<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 15, 1998 REGISTRATION NOS.: 33-57166
811-7434
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20546
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. [9]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----
Amendment No. [11]
THE STRATTON FUNDS, INC.
------------------------
(Exact Name of Registrant as Specified in Charter)
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
------------------------------------------------------------------
(Address of Principal Executive Offices including Zip Code)
(610) 941-0255
--------------
(Registrant's Telephone Number, including Area Code)
Patricia L. Sloan, Secretary/Treasurer
The Stratton Funds, Inc.
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
------------------------------------------------------------------
(Name and Address of Agent for Service)
With copies to:
Vernon Stanton, Jr., Esq.
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
(215) 988-2700
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
THE STRATTON FUNDS, INC.
CROSS-REFERENCE SHEET
[AS REQUIRED BY RULE 481(A)]
<TABLE>
<CAPTION>
PART A
ITEM NO. PROSPECTUS CAPTION
- -------- ------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Introduction; Fee Table
3. Condensed Financial Information Financial Highlights;
Performance Calculations
4. General Description of Registrant Introduction; Investment Objectives, Policies,
Restrictions and Risk Considerations;
Description of Common Stock
5. Management of the Fund Management of the Funds; Investment
Advisor; Service Providers and Underwriter
5a. Management's Discussion of Fund Performance Inapplicable
6. Capital Stock and Other Securities How to Buy Fund Shares: Reinvestment of
Income Dividends and Capital Gains
Distributions; Tax Treatment:
Dividends and Distributions; Description of Common Stock
7. Purchase of Securities Being Offered Service Providers and Underwriter;
Computation of Net Asset Value; How to Buy
Fund Shares; Exchange Privilege; Retirement Plans
8. Redemption or Repurchase How to Redeem Fund Shares; Exchange
Privilege
9. Legal Proceedings Inapplicable
</TABLE>
<PAGE>
STRATTON MUTUAL FUNDS
STRATTON GROWTH FUND, INC.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
STRATTON SMALL-CAP YIELD FUND
STRATTON SPECIAL VALUE FUND
PROSPECTUS
APRIL 15, 1998
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
Stratton Mutual Funds represents four separate funds (each a "Fund" and
collectively the "Funds"). Each of the Funds has distinct investment
objectives and policies. Information concerning the Funds has been combined
into this one Prospectus to aid investors in understanding the similarities
and differences among the Funds.
STRATTON GROWTH FUND, INC. is a no-load mutual fund seeking as its primary
objective possible growth of capital 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.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC. is a no-load mutual fund seeking
as its objective a high rate of return from dividend and interest income on
its investments in common stock and securities convertible into common stock.
THE STRATTON FUNDS, INC. is a no-load, open-end series management company
currently offering two series of shares:
STRATTON SMALL-CAP YIELD FUND seeks to achieve both dividend income and
capital appreciation. The Fund seeks to achieve its objective by investing
in equity securities, primarily common stock, and securities convertible
into common stock, of companies with total market capitalizations at the
time of investment of less than $1 billion and which are outside the
Standard & Poor's 500 Index (hereinafter referred to as "small-cap
companies").
STRATTON SPECIAL VALUE FUND seeks to achieve capital appreciation. The Fund
seeks to achieve its objective by investing in equity securities, primarily
common stock and securities convertible into or exchangeable for common
stock which represent a value or potential worth which is not fully
recognized by prevailing market prices.
STRATTON SPECIAL VALUE FUND has an aggressive investment policy in that it
expects to incur the risk of investing in short positions, and it should
not be considered a complete investment program.
This Prospectus sets forth concisely the information about the Funds that
prospective investors should know before investing. Investors should read this
Prospectus and retain it for future reference.
<PAGE>
Additional information about the Funds has been filed with the U.S. Securities
and Exchange Commission ("SEC") and is available upon request and without
charge by calling or writing the Funds at the telephone number or address
above. The Statement of Additional Information bears the same date as this
Prospectus and is incorporated by reference into this Prospectus in its
entirety. The Statement of Additional Information, material incorporated by
reference into this Prospectus, and any other information regarding the Funds
are maintained electronically with the SEC at its Internet Web sight
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE U.S.
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.............................................................. 3
Fee Table................................................................. 4
Financial Highlights...................................................... 5
Investment Objectives, Policies, Restrictions and Risk Considerations..... 8
Management of the Funds................................................... 14
Investment Advisor........................................................ 14
Computation of Net Asset Value............................................ 16
How to Buy Fund Shares.................................................... 17
Investing by Mail....................................................... 17
Investing by Wire....................................................... 17
Automatic Investment Plan............................................... 18
Direct Deposit Program.................................................. 18
Reinvestment of Income Dividends and Capital Gains Distributions........ 18
Additional Information.................................................. 19
How to Redeem Fund Shares................................................. 19
By Written Request...................................................... 20
By Automated Clearing House ("ACH")..................................... 20
Systematic Cash Withdrawal Plan......................................... 20
Additional Information.................................................. 21
Exchange Privilege........................................................ 22
Retirement Plans.......................................................... 23
Tax Treatment: Dividends and Distributions................................ 23
Performance Calculations.................................................. 25
Description of Common Stock............................................... 25
Service Providers and Underwriter......................................... 26
</TABLE>
- -------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION ABOUT THE ITEMS DISCUSSED IN THIS PROSPECTUS, A
COPY OF THE STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED WITHOUT CHARGE
BY WRITING TO THE FUNDS' DISTRIBUTOR, FPS BROKER SERVICES, INC., 3200 HORIZON
DRIVE, P.O. BOX 61503, KING OF PRUSSIA, PA 19406-0903, OR BY TELEPHONING 800-
634-5726.
2
<PAGE>
INTRODUCTION The securities offered by this Prospectus consist of shares
of common stock of four separate Funds. Each Fund has
distinct investment objectives and policies. The Funds are
no-load, open-end, diversified mutual funds. The four Funds
are identified herein as follows: STRATTON GROWTH FUND, INC.
("SGF"); STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
("SMDS"); STRATTON SMALL-CAP YIELD FUND ("SSCY"); and
STRATTON SPECIAL VALUE FUND ("SSVF").
Investment SGF seeks as its primary objective possible growth of
Objectives capital 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.
SMDS seeks as its objective a high rate of return from
dividend and interest income on its investments in common
stock and securities convertible into common stock. Under
normal conditions, at least 65% of the Fund's total assets
will be invested in real estate investment trusts ("REITs").
SSCY seeks to achieve both dividend income and capital
appreciation by investing in equity securities, primarily
common stock and securities convertible into common stock of
small-cap companies. Under normal conditions, at least 80%
of the Fund's total assets will be invested in the equity
securities of small-cap companies.
SSVF seeks as its objective capital appreciation. The Fund
seeks to achieve its objective by investing in equity
securities, primarily common stock and securities
convertible into or exchangeable for common stock which
represent a value or potential worth which is not fully
recognized by prevailing market prices.
The value of each Fund's shares fluctuate because the value
of the securities in which each Fund invests fluctuates.
Each Fund will earn dividend or interest income to the
extent that it receives dividends or interest from its
investments. An investment in any of the Funds is neither
insured nor guaranteed by the U.S. Government. There can be
no assurance that any Fund's investment objective will be
achieved.
How to Buy Fund The minimum initial investment for each Fund is $2,000.
Shares There is no minimum initial investment requirement for any
retirement plan. Subsequent investments will be accepted in
minimum amounts of $100 or more. The Funds do not impose any
sales load nor bear any fees pursuant to a Rule 12b-1 Plan.
The public offering price for shares of each Fund is the net
asset value per share next determined after receipt and
acceptance of a purchase order at the transfer agent in
proper form with accompanying check or bank wire
arrangement. See "How to Buy Fund Shares."
How to Redeem Shares of the Funds may be redeemed at the net asset value
Fund Shares per share next determined after receipt by the transfer
agent of a redemption request in proper form. Signature
guarantees may be required for certain redemption requests.
See "How to Redeem Fund Shares."
3
<PAGE>
Dividends SGF intends to pay semi-annual dividends from its net
investment income. SMDS intends to pay monthly dividends
from its net investment income. SSCY intends to pay
quarterly dividends from its net investment income. SSVF
intends to pay annual dividends from its net investment
income.
Distributions of net capital gains, if any, for each Fund
will be paid annually.
Stratton Management Company (the "Investment Advisor"),
Investment Plymouth Meeting Executive Campus, 610 W. Germantown Pike,
Management, Suite 300, Plymouth Meeting, PA 19462-1050 is the Investment
Underwriter and Advisor for the Funds.
Servicing
Agents
FPS Broker Services, Inc. ("FPSB"), 3200 Horizon Drive, P.O.
Box 61503, King of Prussia, PA 19406-0903 serves as the
Funds' Underwriter. First Data Investor Services Group, Inc.
("Investor Services Group"), a wholly owned subsidiary of
First Data Corporation, which has its principal business
address at 4400 Computer Drive, Westboro, MA 01581, serves
as the Funds' Administrator, Accounting/Pricing Agent and
Transfer Agent.
Shareholders of each Fund can obtain toll-free access to
Integrated account information, as well as some transactions, by
Voice Response calling 1 (800) 472-4266. IVR provides share price and price
(IVR) System change for the Funds; gives account balances and history
(i.e., last transaction, latest dividend distribution,
redemptions by check during the last three months); and
allows exchanges of shares.
- -------------------------------------------------------------------------------
Below is a summary of the Operating Expenses: (1) incurred
FEE TABLE by SGF, SMDS and SSCY for its fiscal year ended December 31,
1997; and (2) estimated to be incurred by SSVF for the
fiscal year ending December 31, 1998. A hypothetical example
based on the summary is also shown.
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
--- ---- ---- ----
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
-------------------------------
(as a percentage of average net
assets)
Management Fees................. 0.72%/1/ 0.61%/1/ 1.09%/2/ 0.75%/2/
Other Expenses.................. 0.39% 0.41% 0.53% 1.25%
---- ---- ---- ----
Total Fund Operating Expenses... 1.11% 1.02% 1.62% 2.00%
</TABLE>
EXAMPLE
The following example illustrates the expenses that a
stockholder would pay on a $1,000 investment, assuming a 5%
annual rate of return and redemption at the end of each time
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
SGF.................................. $11 $35 $61 $135
SMDS................................. $10 $32 $56 $125
SSCY................................. $16 $51 $88 $192
SSVF................................. $20 $63 n/a n/a
</TABLE>
4
<PAGE>
/1/The Investment Advisor has voluntarily agreed to waive
$15,000 annually of the compensation due it under the
agreement with SGF and SMDS to offset a portion of the
cost of certain administrative responsibilities delegated
to Investor Services Group.
/2/This fee represents the basic management fee of 0.75%
payable to SSCY and SSVF under the Investment Advisory
Agreement subject to a performance adjustment. The
performance adjustment is a rolling 24-month comparison
to the Frank Russell 2000 Index ("Russell 2000"), see
"Investment Advisor" for a further discussion. For the
fiscal year ended December 31, 1997 the Investment
Advisor received 1.09% of SSCY'S average net assets.
Absent such performance adjustment, the Investment
Advisor would have received 0.75% of SSCY'S average net
assets. The performance adjustment for SSVF has not yet
commenced.
The purpose of this table is to assist investors in
understanding the various costs and expenses that investors
will bear directly or indirectly. The Funds do not impose
any sales load, redemption or exchange fees, nor do they
bear any fees pursuant to a Rule 12b-1 Plan; however, the
Transfer Agent currently charges investors who request
redemptions by wire transfer a fee of $9 for each such
payment. For more complete descriptions of the various costs
and expenses, see "Investment Advisor," "How to Buy Fund
Shares," "How to Redeem Fund Shares," "Retirement Plans" and
"Service Providers and Underwriter" and the financial
statements and related notes which appear in the Funds'
Annual Report to Shareholders.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE MORE OR LESS THAN THOSE SHOWN.
- -------------------------------------------------------------------------------
FINANCIAL The following information provides financial highlights for
HIGHLIGHTS a share outstanding of SGF, SMDS and SSCY, during the
periods stated. These Financial Highlights have been audited
by Tait, Weller & Baker, certified public accountants, whose
report appears in the Funds' Annual Report to Shareholders
dated December 31, 1997. This information should be read in
conjunction with the financial statements and accompanying
notes appearing in the 1997 Annual Report to Shareholders,
which are incorporated by reference into the Statement of
Additional Information. Further information about the
performance of the Funds is available in the Annual Report
to Shareholders. Both the Statement of Additional
Information and the Annual Report to Shareholders may be
obtained from the Funds free of charge by calling 800-634-
5726.
Also provided are unaudited Financial Highlights for a share
outstanding of SSVF from the commencement of operations to
March 31, 1998.
5
<PAGE>
STRATTON GROWTH FUND, INC.
<TABLE>
<CAPTION>
7 MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
---------- -------- -------------------------------------------------------------------------------
12/31/97 12/31/96 1996 1995 1994 1993 1992 1991/1/ 1990/1/ 1989/1/ 1988/1/
---------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR..... $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75 $ 19.66 $ 21.84 $ 19.48 $ 22.24
------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------
Net investment
income............... 0.550 0.312 0.556 0.537 0.510 0.560 0.64 0.72 0.82 0.55 0.58
Net gains (loss) on
securities (both
realized and
unrealized).......... 8.900 1.298 5.759 2.978 0.665 1.160 1.32 0.65 0.20 3.83 (1.11)
------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations........... 9.450 1.610 6.315 3.515 1.175 1.720 1.96 1.37 1.02 4.38 (0.53)
------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net
investment income)... (0.540) (0.580) (0.540) (0.540) (0.510) (0.565) (0.725) (0.82) (0.71) (0.53) (0.70)
Distributions (from
capital gains)....... (2.520) (1.210) (0.945) (1.275) (0.905) (0.815) (0.435) (0.46) (2.49) (1.49) (1.53)
------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (3.060) (1.790) (1.485) (1.815) (1.415) (1.380) (1.160) (1.28) (3.20) (2.02) (2.23)
------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR.................. $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75 $ 19.66 $ 21.84 $ 19.48
======= ======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN........... 36.06% 6.40% 29.62% 18.61% 5.92% 8.91% 10.57% 7.58% 4.94% 24.25% (2.17%)
RATIOS/SUPPLEMENTAL
DATA
- -------------------
Net assets, end of year
(in 000's)............ $60,177 $ 44,801 $42,880 $31,719 $25,475 $25,315 $25,311 $25,111 $23,407 $20,268 $16,859
Ratio of expenses to
average net assets.... 1.11% 1.17%/2/ 1.16% 1.31% 1.34% 1.39% 1.35% 1.41% 1.38% 1.41% 1.48%
Ratio of net investment
income to average net
assets................ 1.87% 2.08%/2/ 2.28% 2.70% 2.51% 2.76% 3.20% 3.94% 4.09% 2.79% 2.80%
Portfolio turnover
rate.................. 34.40% 20.32% 15.41% 42.54% 49.81% 35.34% 59.76% 56.78% 54.80% 49.85% 34.42%
Average commission rate
paid.................. $0.0509 $ 0.0537 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
/1/NOT COVERED BY INDEPENDENT ACCOUNTANTS' REPORT
/2/ANNUALIZED
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
<TABLE>
<CAPTION>
11 MONTHS
YEAR ENDED ENDED YEARS ENDED JANUARY 31
---------- --------- -------------------------------------------------------------------------
12/31/97 12/31/96 1996 1995 1994 1993 1992 1991/1/ 1990/1/ 1989/1/
---------- --------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02 $ 24.50 $ 24.43 $ 25.11
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------
Net investment income.. 1.54 1.63 1.88 1.94 1.87 1.94 1.97 2.05 2.09 2.10
Net gains (loss) on
securities (both
realized and
unrealized)........... 3.20 0.16 2.60 (3.87) (1.14) 2.08 4.79 (1.33) 0.03 (0.70)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations............ 4.74 1.79 4.48 (1.93) 0.73 4.02 6.76 0.72 2.12 1.40
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net
investment income).... (1.54) (1.63) (1.89) (1.92) (1.94) (1.94) (1.95) (2.20) (2.05) (2.08)
Distributions in excess
of net Investment
Income................ 0.00 (0.13) (0.03) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00
Distributions from net
realized gains from
security
transactions.......... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
paid-in capital/3/.... (0.38) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total distributions.... (1.92) (1.76) (1.92) (1.92) (1.95) (1.94) (1.95) (2.20) (2.05) (2.08)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02 $ 24.50 $ 24.43
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
TOTAL RETURN............ 18.09% 7.12% 18.98% (6.57%) 2.22% 15.18% 30.55% 3.30% 8.69% 5.93%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of year
(in 000's)............. $101,956 $103,780 $129,267 $134,066 $165,798 $98,227 $45,566 $31,178 $33,200 $33,845
Ratio of expenses to
average net assets..... 1.02% 1.02%/4/ 0.99% 1.08% 0.99% 1.10% 1.23% 1.27% 1.25% 1.21%
Ratio of net income to
average net asset...... 5.48% 6.94%/4/ 7.42% 7.71% 6.12% 6.74% 7.63% 8.79% 8.19% 8.54%
Portfolio turnover
rate................... 42.47% 69.19% 53.30% 39.50% 19.15% 35.94% 43.55% 14.00% 39.10% 15.00%
Average commission rate
paid................... $ 0.0505 $ 0.0498 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
/1/ NOT COVERED BY INDEPENDENT ACCOUNTANTS' REPORT
/2/ PER SHARE INCOME AND EXPENSES AND NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS HAVE BEEN COMPUTED USING THE AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD. THESE COMPUTATIONS HAD NO EFFECT ON NET ASSET
VALUE PER SHARE.
/3/ DISTRIBUTIONS FROM PAID-IN CAPITAL RESULT FROM THE EXCESS OF TAXABLE
CAPITAL GAINS OVER GAINS AVAILABLE FROM BOOK SOURCES.
- --------
/4/ ANNUALIZED
6
<PAGE>
STRATTON SMALL-CAP YIELD FUND
<TABLE>
<CAPTION>
YEAR 9 MONTHS YEAR YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED 4/12/93/1/
12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ TO 03/31/94/3/
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 16.79 $ 15.98 $ 12.94 $ 12.97 $12.50
------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------
Net investment income... 0.21 0.26 0.33 0.29 0.22
Net gains (loss) on
securities (both
realized and
unrealized)............ 6.80 1.74 3.04 (0.02) 0.45
------- ------- ------- ------- ------
Total from investment
operations............. 7.01 2.00 3.37 0.27 0.67
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net
investment income)..... (0.20) (0.27) (0.33) (0.30) (0.20)
Distributions (from
capital gains)......... (1.13) (0.92) 0.00 0.00 0.00
------- ------- ------- ------- ------
Total distributions..... (1.33) (1.19) (0.33) (0.30) (0.20)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................. $ 22.47 $ 16.79 $ 15.98 $ 12.94 $12.97
======= ======= ======= ======= ======
TOTAL RETURN............ 42.37% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (in 000's)...... $39,377 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets..... 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net investment
income to average net
assets................. 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................... 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission rate
paid................... $0.0548 $0.0579 N/A N/A N/A
</TABLE>
/1/ COMMENCEMENT OF OPERATIONS
/2/ ANNUALIZED
/3/ ADJUSTED FOR A 2-FOR-1 STOCK SPLIT DECLARED BY THE FUND TO SHAREHOLDERS OF
RECORD ON DECEMBER 17, 1997.
- --------
STRATTON SPECIAL VALUE FUND
<TABLE>
<CAPTION>
3 MONTHS
ENDED
03/31/98
(UNAUDITED)
-----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 15.00/1/
-------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income............................................ 0.004
Net gains (loss) on securities (both realized and unrealized).... 1.866
-------
Total from investment operations................................. 1.870
-------
NET ASSET VALUE, END OF PERIOD................................... $ 16.87
=======
TOTAL RETURN..................................................... 12.47%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in 000's)............................. $ 5,713
Ratio of expenses to average net assets.......................... 1.40%/2/
Ratio of net investment income to average net assets............. 0.14%/2/
Portfolio turnover rate.......................................... 18.58%
Average commission rate paid..................................... $0.0499
</TABLE>
- --------
/1/ COMMENCEMENT OF OPERATIONS 12/31/97
/2/ ANNUALIZED
7
<PAGE>
INVESTMENT The investment objective of SGF is fundamental and may not
OBJECTIVES, be changed without a vote of a majority of the Fund's
POLICIES, shares. The investment objectives of SMDS, SSCY and SSVF are
RESTRICTIONS not fundamental and may be changed by the Board of Directors
AND RISK of the applicable Fund. Unless otherwise stated in this
CONSIDERATIONS Prospectus or the Statement of Additional Information, each
Fund's investment policies are not fundamental and may be
changed without shareholder approval. While a non-
fundamental policy or restriction may be changed by the
Board of Directors of the applicable Fund without
shareholder approval, the Funds intend to notify
shareholders before making any change in any such policy or
restriction. Fundamental policies may not be changed without
shareholder approval. A complete list of each Fund's
fundamental investment restrictions appears in the Statement
of Additional Information.
SGF 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.
On an overall portfolio basis, the Investment Advisor will
seek appreciation of capital for the Fund by continuously
reviewing both individual securities and relevant economic
and social conditions so that in the view of the Investment
Advisor, the Fund's portfolio has the greatest possible
potential for capital growth consistent with reasonable
risk. The Fund's investments will normally consist of common
stock and securities convertible into common stock. The Fund
may also invest in REITs. In making its investment decision,
the Investment Advisor examines the securities of domestic
companies, generally those with dividend payment records,
with a view to selecting those securities which it believes
will provide a greater opportunity for growth and return of
capital.
Preferred stocks and debt securities which are not
convertible into common stock will normally not be
purchased. However, when the Investment Advisor determines
that a temporary defensive position is warranted, it may
invest in non-convertible preferred stocks, debt securities
and domestic corporate and government fixed income
obligations without limitation and to the extent such
investments are made, the Fund will not be achieving growth
of capital. The Fund's relative equity and cash (or cash
equivalent) positions may also be changed as the Fund alters
its evaluation of trends in general securities price levels.
The Fund does not intend to obtain short-term trading
profits. It is anticipated that the Fund's annual portfolio
turnover rate will generally fall within a 30% to 70% range;
but the rate of portfolio turnover is not a limiting factor
when the Fund's management deems changes appropriate and
could be less than 30% or greater than 70% in any particular
year, depending upon market and other considerations.
The following investment restrictions are deemed fundamental
policies:
1. The Fund will not invest more than 5% of the value of its
total assets in the securities of any one issuer, except
for securities of the United States Government or
agencies thereof.
2. The Fund will not invest in more than 10% of any class of
securities of any one issuer (except for government
obligations) or in more than 10% of the voting securities
of any one issuer.
8
<PAGE>
SMDS SMDS' objective 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.
Investment decisions will be made on the basis of an
analysis of fundamentals of individual companies and on
relevant economic and social conditions. The Fund will
invest at least 80% of its assets in common stock and
securities convertible into common stock. Under normal
conditions, at least 65% of the Fund's total assets will be
invested in REITs.
SSCY The investment objective of SSCY is to achieve both dividend
income and capital appreciation. The Fund seeks to achieve
its objective by investing in equity securities of small-cap
companies.
On an overall portfolio basis, the Investment Advisor will
seek to achieve the Fund's objective by continuously
reviewing both individual securities and relevant economic
and social conditions so that in the view of the Investment
Advisor, the Fund has the greatest possible potential for
capital appreciation consistent with reasonable risk. The
Investment Advisor generally selects companies which pay
quarterly dividends at an above-average rate.
Under normal market conditions, it is expected that the Fund
will invest at least 80% of its assets in equity securities,
primarily common stock and securities convertible into
common stock of small-cap companies. The Fund may also
invest in other types of securities with equity
characteristics such as REITs, preferred stocks, warrants,
units and rights. The Fund may invest in both exchange-
listed and over-the-counter securities. As a matter of
fundamental policy which cannot be changed without the vote
of a majority of the Fund's outstanding shares, the Fund
will not invest more than 25% of its total assets in any one
industry.
The Fund will not knowingly invest more than 5% of its total
assets in securities that are illiquid. Securities having
legal or contractual restrictions on resale and no readily
available market, and instruments that do not provide for
payment to the Fund within seven days after notice are
subject to this 5% limit. Securities that have legal or
contractual restrictions on resale but have a readily
available market are not deemed to be illiquid for the
purposes of this limitation.
Investments in small-cap companies 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 attempts to counteract these concerns about investing
in small-cap companies by using strict purchase criteria.
One of these criteria stipulates that these companies must
have been sound and going entities for over three years. In
addition, these companies must be established dividend-
paying entities. The dividend requirement helps to reduce
share price volatility of the issues in the Fund and
ultimately of the Fund itself.
SSVF The investment objective of SSVF is to achieve capital
appreciation. The Fund seeks to achieve its objective by
investing in equity securities, primarily common stock and
securities convertible into or exchangeable for common stock
9
<PAGE>
which represent a value or potential worth which is not
fully recognized by prevailing market prices. These stocks
are considered by the Investment Advisor to be under-
researched as measured by the professional, financial
research analysts covering them. The Investment Advisor
employs a "value" approach to the Fund's investments,
seeking to identify companies that have experienced
fundamental change, are intrinsically undervalued or are
misunderstood by the investment community. The Investment
Advisor examines various factors in determining the value
characteristics of securities including, but not limited to,
ratios of price to cash flow, price to sales, price to book,
price to revenue and price to earnings. The Fund may also
seek to achieve its objective by investing in companies that
are suffering from market inefficiencies due to less
liquidity, and companies whose share price may have declined
relative to the intrinsic value of its business. The Fund
will pursue a wide array of opportunities among very small
growth companies and mature companies. The Fund will seek
out companies in which there is a large disparity between
its market value and the Investment Advisor's estimate of
its earnings power, assets, or private market value.
On an overall portfolio basis, the Investment Advisor will
seek to achieve the Fund's objective by continuously
reviewing both individual securities and relevant economic
and social conditions so that in the view of the Investment
Advisor, the Fund has the greatest possible potential for
capital appreciation.
Under normal market conditions, it is expected that the Fund
will invest at least 80% of its assets in equity securities,
primarily common stock and securities convertible into
common stock. The Fund may also invest in other types of
securities with equity characteristics such as REITs,
preferred stocks, warrants, units and rights. The Fund may
invest in both exchange-listed and over-the- counter
securities. The Fund may engage in short sale transactions,
invest in futures contracts and related options, and
purchase and sell exchange-listed put and call options. As a
matter of fundamental policy which cannot be changed without
the vote of a majority of the Fund's outstanding shares, the
Fund will not invest more than 25% of its total assets in
any one industry.
The Fund will not knowingly invest more than 15% of its
total assets in securities that are illiquid. Securities
having legal or contractual restrictions on resale and no
readily available market, and instruments that do not
provide for payment to the Fund within seven days after
notice are subject to this 15% limit. Securities that have
legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for
the purposes of this limitation.
Risk Short sales are transactions in which SSVF sells a security
Considerations it does not own in anticipation of a decline in the market
of SSVF value of that security. To complete such a transaction, SSVF
must borrow the security to make delivery to the buyer. The
Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of
replacement. The price at such time may be more or less than
the price at which the security was sold by the Fund. Until
the security is replaced, the Fund is required to pay to the
lender amounts equal to any dividend which accrues during
the period of the loan. To borrow the security, the
Short Sale
Transactions
10
<PAGE>
Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short
position is closed out.
Since short selling can result in profits when stock prices
generally decline, the Fund in this manner, can, to a
certain extent, hedge the market risk to the value of its
other investments and protect its equity in a declining
market. However, the Fund could, at any given time, suffer
both a loss on the purchase or retention of one security, if
that security should decline in value and a loss on a short
sale of another security if the security sold short should
increase in value. Moreover, to the extent that in a
generally rising market the Fund maintains short positions
in securities rising with the market, the net asset value of
the Fund would be expected to increase to a lesser extent
than the net asset value of an investment company that does
not engage in short sales. Among the factors which
management may consider in making short sales are a
decreasing demand for a company's products, lower profit
margins, lethargic management and a belief that a disparity
exists between the price of the security and its underlying
assets or other values.
No short sale will be effected which will, at the time of
making such short sale transaction and giving effect
thereto, cause the aggregate market value of all securities
sold short to exceed 25% of the value of the Fund's net
assets. The value of the securities of any one issuer that
have been "shorted" by the Fund is limited to the lesser of
2% of the outstanding value of the Fund's net assets or 2%
of the outstanding securities of any class of the issuer. In
addition, to secure the Fund's obligation to replace any
borrowed security, it will place in a segregated account, an
amount of cash or U.S. Government securities, at such a
level that (i) the amount deposited in the account plus the
amount deposited with the broker as collateral will equal
the current value of the security sold short and (ii) the
amount deposited in the segregated account plus the amount
deposited with the broker as collateral will not be less
than the market value of the security at the time it was
sold short; or otherwise cover its short position in
accordance with positions taken by the SEC.
In addition to the short sales discussed above, the Fund may
also make short sales "against the box", i.e., short sales
made when the Fund owns securities identical to those sold
short. The Fund may only engage in short sale transactions
in securities listed on one or more national securities
exchange or on NASDAQ.
Futures SSVF may invest in futures contracts and options on futures
Contracts and contracts for hedging purposes or to maintain liquidity.
Related Options However, the Fund may not purchase or sell a futures
contract or purchase a related option unless immediately
after any such transaction the sum of the aggregate amount
of initial margin deposits on its existing futures positions
and the amount of premiums paid for related options does not
exceed 5% of its total assets.
At maturity, a futures contract obligates the Fund to take
or make delivery of certain securities or the cash value of
a securities index. When the Fund sells a futures contract,
it agrees to sell a specified underlying instrument at a
specified future date. The Fund may sell a futures contract
in order to offset a decrease in
11
<PAGE>
the market value of its portfolio securities that might
otherwise result from a market decline. The Fund may do so
either to hedge the value of its portfolio of securities as
a whole, or to protect against declines, occurring prior to
sales of securities, in the value of the securities to be
sold. When the Fund purchases a futures contract, it agrees
to purchase a specified underlying instrument at a specified
future date. The Fund may purchase a futures contract in
anticipation of purchases of securities. In addition, the
Fund may utilize futures contracts in anticipation of
changes in the composition of its portfolio holdings.
The Fund may purchase and sell call and put options on
futures contracts traded on an exchange or board of trade.
When the Fund purchases an option on a futures contract, it
has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any
time during the option period. When the Fund sells an option
on a futures contract, it becomes obligated to purchase or
sell a futures contract if the option is exercised. In
anticipation of a market advance, the Fund may purchase call
options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible
increase in the price of securities which the Fund intends
to purchase. Similarly, if the market is expected to
decline, the Fund might purchase put options or sell call
options on futures contracts rather than sell futures
contracts.
To enter into a futures contract, the Fund must make a
deposit of an initial margin with its custodian in a
segregated account in the name of the futures broker.
Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the
underlying security or index fluctuates, making the long and
short positions in the futures contracts more or less
valuable.
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation between
the change in market value of the securities held by the
Fund and the price of futures contracts and options; (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
contract when desired; (iii) losses, which are potentially
unlimited, due to unanticipated market movements; and (iv)
the Investment Advisor's ability to predict correctly the
direction of security prices, interest rates and other
economic factors. Successful use of options and futures by
the Fund is subject to the Investment Advisor's ability to
predict correctly the movements in the direction of the
market. For example, if the Fund uses future contracts as a
hedge against the possibility of a decline in the market
adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of
the benefit of the increased value of its securities which
it has hedged because it will have approximately equal
offsetting losses in its futures positions. The risk of loss
in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required,
and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss or gain to the investor. Thus, a purchase
or sale of a futures contract may result in losses or gains
in excess of the amount invested in the contract. For
further discussion, see "Additional Information on
Investment Objectives and Policies" in the Statement of
Additional Information.
12
<PAGE>
Options SSVF may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing
Corporation to the extent that premiums paid on all
outstanding call options do not exceed 20% of the Fund's
total assets. Purchasing options is a specialized investment
technique that entails a substantial risk of a complete loss
of the amounts paid as premiums to the writer of the option.
A call option enables the purchaser, in return for the
premium paid, to purchase securities from the writer of the
option at an agreed-upon price during the option period. The
advantage is that the purchaser may hedge against an
increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index.
The Fund will only write call options on a covered basis
(options on securities owned by the Fund). The Fund will
receive premium income from writing call options, which may
offset the cost of purchasing put options and may also
contribute to the Fund's total return. The Fund may lose
potential market appreciation if the Investment Advisor's
judgment is incorrect with respect to interest rates,
security prices or the movement of indices.
A put option enables the purchaser of the option, in return
for the premium paid, to sell the security underlying the
option to the writer at the exercise price during the option
period, and the writer of the option has the obligation to
purchase the security from the purchaser of the option. The
advantage is that the purchaser can be protected should the
market value of the security decline or should a particular
index decline. The Fund will only write put options on a
covered basis. The Fund will receive premium income from
writing put options, although it may be required, when the
put is exercised, to purchase securities at higher prices
than the current market price.
An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive
cash from the seller equal to the difference between the
closing price of the index and the exercise price of the
option.
Closing transactions essentially let the Fund offset put
options or call options prior to exercise or expiration. If
the Fund cannot effect a closing transaction, it may have to
hold a security it would otherwise sell or deliver a
security it might want to hold. For further discussion, see
"Additional Information on Investment Objectives and
Policies" in the Statement of Additional Information.
Portfolio SSVF'S portfolio turnover rate may vary significantly from
Turnover year to year as well as within the year and its turnover
rate could reach or exceed 100%. A 100% turnover rate would
occur, for example, if all the securities in the Fund's
portfolio were replaced in a period of one year. A greater
portfolio turnover rate reflects a greater number of
securities transactions. High portfolio turnover may also
result in the realization of substantial capital gains, and
any distributions from short-term capital gains are taxable
at ordinary income rates for Federal tax purposes. High
portfolio turnover involves correspondingly greater
brokerage commission and other transaction costs to SSVF.
13
<PAGE>
Risk Each Fund may invest in REITs. Equity REITs invest directly
Considerations in real property while mortgage REITs invest in mortgages on
of each Fund real property. REITs may be subject to certain risks
associated with the direct ownership of real estate
including declines in the value of real estate, risks
related to general and local economic conditions,
overbuilding and increased competition, increases in
property taxes and operating expenses, and variations in
rental income. Generally, increases in interest rates will
decrease the value of high yielding securities and increase
the costs of obtaining financing, which could decrease the
value of the portfolio's investments. In addition, equity
REITs may be affected by changes in the value of the
underlying property owned by the trusts, while mortgage
REITs may be affected by the quality of credit extended.
Equity and mortgage REITs are dependent upon management
skill, are not diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers, self liquidation and
the possibility of failing to qualify for tax-free pass-
through of income under the Internal Revenue Code and to
maintain exemption from the Investment Company Act of 1940,
as amended (the "1940 Act").
REITs
REITs 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. A Fund intends to
include the gross dividends from such REITs in its
distributions to shareholders and, accordingly, a portion of
the Funds' distributions may also be designated as a return
of capital. For more information, please see the discussion
under "Tax Treatment: Dividends and Distributions."
Short-Term Although each Fund normally seeks to remain fully invested
Securities in equity securities, a Fund may invest temporarily up to
100% of its assets in certain short-term fixed income
securities. Such securities may be used to invest
uncommitted cash balances, for temporary purposes pending
investments in other securities, to maintain liquidity to
meet shareholder redemptions or for temporary defensive
measures to protect against the erosion of its capital base.
These securities include, but are not limited to,
obligations of the U.S. government, its agencies and
instrumentalities, commercial paper, certificates of
deposit, bankers acceptances and repurchase agreements. When
a Fund invests for defensive purposes, it may affect the
attainment of the Fund's investment objective.
- -------------------------------------------------------------------------------
MANAGEMENT OF The business of each Fund is managed under the direction of
THE FUNDS each Fund's Board of Directors. Information about the
directors and officers of the Funds is included in the
Statement of Additional Information.
- -------------------------------------------------------------------------------
INVESTMENT Stratton Management Company (the "Investment Advisor"), with
ADVISOR offices at Plymouth Meeting Executive Campus, 610 W.
Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050,
is the Funds' investment advisor and manager and is
registered as an investment advisor under the Investment
Advisors Act of 1940, as amended. The Investment Advisor
provides investment advisory
14
<PAGE>
services, consisting of portfolio management, for a variety
of individuals and institutions and had approximately $1.7
billion in assets under management as of December 31, 1997.
By reason of his ownership of all the Investment Advisor's
voting stock, James W. Stratton may be considered a
"controlling person" of that firm.
Mr. Stratton is the Chief Executive officer of the
Investment Advisor and has been primarily responsible for
the day-to-day investment management of SGF and SMDS since
1972 and 1980, respectively. Mr. Frank H. Reichel, III has
been primarily responsible for the day-to-day investment
management of SSCY since the Fund's commencement of
operations in April of 1993. Mr. James Van Dyke Quereau has
been primarily responsible for the day-to-day investment
management of SSVF since the Fund's commencement of
operations in January of 1998. Mr. Quereau has been a
Managing Partner and Director of Research of the Investment
Advisor since May 1990, and has been in the investment
management business for 26 years.
Investment Pursuant to Investment Advisory Agreements, Stratton
Advisory Fee Management Company provides an investment program in
accordance with each respective Fund's investment policies,
limitations and restrictions.
For providing investment advisory services, the Investment
Advisor receives: for SGF, a fee at the annual rate of 0.75%
of daily net assets; and for SMDS, a fee at the annual rate
of 0.63% of daily net assets. The Investment Advisor has
voluntarily agreed to waive $15,000 annually of the advisory
fees due it under the Investment Advisory Agreements with
SGF and SMDS to offset a portion of the fees that the Funds
will incur under certain administration agreements with
Investor Services Group. See "Service Providers and
Underwriter." During the fiscal periods ended December 31,
1997, SGF and SMDS paid the Investment Advisor advisory fees
at the effective annual rates of .72% and .61%, of such
Fund's respective average daily net assets.
For providing investment advisory services for SSCY and
SSVF, the Investment Advisor receives an investment advisory
fee payable monthly at an annual rate of 0.75% of average
daily net assets, subject to a performance adjustment. The
performance adjustment for SSCY is calculated at the end of
each month based upon a rolling 24-month performance period.
The performance adjustment for SSVF will commence at the end
of the month in which the Fund has completed 24 months of
operation, if it has net assets of $20 million or more, at
such date, or at the end of any succeeding month at which it
has net assets of $20 million, but in any event,
irrespective of its net assets, at the end of the month in
which the Fund has completed 36 months of operation and will
be calculated at the end of the commencement month and each
succeeding month based upon a rolling 24 month performance
period. The performance adjustment is added to or subtracted
from the basic investment advisory fee. Pursuant to the
performance adjustment, a Fund's gross performance is
compared with the performance of the Russell 2000, a widely
recognized unmanaged index of common stock prices, over a
rolling 24-month performance period. The Russell 2000 is
composed of the
15
<PAGE>
smallest 2000 stocks in the Frank Russell annual ranking of
3000 common stocks by market capitalization. The Russell
2000 is a widely recognized common stock index of small to
medium size companies. Total return performance on the
Russell 2000 includes dividends and is reported monthly on a
market capitalization-weighted basis. When a 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 a 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 a Fund outperformed or underperformed the Russell
2000 by 5.00%. The effect of this performance fee adjustment
is that the advisory fee may never be greater than 1.25% or
less than 0.25% of a Fund's average daily net assets for the
preceding month. Due to the complexities of researching and
investing in small-cap equity securities and special value
securities, the advisory and incentive fees (if realized)
paid by these Funds are higher than those paid by most other
investment companies. Additionally, a Fund's incentive fee
of plus or minus 0.50% is greater than that of other mutual
funds with similar objectives which pay incentive fees.
Based on the foregoing, during the fiscal year ended
December 31, 1997, SSCY paid the Investment Advisor a fee at
the effective annual rate of 1.09% of the Fund's average
daily net assets.
- -------------------------------------------------------------------------------
The net asset value per share of each Fund is determined
COMPUTATION OF once each business day as of the close of regular trading
NET ASSET VALUE hours (currently 4:00 p.m. Eastern time) on the New York
Stock Exchange ("NYSE"). Such determination will be made by
dividing the value of all securities and other assets
(including dividends accrued but not collected) less any
liabilities (including accrued expenses), by the total
number of shares outstanding.
Portfolio securities are valued as follows:
1. 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.
2. 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.
3. All other securities and assets are valued at their fair
value as determined in good faith by the Board 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.
Determination of the net asset value may be suspended when
the right of redemption is suspended as provided under "How
to Redeem Fund Shares."
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<PAGE>
HOW TO BUY FUND Shares of each Fund are offered on a continuous basis at the
SHARES net asset value. The net asset value per share of each Fund,
and hence the purchase price of the shares, will vary with
the value of securities held in each Fund's portfolio.
Purchasers of Fund shares pay no "sales load"; the full
amount of the purchase price goes toward the purchase of
shares of a Fund. Purchases are made at the net asset value
next determined following receipt of a purchase order by the
Transfer Agent, at the address set forth below, accompanied
by payment for the purchase. The Funds may also from time to
time accept wire purchase orders from broker/dealers and
institutions who have been previously approved by a Fund.
Orders for shares of a Fund received prior to the close of
regular trading hours on the NYSE are confirmed at the net
asset value determined at the close of regular trading hours
on the NYSE on that day.
Orders received at the address set forth below subsequent to
the close of regular trading hours on the NYSE will be
confirmed at the net asset value determined at the close of
regular trading hours on the next day the NYSE is open.
Investing by
Mail An account may be opened and shares of a Fund purchased by
completing a New Account Application (the "Application"),
which is attached to the back of this Prospectus, and
sending it, together with a check for the desired amount,
payable to " Name of Fund" c/o First Data Investor Services
Group, Inc., 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903. The minimum amount for the initial
purchase of shares for each Fund is $2,000.
Subsequent purchases may be made in amounts of $100 or more.
(Note: There are no minimum investment amounts applied to
retirement plans.) After each purchase you will receive an
account statement for the shares purchased. Once a
shareholder's account has been established, additional
purchases may be made by sending a check made payable to
"Name of Fund" c/o First Data Investor Services Group, Inc.,
P.O. Box 412797, Kansas City, MO 64141-2797. Please enclose
the stub of your account statement and include your Fund
account number on your check (as well as the attributable
year for retirement plan investments, if applicable).
PLEASE NOTE: The Funds will not accept third party checks
for the purchase of shares. Third party checks are those
that are made out to someone other than the Fund and are
endorsed over to the Fund. In order to ensure receipt of
good funds, the Funds reserve the right to delay sending
your redemption proceeds up to 15 days if you recently
purchased shares by check. A $20 fee will be charged to your
account for any payment check returned to the custodian.
Investing by You may also pay for shares by instructing your bank to wire
Wire Federal funds to the Transfer Agent. Federal funds are
monies of member banks within the Federal Reserve System.
Your bank must include the full name(s) in which your
account is registered and your Fund account number, and
should address its wire as follows:
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<PAGE>
UMB BANK KC NA
ABA # 10-10-00695
For: First Data Investor Services Group, Inc.
Account # 98-7037-071-9
FBO: "NAME OF FUND"
Account of (exact name(s) of account
registration)
Shareholder Account #
-----------------
If you are opening a new account by wire transfer, you must
first telephone the Transfer Agent at 800-472-4266 to
request an account number and furnish the applicable Fund
with your social security or other tax identification
number. A completed Application with signature(s) of
registrant(s) must be filed with the applicable Fund
immediately subsequent to the initial wire. Your bank will
generally charge a fee for this wire. The Funds will not be
responsible for the consequences of delays, including delays
in the banking or Federal Reserve wire systems.
PLEASE NOTE: Your initial Fund account must satisfy the
$2,000 minimum balance requirement in order to participate
in the following programs or plans.
Automatic Shares of a Fund may be purchased through our Automatic
Investment Plan Investment Plan (the "Plan"), an application is attached to
the back of this Prospectus. The Plan provides a convenient
method by which investors may have monies deducted 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 ("ACH") member may be so designated. A Fund
may alter, modify or terminate this Plan at any time.
Direct Deposit This program enables a shareholder to purchase additional
Program shares by having certain payments from the Federal
Government only (i.e. federal salary, social security and
certain veterans, military or other payments) automatically
deposited into the shareholder's account in a Fund. The
minimum investment is $100.
To elect this privilege, a shareholder must complete a
Direct Deposit Enrollment Form for each type of payment
desired. The form may be obtained by contacting the Transfer
Agent, at the address or telephone number shown below. Death
or legal incapacity will terminate a shareholder's
participation in this program. A shareholder may terminate
their participation by notifying, in writing, the
appropriate Federal agency. In addition, the Funds may
terminate participation upon 30 days' notice to the
shareholder.
Reinvestment of Any shareholder may at any time request and receive
Income automatic reinvestment of any Funds' income dividends and
Dividends and capital gains distributions, or income dividends only, or
Capital Gains capital gains distributions only, in additional shares of a
Distributions Fund unless the Funds' Board of Directors determines
otherwise. Each Fund will send the
18
<PAGE>
shareholder an account statement reflecting all such
reinvestments. The $100 minimum requirement for subsequent
investments does not apply to the reinvestment of income
dividends and/or capital gain distributions.
The election to reinvest may be made on the Application or
by writing to " Name of Fund", c/o First Data Investor
Services Group, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903. Any such election will
automatically continue for subsequent dividends, and/or
distributions until written revocation is received by the
applicable Fund. If no election is chosen each Fund will
automatically reinvest dividends and capital gains
distributions.
Additional Shares of a Fund may be purchased or redeemed through
Information certain broker/dealers who may charge a transaction fee,
which would not otherwise be charged if the shares were
purchased directly from a Fund.
Each Fund reserves the right to reject purchases under
circumstances or in amounts considered disadvantageous to
the Fund. Certificates will not be issued unless requested
in writing by the registered shareholder(s).
Each Fund is required by Federal tax law to withhold 31% of
reportable payments (which may include dividends, capital
gains distributions, and redemptions) paid to shareholders
who have not complied with Internal Revenue Service
regulations regarding Tax Identification Certification. In
order to avoid this withholding requirement, you must
certify via signature on your Application, or on a separate
W-9 Form supplied by the Transfer Agent, that your Social
Security or Taxpayer Identification Number is correct (or
you are waiting for a number to be issued to you), and that
you are currently not subject to backup withholding, or you
are exempt from backup withholding.
While the Funds provide most shareholder services, certain
special services, such as a request for a historical
transcript of an account, may involve an additional fee. To
avoid having to pay such a fee for these special services,
it is important that you save your last Year-to-Date
Confirmation Statement received each year.
PLEASE NOTE: All questions and correspondence on new and
existing accounts (such as purchases or redemptions, or
statements not received) should be referred directly to the
transfer agent, by writing to First Data Investor Services
Group, Inc., 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903, or by calling Investor Services
Group's customer service department at 800-472-4266. Please
reference your Fund name and account number.
- -------------------------------------------------------------------------------
HOW TO REDEEM Shareholders may redeem shares of a Fund by mail, by writing
FUND SHARES directly to the Transfer Agent, and requesting liquidation
of all or any part of their shares. The redemption request
must be signed exactly as the shareholder's name appears in
the registration and must include the Fund name and account
number. If shares are owned by more than one person, the
redemption request must be signed by all owners exactly as
their names appear in the registration. Shareholders holding
stock certificates must deliver them along with their signed
redemption requests.
19
<PAGE>
By Written
Request To protect your account, the Transfer Agent and the Funds
from fraud, signature guarantees are required for certain
redemptions. SIGNATURE GUARANTEES ARE REQUIRED FOR: (1) all
redemptions of $10,000 or more; (2) any redemptions if the
proceeds are to be paid to someone other than the person(s)
or organization in whose name the account is registered; (3)
any redemptions which request that the proceeds be wired to
a bank; (4) requests to transfer the registration of shares
to another owner; and (5) any redemption if the proceeds are
to be sent to an address other than the address of record.
The Transfer Agent requires that signatures be guaranteed by
an "eligible guarantor institution" as defined in Rule 17Ad-
15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers,
credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings
associations. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to
issue signature guarantees. Signature guarantees will be
accepted from any eligible guarantor institution which
participates in a signature guarantee program. The Transfer
Agent cannot accept guarantees from notaries public. In
certain instances, the Funds may require additional
documents, such as certified death certificates or proof of
fiduciary or corporate authority. Please call Investor
Services Group to verify required language for all
retirement plan redemption requests or to obtain the
Retirement Plan Withdrawal Form. No redemption shall be made
unless a shareholder's Application is first on file. In
addition, a Fund will not accept redemption requests until
checks (including certified checks or cashier's checks)
received for the shares purchased have cleared, which can be
as long as 15 days.
Redemption requests mailed to the Investment Advisor must be
forwarded to the Transfer Agent and will not be effected
until they are received in good order by the Transfer Agent.
The Transfer Agent cannot accept redemption requests which
specify a particular forward date for redemption.
By Automated A shareholder may elect to have redemption proceeds, cash
Clearing House distributions or systematic cash withdrawal payments
transferred to his or her bank, savings and loan association
or credit union that is an on-line member of the ACH system.
There are no fees associated with the use of the ACH
service.
Written ACH redemption requests must be received by the
Transfer Agent before 4 p.m. Eastern time to receive that
day's closing net asset value. ACH redemptions will be sent
on the day following the shareholder's request and funds
will be available two days later.
Redemption proceeds (including systematic cash withdrawals),
as well as dividend and capital gains distributions, may be
sent to a shareholder via Federal Funds wire. However, the
Transfer Agent will charge a $9 fee for each Federal Funds
wire transmittal, which will be deducted from the amount of
the payment.
Systematic Cash Each Fund offers a Systematic Cash Withdrawal Plan as
Withdrawal Plan another option which may be utilized by an investor who
wishes to withdraw funds from his or her account on a
regular basis. To participate in this option, an investor
must either own or purchase shares having a value of $10,000
or more. Automatic payments
20
<PAGE>
by check will be mailed to the investor on either a monthly,
quarterly, semi-annual or annual basis in amounts of $50 or
more. All withdrawals are processed on the 25th of the month
or, if such day is not a business day, on the next business
day and paid promptly thereafter. Please complete the
appropriate section on the Application, indicating the
amount of the distribution and the desired frequency.
An investor should realize that if withdrawals exceed income
dividends and capital gains distributions, the invested
principal will be depleted. Thus, depending on the size of
the withdrawal payments and fluctuations in the value of the
shares, the original investment could be exhausted entirely.
An investor may change or stop the Plan at any time by
written notice to the Funds. Dividends and capital gains
distributions must be automatically reinvested to
participate in this plan. Stock certificates cannot be
issued under the Systematic Cash Withdrawal Plan.
Due to the relatively high cost of maintaining smaller
Additional accounts, the Funds reserve the right to involuntarily
Information redeem shares in any account for its then current net asset
value (which will be paid to the shareholder within five
business days, or such shorter time period as may be
required by applicable SEC rules) if at any time the total
investment does not have a value of at least $500. The
shareholder will be notified that the value of his or her
account is less than the required minimum and will be
allowed at least 45 days to bring the value of the account
up to at least $500 before the redemption is processed.
The redemption price will be the net asset value of the
shares to be redeemed as determined at the close of regular
trading hours on the NYSE after receipt at the address set
forth above of a request for redemption in the form
described above and the certificates (if any) evidencing the
shares to be redeemed. No redemption charge will be made.
Payment for shares redeemed is made within five business
days, or such shorter time period as may be required by
applicable SEC rules, after receipt of the certificates (or
of the redemption request where no certificates have been
issued) by mailing a check to the shareholder's address of
record.
PLEASE NOTE: A $9 fee will be charged to your account at the
time of redemption if instructions to wire proceeds are
given; there is no fee to mail proceeds. Also, your
redemption proceeds may be delayed up to 15 days if you
recently purchased shares by check in order to confirm
clearance of check.
The Funds may also from time to time accept telephone
redemption requests from broker/dealers and institutions who
have been approved previously by the Funds. Neither the
Funds nor any of their service contractors will be liable
for any loss or expense or cost in acting upon any telephone
instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are
genuine, the Funds will use such procedures as are
considered reasonable, including requesting a shareholder to
correctly state his or her Fund account number, the name in
which his or her account is registered, his or her banking
institution, bank account number and the name in which his
or her bank account is registered. To the extent that a Fund
fails to use reasonable procedures to verify the genuineness
of telephone instructions, it and/or its service contractors
may be liable for any such instructions that prove to be
fraudulent or unauthorized.
21
<PAGE>
During times of unusual market conditions it may be
difficult to reach the Funds by telephone. If the Funds
cannot be reached by telephone, shareholders should follow
the procedures for redeeming by mail as set forth above.
The right of redemption may not be suspended or payment upon
redemption deferred for more than five business days, or
such time shorter time period as may be required by
applicable SEC rules, except: (1) when trading on the NYSE
is restricted as determined by the SEC or such NYSE is
closed for other than weekends and holidays; (2) when the
SEC has by order permitted such suspension; or (3) when an
emergency, as defined by the rules of the SEC, exists,
making disposal of portfolio securities or valuation of net
assets of a Fund not reasonably practicable. In case of a
suspension of the determination of the net asset value, the
right of redemption is also suspended and unless a
shareholder withdraws his request for redemption, he or she
will receive payment at the net asset value next determined
after termination of the suspension.
As provided in the Funds' Articles of Incorporation, payment
for shares redeemed may be made either in cash or in-kind,
or partly in cash and partly in-kind. However, the Funds
have elected, pursuant to Rule 18f-1 under the 1940 Act to
redeem shares solely in cash up to the lesser of $250,000 or
one percent of the net asset value of the Fund, during any
90 day period for any one shareholder. Payments in excess of
this limit will also be made wholly in cash unless the Board
of Directors of such Fund believes that economic conditions
exist which would make such a practice detrimental to the
best interests of the Fund. Any portfolio securities paid or
distributed in-kind will be in readily marketable
securities, and will be valued as described under
"Computation of Net Asset Value." Subsequent sale of such
securities would require payment of brokerage commissions by
the investor.
The value of a shareholder's shares on redemption may be
more or less than the cost of such shares to the
shareholder, depending upon the net asset value of the
Fund's shares at the time of redemption.
- -------------------------------------------------------------------------------
EXCHANGE Shares of each Fund may be exchanged for shares of the other
PRIVILEGE 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.
PLEASE NOTE: Shareholders who have certificated shares in
their possession must surrender these shares to the Transfer
Agent to be held on account in unissued form prior to taking
advantage of the exchange privilege. When returning
22
<PAGE>
certificates for this purpose only, signature(s) need not be
guaranteed. There are no sales charges involved.
Shareholders who engage in frequent exchange transactions
may be prohibited from further exchanges or otherwise
restricted in placing future orders. The Funds reserve the
right to suspend the telephone exchange privilege at any
time. An exchange for tax purposes constitutes the sale of
one fund and the purchase of another. Consequently, the sale
may involve either a capital gain or loss to the shareholder
for federal income tax purposes.
- -------------------------------------------------------------------------------
RETIREMENT Each Fund has available four types of tax-deferred
PLANS retirement plans for its shareholders: Defined Contribution
Plans, for use by both self-employed individuals and
corporations; an Individual Retirement Account, both
Traditional and Roth, for use by certain eligible
individuals with compensation (including earned income from
self-employment), a Simple Individual Retirement Account and
Profit Sharing/Money Purchase Pension Plan for use by
certain small companies, and a 403(b)(7) Retirement Plan,
for use by employees of schools, hospitals, and certain
other tax- exempt organizations or associations. More
detailed information about how to participate in these
plans, the fees charged by the custodian, and the limits on
contributions can be found in the Statement of Additional
Information. To invest in any of the tax-deferred retirement
plans, please call the Funds for information and the
required separate application, disclosure statement and
custodial agreement.
- -------------------------------------------------------------------------------
TAX TREATMENT: During their most recent taxable years, SGF, SMDS and SSCY
DIVIDENDS AND qualified separately as a regulated investment company under
DISTRIBUTIONS Subchapter M of the Internal Revenue Code and each Fund,
including SSVF, intends to do so qualify in future years, as
long as such qualification is in the best interest of its
shareholders.
Tax Treatment Under Subchapter M of the Internal Revenue Code (the
"Code"), a Fund is not subject to Federal income tax on such
part of its ordinary taxable income or net realized long-
term capital gains that it distributes to shareholders.
Distributions paid by a Fund from net investment income and
short- term capital gains (but not distributions paid from
mid-term or long-term capital gains) will be taxable as
ordinary income to shareholders, whether received in cash or
reinvested in additional shares of such Fund. Such ordinary
income distributions will qualify for the dividends received
deduction for corporations to the extent of the total
qualifying dividends from domestic corporations received by
a Fund for the year. Shareholders who are citizens or
residents of the United States will be subject to Federal
taxes with respect to mid-term or long-term realized capital
gains as the case may be) which are distributed to them,
whether or not reinvested in the Funds and regardless of the
period of time such shares have been owned by the
shareholders. These distributions do not qualify for the
dividends received deduction. Dividends attributable to
distributions made by a REIT to a Fund also do not qualify
for the dividends received deduction. In addition,
distributions paid by REITs often include a "return of
capital." The Code requires a REIT to distribute at least
95% of its taxable income to investors. In many cases,
however, because of "non-cash" expenses such as property
depreciation, an equity REIT's
23
<PAGE>
cash flow will exceed its taxable income. The REIT may
distribute this excess cash to offer a more competitive
yield. This portion of the distribution is deemed a return
of capital, and is generally not taxable to shareholders.
However, when shareholders receive a return of capital, the
cost basis of their shares is decreased by the amount of
such return of capital. This, in turn, affects the capital
gain or loss realized when shares of a Fund are exchanged or
sold. Therefore, a shareholder's original investment in a
Fund will be reduced by the amount of the return of capital
and capital gains included in a distribution if such
shareholder elects to receive distributions in cash (as
opposed to having them reinvested in additional shares of a
Fund). Once a shareholder's cost basis is reduced to zero,
any return of capital is taxable as a capital gain.
Shareholders will be advised after the end of each calendar
year as to the Federal income tax consequences of dividends
and distributions of the Funds made each year.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date
in such months, will be deemed for Federal tax purposes to
have been received by the shareholders and paid by such Fund
on December 31 of such year in the event such dividends are
paid during January of the following year.
Prior to purchasing shares of a Fund, the impact of
dividends or capital gains distributions which are expected
to be announced or have been announced, but not paid, should
be carefully considered. Any such dividends or capital gains
distributions paid shortly after a purchase of shares by an
investor prior to the record date will have the effect of
reducing the per share net asset value of his or her shares
by the per share amount of the dividends or distributions.
All or a portion of such dividends or distributions,
although in effect a return of capital to the shareholder,
is subject to taxes, which may be at ordinary income tax
rates.
A taxable gain or loss may be realized by an investor upon
his or her redemption, transfer or exchange of shares of a
Fund, depending upon the cost of such shares when purchased
and their price at the time of redemption, transfer or
exchange. If a shareholder has held Fund shares for six
months or less and received a distribution taxable as
capital gains attributable to those shares, any loss he
realizes on a disposition of those shares will be treated as
a long-term capital loss to the extent of the earlier
capital gain distribution.
The information above is only a short summary of some of the
important Federal tax considerations generally affecting the
Funds and their shareholders. Income and capital gains
distributions may also be subject to state and local taxes.
Investors should consult their tax advisor with respect to
their own tax situation.
Dividends and The shareholders of each Fund are entitled to dividends and
Distributions distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the
Fund involved, when declared by the Board of Directors of
such Fund. SGF declares and pays dividends from net
investment income on a semi-annual basis. SMDS declares and
pays dividends from net investment
24
<PAGE>
income on a monthly basis. SSCY declares and pays dividends
from net investment income quarterly. SSVF declares and pays
dividends from net investment income annually. Each Fund
will make distributions from net realized gains, if any,
once a year, but may make distributions on a more frequent
basis to comply with the distribution requirements of
Subchapter M of the Internal Revenue Code. Any distribution
paid necessarily reduces a Fund's net asset value per share
by the amount of the distribution. Distributions may be
reinvested in additional shares of such Fund, see
"Reinvestment of Income Dividends and Capital Gains
Distributions."
- -------------------------------------------------------------------------------
From time to time, performance information such as total
PERFORMANCE return for the Funds may be quoted in advertisements or in
CALCULATIONS communications to shareholders. Each Fund's total return may
be calculated on an average annual total return basis, and
may also be calculated on an aggregate total return basis,
for various periods. Average annual total return reflects
the average annual percentage change in value of an
investment in a Fund over the measuring period. Aggregate
total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total
return assume that dividends and capital gains distributions
made by a Fund during the period are reinvested in such
Fund's shares.
The total return of each Fund may be compared to that of
other mutual funds with similar investment objectives and to
bond and other relevant indices or to rankings prepared by
independent services or other financial or industry
publications that monitor the performance of mutual funds.
For example, the total return of a Fund's shares may be
compared to data prepared by Lipper Analytical Services,
Inc., National Association of Real Estate Investment Trusts
and to indices prepared by Dow Jones & Co., Inc. and
Standard & Poor's Ratings Group.
Performance quotations of each Fund represent such Fund's
past performance, and should not be considered as
representative of future results. The investment return and
principal value of an investment in a Fund will fluctuate so
that an investor's shares, when redeemed, may be worth more
or less than their original cost. Any fees charged by
broker-dealers, banks or other financial institutions
directly to their customer accounts in connection with
investments in shares of a Fund will not be included in the
Fund's calculations of total return. Further information
about the performance of each Fund is included in the Fund's
most recent Annual Report which may be obtained without
charge by contacting the Fund at (800) 634-5726.
- -------------------------------------------------------------------------------
The Funds are each organized as separate Maryland
DESCRIPTION OF corporations. SGF was organized on June 21, 1985, as
COMMON STOCK successor to a Delaware corporation organized on June 5,
1972; SMDS was organized on March 4, 1985, as successor to a
Delaware corporation organized on November 10, 1971; and THE
STRATTON FUNDS, INC. was organized on January 5, 1993. SGF'S
authorized capital is 10,000,000 shares of common stock, par
value $0.10 per share. SMDS' authorized capital is
10,000,000 shares of common stock, par value $1.00 per
share. THE STRATTON
25
<PAGE>
FUNDS, INC. is authorized to issue 1,000,000,000 shares of
common stock, par value $0.001 per share, and to classify
and reclassify any authorized and unissued shares into one
or more series or classes. At present, the Board of
Directors of THE STRATTON FUNDS, INC. has authorized the
issuance of 200,000,000 shares of Class A common stock
representing interests in SSCY and 200,000,000 shares of
Class B common stock representing interests in SSVF.
There are no conversion or preemptive rights in connection
with any shares of the Funds, nor are there cumulative
voting rights. Shares of each Fund are freely transferable.
Each share of a particular Fund has equal voting, dividend
and distribution, and liquidation rights with other shares
of such Fund. When issued for payment as described in this
Prospectus, a Fund's shares will be fully paid and
nonassessable. Fractional shares of a Fund have
proportionately the same rights as provided for full shares
of the particular Fund.
Saxon & Company may be deemed to be a "controlling person"
(as defined in the 1940 Act) of SSVF, because as of March
31, 1998, it owned of record 29.67% of the Fund.
Each Fund does not presently intend to hold annual meetings
of shareholders except as required by the 1940 Act or other
applicable law. Each Fund is a separate legal entity and
holders vote separately as shareholders of each Fund. Under
certain circumstances, shareholders of a Fund have the right
to call a shareholders meeting of that Fund to consider the
removal of one or more directors.
Investors should be aware that by combining the Prospectus
of each Fund into this one document, there is the
possibility that one Fund may become liable for any
misstatements in the Prospectus about another Fund. To the
extent that a Fund incurs such liability, a shareholders
investment in such Fund could be adversely affected.
- -------------------------------------------------------------------------------
SERVICE Pursuant to arrangements between the Funds, The Bank of New
PROVIDERS AND York and Investor Services Group, The Bank of New York
UNDERWRITER serves as custodian of all securities and cash owned by each
Fund. The Bank of New York performs no managerial or policy-
making functions for the Funds. Pursuant to agreements
between The Bank of New York and Investor Services Group,
Investor Services Group performs certain administrative and
record keeping services. The Bank of New York reallows a
portion of its custody fee to Investor Services Group for
providing such services.
Investor Services Group also serves as the Transfer Agent,
Administrator and Fund Accounting/Pricing Agent. Investor
Services Group is a wholly owned subsidiary of First Data
Corporation.
Administration services include all administrative services
except those relating to the investment portfolios of the
Funds, the distribution of the Funds and the maintenance of
the Funds' financial records. For these administrative
services, SGF, SMDS and SSCY pays a flat fee of $30,000 and
SSVF pays a flat fee of $10,000.
26
<PAGE>
FPSB acts as underwriter to each Fund pursuant to separate
underwriting agreements. FPSB was paid $3,000 from each Fund
for underwriting services in connection with the
registration of the Fund's shares under state securities
laws.
FPSB is a wholly-owned subsidiary of FinDaTex, Inc. FPSB is
an affiliate of the Investment Advisor inasmuch as FPSB and
the Investment Advisor are under common control. Certain
directors and officers of Stratton Management Company, the
Investment Advisor to the Funds, and certain directors and
officers of each Fund are controlling shareholders of
FinDaTex, Inc.
27
<PAGE>
<TABLE>
<CAPTION>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- -------- -------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Inapplicable
13. Investment Objectives and Policies Additional Information on Investment
Objective and Policies; Investment
Restrictions
14. Management of the Registrant Directors and Officers of the Funds
15. Control Persons and Principal Control Persons and Principal Holders
Holders of Securities of Securities
16. Investment Advisory and Other The Investment Advisor and Other
Services Service Providers
17. Brokerage Allocation Portfolio Transactions and Brokerage
Commissions
18. Capital Stock and Other Securities Covered in Part A
19. Purchase, Redemption and Pricing Additional Purchase and Redemption
of Securities Being Offered Information
20. Tax Status Additional Information Concerning
Taxes
21. Underwriters The Investment Advisor and Other
Service Providers
22. Calculation of Performance Data Additional Information on Performance
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
STRATTON
MUTUAL FUNDS
STRATTON GROWTH FUND, INC.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
STRATTON SMALL-CAP YIELD FUND
STRATTON SPECIAL VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 15, 1998
This Statement of Additional Information provides supplementary information
pertaining to shares of common stock in four separate mutual funds: STRATTON
GROWTH FUND, INC. ("SGF"); STRATTON MONTHLY DIVIDEND REIT SHARES, INC. ("SMDS");
STRATTON SMALL-CAP YIELD FUND ("SSCY") and STRATTON SPECIAL VALUE FUND ("SSVF")
of The Stratton Funds, Inc. (each a "Fund" and collectively the "Funds").
This Statement of Additional Information is not a Prospectus but should be read
in conjunction with the current Prospectus dated April 15, 1998, and is
incorporated by reference in its entirety into the Prospectus. A copy of the
Prospectus for the Funds may be obtained by contacting the Funds' Distributor,
FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
PA 19406-0903, or by telephoning (800) 634-5726.
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
<PAGE>
TABLE OF CONTENTS
Page
Statement of Additional Information.........................................
Additional Information on Investment Objectives and Polices for SSVF........
Investment Restrictions.....................................................
SGF....................................................................
SMDS...................................................................
SSCY...................................................................
SSVF...................................................................
Directors and Officers of the Funds.........................................
Compensation Table..........................................................
Control Persons and Principal Holders of Securities.........................
The Investment Advisor and Other Service Providers..........................
The Investment Advisor.................................................
Service Providers and Underwriter......................................
Portfolio Transactions and Brokerage Commissions............................
Retirement Plans............................................................
Defined Contribution Plans.............................................
Individual Retirement Account..........................................
Roth IRA...............................................................
403(b)(7) Retirement Plan..............................................
Simple Individual Retirement Account...................................
General Information....................................................
Additional Purchase and Redemption Information..............................
Additional Information Concerning Taxes.....................................
Taxation of Certain Financial Instruments..............................
Additional Information on Performance Calculations..........................
Total Return Calculations..............................................
Financial Statements........................................................
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction with the
Prospectus of the Funds having the same date as this Statement of Additional
Information. Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus. No investment in
shares of the Funds should be made without first reading the Prospectus of the
Funds.
ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVE AND POLICIES FOR SSVF
FUTURES CONTRACTS
SSVF may enter into contracts for the purchase or sale for future delivery of
securities, including index contracts. While futures contracts provide for the
delivery of securities, deliveries usually do not occur. Contracts are
generally terminated by entering into offsetting transactions.
The Fund may enter into such futures contracts to protect against the adverse
effects of fluctuations in security prices or interest rates without actually
buying or selling the securities underlying the contract. For example, if
interest rates are expected to increase, the Fund might enter into futures
contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the Fund.
If interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the futures contracts to the Fund
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have. Similarly,
when it is expected that interest rates may decline, futures contracts may be
purchased to hedge in anticipation of subsequent purchases of securities at
higher prices. Since the fluctuations in the value of futures contracts should
be similar to those of debt securities, the Fund could take advantage of the
anticipated rise in value of debt securities without actually buying them until
the market had stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy debt securities on the cash market.
A stock index futures contract obligates the seller to deliver, and the
purchaser to receive an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement was made.
Open futures contracts are valued on a daily basis and the Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in
the future.
With respect to options on futures contracts, when the Fund is temporarily not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The purchase of a
call option on a futures contract is similar in some respects to the purchase of
a call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based, or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Fund is not fully invested, it may
purchase a call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial hedge
against the declining price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings.
The writing of a put option on a futures contract constitutes a partial hedge
against the increasing price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of securities which the Fund intends to purchase.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to purchase or sell stock at a specified
price, options on a stock index future give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the futures contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing price of the futures contract on the expiration date.
3
<PAGE>
If a put or call option which the Fund has written is exercised, the Fund may
incur a loss which will be reduced by the amount of the premium it received.
Depending upon the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The purchase of a
put option on a futures contract is similar in some respects to the purchase of
protective puts on portfolio securities, and for Federal tax purposes will be
considered a "short sale". For example, the Fund will purchase a put option on
a futures contract to hedge the Fund's portfolio against the risk of rising
interest rates.
To the extent that market prices move in an unexpected direction, the Fund may
not achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize a loss. For example, if the Fund is hedged against the
possibility of an increase in interest rates that would adversely affect the
price of securities held in its portfolio and interest rates decrease instead,
the Fund would lose part or all of the benefit of the increased value that it
has because it would have offsetting losses in its futures position. In
addition, in such situations, if the Fund had insufficient cash, it may be
required to sell securities from its portfolio to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. The Fund may be required to
sell securities at a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may seek to
close out an option position by writing or buying an offsetting position
covering the same securities or contracts and having the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
OPTIONS
SSVF may buy put and call options and write covered call and secured put
options. Such options may relate to particular securities, stock indices, or
financial instruments listed on a national securities exchange and issued by the
Options Clearing Corporation. Options trading is a highly specialized activity
that entails greater than ordinary investment risk. Options on particular
securities may be more volatile than the underlying securities, and therefore,
on a percentage basis, an investment in options may be subject to greater
fluctuation than a direct investment in the underlying securities.
The Fund will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, liquid assets, such as cash, U.S. Government
securities or other liquid high-grade debt obligations, in such amount as are
held in a segregated account by its custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if the Fund maintains with its custodian a diversified stock portfolio,
or liquid assets equal to the contract value. A call option is also covered if
the Fund holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written; or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Fund in liquid assets such
as cash, U.S. Government securities and other high-grade debt obligations in a
segregated account with its custodian. The Fund will write put options only if
they are "secured" by liquid assets maintained in a segregated account by the
Funds' custodian in an amount not less than the exercise price of the option at
all times during the option period.
The Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series as the previously written
option. Such a purchase does not result in the ownership of an option. A
closing purchase transaction will ordinarily be effected to realize a profit on
an outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. There is no assurance that a liquid secondary market
will exist for any particular option. An option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
(in the case of a covered call option) or liquidate the segregated account (in
the case of a secured put option) until the option expires or the optioned
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the security during such period.
4
<PAGE>
PURCHASING CALL OPTIONS
SSVF may purchase call options to the extent that premiums paid by the Fund do
not aggregate more than 20% of that Fund's total net assets. When the Fund
purchases a call option, in return for a premium paid by the Fund to the writer
of the option, the Fund obtains the right to buy the security underlying the
option at a specified exercise price at any time during the term of the option.
The writer of the call option, who receives the premium upon writing the option,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. The advantage of purchasing
call options is that the Fund may alter portfolio characteristics and modify
portfolio maturities without incurring the cost associated with transactions.
The Fund may, following the purchase of a call option, liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an option
of the same series as the option previously purchased. The Fund will realize a
profit from a closing sale transaction if the price received on the transaction
is more than the premium paid to purchase the original call option; the Fund
will realize a loss from a closing sale transaction if the price received on the
transaction is less than the premium paid to purchase the original call option.
Although the Fund will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by the Fund may expire without any value to the Fund, in which event
the Fund would realize a capital loss that would be characterized as short-term
unless the option was held for more than one year.
COVERED CALL WRITING
SSVF may write covered call options from time to time on such portions of their
portfolios, without limit, as the Advisor determines is appropriate in seeking
to obtain the Fund's investment objective. The advantage to the Fund of writing
covered calls is that the Fund receives a premium that is additional income.
However, if the security rises in value, the Fund may not fully participate in
the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
or upon entering a closing purchase transaction. A closing purchase
transaction, in which the Fund, as writer of an option, terminates its
obligation by purchasing an option of the same series as the option previously
written, cannot be effected with respect to an option once the option writer has
received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Fund may realize a net gain or loss from
a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short-term capital
gain in the amount of the premium on the option less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between the cost of the underlying security and the
proceeds of the sale of the security plus the amount of the premium on the
option less the commission paid.
The Fund will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected,
the Fund would be required to continue to hold a security which it might
otherwise wish to sell or deliver a security it would want to hold. The
5
<PAGE>
exercise price of a call option may be below, equal to or above the current
market value of the underlying security at the time the option is written.
PURCHASING PUT OPTIONS
SSVF may invest up to 20% of their total net assets in the purchase of put
options. The Fund will, at all times during which it holds a put option, own
the security covered by such option. The purchase of the put on substantially
identical securities held will constitute a short sale for tax purposes, the
effect of which is to create short-term capital gain on the sale of the security
and to suspend running of its holding period (and treat it as commencing on the
date of the closing of the short sale) or that of a security acquired to cover
the same if, at the time the put was acquired, the security had not been held
for more than one year.
A put option purchased by the Fund gives it the right to sell one of its
securities for an agreed-upon price up to an agreed date. The Fund intends to
purchase put options in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
the Fund to protect unrealized gains in an appreciated security in their
portfolios without actually selling the security. If the security does not drop
in value, the Fund will lose the value of the premium paid. The Fund may sell a
put option which it has previously purchased prior to the sale of the securities
underlying such option. Such sale will result in a net gain or loss depending
upon whether the amount received on the sale is more or less than the premium
and other transaction costs paid on the put option which is sold.
The Fund may sell a put option purchased on individual portfolio securities.
Additionally, the Fund may enter into closing sale transactions. A closing sale
transaction is one in which the Fund, when it is the holder of an outstanding
option, liquidates its position by selling an option of the same series as the
option previously purchased.
WRITING PUT OPTIONS
SSVF may also write put options on a secured basis, which means that the Fund
will maintain, in a segregated account with its custodian, cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. The amount of cash or U.S.
Government securities held in the segregated account will be adjusted on a daily
basis to reflect changes in the market value of the securities covered by the
put option written by the Fund. Secured put options will generally be written in
circumstances where the Advisor wishes to purchase the underlying security for
the Fund's portfolio at a price lower than the current market price of the
security. In such event, that Fund would write a secured put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. With regard to the writing of put
options, each Fund will limit the aggregate value of the obligations underlying
such put options to 50% of its total net assets.
Following the writing of a put option, the Fund may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
INVESTMENT RESTRICTIONS
A list of the Funds' investment objectives and policies, can be found under
"INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISK CONSIDERATIONS" in the
Funds' Prospectus.
The following investment restrictions are deemed fundamental policies and may be
changed with respect to a Fund only by the approval of the holders of a
"majority" of such Fund's outstanding shares. The term "majority" of a Fund's
outstanding shares means the holders of the lesser of: (1) 67% of such Fund's
shares present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy; or (2) more than 50% of such Fund's
outstanding shares.
SGF WILL NOT:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer, except for securities of the United States Government or
agencies thereof.
2. Invest in more than 10% of any class of securities of any one issuer
(except for government obligations) or in more than 10% of the voting
securities of any one issuer.
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<PAGE>
3. Invest more than 5% of the value of its total assets in securities of
companies which (including operations of their predecessors and of
subsidiaries if the company is a holding company) have not had a record of
at least three years of continuous operations and in equity securities
which are not readily marketable (that is, with a limited trading market).
4. Borrow money, except from banks for temporary or emergency purposes (but
not for investment purposes), provided that such borrowings shall not
exceed 5% of its total assets (at the lower of cost or market value).
5. Underwrite the securities of other issuers or invest in securities under
circumstances where, if sold, the Fund might be deemed to be an underwriter
under the Securities Act of 1933.
6. Pledge, mortgage or hypothecate its assets.
7. Invest for purposes of exercising management or control.
8. Invest in securities of other investment companies or in options, puts,
calls, straddles, spreads or similar devices, or engage in arbitrage
transactions or short sales.
9. Purchase securities on margin, but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
10. Make loans to other persons except that this restriction shall not apply to
government obligations, commercial paper or notes or other evidences of
indebtedness which are publicly distributed.
11. Purchase or sell real estate or interests in real estate. This will not
prevent the Fund from investing in publicly-held real estate investment
trusts or marketable securities which may represent indirect interests in
real estate.
12. Purchase or sell commodities or commodity contracts or invest in interests
in oil, gas or other mineral exploration or development programs.
13. Invest more than 2% of the value of its total assets in warrants. This
restriction does not apply to warrants initially attached to securities
purchased by the Fund. This restriction may be changed or eliminated at
any time by the Board of Directors of the Fund without action by the Fund's
shareholders.
14. Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any officer or director of the Fund or its Investment Advisor
owns beneficially more than 1/2 of 1%, and such officers and directors
holding more than 1/2 of 1% together own beneficially more than 5% of the
issuer's securities.
SMDS WILL NOT:
1. Borrow money, except from banks for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets; or mortgage,
pledge or hypothecate its assets to secure any borrowing except to secure
temporary or emergency borrowing and then only in an amount not exceeding
15% of the value of its total assets.
2. Invest more than 5% of the value of its total assets in securities of
issuers which, with their predecessors, have not had at least three years
of continuous operation.
3. Issue any senior securities (as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), except in so far as investment
restriction 1 may be deemed to be an issuance of a senior security.
4. Act as an underwriter or purchase securities which the Fund may not be free
to sell to the public without registration of the securities under the
Securities Act of 1933.
5. Purchase or sell real estate, commodities, or commodity contracts.
7
<PAGE>
6. Invest less than 75% of the value of its total assets in securities limited
in respect to any one issuer to an amount not exceeding 5% of the value of
its total assets, Government securities (as defined in the 1940 Act) cash
and cash items. (There is no similar restriction as to the investment of
the balance of the Fund's total assets).
7. Purchase or own 5% or more of the outstanding voting securities of any
electric or gas utility company (as defined in the Public Utility Holding
Company Act of 1935), or purchase or own 10% or more of the outstanding
voting securities of any other issuer.
8. Purchase the securities of an issuer, if, to the Fund's knowledge, one or
more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more than
0.5% together own beneficially more than 5%, of the outstanding securities
of such issuer.
9. Make loans to other persons, except that the purchase of a portion of an
issue of publicly distributed debt securities (whether or not upon original
issuance) shall not be considered the making of a loan.
10. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities.
11. Participate on a joint or a joint-and-several basis in any securities
trading account.
12. Invest in puts, calls or combinations thereof or make short sales.
13. Purchase the securities of other investment companies.
14. Purchase securities which do not have readily available market quotations.
15. The Fund will invest at least 25% of its assets in securities of real
estate investment trusts ("REITs").
REITs are not considered investment companies, and therefore are not subject to
the restriction in limitation 13 above. The restriction in limitation 5 on the
purchase or sale of real estate does not include investments by the Fund in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
The following investment restrictions can be changed only by the Board of
Directors of SMDS:
1. The Fund will not invest for the purpose of exercising control or
management.
2. The Fund will not invest in warrants, except when acquired as a unit with
other securities.
SSCY WILL NOT:
1. Issue any senior securities (as defined in the Investment Company Act of
1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total assets; or
mortgage, pledge or hypothecate its assets.
2. Act as an underwriter of securities, except that, in connection with the
disposition of a security, the Fund may be deemed to be an "Underwriter" as
that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate, commodities, or commodity contracts.
4. As to 75% of the total assets of the Fund, purchase the securities of any
one issuer, other than securities issued by the U.S. government, its
agencies or its instrumentalities, if immediately after such purchase more
than 5% of the total assets of the Fund would be invested in securities of
such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any one
issuer.
6. Purchase the securities of an issuer, if, to the Fund's knowledge, one or
more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more than
0.5% together own beneficially more than 5%, of the outstanding securities
of such issuer.
8
<PAGE>
7. Make loans to other persons, except that the purchase of a portion of an
issue of publicly distributed debt securities (whether or not upon original
issuance) shall not be considered the making of a loan, nor shall the Fund
be prohibited from entering into repurchase agreements with banks or
broker/dealers.
8. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities.
9. Purchase the securities of issuers conducting their principal business
activities in the same industry other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities if, immediately
after such purchase, the value of the Fund's investments in such industry
would exceed 25% of the value of the total assets of the Fund.
10. Invest in puts, calls, straddles or combinations thereof or make short
sales.
11. Purchase the securities of other investment companies, except if they are
acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a Securities and Exchange Commission approved offer of
exchange.
12. Invest for the purpose of exercising control over, or management of, the
issuer.
SSVF WILL NOT:
1. Issue any senior securities (as defined in the Investment Company Act of
1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total assets; or
mortgage, pledge or hypothecate its assets, except that this restriction
shall not apply to transactions in options, futures contracts and options
on futures contracts.
2. Act as an underwriter of securities, except that, in connection with the
disposition of a security, the Fund may be deemed to be an "Underwriter" as
that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate.
4. As to 75% of the total assets of the Fund, purchase the securities of any
one issuer, other than securities issued by the U.S. government, its
agencies or its instrumentalities, if immediately after such purchase more
than 5% of the total assets of the Fund would be invested in securities of
such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any one
issuer.
6. Purchase or sell commodities or commodity contracts, except that it may
engage in options transactions and may enter into futures contracts and
options thereon in accordance with its Prospectus.
7. Make loans to other persons, except that the purchase of a portion of an
issue of publicly distributed debt securities (whether or not upon original
issuance) shall not be considered the making of a loan, nor shall the Fund
be prohibited from entering into repurchase agreements with banks or
broker/dealers.
8. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities. The Fund may establish margin accounts in connection with its
use of options, futures contracts and options on futures contracts.
9. Purchase the securities of issuers conducting their principal business
activities in the same industry other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities if, immediately
after such purchase, the value of the Fund's investments in such industry
would exceed 25% of the value of the total assets of the Fund.
10. Purchase the securities of other investment companies, except if they are
acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a Securities and Exchange Commission approved offer of
exchange.
11. Invest for the purpose of exercising control over, or management of, the
issuer.
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Real estate investment trusts ("REITs") are not considered investment companies,
and therefore are not subject to the restriction in limitation 11 above. The
restriction in limitation 3 on the purchase or sale of real estate does not
include investments by the Fund in securities secured by real estate or
interests therein or issued by companies or investment trusts which invest in
real estate or interests therein.
* * *
The percentage limitations on investments are applied at the time an investment
is made. An actual percentage in excess of a stated percentage limitation does
not violate the limitation unless such excess exists immediately after an
investment is made and results from the investment. In other words,
appreciation or depreciation of a Fund's investments will not cause a violation
of the limitations. In addition, the limitations will not be violated if a Fund
receives securities by reason of a merger or other form of reorganization.
DIRECTORS AND OFFICERS OF THE FUNDS
The Directors and executive officers of the Funds, their position with the
Funds, their addresses, affiliations, if any, with the Investment Advisor, and
principal occupations during the past five years are set forth below. Each of
the Directors named below is a Director for each of the Funds and each of the
officers named below holds the same position, unless otherwise noted, with each
of the Funds.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING LAST 5 YEARS
WITH
REGISTRANTS
<S> <C> <C> <C>
James W. Stratton/1,3/ 61 Director/ Mr. Stratton is the Chairman of the Board and Chief Executive Officer
610 W. Germantown Pike Chairman of the Investment Advisor, Stratton Management Company. He is a
Suite 300 Director of Unisource Worldwide, Inc. (paper distribution), Amerigas
Plymouth Meeting, PA 19462 Propane Ltd. (energy), FinDaTex, Inc. (financial services), Teleflex, Inc.
(aerospace controls and medical products) and UGI Corp., Inc. (utility-
natural gas).
Lynne M. Cannon/2/ 42 Director Ms. Cannon is a Senior Vice President of Relationship Management of
3200 Horizon Drive First Data Investor Services Group, Inc. and a Director of FPS Broker
King of Prussia, PA 19406 Services, Inc. She was formerly employed as Vice President of Mutual
Funds of Independence Capital Management, Inc. (investment advisor).
Prior to Independence Capital, she was Vice President of AMA
Investment Advisors, Inc. (investment advisor & broker/dealer).
John J. Lombard, Jr. 63 Director Mr. Lombard is a partner in the law firm of Morgan, Lewis & Bockius
2000 One Logan Sq. LLP.
Philadelphia, PA 19103
Douglas J. MacMaster, Jr. 67 Director Mr. MacMaster is a private investor. He was formerly Senior Vice
5 Morris Road President of Merck, Inc. He is a Director of American Precision Industries, Inc.,
Ambler, PA 19002 Marteck Biosciences Corp., Neose Pharmaceuticals Inc., Oravax, Inc., U.S.
Bioscience, Inc., and Flamel Technologies, S.A.
Henry A. Rentschler 69 Director Mr. Rentschler is a private investor. He was formerly the President of
P.O. Box 962 Baldwin-Hamilton Company, a division of Joy Environmental
Paoli, PA 19301 Equipment Co. (manufacturer of renewal parts for Baldwin locomotives
and diesel engines) and was also formerly a Director of the Society for
Industrial Archeology (which promotes the study and preservation of the
physical survivals of our technological and industrial past).
Merritt N. Rhoad, Jr./3/ 68 Director Mr. Rhoad is a private investor.
640 Bridle Road
Custis Woods
Glenside, PA 19038
Alexander F. Smith 69 Director Mr. Smith is a private investor. He was formerly the Chairman and
Cricket Springs Director of Gilbert Associates, Inc. (engineering/consulting services).
Geigertown , PA 19523
Richard W. Stevens 64 Director Mr. Stevens is an attorney in private practice.
One Jenkintown Station
115 W. Avenue, Suite 108
Jenkintown, PA 19046
</TABLE>
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<TABLE>
<S> <C> <C> <C>
John A. Affleck/3/ 51 Officer Mr. Affleck is President and Director of the Investment Advisor, Stratton
610 W. Germantown Pike Management Company. He is President of Stratton Monthly Dividend
Suite 300 REIT Shares, Inc., Vice President of Stratton Growth Fund, Inc. and
Plymouth Meeting, PA 19462 The Stratton Funds, Inc.
Gerard E. Heffernan/3/ 60 Officer Mr. Heffernan is a Senior Vice President and Director of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company. He is President of Stratton
Suite 300 Growth Fund, Inc., Vice President of Stratton Monthly Dividend REIT
Plymouth Meeting, PA 19462 Shares, Inc. and The Stratton Funds, Inc. He is Secretary of FinDaTex,
Inc.
James Van Dyke Quereau 49 Officer Mr. Quereau is a Vice President, a Director and the Director of
610 W. Germantown Pike Qualitative Research of the Investment Advisor, Stratton Management
Suite 300 Company. He is Vice President of the Funds and Portfolio Manager of
Plymouth Meeting, PA 19462 Stratton Special Value Fund.
Frank H. Reichel, III 33 Officer Mr. Reichel is a Vice President, a Director and the Director of
610 W. Germantown Pike Quantitative Research of the Investment Advisor, Stratton Management
Suite 300 Company. He is President of The Stratton Funds, Inc., Vice President
Plymouth Meeting, PA 19462 of Stratton Growth Fund, Inc. and Stratton Monthly Dividend REIT
Shares, Inc. and Portfolio Manager of Stratton Small-Cap Yield Fund.
James A. Beers 35 Officer Mr. Beers is a Vice President of the Investment Advisor, Stratton
610 W. Germantown Pike Management Company; prior thereto, Account Manager of Client
Suite 300 Services at FPS Services, Inc. He is Vice President of the Funds. Mr.
Plymouth Meeting PA 19462 Beers is related to Mr. Stratton by marriage.
Joanne E. Kuzma 43 Officer Mrs. Kuzma is the Director of Trading and a Managing Partner of the
610 W. Germantown Pike Investment Advisor, Stratton Management Company. She is Vice
Suite 300 President of Compliance for the Funds.
Plymouth Meeting, PA 19462
Patricia L. Sloan 44 Officer Ms. Sloan is an employee of the Investment Advisor, Stratton
610 W. Germantown Pike Management Company. She is Secretary and Treasurer of the Funds.
Suite 300
Plymouth Meeting, PA 19462
Carol L. Royce 40 Officer Mrs. Royce is an employee of the Investment Advisor, Stratton
610 W. Germantown Pike Management Company. She is Assistant Secretary and Assistant
Suite 300 Treasurer of the Funds.
Plymouth Meeting PA 19462
</TABLE>
/1/ As defined in the 1940 Act, Mr. Stratton is an "interested person" of the
Funds by reason of his positions with the Investment Advisor and his
indirect ownership, through FinDaTex, Inc., of FPS Broker Services, Inc.
("FPSB"). FinDaTex, Inc. is the 100% owner of FPSB, the Funds'
underwriter.
/2/ Ms. Cannon is an "interested person" of the Funds by reason of her
affiliation with FPSB.
/3/ Messrs. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
COMPENSATION TABLE
The officers and Directors of the Funds who are also officers or employees of
the Investment Advisor or FPS receive no direct compensation from the Fund for
services to them. The Directors of the Funds serve in the same capacity for
each Fund and meet concurrently four times a year. In the aggregate, each
director currently receives $1,000 for each meeting attended, and an annual
retainer of $5,000. These fees are divided on a percentage basis between each
Fund based on their relative net assets as of the meeting date. There are no
separate audit, compensation or nominating committees of the Board of Directors.
Set forth are the total fees which were paid to each of the directors who are
not "interested persons" for fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM FUND AND FUND
NAME OF DIRECTOR FROM FUND COMPLEX /(1)/ PAID TO DIRECTORS
- ---------------- ---------------------- -------------------------------
<S> <C> <C>
James W. Stratton
SGF $ 0 $ 0
SMDS $ 0
SSCY $ 0
</TABLE>
11
<PAGE>
Lynne M. Cannon
SGF $ 0 $ 0
SMDS $ 0
SSCY $ 0
John J. Lombard, Jr.
SGF $1,831.02 $6,250.00
SMDS $3,365.78
SSCY $1,053.20
Douglas J. MacMaster, Jr.
SGF $ 522.38 $1,750.00
SMDS $ 887.74
SSCY $ 339.88
Henry A. Rentschler
SGF $1,821.69 $6,250.00
SMDS $3,385.40
SSCY $1,042.91
Merritt N. Rhoad, Jr.
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
Alexander F. Smith
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
Richard W. Stevens
SGF $2,042.94 $7,000.00
SMDS $3,801.37
SSCY $1,155.69
/(1)/ The "Fund Complex" consists of SGF, SMDS and THE STRATTON FUNDS, INC.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1998, beneficial ownership in the Funds by the directors and
officers as a group was as follows:
FUND NUMBER OF SHARES PERCENTAGE
- ---- ---------------- -----------
1. SGF 210,182 11.73%
2. SMDS 103,100 3.17%
3. SSCY 212,528 9.07%
4. SSVF 83,456 24.65%
As of March 31, 1998, the following shareholders owned of record or to the best
of knowledge beneficially more than 5% of the outstanding shares of the
respective Fund.
12
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS OWNED OWNED
---------------- ------ --------
<S> <C> <C> <C>
1. SGF Sandmeyer Steel Company 114,564 6.39%
Capital Accumulation Plan
1 Sandmeyer Lane
Philadelphia, PA
Charles Schwab & Co., Inc. 111,400 6.21%
Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
2. SMDS Charles Schwab & Co., Inc. 175,614 5.40%
Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
3. SSCY Boston & Company 479,436 20.46%
CUST TJU Employee Pension Plan
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Charles Schwab & Co., Inc. 315,239 13.45%
SPL CSTY a/c FBO Customers Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
Boston & Company 240,000 10.24%
CUST Thomas Jefferson University
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
National Financial Services Corp. 123,103 5.25%
One World Financial Center
200 Liberty Street
New York, NY
4. SSVF Saxon & Company 100,469 29.67%
FBO T/A Teleflex Stratton
P.O. Box 7780-1888
Philadelphia, PA
James W. Stratton and 53,333 15.75%
John A. Affleck and Gerard E. Heffernan
TRST Stratton Management Co. 401k
Profit Sharing Plan
610 W. Germantown Pike, Ste 300
Plymouth Meeting, PA 19462-1050
Union National Bank & Trust Co. 24,024 7.09%
TRST Univest & Co.
14 N. Main Street/Trust Department
P.O. Box 197
Souderton, PA 18964-0197
</TABLE>
13
<PAGE>
THE INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
THE INVESTMENT ADVISOR
The Investment Advisory Agreements (the "Agreements") require the Investment
Advisor to maintain a continuous review of each Fund's portfolio of investments,
and to manage the investment and reinvestment of each Fund's assets. The
Agreements provide that the Investment Advisor is not required to give the Funds
preferential treatment as compared with the treatment given to any other
customer or investment company. In addition, the Investment Advisor furnishes
to the Funds office space and facilities necessary in connection with the
operation of the Funds. The Funds pay, or arrange for others to pay, all other
expenses in connection with their operations.
The Funds pay the following expenses: (1) the fees and expenses of the Funds'
disinterested directors; (2) interest expenses; (3) taxes; (4) brokerage
commissions and other expenses incurred in acquiring or disposing of portfolio
securities; (5) the expenses of registering shares for sale with the Securities
and Exchange Commission and with various state securities commissions; (6)
accounting and legal costs; (7) insurance premiums; (8) fees and expenses of the
Funds' custodian, administrator, accounting services agent and transfer agent
and any related services; (9) expenses of obtaining quotations of the Funds'
portfolio securities and of pricing the Funds' shares; (10) expenses of
maintaining the Funds' legal existence and of shareholders' meetings; (11)
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and (12) fees and expenses of membership in industry
organizations.
1. SGF - The investment advisory fee payable under the Agreement is payable
monthly, at an annual rate of 3/4 of 1% of the Fund's daily net assets.
During the fiscal years ended May 31, 1995 and 1996, the fees paid to the
Investment Advisor were $189,594 and $266,741, respectively. For the
period June 1, 1996 through December 31, 1996, the fees paid to the
Investment Advisor were $177,939. For the fiscal year ended December 31,
1997, the fee paid to the Investment Advisor was $366,356.
2. SMDS - The investment advisory fee payable under the Agreement is payable
monthly, at an annual rate of 5/8 of 1% of the Fund's daily net assets.
During the fiscal years ended January 31, 1995 and 1996, the fees paid to
the Investment Advisor were $829,796 and $794,629, respectively. For the
period February 1, 1996 through December 31, 1996, the fees paid to the
Investment Advisor were $606,818. For the fiscal year ended December 31,
1997, the fee paid to the Investment Advisor was $600,138.
3. SSCY - The Investment Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets subject to a
performance adjustment and is responsible for paying its expenses. During
the fiscal years ended March 31, 1995 and 1996, the fees paid to the
Investment Advisor were $76,075 and $126,638, respectively.
For the period April 1, 1996 through December 31, 1996, the fees paid to
the Investment Advisor were $91,179. For the fiscal year ended December 31,
1997, the fee paid to the Investment Advisor was $312,050.
4. SSVF - The Investment Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets subject to a
performance adjustment. The performance adjustment will commence at the
end of the month in which the Fund has completed 24 months of operation, if
it has net assets of $20 million or more, at such date, or at the end of
any succeeding month at which it has net assets of $20 million, but in any
event, irrespective of its net assets, at the end of the month in which the
Fund has completed 36 months of operation and will be calculated at the end
of the commencement month and each succeeding month based upon a rolling 24
month performance period. The performance adjustment is added to or
subtracted from the basic investment advisory fee. The Fund's gross
performance is compared with the performance of the Frank Russell 2000, as
discussed above.
The performance adjustment for SSCY and SSVF is 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. Pursuant to the performance adjustment, a Fund's gross
performance is compared with the performance of the Frank Russell 2000, a
widely recognized unmanaged index of common stock prices, over a
rolling 24-month performance period. The Russell 2000 is composed of the
smallest 2000 stocks in the Frank Russell annual ranking of 3000 common
stocks by market capitalization. The Russell 2000 is a widely recognized
common stock index of small to medium size companies. Total return
performance on the Russell 2000 includes dividends and is reported monthly
on market capitalization-weighted basis. When a 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 a 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
14
<PAGE>
be added to or deducted from the advisory fee if a Fund outperformed or
under performed the Russell 2000 by 5.00%. The effect of this performance
fee adjustment is that the advisory fee may never be greater than 1.25% or
less than 0.25% of a Fund's average daily net assets for the preceding
month. Due to the complexities of researching and investing in small-cap
equity securities, the advisory and incentive fees (if realized) paid by
the Fund are higher than those paid by most other investment companies.
Additionally, the Fund's incentive fee of plus or minus 0.50% is greater
than that of other mutual funds with similar objectives which pay incentive
fees.
SERVICE PROVIDERS AND UNDERWRITER
First Data Investor Services Group, Inc. ("Investor Services Group"), a wholly-
owned subsidiary of First Data Corporation, has been engaged by the Funds to
provide most of the back office services on the Funds' behalf. Pursuant to
certain agreements, Investor Services Group provides the services commonly and
separately referred to as: Fund Administration, Fund Accounting, Transfer Agency
and Custody Administration.
Certain directors and officers of Stratton Management Company, the Investment
Advisor to the Funds, and certain Directors and officers of each Fund are
controlling shareholders of FinDaTex, Inc., parent of FPSB, the Funds
underwriter.
As the Funds' accounting services agent, Investor Services Group is responsible
for certain accounting services such as computation of the net asset value of
the Funds' shares and maintenance of the Funds' books and financial records.
FPS Services, Inc. ("FPS") is the predecessor to Investor Services Group.
1. SGF - For the fiscal year ended May 31, 1996, the Fund paid FPS $20,000 in
fees pursuant to the Accounting Services Agreement. For the period June 1,
1996 through December 31, 1996, the Fund paid FPS $11,667 in fees pursuant
to the Accounting Services Agreement. For the fiscal year ended December
31, 1997, the Fund paid FPS $20,000 in fees pursuant to the Accounting
Services Agreement.
2. SMDS - For the fiscal year ended January 31, 1996, the Fund paid FPS
$26,000 in fees pursuant to the Accounting Services Agreement. For the
period February 1, 1996 through December 31, 1996, the Fund paid FPS
$23,833 in fees pursuant to the Accounting Services Agreement. For the
fiscal year ended December 31, 1997, the Fund paid FPS $26,000 in fees
pursuant to the Accounting Services Agreement.
3. SSCY - For the fiscal year ended March 31, 1996, the Fund paid FPS $20,000
in fees pursuant to the Accounting Services Agreement. For the period
April 1, 1996 through December 31, 1996, the Fund paid FPS $15,000 in fees
pursuant to the Accounting Services Agreement. For the fiscal year ended
December 31, 1997, the Fund paid FPS $21,666 in fees pursuant to the
Accounting Services Agreement.
4. SSVF - Pursuant to the Accounting Services Agreement, Investor Services
Group receives an asset based fee computed at the annual rate of $25,000 on
the first $20 million of average net assets, .03% of the next $30 million
of average net assets, .02% of the next $50 million of average net assets
and .01% of average net assets over $100 million.
As the Funds' administrative services agent, Investor Services Group is
responsible for certain administrative services such as: (1) coordination and
monitoring the activities of any other third party service provider providing
services to the Funds (e.g. the Funds' independent auditors, printers, etc.);
(2) providing the Funds with necessary office space, telephones and other
communications facilities and personnel competent to perform the
responsibilities under the Agreement; (3) maintenance of such books and records
of the Funds as may be required by applicable Federal or state law; (4) prepares
and, after approval by the Funds, files and arranges for the distribution of
proxy materials and periodic reports to shareholders of the Funds as required by
applicable law; (5) prepares and, after approval by the Funds, arranges for the
filing of such registration statements and other documents with the U.S.
Securities and Exchange Commission and any other Federal or state regulatory
authorities as may be required by applicable law; (6) reviews and submits to the
officers of the Funds for their approval, invoices or other requests for payment
of the Funds' expenses and instructs the Custodian to issue checks in payment
thereof, and (7) takes such other action with respect to the Funds as may be
deemed by Investor Services Group to appropriately perform its duties under the
Agreement.
1. SGF - For the fiscal year ended May 31, 1996, the Fund paid FPS $30,000 in
fees for administrative services. For the period from June 1, 1996 through
December 31, 1996, the Fund paid FPS $17,500. For the fiscal year ended
December 31, 1997, the Fund paid FPS $30,000 in fees for administrative
services. The Investment Advisor has waived $15,000 annually of the
compensation due it under the Investment Advisory Agreement, to offset a
portion of the fee that the Fund will incur under the Administration
Agreement. This fee waiver can be terminated or reduced by the Investment
Advisor upon 60 days prior written notice to the Fund.
15
<PAGE>
2. SMDS - For the fiscal year ended January 31, 1996, the Fund paid FPS
$30,000 in fees for administrative services. For the period from February
1, 1996 through December 31, 1996, the Fund paid FPS $27,500. For the
fiscal year ended December 31, 1997, the Fund paid FPS $30,000 in fees for
administrative services. The Investment Advisor has waived $15,000
annually of the compensation due it under the Investment Advisory
Agreement, to offset a portion of the fee that the Fund will incur under
the Administration Agreement. This fee waiver can be terminated or reduced
by the Investment Advisor upon 60 days prior written notice to the Fund.
3. SSCY - For the fiscal year ended March 31, 1996, the Fund paid FPS $10,000
in fees for administrative services. For the period from April 1, 1996
through December 31, 1996, the Fund paid FPS $7,500. For the fiscal year
ended December 31, 1997, the Fund paid FPS $10,833 in fees for
administrative services.
4. SSVF - Investor Services Group is entitled to receive a fee payable monthly
at the annual rate of $10,000 per year.
Investor Services Group also serves as the Funds' transfer agent and dividend-
paying agent. Investor Services Group annually receives $13.00 per account for
providing transfer agent and dividend disbursing agent services.
The Funds' independent auditor is Tait, Weller & Baker. Their offices are
located at 8 Penn Center Plaza, Suite 800, Philadelphia PA 19103. The auditor's
responsibilities are (1) to ensure that all relevant accounting principles are
being followed by the Funds; and (2) to report to the Boards of Directors
concerning the Funds' operations.
The Bank of New York, 48 Wall Street, New York, New York 10286 serves as the
custodian of each Fund's assets pursuant to custodian agreements. Under such
agreements, The Bank of New York (1) maintains a separate account or accounts in
the name of the Funds; (2) holds and transfers portfolio securities on account
of the Funds; (3) accepts receipts and makes disbursements on money on behalf of
the Funds; (4) collects and receives all income and other payments and
distributions on account of the Funds' securities; and (5) makes periodic
reports to the Boards of Directors concerning the Funds' operations.
The Funds have entered into Underwriting Agreements with FPSB. FPSB acts as an
underwriter of the Funds' shares for the purpose of facilitating the
registration of shares. In this regard, FPSB has agreed at its own expense to
qualify as a broker/dealer under all applicable Federal or state laws in those
states which the Funds shall from time to time identify to FPSB as states in
which it wishes to offer its shares for sale, in order that state registrations
may be maintained for the Funds.
FPSB is a broker/dealer registered with the Securities and Exchange Commission
and a member in good standing of the National Association of Securities Dealers,
Inc. FPSB is an affiliate of the Investment Advisor inasmuch as both the
Underwriter and the Investment Advisor are under common control.
For the services to be provided under the Underwriting Agreement in facilitating
the registration of Funds shares under state securities laws, FPSB has received
an annual fee of $3,000 from each Fund for providing these services in each of
the last three fiscal years. This fee is included in the net expenses of the
Funds. The Funds shall continue to bear the expense of all filing or
registration fees incurred in connection with the registration of shares of the
Funds under state securities laws. The Funds pay no compensation to FPSB for
its assistance in sales of Funds shares. The Investment Advisor pays certain
out-of-pocket expenses, plus the cost for each employee to be licensed as a
Registered Representative by FPSB.
The Underwriting Agreement may be terminated by either party upon 60 days prior
written notice to the other party, and if so terminated, the pro-rata portion of
the unearned fee will be returned to the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Funds seek to obtain the best price and execution in all purchases and sales
of securities, except when the authorization to pay higher commissions for
research and services, as provided for in the Investment Advisory Agreements, is
exercised. Purchases and sales of over-the-counter securities are ordinarily
placed with primary market makers acting as principals. Consistent with its
obligation to seek the best price and execution, the Funds may place some
purchases and sales of portfolio securities with dealers or brokers who provide
statistical and research information to the Investment Advisor. Statistical and
research services furnished by brokers through whom the Funds effects securities
transactions in accordance with these procedures are ordinarily of general
application and may be used by the Advisor in servicing other accounts as well
as that of the Funds. In addition, not all such services may be used in
connection with the Investment Advisor's activities on behalf of the Funds.
Portfolio transactions are assigned to brokers, and commission rates negotiated,
based on an assessment of the reliability and quality of a broker's services,
which may include research and statistical information such as reports on
specific companies or groups of companies, pricing information, or broad
overviews of the stock market and the economy.
16
<PAGE>
Although investment decisions for the Funds will be made independently from
investment decisions made with respect to other clients advised by the
Investment Advisor, simultaneous transactions may occur on occasion when the
same security is suitable for the investment objectives of more than one client.
When two or more such clients are simultaneously engaged in the purchase or sale
of the same security, to the extent possible the transactions will be averaged
as to price and allocated among the clients in accordance with an equitable
formula. In some cases this system could have a detrimental effect on the price
or quantity of a security available to the Funds. In other cases, however, the
ability of the Funds to participate with other clients of the Investment Advisor
in volume transactions may produce better executions for the Funds.
The Investment Advisory Agreements contain provisions which authorize the
Investment Advisor to recommend and cause the Funds to pay brokerage commissions
in excess of commissions which might be charged by other brokers, where a
determination is made that the amount of commission paid is reasonable in
relation to the brokerage and research services provided by the broker to the
Funds, viewed in terms of the particular transaction or the overall
responsibilities of the Investment Advisor with respect to the Funds. In
addition, the Investment Advisory Agreements recognize that the Investment
Advisor may, at its expense, acquire statistical and factual information, advice
about economic factors and trends and other appropriate information from others
in carrying out its obligations. For SGF, during the fiscal years ended May 31,
1995 and 1996, the period June 1, 1996 through December 31, 1996 and the fiscal
year ended December 31, 1997, no brokerage commissions were paid by the Fund
pursuant to this provision. For SMDS, during the fiscal year ended January 31,
1995 and 1996 and the period February 1, 1996 through December 31, 1996 and the
fiscal year ended December 31, 1997 , no brokerage commissions were paid by the
Fund pursuant to this provision. For SSCY, during the fiscal years ended March
31, 1995, 1996 and the period April 1, 1996 through December 31, 1996 and the
fiscal year ended December 31, 1997, no brokerage commissions were paid by the
Fund pursuant to this provision.
1. SGF - During the fiscal year ended May 31, 1996; the period June 1, 1996
through December 31, 1996; and the fiscal year ended December 31, 1997, the
Fund paid $13,398, $24,150 and $46,704 respectively, in brokerage
commissions, substantially all of which were paid to brokers which had
provided research, statistical data or pricing information to the
Investment Advisor. The variation in these commissions from year to year
reflects primarily the amount of total net assets in the Fund and to a
lesser extent the annual turnover rate. For the fiscal year ended May 31,
1996; the period ended December 31, 1996 and the fiscal year ended December
31, 1997, the Fund's portfolio turnover rates were 15.41%, 20.32% and
34.40%, respectively.
2. SMDS - During the fiscal year ended January 31, 1996; the period February
1, 1996 through December 31, 1996; and the fiscal year ended December 31,
1997, the Fund paid $280,842, $337,175 and $184,272 respectively, in
brokerage commissions, substantially all of which were paid to brokers
which had provided research, statistical data or pricing information to the
Investment Advisor. The variation in these commissions from year to year
reflects primarily the amount of total net assets in the Fund and to a
lesser extent the annual turnover rate. For the fiscal year ended January
31, 1996; the period ended December 31, 1996 and the fiscal year ended
December 31, 1997, the Fund's portfolio turnover rates were 53.30 %, 69.19%
and 42.47%, respectively.
3. SSCY - During the fiscal year ended March 31, 1996; the period April 1,
1996 through December 31, 1996; and the fiscal year ended December 31,
1997, the Fund paid $22,378, $29,899 and $41,488 respectively, in brokerage
commissions, substantially all of which were paid to brokers which had
provided research, statistical data or pricing information to the
Investment Advisor. For the fiscal year ended March 31, 1996; the period
ended December 31, 1996 and the fiscal year ended December 31, 1997 the
Fund's portfolio turnover rates were 33.50%, 35.86% and 26.27%,
respectively.
4. SSVF - The Fund commenced investment operations on December 31, 1997,
therefore no brokerage commissions were paid.
Each Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
such Fund as of the close of its most recent fiscal years.
RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
The Funds offer a profit sharing and a money purchase plan (the "Defined
Contribution Plans") for use by both self-employed individuals (sole
proprietorships and partnerships) and corporations who wish to use shares of the
Funds as a funding medium for a retirement plan qualified under the Internal
Revenue Code.
17
<PAGE>
The Internal Revenue Code provides certain tax benefits for participants in a
Defined Contribution Plan. For example, amounts contributed to a Defined
Contribution Plan and earnings on such amounts are not taxed until distributed.
However, distributions to a participant from a Defined Contribution Plan before
the participant attains age 59 1/2 will (with certain exceptions) result in an
additional 10% tax on the amount included in the participant's gross income.
INDIVIDUAL RETIREMENT ACCOUNT
The Funds offer an individual retirement account (the "IRA") for use by
individuals with compensation for services rendered (including earned income
from self-employment) who wish to use shares of the Funds as a funding medium
for individual retirement saving. However, except for rollover contributions,
an individual who has attained, or will attain, age 70 1/2 before the end of
the taxable year may only contribute to an IRA for a nonworking spouse who is
under age 70 1/2. The general deductible limit for contributions to an IRA is
the lesser of 100% of compensation or $2,000. An individual may roll over to
the IRA funds (in any amount) that he or she has received in a qualifying
distribution from an employer's retirement plan or IRA.
The individual's IRA assets (and earnings thereon) may generally not be
withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
ROTH-IRA
The total amount contributed to a Roth IRA for any taxable year cannot exceed
the lesser of $2,000 or 100 percent of the individual's compensation. If an
individual also maintains a traditional IRA the maximum contribution to the Roth
IRA is reduced by any contributions made to the traditional IRA. The total
annual contribution to all traditional IRAs and Roth IRAs cannot exceed the
lesser of $2,000 or 100 percent of the individual's compensation.
Unless the individual's adjusted gross income is more than $100,000, or is
married and filing a separate tax return, the individual is eligible to roll
over, transfer or convert all or any portion of the existing traditional IRA(s)
into the Roth IRA(s). A separate Roth Conversion IRA should generally be
established to hold conversion amounts. If the Roth IRA is designated as a Roth
Conversion IRA, the only permissible contributions are amounts converted from a
traditional IRA during the same tax year. The amount of the conversion from the
traditional IRA to the Roth IRA will be treated as a distribution for income tax
purposes and is includible in the individual's gross income (except for any
nondeductible contributions). Although the conversion amount is generally
included in income, the 10 percent early distribution penalty will not apply to
rollovers or conversions from a traditional IRA to a Roth IRA, regardless of
whether the individual qualifies for any exceptions to the 10 percent penalty.
Funds distributed from the Roth IRA may be rolled over to a Roth IRA of the
individuals'. A proper Roth IRA to Roth IRA rollover is completed if all or
part of the distribution is rolled over not later than 60 days after the
distribution is received. The individual may not have completed another Roth IRA
to Roth IRA rollover from the distributing Roth IRA during the 12 months
preceding the date the distribution was received. Further, the individual may
roll the same dollars or assets only once every 12 months. Roth IRA assets may
not be rolled over to other types of IRAs (e.g., traditional IRA, Simple IRA).
403(B)(7) RETIREMENT PLAN
The Funds offer a plan (the "403(b)(7) Plan") for use by schools, hospitals, and
certain other tax-exempt organizations or associations who wish to use shares of
the Funds as a funding medium for a retirement plan for their employees.
Contributions are made to the 403(b)(7) Plan based on a reduction of the
employee's regular compensation. Such contributions, to the extent they do not
exceed applicable limitations (including a generally applicable limitation of
$9,500 per year), are excludable from the gross income of the employee for
Federal income tax purposes. Assets withdrawn from the 403(b)(7) Plan are
subject to Federal income tax and to the additional 10% tax on early withdrawals
discussed above under "Defined Contribution Plans."
18
<PAGE>
SIMPLE INDIVIDUAL RETIREMENT ACCOUNT
The Funds offer a plan (the "Simple IRA") for use by companies or tax-exempt
organizations who wish to use shares of the Funds as a funding medium for a
retirement plan for their employees. Contributions are made to the Simple IRAs
based on a reduction of the employee's regular compensation. Such
contributions, to the extent they do not exceed applicable limitations
(including a generally applicable limitation of $6,000 per year), are excludable
from the gross income of the employee for Federal income tax purposes. Assets
withdrawn from the Simple IRA are subject to Federal income tax and to the
additional 10% tax on early withdrawals discussed above under "Defined
Contribution Plans." Also, any distribution to an individual within two years of
initial participation in the plan increases the early withdrawal penalty to 25%.
GENERAL INFORMATION
In all these Plans, distributions of net investment income and capital gains
will be automatically reinvested in the Funds.
The custodian of the Plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Semper is controlled by certain Directors and officers of the
Funds and certain directors and officers of Stratton Management Company.
Investor Services Group serves as the fiduciary agent for Semper and in such
capacity is responsible for all record keeping, applicable tax reporting and fee
collection in connection with the plan accounts. Semper is entitled to deduct
its fees and administrative expenses by liquidating shares annually in
September, unless the annual maintenance fee is paid separately to Investor
Services Group. The annual maintenance fee is currently $12.00 per plan
account. This fee may be amended upon 30 days notice by Stratton Management
Company, Semper or Investor Services Group in the future.
The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution, IRA, Roth IRA, 403(b)(7) or Simple IRA Plans available
for investment in the Funds. Any person who wishes to establish a retirement
plan account may do so by contacting the Funds directly. The complete Plan
documents and applications will be provided to existing or prospective
shareholders upon request, without obligation. Since all these Plans involve
setting aside assets for future years, it is important that investors consider
their needs and whether the investment objective of the Funds as described in
this Statement of Additional Information and in the Prospectus is most likely to
fulfill them. The Funds recommend that investors consult their attorneys or tax
advisors to determine if the retirement programs described herein are
appropriate for their needs.
ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION
The computation of the offering price per share of each Fund based on the value
of SGF's, SMDS' and SSCY's net assets on December 31, 1997 and SSVF's net assets
on March 31, 1998 and each Fund's outstanding securities on such dates is as
follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
<S> <C> <C> <C> <C>
Net Assets $60,177,483 $101,956,224 $39,376,948 $5,712,551.53
Outstanding Shares 1,802,433 3,370,941 1,752,053 338,539
Net Asset Value,
Offering Price and
Redemption Price per Share $33.39 $30.25 $22.47 $16.87
</TABLE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situation.
As stated in the Prospectus, each Fund intends to qualifly as a regulated
investment copany under Subchaper M of the Internal Revenue Code, as amended
("the Code") for each taxable year. As a regulated investment company,
19
<PAGE>
each Fund is exempt from Federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of (a) 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gain over net long-term capital loss, if any, for the year) and (b) 90%
of its net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net tax-
exempt interest income made during taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Fund must
satisfy certain requirements with respect to the source of its income for a
taxable year. At least 90% of the gross income of each Fund must be derived
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks, securities or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to the Fund's business of investing in
such stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to the Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by
a Fund from a partnership or trust is treated as derived with respect to the
Fund's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust.
Each Fund will designate any distribution of long term capital gains as a
capital gain dividend in a written notice mailed to shareholders within 60 days
after the close of the Fund's taxable year. Upon the sale or exchange of Fund
shares, if a shareholder has not held such shares for at least six months, any
loss on the sale or exchange of those shares will be treated as long term
capital loss to the extent of the capital gain dividend received with respect to
the shares.
Ordinary income of individuals is taxable at a maximum nominal marginal rate of
39.6%; although because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for certain taxpayers may be more than 39.6% in certain
circumstances. Pursuant to the Tax Relief Act of 1997, for capital gains on
securities recognized after July 28, 1997, the maximum tax rate for individuals
is 20% if the property was held more than 18 months; for property held for more
than 12 months, but no longer than 18 months, the maximum rate continues to be
28%. For corporations, long-term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35%.
SMDS has a capital loss carry over available to offset future capital gains, if
any, of approximately $16,775,000 of which $11,277,000 expires in 2003,
$4,331,000 expires in 2004 and $1,167,000 expires in 2005.
A 4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Funds intend to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
If for any fiscal year a Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to Federal income tax at regular corporate rates (without any deduction
for distributions to its shareholders). In such event, dividend distributions
would be taxable as ordinary income to shareholders to the extent of the Fund's
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Strategic rules govern the Federal income tax treatment of certain financial
investments that may be held by SSVF. These rules may have a particular impact
ion the amount of income or gain that the fund must distribute to its
shareholders.
FUTURES CONTRACTS AND OPTIONS OF FUTURES CONTRACTS. Generally, futures
contracts and options on futures contracts held by the Fund (collectively, the
"Instruments") at the close of its taxable year are treated for Federal income
tax purposes as sold for their fair market value on the last business day of
such year, a process known as "mark-to-market." Forty percent of any gain or
loss resulting from such constructive sales will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the period the Fund has held the
Instruments ("the 40-60 rule"). The amount of any capital gain or loss actually
realized by the Fund in a subsequent sale or other disposition of those
Instruments is adjusted to reflect any capital gain or loss taken into account
by the Fund in a prior year as a result of the constructive sale of the
Instruments. With respect to certain Instruments, deductions for interest and
carrying charges may not be allowed.
20
<PAGE>
With respect to futures contracts to sell which are properly identified as such,
the Fund may make an election which will exempt (in whole or in part) those
identified futures contracts from being treated for Federal income tax purposes
as sold on the last business day of the Fund's taxable year, but gains and
losses will be subject to such short sales, wash sales, loss deferral rules and
the requirement to capitalize interest and carrying charges. Under temporary
regulations, the Fund would be allowed (in lieu of the foregoing) to elect to
either (1) offset gains or losses from positions which are part of a mixed
straddle to which such treatment applies, or (2) establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40-60 rule will apply
to the net gain or loss attributable to the futures contracts, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
OPTIONS. When the Fund writes an option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included as a deferred
credit in the liability section of the Fund's statement of assets and
liabilities. The amount of the deferred credit will be subsequently marked-to-
market to reflect the current value of the option written. The current value of
the traded option is the last sale price or, in the absence of a sale price, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold), and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security from its portfolio and
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired call options
written by the Fund and net gains from closing purchase transactions are treated
as short-term capital gains for Federal income tax purposes, and losses on
closing purchase transactions are treated as short-term capital losses.
The foregoing discussion is based on Federal tax laws and regulations which are
in effect on the date of this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS
From time to time, the Funds' total return may be quoted in advertisements,
shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATIONS
The Funds compute their average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result.
This calculation can be expressed as follows:
ERV
T= [(-----)1/n-1]
P
Where T = average annual total return
ERV = ending redeemable value at the end of the period
covered by the computation of a
P = hypothetical initial investment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their aggregate total return by determining the aggregate
compounded rate of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment.
21
<PAGE>
The formula for calculating aggregate total return is as follows:
A= (ERV-P)
-------
P
Where: A = aggregate total return.
ERV = ending redeemable value at end of the period
covered by the computation of a hypothetical
$1,000 investment made at the beginning of the
period.
P hypothetical initial investment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the Funds cannot
necessarily be used to compare an investment in the Funds' shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
1. SGF - Based on the foregoing calculations, the average annual total returns
for the Fund for the one year, five year and ten year periods ended
December 31, 1997 were 36.06%, 19.52% and 16.24%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1997 were 143.93%, and 350.23%, respectively.
2. SMDS - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year, five year and ten year periods ended
December 31, 1997 were 18.09%, 8.20% and 10.74%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1997 were 48.27% and 177.27%, respectively.
3. SSCY - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year period ended December 31, 1997 was
42.37% and from inception was 17.93%. The aggregate total return from
inception to the period ended December 31, 1997 was 117.99%.
4. SSVF - Based on the foregoing calculations, the average annual total return
for the Fund for the period December 31, 1997 (inception) through March 31,
1998 was 12.47%. The aggregate total return from inception to March 31,
1998 was 12.47%.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for SGF, SMDS and SSCY
contained in such Funds' Annual Report dated December 31, 1997 are incorporated
by reference into this Statement of Additional information and have been audited
by Tait, Weller & Baker, whose reports also appear in the 1997 Annual Report and
are also incorporated by reference herein. No other parts of the Annual Report
are incorporated by reference herein. Such financial statements and notes
thereto have been incorporated herein in reliance on the reports of Tait, Weller
& Baker, independent accountants, given on the authority of said firm as experts
in auditing and accounting, incorporated by reference from such Funds' 1997
Annual Report to Shareholders.
Unaudited financial statements for the period December 31, 1997, commencement of
operations, through March 31, 1998, for SSVF are attached hereto.
22
<PAGE>
SCHEDULE OF INVESTMENTS March 31, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
COMMON STOCKS - 96.3% Number Of Shares Market Value
---------------- ------------
<S> <C> <C>
Automotive - 4.6%
Motorcar Parts & Accessories, Inc. 6,000 106,875
R&B, Inc. 6,000 62,250
Safety Components International, Inc. 6,000 94,500
------------------
263,625
------------------
Banking/Financial - 1.0%
Hanmi Bank 2,725 55,863
------------------
Business Services - 0.9%
Gallagher (Arthur J.) & Co. 1,200 51,975
------------------
Capital Goods - 2.0%
Chicago Rivet & Machine Co. 2,500 116,250
------------------
Capital Goods/Technology - 6.8%
Bell Fuse, Inc. 5,000 114,375
Hummingbird Communications Ltd. 2,600 89,213
Percon, Inc 8,000 88,750
SIFCO Industries, Inc. 1,000 22,875
Specialty Equipment Companies 3,500 71,312
------------------
386,525
------------------
Consumer Products - 17.7%
American Woodmark Corp. 5,000 130,000
Callaway Golf Co. 2,000 58,000
Cannondale Corp. 4,500 74,531
Koss Corp. 7,000 75,250
LaCrosse Footware, Inc. 5,000 58,750
Stanley Furniture Co., Inc. 4,300 171,463
Sturm, Ruger & Co., Inc. 5,200 107,250
Velcro Industries NV 1,200 136,200
WD-40 Co. 3,000 91,312
Winsloew Furniture, Inc. 5,000 110,000
------------------
1,012,756
------------------
Construction - 14.6%
Ameron International Corp. 1,400 81,813
Crossmann Communities, Inc. 4,800 142,500
Drew Industries, Inc. 7,000 88,375
Engle Homes, Inc. 4,200 70,350
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
M/I Schottenstein Homes, Inc. 4,400 96,250
Medusa Corp. 1,700 103,913
NCI Building Systems, Inc. 4,000 194,000
Texas Industries, Inc. 1,000 57,812
------------------
835,013
------------------
Distribution - 2.8%
Bell Industries, Inc. 5,500 77,687
Richey Electronics, Inc. 8,500 83,938
------------------
161,625
------------------
Energy - 3.1%
Dawson Geophysical Co. 6,000 95,250
Ultramar Diamond Shamrock Corp. 2,300 81,075
------------------
176,325
------------------
Entertainment - 6.3%
Anchor Gaming 1,200 89,100
Churchill Downs, Inc. 2,700 153,900
Jackpot Enterprises, Inc. 9,000 117,000
------------------
360,000
------------------
Industrial - 5.6%
Cascade Corp. 5,700 92,269
Lufkin Industries 3,700 120,250
Raven Industries, Inc. 5,000 106,250
------------------
318,769
------------------
Insurance/Services - 9.0%
Donegal Group, Inc. 7,000 163,625
LandAmerica Financial Group 3,900 176,475
Mobile America Corp. 7,500 89,062
Motor Club of America 5,000 85,625
------------------
514,787
------------------
Metals - 6.8%
Lindberg Corp. 6,000 105,750
Penn Engineering & Manufacturing Corp. 4,200 106,969
RMI Titanium Co. 3,500 75,687
Special Metals Corp. 6,000 97,500
------------------
385,906
------------------
Real Estate - 2.5%
RFS Hotel Investors, Inc. 3500 63,875
Sunstone Hotel Investors, Inc. 5,000 80,000
------------------
143,875
------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Retailing - 2.4%
Duckwall-Alco Stores, Inc. 9,000 137,250
------------------
Specialty Chemical - 0.3%
Quaker Chemical Corp. 1,000 19,000
------------------
Technology - 7.6%
Boston Acoustics, Inc. 3,000 95,250
Esterline Technologies Corp. 2,400 101,250
Software Spectrum, Inc. 2,000 43,500
Trimble Navigation Ltd. 6,000 106,875
Vari-L Company, Inc. 9,700 87,906
------------------
434,781
------------------
Telecommunications - 1.1%
Hickory Tech Corp. 1,700 62,900
------------------
Transportation - 1.2%
HVIDE Marine, Inc. Cl A 3,800 66,975
------------------
Total Common Stocks
(cost $5,083,473 ) 5,504,200
COMMERCIAL PAPER - 3.2% Principal Amount
(cost $180,000 )
Ford Motor Credit Corp.
5.65% due 04/03/98 180,000 180,000
Total Investments
(cost $5,263,473 ) 5,684,200
Cash and Other Assets,
Less Liabilities - 0.5% 28,352
==================
NET ASSETS - 100.00% $5,712,552
==================
- ---------------------------------------------------------
*Aggregate cost for federal income tax purposes is $5,263,473; and net
unrealized appreciation is as follows:
Gross unrealized appreciation.............................................. $534,696
Gross unrealized depreciation.............................................. (113,969)
------------------
Net unrealized appreciation............................................ $420,727
==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
SSVF
<S> <C>
ASSETS:
Investments in securities at value (cost $5,263,473) $ 5,684,200
Cash ....................................................... 238,097
Dividends and interest receivable .......................... 2,405
---------------
Total Assets .......................................... 5,924,702
---------------
LIABILITIES:
Payable for investment securities purchased ................ 212,150
---------------
Total Liabilities ..................................... 212,150
---------------
NET ASSETS:
Applicable to 338,539 shares outstanding/1/................. $ 5,712,552
===============
Net asset value, offering and redemption price per share ... $ 16.87
===============
SOURCE OF NET ASSETS:
Paid-in capital ............................................ $ 5,164,767
Undistributed net investment income ....................... 1,389
Accumulated net realized gain on investments................ 125,669
Net unrealized appreciation of investments.................. 420,727
---------------
Net Assets......................................... $ 5,712,552
===============
</TABLE>
/1/ $.001 par value, 2,000,000 shares authorized.
<PAGE>
STATEMENT OF OPERATIONS
Three Months Ended March 31, 1998~i (unaudited)
<TABLE>
<CAPTION>
SSVF*
--------------
<S> <C>
INCOME:
Dividends....................................................... $ 12,397
Interest........................................................ 2,863
--------------
Total Income............................................... 15,260
--------------
EXPENSES:
Accounting/Pricing services fees (Note 2)....................... 3,030
Administration services fees (Note 2)........................... 833
Advisory fees (Note 2).......................................... 7,413
Custodian fees (Note 2)......................................... 250
Directors' fees................................................. 311
Legal fees...................................................... 49
Miscellaneous fees.............................................. 14
Printing and postage fees....................................... 837
Registration fees (Note 2)...................................... 741
Shareholder services fees (Note 2).............................. 293
Taxes other than income taxes................................... 100
--------------
Total Expenses............................................ 13,871
--------------
Net Investment Income............................... 1,389
--------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments................................ 125,669
Net increase in unrealized appreciation on investments.......... 420,727
--------------
Net gain on investments......................................... 546,396
--------------
Net increase in net assets resulting from operations $ 547,785
==============
</TABLE>
*Fund commenced operations on December 31, 1997.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SSVF
--------------------------------
3 Months Ended Period Ended
03/31/98* 12/31/97**
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 1,389 $ 0
Net realized gain on investments..................... 125,669 0
Net increase in unrealized
appreciation of investments....................... 420,727 0
Net increase in net assets resulting
------------- -------------
from operations................................... 547,785 0
============= =============
CAPITAL SHARE TRANSACTIONS: /2/ 5,059,767 105,000
------------- -------------
Total increase in net assets......................... 5,607,552 105,000
NET ASSETS:
Beginning of period.................................. 105,000 0
------------- -------------
End of period (including undistributed
net investment income of $1,389
and $0, respectively)............................. $ 5,712,552 $ 105,000
============= =============
</TABLE>
CAPITAL SHARE TRANSACTIONS
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SSVF
-------------------------------------------------------------------
3 Months Ended 03/31/98* Period Ended 12/31/97**
------------------------------ -------------------------------
Shares Value Shares Value
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Shares issued................................. 331,539 $ 5,059,767 7,000 $ 105,000
Shares reinvested from net investment income
and capital gains distributions............ 0 0 0 0
----------- ------------- ------------- ------------
331,539 5,059,767 7,000 105,000
Shares redeemed............................... 0 0 0 0
=========== ============= ============= ============
Net increase .............................. 331,539 $ 5,059,767 7,000 $ 105,000
=========== ============= ============= ============
</TABLE>
------------------------------------------
*Unaudited
**Fund commenced operations on December 31, 1997.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Special Value Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout the period.
3 Months
Ended
03/31/98
(unaudited)
---------------
Net Asset Value, Beginning of Period................. $15.00/1/
---------------
Income from Investment Operations
Net investment income....................... 0.004
Net gains on securities
(both realized and unrealized)............ 1.866
---------------
Total from investment operations........ 1.870
---------------
Net Asset Value, End of Period....................... $16.87
===============
Total Return......................................... 12.47%
Ratios/Supplemental Data
Net assets, end of period (in 000's)........ $5,713
Ratio of expenses to average
net assets................................ 1.40%/2/
Ratio of net investment
income to average net assets.............. 0.14%/2/
Portfolio turnover rate..................... 18.58%
Average commission rate paid................ $0.049
- -------------------------
/1/ Commencement of operations 12/31/97
/2/ Annualized
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998 (unaudited)
NOTE 1. - Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT 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") and Stratton Special Value
Fund ("SSVF"), which began operations on December 31, 1997. 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 SSVF is to achieve capital appreciation through investment in
securities which represent a value or potential worth which is not fully
recognized by prevailing market prices.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on any
national securities exchange are valued at their last sale price on the
exchange where the securities are principally traded or, if there has been
no sale on that date, at the mean between the last reported bid and asked
prices. Securities traded in the over-the-counter market are valued at the
last sale price, if carried in the National Market Issues section by
NASDAQ; other over-the-counter securities are valued at the mean between
the closing bid and asked prices obtained from a principal market maker.
All other securities and assets are valued at their fair value as
determined in good faith by the Boards of Directors of the Funds, which may
include the amortized cost method for securities maturing in sixty days or
less and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains or
losses on the sale of securities are calculated for accounting and tax
purposes on the identified cost basis.
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
March 31, 1998 (unaudited)
to their 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.
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.
NOTE 2. - During the three months ended March 31, 1997, SSVF paid advisory fees
to Stratton Management Company, (the"Advisor") of $7,413. Management services
are provided by the Advisor under agreements 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.
SSVF 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 for SSVF will commence at the end of the month in which
the Fund has completed 24 months of operation, if it has net assets of $20
million or more, at such date, or at the end of any succeeding month at which it
has net assets of $20 million, but in any event, irrespective of its net assets,
at the end of the month in which the Fund has completed 36 months of operation
and will be calculated at
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
March 31, 1998 (unaudited)
the end of the commencement month and each succeeding month based upon a rolling
24 month performance period. The performance adjustment is added to or
subtracted from the basic investment advisory fee. Pursuant to the performance
adjustment, the Fund's gross performance is compared with the performance of the
Russell 2000, a widely recognized unmanaged index of common stock prices, over a
rolling 24-month performance period. The Russell 2000 is composed of the
smallest 2000 stocks in the Frank Russell annual ranking of 3000 common stocks
by market capitalization. The Russell 2000 is a widely recognized common stock
index of small to medium size companies. Total return performance on the
Russell 2000 includes dividends and is reported monthly on a market
capitalization-weighted basis. 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 a 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 a Fund outperformed or
underperformed the Russell 2000 by 5.00%. The effect of this performance fee
adjustment is that the advisory fee may never be greater than 1.25% or less than
0.25% of the Fund's average daily net assets for the preceding month. Due to
the complexities of researching and investing in special value securities, the
advisory and incentive fees (if realized) paid by the Fund are higher than those
paid by most other investment companies. Additionally, the Fund's incentive fee
of plus or minus 0.50% is greater than that of other mutual funds with similar
objectives which pay incentive fees.
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.
First Data Investor Services Group, Inc. ("Investor Services Group"), the Funds'
Administrator, Accounting Agent and Transfer Agent, is a wholly-owned subsidiary
of First Data Corporation. Investor Services Group received fees for providing
shareholder services, for accounting/pricing services and for certain
administrative services during the three months ended March 31, 1998 as follows:
Shareholder Services $293, Accounting/Pricing Services $3,030, Administration
$833.
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
Investor Services Group, the Custodian reallows a portion of its custody fees to
Investor Services Group for certain services delegated to Investor Services
Group. The amount is not readily determinable. FPS Broker Services, Inc., a
wholly-owned subsidiary of FinDaTex, Inc., 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, aggregated $5,580,612 and $622,808, respectively, for the three months
ended March 31, 1998.
<PAGE>
PART C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Post-Effective Amendment No. 9 to the
Registration Statement.
<PAGE>
POST-EFFECTIVE AMENDMENT NO. 9
TO REGISTRATION STATEMENT NO. 33-57166
ON
FORM N-1A
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Included in Part A:
Financial Highlights for STRATTON SMALL-CAP YIELD FUND and STRATTON
SPECIAL VALUE FUND
Incorporated by reference in Part B:
STRATTON SMALL-CAP YIELD FUND
The audited financial statements and related notes thereto as well
as the auditors report thereon for the fiscal year ended December
31, 1997 are incorporated by reference to the Annual Report to
Shareholders as filed with the U.S. Securities and Exchange
Commission on February 27, 1998 pursuant to Rule 30b2-1 of the
Investment Company Act of 1940, as amended (File Nos. 33-57166/811-
7434).
STRATTON SPECIAL VALUE FUND
The unaudited financial statements and related notes thereto for the
period ended March 31, 1998 are filed with Part B. This Post-
Effective Amendment No. 9 is filed to comply with Stratton Special
Value Fund's undertaking to file a Post-Effective Amendment
containing reasonably current financial statements which need not be
certfied, within four to six months of its effective date or
commencement of operations, whichever is later.
(b) Exhibits:
Exhibits filed pursuant to Form N-1A:
(1) Articles of Incorporation
(a) Articles of Incorporation of Registrant, dated January
5, 1993 are incorporated herein by reference to Exhibit
No. 99.1 of Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A (File
No.'s 33-57166/811-7434), filed on July 29, 1996
("Post-Effective Amendment No. 5").
(b) Articles Supplementary to Articles of Incorporation,
dated December 9, 1997, are filed herewith.
(2) By-Laws of Registrant, dated January 15, 1993, are
incorporated herein by reference to Exhibit No. 99.2 of
Post-Effective Amendment No. 5.
(4) Specimen certificate for shares of common stock of STRATTON
SMALL-CAP YIELD FUND is incorporated herein by reference to
Exhibit 99.4 of Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A (File No.'s
33-57166/811-7434), filed on March 12, 1997 ("Post-Effective
Amendment No. 6").
<PAGE>
(5) Investment Advisory Agreement, dated April 1, 1993, between
Registrant and Stratton Management Company is incorporated
herein by reference to Exhibit No. 99.5 of Post-Effective
Amendment No. 5.
(6) Underwriting Agreements
(a) Underwriting Agreement, dated April 12, 1993, between
Registrant and FPS Broker Services, Inc. is incorporated
herein by reference to Exhibit 99.6 (a) of Post-
Effective Amendment No. 6.
(b) Amendment to Underwriting Agreement, dated June 25,
1996, between Registrant and FPS Broker Services, Inc.
is incorporated herein by reference to Exhibit 99.6 (b)
of Post-effective Amendment No.6.
(8) Custodian Agreements
(a) Custodian Agreement between Registrant and The Bank of
New York, dated November 1, 1994, is incorporated herein
by reference to Exhibit No. 99.8 (a) of Post-Effective
Amendment No. 5.
(b) Custody Administration and Agency Agreement between
Registrant and FPS Services, Inc., dated November 1,
1994, is incorporated herein by reference to Exhibit No.
99.8 (b) of Post-Effective Amendment No. 5.
(9) (a) Administration Agreement, dated March 31, 1993, between
Registrant and FPS Services, Inc. is incorporated herein
by reference to Exhibit 99.9 (a) of Post-Effective
Amendment No. 6.
(b) Shareholder Services Agreement, dated March 31, 1993,
between Registrant and FPS Services, Inc. is
incorporated herein by reference to Exhibit 99.9 (b) of
Post-Effective Amendment No. 6.
(c) Accounting Services Agreement, dated March 31, 1993,
between Registrant and FPS Services, Inc. is
incorporated herein by reference to Exhibit 99.9 (c) of
Post-Effective Amendment No. 6.
(d) Investment Company Services Agreement is filed
herewith.
(10) Opinion and Consents of Counsel on the legality of the
securities being issued is incorporated herein by
reference to Exhibit 99.10 of Post-Effective Amendment
No. 8 to Registrant's Registration Statement on Form N-
1A (File No.'s 33-57166/811-7434), filed on February 27,
1998 ("Post-Effective Amendment No. 8").
(11) Consent of Independent Auditors is filed herewith.
(13) Letters of Understanding relating to Initial Capital
between The Stratton Funds, Inc. and James W. Stratton,
Arlene E. Stratton, Carol A. Stratton, John A. Affleck,
Gerard E. Heffernan, Frank H. Reichel, III, James Van
Dyke Quereau (individually) are incorporated herein by
reference to Exhibit 99.13 of Post-Effective Amendment
No. 6.
(14) (a) Form of 403(b)(7) Retirement Plan is incorporated herein
by reference to Exhibit No. 99.14 (a) of Post-Effective
Amendment No. 5.
(b) Form of Individual Retirement Account (I.R.A.) is
incorporated herein by reference to Exhibit 99.14 (b).
of Post-Effective Amendment No. 6.
<PAGE>
(c) Form of Self-Employed Retirement Plan (Defined
Contribution Plans), as amended June 30, 1994, is
incorporated herein by reference to Exhibit No. 99.14
(c) of Post-Effective Amendment No. 5.
(17) Financial Data Schedule
STRATTON SPECIAL VALUE FUND is filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS
TITLE OF CLASS (AS OF MARCH 31, 1998)
-------------- ------------------------
STRATTON SMALL-CAP YIELD FUND 1826
Class A Common Stock,
par value $0.001 per share
STRATTON SPECIAL VALUE FUND 36
Class B Common Stock,
par value $0.001 per share
ITEM 27. INDEMNIFICATION
Section 2-418 of the Corporations and Associations Article of the
Annotated Code of Maryland gives Registrant the power to indemnify
its directors and officers under certain situations. Article SEVENTH
section (a) & (b) of Registrant's Articles of Incorporation,
incorporated by reference as Exhibit 99.1 of Post-Effective
Amendment No. 5, and Article VI, Section 1 of Registrant's By-Laws,
as amended, incorporated by reference as Exhibit 99.2 of Post-
Effective Amendment No. 5, provide for the indemnification of
Registrant's directors and officers. Each indemnification must be
authorized by the Board of Directors of Registrant by a majority of
a quorum consisting of directors who were not parties to the action,
suit or proceeding, or by independent legal counsel in a written
opinion, or by the shareholders. Notwithstanding the foregoing,
Article VI Section 1 (a) of Registrant's By-Laws provides that no
director or officer of Registrant shall be indemnified against
liability to Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such person's duties to the
corporation.
In addition, the aforesaid section of the Corporations and
Associations Article of the Annotated Code of Maryland gives
Registrant the power (a) to purchase and maintain insurance for its
directors and officers against any liability asserted against them
and incurred by them in that capacity or arising out of their status
as such, whether or not Registrant would have the power to indemnify
such directors and officers under such statute, and (b) under
certain circumstances to pay the reasonable expenses incurred by a
director or officer in defending an action, suit or proceeding in
advance of the final disposition of the action, suit or proceeding.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer
or controlling person of the
<PAGE>
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Indemnification of Registrant's Custodian, Transfer Agent,
Accounting/Pricing Agent and Administrator against certain stated
liabilities is provided for the following documents:
(a) Section 8(d) of Administration Agreement between the Registrant
and FPS Services, Inc. included as Exhibit 99.9.a.;
(b) Section 24(c) of Shareholder Services Agreement between the
Registrant and FPS Services, Inc. included as Exhibit 99.9.b;
(c) Section 11(c) of Accounting Services Agreement, between the
Registrant and FPS Services, Inc. included as Exhibit 99.9.c; and
(d) Article XVII (14) of Custodian Agreement between the Registrant
and Bank of New York, incorporated herein by reference to Exhibit
99.8.a of Post-Effective Amendment No. 5.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF ADVISOR
Stratton Management Company provides investment advisory services
consisting of portfolio management for a variety of individuals
and institutions, and as of December 31, 1997 had approximately
$1.7 billion in assets under management. It presently also acts
as investment advisor to two other registered investment
companies, STRATTON MONTHLY DIVIDEND REIT SHARES, INC. and
STRATTON GROWTH FUND, INC.
For information as to any other business, vocation or employment
of a substantial nature in which each director or officer of the
Registrant's investment advisor has been engaged for his own
account or in the capacity of director, officer, employee,
partner or trustee, reference is made to the Form ADV (File #801-
8681) filed by it under the Investment Advisors Act of 1940, as
amended.
ITEM 29. PRINCIPAL UNDERWRITER
(a) FPS Broker Services, Inc. ("FPSB"), the principal underwriter for
the Registrant's securities, currently acts as principal
underwriter for the following entities:
The Bjurman Funds
Focus Trust, Inc.
The Govett Funds, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Tax Exempt Bond Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
Matthews International Funds
McM Funds
Metropolitan West Funds
Polynous Trust
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Trust
The Sports Trust Funds
The Stratton Funds, Inc.
<PAGE>
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Trainer Wortham First Mutual Funds
(b) The information required by this Item 29 with respect to each
Director, Officer or Partner of FPSB is incorporated herein by
reference to Form BD filed by FPSB with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of
1934 (Sec File No. 8-41540)
(c) Not applicable.
James W. Stratton may be considered a control person of the Underwriter due to
his direct or indirect ownership of FinDaTex, Inc., the parent of FPSB.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All records described in Section 31(a) of the 1940 Act and Rules
17 CFR 270.31a-1 to 31a-3 promulgated thereunder, are maintained
by Stratton Management Company, the Fund's Investment Advisor,
Plymouth Meeting Executive Campus, 610 W. Germantown Pike, Suite
300, Plymouth Meeting, Pennsylvania 19462-1050, except for those
maintained by the Fund's Custodian, The Bank of New York, 48 Wall
Street, New York, New York 10286, and First Data Investor
Services Group, Inc., the Fund's Administrator, Transfer,
Redemption and Dividend Disbursing Agent, Administrator of its
Retirement Plans and Accounting Services Agent, 3200 Horizon
Drive, King of Prussia Pennsylvania, 19406.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to provide its Annual Report upon request
without charge to any recipient of the Fund's Prospectus.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment No. 9 to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the city of Plymouth
Meeting, and the State of Pennsylvania, on the 14th day of April, 1998.
THE STRATTON FUNDS, INC.
Registrant
/s/ Frank H. Reichel, III
-------------------------------------
Frank H. Reichel, III, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 9 to the Registration Statement of THE STRATTON FUNDS, INC. has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ James W. Stratton Director April 14, 1998
- ----------------------
James W. Stratton
/s/ Lynne M. Cannon Director April 14, 1998
- -------------------
Lynne M. Cannon
/s/ John J. Lombard, Jr. Director April 14, 1998
- ------------------------
John J. Lombard, Jr.
/s/ Douglas J. MacMaster, Jr. Director April 14, 1998
- -----------------------------
Douglas J. MacMaster, Jr.
/s/ Henry A. Rentschler Director April 14, 1998
- -----------------------
Henry A. Rentschler
/s/ Merritt N. Rhoad, Jr. Director April 14, 1998
- -------------------------
Merritt N. Rhoad, Jr.
/s/ Alexander F. Smith Director April 14, 1998
- ----------------------
Alexander F. Smith
/s/ Richard W. Stevens Director April 14, 1998
- ----------------------
Richard W. Stevens
/s/ Patricia L. Sloan Treasurer April 14, 1998
- ---------------------
Patricia L. Sloan
/s/ Frank H. Reichel, III President April 14, 1998
- -------------------------
Frank H. Reichel, III
</TABLE>
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
Exhibit
Number Exhibit
Item 24(b)
(1)(b) Articles Supplementary to Articles of Incorporation
(9)(d) Investment Company Services Agreement
(11) Consents of Independent Auditors
(17) Financial Data Schedule for STRATTON SPECIAL VALUE FUND
<PAGE>
EXHIBIT 24(b) 1(b)
THE STRATTON FUNDS, INC.
ARTICLES SUPPLEMENTARY TO
ARTICLES OF INCORPORATION
The Stratton Funds, Inc, a Maryland Corporation its principal office of the
Corporation in this State is c/o The Corporation Trust, Incorporated, 300 East
Lombard Street, Baltimore, MD 21202. The name of the resident agent of the
Corporation in this state is The Corporation Trust, Incorporated a corporation
of this state and the post office address of the resident agent is c/o The
Corporation Trust, Incorporated, 300 East Lombard Street, Baltimore, MD 21202.
FIRST: The total number of shares of stock which the Corporation has
authority to issue is One Billion (1,000,000,000) shares of stock, with a par
value of one-tenth of one cent ($.001) per share, to be known and designated as
Common Stock, such shares of Common Stock having an aggregate par value of One
Million Dollars ($1,000,000).
SECOND: The shares of the Stratton Special Value Fund class has been
classified by the Board of Directors pursuant to authority contained in the
Articles of Incorporation of the Corporation.
THIRD: The Board of Directors of the Corporation, at a meeting held on
December 9, 1997 adopted resolutions designating of such One Billion
(1,000,000,000 ) shares of common stock as follows: Two Hundred Million
(200,000,000) shares of Class B common stock representing interests in Stratton
Special Value Fund.
FOURTH: The shares of the Stratton Special Value Fund class shall have the
same preferences, conversion or other rights, voting powers, restrictions and
limitations as to dividends, qualifications, or terms or conditions of
redemption, as set forth in the Articles of Incorporation of the Corporation.
FIFTH: The Corporation was formed to operate as a management investment
company under the Investment Company Act of 1940 and to exercise and enjoy all
of the powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereafter in force.
SIXTH: These Articles Supplementary shall become effective at 5:00 p.m. on
December 31, 1997.
IN WITNESS WHEREOF, The Stratton Funds, Inc. has caused these Articles
Supplementary to be signed in its name and on its behalf by its President and
attested by its Secretary on this 9th day of December, 1997.
The Stratton Funds, Inc. ATTEST:
By: /s/ Frank H. Reichel, III /s/ Patricia L. Sloan
---------------------------- -------------------------------
Frank H. Reichel III, President Patricia L. Sloan, Secretary
<PAGE>
EXHIBIT 24(b) 9(d)
Investment Company Services Agreement
This Agreement, dated as of the 31st day of December, 1997, made by and
---- --------
between The Stratton Funds, Inc., (the "Company"), a corporation operating as an
open-end, management investment company registered under the Investment Company
Act of 1940, as amended (the "Act"), duly organized and existing under the laws
of the State of Maryland and FPS Services, Inc. ("FPS"), a corporation duly
organized under the laws of the State of Delaware (collectively, the "Parties").
Witnesseth That:
Whereas, the Company is authorized by its Articles of Incorporation to
issue separate series of shares representing interests in separate investment
portfolios which are identified on Schedule "C" attached hereto and which
Schedule "C" may be amended from time to time by mutual agreement of the
Parties; and
Whereas, the Parties desire to enter into an agreement whereby FPS will
provide the services to the Company as specified herein and set forth in
particular in Schedule "A" which is attached hereto and made a part hereof.
Now Therefore, in consideration of the premises and mutual covenants
contained herein, and in exchange of good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the Parties hereto,
intending to be legally bound, do hereby agree as follows:
General Provisions
Section 1. Appointment. The Company hereby appoints FPS as servicing
---------- -----------
agent and FPS hereby accepts such appointment. In order that FPS may perform its
duties under the terms of this Agreement, the Board of Directors of the Company
shall direct the officers, investment adviser, legal counsel, independent
accountants and custodian of the Company to cooperate fully with FPS and, upon
request of FPS, to provide such information, documents and advice relating to
the Company which FPS requires to execute its responsibilities hereunder. In
connection with its duties, FPS shall be entitled to rely, and will be held
harmless by the Company when acting in reasonable reliance, upon any
instruction, advice or document relating to the Company as provided to FPS by
any of the aforementioned persons on behalf of the Company. All fees charged by
any such persons acting on behalf of the Company will be deemed an expense of
the Company.
Any services performed by FPS under this Agreement will conform to the
requirements of:
(a) the provisions of the Act and the Securities Act of 1933, as amended, and
any rules or regulations in force thereunder;
(b) any other applicable provision of state and federal law;
(c) the provisions of the Articles of Incorporation and the By-Laws as amended
from time to time and delivered to FPS;
(d) any policies and determinations of the Board of Directors of the Company
which are communicated to FPS; and
(e) the policies of the Company as reflected in the Company's registration
statement as filed with the U.S. Securities and Exchange Commission.
Nothing in this Agreement will prevent FPS or any officer thereof from
providing the same or comparable services for or with any other person, firm or
corporation. While the services supplied to the Company may be different than
those supplied to other persons, firms or corporations, FPS will provide the
Company equitable treatment in supplying services. The Company recognizes that
it will not receive preferential treatment from FPS as compared with the
treatment provided to other FPS clients.
Section 2. Duties and Obligations of FPS.
---------- -----------------------------
Subject to the provisions of this Agreement, FPS will provide to the
Company the specific services as set forth in Schedule "A" attached hereto.
<PAGE>
Section 3. Definitions. For purposes of this Agreement:
---------- -----------
"Certificate" will mean any notice, instruction, or other instrument in
-----------
writing, authorized or required by this Agreement. To be effective, such
Certificate shall be given to and received by the custodian and shall be signed
on behalf of the Company by any two of its designated officers, and the term
Certificate shall also include instructions communicated to the custodian by
FPS.
"Custodian" will refer to that agent which provides safekeeping of the
---------
assets of the Company.
"Instructions" will mean communications containing instructions transmitted
------------
by electronic or telecommunications media including, but not limited to,
Industry Standardization for Institutional Trade Communications, computer-to-
computer interface, dedicated transmission line, facsimile transmission (which
may be signed by an officer or unsigned) and tested telex.
"Oral Instruction" will mean an authorization, instruction, approval, item
----------------
or set of data, or information of any kind transmitted to FPS in person or by
telephone, telegram, telecopy or other mechanical or documentary means lacking
original signature, by a person or persons reasonably identified to FPS to be a
person or persons so authorized by a resolution of the Board of Directors of the
Company to give Oral Instructions to FPS on behalf of the Company.
"Shareholders" will mean the registered owners of the shares of the Company
------------
in accordance with the share registry records maintained by FPS for the Company.
"Shares" will mean the issued and outstanding shares of the Company.
------
"Signature Guarantee" will mean the guarantee of signatures by an "eligible
-------------------
guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealers guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Signature guarantees will be
accepted from any eligible guarantor institution which participates in a
signature guarantee program.
"Written Instruction" will mean an authorization, instruction, approval,
-------------------
item or set of data or information of any kind transmitted to FPS in an original
writing containing an original signature or a copy of such document transmitted
by telecopy including transmission of such signature reasonably identified to
FPS to be the signature of a person or persons so authorized by a resolution of
the Board of Directors of the Company, or so identified by the Company to give
Written Instructions to FPS on behalf of the Company.
Concerning Oral and Written Instructions For all purposes under this
----------------------------------------
Agreement, FPS is authorized to act upon receipt of the first of any
Written or Oral Instruction it receives from the Company or its agents. In
cases where the first instruction is an Oral Instruction that is not in the
form of a document or written record, a confirmatory Written Instruction or
Oral Instruction in the form of a document or written record shall be
delivered. In cases where FPS receives an Instruction, whether Written or
Oral, to enter a portfolio transaction onto the Company's records, the
Company shall cause the broker/dealer executing such transaction to send a
written confirmation to the Custodian.
FPS shall be entitled to rely on the first Instruction received. For any
act or omission undertaken by FPS in compliance therewith, it shall be free
of liability and fully indemnified and held harmless by the Company,
provided however, that in the event a Written or Oral Instruction received
by FPS is countermanded by a subsequent Written or Oral Instruction
received prior to acting upon such countermanded Instruction, FPS shall act
upon such subsequent Written or Oral Instruction. The sole obligation of
FPS with respect to any follow-up or confirmatory Written Instruction or
Oral Instruction in documentary or written form shall be to make reasonable
efforts to detect any such discrepancy between the original Instruction and
such confirmation and to report such discrepancy to
<PAGE>
the Company. The Company shall be responsible and bear the expense of its
taking any action, including any reprocessing, necessary to correct any
discrepancy or error. To the extent such action requires FPS to act, the
Company shall give FPS specific Written Instruction as to the action
required.
The Company will file with FPS a certified copy of each resolution of the
Company's Board of Directors authorizing execution of Written Instructions or
the transmittal of Oral Instructions as provided above.
Section 4. Indemnification.
---------- ---------------
(a) FPS, its directors, officers, employees, shareholders, and agents will
be liable for any loss suffered by the Company resulting from the willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
FPS in the performance of its obligations and duties under this Agreement.
(b) Any director, officer, employee, shareholder or agent of FPS, who may
be or become an officer, director, employee or agent of the Company, will be
deemed, when rendering services to the Company, or acting on any business of the
Company (other than services or business in connection with FPS' duties
hereunder), to be rendering such services to or acting solely for the Company
and not as a director, officer, employee, shareholder or agent of, or under the
control or direction of FPS even though such person may be receiving
compensation from FPS.
(c) The Company agrees to indemnify and hold FPS harmless, together with
its directors, officers, employees, shareholders and agents from and against any
and all claims, demands, expenses and liabilities (whether with or without basis
in fact or law) of any and every nature which FPS may sustain or incur or which
may be asserted against FPS by any person by reason of, or as a result of:
(i) any action taken or omitted to be taken by FPS except claims,
demands, expenses and liabilities arising from willful misfeasance, bad faith,
gross negligence or reckless disregard on the part of FPS in the performance of
its obligations and duties under this Agreement; or
(ii) any action taken or omitted to be taken by FPS in reliance upon
any Certificate, instrument, order or stock certificate or other document
reasonably believed by FPS to be genuine and signed, countersigned or executed
by any duly authorized person, upon the Oral Instructions or Written
Instructions of an authorized person of the Company, or upon the written opinion
of legal counsel for the Company or FPS; or
(iii) the offer or sale of shares of the Company to any person,
natural or otherwise, which is in violation of any state or federal law.
If a claim is made against FPS as to which FPS may seek indemnity under
this Section, FPS will notify the Company promptly after receipt of any written
assertion of such claim threatening to institute an action or proceeding with
respect thereto and will notify the Company promptly of any action commenced
against FPS within ten (10) days after FPS has been served with a summons or
other legal process. Failure to notify the Company will not, however, relieve
the Company from any liability which it may have on account of the indemnity
under this Section so long as the Company has not been prejudiced in any
material respect by such failure.
The Company and FPS will cooperate in the control of the defense of any
action, suit or proceeding in which FPS is involved and for which indemnity is
being provided by the Company to FPS. The Company may negotiate the settlement
of any action, suit or proceeding subject to FPS' approval, which will not be
unreasonably withheld. FPS reserves the right, but not the obligation, to
participate in the defense or settlement of a claim, action or proceeding with
its own counsel. Costs or expenses incurred by FPS in connection with, or as a
result of such participation, will be borne solely by the Company if:
<PAGE>
(i) FPS has received an opinion of counsel from counsel to the
Company stating that the use of counsel to the Company by FPS would present an
impermissible conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding
include both FPS and the Company, and legal counsel to FPS has reasonably
concluded that there are legal defenses available to it which are different from
or additional to those available to the Company or which may be adverse to or
inconsistent with defenses available to the Company (in which case the Company
will not have the right to direct the defense of such action on behalf of FPS);
or
(iii) the Company authorize FPS to employ separate counsel at the
expense of the Company.
(d) The terms of this Section will survive the termination of this
Agreement.
Section 5. Representations and Warranties.
--------- ------------------------------
(a) FPS represents and warrants that:
(i) it is a corporation duly organized and existing and in good
standing under the laws of Delaware;
(ii) it is empowered under applicable laws and by its Certificate of
Incorporation and By-Laws to enter into and perform this Agreement;
(iii) all requisite corporate proceedings have been taken to
authorize FPS to enter into and perform this Agreement;
(iv) it has and will continue to have access to the facilities,
personnel and equipment required to fully perform its duties and obligations
hereunder;
(v) no legal or administrative proceeding have been instituted or
threatened which would impair FPS' ability to perform its duties and obligations
under this Agreement;
(vi) its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation of FPS
or any law or regulation applicable to it;
(vii) it is registered as a transfer agent under Section 17A(c)(2) of
the Exchange Act;
(viii) this Agreement has been duly authorized by FPS and, when
executed and delivered, will constitute valid, legal and binding obligation of
FPS, enforceable in accordance with its terms.
(b) The Company represents and warrants that:
(i) it is a corporation duly organized and existing and in good
standing under the laws of the State of Maryland;
(ii) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(iii) all requisite proceedings have been taken to authorize the
Company to enter into and perform this Agreement;
(iv) no legal or administrative proceedings have been instituted or
threatened which would impair the Company's ability to perform its duties and
obligations under this Agreement;
(v) the Company's entrance into this Agreement shall not cause a
material breach or be in material conflict with any other agreement or
obligations of the Company, or any law or regulation applicable to either;
(vi) this Agreement has been duly authorized by the Company and,
when executed and delivered, will constitute valid, legal and binding obligation
of the Company, enforceable in accordance with its terms.
(c) Record Keeping and Other Information
<PAGE>
FPS will create and maintain all records required of it pursuant to its
duties hereunder and as set forth in Schedule "A" in accordance with all
applicable laws, rules and regulations, including records required by Section
31(a) of the Act. All such records will be the property of the Company and will
be available during regular business hours for inspection, copying and use by
the Company. Where applicable, such records will be maintained by FPS for the
periods and in the places required by Rule 31a-2 under the Act. Upon termination
of this Agreement, FPS will deliver all such records to the Company or such
person as the Company may designate.
In case of any request or demand for the inspection of the Share records of
the Company, FPS shall notify the Company and secure instructions as to
permitting or refusing such inspection. FPS may, however, exhibit such records
to any person in any case where it is advised by its counsel that it may be held
liable for failure to do so.
Section 6. Compensation. The Company agrees to pay FPS compensation for
---------- ------------
its services, and to reimburse it for expenses at the rates, times, manner and
amounts as set forth in Schedule "B" attached hereto and incorporated herein by
reference and as will be set forth in any amendments to such Schedule "B" agreed
upon in writing by the Parties. Upon receipt of an invoice therefor, FPS is
authorized to collect such fees by debiting the Company's custody account. In
addition, the Company agrees to reimburse FPS for any out-of-pocket expenses
paid by FPS on behalf of the Company within ten (10) calendar days of the
Company's receipt of an invoice therefor.
For the purpose of determining fees payable to FPS, the value of the
Company's net assets will be computed at the times and in the manner specified
in the Company's Prospectus and Statement of Additional Information then in
effect.
During the term of this Agreement, should the Company seek services or
functions in addition to those outlined below or in Schedule "A" attached
hereto, a written amendment to this Agreement specifying the additional services
and corresponding compensation will be executed by the Parties.
In the event that the Company is more than sixty (60) days delinquent in
its payments of monthly billings in connection with this Agreement (with the
exception of specific amounts which may be contested in good faith by the
Company), this Agreement may be terminated upon thirty (30) days' written notice
to the Company by FPS. The Company must notify FPS in writing of any contested
amounts within thirty (30) days of receipt of a billing for such amounts.
Disputed amounts are not due and payable while they are being disputed.
Section 7. Days of Operation. Nothing contained in this Agreement is
---------- -----------------
intended to or will require FPS, in any capacity hereunder, to perform any
functions or duties on any holiday, day of special observance or any other day
on which the New York Stock Exchange ("NYSE") is closed. Functions or duties
normally scheduled to be performed on such days will be performed on and as of
the next succeeding business day on which the NYSE is open. Notwithstanding the
foregoing, FPS will compute the net asset value of the Company on each day
required pursuant to Rule 22c-1 promulgated under the Act.
Section 8. Acts of God, etc. FPS will not be liable or responsible for
---------- -----------------
delays or errors caused by acts of God or by reason of circumstances beyond its
control including, acts of civil or military authority, national emergencies,
labor difficulties, mechanical breakdown, insurrection, war, riots, or failure
or unavailability of transportation, communication or power supply, fire, flood
or other catastrophe.
In the event of equipment failures beyond FPS' control, FPS will, at no
additional expense to the Company, take reasonable steps to minimize service
interruptions but will have no liability with respect thereto. The foregoing
obligation will not extend to computer terminals located outside of premises
maintained by FPS. FPS has entered into and maintains in effect agreements
making reasonable provision for emergency use of electronic data processing
equipment to the extent appropriate equipment is available.
<PAGE>
Section 9. Inspection and Ownership of Records. In the event of a request
---------- -----------------------------------
or demand for the inspection of the records of the Company, FPS will use its
best efforts to notify the Company and to secure instructions as to permitting
or refusing such inspection. FPS may, however, make such records available for
inspection to any person in any case where it is advised in writing by its
counsel that it may be held liable for failure to do so after notice to the
Company.
FPS recognizes that the records it maintains for the Company are the
property of the Company and will be surrendered to the Company upon written
notice to FPS as outlined under Section 10(c) below. The Company is responsible
for the payment in advance of any fees owed to FPS. FPS agrees to maintain the
records and all other information of the Company in a confidential manner and
will not use such information for any purpose other than the performance of FPS'
duties under this Agreement.
Section 10. Duration and Termination.
----------- ------------------------
(a) The initial term of this Agreement will commence on the date
hereinabove first written (the "Effective Date") and will continue thereafter
subject to termination by either Party as set forth in subsection (c) below,
until February 28, 1999.
(b) The fee schedules set forth in Schedule "B" attached hereto will be
fixed until February 28, 1999, except as noted, commencing on the Effective Date
of this Agreement.
(c) After the initial term of this Agreement, a Party may give written
notice to the other (the day on which the notice is received by the Party
against which the notice is made shall be the "Notice Date") of a date on which
this Agreement shall be terminated ("Termination Date"). The Termination Date
shall be set on a day not less than one hundred eighty (180) days after the
Notice Date. The period of time between the Notice Date and the Termination Date
is hereby identified as the "Notice Period". Any time up to, but not later than
fifteen (15) days prior to the Termination Date, the Company will pay to FPS
such compensation as may be due as of the Termination Date and will likewise
reimburse FPS for any out-of-pocket expenses and disbursements reasonably
incurred or expected to by incurred by FPS up to and including the Termination
Date.
(d) In connection with the termination of this Agreement, if a successor
to any of FPS' duties or responsibilities under this Agreement is designated by
the Company by written notice to FPS, FPS will promptly, on the Termination Date
and upon receipt by FPS of any payments owed to it as set forth in Section
10.(c) above, transfer to the successor, at the Company's expense, all records
which belong to the Company and will provide appropriate, reasonable and
professional cooperation in transferring such records to the named successor.
(e) Should the Company desire to move any of the services outlined in this
Agreement to a successor service provider prior to the Termination Date, FPS
shall make a good faith effort to facilitate the conversion on such prior date,
however, there can be no guarantee that FPS will be able to facilitate a
conversion of services prior to the end of the Notice Period. Should services be
converted to a successor service provider prior to the end of the Notice Period,
or if the Company is liquidated or its assets merged or purchased or the like
with another entity, payment of fees to FPS shall be accelerated to a date prior
to the conversion or termination of services and calculated as if the services
had remained at FPS until the expiration of the Notice Period and shall be
calculated at the asset levels on the Notice Date.
(f) Notwithstanding the foregoing, this Agreement may be terminated at any
time by either Party in the event of a material breach by the other Party
involving gross negligence, willful misfeasance, bad faith or a reckless
disregard of its obligations and duties under this Agreement provided that such
breach shall have remained unremedied for sixty (60) days or more after receipt
of written specification thereof.
<PAGE>
Section 11. Rights of Ownership. All computer programs and procedures
----------- -------------------
developed to perform services required to be provided by FPS under this
Agreement are the property of FPS. All records and other data except such
computer programs and procedures are the exclusive property of the Company and
all such other records and data will be furnished to the Company in appropriate
form as soon as practicable after termination of this Agreement for any reason.
Section 12. Amendments to Documents. The Company will furnish FPS written
----------- -----------------------
copies of any amendments to, or changes in, the Company Instrument, By-Laws,
Prospectus or Statement of Additional Information in a reasonable time prior to
such amendments or changes becoming effective. In addition, the Company agrees
that no amendments will be made to the Prospectus or Statement of Additional
Information of the Company which might have the effect of changing the
procedures employed by FPS in providing the services agreed to hereunder or
which amendment might affect the duties of FPS hereunder unless the Company
first obtains FPS' approval of such amendments or changes.
Section 13. Confidentiality. Both Parties hereto agree that any non-
----------- ---------------
public information obtained hereunder concerning the other Party is confidential
and may not be disclosed to any other person without the consent of the other
Party, except as may be required by applicable law or at the request of the U.S.
Securities and Exchange Commission or other governmental agency. FPS agrees that
it will not use any non-public information for any purpose other than
performance of its duties or obligations hereunder. The obligations of the
Parties under this Section will survive the termination of this Agreement. The
Parties further agree that a breach of this Section would irreparably damage the
other Party and accordingly agree that each of them is entitled, without bond or
other security, to an injunction or injunctions to prevent breaches of this
provision.
Section 14. Notices. Except as otherwise provided in this Agreement, any
----------- -------
notice or other communication required by or permitted to be given in connection
with this Agreement will be in writing and will be delivered in person or sent
by first class mail, postage prepaid or by prepaid overnight delivery service to
the respective parties as follows:
If to the Company: If to FPS:
------------------ ----------
The Stratton Funds, Inc. FPS Services, Inc.
610 W. Germantown Pike 3200 Horizon Drive
Plymouth Meeting, PA 19462 King of Prussia, PA 19406-0903
Attention: James W. Stratton Attention: Kenneth J. Kempf
Chairman President
Section 15. Amendment. No provision of this Agreement may be amended or
----------- ---------
modified in any manner except by a written agreement properly authorized and
executed by the Parties. This Agreement may be amended from time to time by
supplemental agreement executed by the Parties and the compensation stated in
Schedule "B" attached hereto may be adjusted accordingly as mutually agreed
upon.
Section 16. Authorization. The Parties represent and warrant to each
----------- --------------
other that the execution and delivery of this Agreement by the undersigned
officer of each Party has been duly and validly authorized; and when duly
executed, this Agreement will constitute a valid and legally binding enforceable
obligation of each Party.
Section 17. Counterparts. This Agreement may be executed in two or more
----------- ------------
counterparts, each of which when so executed will be deemed to be an original,
but such counterparts will together constitute but one and the same instrument.
Section 18. Assignment. This Agreement will extend to and be binding upon
----------- ----------
the Parties hereto and their respective successors and assigns; provided,
however, that this Agreement will not be assignable by the Company without the
written consent of FPS or by FPS without the written consent of the Company
which consent shall be authorized or approved by a resolution by its respective
Boards of Directors.
<PAGE>
Section 19. Governing Law. This Agreement will be governed by the laws of
----------- -------------
the State of Pennsylvania and the exclusive venue of any action arising under
this Agreement will be Montgomery County, Commonwealth of Pennsylvania.
Section 20. Severability. If any part, term or provision of this
----------- ------------
Agreement is held by any court to be illegal, in conflict with any law or
otherwise invalid, the remaining portion or portions will be considered
severable and not be affected and the rights and obligations of the parties will
be construed and enforced as if the Agreement did not contain the particular
part, term or provision held to be illegal or invalid, provided that the basic
agreement is not thereby materially impaired.
In Witness Whereof, the Parties hereto have caused this Agreement
consisting of twelve (12) typewritten pages, together with Schedules "A," "B"
and "C" to be signed by their duly authorized officers as of the day and year
first above written.
The Stratton Funds, Inc. FPS Services, Inc.
- ------------------------ ------------------
By:______________________________ By:______________________________
James W. Stratton, Chairman Kenneth J. Kempf, President
<PAGE>
Schedule "A"
============
Services to be provided by FPS Services, Inc.
---------------------------------------------
FPS Services, Inc., (FPS) will (i) provide its own office space, facilities,
equipment and personnel for the performance of its duties under this Agreement;
and (ii) take all actions it deems necessary to properly execute its
responsibilities hereunder.
1. SERVICES RELATED TO ADMINISTRATIVE SERVICES
- ------------------------------------------------
I. Regulatory Compliance
---------------------
A. Compliance - Federal Investment Company Act of 1940
1. Review, report and renew
a. investment advisory contracts
b. fidelity bond
c. underwriting contracts
d. distribution (12b-1) plans
e. administration contracts
f. accounting contracts
g. custody administration contracts
h. transfer agent and shareholder services
2. Filings
a. N-SAR (semi-annual report)
b. N-1A (prospectus), post-effective amendments and supplements
("stickers")
c. 24f-2 indefinite registration of shares
d. filing fidelity bond under 17g-1
e. filing shareholder reports under 30b2-1
3. Annual up-dates of biographical information and questionnaires for
Directors/Trustees and Officers
II. Corporate Business and Shareholder/Public Information
A. Directors/Trustees/Management
1. Preparation of meetings
a. agendas - all necessary items of compliance
b. arrange and conduct meetings
c. prepare minutes of meetings
d. keep attendance records
e. maintain corporate records/minute book
B. Coordinate Proposals
1. Printers
2. Auditors
3. Literature fulfillment
4. Insurance
C. Maintain Corporate Calendars and Files
D. Release Corporate Information
<PAGE>
1. To shareholders
2. To financial and general press
3. To industry publications
a. distributions (dividends and capital gains)
b. tax information
c. changes to prospectus
d. letters from management
e. funds' performance
4. Respond to:
a. financial press
b. miscellaneous shareholders inquiries
c. industry questionnaires
E. Communications to Shareholders
1. Coordinate printing and distribution of annual, semi-annual
reports, and prospectus
III. Financial and Management Reporting
A. Income and Expenses
1. Monitoring of expense accruals, budgets, expense payments and
expense caps
2. Approve and coordinate payment of expenses
3. Establish Funds' operating expense checking account and perform
monthly reconciliation of checking account
4. Calculation of advisory fee, 12b-1 fee and reimbursements to
fund, (if applicable)
5. Authorize the recording and amortization of organizational costs
and pre-paid expenses (supplied by advisor), for start-up funds
and reorganizations
6. Calculation of average net assets
7. Expense ratios calculated
B. Distributions to Shareholders
1. Calculations of dividends and capital gain distributions (in
conjunction with the fund and their auditors)
a. compliance with income tax provisions
b. compliance with excise tax provisions
c. compliance with Investment Company Act of 1940
2. Book/Tax identification and adjustments at required distribution
periods (in conjunction with the funds' auditors)
C. Financial Reporting
1. Liaison between fund management, independent auditors and
printers for semi-annual and annual shareholder reports
2. Preparation of semi-annual and annual reports to shareholders
3. Preparation of semi-annual and annual NSAR's (Financial Data)
<PAGE>
4. Preparation of Financial Statements for required SEC Post
Effective filings (if applicable)
5. Preparation of required performance graph (annually) (based on
advisor supplied indices)
D. Subchapter M Compliance (monthly)
1. Asset diversification and gross income tests
E. Other Financial Analyses
1. Upon request from fund management, other budgeting and analyses
can be constructed to meet the fund's specific needs (additional
fees may apply)
2. Sales information, portfolio turnover (monthly)
3. Work closely with independent auditors on tax reporting schedules
we prepare on return of capital presentation, excise tax
calculation
4. Performance (total return) calculation (monthly)
5. 1099 Miscellaneous - prepared and filed for Directors/Trustees
(annual)
6. Analysis of interest derived from various Government obligations
(annual) (if interest income was distributed in a calendar year)
7. Analysis of interest derived, by state, for Municipal Bond Funds
8. Review and characterize 1099-Dividend Forms
9. Prepare and coordinate with printer the printing and mailing of
1099-Dividend Insert Cards
F. Review and Monitoring Functions (monthly)
1. Review expense and reclassification entries to ensure proper
update
2. Perform various reviews to ensure accuracy of Accounting (the
monthly expense analysis) and Custody (review of daily bank
statements to ensure accurate expense money movement for expense
payments)
3. Review accruals, budgets and expenditures (where applicable)
G. Preparation and distribution of monthly operational reports to
management by 10th business day
1. Management Statistics (Recap)
a. portfolio summary
b. book gains/losses/per share
c. net income, book income/per share
d. capital stock activity
e. distributions
2. Performance Analysis (faxed to Fund 1/st/ workday of month)
a. total return
b. monthly, quarterly, year to date, average annual
3. Expense Analysis
a. schedule
b. summary of due to/from advisor
c. expenses paid
<PAGE>
d. expense cap
e. accrual monitoring
f. advisory fee
4. Portfolio Turnover
a. market value
b. cost of purchases
c. net proceeds of sales
d. average market value
5. Asset Diversification and Gross Income Tests
a. gross assets
b. non-qualifying assets
c. gross income test
6. Activity Summary
a. shares sold, redeemed and reinvested
b. change in investment
H. Provide rating agencies statistical data as requested
(monthly/quarterly)
I. Standard schedules for Board Package (Quarterly)
1. Activity Summary (III-G-7 from above)
2. Expense analysis
3. Other schedules can be provided (additional fees may apply)
IV. Blue Sky Administration
A. Sales Data
1. Receive daily sales figures through SUNGARD interface with Price
Waterhouse Blue 2 System.
2. Receive daily sales figures broken down by state from Charles
Schwab or other mutual fund marketplaces (if applicable).
3. Produce daily warning report for sales in excess of pre-
determined percentage.
4. Analysis of all sales data to determine trends within any state.
B. Filings
1. Produce and mail the following required filings:
a. Initial Filings - produce all required forms including
notification of SEC Effectiveness.
b. Renewals - produce all renewal documents and mail to states,
includes follow-up to ensure all is in order to continue
selling in states.
c. Sales Reports - produce all relevant sales reports for the
states and complete necessary documents to properly file
sales reports with states.
d. Prospectus Filings - file all copies of Definitive SAI &
Prospectuses with the states which require notification.
e. Post-Effective Amendment Filing - file all Post-Effective
Amendments with the states which require notification, as
well as, any other required documents.
2. On demand additional states - complete filing for any states that
you would like to add. This includes all of the items in 1(a).
<PAGE>
3. Amendments to current permits - file in a timely manner any
amendment to registered share amounts.
4. Update and file hard copy of all data pertaining to individual
permits.
C. Consulting and Analysis - We will supply you with the most current fee
structure for each state and help you decide what course of action to
take in each state to minimize the amount of money spent on Blue Sky
Registration.
2. SERVICES RELATED TO SHAREHOLDERS AND SHARE TRANSACTIONS
- ------------------------------------------------------------
A. Shareholder File
1. Establish new accounts and enter demographic data into shareholder
base. Includes in-house processing and National Securities Clearing
Corporation (NSCC) -Fund/SERV and/or Networking transmissions.
2. Create Customer Information File (CIF) to link accounts within the
Fund and across funds within the Fund Group. Facilitates account
maintenance, lead tracking, quality control, household mailings and
combined statements.
3. 100% quality control of new account information including verification
of initial investment.
4. Maintain account and customer file records based on shareholder
request and routine quality review.
5. Maintain tax ID certification and Non Resident Agent (NRA) records for
each account, including backup withholding.
6. Provide written confirmation of address changes.
7. Produce shareholder statements for daily activity, dividends, on-
request, interested party and periodic mailings.
8. Automated processing of dividends and capital gains with daily,
monthly, quarterly or annual distributions. Payment options include
reinvestment, directed payment to another fund, cash via mail, Fed
wire or ACH.
9. Image all applications, account documents, data changes,
correspondence, monetary transactions and other pertinent shareholder
documents.
B. Shareholder Services
1. Provide quality service through a staff of highly trained NASD
licensed customer service personnel, including phone, research and
correspondence representatives.
2. Answer shareholder calls: provide routine account information,
transaction details including direct and wire purchases, redemptions,
exchanges, systematic withdrawals, pre-authorized drafts, Fund/SERV
and wire order trades, problem solving and process telephone
transactions.
3. Silent monitoring of telephone representative calls by the phone
supervisor during live conversations to ensure exceptional customer
service.
4. Record and maintain tape recordings of all shareholder calls for a six
month period.
5. Phone Supervisor produces daily management reports of shareholder
calls which include tracking volume, call length, average wait time
and abandoned call rates to ensure quality service.
6. Phone representatives are thoroughly trained through in-house training
programs on the techniques of providing Exceptional Customer Service.
7. Customer inquiries received by letter or telephone are researched by a
correspondence team. These inquires include such items as
account/customer file information, complete historical account
information, stop payments on checks, transaction details and lost
certificates.
<PAGE>
8. Provide written correspondence in response to shareholder inquiries
and request through the CORRO Letter Writer system. Whenever possible,
unclear shareholder instructional letters are handled by a phone call
to the shareholder from our phone representatives to avoid delay in
processing of the request.
C. Investment Processing
1. Initial investment (checks or Fed wires)
2. Subsequent investments processed through lock box
3. Pre-authorized investments (PAD) through ACH system
4. Government allotments through ACH system
5. Wire order and NSCC - Fund/SERV trades
6. Prepare and process daily bank deposit of shareholder investments
D. Redemption Processing
1. Process mail redemption requests
2. Process telephone redemption transactions
3. Establish Systematic Withdrawal file and process automated
transactions on monthly basis
4. Provide wire order and NSCC - Fund/SERV trade processing
5. Distribute redemption proceeds to shareholder by check, wire or ACH
processing
E. Exchange & Transfer Processing
1. Process legal transfers
2. Process ACATS transfers
3. Issue and cancel certificates
4. Replace certificates through surety bonds (separate charge to
shareholder)
5. Process exchange transactions (letter and/or telephone requests)
F. Retirement Plan Services
1. Fund sponsored IRAs offered using Semper Trust Company as custodian.
Services include:
a. Contribution processing
b. Distribution processing
c. Apply rollover transactions
d. Process Transfer of Assets
e. Letters of Acceptance to prior custodians
f. Notify IRA holders of 70 1/2 requirements
g. Calculate Required Minimum Distributions (RMD)
h. Maintain beneficiary information file
i. Solicit birth date information
2. Fund sponsored SEP-IRA plans offered using Semper Trust Company as
custodian. Services include those listed under IRAs and:
a. Identification of employer contributions
<PAGE>
3. Fund sponsored Qualified plans offered:
a. Plan document available
b. Omnibus/master account processing only
c. Produce annual statements
d. Process contributions
e. Process distributions
f. Process rollover and Transfer of Assets transactions
G. Settlement & Control
1. Daily review of processed shareholder transactions to assure input was
processed correctly. Accurate trade activity figures passed to the
Fund's Accounting Agent.
2. Preparation of daily cash movement sheets to be passed to the Fund's
Accounting Agent and Custodian Bank for use in determining the Fund's
daily cash availability.
3. Prepare a daily share reconcilement which balances the shares on the
Transfer Agent system to those on the books of the Fund.
4. Resolve any outstanding share or cash issues that are not cleared by
trade date + 2.
5. Process shareholder adjustments to also include the proper
notification of any booking entries needed, as well as any necessary
cash movement.
6. Settlement and review of the Fund's declared dividends and capital
gains will include the following:
a. Review of record date report for accuracy of shares
b. Prepare dividend settlement report after dividend is posted
c. Verify the posting date shares, the rate used and the NAV price
of reinvest date to ensure dividend was posted properly
d. Distribute copies to the Fund's Accounting Agent
e. Prepare the checks prior to being mailed
f. Send any dividends via wire, if requested
g. Prepare cash movement sheets for the cash portion of the dividend
payout on payable date
7. Placement of stop payments on dividend and liquidation checks as well
as the issuance of their replacements.
8. Maintain inventory control for stock certificates and dividend check
form.
9. Aggregate tax filings for all FPS clients. Monthly deposits are made
to the IRS for all taxes withheld from shareholder disbursements,
distributions and foreign account distributions. Correspond with the
IRS concerning any of the above issues.
10. Timely settlement and cash movement for all NSCC - Fund/SERV activity.
H. Year-End Processing
1. Maintain shareholder records in accordance with IRS notices for under-
reporting and invalid tax IDs. This includes initiating 31% backup
withholding and notifying shareholders of their tax status and the
corrective action which is needed.
2. Conduct annual W-9 solicitation of all uncertified accounts. Update
account tax status to reflect backup withholding or certified status
depending upon responses.
3. Conduct periodic W-8 solicitation of all non-resident alien
shareholder accounts. Update account tax status with updated
shareholder information and treaty rates for NRA tax.
4. Review IRS Revenue Procedures for changes in transaction and
distribution reporting and specifications for the production of forms
to ensure compliance.
<PAGE>
5. Coordinate year-end activity with client. Activities include producing
year-end statements, scheduling record dates for year-end dividends
and capital gains, production of combined statements and printing of
inserts to be mailed with tax forms.
6. Distribute Dividend Letter to funds for them to sign off on all
distributions paid year-to-date. Dates and rates must be authorized so
that they can be used for reporting to the IRS.
7. Coordinate the ordering of forms and envelopes from vendors in
preparation of tax reporting. Compare forms with IRS requirements to
ensure accuracy. Upon receipt of forms and envelopes, allocate space
for storage.
8. Prepare form flashes for the microfiche vendor. Test and oversee the
production of fiche for year-end statements and tax forms.
9. Match and settle tax reporting totals to fund records and on-line data
from INVESTAR.
10. Produce forms 1099R, 1099B, 1099Div, 5498, 1042S and year-end
valuations. Quality assure forms before mailing to shareholders.
11. Monitor IRS deadlines and special events such as crossover dividends
and prior year IRA contributions.
12. Prepare magnetic tapes and appropriate forms for the filing of all
reportable activity to the IRS.
I. Client Services
1. An Account Manager is assigned to each relationship and is the liaison
between the Fund and the Transfer Agency staff. Responsibilities
include scheduling of events, system enhancement implementation,
special promotion/event implementation and follow-up and constant fund
interaction on daily operational issues.
Specifically:
a. Scheduling of dividends, proxies, report mailings and special
mailings
b. Coordinating with the Fund the shipment of materials for
scheduled mailings
c. Acting as liaison between the Fund and support services for
preparation of proofs and eventual printing of statement forms,
certificates, proxy cards, envelopes, etc.
d. Handling all notification to the client regarding proxy
tabulation through the meeting - coordinate scheduling of
materials, including voted cards, tabulation letters and
shareholder list to be available for the meeting
e. Ordering special reports, tapes and/or discs for special systems
requests received
f. Implementing new operational procedures, i.e., check writing
feature, load discounts, minimum waivers, sweeps, telephone
options, PAD promotions, etc.
g. Coordinating with systems, services and operations, special
events, i.e., mergers, new fund start ups, small account
liquidations, combined statements, household mailings, additional
mail files
h. Preparing standard operating procedures and review prospectuses -
coordinate implementation of suggested changes with the Fund
i. Acting as liaison between the Fund and the Transfer Agency staff
regarding all service and operational issues
2. Blue Sky Processing
a. Maintain file with additions, deletions, changes and updates at
the Fund's direction
J. Other Related Services (not included in this Agreement)
1. Systematic linkage of shareholder accounts with exact matches on SSN
and address for the purpose of consolidated account history reporting.
Periodic production of laser printed combined statements.
2. Production of household mailing labels which enable the Fund to do
special mailings to each address in the Fund Group rather than each
account.
3. Produce shareholder lists, labels and ad hoc reports to Fund
management as requested.
<PAGE>
DAILY REPORTS
-------------
REPORT NUMBER REPORT DESCRIPTION
------------- ------------------
-- Daily Activity Register
024 Tax Reporting Proof
051 Cash Receipts and Disbursement Proof
053 Daily Share Proof
091 Daily Gain/Loss Report
104 Maintenance Register
044 Transfer/Certificate Register
056 Blue Sky Warning Report
MONTHLY REPORTS
---------------
REPORT DESCRIPTION
------------------
Blue Sky
Certificate Listing
State Sales and Redemption
Monthly Statistical Report
Account Demographic Analysis
MTD Sales - Demographics by Account Group
Account Analysis by Type
3. SERVICES RELATED TO PORTFOLIO VALUATION AND MUTUAL FUND ACCOUNTING
- -----------------------------------------------------------------------
All financial data provided to, processed and reported by FPS under this
Agreement shall be in United States dollars. FPS' obligation to convert, equate
or deal in foreign currencies or values extends only to the accurate
transposition of information received from the various pricing and information
services.
A. Daily Accounting Services
1. Calculate Net Asset Value ("NAV") Per Share:
. Update the daily market value of securities held by the Fund using
FPS's standard agents for pricing U.S. equity and bond securities. The
U.S. equity pricing services are Reuters, Inc., Muller Data
Corporation, J.J. Kenny Co., Inc. and Interactive Data Corporation
(IDC). Muller Data, Dow Jones Markets (formerly Telerate Systems,
Inc.), J.J. Kenny Co., Inc., Municipal Market Data and IDC are also
used for bond and money market prices/yields. Bloomberg is available
and used for price research.
. Enter limited number of manual prices supplied by The Stratton Funds,
Inc. and/or broker.
. Prepare NAV proof sheet. Review components of change in NAV for
reasonableness.
. Review variance reporting on-line and in hard copy for price changes
in individual securities using variance levels established by The
Stratton Funds, Inc. Verify U.S.
dollar security prices exceeding variance levels by notifying The
Stratton Funds, Inc. and pricing sources of noted variances.
. Review for ex-dividend items indicated by pricing sources; trace to
Fund's general ledger for agreement.
. Communicate pricing information (NAV) to The Stratton Funds, Inc.,
Fund's transfer agent ("Transfer Agent") and electronically to NASDAQ.
2. Determine and Report Cash Availability to The Stratton Funds, Inc. by
approximately 9:30 a.m. Eastern Time:
. Receive daily cash and transaction statements from the agent
responsible for the safekeeping of the Fund's assets (the "Custodian")
by 8:30 a.m. Eastern time.
. Receive previous day shareholder activity reports from the Transfer
Agent by 8:30 a.m. Eastern time.
. Fax hard copy Cash Availability calculations with all details to The
Stratton Funds, Inc.
. Supply The Stratton Funds, Inc. with 3-day cash projection report.
. Prepare daily bank cash reconciliations. Notify the Custodian and The
Stratton Funds, Inc. of any reconciling items.
<PAGE>
3. Reconcile and Record All Daily Expense Accruals:
. Accrue expenses based on budget supplied by The Stratton Funds, Inc.
either as percentage of net assets or specific dollar amounts.
. If applicable, monitor expense limitations established by The Stratton
Funds, Inc.
. If applicable, accrue daily amortization of organizational expense.
. If applicable, complete daily accrual of 12b-1 expenses.
4. Verify and Record All Daily Income Accruals for Debt Issues:
. Review and verify all system generated Interest and Amortization
reports.
. Establish unique security codes for bond issues to permit segregated
trial balance income reporting.
5. Monitor Securities Held for Cash Dividends, corporate actions and capital
changes such as splits, mergers, spinoffs, etc. and process appropriately.
. Monitor electronically received information from Muller Data
Corporation for all domestic securities.
. Review current daily security trades for dividend activity.
. Monitor collection and postings of corporate actions, dividends and
interest.
6. Enter All Security Trades on Investment Accounting System (IAS) based on
written instructions from the Fund's Advisor.
. Review system verification of trade and interest calculations.
. Verify settlement through statements supplied by the Custodian.
. Maintain security ledger transaction reporting.
. Maintain tax lot holdings.
. Determine realized gains or losses on security trades.
. Provide broker commission reporting.
7. Enter All Fund Share Transactions on IAS:
. Process activity identified on reports supplied by the Transfer Agent.
. Verify settlement through statements supplied by the Custodian.
. Reconcile to FPS's Transfer Agent report balances.
8. Prepare and Reconcile/Prove Accuracy of the Daily Trial Balance (listing
all asset, liability, equity, income and expense accounts).
. Post manual entries to the general ledger.
. Post Custodian activity.
. Post security transactions.
. Post and verify system generated activity, i.e. income and expense
accruals.
. Prepare general ledger net cash proof used in NAV calculation.
9. Review and Reconcile with Custodian Statements:
. Verify all posted interest, dividends, expenses and shareholder and
security payments/receipts, etc. (Discrepancies will be reported to
the Custodian).
. Post all cash settlement activity to the trial balance.
. Reconcile to ending cash balance accounts.
. Clear IAS subsidiary reports with settled amounts.
. Track status of past due items and failed trades as reported by the
Custodian.
10. Submission of Daily Accounting Reports to The Stratton Funds, Inc.:
(Additional reports readily available)
. Trial Balance.
. Portfolio Valuation (listing inclusive of holdings, costs, market
values, unrealized appreciation/depreciation and percentage of
portfolio comprised of each security).
. NAV Calculation Report.
. Cash Availability
. 3-Day Cash Projection Report.
B. Monthly Accounting Services
1. Full Financial Statement Preparation (automated Statements of Assets and
Liabilities, of Operations and of Changes in Net Assets) and submission to
The Stratton Funds, Inc. by 10th business day.
<PAGE>
2. Submission of Monthly Automated IAS Reports to The Stratton Funds, Inc.:
. Security Purchase/Sales Journal.
. Interest and Maturity Report.
. Brokers Ledger (Commission Report).
. Security Ledger Transaction Report with Realized Gains/Losses.
. Security Ledger Tax Lot Holdings Report.
. Additional reports available upon request.
3. Reconcile Accounting Asset Listing to Custodian Asset Listing:
. Report any security balance discrepancies to the Custodian/The Stratton
Funds, Inc.
4. Provide Monthly Analysis and Reconciliation of Additional Trial Balance
Accounts,
such as:
. Security cost and realized gains/losses.
. Interest/dividend receivable and income.
. Payable/receivable for securities purchased and sold.
. Payable/receivable for fund shares; issued and redeemed.
. Expense payments and accruals analysis.
5. If Appropriate, Prepare and Submit to The Stratton Funds, Inc. (additional
fees may apply):
. Income by state reporting
. Standard Industry Code Valuation Report.
. Alternative Minimum Tax Income segregation schedule
. SEC yield reporting (non-money market funds with domestic and ADR
securities only).
C. Annual (and Semi-Annual) Accounting Services
1. Annually assist and supply Fund's auditors with schedules supporting
securities and shareholder transactions, income and expense accruals, etc.
during the year in accordance with standard audit assistance requirements.
2. Provide N-SAR Reporting (Accounting Questions) on a Semi-Annual Basis:
If applicable, answer the following items: 2, 12B, 20, 21, 22, 23, 28, 30A,
31, 32, 35, 36, 37, 43, 53, 55, 62, 63, 64B, 71, 72, 73, 74, 75 and 76
D. Accounts and Records
On each day the NYSE is open for regular trading and subject to the proper
receipt (via Oral or Written Instructions) by FPS of all information
required to fulfill its duties under this Agreement, FPS will maintain and
keep current the following Accounts and Records and any other records
required to be kept pursuant to Rule 31a-1 of the Act relating to the
business of the Series in such form as may be mutually agreed upon between
the Trust and FPS:
(1) Net Asset Value Calculation Reports;
(2) Cash Receipts Report;
(3) Cash Disbursements Report;
(4) Dividends Paid and Payable Schedule;
(5) Purchase and Sales Journals - Portfolio Securities;
(6) Subscription and Redemption Reports;
(7) Security Ledgers - Transaction Report and Tax Lot Holdings Report;
(8) Broker Ledger - Commission Report;
(9) Daily Expense Accruals;
(10) Daily Interest Accruals;
(11) Daily Trial Balance;
(12) Portfolio Interest Receivable and Income Reports;
(13) Portfolio Dividend Receivable and Income Reports;
(14) Listing of Portfolio Holdings - showing cost, market value and
percentage of portfolio comprised of each security; and
(15) Average Daily Net assets provided on monthly basis.
<PAGE>
E. Protocol concerning accuracy of Pricing Portfolio Securities
FPS shall perform the ministerial calculations necessary to calculate the
net asset value each day that the New York Stock Exchange is open for
business, in accordance with; (i) the current Prospectus and Statement of
Additional Information for each Series, and (ii) procedures with respect
thereto approved by the Board of Trustees of the Trust and supplied in
writing to FPS. Portfolio items for which market quotations are available
by FPS' use of an automated financial information service (the "Service")
shall be based on the closing prices of such Service except where a Series
or the Advisor has given or caused to be given specific Written or Oral
Instructions to utilize a different value subject to the appropriate
provisions in each Series' Prospectus and Statement of Additional
Information then in effect. All of the portfolio securities shall be given
such values as the applicable Series or the Advisor provides by Written or
Oral Instructions including all restricted securities and other securities
requiring valuation not readily ascertainable solely by such Service
subject to the appropriate provisions in the Series' Prospectus and
Statement of Additional Information then in effect.
FPS will have no responsibility or liability for (i) the accuracy of prices
quoted by such Service; (ii) the accuracy of the information supplied by
the a Series; or (iii) any loss, liability, damage, or cost arising out of
any inaccuracy of such data. FPS will have no responsibility or duty to
include information or valuations to be provided by a Series in any
computation unless and until it is timely supplied to FPS in usable form.
FPS will record corporate action information as received from the
Custodians, the Service or a Series. FPS will not have any duty to gather
or record corporate action information not supplied by these sources.
FPS will assume no liability for price changes caused by the Advisor or any
subadvisor, Custodian, suppliers of security prices, corporate action and
dividend information, or any party other than FPS itself.
F. Protocol regarding Receipt of Instructions
For all purposes under this Agreement, FPS is authorized to act upon
receipt of the first of any Written or Oral Instruction it receives from
the Trust on behalf of a Series or its agents on behalf of the Trust. In
cases where the first instruction is an Oral Instruction that is not in the
form of a document or written record, a confirmatory Written Instruction or
Oral Instruction in the form of a document or written record will be
delivered, and in cases where FPS receives an Instruction, whether Written
or Oral, to enter a portfolio transaction on the records, the Trust will
cause the broker/dealer to send a written confirmation to the Custodian.
FPS will be entitled to rely on the first Oral or Written Instruction
received and any act or omission undertaken in compliance therewith will be
free of liability and fully indemnified and held harmless by the applicable
Series, provided, however, that in the event a Written or Oral Instruction
received by FPS is countermanded by a subsequent Written or Oral
Instruction received by FPS prior to acting upon such countermanded
Instruction, FPS will act upon such subsequent Written or Oral Instruction.
The sole obligation of FPS with respect to any follow-up or confirmatory
Written Instruction or Oral Instruction in documentary or written form will
be to make reasonable efforts to detect any such discrepancy between the
original Instruction and such confirmation and to report such discrepancy
to the applicable Series. The Series will be responsible, at the Series'
expense, for taking any action, including any reprocessing, necessary to
correct any discrepancy or error. To the extent such action requires FPS to
act, the Trust will give FPS specific Written Instruction as to the action
required.
G. Accounting Services Basic Assumptions for the Funds
The Accounting Fees as set forth in Schedule "B" are based on the following
assumptions. To the extent these assumptions are inaccurate or requirements
change, fee revisions may be necessary.
1. The Funds portfolio asset composition will be domestic equity, debt and
money market issues. Trading activity is expected to be moderate, with an
annual turnover rate not to exceed 100%.
2. Each Fund has a tax year-end which coincides with its fiscal year-end. No
additional accounting requirements are necessary to identify or maintain
book-tax differences. FPS does not provide security tax accounting which
differs from its book accounting under this fee schedule.
3. Each Fund agrees to the use of FPS' standard current pricing services for
domestic equity, debt and ADR securities.
It is assumed that FPS will work closely with each Fund to ensure the
accuracy of the Funds' NAV and to obtain the most satisfactory pricing
sources and specific methodologies. Each Fund will establish security
variance procedures to minimize NAV miscalculations.
<PAGE>
4. To the extent a Fund requires a limited number of daily security prices
from specific brokers (as opposed to pricing information received
electronically), these manual prices will be obtained by the Funds' Advisor
and faxed to FPS by 4:00 p.m. Eastern time for inclusion in the NAV
calculations. The Advisor will supply FPS with the appropriate pricing
contacts for these manual quotes.
5. FPS will supply weekly Portfolio Valuation Reports to each Funds' Advisor
identifying current security positions, original/amortized cost, security
market values and changes in unrealized appreciation/depreciation. It will
be the responsibility of the Advisor to review these reports and to
promptly notify FPS of any possible problems, trade discrepancies,
incorrect security prices or corporate action/capital change information
that could result in a misstated NAV.
6. Each Fund does not currently expect to invest in Open-end Regulated
Investment Company's (RIC's), Swaps, Futures, Hedges, Derivatives or
foreign (non-U.S. dollar denominated) securities and currency. To the
extent these investment strategies should change, additional fees may apply
after the appropriate procedural discussions have taken place between FPS
and Fund management. (Two weeks advance notice is required should the Funds
commence trading in these investments.)
7. Each Fund will supply FPS with income information such as accrual methods,
interest payment frequency details, coupon payment dates, floating rate
reset dates, and complete security descriptions with issue types and
cusip/Sedol numbers for all debt issues. The Funds' Advisor shall supply
the yield to maturity, related cash flow schedules and principal repayment
factors for any mortgage/asset-backed securities held in the Fund not
available on Bloomberg.
Any income accrual adjustments (to the extent necessary) based upon initial
estimates will be completed by FPS when actual principal/income payments
are collected by the Custodian and reported to FPS.
8. FPS will use the ICI/NAREIT Tracking System along with Bloomberg to obtain
receipt of complete and accurate information on REITs for entry into the
FPS Investment Accounting System (IAS). The Advisor will also
supply/support FPS in timely receipt of dividend information and return of
capital characterization for the REITs held in each Fund, if not available
from the ICI or Bloomberg systems.
To the extent applicable, FPS will maintain on a daily basis U.S. dollar-
denominated qualified covered call options and index options reporting on
the daily Trial Balance and value the respective options and underlying
positions. This Agreement does not provide for tax classifications if they
are required.
9. Each Fund is responsible for the establishment and monitoring of any
segregated accounts pertaining to any line of credit for temporary
administrative purposes, and/or leveraging/hedging the portfolio. FPS will
reflect appropriate trial balance account entries for interest expense
accrual charges on the daily trial balance adjusting as necessary at month-
end.
10. If a Fund commences participation in security lending or short sales within
its portfolio securities, additional fees apply as identified in the Fee
Schedule. Should a Fund require these additional services, procedural
discussions must take place between FPS and the Funds' Advisor to clarify
responsibilities. (Two weeks advance notice to FPS is required should a
Fund desire to participate in the above.)
11. The following specific deadlines will be met and complete information will
be supplied by each Fund in order to minimize any settlement problems, NAV
miscalculations or income accrual adjustments.
Each Fund will direct its Advisor to provide Trade Authorization Forms to
FPS with the appropriate officer's signature on all security trades placed
by the Fund no later than 12:30 p.m. Eastern time on settlement/value date
for short term money market securities issues (assuming that trade date
equals settlement date); and by 11:00 a.m. Eastern time on trade date plus
one for non-money market securities. Receipt by FPS of trade information
within these identified deadlines may be made via telex, fax or on-line
system access. The Advisor will supply FPS with the trade details in
accordance with the above stated deadlines.
The Advisor will provide all information required by FPS, including
cusip/Sedol numbers and/or ticker symbols for all trades on the Trade
Authorization, telex or on-line support. FPS will not be responsible for
NAV changes or distribution rate adjustments that result from incomplete
trade information.
<PAGE>
12. To the extent a Fund utilizes purchases in-kind (U.S. dollar denominated
securities only) as a method for shareholder subscriptions, FPS will
provide the Fund with procedures to properly handle and process such
transactions. Should a Fund prefer procedures other than those provided by
FPS, additional fees may apply. Discussions shall take place at least two
weeks in advance between FPS and the Fund to clarify the appropriate in-
kind operational procedures to be followed.
13. The Parties will establish mutually agreed upon amortization procedures and
accretion requirements for debt issues held by the Fund prior to
commencement of operations/conversion. Adjustments for financial statements
regarding any issues with original issue discount (OID) are not included
under this Agreement. Each Fund will direct its independent auditors to
complete the necessary OID adjustments for financial statements and/or tax
reporting.
14. The Accounting fees assume FPS will provide Custody Administration and/or
Transfer Agency Services.
4. SERVICES RELATED TO CUSTODY ADMINISTRATION
- ---------------------------------------------
. Assign a Custody Administrator to accept, control and process The Stratton
Funds, Inc.'s daily portfolio transactions through direct computer link
with the Custodian.
. Match and review DTC eligible ID's and trade information with The Stratton
Funds, Inc.'s instructions for accuracy and coordinating with the Custodian
and The Stratton Funds, Inc.'s Accounting agent for recording and
affirmation processing with the depository.
. Systematically settle all depository eligible issues. Transactions
requiring physical delivery will be settled through the Custodian's New
York office.
. Assist The Stratton Funds, Inc. in placing cash management trades through
Custodian, such as commercial paper, CD's and repurchase agreements.
. Provide The Stratton Funds, Inc.'s Fund Accounting agent and Investment
Advisor with daily custodian statements reflecting all prior day cash
activity on behalf of each portfolio by 8:30 a.m. Eastern time. Complete
descriptions of any posting, inclusive of Sedol/cusip numbers,
interest/dividend payment date, capital stock details, expense
authorizations, beginning/ending cash balances, etc., will be provided by
the Custodian's reports or system.
. Provide monthly activity statements combining both cash changes and
security trades, and a full portfolio listing.
. Communicate to The Stratton Funds, Inc. and The Stratton Funds, Inc.'s Fund
Accounting agent on any corporate actions, capital changes and interest
rate changes supported by appropriate supplemental reports received from
the Custodian. Follow-up will be made with the Custodian to ensure all
necessary actions and/or paperwork is completed.
. Work with Fund Accounting and the Custodian on monthly asset
reconciliations.
. Coordinate and resolve unsettled dividends, interest, paydowns and capital
changes. Assist in resolution of failed transactions and any settlement
problems.
. Arrange for securities lending, lines of credit and/or letters of credit
through the Custodian.
. Provide automated mortgage-backed processing through the Custodian.
. Provide broker interface ensuring trade settlement with fail trade follow-
up.
. Provide The Stratton Funds, Inc.'s auditors with trade documentation to
help expedite the fund's audit.
<PAGE>
SCHEDULE "B"
============
Fee Schedule
For
The Stratton Funds, Inc.
(Except as noted below, fees are quoted from effective date through February 28,
1999)
I. Fees Related to Fund Administration (1/12th payable monthly)
Stratton Small-Cap Yield Fund - $30,000 per year
Stratton Special Value Fund - $10,000 per year
II. Fees Related to Shareholder Servicing (1/12th payable monthly)
A. $13.00 per account per year per portfolio
$1.00 per account redemption fee
B. IRA's, 403(b) Plans, Defined Contribution/Benefit Plans:
Annual Maintenance Fee - $12.00 per account per year
(Normally charged to participants)
C. FUND/SERV Processing (If Applicable)
$50.00 Per month/per fund monthly maintenance fee
D. Networking Processing (If Applicable)
$75.00 Per month/per fund monthly maintenance fee
III. Fees Related to Fund Accounting and Portfolio Valuation
A. Annual Fee Schedule for Stratton Small-Cap Yield Fund: U.S. Dollar
Denominated Securities only (1/12th payable monthly)
$20,000 Annual Fee (which fee will be for a term of 5 months from the
Effective Date, and thereafter will be subject to renegotiation).
B. Annual Fee Schedule for Stratton Special Value Fund effective January
1, 1998:
U.S. Dollar Denominated Securities only (1/12th payable monthly)
<TABLE>
<S> <C>
$25,000 Minimum to $ 20 Million of Average Net Assets
.0003 On Next $ 30 Million of Average Net Assets
.0002 On Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
</TABLE>
C. Annual Fee Schedule for Stratton Special Value Fund Upon Commencement
of Short Sales per Complex Domestic Portfolio: (1/12th payable monthly)
<TABLE>
<S> <C>
$30,000 Minimum to $ 20 Million of Average Net Assets
.0003 On Next $ 30 Million of Average Net Assets
.0002 On Next $ 50 Million of Average Net Assets
.0001 Over $100 Million of Average Net Assets
</TABLE>
D. Pricing Services Quotation Fee
Specific costs will be identified based upon options selected by the
client and will be billed monthly.
FPS does not currently pass along charges for U.S. equity prices
supplied by Muller Data. Should the Fund invest in security types other
than domestic equities supplied by Muller, the following fees would
apply.
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
MULLER DATA INTERACTIVE DATA J.J. KENNY CO.,
SECURITY TYPES CORP.* CORP.* INC.*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Bonds $ .50 $ .50 $ .25 (a)
- ------------------------------------------------------------------------------------------------------
Mortgage-Backed (evaluated, seasoned, closing) .50 .50 .25 (a)
- ------------------------------------------------------------------------------------------------------
Corporate Bonds (short and long term) .50 .50 .25 (a)
- ------------------------------------------------------------------------------------------------------
U.S. Municipal Bonds (short and long term) .55 .80 .50 (b)
- ------------------------------------------------------------------------------------------------------
CMO's/ARM's/ABS 1.00 .80 1.00 (a)
- ------------------------------------------------------------------------------------------------------
Convertible Bonds .50 .50 1.00 (a)
- ------------------------------------------------------------------------------------------------------
High Yield Bonds .50 .50 1.00 (a)
- ------------------------------------------------------------------------------------------------------
Mortgage-Backed Factors (per Issue per Month) 1.00 n/a n/a
- ------------------------------------------------------------------------------------------------------
U.S. EQUITIES (D) .15 n/a
- ------------------------------------------------------------------------------------------------------
U.S. Options n/a .15 n/a
- ------------------------------------------------------------------------------------------------------
Domestic Dividends & Capital Changes
(per Issue per Month) (d) 3.50 n/a
- ------------------------------------------------------------------------------------------------------
Foreign Securities .50 .50 n/a
- ------------------------------------------------------------------------------------------------------
Foreign Securities Dividends & Capital Changes
(per Issue per Month) 2.00 4.00 n/a
- ------------------------------------------------------------------------------------------------------
Set-up Fees n/a n/a (e) .25 (c)
- ------------------------------------------------------------------------------------------------------
All Added Items n/a n/a .25 (c)
======================================================================================================
</TABLE>
* Based on current Vendor costs, subject to change. Costs are quoted
based on individual security CUSIP/identifiers and are per issue per
day.
(a) $35.00 per day minimum
(b) $25.00 per day minimum
(c) $ 1.00, if no cusip
(D) AT NO ADDITIONAL COST TO FPS CLIENTS
(e) Interactive Data also charges monthly transmission costs and disk
storage charges.
A) FUTURES AND CURRENCY FORWARD CONTRACTS $2.00 per Issue per Day
B) DOW JONES MARKETS (FORMERLY TELERATE SYSTEMS, INC.)* (if applicable)
*Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected by the
client and will be billed monthly.
C) REUTERS, INC.*
*Based on current vendor costs, subject to change.
FPS does not currently pass along charges for domestic security prices
supplied by Reuters, Inc.
D) MUNICIPAL MARKET DATA* (if applicable)
*Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected by the
client and will be billed monthly.
E. SEC Yield Calculation: (if applicable)
Provide up to 12 reports per year to reflect the yield calculations for
non-money market Funds required by the SEC, $1,000 per year per Fund. For
multiple class Funds, $1,000 per year per class. Daily SEC yield reporting
is available at $3,000 per year per Fund (US dollar denominated securities
only).
<PAGE>
IV. Fees Related to Custody Administration of Fund Assets Using Bank of New
York
A. Domestic Securities and ADRS Per Portfolio : (1/12th payable monthly)
U.S. Dollar Denominated Securities only
<TABLE>
<S> <C> <C>
.00065 On First $ 10 Million of Average Net Assets
.00035 On the Next $ 20 Million of Average Net Assets
.00025 On the Next $ 20 Million of Average Net Assets
.000175 On the Next $ 50 Million of Average Net Assets
.00015 Over $100 Million of Average Net Assets
</TABLE>
B. Custody Domestic Securities Transactions Charge: (billed monthly)
Book Entry DTC, Federal Book Entry $14.00
Physical Securities $24.50
A transaction includes buys, sells, maturities or free security
movements.
C. When Issued, Securities Lending, Index Futures, etc.: Should any
investment vehicle require a separate segregated custody account, a
fee of $125 per account per month will apply. THIS FEE IS WAIVED FOR
BOTH FUNDS.
D. Custody Miscellaneous Fees
Administrative fees incurred in certain local markets will be passed
onto the customer with a detailed description of the fees. Fees
include income collection, corporate action handling, overdraft
charges, funds transfer, special local taxes, stamp duties,
registration fees, messenger and courier services and other out-of-
pocket expenses.
V. Out-of-Pocket Expenses
The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-
pocket expenses, including telephone, postage, EDGAR filings, Fund/SERV and
Networking expenses, shareholder statements, incoming wire charges,
telecommunications, special reports, record retention, special transportation
costs, copying and sending materials to auditors and/or regulatory agencies as
incurred and approved.
VI. Additional Services
To the extent the Funds commence using investment techniques such as Security
Lending, Swaps, Leveraging, Short Sales, Derivatives, Precious Metals, or
foreign (non-U.S.D.) securities and currency, additional fees will apply.
Activities of a non-recurring nature such as shareholder in-kinds, fund
consolidations, mergers or reorganizations will be subject to negotiation. To
the extent that the Funds should decide to issue multiple/separate classes of
shares, additional fees will apply. Any additional/enhanced services,
programming requests, or reports will be quoted upon request.
<PAGE>
SCHEDULE "C"
============
Identification of Account
-------------------------
Below are listed the separate accounts of The Stratton Funds, Inc. to which
services under this Agreement are to be performed as of the Execution Date of
this Agreement.
Stratton Small-Cap Yield Fund
Stratton Special Value Fund
This Schedule "C" may be amended from time to time by agreement of the Parties.
<PAGE>
EXHIBIT 24(b) 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement, (Form N-
1A), and related Statement of Additional Information of Stratton Small-Cap Yield
Fund, a series of The Stratton Funds, Inc. and to the inclusion of our report
dated January 16, 1998 to the Shareholders and Board of Directors of The
Stratton Funds, Inc.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 14, 1998
<PAGE>
EXHIBIT 24(b) 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement, (Form N-
1A), and related Statement of Additional Information of Stratton Special Value
Fund, a series of The Stratton Funds, Inc. and to the inclusion of our report
dated January 16, 1998 to the Shareholders and Board of Directors of The
Stratton Funds, Inc.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 14, 1998
<PAGE>
[ARTICLE] 6
[CIK] 0000896165
[NAME] THE STRATTON FUNDS, INC.
[SERIES]
[NUMBER] 2
[NAME] STRATTON SPECIAL VALUE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] MAR-31-1998
[INVESTMENTS-AT-COST] 5,263,473
[INVESTMENTS-AT-VALUE] 5,684,200
[RECEIVABLES] 2,405
[ASSETS-OTHER] 238,097
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 5,924,702
[PAYABLE-FOR-SECURITIES] 212,150
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 212,150
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 5,164,767
[SHARES-COMMON-STOCK] 338,539
[SHARES-COMMON-PRIOR] 7,000
[ACCUMULATED-NII-CURRENT] 1,389
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 125,669
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 420,727
[NET-ASSETS] 5,712,552
[DIVIDEND-INCOME] 12,397
[INTEREST-INCOME] 2,863
[OTHER-INCOME] 0
[EXPENSES-NET] 13,871
[NET-INVESTMENT-INCOME] 1,389
[REALIZED-GAINS-CURRENT] 125,669
[APPREC-INCREASE-CURRENT] 420,727
[NET-CHANGE-FROM-OPS] 547,785
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 331,539
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 5,607,552
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 7,413
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 13,871
[AVERAGE-NET-ASSETS] 4,018,868
[PER-SHARE-NAV-BEGIN] 15.
[PER-SHARE-NII] .014
[PER-SHARE-GAIN-APPREC] 1.856
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 16.87
[EXPENSE-RATIO] 1.40
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
