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Stratton Special Value Fund
PROSPECTUS
December 31, 1997
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
Stratton Special Value Fund (the "Fund") is a separate, diversified investment
portfolio offered by The Stratton Funds, Inc. (the "Company"), a no-load
open-end series management investment company. The Fund's investment objective
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 which represent a value or
potential worth which is not fully recognized by prevailing market prices.
This 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 Fund that
prospective investors ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
Additional information about the Fund has been filed with the U.S. Securities
and Exchange Commission and is available upon request and without charge by
calling or writing the Fund 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 Fund is maintained
electronically with the U.S. Securities and Exchange Commission 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.
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Stratton Special Value Fund - Prospectus
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TABLE OF CONTENTS
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Introduction....................................................................
Fee Table.......................................................................
Investment Objective, Policies, Restrictions and Risk Considerations............
Portfolio Turnover..............................................................
Management of the Fund..........................................................
Investment Advisor..............................................................
Computation of Net Asset Value .................................................
How to Buy Fund Shares .........................................................
Investing by Mail.............................................................
Investing by Wire.............................................................
Automatic Investment Plan.....................................................
Direct Deposit Program........................................................
Reinvestment of Income Dividends and Capital Gains Distributions..............
Additional Information........................................................
How to Redeem Fund Shares.......................................................
By Written Request............................................................
By Automated Clearing House ("ACH")...........................................
Systematic Cash Withdrawal Plan...............................................
Additional Information........................................................
Exchange Privilege .............................................................
Retirement Plans................................................................
Tax Treatment: Dividends and Distributions .....................................
Performance Calculations .......................................................
Description of Common Stock ....................................................
Service Providers and Underwriter...............................................
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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 FUND'S DISTRIBUTOR, FPS BROKER SERVICES, INC., 3200 HORIZON
DRIVE, P.O. BOX 61503, KING OF PRUSSIA, PA 19406-0903, OR BY TELEPHONING
800-634-5726.
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Stratton Special Value Fund - Prospectus
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INTRODUCTION Stratton Special Value Fund (the "Fund"), a series of The
Stratton Funds, Inc., is a no-load, open-end diversified
mutual fund.
Investment The Fund's investment objective is to achieve capital
Objective 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 the Fund's shares fluctuate because the
value of the securities in which the Fund invests
fluctuates. The Fund will earn dividend or interest
income to the extent that it receives dividends or
interest from its investments. An investment in the Fund
is neither insured nor guaranteed by the U.S. Government.
There can be no assurance that the Fund's investment
objective will be achieved.
How to Buy Fund The minimum initial investment for the Fund is $5,000.
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 Fund
does not impose any sales load nor bear any fees pursuant
to a Rule 12b-1 Plan. The public offering price for
shares of the 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 Fund 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."
Dividends The Fund may invest in dividend paying companies, and as
such, intends to pay dividends from its net investment
income annually. Distributions of net capital gains, if
any, will be paid annually.
Investment Stratton Management Company (the "Investment Advisor"),
Management, Plymouth Meeting Executive Campus, 610 W. Germantown
Underwriter and Pike, Suite 300, Plymouth Meeting, PA 19462-1050 is the
Servicing Agents Investment Advisor for the Fund.
FPS Broker Services, Inc. ("FPSB"), 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903 serves as
the Fund's Underwriter. FPS Services, Inc. ("FPS"), 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-
0903 serves as the Fund's Administrator,
Accounting/Pricing Agent, and Transfer Agent.
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Stratton Special Value Fund - Prospectus
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FEE TABLE Below is a summary of the estimated Operating Expenses that the
Fund may incur for its upcoming fiscal period. A hypothetical
example based on the summary is also shown.
Annual Fund Operating Expenses:
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(as a percentage of average net assets)
Management Fees......................... 0.75%/1/
Other Expenses.......................... 1.25%
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Total Fund Operating Expenses........... 2.00%
Example:
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You would pay the following expenses 1 year $ 16
on a $1,000 investment, assuming: (1) a 5% 3 years $ 50
annual return; and (2) redemption at the
end of each time period:
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WHILE THE FOREGOING EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE FUND'S
ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
MORE OR LESS THAN 5%. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
MORE OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding
the various costs and expenses that investors will bear directly or
indirectly. The Fund does not impose any sales load, redemption or
exchange fees, nor does it 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."
/1/ This fee represents the basic management fee of 0.75% payable
to the Fund under the Investment Advisory Agreement. The basic
management fee may be increased or decreased by 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.
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Stratton Special Value Fund - Prospectus
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INVESTMENT The investment objective of the Fund is not fundamental
OBJECTIVE, and may be changed by the Board of Directors without
POLICIES, shareholder approval. Unless otherwise stated in this
RESTRICTIONS Prospectus or the Statement of Additional Information,
AND RISK the Fund's investment policies are not fundamental and
CONSIDERATIONS may be changed without shareholder approval. While a non-
fundamental policy or restriction may be changed by the
Board of Directors of the Fund without shareholder
approval, the Fund intends to notify shareholders before
making any change in any such policy or restriction.
Fundamental policies and restrictions may not be changed
without shareholder approval. A complete list of the
Fund's fundamental investment restrictions appears in the
Statement of Additional Information.
The investment objective of the Fund 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 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.
Short Sale Short sales are transactions in which the Fund sells a
Transactions security it does not own in anticipation of a decline in
the market value of that security. To complete such a
transaction, the Fund 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 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
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Stratton Special Value Fund - Prospectus
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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 U.S. Securities
and Exchange Commission ("S.E.C.").
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 Contract The Fund may invest in futures contracts and options on
and Related futures contracts for hedging purposes or to maintain
Options liquidity. 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 sell 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 decrease in 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
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Stratton Special Value Fund - Prospectus
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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.
Options The Fund 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.
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Stratton Special Value Fund - Prospectus
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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.
REITs The Fund may invest in REITs. Equity REITs invest
directly in real property while mortgage REITs invest in
mortgages on 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 pay dividends to their shareholders based upon
available funds from operations. It is quite common for
these dividends to exceed the REIT's taxable earnings and
profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends
to include the gross dividends from such REITs in its
distributions to shareholders and, accordingly, a portion
of the Fund's 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 the Fund normally seeks to remain fully invested
Securities in equity securities, it 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 the Fund invests for defensive purposes, it may
affect the attainment of its investment objective.
PORTFOLIO The Fund's portfolio turnover rate may vary significantly
TURNOVER from 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 the Fund.
MANAGEMENT The business of the Fund is managed under the direction
OF THE FUND of the Company's Board of Directors. Information about
the directors and officers of the Fund is included in the
Statement of Additional Information.
INVESTMENT Stratton Management Company (the "Investment Advisor"),
ADVISOR with offices at Plymouth Meeting Executive Campus, 610 W.
Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-
1050, manages the Fund's investments, provides various
administrative services and supervises the Fund's daily
business affairs, subject to the authority of the
Company's Board of Directors. The Investment Advisor is
registered as an investment advisor under the
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Stratton Special Value Fund - Prospectus
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Investment Advisors Act of 1940, as amended. The
Investment Advisor provides investment advisory services,
consisting of portfolio management, for a variety of
individuals and institutions and had approximately $1.7
billion in assets under management as of September 30,
1997. By reason of his ownership of all the Investment
Advisor's Class A voting stock, James W. Stratton is a
"controlling person" of that firm.
Mr. Stratton is the Chief Executive officer of the
Investment Advisor. James Van Dyke Quereau is the
designated Portfolio Manager and will be responsible for
the day-to-day investment management of this Fund. Mr.
Quereau has been a Managing Partner and Director of
Research of the Advisor since May 1990, and has been in
the investment management business for 26 years.
Investment Pursuant to an Investment Advisory Agreement, Stratton
Advisory Fee Management Company provides an investment program in
accordance with the Fund's investment policies,
limitations and restrictions.
For providing investment advisory services, 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 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, 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 the Fund and the
Russell 2000 during the performance period is equal to a
0.10% adjustment to the basic fee. The maximum annualized
performance adjustment rate is +/- 0.50% of average net
assets which would be added to or deducted from the
advisory fee if the Fund outperformed or underperformed
the Russell 2000 by 5.00%. The effect of this performance
fee adjustment is that the basic advisory fee may be
increased as high as an annual rate of 1.25% or decreased
to as low as an annual rate of 0.25% of the Fund's
average daily net asset value. 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.
COMPUTATION The net asset value per share of the Fund is determined
OF NET ASSET once each business day as of the close of regular trading
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.
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Stratton Special Value Fund - Prospectus
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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 Fund, 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."
HOW TO BUY Shares of the Fund are offered on a continuous basis at
FUND SHARES the net asset value. The net asset value per share of the
Fund, and hence the purchase price of the shares, will
vary with the value of securities held in the 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 the 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
Fund may also from time to time accept wire purchase
orders from broker/dealers and institutions who have been
approved previously by the Fund.
Orders for shares of the 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 the Fund purchased
by completing the Investment Application (the
"Application"), enclosed within this Prospectus and
sending the Application, together with a check for the
desired amount, payable to Stratton Special Value Fund
c/o FPS Services, Inc., 3200 Horizon Drive, P.O. Box
61503, King of Prussia, PA 19406-0903. The minimum amount
for the initial purchase of shares is $5,000.
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 Stratton Special Value Fund c/o
FPS Services, Inc., P.O. Box 412797, Kansas City, MO
64141-2797. Please enclose the stub of your account
statement and include the Fund account number on your
check (as well as the attributable year for retirement
plan investments, if applicable).
Please Note: The Fund 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 Fund reserves 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 Wire You may also pay for shares by instructing your bank to
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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Stratton Special Value Fund - Prospectus
Page 10
<PAGE>
UMB BANK KC NA
ABA # 10-10-00695
For: FPS Services, Inc.
Account # 98-7037-071-9
FBO: "Stratton Special Value 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 800-441-6580
to request an account number and furnish the Fund with
your social security or other tax identification number.
A completed Application with signature(s) of
registrant(s) must be filed with the Fund immediately
subsequent to the initial wire. Your bank will generally
charge a fee for this wire. The Fund 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
$5,000 minimum balance requirement in order to
participate in the following programs or plans.
Automatic Shares of the Fund may be purchased through our
Investment Plan "Automatic Investment Plan" (the "Plan"), (a tear-out
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
the 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. The
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
the 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 Fund may terminate participation upon 30
days' notice to the shareholder.
Reinvestment of Any shareholder may at any time request and receive
Income Dividends automatic reinvestment of any Fund's income dividends and
and Capital Gains capital gains distributions, or income dividends only, or
Distributions capital gains distributions only, in additional shares of
the Fund unless the Fund's Board of Directors determines
otherwise. The Fund will send the 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 enclosed
Application or by writing to "Stratton Special Value Fund
", c/o FPS Services, 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 Fund. If no election is chosen the Fund will
automatically reinvest your dividends and capital gains.
Additional Shares of the 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 the Fund.
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Stratton Special Value Fund - Prospectus
Page 11
<PAGE>
The 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).
The 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 Fund provides 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 REFER ALL QUESTIONS AND CORRESPONDENCE ON NEW AND
EXISTING ACCOUNTS (SUCH AS PURCHASES OR REDEMPTIONS, OR
STATEMENTS NOT RECEIVED), DIRECTLY TO THE TRANSFER AGENT,
BY WRITING TO FPS SERVICES, INC., 3200 HORIZON DRIVE,
P.O. BOX 61503, KING OF PRUSSIA, PA 19406-0903, OR BY
CALLING FPS' CUSTOMER SERVICE DEPARTMENT AT 800-441-6580.
PLEASE REFERENCE YOUR FUND NAME AND ACCOUNT NUMBER.
HOW TO Shareholders may redeem shares of the Fund by mail, by
REDEEM FUND writing directly to the Transfer Agent, and requesting
SHARES 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
By Written Request certificates must deliver them along with their signed
redemption requests. To protect your account, the
Transfer Agent and the Fund 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 Fund may
require additional documents, such as certified death
certificates or proof of fiduciary or corporate
authority. (NOTE: PLEASE CALL OUR TRANSFER AGENT TO
VERIFY REQUIRED LANGUAGE FOR ALL RETIREMENT PLAN
REDEMPTION REQUESTS.) No redemption shall be made unless
a shareholder's Application is first on file. In
addition, the 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.
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Stratton Special Value Fund - Prospectus
Page 12
<PAGE>
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 The 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 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 Fund. 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.
Integrated Voice Shareholders of the Fund can obtain toll-free access to
Response (IVR) account information, as well as some transactions, by
System calling 1 (800) 472-4266. IVR provides total return,
share price, price change, and yield quotations for the
Fund; gives account balances and history (i.e., last
transaction, latest dividend distribution, redemptions by
check during the last three months); and allows sales or
exchanges of shares.
Additional Due to the relatively high cost of maintaining smaller
Information accounts, the Company reserves the right to involuntarily
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 applicable S.E.C. 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 S.E.C. 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.
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Stratton Special Value Fund - Prospectus
Page 13
<PAGE>
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 FUND MAY ALSO FROM TIME TO TIME ACCEPT TELEPHONE
REDEMPTION REQUESTS, FROM BROKER/DEALERS AND INSTITUTIONS
WHO HAVE BEEN APPROVED PREVIOUSLY BY THE FUND. Neither
the Fund nor any of its 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 Fund 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 the 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. During times of unusual
market conditions it may be difficult to reach the Fund
by telephone. If the Fund 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 S.E.C. rules, except: (1) when trading on
the NYSE is restricted as determined by the S.E.C. or
such NYSE is closed for other than weekends and holidays;
(2) when the S.E.C. has by order permitted such
suspension; or (3) when an emergency, as defined by the
rules of the S.E.C., exists, making disposal of portfolio
securities or valuation of net assets of the 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 Fund's 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 Fund has 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 the 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 the Fund may be exchanged for shares of the
PRIVILEGE other Stratton Mutual Funds; Stratton Growth Fund, Inc.,
Stratton Monthly Dividend Shares, Inc., and The Stratton
Funds, Inc.-Stratton Small-Cap Yield Fund, provided such
other shares may legally be sold in the state of the
investor's residence. The other Funds have a distinct
investment objective which should be reviewed before
executing any exchange of shares.
The Prospectus regarding the other Funds can be obtained
by calling (800) 634-5726, and 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
Fund's policy regarding telephone instructions.
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Stratton Special Value Fund - Prospectus
Page 14
<PAGE>
RETIREMENT The 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, for use by certain eligible individuals with
compensation (including earned income from self-
employment), a Simple Individual Retirement Account, 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
FUND FOR INFORMATION AND THE REQUIRED SEPARATE
APPLICATION.
TAX The Fund expects to qualify as a regulated investment
TREATMENT: company under Subchapter M of the Internal Revenue Code
DIVIDENDS as long as such qualification is in the best interest of
AND its shareholders.
DISTRIBUTIONS
Under Subchapter M of the Internal Revenue Code, the Fund
is not subject to Federal income tax on such part of its
Tax Treatment ordinary taxable income or net realized long-term capital
gains that it distributes to shareholders. Distributions
paid by the 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 the 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 the 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 Fund 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. Due to the nature of REIT dividends,
the Fund may or may not realize a return of capital.
Consequently, a portion of the Fund's total distributions
might also include return of capital. Shareholders will
be advised after the end of each calendar year as to the
Federal income tax consequences of dividends and
distributions of the Fund 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 the 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 the 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 the 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 Fund 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.
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Stratton Special Value Fund - Prospectus
Page 15
<PAGE>
Dividends and The shareholders of the Fund are entitled to dividends
Distributions and 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. The Fund declares and pays dividends from net
investment income annually. The 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 the Fund's net
asset value per share by the amount of the distribution.
Distributions may be reinvested in additional shares of
the Fund, see "Reinvestment of Income Dividends and
Capital Gains Distributions."
PERFORMANCE From time to time, performance information such as total
CALCULATIONS return for the Fund may be quoted in advertisements or in
communications to shareholders. The 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 the 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 the
Fund during the period are reinvested in the Fund's
shares.
The total return of the 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 the 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 the Fund represent past
performance, and should not be considered as
representative of future results. The investment return
and principal value of an investment in the 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 the Fund will
not be included in the Fund's calculations of total
return. Further information about the performance of the
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.
DESCRIPTION The Company was organized as a Maryland corporation on
OF COMMON January 5, 1993. The Fund is a series of the Company and
STOCK 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 Company has authorized the issuance of
200,000,000 shares of Class B common stock representing
interests in the Fund and 200,000,000 shares of Class A
common stock representing interests in Stratton Small-Cap
Yield Fund.
There are no conversion or preemptive rights in
connection with any shares of the Fund, nor are there
cumulative voting rights. Shares of the Fund are freely
transferable. Each share of the Fund has equal dividend
and distribution, and liquidation rights with other
shares of the Fund. When issued for payment as described
in this Prospectus, the Fund's shares will be fully paid
and nonassessable. Fractional shares of the Fund have
proportionately the same rights as provided for full
shares of the Fund.
The Company does not presently intend to hold annual
meetings of shareholders except as required by the 1940
Act or other applicable law. Under certain circumstances,
shareholders of the Company have the right to call a
shareholders meeting to consider the removal of one or
more directors. Shareholders of the Fund and of the
Stratton Small-Cap Yield Fund will vote in the aggregate,
and not by portfolio, except as otherwise required by law
or when the Board of Directors determines that the matter
to be voted upon affects only the interests of the
- --------------------------------------------------------------------------------
Stratton Special Value Fund - Prospectus
Page 16
<PAGE>
shareholders of a particular portfolio. Shareholders of
the Company are entitled to one vote for each full share
held (irrespective of portfolio) and fractional votes for
fractional shares held. Voting rights are not cumulative
and, accordingly, the holders of more than 50% of the
aggregate shares of common stock of the Company may elect
all of the directors.
SERVICE Pursuant to arrangements between the Fund, The Bank of
PROVIDERS New York and FPS, The Bank of New York serves as
AND custodian of all securities and cash owned by the Fund.
UNDERWRITER The Bank of New York performs no managerial or policy-
making functions for the Fund. Pursuant to agreements
between The Bank of New York and FPS, FPS performs
certain administrative and record keeping services. The
Bank of New York reallows a portion of its custody fee to
FPS for providing such services.
FPS also serves as the Transfer Agent, Administrator and
Fund Accounting/Pricing Agent. FPS is a wholly-owned
subsidiary of FinDaTex, Inc. Certain directors and
officers of Stratton Management Company, the Investment
Advisor to the Fund, and certain directors and officers
of the Fund are controlling shareholders of FinDaTex,
Inc.
Administration services include all administrative
services except those relating to the investment
portfolios of the Fund, the distribution of the Fund and
the maintenance of the Fund's financial records. For
these administrative services, the Fund pays a flat fee
of $10,000
FPSB acts as underwriter to the Fund pursuant to separate
underwriting agreements. FPSB is paid $3,000 for
underwriting services in connection with the registration
of the Fund's shares under state securities laws. FPSB is
a wholly-owned subsidiary of FPS. FPS and FPSB are
affiliates of the Investment Advisor inasmuch as FPSB,
FPS and the Investment Advisor are under common control.
- --------------------------------------------------------------------------------
Stratton Special Value Fund - Prospectus
Page 17
<PAGE>
STRATTON SPECIAL VALUE FUND
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1997
================================================================================
This Statement of Additional Information, dated December 31, 1997, is not a
prospectus but should be read in conjunction with the current Prospectus for
Stratton Special Value Fund (the "Fund"), a series of The Stratton Funds, Inc.
(the "Company"), dated December 31, 1997, and is incorporated by reference in
its entirety into the Prospectus. This Statement of Additional Information is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the Prospectus. A
copy of the Prospectus may be obtained without charge by contacting the Fund's
Distributor, FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King
of Prussia, PA 19406-0903, or by telephoning (800) 634-5726.
- --------------------------------------------------------------------------------
Stratton Special Value Fund-Statement of Additional Information
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Statement of Additional Information........................................
Additional Information on Investment Objective and Policies................
Investment Restrictions....................................................
Directors and Officers of the Fund.........................................
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.....................................
403(b)(7) Retirement Plan.........................................
Simple Individual Retirement Account..............................
General Information...............................................
Additional Purchase and Redemption Information.............................
Additional Information Concerning Taxes....................................
Additional Information on Performance Calculations
Total Return Calculations.........................................
Financial Statements.......................................................
</TABLE>
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Stratton Special Value Fund-Statement of Additional Information
Page 2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction with the
Prospectus of the Fund 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 Fund should be made without first reading the Prospectus of the
Fund.
ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVE AND POLICIES
Futures Contracts
The Fund 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
- --------------------------------------------------------------------------------
Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
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.
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
The Fund 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
- --------------------------------------------------------------------------------
Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
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.
Purchasing Call Options
The Fund may purchase call options to the extent that premiums paid by the Fund
do not aggregate more than 20% of that Fund's total 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
The Fund 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
- --------------------------------------------------------------------------------
Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
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 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
The Fund may invest up to 20% of their total 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
The Fund 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.
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Stratton Special Value Fund-Statement of Additional Information
Page 6
<PAGE>
INVESTMENT RESTRICTIONS
A list of the Fund's investment objective and policies, can be found under
"INVESTMENT OBJECTIVE, POLICIES, RESTRICTIONS and RISK CONSIDERATIONS" in the
Fund's Prospectus.
The following investment restrictions are deemed fundamental policies and may be
changed with respect to the Fund only by the approval of the holders of a
"majority" of the Fund's outstanding shares. The term "majority" of the Fund's
outstanding shares means the holders of the lesser of: (1) 67% of the 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 the Fund's
outstanding shares.
The Fund 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, and it 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.
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.
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Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
* * *
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 the Fund's investments will not cause a violation of the
limitations. In addition, the limitations will not be violated if the Fund
receives securities by reason of a merger or other form of reorganization.
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Stratton Special Value Fund-Statement of Additional Information
Page 8
<PAGE>
DIRECTORS AND OFFICERS OF THE COMPANY
The Directors and executive officers of the Company, their position with the
Company, 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 also a Director of Stratton Growth Fund, Inc. and
Stratton Monthly Dividend Shares, Inc.
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
<S> <C> <C> <C>
James W. Stratton/1,3/ 60 Director/ Mr. Stratton is the Chairman of the Board and Chief
610 W. Germantown Pike Chairman Executive Officer of the Investment Advisor, Stratton
Suite 300 Management Company. He is a Director of Unisource
Plymouth Meeting, PA 19462 Worldwide, Inc. (paper distribution), Amerigas 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/ 41 Director Ms. Cannon is a Senior Vice President of Relationship
3200 Horizon Drive Management of FPS Services, Inc. and a Director of
King of Prussia, PA 19406 FPS Broker 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. 62 Director Mr. Lombard is a partner in the law firm of Morgan,
2000 One Logan Sq. Lewis & Bockius LLP.
Philadelphia, PA 19103
Douglas J. MacMaster 67 Director Mr. MacMaster is a private investor. He was formerly
5 Morris Road Senior Vice President of Merck, Inc. He is a Trustee
Ambler, PA 19002 of Gwynedd Mercy College, a Director of American
Precision Industries, Inc., Marteck Biosciences
Corp., Neose Pharmaceuticals Inc., Oravax, Inc. and
U.S. Bioscience, Inc. Director of SGF, SMDS and SSCY
since October 1, 1997.
Henry A. Rentschler 68 Director Mr. Rentschler is a private investor. He was
P.O. Box 962 formerly the President of Baldwin-Hamilton Company, a
Paoli, PA 19301 division of Joy Environmental 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/ 67 Director Mr. Rhoad is a private investor. He was formerly a
640 Bridle Road senior systems engineer with International Business
Custis Woods Machines Corporation.
Glenside, PA 19038
Alexander F. Smith 68 Director Mr. Smith is a private investor. He was formerly
Cricket Springs the Chairman and Director of Gilbert Associates, Inc.
Geigertown, PA 19523 (engineering/consulting services).
Richard W. Stevens 63 Director Mr. Stevens is an attorney in private practice. He
One Jenkintown Station was formerly a partner in the law firm of Clark,
115 W. Avenue, Suite 108 Ladner, Fortenbaugh and Young.
Jenkintown, PA 19046
Gerard E. Heffernan/3/ 59 Officer Mr. Heffernan is a Senior Vice President and Director
610 W. Germantown Pike of the Investment Advisor, Stratton Management
Suite 300 Company. He is President of Stratton Monthly
Plymouth Meeting, PA 19462 Dividend Shares, Inc., Vice President of Stratton
Growth Fund, Inc. and The Stratton Funds, Inc. He is
Secretary of FinDaTex, Inc.
John A. Affleck/3/ 50 Officer Mr. Affleck is President and Director of the
610 W. Germantown Pike Investment Advisor, Stratton Management Company. He
Suite 300 is President of Stratton Growth Fund, Inc., Vice
Plymouth Meeting, PA 19462 President of Stratton Monthly Dividend Shares, Inc.
and The Stratton Funds, Inc.
</TABLE>
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Stratton Special Value Fund-Statement of Additional Information
Page 9
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
<S> <C> <C> <C>
Joanne E. Kuzma 42 Officer Mrs. Kuzma is the Director of Trading and a Managing
610 W. Germantown Pike Partner of the Investment Advisor, Stratton
Suite 300 Management Company. She is Vice President of
Plymouth Meeting, PA 19462 Compliance for Stratton Growth Fund, Inc., Stratton
Monthly Dividend Shares, Inc. and The Stratton Funds,
Inc.
Frank H. Reichel, III 32 Officer Mr. Reichel is a Vice President, a Director and the
610 W. Germantown Pike Director of Research of the Investment Advisor,
Suite 300 Stratton Management Company. He is President of The
Plymouth Meeting, PA 19462 Stratton Funds, Inc., Vice President of Stratton
Growth Fund, Inc. and Stratton Monthly Dividend
Shares, Inc.
Patricia L. Sloan 43 Secretary, Ms. Sloan is an employee of the Investment Advisor,
610 W. Germantown Pike Treasurer Stratton Management Company.
Suite 300
Plymouth Meeting, PA 19462
James A. Beers 33 Assistant Mr. Beers is a Vice President of the Investment
610 W. Germantown Pike Secretary/ Advisor, Stratton Management Company; prior thereto,
Suite 300 Treasurer Account Manager of Client Services at FPS Services,
Plymouth Meeting, PA 19462 Inc. Mr. Beers is related to Mr. Stratton by
marriage.
Carol L. Royce 39 Assistant Mrs. Royce is an employee of the Investment Advisor,
610 W. Germantown Pike Secretary/ Stratton Management Company.
Suite 300 Treasurer
Plymouth Meeting, PA 19462
</TABLE>
/1/ As defined in the 1940 Act, Mr. Stratton is an "interested person" of
the Company by reason of his positions with the Investment Advisor and
his indirect ownership, through FinDaTex, Inc., of FPS Services, Inc.
("FPS") and it's subsidiary FPS Broker Services, Inc. ("FPSB").
FinDaTex, Inc. is the 100% owner of FPS, the Funds' servicing agent,
and FPSB, the Funds' underwriter.
/2/ Ms. Cannon is an "interested person" of the Company by reason of her
employment with FPS and FPSB.
/3/ Messrs. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
COMPENSATION TABLE
The officers and Directors of the Company who are also officers or employees of
the Investment Advisor or FPS receive no direct compensation from the Fund for
services to them. The Company pays each Director, $750 for each meeting
attended, and an annual retainer of $4,000. There are no separate audit,
compensation or nominating committees of the Board of Directors.
Set forth are the total fees which were paid by Stratton Small Cap Yield Fund to
each of the Directors who are not "interested persons" from June 1, 1996 to
December 31, 1996:
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant and
Name of Director from Registrant Fund Complex/(1)/
- ---------------- ---------------------- -------------------
<S> <C> <C>
James W. Stratton $0 $0
Lynne M. Cannon $0 $0
Rose J. Randall/(2)/ $365.74 $6,848.23
John J. Lombard, Jr $758.69 $6,848.23
Henry A. Rentschler $758.69 $6,848.23
Merritt N. Rhoad, Jr $758.69 $6,848.23
Alexander F. Smith $758.69 $6,848.23
Richard W. Stevens $758.69 $6,848.23
</TABLE>
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Stratton Special Value Fund-Statement of Additional Information
Page 10
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant and
Name of Director from Registrant Fund Complex/(1)/
- ---------------- ---------------------- -------------------
<S> <C> <C>
Douglas J. MacMaster $0 $0
</TABLE>
/(1)/ The "Fund Complex" consists of Stratton Growth Fund, Inc., Stratton
Monthly Dividend Shares, Inc. and The Stratton Funds, Inc.
/(2)/ Ms. Randall resigned from the Board of Directors on June 25, 1996.
THE INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
The Investment Advisor
The Investment Advisory Agreement (the "Agreement") requires the Investment
Advisor to maintain a continuous review of the Fund's portfolio of investments,
and to manage the investment and reinvestment of the Fund's assets. The
Agreement provides that the Investment Advisor is not required to give the Fund
preferential treatment as compared with the treatment given to any other
customer or investment company. In addition, the Investment Advisor furnishes to
the Fund office space and facilities necessary in connection with the operation
of the Fund. The Fund pays, or arrange for others to pay, all other expenses in
connection with their operations.
The Fund pays the following expenses: (1) the fees and expenses of the Company's
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
Fund's custodian, administrator, accounting services agent and transfer agent
and any related services; (9) expenses of obtaining quotations of the Fund's
portfolio securities and of pricing the Fund's shares; (10) expenses of
maintaining the Company's 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.
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, 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
the Fund and the Russell 2000 during the performance period is equal to a 0.10%
adjustment to the basic fee. The maximum annualized performance adjustment rate
is +/- 0.50% of average net assets which would be added to or deducted from the
advisory fee if the Fund outperformed or underperformed the Russell 2000 by
5.00%. The effect of this performance fee adjustment is that the basic advisory
fee may be increased as high as an annual rate of 1.25% or decreased to as low
as an annual rate of 0.25% of the Fund's average daily net asset value. 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
FPS is a wholly-owned subsidiary of FinDaTex, Inc. Certain Directors and
officers of Stratton Management Company, the Investment Advisor to the Fund, and
certain Directors and officers of the Company are controlling shareholders of
FinDaTex, Inc. FPSB, the Company's underwriter, is a wholly-owned subsidiary of
FPS.
FPS has been engaged by the Fund to provide most of the back office services on
the Fund's behalf. Pursuant to
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<PAGE>
certain agreements, FPS provides the services commonly and separately referred
to as: Fund Administration, Fund Accounting, Transfer Agency and Custody
Administration.
Included among the many tasks which FPS performs on behalf of the Fund are: (1)
coordination and monitoring, through the Fund Administration function, the
activities of any other third party service provider providing services to the
Fund (e.g. the Fund's independent auditors, printers, etc.); (2) providing the
Fund 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 Fund as may be required by
applicable federal or state law; (4) prepares and, after approval by the Fund,
files and arranges for the distribution of proxy materials and periodic reports
to shareholders of the Fund as required by applicable law; (5) prepares and,
after approval by the Fund, 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 Fund for their
approval, invoices or other requests for payment of the Fund's expenses and
instructs the Custodian to issue checks in payment thereof, and (7) takes such
other action with respect to the Fund as may be deemed by FPS to appropriately
perform its duties under the Agreement.
Pursuant to the Fund's Administration Agreement, FPS receives a fee payable
monthly at the annual rate of $10,000 per year from the Company. Pursuant to the
Fund's Accounting Services Agreement, FPS annually receives $13.00 per account.
The Company's independent auditor is Tait, Weller & Baker. Their offices are
located at 2 Penn Center Plaza, Suite 700, Philadelphia PA 19102-1707. The
auditor's responsibilities are (1) to ensure that all relevant accounting
principles are being followed by the Fund; and (2) to report to the Board of
Directors concerning the Fund's operations.
The Bank of New York, 48 Wall Street, New York, New York 10286 serves as the
custodian of the 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 Fund; (2) holds and transfers portfolio securities on account of
the Fund; (3) accepts receipts and makes disbursements on money on behalf of the
Fund; (4) collects and receives all income and other payments and distributions
on account of the Fund's securities; and (5) makes periodic reports to the Board
of Directors concerning the Fund's operations.
The Company has entered into Underwriting Agreements with FPSB. FPSB acts as an
underwriter of the Fund's 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 Fund 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 Fund.
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 Fund shares under state securities laws, FPSB will receive
an annual fee of $3,000 from each Fund for providing these services. This fee is
included in the net expenses of the Fund. The Fund shall continue to bear the
expense of all filing or registration fees incurred in connection with the
registration of shares of the Fund under state securities laws. The Fund pays no
compensation to FPSB for its assistance in sales of Fund 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 Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund seeks 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
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Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
makers acting as principals. Consistent with its obligation to seek the best
price and execution, the Fund 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 Fund 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 Fund.
In addition, not all such services may be used in connection with the Investment
Advisor's activities on behalf of the Fund. 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.
Although investment decisions for the Fund 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 Fund. In other cases, however, the
ability of the Fund to participate with other clients of the Investment Advisor
in volume transactions may produce better executions for the Fund.
The Investment Advisory Agreement contains provisions which authorize the
Investment Advisor to recommend and cause the Fund 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
Fund, viewed in terms of the particular transaction or the overall
responsibilities of the Investment Advisor with respect to the Fund. In
addition, the Investment Advisory Agreement recognizes 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.
RETIREMENT PLANS
Defined Contribution Plans
The Fund offers 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
Fund as a funding medium for a retirement plan qualified under the Internal
Revenue Code.
Annual deductible contributions to the Defined Contribution Plans may generally
be made on behalf of each participant in a total amount of up to the lesser of
20% of a self-employed participant's pre-contribution earned income (after
reducing the earned income by the self-employed's deduction for 50% of his or
her self-employment tax) (25% of a non-self-employed participant's wages) or
$30,000. Unless the employer chooses to take Social Security contributions into
account, the same percentage of earned income (or wages) must be contributed on
behalf of each participant in the Defined Contribution Plans. Earned income and
wages are generally limited for this purpose to $160,000 (for 1997 -- indexed
for cost-of-living).
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 Fund offers 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 Fund as a funding medium for
individual retirement saving. However, except for rollover contributions, an
individual who has attained, or will
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Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
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. However, this limit is phased out for certain
individuals who are active participants in an employer-maintained retirement
plan. If such an individual is a married person with adjusted gross income
("AGI") on his or her joint return in excess of $40,000 but less than $50,000,
or a single person with AGI in excess of $25,000 but less than $35,000, the
individual's $2,000 deduction will be decreased proportionately. A married
individual with AGI on his or her joint return of $50,000 or more, or a single
individual with AGI of $35,000 or more, may not make any deductible contribution
if he or she is an active participant in a retirement plan.
Even if the individual is not an active participant in a retirement plan, if his
or her spouse is a participant in such a plan and if their AGI, filed jointly,
is more than $40,000, the individual and his or her spouse will both be subject
to the phase-out discussed above. If neither the individual nor his or her
spouse is a participant in an employer-sponsored retirement plan, or if their
AGI is less than the $40,000 amount discussed above, the individual may continue
to make deductible contributions of up to the lesser of $2,000, or 100% of
compensation. (Beginning with the 1997 tax year, if neither spouse is an active
participant in an employer-sponsored retirement plan, or if their combined AGI
is less than $40,000, a married couple filing a joint tax return may make
deductible contributions to separate IRAs - no more than $2,000 to either - up
to the lesser of $4,000 or 100% of their combined compensation.)
Nondeductible contributions to the IRA may be made to the extent an individual
is unable to make a deductible contribution under the phase-out rules discussed
above. In addition, 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.
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.
403(b)(7) Retirement Plan
The Fund offers 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 Fund 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."
Simple Individual Retirement Account
The Fund offers a plan (the "Simple IRA") for use by companies or tax-exempt
organizations who wish to use shares of the Fund 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 Fund.
The custodian of the Plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Semper is
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Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
controlled by certain Directors and officers of the Company and certain
directors and officers of Stratton Management Company. FPS 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 FPS. The annual maintenance fee is currently $12.00 per plan
account. This fee may be amended without notice by Stratton Management Company,
Semper or FPS in the future.
The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution Plan, IRA, 403(b)(7) Plan or Simple IRA available for
investment in the Fund. Any person who wishes to establish a retirement plan
account may do so by contacting the Fund 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 Fund as described in this Statement of
Additional Information and in the Prospectus is most likely to fulfill them. The
Fund recommends that investors consult their attorneys or tax advisors to
determine if the retirement programs described herein are appropriate for their
needs.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund 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 Fund 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, the Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, as amended
("the Code") for each taxable year. 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%.
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 Fund intends 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 the 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.
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 Fund's total return may be quoted in advertisements,
shareholder reports or other communications to shareholders.
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Stratton Special Value Fund-Statement of Additional Information
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<PAGE>
Total Return Calculations
The Fund computes 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:
T=[(ERV)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
hypothetical $1,000 investment made at the
beginning of the period.
P = hypothetical initial investment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Fund computes 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. 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 Fund cannot
necessarily be used to compare an investment in the Fund's 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.
FINANCIAL STATEMENTS
Shareholders will receive unaudited semi-annual reports describing the Fund's
investment operations and annual
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<PAGE>
financial statements audited by the Fund's independent accountants.
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Page 17
