................. 10,000 916,250
-----------
2,446,250
-----------
INDUSTRIAL - 2.4%
Fleetwood Enterprises, Inc. ............................. 40,000 1,192,500
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
INSURANCE/SERVICES - 12.1%
American General Corp. ................................. 53,207 $ 2,540,634
Aon Corp................................................ 22,500 1,164,375
HSB Group, Inc. ........................................ 10,000 533,750
Lincoln National Corp................................... 20,000 1,287,500
Unitrin, Inc............................................ 10,000 610,000
-----------
6,136,259
-----------
METALS - 4.2%
Carpenter Technology Corp............................... 46,000 2,104,500
-----------
PAPER - 3.9%
Glatfelter (P.H.) Co. .................................. 60,000 1,200,000
Weyerhaeuser Co......................................... 15,000 780,000
-----------
1,980,000
-----------
RETAILING - 1.8%
The Limited, Inc........................................ 20,000 405,000
Penney (J.C.) Co., Inc. ................................ 10,000 521,875
-----------
926,875
-----------
Total Common Stocks
(cost $28,020,182)..................................... 46,843,728
-----------
PRINCIPAL
AMOUNT
----------
SHORT-TERM NOTES - 7.0%
Ford Motor Credit Corp.
5.52% due 07/03/97..................................... $1,800,000 1,800,000
General Electric Capital Corp.
5.62% due 07/09/97..................................... 1,750,000 1,750,000
-----------
Total Short-Term Notes
(cost $3,550,000)...................................... 3,550,000
-----------
TOTAL INVESTMENTS - 99.7%
(cost $31,570,182*).................................... 50,393,728
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.3%................................ 129,586
-----------
NET ASSETS - 100.0%..................................... $50,523,314
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $31,570,182; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $18,823,546
Gross unrealized depreciation....................................... 0
-----------
Net unrealized appreciation........................................ $18,823,546
===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 87.0%
REAL ESTATE - 87.0%
APARTMENTS - 16.7%
Berkshire Realty Co., Inc. .............................. 110,000 $ 1,168,750
Cornerstone Realty Income Trust, Inc. ................... 80,000 865,000
Evans Withycombe Residential, Inc........................ 60,000 1,245,000
Gables Residential Trust................................. 100,000 2,525,000
Home Properties of New York, Inc. ....................... 75,000 1,687,500
Mid-America Apartment Communities, Inc. ................. 50,000 1,403,125
Oasis Residential, Inc. ................................. 65,000 1,527,500
Summit Properties, Inc................................... 60,000 1,237,500
Town & Country Trust..................................... 153,300 2,356,988
Walden Residential Properties, Inc....................... 80,000 2,050,000
-----------
16,066,363
-----------
DIVERSIFIED - 6.8%
Colonial Properties Trust................................ 75,000 2,203,125
EastGroup Properties, SBI................................ 136,350 2,744,044
Pacific Gulf Properties, Inc............................. 70,000 1,540,000
-----------
6,487,169
-----------
HEALTH CARE - 16.9%
American Health Properties, Inc.......................... 100,000 2,512,500
Health & Retirement Properties Trust..................... 70,000 1,316,875
Health Care REIT, Inc.................................... 194,100 4,719,056
LTC Properties, Inc...................................... 80,000 1,450,000
National Health Investors, Inc. ......................... 123,400 4,843,450
Universal Health Realty Income Trust..................... 75,000 1,420,312
-----------
16,262,193
-----------
HOTELS/MOTELS - 15.2%
Equity Inns, Inc......................................... 190,000 2,541,250
Hospitality Properties Trust............................. 50,000 1,531,250
Innkeepers USA Trust..................................... 160,000 2,400,000
Jameson Inns, Inc. ...................................... 140,000 1,645,000
RFS Hotel Investors, Inc................................. 110,000 1,980,000
Sunstone Hotel Investors, Inc............................ 130,000 1,885,000
Winston Hotels, Inc. .................................... 170,000 2,560,625
-----------
14,543,125
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
OFFICE/INDUSTRIAL - 4.8%
Commercial Net Lease Realty, Inc......................... 90,000 $ 1,378,125
Liberty Property Trust................................... 75,000 1,865,625
TriNet Corporate Realty Trust, Inc....................... 40,000 1,322,500
-----------
4,566,250
-----------
OUTLET CENTERS - 4.3%
Mills Corp. ............................................. 60,000 1,661,250
Tanger Factory Outlet Centers, Inc....................... 90,000 2,418,750
-----------
4,080,000
-----------
REGIONAL MALLS - 3.4%
Mid-America Realty Investments, Inc. .................... 339,000 3,284,063
-----------
SHOPPING CENTERS - 18.9%
Bradley Real Estate, Inc. ............................... 70,000 1,347,500
Developers Diversified Realty Corp. ..................... 90,000 3,600,000
Excel Realty Trust, Inc. ................................ 175,000 4,615,625
Glimcher Realty Trust.................................... 130,000 2,681,250
IRT Property Co.......................................... 166,000 1,950,500
The Price REIT, Inc. .................................... 67,500 2,455,312
Western Investment Real Estate Trust..................... 110,000 1,519,375
-----------
18,169,562
-----------
Total Common Stocks
(cost $76,603,982)...................................... 83,458,725
-----------
PREFERRED STOCKS - 2.9%
Psychiatric Group Preferred Depositary Shares............ 100,000 1,825,000
(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................................. 20,000 965,000
-----------
Total Preferred Stocks (cost $2,771,480)................. 2,790,000
-----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1997 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend Shares
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 2.7%
Mid-Atlantic Realty Trust
7.625% Cv. Sub. Debs.
09/15/03............................................... $2,500,000 $ 2,612,500
-----------
Total Convertible Debentures
(cost $2,500,000)...................................... 2,612,500
-----------
SHORT-TERM NOTES - 6.8%
Ford Motor Credit Corp.
5.26% due 07/01/97..................................... 1,635,000 1,635,000
American Express Credit Corp.
5.56% due 07/02/97..................................... 1,820,000 1,820,000
General Electric Capital Corp.
5.50% due 07/03/97..................................... 3,045,000 3,045,000
-----------
Total Short-Term Notes
(cost $6,500,000)...................................... 6,500,000
-----------
TOTAL INVESTMENTS - 99.4%
(cost $88,375,462*).................................... 95,361,225
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.6%................................ 596,118
-----------
NET ASSETS - 100.0%..................................... $95,957,343
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $88,375,462; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $7,944,160
Gross unrealized depreciation....................................... (958,397)
----------
Net unrealized appreciation........................................ $6,985,763
==========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 94.8%
BANKING/FINANCIAL - 18.9%
Affiliated Community Bancorp.............................. 2,500 $ 58,750
American Bank of Connecticut.............................. 7,500 269,531
CCB Financial Corp........................................ 4,000 292,500
Centura Banks, Inc. (NC).................................. 8,000 367,000
Colonial BancGroup, Inc................................... 14,000 339,500
Commerce Bancorp, Inc. (NJ)............................... 15,000 581,250
Community Bank Systems, Inc............................... 12,000 339,000
Eagle Financial Corp...................................... 9,900 300,713
First Essex Bancorp, Inc.................................. 20,000 350,000
First Financial Holdings, Inc............................. 9,000 288,000
Firstbank of Illinois Co.................................. 4,500 176,062
Medford Savings Bank...................................... 13,000 380,250
Portsmouth Bank Shares, Inc............................... 20,400 364,650
Reliance Bancorp, Inc..................................... 10,000 294,375
United Carolina Bancshares Corp........................... 9,000 468,000
Vermont Financial Services Corp........................... 7,000 329,000
-----------
5,198,581
-----------
BUSINESS SERVICES - 11.7%
American Business Products, Inc........................... 25,000 568,750
Eaton Vance Corp.......................................... 20,000 556,250
Interra Financial, Inc.................................... 17,000 721,437
Marc, Inc................................................. 37,500 731,250
Primesource Corp.......................................... 1,200 9,150
True North Communications, Inc............................ 25,000 618,750
-----------
3,205,587
-----------
CHEMICAL - 4.2%
Mississippi Chemical Corp................................. 25,000 518,750
Primex Technologies, Inc.................................. 30,000 641,250
-----------
1,160,000
-----------
CONSUMER DURABLES - 4.8%
K2, Inc................................................... 23,000 728,813
TB Wood's Corp............................................ 40,000 582,500
-----------
1,311,313
-----------
CONSUMER NON-DURABLES - 10.2%
International Multifoods Corp............................. 25,000 628,125
Morrison Health Care, Inc................................. 9,200 146,625
Riviana Foods, Inc. (DE).................................. 25,000 500,000
Tasty Baking Co........................................... 27,500 481,250
Velcro Industries, N.V.................................... 6,000 492,000
West Co., Inc............................................. 20,000 572,500
-----------
2,820,500
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
INDUSTRIAL - 24.4%
A.O. Smith Corp........................................... 20,000 $ 711,250
Carpenter Technology Corp................................. 12,000 549,000
Cleveland-Cliffs, Inc..................................... 10,000 407,500
Commercial Intertech Corp................................. 35,000 487,812
Excel Industries, Inc..................................... 30,000 585,000
Florida Rock Industries, Inc.............................. 15,000 609,375
Guilford Mills, Inc....................................... 30,000 624,375
Kuhlman Corp.............................................. 25,000 806,250
Quanex Corp............................................... 25,000 767,188
Republic Group, Inc....................................... 32,000 644,000
Roanoke Electric Steel Corp............................... 30,000 502,500
-----------
6,694,250
-----------
INSURANCE/SERVICES - 5.9%
Acordia, Inc.............................................. 10,000 400,000
Donegal Group, Inc........................................ 25,000 609,375
Selective Insurance Group, Inc............................ 12,500 605,469
-----------
1,614,844
-----------
REAL ESTATE - 4.8%
Brandywine Realty Trust................................... 2,500 50,625
Camden Property Trust..................................... 8,000 253,000
Chateau Communities, Inc.................................. 9,378 268,445
Colonial Properties Trust................................. 8,000 235,000
Innkeepers USA Trust...................................... 20,000 300,000
Sovran Self Storage, Inc.................................. 7,000 204,750
-----------
1,311,820
-----------
TECHNOLOGY - 9.0%
Boston Acoustics, Inc..................................... 14,500 348,000
Helix Technology Corp..................................... 20,000 810,000
Shared Medical Systems Corp............................... 9,000 486,000
Technitrol, Inc........................................... 30,000 821,250
-----------
2,465,250
-----------
UTILITIES - 0.9%
WICOR, Inc................................................ 6,000 233,625
-----------
Total Common Stocks
(cost $17,861,172)....................................... 26,015,770
-----------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1997 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 7.3%
Chevron Oil Financial Co.
5.40% due 07/01/97................................... $1,000,000 $1,000,000
General Electric Capital Corp.
5.62% due 07/07/97................................... 1,000,000 1,000,000
-----------
Total Short-Term Notes
(cost $2,000,000).................................... 2,000,000
-----------
TOTAL INVESTMENTS - 102.1%
(cost $19,861,172*).................................. 28,015,770
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -
(2.1%).............................................. (581,401)
-----------
NET ASSETS - 100.0%................................... $27,434,369
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $19,861,172; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $8,276,048
Gross unrealized depreciation....................................... (121,450)
----------
Net unrealized appreciation........................................ $8,154,598
==========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities at value
(cost $31,570,182, $88,375,462, and
$19,861,172, respectively) (Note 1)... $50,393,728 $ 95,361,225 $28,015,770
Cash................................... 23,353 937 9,453
Dividends and interest receivable...... 103,195 614,791 48,287
Prepaid expenses....................... 6,881 -- --
----------- ------------ -----------
Total Assets......................... 50,527,157 95,976,953 28,073,510
----------- ------------ -----------
LIABILITIES:
Accrued expenses and other
liabilities........................... 3,843 19,610 9,619
Payable for investment securities
purchased............................. -- -- 629,522
----------- ------------ -----------
Total Liabilities.................... 3,843 19,610 639,141
----------- ------------ -----------
NET ASSETS:
Applicable to 1,640,500, 3,434,764 and
694,761 shares outstanding,
respectively/1/....................... $50,523,314 $ 95,957,343 $27,434,369
=========== ============ ===========
Net asset value, offering and
redemption price per share............ $ 30.80 $ 27.94 $ 39.49
=========== ============ ===========
SOURCE OF NET ASSETS:
Paid-in capital........................ $29,428,664 $107,484,795 $18,744,340
Undistributed net investment income.... 166,318 96,828 18,041
Accumulated net realized gain (loss) on
investments........................... 2,104,786 (18,610,043) 517,390
Net unrealized appreciation of
investments........................... 18,823,546 6,985,763 8,154,598
----------- ------------ -----------
Net Assets........................... $50,523,314 $ 95,957,343 $27,434,369
=========== ============ ===========
</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
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY
---------- ----------- ----------
<S> <C> <C> <C>
INCOME:
Dividends................................. $ 652,168 $ 3,658,245 $ 311,651
Interest.................................. 84,861 379,768 29,824
---------- ----------- ----------
Total Income............................ 737,029 4,038,013 341,475
---------- ----------- ----------
EXPENSES:
Accounting/Pricing services fees (Note
2)....................................... 10,000 13,000 8,333
Administration services fees (Note 2)..... 12,500 15,000 4,167
Advisory fees (Note 2).................... 167,585 294,987 128,204
Audit fees................................ 96 2,295 12,900
Custodian fees (Note 2)................... 11,917 21,700 5,801
Directors' fees........................... 4,620 9,083 1,093
Legal fees................................ 1,711 3,588 1,072
Miscellaneous fees........................ 2,966 8,518 1,126
Printing and postage fees................. 5,749 12,597 2,448
Registration fees (Note 2)................ 21,963 27,366 20,126
Shareholder services fees (Note 2)........ 14,784 82,075 7,707
Taxes other than income taxes............. 1,938 3,700 550
---------- ----------- ----------
Total Expenses.......................... 255,829 493,909 193,527
---------- ----------- ----------
Net Investment Income................. 481,200 3,544,104 147,948
---------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on investments... 2,106,147 (2,609,829) 522,572
Net increase in unrealized appreciation on
investments.............................. 4,676,121 4,323,706 3,621,809
---------- ----------- ----------
Net gain on investments................... 6,782,268 1,713,877 4,144,381
---------- ----------- ----------
Net increase in net assets resulting
from operations........................ $7,263,468 $ 5,257,981 $4,292,329
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
----------------------------------------- ----------------------------------
6 MONTHS ENDED 7 MONTHS ENDED YEAR ENDED 6 MONTHS ENDED 11 MONTHS ENDED
06/30/97* 12/31/96 05/31/96 06/30/97* 12/31/96
-------------- -------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 481,200 $ 514,358 $ 854,333 $ 3,544,104 $ 6,886,732
Net realized gain
(loss) on
investments........... 2,106,147 749,571 2,277,319 (2,609,829) 1,855,839
Net increase (decrease)
in unrealized
appreciation
(depreciation) of
investments........... 4,676,121 1,414,784 6,391,511 4,323,706 (2,376,846)
----------- ----------- ----------- ------------ ------------
Net increase in net
assets resulting from
operations............ 7,263,468 2,678,713 9,523,163 5,257,981 6,365,725
----------- ----------- ----------- ------------ ------------
DISTRIBUTIONS TO SHARE-
HOLDERS:
From net investment
income ($0.20, $0.58
and $0.54 per share,
respectively, for SGF,
$0.96 and $1.63,
respectively, for
SMDS)................. (323,965) (936,276) (788,687) (3,447,276) (6,886,732)
From realized gains on
investments ($0.46,
$1.210 and $0.945 per
share, respectively,
for SGF).............. (745,123) (1,910,237) (1,357,531) -- --
In excess of net
investment income
($0.13 for SMDS)...... -- -- -- -- (531,985)
CAPITAL SHARE
TRANSACTIONS: /2/ (472,322) 2,089,016 3,783,914 (9,633,097) (24,434,759)
----------- ----------- ----------- ------------ ------------
Total increase
(decrease) in net
assets................ 5,722,058 1,921,216 11,160,859 (7,822,392) (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
$166,318, $9,083 and
$431,001,
respectively, for SGF,
$96,828 and $0,
respectively, for
SMDS)................. $50,523,314 $44,801,256 $42,880,040 $ 95,957,343 $103,779,735
=========== =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
SSCY
-----------------------------
6 MONTHS ENDED 9 MONTHS ENDED
06/30/97* 12/31/96
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income........................... $ 147,948 $ 310,419
Net realized gain on investments................ 522,572 946,175
Net increase in unrealized appreciation of
investments.................................... 3,621,809 1,260,568
----------- -----------
Net increase in net assets resulting from
operations..................................... 4,292,329 2,517,162
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.20 and $0.54,
respectively).................................. (129,907) (333,221)
From realized gains on investments ($0.46 and
$1.83, respectively)........................... (304,566) (1,129,636)
CAPITAL SHARE TRANSACTIONS: /2/ 1,885,437 1,044,806
----------- -----------
Total increase in net assets.................... 5,743,293 2,099,111
NET ASSETS:
Beginning of period............................. 21,691,076 19,591,965
----------- -----------
End of period (including undistributed net
investment income of $18,041 and $0,
respectively).................................. $27,434,369 $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
-----------------------------------------------------------------------
6 MONTHS ENDED 7 MONTHS ENDED YEAR ENDED
JUNE 30, 1997* DECEMBER 31, 1996 MAY 31, 1996
---------------------- ------------------------ ---------------------
SHARES VALUE SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued........... 53,360 $ 1,529,730 84,152 $ 2,143,395 234,168 $ 5,879,301
Shares reinvested from
net investment income
and capital gains
distributions.......... 29,765 926,258 96,302 2,447,768 80,419 1,841,377
-------- ------------ ---------- ------------ -------- -----------
83,125 2,455,988 180,454 4,591,163 314,587 7,720,678
Shares redeemed......... (102,033) (2,928,310) (98,426) (2,502,147) (156,417) (3,936,764)
-------- ------------ ---------- ------------ -------- -----------
Net increase (de-
crease).............. (18,908) $ (472,322) 82,028 $ 2,089,016 158,170 $ 3,783,914
======== ============ ========== ============ ======== ===========
<CAPTION>
SMDS
------------------------------------------------
6 MONTHS ENDED 11 MONTHS ENDED
JUNE 30, 1997* DECEMBER 31, 1996
---------------------- ------------------------
SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares issued........... 83,598 $ 2,278,605 238,241 $ 6,238,119
Shares reinvested from
net investment income.. 71,402 1,937,445 165,671 4,298,372
-------- ------------ ---------- ------------
155,000 4,216,050 403,912 10,536,491
Shares redeemed......... (503,896) (13,849,147) (1,338,319) (34,971,250)
-------- ------------ ---------- ------------
Net decrease.......... (348,896) $ (9,633,097) (934,407) $(24,434,759)
======== ============ ========== ============
<CAPTION>
SSCY
------------------------------------------------
6 MONTHS ENDED 9 MONTHS ENDED
JUNE 30, 1997* DECEMBER 31, 1996
---------------------- ------------------------
SHARES VALUE SHARES VALUE
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares issued........... 125,728 $ 4,585,036 28,881 $ 940,160
Shares reinvested from
net investment income
and capital gains
distributions.......... 8,755 334,800 32,327 1,049,304
-------- ------------ ---------- ------------
134,483 4,919,836 61,208 1,989,464
Shares redeemed......... (85,600) (3,034,399) (28,629) (944,658)
-------- ------------ ---------- ------------
Net increase.......... 48,883 $ 1,885,437 32,579 $ 1,044,806
======== ============ ========== ============
</TABLE>
- --------
* Unaudited
See accompanying notes to financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 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 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 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)
- -------------------------------------------------------------------------------
June 30, 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 six months ended June 30, 1997, the Funds paid advisory
fees to Stratton Management Company, (the "Advisor") as follows: SGF--
$167,585; SMDS--$294,987; SSCY--$128,204. 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 June 30, 1997 caused the advisory fee to increase by $40,852.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
June 30, 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 six months ended June 30, 1997 as
follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY
------- ------- ------
<S> <C> <C> <C>
Shareholder Services $14,784 $82,075 $7,707
Administration 12,500 15,000 4,167
Accounting/Pricing 10,000 13,000 8,333
</TABLE>
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 six months ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY
----------- ----------- ----------
<S> <C> <C> <C>
Cost of purchases $10,216,877 $27,303,341 $4,693,463
Proceeds of sales 11,447,918 37,593,278 3,009,961
</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>
6 MONTHS
ENDED 7 MONTHS YEARS ENDED MAY 31,
06/30/97 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 in-
come................. 0.296 0.312 0.556 0.537 0.510 0.560 0.640
Net gains on
securities (both
realized and
unrealized).......... 4.164 1.298 5.759 2.978 0.665 1.160 1.320
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations......... 4.460 1.610 6.315 3.515 1.175 1.720 1.960
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.200) (0.580) (0.540) (0.540) (0.510) (0.565) (0.725)
Distributions (from
capital gains)....... (0.460) (1.210) (0.945) (1.275) (0.905) (0.815) (0.435)
------- ------- ------- ------- ------- ------- -------
Total distribu-
tions.............. (0.660) (1.790) (1.485) (1.815) (1.415) (1.380) (1.160)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 30.80 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 16.49% 6.40% 29.62% 18.61% 5.92% 8.91% 10.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $50,523 $44,801 $42,880 $31,719 $25,475 $25,315 $25,311
Ratio of expenses to
average net assets... 1.10%/1/ 1.17%/1/ 1.16% 1.31% 1.34% 1.39% 1.35%
Ratio of net
investment income to
average net assets... 2.06%/1/ 2.08%/1/ 2.28% 2.70% 2.51% 2.76% 3.20%
Portfolio turnover
rate................. 23.37% 20.32% 15.41% 42.54% 49.81% 35.34% 59.76%
Average commission
rate paid............ $0.0503 $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>
6 MONTHS
ENDED 11 MONTHS YEARS ENDED JANUARY 31,
06/30/97 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............... 0.99 1.63 1.88 1.94 1.87 1.94 1.97
Net gains (losses) on
securities (both
realized and
unrealized).......... 0.48 0.16 2.60 (3.87) (1.14) 2.08 4.79
------- -------- -------- -------- -------- ------- -------
Total from
investment
operations......... 1.47 1.79 4.48 (1.93) 0.73 4.02 6.76
------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.96) (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...... (0.96) (1.76) (1.92) (1.92) (1.95) (1.94) (1.95)
------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 27.94 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
======= ======== ======== ======== ======== ======= =======
TOTAL RETURN............ 5.52% 7.12% 18.98% (6.57%) 2.22% 15.18% 30.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period
(in 000's)........... $95,957 $103,780 $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to
average
net assets........... 1.02%/1/ 1.02%/1/ 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net
investment income to
average net assets... 7.32%/1/ 6.94%/1/ 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover
rate................. 30.73% 69.19% 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission
rate paid............ $0.0496 $ 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>
6 MONTHS
ENDED 9 MONTHS YEAR YEAR FOR THE PERIOD
06/30/97 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,
BEGINNING OF PERIOD.... $ 33.58 $ 31.95 $ 25.88 $ 25.94 $25.00
------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.23 0.53 0.66 0.57 0.43
Net gains (loss) on
securities (both
realized and
unrealized).......... 6.34 3.47 6.07 (0.04) 0.91
------- ------- ------- ------- ------
Total from
investment
operations......... 6.57 4.00 6.73 0.53 1.34
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.20) (0.54) (0.66) (0.59) (0.40)
Distributions (from
capital gains)....... (0.46) (1.83) 0.00 0.00 0.00
------- ------- ------- ------- ------
Total
distributions...... (0.66) (2.37) (0.66) (0.59) (0.40)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................. $ 39.49 $ 33.58 $ 31.95 $ 25.88 $25.94
======= ======= ======= ======= ======
TOTAL RETURN............ 19.64% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $27,434 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets... 1.68%/2/ 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net
investment income to
average net assets... 1.28%/2/ 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................. 13.48% 35.86% 33.50% 30.20% 28.60%/2/
Average commission
rate paid............ $0.0562 $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
