<PAGE>
STRATTON MUTUAL FUNDS
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Stratton Small-Cap Yield Fund
PROSPECTUS
May 1, 1999
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
The Securities and Exchange Commission has not approved or disapproved
these securities nor has it passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
Page
Fund Summaries.............................................
Fee Table..................................................
Financial Highlights.......................................
Investment Policies and Risk Considerations................
Investment Advisor.........................................
Pricing Fund Shares........................................
How to Buy Fund Shares.....................................
How to Redeem Fund Shares..................................
Exchange Privilege.........................................
Retirement Plans...........................................
Tax Treatment: Dividends and Distributions.................
- --------------------------------------------------------------------------------
Page 1
<PAGE>
FUND SUMMARIES This Prospectus offers shares of the
following Funds: STRATTON GROWTH
FUND, INC. ("SGF"); STRATTON MONTHLY
DIVIDEND REIT SHARES, INC. ("SMDS");
and STRATTON SMALL-CAP YIELD FUND
("SSCY").
Stratton Growth Fund
Investment Objectives Possible growth of capital with
current income from interest and
dividends as a secondary objective.
Principal Strategy The fund normally invests in common
stocks of well-established U.S.
companies with excellent dividend
records, in the opinion of the
investment advisor. Stock of
companies that pay above average
dividends tend to be less volatile
than companies that do not pay
dividends. The investment advisor
believes that companies which
consistently strive to increase their
dividends tend to offer the potential
of above average returns. The fund
also may invest in securities
convertible into common stock.
In picking stocks for the fund, the
fund's investment advisor initially
reviews common stock yield. The
investment advisor then reviews
additional yield characteristics such
as dividend growth rates and dividend
coverage. Fundamental analysis is
also employed, focusing on important
characteristics such as earnings and
cash flow outlook, management
strengths, and industry competitive
position. The investment advisor
continuously reviews economic and
social conditions so that the fund's
portfolio has the greatest possible
potential for capital growth,
consistent with reasonable levels of
risk. SGF hopes to achieve steady,
stable growth of principal and
dividend income.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund
include:
. Stock market risk, or the risk that
the price of securities held by the
fund will rise or fall due to various
conditions or circumstances which may
be unpredictable.
. Loss of part or all of your money
invested in the fund.
. The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and
performance table provide some
indication of the risks of investing
in the fund by showing changes in the
fund's performance from year to year
and showing how the fund's average
annual returns compare with those of
a broad measure of market
performance. Both tables assume
reinvestment of dividends and
distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
Page 2
<PAGE>
Annual Returns (%)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
11.46% 30.60% 14.71% 37.68% 7.19% 6.41% 6.71% 22.18% -6.72% 23.79%
Calender Year
During the ten years ended December 31, 1998, the highest return for a quarter
was 15.47% for the quarter end December 31, 1998, and the lowest return was -
12.95% for the quarter ended September 30, 1998.
Performance Table
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Growth Fund 11.46% 20.64% 15.14%
S & P 500* 28.58% 24.05% 19.22%
S & P/BARRA Value** 14.67% 19.87% 16.67%
- -------------------------------------------------------------
</TABLE>
*The S&P 500 Index is an unmanaged index comprised of 500 widely held
common stocks listed on the New York Stock Exchange, the American
Stock Exchange and NASDAQ.
**The S&P/BARRA Value index is an unmanaged, capitalization-weighted
index of all the stocks in the S&P 500 that have low price-to-book
ratios.
Suitability The fund may be a suitable investment for you if you:
* Desire an investment that focuses on growth, but with some
income.
* Are investing for retirement or other long-term goals.
* Can tolerate performance that varies from year to year.
Page 3
<PAGE>
Stratton Monthly
Dividend REIT
Shares
Investment Objective A high rate of return from dividend and
interest income on investments in common
stock and securities convertible into
common stock.
Principal Strategy The fund invests at least 65% of its
total assets in common stocks and
other equity securities of real
estate investment trusts ("REITs").
REITs were created to enable
investors to participate in the
benefits of owning income producing
real estate. REITs own many
different types of properties, such
as apartment complexes, office
buildings, hotels, health care
facilities, shopping centers, and
shopping malls.
The fund is managed to provide a high
level of monthly income to its
shareholders and therefore looks for
companies that have strong dividend
payouts. The fund needs higher
yielding securities to maintain its
own attractive dividend payout.
REITs satisfy this income
requirement, while also offering the
potential for dividend growth and
capital appreciation. Investment
decisions will be made on the basis
of an analysis of fundamentals of
individual companies and on relevant
economic and social conditions.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund
include:
.Stock market risk, or the risk that
the price of securities held by the
fund will rise or fall due to various
conditions or circumstances which may
be unpredictable.
.The cyclical nature of the real estate
industry, which subjects the real
estate and real estate related
securities held by the fund to any
market or economic condition that may
affect the value of real estate (up or
down).
.The fund is concentrated in REIT
securities, which means it may be
subject to a greater risk of loss
than a non-concentrated mutual fund.
.Loss of part or all of your money
invested in the fund.
.The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of
the stocks they buy.
Bar Chart and Performance Table The following bar chart and
performance table provide some
indication of the risks of investing
in the fund by showing changes in the
fund's performance from year to year
and showing how the fund's average
annual returns compare with those of
a broad measure of market
performance. Both tables assume
reinvestment of dividends and
distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
Page 4
<PAGE>
Annual Returns (%)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -11.75% 18.09% 8.58% 23.45% -12.13% 6.60% 10.41% 35.10% -3.83% 18.77%
Calender Year
During the ten years ended December 31, 1998, the highest return for a
quarter was 11.70% for the quarter ended March 31, 1991, and the
lowest return for a quarter was -7.26% for the quarter ended June 30, 1994.
Performance Table
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Monthly Dividend REIT Shares -11.75% 4.18% 8.35%
S & P 500* 28.58% 24.05% 19.22%
NAREIT Equity** -16.62% 10.63% 11.21%
- ----------------------------------------------------------------------
</TABLE>
*The S&P 500 Index is an unmanaged index comprised of 500 widely held
common stocks listed on the New York Stock Exchange, the American
Stock Exchange and NASDAQ.
**The NAREIT Equity Index is an unmanaged index comprised of 178 real
estate investment trusts.
Suitability The fund may be a suitable investment
for you if you:
.Desire an investment that focuses on
income.
.Are investing for retirement or
other long-term goals.
.Can tolerate performance that varies
from year to year.
Page 5
<PAGE>
Stratton Small-Cap
Yield Fund
Investment Objective Dividend income and capital
appreciation.
Principal Strategy Under normal market conditions, the
Principal Risks fund invests at least
80% of its assets in common stock and
securities convertible into common stock
of small-cap companies. The fund invests
in dividend-paying companies with total
market capitalizations at the time of
purchase of less than $1 billion, and
which are outside the S&P 500. The fund
normally invests in common stocks of
well-established U.S. companies.
Generally, small company stocks are
considered more volatile than large
company stocks because they have limited
product lines and financial resources
and may experience more abrupt price
movements. However, the fund strives to
temper that volatility by investing in
stocks of small but established,
dividend-paying companies. The
investment advisor generally selects
companies that pay quarterly dividends
at an above-average rate. Small-cap
companies that pay dividends tend to
have strong financial characteristics,
since the quarterly dividend payout
requires management to exhibit a high
degree of financial discipline. The fund
also may invest in securities
convertible into common stock and REITs.
The initial screen for stock selection
is a yield that is greater than the
small-cap average, as measured by the
Russell 2000 Index. The fund's
investment advisor then employs a three-
step process that focuses on a stock's
fundamental valuation, earnings
prospects, and, as a confirming factor,
relative price strength. The investment
advisor believes that companies that
exhibit consistent earnings and that
regularly increase their dividends have
superior appreciation potential, with
reasonable levels of risk.
Principal Risks There are risks involved with any
investment, but the risks associated
with an investment in the fund include:
.Stock market risk, or the risk that the
price of securities held by the fund
will rise or fall due to various
conditions or circumstances which may
be unpredictable.
.Small-cap stocks tend to have a higher
degree of market risk than large-cap
stocks, due to lack of liquidity and
other reasons.
.The cyclical nature of the real estate
industry, which subjects the real
estate and real estate related
securities held by the fund to any
market or economic condition that may
affect the value of real estate (up or
down).
.Loss of part or all of your
investment in the fund.
.The success of the fund's investment
depends on the portfolio manager's
skill in assessing the potential of the
stocks they buy.
Bar Chart and Performance Table The following bar chart and performance
table provide some indication of the
risks of investing in the fund by
showing changes in the fund's
performance from year to year and
showing how the fund's average annual
returns compare with those of a broad
measure of market performance. Both
tables assume reinvestment of dividends
and distributions. As with all mutual
funds, past performance is not a
prediction of future performance.
Page 6
<PAGE>
Annual Returns (%)
1998 1997 1996 1995 1994
-9.58% 42.37% 14.96% 27.27% -2.69%
Calender Year
During the five years ended December 31, 1998, the highest return for
a quarter was 16.72% for the quarter ended September 30, 1997, and the
lowest return for a quarter was -18.92% for the quarter ended
September 30, 1998.
Performance Table
Average annual total returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- -------- ---------
<S> <C> <C> <C>
Small-Cap Yield Fund -9.58% 12.88% NA
Russell 2000* -2.55% 11.86% 12.92%
- --------------------------------------------------------------
</TABLE>
* The Russell 2000 Index is an unmanaged index comprised of the
smallest 2000 companies in the Russell 3000 Index, representing
approximately 11% of the Russell 3000 total market capitalization. The
Russell 3000 Index represents approximately 98% of the investable U.S.
equity market.
Suitability The fund may be a suitable investment
for you if you:
.Desire an investment that focuses on
both growth and income.
.Are investing for retirement or
other long-term goals.
.Are willing to accept more market
risk in return for the potentially
higher returns that may come from
investing in small-cap companies.
.Can tolerate performance that varies
from year to year.
Page 7
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
SGF SMDS SSCY
--------- --------- ---------
<S> <C> <C> <C>
Annual Fund Operating Expenses:
-------------------------------
(as a percentage of average net assets)
Management Fees 0.75%/1/ 0.63%/1/ 1.09%/2/
Other Expenses 0.34% 0.41% 0.47%
-------- -------- --------
Total Fund Operating Expenses 1.09% 1.04% 1.56%
</TABLE>
Example
The following example illustrates the expenses that you would
pay on a $10,000 investment, assuming (1) a 5% annual rate of
return, (2) redemption at the end of each time period, (3) all
distributions are reinvested; and (4) each fund's operating
expenses remain the same:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
SGF $111 $347 $601 $1329
SMDS $106 $331 $574 $1271
SSCY $159 $493 $850 $1856
</TABLE>
/1/ Total Fund Operating Expenses for SGF and SMDS for the
fiscal year ended December 31, 1998, with fee waivers, were
1.07% and 1.04%, respectively, of SGF's and SMDS' average
net assets. The investment advisor voluntarily has agreed to
waive annually $15,000 of its compensation from SGF and SMDS
to offset a portion of the cost of certain administrative
responsibilities delegated to First Data Investor Services
Group.
/2/ This fee represents the basic management fee of 0.75%
payable to SSCY, subject to a performance adjustment. The
performance adjustment is a rolling 24-month comparison to
the Frank Russell 2000 Index ("Russell 2000"). See
"Investment Advisor" for a further discussion. For the
fiscal year ended December 31, 1998 the investment advisor
received 1.09% of SSCY's average net assets. Absent such
performance adjustment, the investment advisor would have
received 0.75% of SSCY's average net assets.
The purpose of the fee table is to help you understand the
various costs and expenses you will bear directly or indirectly.
In addition to the above fees, the funds' transfer agent charges
$9 for each redemption by wire transfer. A more complete
description of the various costs and expenses of the funds is
contained throughout this prospectus, in the Statement of
Additional Information and in the financial statements and
related notes which appear in the funds' Annual Report to
Shareholders.
This example should not be considered a representation of past
or future expenses or performance. Actual expenses may be more
or less than those shown.
Page 8
<PAGE>
FINANCIAL The financial highlights tables are
HIGHLIGHTS intended to help you understand each
fund's financial performance during
the periods stated. Certain
information reflects financial
results for a single fund share.
"Total return" shows how much your
investment in a fund would have
increased (or decreased) during each
period, assuming you had reinvested
all dividends and distributions.
These figures have been audited by
Tait, Weller & Baker, certified
public accountants, whose report,
along with the funds' financial
statements is incorporated by
reference into the Statement of
Additional Information and is
included in the funds' Annual Report
to Shareholders dated December 31,
1998, each of which may be obtained
free of charge by calling
800-634-5726.
Stratton Growth Fund, Inc.
<TABLE>
<CAPTION>
Year Year 7 Months Years Ended May 31,
Ended Ended Ended -----------------------------
12/31/98 12/31/97 12/31/96 1996 1995 1994
----------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89
----------------------------------- -----------------------------
Income From Investment Operations
Net investment income 0.570 0.550 0.312 0.556 0.537 0.510
Net gains on securities (both realized and
unrealized) 3.130 8.900 1.298 5.759 2.978 0.665
----------------------------------- -----------------------------
Total from investment operations 3.700 9.450 1.610 6.315 3.515 1.175
----------------------------------- -----------------------------
Less Distributions
Dividends (from net investment income) (0.590) (0.540) (0.580) (0.540) (0.540) (0.510)
Distributions (from capital gains) (2.430) (2.520) (1.210) (0.945) (1.275) (0.905)
----------------------------------- -----------------------------
Total distributions (3.020) (3.060) (1.790) (1.485) (1.815) (1.415)
----------------------------------- -----------------------------
Net Asset Value, End of Period $ 34.07 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65
=================================== =============================
Total Return 11.46% 36.06% 6.40% 29.62% 18.61% 5.92%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 63,323 $ 60,177 $ 44,801 $42,880 $31,719 $25,475
Ratio of expenses to average net assets 1.07% 1.11% 1.17% /1/ 1.16% 1.31% 1.34%
Ratio of net investment income to
average net assets 1.60% 1.87% 2.08% /1/ 2.28% 2.70% 2.51%
Portfolio turnover rate 38.02% 34.40% 20.32% 15.41% 42.54% 49.81%
</TABLE>
__________________
/1/ Annualized
Page 9
<PAGE>
Stratton Monthly Dividend REIT Shares, Inc.
<TABLE>
<CAPTION>
Year Year 11 Months Years Ended January 31,
Ended Ended Ended --------------------------------
12/31/98 12/31/97 12/31/96 1996 1995 1994
----------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91
----------------------------------- --------------------------------
Income From Investment Operations
Net investment income 1.650 1.540 1.630 1.880 1.940 1.870
Net gains (losses) on securities (both realized
and unrealized) (5.070) 3.200 0.160 2.600 (3.870) (1.140)
----------------------------------- --------------------------------
Total from investment operations (3.420) 4.740 1.790 4.480 (1.930) 0.730
----------------------------------- --------------------------------
Less Distributions
Dividends (from net investment income) (1.650) (1.540) (1.630) (1.890) (1.920) (1.940)
Distributions (in excess of net investment
income) (0.400) -- (0.130) (0.030) -- (0.010)
Return of capital -- (0.380) -- -- -- --
----------------------------------- --------------------------------
Total distributions (2.050) (1.920) (1.760) (1.920) (1.920) (1.950)
----------------------------------- --------------------------------
Net Asset Value, End Of Period $ 24.78 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69
=================================== ================================
Total Return (11.75)% 18.09% 7.12% 18.98% (6.57)% 2.22%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 79,936 $ 101,956 $ 103,780 $129,267 $134,066 $165,798
Ratio of expenses to average net assets 1.02% 1.02% 1.02% /1/ 0.99% 1.08% 0.99%
Ratio of net investment income to
average net assets 5.95% 5.48% 6.94% /1/ 7.42% 7.71% 6.12%
Portfolio turnover rate 18.89% 42.47% 69.19% 53.30% 39.50% 19.15%
</TABLE>
__________________
/1/ Annualized
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
Year Year For the Period
Year Year 9 Months Ended Ended 04/12/93/1/
Ended Ended Ended ----------------------------------------------
12/31/98 12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ to 03/31/94/3/
------------------------------------------ ----------------------------------------------
Net Asset Value, Beginning Of Period $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97 $ 12.50
------------------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income From Investment Operations
Net investment income 0.170 0.210 0.260 0.330 0.290 0.220
Net gains (losses) on securities
(both realized and unrealized) (2.310) 6.800 1.740 3.040 (0.020) 0.450
------------------------------------------ ----------------------------------------------
Total from investment operations (2.140) 7.010 2.000 3.370 0.270 0.670
------------------------------------------ ----------------------------------------------
Less Distributions
Dividends (from net investment
income) (0.180) (0.200) (0.270) (0.330) (0.300) (0.200)
Distributions (from capital gains) (0.040) (1.130) (0.920) -- -- --
------------------------------------------ ----------------------------------------------
Total distributions (0.220) (1.330) (1.190) (0.330) (0.300) (0.200)
------------------------------------------ ----------------------------------------------
Net Asset Value, End of Period $ 20.11 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97
========================================== ==============================================
Total Return (9.58%) 42.37% 12.84% 26.18% 2.09% 5.51%/2/
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 42,789 $ 39,377 $ 21,691 $ 19,592 $ 14,058 $ 8,257
Ratio of expenses to average net 1.56% 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
assets
Ratio of net investment income to 0.80% 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
average net assets
Portfolio turnover rate 35.74% 26.27% 35.86% 33.50% 30.20% 28.60%/2/
</TABLE>
__________________
/1/ Commencement of operations
/2/ Annualized
/3/ Adjusted for a 2-for-1 stock split declared by the fund to shareholders of
record on December 17, 1997
Page 10
<PAGE>
INVESTMENT The investment objective of SGF is
POLICIES fundamental and may not be changed
AND RISK without the vote of a majority of the
CONSIDERATIONS Fund's shares. Unless otherwise
stated in this Prospectus or the
Statement of Additional Information,
each fund's investment objective and
policies are not fundamental and may
be changed without shareholder
approval. However, the funds intend
to notify shareholders before making
any change in any policy or
restriction. Fundamental policies
may not be changed without
shareholder approval. A complete
list of each fund's fundamental
investment restrictions appears in
the Statement of Additional
Information.
Risk Considerations Investments in small-cap companies
for SSCY have certain risks associated with
them. First and foremost is their
greater earnings and price volatility
in comparison to large companies.
Earnings risk is partially due to the
undiversified nature of small company
business lines. The fund attempts to
counteract these concerns about
investing in small-cap companies by
using strict purchase criteria. One
of these criteria stipulates that
these companies must have been sound
and going entities for over three
years. In addition, these companies
must be established dividend-paying
entities. The dividend requirement
helps to reduce share price
volatility of the issues in the fund
and ultimately of the fund itself.
Risk Considerations for each Fund Each fund may invest in REITs.
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.
REITs pay dividends to their
shareholders based upon available
funds from operations. It is quite
common for these dividends to exceed
the REIT's taxable earnings and
profits resulting in the excess
portion of such dividends being
designated as a return of capital. A
fund intends to include the gross
dividends from such REITs in its
distributions to shareholders and,
accordingly, a portion of the funds'
distributions may also be designated
as a return of capital. For more
information, please see the
discussion under "Tax Treatment:
Dividends and Distributions."
Page 11
<PAGE>
Temporary Although each fund normally seeks to
Investments remain fully invested in equity
securities, each fund may invest
temporarily up to 100% of its assets
in certain short-term fixed income
securities. Such securities may be
used to invest uncommitted cash
balances temporarily to maintain
liquidity to meet shareholder
redemptions, or as a defensive
measure to protect capital. These
securities include, but are not
limited to, obligations of the U.S.
government, its agencies and
instrumentalities, commercial paper,
certificates of deposit, bankers
acceptances and repurchase
agreements. When a fund invests for
defensive purposes, the fund may not
achieve its investment objective.
For temporary defensive purposes, SGF
may invest in non-convertible
preferred stocks, debt securities and
domestic corporate and government
fixed income obligations without
limitation and, to the extent such
investments are made, the fund will
not be achieving growth of capital.
Year 2000 The funds could be adversely affected
Compliance if the computer systems used by their
service providers do not properly
process and calculate date-related
information after December 31, 1999.
The Year 2000 issue affects virtually
all companies and organizations.
While Year 2000-related computer
problems could have a negative effect
on the funds, Stratton Management and
First Data Investor Services Group,
Inc. are working to avoid such
problems and to obtain assurances
from the funds' other service
providers that they are taking
similar steps. Companies,
organizations, governmental entities
and securities in which the funds
invest could be affected by the Year
2000 issue, but at this time the
funds cannot predict the degree of
impact. To the extent the effect is
negative, a fund's returns could be
reduced.
INVESTMENT ADVISOR Stratton Management Company, with
offices at Plymouth Meeting Executive
Campus, 610 W. Germantown Pike, Suite
300, Plymouth Meeting, PA 19462-1050,
is the funds' investment advisor and
manager and is a registered
investment advisor. Stratton
Management provides investment
advisory services for a variety of
individuals and institutions, and had
approximately $2.2 billion in assets
under management as of December 31,
1998.
James W. Stratton is the Chief
Executive officer of Stratton
Management and has been primarily
responsible for the day-to-day
investment management of SGF and SMDS
since 1972 and 1980, respectively.
Mr. Frank H. Reichel, III has been
primarily responsible for the
day-to-day investment management of
SSCY since that fund's commencement
of operations in April of 1993.
Pursuant to Investment Advisory
Agreements, Stratton Management
Company provides an investment
program in accordance with each
respective fund's investment
policies, limitations and
restrictions.
Investment Advisory Fee For its advisory services, the
investment advisor receives an annual
fee of 0.75% of daily net assets of
SGF and an annual fee of 0.63% of
daily net assets of SMDS. The
investment advisor voluntarily has
agreed to waive annually $15,000 of
its fees from SGF and SMDS to offset
a portion of the fees that those
funds will incur under administration
agreements with First Data Investor
Services Group. See the Statement of
Additional Information for a detailed
description of those fees. During
the fiscal year ended December 31,
1998, SGF and SMDS paid the
investment advisor fees at the
effective annual rates of .73% and
.61%, of each fund's respective
average daily net assets.
For its investment advisory services
to SSCY, the investment advisor
receives a fee, payable monthly at an
annual rate of 0.75% of average daily
net assets, plus/minus a performance
fee adjustment.
Page 12
<PAGE>
The performance fee adjustment for
SSCY is calculated at the end of each
month based upon the Fund's
performance during the last rolling
24-month period. The fund's gross
performance is then compared with the
performance of the Russell 2000
Index. The Russell 2000 is a widely
recognized unmanaged common stock
index of small to medium size
companies. When the fund performs
better than the Index, it pays the
investment advisor additional fees.
If the fund lags the Index, the
investment advisor is paid less than
the basic fee. Each 1.00% of the
difference in performance between the
fund and the Index during the
performance period is equal to a
0.10% adjustment to the basic fee.
The end result is that if the
investment advisor manages the fund
in such a way as to outperform the
benchmark index, the investment
advisor is paid more for its efforts.
Most important, however, is the fact
that if the investment advisor does
not perform as well as the benchmark
index, the investment advisor is paid
less, and in this way, penalized for
poor performance.
The maximum annualized performance
adjustment rate is +/- 0.50% of
average net assets which would be
added to or deducted from the
investment advisory fee if the fund
outperformed or underperformed the
Index by 5.00%. The effect of this
performance fee adjustment is that
the investment advisory fee may never
be greater than 1.25% or less than
0.25% of the fund's average daily net
assets for the preceding month.
During the fiscal year ended December
31, 1998, SSCY paid the investment
advisor a fee at the effective annual
rate of 1.09% of the fund's average
daily net assets.
PRICING FUND Fund share pricing is based upon net
SHARES asset value. The net asset value per
share of each fund is determined once
each business day as of the close of
regular trading hours (currently 4:00
p.m. Eastern time) on the New York
Stock Exchange ("NYSE"). Such
determination will be made by
dividing the value of all securities
and other assets (including dividends
accrued but not collected) less any
liabilities (including accrued
expenses), by the total number of
shares outstanding.
Portfolio securities are valued as
follows:
1. Securities listed or admitted to
trading on any national securities
exchange are valued at their last
sale price on the exchange where
the securities are principally
traded or, if there has been no
sale on that date, at the mean
between the last reported bid and
asked prices.
2. Securities traded in the over-the-
counter market are valued at the
last sale price, if carried in the
National Market Issues section by
NASDAQ; other over-the-counter
securities are valued at the mean
between the closing bid and asked
prices obtained from a principal
market maker.
3. All other securities and assets are
valued at their fair value as
determined in good faith by the
Board of Directors of the funds,
which may include the amortized
cost method for securities maturing
in sixty days or less and other
cash equivalent investments.
Determination of the net asset value
may be suspended when the right of
redemption is suspended as provided
under "How to Redeem Fund Shares."
Page 13
<PAGE>
HOW TO BUY FUND SHARES
Purchase Price You pay no sales charge to invest in any
of the funds. Shares of all funds are
sold at the net asset value per share
(NAV) next determined after receipt of
the order by First Data Investor
Services Group, Inc.
Time of Requests All requests received by First Data
Investor Services Group before 4:00 p.m.
Eastern Standard Time will be executed
the same day, at that day's closing
share price. Orders received after 4:00
p.m. Eastern Standard Time will be
executed the following day, at that
day's closing share price. Shares will
not be priced on days when the New York
Stock Exchange is closed.
Stock exchange closings Shares of the funds will not be priced
and are not available for purchase on
the following days on which the New York
Stock Exchange is closed for trading:
New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Retirement Plans Each fund has available four types of
tax-deferred retirement plans: (1) a
Profit Sharing and a Money Purchase
Plan, for use by both self-employed
individuals and corporations; (2) an
Individual Retirement Account, both
Traditional and Roth, for use by certain
eligible individuals with compensation
(including earned income from self-
employment); (3) a Simple Individual
Retirement Account for use by certain
small employers; and (4) a 403(b)(7)
Retirement Plan, for use by employees of
schools, hospitals, and certain other
tax-exempt organizations or
associations. More detailed information
about how to participate in these plans,
the fees charged by the custodian, and
the limits on contributions can be found
in the Statement of Additional
Information. To invest in any of the
tax-deferred retirement plans, please
call the funds for information and the
required separate application,
disclosure statement and custodial
agreement.
General Information Shares of a fund may be repurchased or
redeemed through broker/dealers who may
charge a transaction fee. This fee would
not otherwise be charged if the shares
were purchased directly from a fund. The
funds may accept wire purchase orders
from broker/dealers and institutions
that previously have been approved by a
fund.
The funds reserve the right to reject
any purchase order. Share certificates
are issued only upon shareholder
request.
The funds do not accept third party
checks for the purchase of shares. The
funds reserve the right to delay sending
redemption proceeds up to 15 days if you
recently purchased shares by check. A
$20 fee is charged to your account for
any purchase check returned to the
custodian.
Shareholder inquiries should be directed
to the funds' transfer agent, First Data
Investor Services Group, Inc., 3200
Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903, phone number 1-
800-472-4266. Certain special
shareholder services, such as a request
for a historical transcript of your
account, may involve an additional fee.
Shareholders of each fund can obtain
toll-free access to account information,
as well as some transactions, by calling
1(800) 472-4266. Integrated Voice
Response System provides share price and
price change for the funds; gives
account balances and history (i.e., last
transaction, latest dividend
distribution, redemptions by check
during the last three months); and
allows exchanges of shares.
Page 14
<PAGE>
<TABLE>
<CAPTION>
How to buy shares
- ---------------------------------------------------------- ------------------------------------------------------
To open an account To add to an account
- ---------------------------------------------------------- ------------------------------------------------------
BY MAIL BY MAIL
- ---------------------------------------------------------- ------------------------------------------------------
<S> <C>
Complete the application. Please make check payable to the name of the fund
you are investing in and write your account number
Mail the application and your check to: on the check.
FIRST DATA INVESTOR SERVICES GROUP
P.O. BOX 61503 Mail your check and the stub from your last
KING OF PRUSSIA, PA 19406-0903 account
statement to:
Please make check payable to the name of the fund
you wish to invest in. FIRST DATA INVESTOR SERVICES GROUP
P.O. BOX 61767
Minimum initial investment for the funds: KING OF PRUSSIA, PA 19406-8767
$2,000 for non-retirement accounts
No minimum investment for retirement accounts. Minimum additional investments for the funds:
$100 for non-retirement accounts
No minimum for retirement accounts
- ---------------------------------------------------------- ------------------------------------------------------
BY WIRE BY WIRE
- ---------------------------------------------------------- ------------------------------------------------------
For new accounts, call (800) 472-4266. An account Follow instructions under TO OPEN AN ACCOUNT -
number will be assigned to you. - By Wire.
Call your bank with instructions to transmit federal Minimum additional investment: same as "By Mail"
funds to: above.
- Boston Safe Deposit & Trust
- ABA#: 011001234
- Credit: The fund name
- Acct#: 000701
- FBO: name(s) on account registration
and new account number from confirmation
received with letter to shareholders dated
May 14, 1999.
Your bank may charge a wire fee.
Minimum investment: same as "By Mail" above.
Mail your completed application to First Data
Investor Services Group at the address above.
- ---------------------------------------------------------- ------------------------------------------------------
BY AUTOMATIC INVESTMENT BY AUTOMATIC INVESTMENT
- ---------------------------------------------------------- ------------------------------------------------------
Complete the application and return it with your initial Call (800) 472-4266 to request an application.
investment. The minimum investment for this plan is
$100. Complete and return the application along with any
other required materials.
Subsequent investments will be drawn from your
bank account and invested into the fund(s). Subsequent investments will be drawn from your
bank account and invested into the fund(s).
Requires $2,000 initial minimum balance.
</TABLE>
Page 15
<PAGE>
HOW TO
REDEEM FUND
SHARES
Timing of Requests Shares are redeemed at the net asset
value next determined at the close of
regular trading hours on the NYSE
after receipt of a request for
redemption in the form described
below, and the certificates (if any)
evidencing the shares to be redeemed.
There is no redemption charge.
However, the transfer agent will
charge a $9 fee for wiring redemption
proceeds. Payment for shares
redeemed is made within five business
days, or such shorter time period as
may be required by applicable SEC
rules, after receipt of the
certificates (or of the redemption
request where no certificates have
been issued) by mailing a check to
your address of record.
Telephone Redemptions Neither the funds nor any of their
service contractors will be liable
for any loss or expense or cost in
acting upon any telephone
instructions that are reasonably
believed to be genuine. To the
extent that a fund fails to use
reasonable procedures to verify the
genuineness of telephone
instructions, it and/or its service
contractors may be liable for any
such instructions that prove to be
fraudulent or unauthorized.
Redeeming recently purchased shares If you wish to redeem shares that
were recently purchased by check, the
funds may delay mailing of your
redemption check for up to 15
business days after your redemption
request to allow the purchase check
to clear. If you are considering
redeeming shares soon after purchase,
you should purchase by bank wire or
certified check to avoid delay.
Signature guarantees The funds may require additional
documentation, or signature
guarantees on redemptions if proceeds
are to be paid to someone other than
the account holder, when redemption
proceeds are to be wired to a bank,
requests to transfer share
registration, or when redemption
proceeds are to be sent to an address
other than the account holder's. A
signature guarantee helps protect
against fraud. You can obtain one
from most banks or securities
dealers, but not from a notary
public. Please call (800) 472-4266
for information on obtaining a
signature guarantee.
Accounts with low balances If your account falls below $500, the
fund may ask you to increase your
balance. If it is still below $500
after 60 days, the fund may close
your account and send you the
proceeds.
Page 16
<PAGE>
<TABLE>
<CAPTION>
How to redeem shares
- ---------------------------------------------------------- ------------------------------------------------------
To redeem or close an account To redeem or close an account
- ---------------------------------------------------------- ------------------------------------------------------
BY MAIL BY TELEPHONE
- ---------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
Write a letter of To make redemptions by telephone, call (800)
instruction that includes: 472-4266 before the close of business on any
- The fund name, your business day. The funds may require additional
account number, the documentation, or signature guarantees on any
name(s) in which the redemptions in amounts over $50,000.
account is registered
and the dollar value or Proceeds will normally be sent the next
number of shares you business day by first class mail to the address
wish to sell. in which the account is registered.
- Include all signatures
and any additional Redemption requests to send proceeds to an
documents that may be address other than the address of record must
required. be in writing with the appropriate signature
- Mail your request and guarantees. Telephone redemption requests to
any applicable stock send proceeds to banks may be accepted if the
certificates you hold to: appropriate wiring instructions are on file
FIRST DATA INVESTOR SERVICES GROUP prior to the request.
P.O. BOX 61503 ------------------------------------------------
KING OF PRUSSIA, PA 19406-0903
- A check will be mailed BY AUTOMATED CLEARING HOUSE
to the name(s) and ______________________________________________
address in which the Redemption proceeds may be transferred to banks
account is registered. that are on-line members of ACH. There are no
service fees. Written ACH redemption requests
- ---------------------------------------------------------- should be sent to First Data Investor Services
BY EXCHANGE Group at the address under "By Mail." ACH
- ---------------------------------------------------------- redemptions are sent the day following receipt
of your request, and funds are available two
Call (800) 472-4266 to request an exchange of days later.
shares into another Stratton Mutual Fund.
- ----------------------------------------------------------
BY SYSTEMATIC CASH WITHDRAWAL PLAN
- ----------------------------------------------------------
Complete the appropriate part of the application and
specify the amount and frequency of withdrawals you would
like (monthly minimum is $50). Be sure to maintain an
account balance of $10,000 or more.
</TABLE>
EXCHANGE
PRIVILEGE You can exchange fund shares for shares of the
other Stratton funds, provided such other shares
may legally be sold in your state. Each fund has a
distinct investment objective, which should be
reviewed before executing any exchange of shares.
You also should read the additional information
about a fund, including its expenses, before
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.
Page 17
<PAGE>
PLEASE NOTE: Shareholders who have certificated
shares must surrender these certificates to the
transfer agent to be held on account in unissued
form before taking advantage of the exchange
privilege. When returning certificates for this
purpose only, signature(s) need not be guaranteed.
There are no sales charges involved. Shareholders
who engage in frequent exchange transactions may be
prohibited from further exchanges or otherwise
restricted in placing future orders. The funds
reserve the right to suspend the telephone exchange
privilege at any time. An exchange for tax purposes
constitutes the sale of one fund and the purchase
of another. Consequently, the sale may involve
either a capital gain or loss to the shareholder
for federal income tax purposes.
TAX Each fund contemplates declaring as dividends each
TREATMENT: year all or substantially all of its taxable
DIVIDENDS AND DISTRIBUTIONS income, including its net capital gain (the excess
of long-term capital gain over short-term capital
Tax Treatment loss). Distributions attributable to the net
capital gain of a fund will be taxable to you as
long-term capital gain, regardless of how long you
have held your shares. Other fund distributions
will generally be taxable as ordinary income.
(However, if a fund's distributions exceed its net
income and gain -- as may be the case particularly
for SMDS, because REIT distributions often include
a nontaxable return of capital - that excess will
generally result in a nontaxable return of capital
to you.)
The tax treatment to you of fund distributions will
be the same regardless whether they are paid in
cash or reinvested in additional shares. Any
dividends declared in October, November or December
and paid in January will be deemed for tax purposes
to have been paid to you on December 31. You will
be notified annually of the amount and tax status
of all distributions to you.
REITs often do not provide complete tax information
to the funds until after the calendar year-end.
Consequently, because of the delay, it may be
necessary for the funds to request permission to
extend the deadline for issuance of Forms 100-DIV
beyond Janaury 31.
You should note that if you purchase shares shortly
before a taxable distribution, the purchase price
will reflect the amount of the upcoming
distribution, but you will be taxable on the entire
amount of the distribution received, even though,
as an economic matter, the distribution simply
constitutes a return of capital. This is known as
"buying into a dividend."
You will recognize taxable gain or loss on a sale,
exchange or redemption of your shares, including an
exchange for shares of another fund, based on the
difference between your tax basis in the shares and
the amount you receive for them. (To aid in
computing your tax basis, you generally should
retain your account statements for the periods
during which you held shares.) Any loss realized on
shares held for six months or less will be treated
as long-term capital loss to the extent of any
capital gain dividends that were received on the
shares.
The one major exception to these tax principles is
that distributions on, and sales, exchanges and
redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
Also, dividends paid to shareholders that are
corporations will be eligible for the 70%
dividends-received deduction to the extent the
dividends are attributable to qualifying dividends
received by the fund from domestic corporations.
You will also generally be subject to any
applicable state and local income taxes on fund
distributions and redemptions. State income taxes
generally will not apply, however, to fund
distributions attributable to interest on federal
securities, if any.
Each fund is required by Federal tax law to
withhold 31% of reportable payments (which may
include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not
complied with Internal Revenue Service regulations
regarding Tax
Page 18
<PAGE>
Identification Certification. In order to avoid
this withholding requirement, you must certify by
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.
The foregoing is only a summary of certain tax
considerations under current law, which may be
subject to change in the future. You should consult
your tax adviser for further information regarding
federal, state, local and/or foreign tax
consequences relevant to your specific situation.
Dividends and The shareholders of each fund are entitled to
Distributions dividends 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 of such
fund. SGF declares and pays dividends from net
investment income on a semi-annual basis. SMDS
declares and pays dividends from net investment
income on a monthly basis. SSCY declares and pays
dividends from net investment income annually. Each
fund will make distributions from net realized
gains, if any, once a year, but may make
distributions on a more frequent basis so as to
avoid incurring any fund level income or excise
taxes. Any distribution paid necessarily reduces a
fund's net asset value per share by the amount of
the distribution. Distributions may be reinvested
in additional shares of such fund.
Page 19
<PAGE>
The Statement of Additional Information (SAI)
contains additional information about the funds.
The Statement of Additional Information is
incorporated by reference in to this Prospectus in
its entirety. Additional information about a fund's
investments is available in the fund's annual and
semi-annual reports to shareholders. In the annual
report, you will find a discussion of the market
conditions and investment strategies that
significantly affected each fund's performance
during the last fiscal year.
To obtain an SAI, annual report or semi-annual
report for the funds, without charge, call 1-800-
472-4266. This number may also be used to make
shareholder inquiries.
Information about the funds (including the SAI) can
be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. (telephone 800-
SEC-0330), or by mail by sending your request,
along with a duplicating fee, to the SEC's Public
Reference Section, Washington, D.C. 20549-6009.
Reports and other information about the funds are
available on the SEC's internet website at
http://www.sec.gov.
SGF's Investment Company Act File No. is 811-2297
SMDS' Investment Company Act File No. is 811-2240
The Stratton Funds, Inc. Investment Company Act
File No. is 811-7434
Page 20
<PAGE>
STRATTON
MUTUAL FUNDS
STRATTON GROWTH FUND, INC.
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
STRATTON SMALL-CAP YIELD FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information provides supplementary information
pertaining to shares of common stock in three separate mutual funds: STRATTON
GROWTH FUND, INC. ("SGF"); STRATTON MONTHLY DIVIDEND REIT SHARES, INC. ("SMDS");
and STRATTON SMALL-CAP YIELD FUND ("SSCY").
This Statement of Additional Information is not a Prospectus but should be read
in conjunction with the current Prospectus dated May 1, 1999, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into the Prospectus. The funds' audited financial statements and financial
highlights included in their annual report to shareholders are incorporated by
reference into this Statement of Additional Information. A copy of the funds'
Prospectus and, annual report are available, without charge, upon request, by
contacting the funds' Distributor, First Data Distributors, Inc., 4400 Computer
Drive, Westborough, MA 01581, or by telephoning (800) 634-5726.
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
HISTORY OF THE FUNDS........................................
INVESTMENT RESTRICTIONS.....................................
SGF....................................................
SMDS...................................................
SSCY...................................................
MANAGEMENT OF THE FUNDS.....................................
Directors and Officers.................................
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.........
INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS..............
Investment Advisor.....................................
Service Providers and Underwriter......................
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS............
PURCHASE AND REDEMPTION INFORMATION.........................
RETIREMENT PLANS............................................
Defined Contribution Plans.............................
Individual Retirement Account..........................
Roth-IRA...............................................
403(b)(7) Retirement Plan..............................
Simple Individual Retirement Account...................
General Information....................................
INFORMATION CONCERNING TAXES................................
Taxation of Certain Financial Instruments..............
DESCRIPTION OF COMMON STOCK.................................
PERFORMANCE CALCULATIONS....................................
FINANCIAL STATEMENTS........................................
<PAGE>
HISTORY OF THE FUNDS
This Statement of Additional Information pertains to the following separate
funds incorporated under the laws of the State of Maryland:
NAME OF FUND DATE OF INCORPORATION
- ------------ ---------------------
Stratton Growth Fund, Inc. (SGF) June 21, 1985*
Stratton Monthly Dividend REIT Shares, Inc. (SMDS) March 4, 1985 **
The Stratton Funds, Inc. January 5, 1993
Stratton Small-Cap Yield Fund (SSCY)
* As successor to a Delaware corporation organized on June 5, 1972.
** As successor to a Delaware corporation organized on November 10, 1971.
On December 9, 1997, the fund changed its name from Stratton Monthly
Dividend Shares, Inc.
Prior to December 31, 1996, the fiscal year ends for SGF, SMDS and SSCY were May
31, January 31 and March 31, respectively. As of December 31, 1996 the funds
changed to a December 31 fiscal year end. For the fiscal year ended December
31, 1996, financial information covered shortened periods of 7, 11 and 9
months, respectively.
CLASSIFICATION:
The funds are classified as open-end management investment companies. The funds
are diversified, which means that, with respect to 75% of each fund's total
assets, the fund will not invest more than 5% of their respective assets in the
securities of any single issuer (other than securities issued by the U.S.
Government or its agencies or instrumentalities).
INVESTMENT RESTRICTIONS
The following investment restrictions are deemed fundamental policies and may be
changed with respect to a fund only by the approval of the holders of a
"majority" of such fund's outstanding shares. The term "majority" of a fund's
outstanding shares means the holders of the lesser of: (1) 67% of such fund's
shares present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy; or (2) more than 50% of such fund's
outstanding shares.
SGF WILL NOT:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer, except for securities of the United States government or
agencies thereof.
2. Invest in more than 10% of any class of securities of any one issuer
(except for government obligations) or in more than 10% of the voting
securities of any one issuer.
3. Invest more than 5% of the value of its total assets in securities of
companies which (including operations of their predecessors and of
subsidiaries if the company is a holding company) have not had a record of
at least three years of continuous operations and in equity securities
which are not readily marketable (that is, with a limited trading market).
1
<PAGE>
4. Borrow money, except from banks for temporary or emergency purposes (but
not for investment purposes), provided that such borrowings shall not
exceed 5% of its total assets (at the lower of cost or market value).
5. Underwrite the securities of other issuers or invest in securities under
circumstances where, if sold, the fund might be deemed to be an underwriter
under the Securities Act of 1933.
6. Pledge, mortgage or hypothecate its assets.
7. Invest for purposes of exercising management or control.
8. Invest in securities of other investment companies or in options, puts,
calls, straddles, spreads or similar devices, or engage in arbitrage
transactions or short sales.
9. Purchase securities on margin, but the fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
10. Make loans to other persons except that this restriction shall not apply to
government obligations, commercial paper or notes or other evidences of
indebtedness which are publicly distributed.
11. Purchase or sell real estate or interests in real estate. This will not
prevent the fund from investing in publicly-held real estate investment
trusts or marketable securities which may represent indirect interests in
real estate.
12. Purchase or sell commodities or commodity contracts or invest in interests
in oil, gas or other mineral exploration or development programs.
13. Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any officer or director of the fund or its investment advisor
owns beneficially more than 1/2 of 1%, and such officers and directors
holding more than 1/2 of 1% together own beneficially more than 5% of the
issuer's securities.
14. 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.
The fund will not invest more than 2% of the value of its total assets in
warrants. This restriction does not apply to warrants initially attached to
securities purchased by the fund. This restriction may be changed or eliminated
at any time by the Board of Directors of the fund without action by the fund's
shareholders.
SMDS WILL NOT:
1. Borrow money, except from banks for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets; or mortgage,
pledge or hypothecate its assets to secure any borrowing except to secure
temporary or emergency borrowing and then only in an amount not exceeding
15% of the value of its total assets.
2. Invest more than 5% of the value of its total assets in securities of
issuers which, with their predecessors, have not had at least three years
of continuous operation.
3. Issue any senior securities (as defined in the 1940 Act), except in so far
as investment restriction 1 may be deemed to be an issuance of a senior
security.
2
<PAGE>
4. Act as an underwriter or purchase securities which the fund may not be free
to sell to the public without registration of the securities under the
Securities Act of 1933.
5. Purchase or sell real estate, commodities, or commodity contracts.
6. 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, it
agencies or its instrumentalities, if immediately thereafter such purchase
more than 5% of the total assets of the fund would be invested in
securities of such issuer.
7. Purchase or own 5% or more of the outstanding voting securities of any
electric or gas utility company (as defined in the Public Utility Holding
Company Act of 1935), or purchase or own 10% or more of the outstanding
voting securities of any other issuer.
8. Purchase the securities of an issuer, if, to the fund's knowledge, one or
more Officers or Directors of the fund or of its investment advisor
individually own beneficially more than 0.5%, and those owning more than
0.5% together own beneficially more than 5%, of the outstanding securities
of such issuer.
9. Make loans to other persons, except that the purchase of a portion of an
issue of publicly distributed debt securities (whether or not upon original
issuance) shall not be considered the making of a loan.
10. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities.
11. Participate on a joint or a joint-and-several basis in any securities
trading account.
12. Invest in puts, calls or combinations thereof or make short sales.
13. Purchase the securities of other investment companies.
14. Purchase securities which do not have readily available market quotations.
15. The fund will invest at least 25% of its assets in securities of real
estate investment trusts.
The fund will invest at least 25% of its assets in real estate investment trusts
("REITs"), and thus will be concentrated. REITs are not considered investment
companies, and therefore are not subject to the restriction in limitation 13
above. The restriction in limitation 5 on the purchase or sale of real estate
does not include investments by the fund in securities secured by real estate or
interests therein or issued by companies or investment trusts which invest in
real estate or interests therein.
The following investment restrictions can be changed only by the Board of
Directors of SMDS:
1. The fund will not invest for the purpose of exercising control or
management.
2. The fund will not invest in warrants, except when acquired as a unit with
other securities.
SSCY WILL NOT:
1. Issue any senior securities (as defined in the Investment Company Act of
1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total assets; or
mortgage, pledge or hypothecate its assets.
3
<PAGE>
2. Act as an underwriter of securities, except that, in connection with the
disposition of a security, the fund may be deemed to be an "Underwriter" as
that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate, commodities, or commodity contracts.
4. As to 75% of the total assets of the fund, purchase the securities of any
one issuer, other than securities issued by the U.S. government, its
agencies or its instrumentalities, if immediately after such purchase more
than 5% of the total assets of the fund would be invested in securities of
such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any one
issuer.
6. Purchase the securities of an issuer, if, to the fund's knowledge, one or
more Officers or Directors of the fund or of its investment advisor
individually own beneficially more than 0.5%, and those owning more than
0.5% together own beneficially more than 5%, of the outstanding securities
of such issuer.
7. Make loans to other persons, except that the purchase of a portion of an
issue of publicly distributed debt securities (whether or not upon original
issuance) shall not be considered the making of a loan, nor shall the fund
be prohibited from entering into repurchase agreements with banks or
broker/dealers.
8. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities.
9. Purchase the securities of issuers conducting their principal business
activities in the same industry other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities if, immediately
after such purchase, the value of the fund's investments in such industry
would exceed 25% of the value of the total assets of the fund.
10. Invest in puts, calls, straddles or combinations thereof or make short
sales.
11. Purchase the securities of other investment companies, except if they are
acquired pursuant to a merger, consolidation, acquisition, plan of
reorganization or a Securities and Exchange Commission approved offer of
exchange.
12. Invest for the purpose of exercising control over, or management of, the
issuer.
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.
* * *
4
<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 a fund's investments will not cause a violation
of the limitations. In addition, the limitations will not be violated if a fund
receives securities by reason of a merger or other form of reorganization.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The business of each fund is managed under the direction of the Board of
Directors of SGF, SMDS and THE STRATTON FUNDS, INC. (collectively, the
"Companies"). The Directors and executive officers of the Companies, their
positions with the Companies, their addresses, affiliations, if any, with the
investment advisor, and principal occupations during the past five years are set
forth below. Each of the Directors named below is a Director for each of the
Companies and each of the officers named below holds the same position, unless
otherwise noted, with each of the Companies.
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James W. Stratton/1//3/ 62 Director/ Mr. Stratton is the Chairman of the Board
610 W. Germantown Pike Chairman and Chief Executive Officer of the
Suite 300 investment advisor, Stratton Management
Plymouth Meeting, PA 19462 Company. He is a Director of Unisource
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/ 43 Director Ms. Cannon is a Vice President of Client
3200 Horizon Drive Services of First Data Investor Services
King of Prussia, PA 19406 Group, Inc. She was formerly a Director of
FPS Broker Services, Inc. She was formerly
employed as Vice President of Mutual Funds
of Independence Capital Management, Inc.
(investment advisor).
John J. Lombard, Jr. 64 Director Mr. Lombard is a partner in the law firm of
1701 Market St. Morgan, Lewis & Bockius LLP.
Philadelphia, PA 19103
Douglas J. MacMaster, Jr. 68 Director Mr. MacMaster is a private investor. He was
5 Morris Road formerly Senior Vice President of Merck,
Ambler, PA 19002 Inc. He is a Director of American Precision
Industries, Inc., Marteck Biosciences Corp.,
Neose Pharmaceuticals Inc., Oravax, Inc.,
U.S. Bioscience, Inc., and Flamel
Technologies, S.A.
Henry A. Rentschler 70 Director Mr. Rentschler is a private investor. He
P.O. Box 962 was formerly the President of
Paoli, PA 19301 Baldwin-Hamilton Company, a 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/ 69 Director Mr. Rhoad is a private investor.
640 Bridle Road
Custis Woods
Glenside, PA 19038
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
- --------------------------------------------------------------------------------------------------
<S> <C>
Richard W. Stevens 65 Director Mr. Stevens is an attorney in private practice.
One Jenkintown Station
115 W. Avenue, Suite 108
Jenkintown, PA 19046
John A. Affleck/3/ 52 Officer Mr. Affleck is President and Director of the
610 W. Germantown Pike investment advisor, Stratton Management
Suite 300 Company. He is President of Stratton
Plymouth Meeting, PA 19462 Monthly Dividend REIT Shares, Inc., Vice
President of Stratton Growth Fund, Inc. and
The Stratton Funds, Inc.
Gerard E. Heffernan/3/ 61 Officer Mr. Heffernan is a Senior Vice President and
610 W. Germantown Pike Director of the investment advisor, Stratton
Suite 300 Management Company. He is President of
Plymouth Meeting, PA 19462 Stratton Growth Fund, Inc., Vice President
of Stratton Monthly Dividend REIT Shares,
Inc. and The Stratton Funds, Inc. He is a
Director of FinDaTex, Inc.
Frank H. Reichel, III 34 Officer Mr. Reichel is a Vice President, a Director
610 W. Germantown Pike and the Director of Quantitative Research of
Suite 300 the investment advisor, Stratton Management
Plymouth Meeting, PA 19462 Company. He is President of The Stratton
Funds, Inc., Vice President of Stratton
Growth Fund, Inc. and Stratton Monthly
Dividend REIT Shares, Inc. and Portfolio
Manager of Stratton Small-Cap Yield Fund.
James A. Beers 36 Officer Mr. Beers is a Vice President of the
610 W. Germantown Pike investment advisor, Stratton Management
Suite 300 Company; prior thereto, Account Manager of
Plymouth Meeting PA 19462 Client Services at FPS Services, Inc. He is
Vice President of the Funds. Mr. Beers is
related to Mr. Stratton by marriage.
Joanne E. Kuzma 44 Officer Mrs. Kuzma is the Director of Trading and a
610 W. Germantown Pike Managing Partner of the investment advisor,
Suite 300 Stratton Management Company. She is Vice
Plymouth Meeting, PA 19462 President of Compliance for the Funds.
Patricia L. Sloan 45 Officer Ms. Sloan is an employee of the investment
610 W. Germantown Pike advisor, Stratton Management Company. She
Suite 300 is Secretary and Treasurer of the Funds.
Plymouth Meeting, PA 19462
Carol L. Royce 41 Officer Mrs. Royce is an employee of the investment
610 W. Germantown Pike advisor, Stratton Management Company. She
Suite 300 is Assistant Secretary and Assistant
Plymouth Meeting PA 19462 Treasurer of the Funds.
</TABLE>
1 As defined in the 1940 Act, Mr. Stratton is an "interested person" of the
funds by reason of his positions with the investment advisor.
2 Ms. Cannon is an "interested person" of the funds by reason of her
affiliation with First Data Distributors, Inc., the funds' distributor.
3 Messrs. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
The officers and Directors of the Companies who are also officers or employees
of the investment advisor receive no direct compensation from the funds for
services to them. The Directors of the Companies serve in the same capacity for
each Company and meet concurrently four times a year. In the aggregate, each
director currently receives $1,000 for each meeting attended, and an annual
retainer of $5,000. These fees are divided on a percentage basis between each
fund based on their relative net assets as of the meeting date. There are no
separate audit, compensation or nominating committees of the Board of Directors.
6
<PAGE>
Set forth are the total fees which were paid to each of the directors who are
not "interested persons" for fiscal year ending December 31, 1998:
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation Fund and Fund Complex (1)
Name of Director From Fund Paid to Directors
- ---------------- ---------------------- -------------------------
<S> <C> <C>
James W. Stratton
SGF $ 0 $ 0
SMDS $ 0
SSCY $ 0
SSVF $ 0
Lynne M. Cannon $ 0
SGF $ 0
SMDS $ 0
SSCY $ 0
SSVF $ 0
John J. Lombard, Jr.
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
Douglas J. MacMaster, Jr.
SGF $2,456.96 $8,000.00
SMDS $3,425.46
SSCY $1,882.76
SSVF $ 234.82
Henry A. Rentschler
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
Merritt N. Rhoad, Jr.
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation Fund and Fund Complex (1)
Name of Director From Fund Paid to Directors
- ---------------- ---------------------- -------------------------
<S> <C> <C>
Alexander F. Smith (2)
SGF $1,726.14 $5,750.00
SMDS $2,477.21
SSCY $1,384.22
SSVF $ 162.43
Richard W. Stevens
SGF $2,768.73 $9,000.00
SMDS $3,853.97
SSCY $2,111.63
SSVF $ 265.67
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The "Fund Complex" consists of SGF, SMDS and THE STRATTON FUNDS, INC.
During the fiscal year ended December 31, 1998, THE STRATTON FUNDS, INC.
consisted of SSCY and STRATTON SPECIAL VALUE FUND ("SSVF").
(2) Mr. Smith is deceased.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 16, 1999, ownership in the funds by the directors and officers
as a group was as follows:
Percentage of
Fund Outstanding Shares
- ---- ------------------
1. SGF 4.0%
2. SMDS 0.6%
3. SSCY 3.8%
As of February 16, 1999, the following shareholders owned of record more than
5% of the outstanding shares of the respective fund.
Shares Percent
Name and Address Owned Owned
-------------------------- ------- ------
1. SGF None
2. SMDS Charles Schwab & Co., Inc. 279,761 8.77%
8
<PAGE>
Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
Boston & Company 222,842 6.98%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
3. SSCY Boston & Company 482,922 23.73%
CUST TJU Employee Pension Plan
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Boston & Company 240,000 11.79%
CUST Thomas Jefferson University
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Charles Schwab & Co., Inc. 213,261 10.48%
SPL CSTY a/c FBO Customers Reinvest Account
Mutual Funds Department
101 Montgomery Street
San Francisco, CA
INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
INVESTMENT ADVISOR
Stratton Management Company is the fund's investment advisor. By reason of his
ownership of all of the investment advisor's voting stock, James W. Stratton may
be considered a "controlling person" of Stratton Management Company. Other
persons who are affiliated with both the funds and with Stratton Management are
listed under the Directors and officers table under "Management of the Funds."
The amount of investment advisory fees paid by each fund for the last three
fiscal years is as follows:
1. SGF - During the fiscal year ended May 31, 1996, the fees paid to the
investment advisor totaled $266,741. For the period June 1, 1996 through
December 31, 1996, the fees paid to the investment advisor were $177,939.
For the fiscal years ended December 31, 1997 and 1998, the fees paid to
the Investment Advisor were $366,356 and $453,119, respectively.
2. SMDS - During the fiscal year ended January 31, 1996, the fees paid to the
investment advisor totaled $794,629. For the period February 1, 1996
through December 31, 1996, the fees paid to the investment advisor were
$606,818. For the fiscal years ended December 31, 1997 and 1998, the fees
paid to the Investment Advisor were $600,138 and $548,380, respectively.
9
<PAGE>
3. SSCY - During the fiscal year ended March 31, 1996, the fees paid to the
investment advisor totaled $126,638. For the period April 1, 1996 through
December 31, 1996, the fees paid to the investment advisor were $91,179.
For the fiscal years ended December 31, 1997 and 1998, the fees paid to the
investment advisor were $312,050 and $526,297, respectively.
The performance adjustment for SSCY is calculated at the end of each month
based upon a rolling 24 month performance period. The performance
adjustment is added to or subtracted from the basic investment advisory
fee. Pursuant to the performance adjustment, a fund's gross performance is
compared with the performance of the Frank Russell 2000, a widely
recognized unmanaged index of common stock prices, over a rolling 24-month
performance period. The Russell 2000 is composed of the smallest 2000
stocks in the Frank Russell annual ranking of 3000 common stocks by market
capitalization. The Russell 2000 is a widely recognized common stock index
of small to medium size companies. Total return performance on the Russell
2000 includes dividends and is reported monthly on market capitalization-
weighted basis. When 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 investment advisory fee if the
fund outperformed or under performed the Russell 2000 by 5.00%. The effect
of this performance fee adjustment is that the investment advisory fee may
never be greater than 1.25% or less than 0.25% of the fund's average daily
net assets for the preceding month.
Performance Fee Schedule For SSCY
+: 1.25%
1.15%
1.05%
0.95%
0.85%
Basic Fee: 0.75%
0.65%
0.55%
0.45%
0.35%
-: 0.25%
SERVICE PROVIDERS AND UNDERWRITER
First Data Investor Services Group, Inc. ("Investor Services Group"), a wholly-
owned subsidiary of First Data Corporation, has been engaged by the funds to
provide most of the back office services on the funds' behalf. Pursuant to
certain agreements, Investor Services Group provides the services commonly and
separately referred to as: Fund Administration, Fund Accounting, Transfer Agency
and Custody Administration. Effective February 23, 1998, FPS Services, Inc.
("FPS"), a wholly-owned subsidiary of FinDaTex, Inc. was acquired by Investor
Services Group. Certain Directors and officers of the funds are shareholders of
FinDaTex, Inc. FPS formerly provided these services.
As the funds' accounting services agent, Investor Services Group is responsible
for certain accounting services such as computation of the net asset value of
the funds' shares and maintenance of the funds' books and financial records.
1. SGF - For the fiscal year ended May 31, 1996, the fund paid FPS $20,000 in
fees pursuant to the Accounting Services Agreement. For the period June 1,
1996 through December 31, 1996, the fund paid FPS $11,667 in fees pursuant
to the Accounting Services Agreement. For the fiscal year ended December
31, 1997, the fund
10
<PAGE>
paid FPS $20,000 in fees pursuant to the Accounting Services Agreement. For
the fiscal year ended December 31, 1998, the fund paid FPS or Investor
Services Group $20,000 for accounting services.
2. SMDS - For the fiscal year ended January 31, 1996, the fund paid FPS
$26,000 in fees pursuant to the Accounting Services Agreement. For the
period February 1, 1996 through December 31, 1996, the fund paid FPS
$23,833 in fees pursuant to the Accounting Services Agreement. For the
fiscal year ended December 31, 1997, the fund paid FPS $26,000 in fees
pursuant to the Accounting Services Agreement. For the fiscal year ended
December 31, 1998, the fund paid FPS or Investor Services Group $26,500 for
accounting services.
3. SSCY - For the fiscal year ended March 31, 1996, the fund paid FPS $20,000
in fees pursuant to the Accounting Services Agreement. For the period
April 1, 1996 through December 31, 1996, the fund paid FPS $15,000 in fees
pursuant to the Accounting Services Agreement. For the fiscal year ended
December 31, 1997, the fund paid FPS $21,666 in fees pursuant to the
Accounting Services Agreement. For the fiscal year ended December 31,
1998, the fund paid FPS or Investor Services Group $27,364 for accounting
services.
As the funds' administrative services agent, Investor Services Group is
responsible for certain administrative services such as: (1) coordinate and
monitor the activities of any other third party service provider providing
services to the funds (e.g. the funds' independent auditors, printers, etc.);
(2) provide the funds with necessary office space, telephones and other
communications facilities and personnel competent to perform the
responsibilities under the Agreement; (3) maintain such books and records of the
funds as may be required by applicable Federal or state law; (4) prepares and,
after approval by the funds, files and arranges for the distribution of proxy
materials and periodic reports to shareholders of the funds as required by
applicable law; (5) prepares and, after approval by the funds, arranges for the
filing of such registration statements and other documents with the U.S.
Securities and Exchange Commission and any other Federal or state regulatory
authorities as may be required by applicable law; (6) reviews and submits to the
officers of the funds for their approval, invoices or other requests for payment
of the funds' expenses and instructs the Custodian to issue checks in payment
thereof, and (7) takes such other action with respect to the funds as may be
deemed by Investor Services Group to appropriately perform its duties under the
Agreement.
1. SGF - For the fiscal year ended May 31, 1996, the fund paid FPS $30,000 in
fees for administrative services. For the period from June 1, 1996 through
December 31, 1996, the fund paid FPS $17,500. For the fiscal year ended
December 31, 1997, the fund paid FPS $30,000 in fees for administrative
services. For the fiscal year ended December 31, 1998, the fund paid FPS
or Investor Services Group $30,000 for administrative services. The
investment advisor has waived $15,000 annually of the compensation due it
under the investment advisory Agreement, to offset a portion of the fee
that the fund will incur under the Administration Agreement. This fee
waiver can be terminated or reduced by the investment advisor upon 60 days
prior written notice to the fund.
2. SMDS - For the fiscal year ended January 31, 1996, the fund paid FPS
$30,000 in fees for administrative services. For the period from February
1, 1996 through December 31, 1996, the fund paid FPS $27,500. For the
fiscal year ended December 31, 1997, the fund paid FPS $30,000 in fees for
administrative services. For the fiscal year ended December 31, 1998, the
fund paid FPS or Investor Services Group $30,500 for administrative
services. The investment advisor has waived $15,000 annually of the
compensation due it under the investment advisory agreement, to offset a
portion of the fee that the fund will incur under the Administration
Agreement. This fee waiver can be terminated or reduced by the investment
advisor upon 60 days prior written notice to the fund.
3. SSCY - For the fiscal year ended March 31, 1996, the fund paid FPS $10,000
in fees for administrative services. For the period from April 1, 1996
through December 31, 1996, the fund paid FPS $7,500. For the fiscal year
ended December 31, 1997, the fund paid FPS $10,833 in fees for
administrative services. For the fiscal year ended December 31, 1998, the
fund paid FPS or Investor Services Group $30,000 for administrative
services.
11
<PAGE>
Investor Services Group also serves as the funds' transfer agent and dividend-
paying agent. Investor Services Group annually receives $15.00 per account for
providing transfer agent and dividend disbursing agent services.
The funds' independent auditor is Tait, Weller & Baker, 8 Penn Center Plaza,
Suite 800, Philadelphia PA 19103. The auditor's responsibilities are (1) to
ensure that all relevant accounting principles are being followed by the funds;
and (2) to report to the Boards of Directors concerning the funds' operations.
The Bank of New York, 48 Wall Street, New York, New York 10286 serves as the
custodian of each fund's assets pursuant to custodian agreements. Under such
agreements, The Bank of New York (1) maintains a separate account or accounts in
the name of the funds; (2) holds and transfers portfolio securities on account
of the funds; (3) accepts receipts and makes disbursements on money on behalf of
the funds; (4) collects and receives all income and other payments and
distributions on account of the funds' securities; and (5) makes periodic
reports to the Boards of Directors concerning the funds' operations.
First Data Distributors, Inc. ("FDDI"), 4400 Computer Drive, Westborough, MA
01581, serves as underwriter for the funds. FDDI, a wholly-owned subsidiary of
Investor Services Group, acts as underwriter for the limited purposes of
facilitating the qualification of shares of each fund under state securities
laws, assisting with the sale of each fund's shares, and licensing of the
investment advisors' sales representatives.
Until December 31, 1998, FPS Broker Services, Inc. ("FPSB") served as the funds'
underwriter. FPSB was an affiliate of the investment advisor inasmuch as both
FPSB and the investment advisor were under common control.
For the services to be provided in facilitating the qualification of each fund's
shares under state securities laws, FPSB has received an annual fee of $3,000
from each fund for providing these services in each of the last three fiscal
years. FDDI will be paid according to the same fee schedule.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The funds seek to obtain the best price and execution in all purchases and sales
of securities, except when the authorization to pay higher commissions for
research and services, as provided for in the investment advisory agreements, is
exercised. Purchases and sales of over-the-counter securities are ordinarily
placed with primary market makers acting as principals. Consistent with its
obligation to seek the best price and execution, the funds may place some
purchases and sales of portfolio securities with dealers or brokers who provide
statistical and research information to the investment advisor. Statistical and
research services furnished by brokers through whom the funds effects securities
transactions in accordance with these procedures are ordinarily of general
application and may be used by the investment advisor in servicing other
accounts as well as that of the funds. In addition, not all such services may
be used in connection with the investment advisor's activities on behalf of the
funds. Portfolio transactions are assigned to brokers, and commission rates
negotiated, based on an assessment of the reliability and quality of a broker's
services, which may include research and statistical information such as reports
on specific companies or groups of companies, pricing information, or broad
overviews of the stock market and the economy.
Although investment decisions for the funds will be made independently from
investment decisions made with respect to other clients advised by the
investment advisor, simultaneous transactions may occur on occasion when the
same security is suitable for the investment objectives of more than one client.
When two or more such clients are simultaneously engaged in the purchase or sale
of the same security, to the extent possible the transactions will be averaged
as to price and allocated among the clients in accordance with an equitable
formula. In some cases this system could have a detrimental effect on the price
or quantity of a security available to the funds. In other cases, however, the
ability of the funds to participate with other clients of the investment advisor
in volume transactions may produce better executions for the funds.
12
<PAGE>
The investment advisory agreements contain provisions which authorize the
investment advisor to pay on behalf of the funds brokerage commissions in excess
of commissions which might be charged by other brokers, where a determination is
made that the amount of commission paid is reasonable in relation to the
brokerage and research services provided by the broker to the funds, viewed in
terms of the particular transaction or the overall responsibilities of the
investment advisor with respect to the funds. In addition, the investment
advisory agreements recognize that the investment advisor may, at its expense,
acquire statistical and factual information, advice about economic factors and
trends and other appropriate information from others in carrying out its
obligations.
1. SGF - During the fiscal year ended May 31, 1996; the period June 1, 1996
through December 31, 1996; and the fiscal years ended December 31, 1997 and
1998, the fund paid $13,398, $24,150, $46,704 and $47,812 respectively, in
brokerage commissions, substantially all of which were paid to brokers
which had provided research, statistical data or pricing information to the
investment advisor. The variation in these commissions from year to year
reflects primarily the amount of total net assets in the fund and to a
lesser extent the annual turnover rate. For the fiscal year ended May 31,
1996; the period ended December 31, 1996 and the fiscal years ended
December 31, 1997 and 1998, the fund's portfolio turnover rates were
15.41%, 20.32%, 34.40% and 38.02%, respectively.
2. SMDS - During the fiscal year ended January 31, 1996; the period February
1, 1996 through December 31, 1996; and the fiscal years ended December 31,
1997 and 1998, the fund paid $280,842, $337,175, $184,272 and $64,746,
respectively, in brokerage commissions, substantially all of which were
paid to brokers which had provided research, statistical data or pricing
information to the investment advisor. The variation in these commissions
from year to year reflects primarily the amount of total net assets in the
fund and to a lesser extent the annual turnover rate. For the fiscal year
ended January 31, 1996; the period ended December 31, 1996 and the fiscal
years ended December 31, 1997 and 1998, the fund's portfolio turnover
rates were 53.30%, 69.19%, 42.47% and 18.89%, respectively.
3. SSCY - During the fiscal year ended March 31, 1996; the period April 1,
1996 through December 31, 1996; and the fiscal years ended December 31,
1997 and 1998, the fund paid $22,378, $29,899, $41,488 and $74,069,
respectively, in brokerage commissions, substantially all of which were
paid to brokers which had provided research, statistical data or pricing
information to the investment advisor. For the fiscal year ended March
31, 1996; the period ended December 31, 1996 and the fiscal year ended
December 31, 1997 and 1998 the fund's portfolio turnover rates were 33.50%,
35.86%, 26.27% and 35.74%, respectively.
PURCHASE AND REDEMPTION INFORMATION
Please call Investor Services Group at 800-472-4266 to verify required language
for all retirement plan redemption requests or to obtain the Retirement Plan
Withdrawal Form. No redemption shall be made unless your Application is first
on file. In addition, a fund will not accept redemption requests until checks
(including certified checks or cashier's checks) received for the shares
purchased have cleared, which can be as long as 15 days.
Redemption requests mailed to the investment advisor must be forwarded to the
transfer agent and will not be effected until they are received in good order by
the transfer agent. The transfer agent cannot accept redemption requests which
specify a particular forward date for redemption.
All withdrawals under the Systematic Cash Withdrawal Plan 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.
If withdrawals under the Systematic Cash Withdrawal Plan exceed income dividends
and capital gains distributions, your invested principal will be depleted. Thus,
depending on the size of withdrawal payments and fluctuations in the
13
<PAGE>
value of your shares, your original investment could be exhausted entirely. You
may change or stop the plan at any time by written notice to the funds.
Dividends and capital gains distributions must be reinvested automatically to
participate in this plan. Stock certificates cannot be issued under the
Systematic Cash Withdrawal Plan.
The right of redemption may not be suspended or payment upon redemption deferred
for more than five business days, or such time shorter time period as may be
required by applicable SEC rules, except: (1) when trading on the NYSE is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (2) when the SEC has by order permitted such suspension;
or (3) when an emergency, as defined by the rules of the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a fund not
reasonably practicable. In case of a suspension of the determination of the net
asset value, the right of redemption is also suspended and unless you withdraw
your request for redemption, you will receive payment at the net asset value
next determined after termination of the suspension.
As provided in the funds' Articles of Incorporation, payment for shares redeemed
may be made either in cash or in-kind, or partly in cash and partly in-kind.
However, the funds have elected, pursuant to Rule 18f-1 under the 1940 Act to
redeem shares solely in cash up to the lesser of $250,000, or one percent of the
net asset value of the fund, during any 90 day period for any one shareholder.
Payments in excess of this limit will also be made wholly in cash unless the
Board of Directors of such fund believes that economic conditions exist which
would make such a practice detrimental to the 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 your shares on redemption may be more or less than the cost of such
shares to you depending upon the net asset value of the fund's shares at the
time of redemption.
RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
The funds offer a profit sharing and a money purchase plan (the "Defined
Contribution Plans") for use by both self-employed individuals (sole
proprietorships and partnerships) and corporations who wish to use shares of the
funds as a funding medium for a retirement plan qualified under the Internal
Revenue Code.
The Internal Revenue Code provides certain tax benefits for participants in a
Defined Contribution Plan. For example, amounts contributed to a Defined
Contribution Plan and earnings on such amounts are not taxed until distributed.
However, distributions to a participant from a Defined Contribution Plan before
the participant attains age 59 1/2 will (with certain exceptions) result in an
additional 10% tax on the amount included in the participant's gross income.
INDIVIDUAL RETIREMENT ACCOUNT
The funds offer an individual retirement account (the "IRA") for use by
individuals with compensation for services rendered (including earned income
from self-employment) who wish to use shares of the funds as a funding medium
for individual retirement saving. However, except for rollover contributions,
an individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may only contribute to an IRA for his or her nonworking spouse who
is under age 70 1/2. The general deductible limit is subject to certain income
limits for contributions to an IRA is the lesser of 100% of compensation or
$2,000. An individual may roll over to the IRA funds (in any amount) that he or
she has received in a qualifying distribution from an employer's retirement plan
or IRA.
The individual's IRA assets (and earnings thereon) may generally not be
withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not subject to federal income tax until
distributed.
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ROTH-IRA
Subject to certain income limits, the total amount contributed to a Roth IRA for
any taxable year cannot exceed the lesser of $2,000 or 100 percent of the
individual's compensation. If an individual also maintains a traditional IRA
the maximum contribution to the Roth IRA is reduced by any contributions made to
the traditional IRA. The total annual contribution to all traditional IRAs and
Roth IRAs cannot exceed the lesser of $2,000 or 100 percent of the individual's
compensation.
Unless the individual's modified adjusted gross income (or the modified adjusted
gross income of a married couple, filing jointly) is more than $100,000, or is
married and filing a separate tax return, the individual is eligible to roll
over, transfer or convert all or any portion of existing traditional IRA(s) into
Roth IRA(s). A separate Roth Conversion IRA should generally be established to
hold conversion amounts. If the Roth IRA is designated as a Roth Conversion IRA,
the only permissible contributions are amounts converted from a traditional IRA
during the same tax year. The amount of the conversion from the traditional IRA
to the Roth IRA will be treated as a distribution for income tax purposes and is
includible in the individual's gross income (except for any nondeductible
contributions). Although the conversion amount is generally included in income,
the 10 percent early distribution penalty will not apply to rollovers or
conversions from a traditional IRA to a Roth IRA, regardless of whether the
individual qualifies for any exceptions to the 10 percent penalty.
Funds distributed from the Roth IRA may be rolled over to a Roth IRA of the
individual. A proper Roth IRA to Roth IRA rollover is completed if all or part
of the distribution is rolled over not later than 60 days after the distribution
is received. The individual may not have completed another Roth IRA to Roth IRA
rollover from the distributing Roth IRA during the 12 months preceding the date
the distribution was received. Further, the individual may rollover the same
dollars or assets only once every 12 months. Roth IRA assets may not be rolled
over to other types of IRAs (e.g., traditional IRA, Simple IRA).
403(B)(7) RETIREMENT PLAN
The funds offer a plan (the "403(b)(7) Plan") for use by schools, hospitals, and
certain other tax-exempt organizations or associations who wish to use shares of
the funds as a funding medium for a retirement plan for their employees.
Contributions are made to the 403(b)(7) Plan based on a reduction of the
employee's regular compensation. Such contributions, to the extent they do not
exceed applicable limitations (including a generally applicable limitation of
$10,000 for 1999), 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 funds offer a plan (the "Simple IRA") for use by certain small employers who
wish to use shares of the funds as a funding medium for a retirement plan for
their employees. Contributions are made to the Simple IRAs based on a reduction
of the employee's regular compensation. Such contributions, to the extent they
do not exceed applicable limitations (including a generally applicable
limitation of $6,000 for 1999), 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%.
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GENERAL INFORMATION
Distributions of net investment income and capital gains on retirement plan
shares will be reinvested automatically in the funds.
The custodian of the Plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Semper is controlled by certain Directors and officers of the
funds and certain directors and officers of Stratton Management Company.
Investor Services Group serves as the fiduciary agent for Semper and in such
capacity is responsible for all record keeping, applicable tax reporting and fee
collection in connection with the plan accounts. Semper is entitled to deduct
its fees and administrative expenses by liquidating shares annually in
September, unless the annual maintenance fee is paid separately to Investor
Services Group. The annual maintenance fee is currently $12.00 per plan
account. This fee may be amended upon 30 days notice by Stratton Management
Company, Semper or Investor Services Group in the future.
The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution, IRA, Roth IRA, 403(b)(7) or Simple IRA Plans available
for investment in the funds. Any person who wishes to establish a retirement
plan account may do so by contacting the funds directly. The complete Plan
documents and applications will be provided to existing or prospective
shareholders upon request, without obligation. Since all these Plans involve
setting aside assets for future years, it is important that investors consider
their needs and whether the investment objective of the funds as described in
this Statement of Additional Information and in the Prospectus is most likely to
fulfill them. The funds recommend that investors consult their attorneys or tax
advisors to determine if the retirement programs described herein are
appropriate for their needs.
INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situation.
Each fund intends to qualify as a regulated investment company (a "RIC") under
Subchapter M of the Internal Revenue Code, as amended ("the Code") for each
taxable year. As a RIC, each fund is exempt from Federal income and excise tax
on its income and gains that it distributes to shareholders.
To maintain its RIC status, each fund must satisfy certain distribution
requirements and certain requirements with respect to the source of its income
for a taxable year and the diversification of its investments. Complying with
these tests may limit somewhat the fund's freedom in pursuing its investment
objectives.
SMDS has a capital loss carryover available to offset future capital gains, if
any, of approximately $13,179,000, of which $7,681,000 expires in 2000,
$4,331,000 expires in 2003 and $1,167,000 expires in 2005. SSCY has a capital
loss carryover available to offset future capital gains, if any, of
approximately $1,159,000, which expire in 2006.
A 4% nondeductible excise tax is imposed on RICs that fail to currently
distribute an amount equal to specified percentages of their ordinary taxable
income and capital gain net income (excess of capital gains over capital
losses). The funds intend to make sufficient distributions or deemed
distributions prior to the end of each calendar year to avoid liability for this
excise tax.
If for any fiscal year a fund does not qualify for the special tax treatment
afforded RICs, 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
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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 that are
in effect on the date of this Statement of Additional Information. These laws
and regulations may be changed by legislative or administrative action.
DESCRIPTION OF COMMON STOCK
SGF'S authorized capital is 10,000,000 shares of common stock, par value $0.10
per share. SMDS' authorized capital is 10,000,000 shares of common stock, par
value $1.00 per share. THE STRATTON FUNDS, INC. is authorized to issue
1,000,000,000 shares of common stock, par value $0.001 per share, and to
classify and reclassify any authorized and unissued shares into one or more
series or classes. At present, the Board of Directors of THE STRATTON FUNDS,
INC. has authorized the issuance of 200,000,000 shares of Class A common stock
representing interests in SSCY.
There are no conversion or preemptive rights in connection with any shares of
the funds, nor are there cumulative voting rights. Shares of each fund are
freely transferable. Each share of a particular fund has equal voting, dividend
and distribution, and liquidation rights with other shares of such fund. When
issued for payment as described in its Prospectus, a fund's shares will be fully
paid and nonassessable. Fractional shares of a fund have proportionately the
same rights as provided for full shares of the particular fund.
Each fund does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. SGF, SMDS and THE
STRATTON FUNDS, INC. are each a separate legal entity and the shareholders of
each will vote separately. Under certain circumstances, shareholders have the
right to call a shareholders meeting to consider the removal of one or more
directors.
Rule 18f-2 under the Investment Company Act of 1940 provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as THE STRATTON FUNDS, INC. shall not be deemed to
have been effectively acted upon unless approved by a majority of the
outstanding shares of the fund affected by the matter. A fund affected by a
matter unless it is clear that the interests of the fund in the matter are
substantially identical or that the matter does not affect any interest of the
fund. Under Rule 18f-2, the approval of an investment advisory agreement or any
change in fundamental investment policy would be effectively acted upon with
respect to a fund only if approved by a majority of the outstanding shares of
such fund. However, the Rule also provides that the ratification of independent
public accountants and the election of directors may be effectively acted upon
by shareholders of THE STRATTON FUNDS, INC. voting without regard to a fund.
Investors should be aware that by combining the Prospectus of each fund into one
document, there is the possibility that one fund may become liable for any
misstatements in the Prospectus about another fund. To the extent that a fund
incurs such liability, a shareholders investment in such fund could be adversely
affected.
PERFORMANCE CALCULATIONS
From time to time, the funds' total return may be quoted in advertisements,
shareholder reports or other communications to shareholders. Each fund's total
return may be calculated on an average annual total return basis, and may also
be calculated on an aggregate total return basis, for various periods. Average
annual total return reflects the average annual percentage change in value of an
investment in a fund over the measuring period. Aggregate total return reflects
the total percentage change in value over the measuring period. Both methods
of calculating total return assume that dividends and capital gains
distributions made by a fund during the period are reinvested in such fund's
shares.
The total return of each fund may be compared to that of other mutual funds with
similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
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publications that monitor the performance of mutual funds. For example, the
total return of a fund's shares may be compared to data prepared by Lipper
Analytical Services, Inc., National Association of Real Estate Investment Trusts
and to indices prepared by Dow Jones & Co., Inc. and Standard & Poor's Ratings
Group.
Performance quotations of each fund represent such fund's past performance, and
should not be considered as representative of future results. The investment
return and principal value of an investment in a fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Any fees charged by broker-dealers, banks or other financial institutions
directly to their customer accounts in connection with investments in shares of
a fund will not be included in the fund's calculations of total return. Further
information about the performance of each fund is included in the fund's most
recent Annual Report which may be obtained without charge by contacting the fund
at (800) 634-5726.
TOTAL RETURN CALCULATIONS
The funds compute their average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result.
This calculation can be expressed as follows:
T= [(ERV/P)1/n-1]
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 funds compute their aggregate total return by determining the aggregate
compounded rate of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
(ERV-P)
A = -------
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.
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P = hypothetical initial investment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the funds cannot
necessarily be used to compare an investment in the funds' shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
1. SGF - Based on the foregoing calculations, the average annual total returns
for the fund for the one year, five year and ten year periods ended
December 31, 1998 were 11.46%, 20.64% and 15.14%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1998 were 155.51%, and 309.34%, respectively.
2. SMDS - Based on the foregoing calculations, the average annual total
returns for the fund for the one year, five year and ten year periods ended
December 31, 1998 were -11.75%, 4.18% and 8.35%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1998 were 18.53% and 122.92%, respectively.
3. SSCY - Based on the foregoing calculations, the average annual total
returns for the fund for the one year and five year periods ended December
31, 1998 were -9.58% and 12.88%, respectively. The aggregate total return
for the five year period ended December 31, 1998 was 83.27%.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for SGF, SMDS, and SSCY
contained in such funds' Annual Report dated December 31, 1998 are incorporated
by reference into this Statement of Additional information and have been audited
by Tait, Weller & Baker, whose reports also appear in the 1998 Annual Report and
are also incorporated by reference herein. No other parts of the Annual Report
are incorporated by reference herein. Such financial statements and notes
thereto have been incorporated herein in reliance on the reports of Tait, Weller
& Baker, independent accountants, given on the authority of said firm as experts
in auditing and accounting, incorporating by reference from such funds' 1998
Annual Report to Shareholders.
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