<PAGE>
STRATTON
SMALL-CAP
YIELD FUND
- --------------------------------------------------------------------------------
SSCY
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
----------- -----------
<S> <C> <C>
Total Net Assets........... $21,691,076 $20,435,759
Net Asset Value Per Share.. $ 33.58 $ 32.76
Shares Outstanding......... 645,878 623,891
Number of Shareholders..... 874 893
Average Size Account....... $ 24,818 $ 22,884
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Changes For the Quarter Ended December 31, 1996
Major Purchases Major Sales
A.O. Smith Corp. Coca-Cola Bottling Co. Consolidated/(2)/
International Multifoods Corp. First Union Corp./(2)/
Inter-Regional Financial
Group, Inc. Interchange Financial Services
Corp./(2)/
Marc, Inc. Jackpot Enterprises, Inc./(2)/
Mississippi Chemical Corp./(1)/ Lukens, Inc./(2)/
Quanex Corp./(1)/ MacNeal-Schwendler Corp./(2)/
Republic Group, Inc. Ryland Group, Inc./(2)/
Sterling Bancorp (NY)/(1)/ Schweitzer-Mauduit International, Inc./(2)/
Tasty Baking Co./(1)/
TB Wood's Corp./(1)/
/(1)/ New Holdings /(2)/ Eliminations
Ten Largest Holdings December 31, 1996
<TABLE>
<CAPTION>
Market Percent
Value of TNA
---------- --------
<S> <C> <C>
A.O. Smith Corp....................... $ 746,875 3.4%
K2, Inc............................... 687,500 3.2
Kysor Industrial Corp................. 652,500 3.0
American Business Products, Inc....... 628,125 2.9
Mississippi Chemical Corp............. 600,000 2.8
Inter-Regional Financial Group, Inc... 599,250 2.8
Sturm, Ruger & Co., Inc............... 581,250 2.7
Technitrol, Inc....................... 575,625 2.6
True North Communications, Inc........ 546,875 2.5
Donegal Group, Inc.................... 512,500 2.4
---------- ----
$6,130,500 28.3%
========== ====
</TABLE>
1
<PAGE>
DEAR SHAREHOLDER:
Your Fund completed its third fiscal quarter on December 31, 1996 ending with a
net asset value of $33.58. Total net assets have grown to $21,691,076. Our
number of shareholder accounts totaled 874 at quarter-end with an average
account size of $24,818. Shareholders should note that the Fund changed to a
calendar fiscal year as of December 31, 1996.
We remain invested in a diversified list of holdings across 10 different
industries. Your portfolio is comprised of small companies all of which were
under $500 million in market value at the time of purchase. The average market
capitalization of the stocks in the portfolio is approximately $350 million. Our
portfolio turnover for the nine months ended December 31, 1996 was 35.86% and we
ended the year with 57 stocks in the Fund.
At the end of the quarter the portfolio was 93% invested with the remaining cash
reserves held in commercial paper. Our industry mix has shifted slightly since
last quarter with Industrial companies now our largest industry group at 21%. We
added to the industrial and consumer sectors of the portfolio as we became more
optimistic about the economic outlook. Banking is still 19% of assets while
Consumer Products now comprise almost 16% of the portfolio. Business Services
and Technology are the next largest at 11% and 9%, respectively. We hold 7% in
REIT's which performed very well in the quarter while providing an above average
income level.
Performance for the quarter at 9.0% was significantly higher than the 5.1%
return of the Russell 2000. Industrial stocks were exceptionally strong with
above market performances also coming from small banks and REIT's. The Nasdaq
and Dow Jones Industrial Indices continue to hit new highs. This reflects the
large money flows into liquid large capitalization names. While the stock market
appears overvalued by many fundamental measures, we still find relative values
in many small-cap dividend paying companies. These dividends should provide a
cushion in the event of a market correction.
Economic growth in the fourth quarter was a robust 4.7% as measured by Gross
Domestic Product. The Federal Reserve Board's inaction on February 5 confirms
our low inflation outlook. We expect growth to moderate to the 1.5-3% range
during the first six months of 1997 as indicated by January's slower
manufacturing activity. Your portfolio is invested to maximize total return to
the shareholder and your Fund's conservative level of dividend payout is the
result of our current industry allocation.
Your Fund's Directors declared the third quarterly dividend at the rate of $2.05
per share, comprised of $0.22 of income and $1.83 of capital gains. The dividend
was payable on December 23 to stockholders of record as of December 13, 1996. We
appreciate the support of all of our existing shareholders and welcome our new
shareholders to the Fund. As a 100% No-Load Fund, your referrals are crucial in
building assets and thereby lowering expense ratios. Should you have any
questions regarding your Fund you may contact us at 1-800-578-8261.
Sincerely yours,
James W. Stratton Frank H. Reichel, III
Chairman President
February 5, 1997
2
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
STRATTON SMALL-CAP YIELD FUND AND THE RUSSELL 2000
PERFORMANCE SINCE INCEPTION (4/12/93 - 12/31/96)
[GRAPH OF STRATTON SMALL-CAP YIELD FUND APPEARS HERE]
Average Annual Total Return
1 Year Since Inception
14.96% 12.12%
<TABLE>
<CAPTION>
SSCY RUSS 2000
<S> <C> <C>
4/12/93 $10,000 $10,000
6/30/93 $10,132 $10,454
9/30/93 $10,850 $11,368
12/31/93 $10,754 $11,663
3/31/94 $10,534 $11,352
6/30/94 $10,529 $10,908
9/30/94 $10,749 $11,666
12/31/94 $10,464 $11,450
3/31/95 $10,754 $11,978
6/30/95 $11,465 $13,101
9/30/95 $12,587 $14,395
12/31/95 $13,318 $14,707
3/31/96 $13,569 $15,458
6/30/96 $13,870 $16,231
9/30/96 $14,049 $16,286
12/31/96 $15,311 $17,133
</TABLE>
3
<PAGE>
DISCUSSION OF INVESTMENT PROCESS AND PERFORMANCE
Stratton Small-Cap Yield Fund's investment philosophy is to achieve both
dividend income and capital appreciation. The Fund seeks to achieve its
objective by investing in dividend-paying small-cap common stocks. Under normal
market conditions, the Fund will invest at least 80% of its assets in equity
securities. The Fund will invest at least 65% of its assets in small-cap
companies. The Fund may not invest more than 25% in any one industry.
From an overall equity universe of 5,000 companies, using a computer, Stratton
Management screens down to about 300 companies by selecting stocks which possess
a greater than average dividend yield and a market capitalization of less than
$500 million. Our second screen then reduces that universe to approximately 80
stocks by measuring additional security characteristics such as earnings
momentum and relative valuation. The portfolio contains approximately sixty
companies that meet these criteria. Fundamental security analysis is applied to
those companies on a continuing basis. The final decision to buy or sell stocks
for the portfolio of Stratton Small-Cap Yield is made by Frank H. Reichel, III
and James W. Stratton.
The volatility of the portfolio, as measured by the Standard Deviation and/or
Beta of the stocks, is considerably below that of the average small-cap fund. By
combining above average dividend yields and lower than average price/earnings
ratios, the Fund tries to produce good performance in up markets and strong
relative performance in down markets.
For the Fund's fourth fiscal year, performance was slightly below that of the
Frank Russell 2000 Index (14.96% vs. 16.49%). We are proud of our performance
given our strict value approach in a seemingly endless bull market. Our
industrial stocks were up over 36% and our banks as a group returned over 32%.
Conditions relating to the Fund's performance for the past quarter and our
outlook for the next twelve months are presented in the President's letter on
page 2.
4
<PAGE>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ----------
<S> <C> <C>
COMMON STOCKS - 93.1%
Banking - 19.3%
2,000 Affiliated Community Bancorp .......................... $ 42,750
7,500 American Bank of Connecticut .......................... 210,000
10,000 Bankers Corp. (Perth Amboy, NJ) ....................... 201,250
4,000 CCB Financial Corp. ................................... 273,000
8,000 Centura Banks, Inc. (NC) .............................. 357,000
7,000 Colonial BancGroup, Inc. .............................. 280,000
12,000 Commerce Bancorp, Inc. (NJ) ........................... 396,000
9,900 Eagle Financial Corp. ................................. 301,950
20,000 First Essex Bancorp, Inc. ............................. 262,500
9,000 First Financial Holdings, Inc. ........................ 202,500
4,500 Firstbank of Illinois Co. ............................. 156,375
13,000 Medford Savings Bank .................................. 334,750
20,000 Portsmouth Bank Shares, Inc. .......................... 280,000
10,000 Reliance Bancorp, Inc. ................................ 195,000
6,000 Sterling Bancorp (NY) ................................. 88,500
9,000 United Carolina Bancshares Corp. ...................... 355,500
7,000 Vermont Financial Services Corp. ...................... 248,500
----------
4,185,575
----------
Business Services - 11.2%
25,000 American Business Products, Inc. ...................... 628,125
17,000 Inter-Regional Financial Group, Inc. .................. 599,250
20,000 Marc, Inc. ............................................ 437,500
15,000 PMC Capital, Inc. ..................................... 210,000
25,000 True North Communications, Inc. ....................... 546,875
----------
2,421,750
----------
Consumer Durables - 8.4%
25,000 K2, Inc. .............................................. 687,500
30,000 Sturm, Ruger & Co., Inc. .............................. 581,250
27,000 TB Wood's Corp. ....................................... 290,250
35,000 Winnebago Industries, Inc. ............................ 253,750
----------
1,812,750
----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ----------
<S> <C> <C>
COMMON STOCKS - 93.1% (continued)
Consumer Non-Durables - 7.1%
25,000 International Multifoods Corp. ........................ $ 453,125
25,000 Riviana Foods, Inc. (DE) .............................. 431,250
20,000 Tasty Baking Co. ...................................... 275,000
6,000 Velcro Industries, N.V. ............................... 375,000
------------
1,534,375
------------
Chemical - 2.8%
25,000 Mississippi Chemical Corp. ............................ 600,000
------------
Industrial - 20.7%
25,000 A.O. Smith Corp. ...................................... 746,875
12,000 Carpenter Technology Corp. ............................ 439,500
10,000 Cleveland-Cliffs, Inc. ................................ 453,750
30,000 Excel Industries, Inc. ................................ 498,750
25,000 Kuhlman Corp. ......................................... 484,375
20,000 Kysor Industrial Corp. ................................ 652,500
15,000 Quanex Corp. .......................................... 410,625
20,000 Republic Group, Inc. .................................. 312,500
30,000 Roanoke Electric Steel Corp. .......................... 502,500
------------
4,501,375
------------
Insurance/Services - 7.3%
15,000 Acordia, Inc. ......................................... 435,000
25,000 Donegal Group, Inc. ................................... 512,500
12,500 Selective Insurance Group, Inc. ....................... 475,000
6,000 Washington National Corp. ............................. 165,000
------------
1,587,500
------------
Real Estate - 6.7%
2,500 Brandywine Realty Trust ............................... 48,750
8,000 Camden Property Trust ................................. 229,000
8,000 Colonial Properties Trust ............................. 243,000
20,000 Innkeepers USA Trust .................................. 277,500
9,000 Merry Land & Investment Co., Inc. ..................... 193,500
9,000 ROC Communities, Inc. ................................. 249,750
7,000 Sovran Self Storage, Inc. ............................. 218,750
------------
1,460,250
------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ----------
<S> <C> <C>
COMMON STOCKS - 93.1% (continued)
Technology - 8.6%
14,500 Boston Acoustics, Inc. ................................ $ 259,187
15,000 Helix Technology Corp. ................................ 435,000
12,000 Kaman Corp. Class A ................................... 156,000
9,000 Shared Medical Systems Corp. .......................... 443,250
15,000 Technitrol, Inc. ...................................... 575,625
------------
1,869,062
------------
Utilities - 1.0%
6,000 WICOR, Inc. ........................................... 215,250
------------
Total Common Stocks (cost $15,655,098)................. 20,187,887
------------
Principal
Amount
- ---------
SHORT-TERM NOTES - 6.2%
$680,000 American Express Credit Corp. 5.46% due 01/02/97....... 680,000
$680,000 General Motors Acceptance Corp. 5.82% due 01/07/97..... 680,000
------------
Total Short-Term Notes (cost $1,360,000)............... 1,360,000
------------
Total Investments - 99.3% (cost $17,015,098)*.......... 21,547,887
Cash and Other Assets, Less Liabilities - 0.7%......... 143,189
------------
NET ASSETS - 100.0%.................................... $ 21,691,076
------------
* Aggregate cost for federal income tax purposes is $17,015,098; and net unrealized appreciation
is as follows:
Gross unrealized appreciation.......................... $ 4,715,514
Gross unrealized depreciation.......................... (182,725)
------------
Net unrealized appreciation............................ $ 4,532,789
============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value (identified cost $17,015,098) (Note 1)... $21,547,887
Cash............................................................................... 86,946
Dividends and interest receivable.................................................. 69,460
Receivable for capital stock sold.................................................. 5,240
------------
Total Assets................................................................... 21,709,533
------------
LIABILITIES
Accrued expenses................................................................... 18,457
------------
Total Liabilities.............................................................. 18,457
------------
NET ASSETS
Applicable to 645,878 shares; $0.001 par value; 1,000,000,000 shares authorized ... $21,691,076
============
Net asset value, offering and redemption price per share
($21,691,076 / 645,878 shares).................................................. $ 33.58
============
SOURCE OF NET ASSETS
Paid-in capital.................................................................... $16,858,903
Accumulated net realized gain on investments....................................... 299,384
Net unrealized appreciation of investments......................................... 4,532,789
------------
Net Assets..................................................................... $21,691,076
============
</TABLE>
STATEMENT OF OPERATIONS
9 Months Ended December 31, 1996
<TABLE>
<S> <C>
INCOME
Dividends........................................................................... $ 451,552
Interest............................................................................ 56,240
------------
Total Income..................................................................... 507,792
------------
EXPENSES
Advisory fees (Note 2).............................................................. 91,179
Registration fees (Note 2).......................................................... 25,272
Shareholder services fees (Note 2).................................................. 16,013
Accounting/Pricing services fees (Note 2)........................................... 15,000
Custodian fees (Note 2)............................................................. 11,970
Audit fees.......................................................................... 11,500
Printing and postage fees........................................................... 8,590
Administrative services fees (Note 2)............................................... 7,500
Directors' fees..................................................................... 4,159
Miscellaneous fees.................................................................. 2,897
Taxes other than income taxes....................................................... 1,675
Legal fees.......................................................................... 1,618
------------
Total Expenses................................................................... 197,373
------------
Net Investment Income......................................................... 310,419
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments.................................................... 946,175
Net increase in unrealized appreciation of investments.............................. 1,260,568
------------
Net gain on investments.......................................................... 2,206,743
------------
Net increase in net assets resulting from operations.......................... $ 2,517,162
============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
9 Months
Ended Year Ended
December 31, March 31,
1996 1996
------------ ----------
<S> <C> <C>
OPERATIONS
Net investment income............................................. 310,419 384,241
Net realized gain on investments.................................. 946,175 970,650
Net increase in unrealized appreciation
of investments.................................................. 1,260,568 2,474,521
---------- ----------
Net increase in net assets resulting from operations........ 2,517,162 3,829,412
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($0.54 and $0.66 per share, respectively).................... (333,221) (382,442)
Distributions from net realized gains from security
transactions ($1.83 and $0.00 per share, respectively)...... (1,129,636) 0
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from the net change
in the number of outstanding shares (a)...................... 1,044,806 2,086,829
---------- ----------
Total Increase in Net Assets................................ 2,099,111 5,533,799
NET ASSETS AT THE BEGINNING OF THE PERIOD ...................... 19,591,965 14,058,166
---------- ----------
NET ASSETS AT THE END OF THE PERIOD
(including undistributed net investment income
of $0 and $6,437, respectively).............................. 21,691,076 19,591,965
========== ==========
</TABLE>
9
<PAGE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
9 Months Ended Year Ended
December 31, 1996 March 31, 1996
--------------------- ----------------------
Shares Value Shares Value
------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Shares issued................... 28,881 $ 940,160 91,285 $ 2,692,659
Shares reinvested from
net investment income....... 32,327 1,049,304 9,200 277,894
------- ---------- ------- -----------
61,208 1,989,464 100,485 2,970,553
Shares redeemed................. (28,629) (944,658) (30,395) (883,724)
------- ---------- ------- -----------
Net increase................ 32,579 $1,044,806 70,090 $ 2,086,829
======= ========== ======= ===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
Note 1. - Significant Accounting Policies - The Stratton Funds, Inc. (the
"Company") was organized on January 5, 1993 as a Maryland Corporation and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. As of the date of this report, the Company
offered one investment portfolio, Stratton Small-Cap Yield Fund (the "Fund").
The Fund's investment objective is to achieve both dividend income and capital
appreciation. The Fund will seek to achieve this objective through investment
in the securities of small-cap companies which have certain risks associated
with them. First and foremost is their greater earnings and price volatility in
comparison to large companies. Earnings risk is partially due to the
undiversified nature of small company business lines. The Fund has changed its
fiscal and tax year end from March 31 to December 31, commencing with December
31, 1996. The following is a summary of significant accounting policies
consistently followed by the Company in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security Valuation - Securities listed or admitted to trading on any
national securities exchange are valued at their last sale price on the
exchange where the securities are principally traded or, if there has been
no sale on that date, at the mean between the last reported bid and asked
prices. Securities traded in the over-the-counter market are valued at the
last sale price, if carried in the National Market Issues section by
NASDAQ; other over-the-counter securities are valued at the mean between
the closing bid and asked prices obtained from a principal market maker.
All other securities and assets are valued at their fair value as
determined in good faith by the Board of Directors of the Fund, which may
include the amortized cost method for securities maturing in sixty days or
less and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains or
losses on the sale of securities are calculated for accounting and tax
purposes on the identified cost basis.
C. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting principles,
management makes estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements, as well
as the reported amounts of income and expenses during the reporting period.
Actual results may differ from these estimates.
E. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date. Dividends and
distributions to shareholders are recorded on the ex-dividend date.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
Note 2. - During the nine months ended December 31, 1996, the Fund paid advisory
fees aggregating $91,179 to Stratton Management Company, (the "Advisor").
Management services are provided by the Advisor under an agreement whereby the
Advisor furnishes all investment advice, office space and facilities to the Fund
and pays the salaries of the Fund's officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, the Fund pays a monthly fee to the
Advisor at an annual rate of 0.75% of the daily net asset value of the Fund for
such month, subject to a performance adjustment. The performance adjustment
will be calculated at the end of each month based upon a rolling 24 month
performance period. The performance adjustment is added to or subtracted from
the basic investment advisory fee.
The Fund's gross performance is compared with the performance of the Frank
Russell 2000 Index, ("Russell 2000"). When the Fund performs better than the
Russell 2000, it pays the Investment Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of the
difference in performance between the Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the basic fee. The maximum
annualized performance adjustment rate is +/- 0.50% of average net assets which
would be added to or deducted from the advisory fee if the Fund outperformed or
underperformed the Russell 2000 by 5.00%. The performance fee adjustment for
the period ended December 31, 1996 caused the advisory fee to decrease by
$24,209. Certain officers and directors of the Fund are also officers and
directors of the Advisor. None of the Fund's officers receive compensation from
the Fund.
The Fund's Administrator, Accounting Agent and Transfer Agent, FPS Services,
Inc. ("FPS"), is a wholly-owned subsidiary of FinDaTex, Inc. Certain directors
and officers of the Fund are shareholders of FinDaTex, Inc. FPS received fees
of $16,013 for providing shareholder services, $7,500 for certain administrative
services and $15,000 for accounting/pricing services during the nine months
ended December 31, 1996. Pursuant to an agreement between The Bank of New York,
(the "Custodian"), and FPS, the Custodian reallows a portion of its custody fee
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 Fund's principal underwriter and receives no fees for services in
assisting in sales of the Fund's shares but does receive an annual fee of $3,000
for its services in connection with the registration of the Fund's shares under
state securities laws.
Note 3. - Purchases and sales of securities, excluding short-term notes,
aggregated $6,802,017 and $6,959,454, respectively, for the nine months ended
December 31, 1996.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
9 Months Year Year For the period
Ended Ended Ended 04/12/93*
12/31/96 03/31/96 03/31/95 to 03/31/94
---------- --------- --------- --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 31.95 $ 25.88 $ 25.94 $ 25.00
---------- --------- --------- -----------
Income From Investment Operations
- ------------------------------------------
Net investment income.................... 0.53 0.66 0.57 0.43
Net gain (loss) on securities
(both realized and unrealized).... 3.47 6.07 (0.04) 0.91
---------- --------- --------- -----------
Total from investment operations....... 4.00 6.73 0.53 1.34
---------- --------- --------- -----------
Less Distributions
- ------------------------------------------
Dividends (from net
investment income)................ (0.54) (0.66) (0.59) (0.40)
Distributions (from capital gains)....... (1.83) 0.00 0.00 0.00
---------- --------- --------- -----------
Total distributions.................... (2.37) (0.66) (0.59) (0.40)
---------- --------- --------- -----------
Net Asset Value, End of Period............ $ 33.58 $ 31.95 $ 25.88 $ 25.94
========== ========= ========= ===========
Total Return.............................. 12.84% 26.18% 2.09% 5.51%**
Ratios/Supplemental Data
- ------------------------------------------
Net assets, end of period (in 000's)..... $ 21,691 $ 19,592 $ 14,058 $ 8,257
Ratio of expenses to average net assets.. 1.29%** 1.46% 2.12% 2.28%**
Ratio of net investment income
to average net assets............. 2.03%** 2.28% 2.36% 1.85%**
Portfolio turnover rate.................. 35.86% 33.50% 30.20% 28.60%**
Average commission rate paid.............. $ 0.0579 N/A N/A N/A
</TABLE>
* Commencement of operations
** Annualized
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Stratton Funds, Inc.
We have audited the accompanying statement of assets and liabilities
of Stratton Small-Cap Yield Fund, a series of The Stratton Funds, Inc.,
including the schedule of investments, as of December 31, 1996, and the related
statement of operations for the nine months then ended, the statement of changes
in net assets for the nine months then ended and for the year ended March 31,
1996, and the financial highlights for the nine months then ended, for each of
the two years ended March 31, 1996 and for the period April 12, 1993,
(commencement of operations) to March 31, 1994. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Stratton Small-Cap Yield Fund as of December 31, 1996, the results
of its operations for the nine months then ended, the changes in its net assets
for the nine months then ended and for the year ended March 31, 1996, and the
financial highlights for the nine months then ended, for each of the two years
in the period then ended and for the period April 12, 1993, (commencement of
operations) to March 31, 1994, in conformity with generally accepted accounting
principles.
Philadelphia, PA
January 13, 1997 TAIT, WELLER & BAKER
13
<PAGE>
SHAREHOLDER INFORMATION
Minimum Investment
- ------------------
The minimum amount for the initial purchase of shares of Stratton Small-Cap
Yield Fund is $500. This minimum amount will remain in effect until the Fund
reaches 2,000 shareholders, after which time the minimum amount for initial
purchases will be $5,000. Subsequent purchases may be made in amounts of $100 or
more.
Telephone Exchange
- ------------------
Shares of Stratton Small-Cap Yield Fund may be exchanged by telephone for shares
of the other funds managed by Stratton Management Company, Stratton Growth Fund,
Inc. or Stratton Monthly Dividend Shares, Inc., if a special authorization form
has been completed and is on file with the Transfer Agent in advance. Exchanges
will only be permitted when the securities of both funds involved are registered
in the state of the investor's residence. Stratton Small-Cap Yield Fund
reserves the right to suspend the exchange privilege at any time. A Prospectus
of Stratton Growth Fund or Stratton Monthly Dividend Shares should be obtained
and read prior to making any such exchange.
Income Dividend and Capital Gains Distributions
- -----------------------------------------------
Stratton Small-Cap Yield Fund expects to distribute substantially all of its net
investment income quarterly, in March, June, September and December. The Fund
intends to distribute all of its net realized capital gains annually.
Systematic Withdrawal Plan
- --------------------------
Investors who either own or purchase Stratton Small-Cap Yield Fund shares having
a value of $10,000 or more may elect as another option to withdraw funds on a
regular basis from their account on a monthly, quarterly, semi-annual or annual
basis in amounts of $50 or more.
Share Price Information
- -----------------------
The daily share price of Stratton Small-Cap Yield Fund can be found in the
mutual fund section of most major daily newspapers as well as The Wall Street
Journal and Investor's Daily, where the Fund is listed under Stratton Funds as
SmCap or Small Cap Yield. The Fund's stock ticker symbol is STSCX.
Retirement Plans
- ----------------
Stratton Small-Cap Yield Fund's IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans are available at no minimum investment.
14
<PAGE>
General Information on SSCY
- ---------------------------
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Fund's "Distributor":
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
Telephones: 610-239-4600 . 800-441-6580
Investment Portfolio Activities
- -------------------------------
Questions regarding Stratton Small-Cap Yield Fund's investment portfolio should
be directed to the Fund's "Investment Advisor":
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
Additional Purchases Only to existing accounts should be mailed to a separate
- -------------------------
lock box unit:
C/O FPS SERVICES, INC.
P.O. Box 412797, Kansas City, MO 64141-2797
This report is authorized for distribution to shareholders and to others who
have received a copy of the Prospectus of Stratton Small-Cap Yield Fund.
15
<PAGE>
SSCY STRATTON SMALL-CAP
YIELD FUND
Directors Investment Advisor
LYNNE M. CANNON STRATTON MANAGEMENT COMPANY
JOHN J. LOMBARD, JR. Plymouth Meeting Executive Campus
HENRY A. RENTSCHLER 610 W. Germantown Pike, Suite 300
MERRITT N. RHOAD, JR. Plymouth Meeting, PA 19462-1050
ALEXANDER F. SMITH Telephone: 610-941-0255
RICHARD W. STEVENS
JAMES W. STRATTON
Officers Transfer Agent and Dividend Paying Agent
JAMES W. STRATTON FPS SERVICES, INC.
Chairman 3200 Horizon Drive, P.O. Box 61503
King of Prussia, PA 19406-0903
FRANK H. REICHEL, III Telephones: 610-239-4600 . 800-441-6580
President
JOHN A. AFFLECK
GERARD E. HEFFERNAN
JOANNE E. KUZMA
Vice President
PATRICIA L. SLOAN
Secretary and Treasurer
JAMES A. BEERS Independent Accountants
CAROL L. ROYCE
Assistant Secretary TAIT, WELLER & BAKER
Assistant Treasurer 2 Penn Center Plaza, Suite 700
Philadelphia, PA 19102-1707
16
