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STATEMENT OF ADDITIONAL INFORMATION
September 30, 1995
This Statement of Additional Information is not a Prospectus but should be read
in conjunction with the current Prospectus for Stratton Growth Fund, Inc. (the
"Fund"), dated September 30, 1995. A copy of the Prospectus for the Fund may be
obtained by contacting the Fund's "Distributor", Fund/Plan Broker Services,
Inc., 2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874, or by
telephoning (800) 634-5726.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Statement of Additional Information .....................................
Investment Restrictions .................................................
Directors and Officers of the Fund.......................................
The Investment Advisor and Other Service Providers ......................
The Investment Advisor .............................................
Accounting Agent ...................................................
The Administrator & Transfer Agent .................................
Auditor & Custodian ................................................
Portfolio Transactions and Brokerage Commissions ........................
Retirement Plans ........................................................
Underwriter .............................................................
Additional Information Concerning Taxes .................................
Additional Information on Performance Calculations ......................
Miscellaneous ...........................................................
Financial Statements ....................................................
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction with the
Prospectus of the Fund having the same date as this Statement of Additional
Information. Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus. No investment in
shares of the Fund should be made without first reading the Prospectus of the
Fund.
INVESTMENT RESTRICTIONS
Except as otherwise expressly provided herein, the Fund's investment objective,
policies and restrictions may not be changed without approval by the holders of
the lesser of: (1) 67% of the Fund's shares present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy; or
(2) more than 50% of the Fund's outstanding shares.
THE FUND WILL NOT:
1. 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
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operations of their predecessors and of subsidiaries if the company is a
holding company) have not had a record of at least three years of continuous
operations and in equity securities which are not readily marketable (that
is, with a limited trading market).
4. Borrow money, except from banks for temporary or emergency purposes (but not
for investment purposes), provided that such borrowings shall not exceed 5%
of its total assets (at the lower of cost or market value).
5. Underwrite the securities of other issuers or invest in securities under
circumstances where, if sold, the Fund might be deemed to be an underwriter
under the Securities Act of 1933.
6. Pledge, mortgage or hypothecate its assets.
7. Invest for purposes of exercising management or control.
8. Invest in securities of other investment companies or in options, puts,
calls, straddles, spreads or similar devices, or engage in arbitrage
transactions or short sales.
9. Purchase securities on margin, but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
10. Make loans to other persons except that this restriction shall not apply to
government obligations, commercial paper or notes or other evidences of
indebtedness which are publicly distributed.
11. Purchase or sell real estate or interests in real estate. This will not
prevent the Fund from investing in publicly-held real estate investment
trusts or marketable securities which may represent indirect interests in
real estate.
12. Purchase or sell commodities or commodity contracts or invest in interests
in oil, gas or other mineral exploration or development programs.
13. Invest more than 2% of the value of its total assets in warrants. This
restriction does not apply to warrants initially attached to securities
purchased by the Fund. This restriction may be changed or eliminated at any
time by the Board of Directors of the Fund without action by the Fund's
shareholders.
14. Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any officer or director of the Fund or its Investment Advisor
owns beneficially more than 1/2 of 1%, and such officers and directors
holding more than 1/2 of 1% together own beneficially more than 5% of the
issuer's securities.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations
described above. To permit the sale of shares of the Fund in Texas, the Fund
has agreed to the following additional, but not fundamental, restrictions:
1. The Fund will not invest more than 15% of its net assets in illiquid
or restricted securities.
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2. The Fund will not invest in real estate limited partnerships.
3. The Fund will not invest in oil, gas or mineral leases.
Should the Fund determine that these commitments or any other commitments are no
longer in its best interests, it will revoke such commitments by terminating
sales of its shares in the state involved.
The percentage limitations of investments are applied at the time an investment
is made. An actual percentage in excess of a stated percentage limitation does
not violate the limitation unless such excess exists immediately after an
investment is made and results from the investment. In other words,
appreciation or depreciation of the Fund's investments will not cause a
violation of the limitations. In addition, the limitations will not be violated
if the Fund receives securities by reason of a merger or other form of
reorganization.
DIRECTORS AND OFFICERS OF THE FUND
The directors and executive officers of the Fund, their position with the Fund,
their addresses, affiliations, if any, with the Investment Advisor, and
principal occupations during the past five years are set forth below. Each of
the directors named below is also a director of Stratton Monthly Dividend
Shares, Inc. and The Stratton Funds, Inc. and each of the officers named below
also holds the same position, unless otherwise noted, with Stratton Monthly
Dividend Shares, Inc. and The Stratton Funds, Inc.:
<TABLE>
<S> <C>
James W. Stratton* Mr. Stratton is the Chairman of the Board of Directors and President of the
Director/Chairman Investment Advisor, Stratton Management Company. He is a Director of ALCO
610 W. Germantown Pike Standard (diversified distribution and manufacturing company), Amerigas
Suite 300 Propane Ltd. (energy), FinDaTex, Inc. (financial services), Gilbert
Plymouth Meeting, PA 19462 Associates, Inc. (engineering/consulting services), Teleflex, Inc. (aerospace
controls and medical products) and UGI Corp.,Inc. (utility-natural- gas).
Lynne M. Cannon* Ms. Cannon is a Senior Vice President of Relationship Management of Fund/Plan
Director Services, Inc. She was formerly employed as Vice President of Mutual Funds of
2 W. Elm Street Independence Capital Management, Inc. (investment advisor). Prior to
Conshohocken, PA 19428 Independence Capital, she was Vice President of AMA Investment Advisors, Inc.
(investment advisor & broker/dealer).
</TABLE>
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<TABLE>
<S> <C>
John J. Lombard, Jr. Mr. Lombard is a partner in the law firm of Morgan, Lewis & Bockius.
Director
2000 One Logan Square
Philadelphia, PA 19103
Rose J. Randall Ms. Randall is a private investor.
Director
20 Laughlin Lane
Philadelphia, PA 19118
Henry A. Rentschler Mr. Rentschler is a private investor. He was formerly the President of Baldwin-
Director Hamilton Company, a division of Joy Environmental Equipment Co. (manufacturer of
P.O. Box 962 renewal parts for Baldwin locomotives and diesel engines) and was also formerly
Paoli, PA 19301 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. Mr. Rhoad is a private investor. He was formerly a senior systems engineer with
Director International Business Machines Corporation.
640 Bridle Road
Custis Woods
Glenside, PA 19038
Alexander F. Smith Mr. Smith is a private investor. He was formerly the Chairman and Director of
Director Gilbert Associates, Inc. (engineering services to the electric utility
Cricket Springs industry).
Geigertown, PA 19523
Richard W. Stevens Mr. Stevens is an attorney in private practice. He was formerly a partner in
Director the law firm of Clark, Ladner, Fortenbaugh and Young.
One Jenkintown Station
115 W. Avenue, Suite 108
Jenkintown, PA 19046
John A. Affleck* Mr. Affleck is a Senior Vice President and Director of the Investment Advisor,
President Stratton Management Company. He is Vice President of Stratton Monthly Dividend
610 W. Germantown Pike Shares, Inc. and The Stratton Funds, Inc.
Suite 300
Plymouth Meeting, PA 19462
</TABLE>
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<TABLE>
<S> <C>
Gerard E. Heffernan* Mr. Heffernan is a Senior Vice President
Vice President and Director of the Investment Advisor,
610 W. Germantown Pike Stratton Management Company. He is
Suite 300 President of Stratton Monthly Dividend
Plymouth Meeting, PA 19462 Shares, Inc. and Vice President of The
Stratton Funds, Inc. He is Secretary of
FinDaTex, Inc.
Frank H. Reichel, III* Mr. Reichel is a Vice President, a Director
Vice President and the Director of Research of the
610 W. Germantown Pike Investment Advisor, Stratton Management
Suite 300 Company. He is President of The
Plymouth Meeting PA 19462 Stratton Funds, Inc. and Vice President
of Stratton Monthly Dividend, Shares, Inc.
Joanne E. Kuzma* Mrs. Kuzma is the Director of Trading
Vice President and a Managing Partner of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company.
Suite 300 She is Vice President of Compliance for
Plymouth Meeting PA 19462 The Stratton Funds, Inc. and Stratton
Monthly Dividend Shares, Inc.
Patricia L. Sloan* Ms. Sloan is an employee of the Investment
Secretary/Treasurer Advisor, Stratton Management Company.
610 W. Germantown Pike
Suite 300
Plymouth Meeting, PA 19462
Carol L. Royce* Mrs. Royce is an employee of the Investment
Assistant Secretary/Treasurer Advisor, Stratton Management Company.
610 W. Germantown Pike
Suite 300
Plymouth Meeting PA 19462
James A. Beers* Mr. Beers is an employee of the Investment
Assistant Secretary/Treasurer Advisor, Stratton Management Company.
610 W. Germantown Pike
Suite 300
Plymouth Meeting PA 19462
</TABLE>
*As defined in the 1940 Act, Messrs. Stratton, Affleck, Heffernan, Reichel, Mrs.
Kuzma, Ms. Sloan, Mrs. Royce and Mr. Beers are "interested persons" of the Fund,
by reason of their positions with the Fund's Investment Advisor. Ms. Cannon is
an "interested person" of the Fund by reason of her employment with Fund/Plan
Services, Inc. Several of the Directors and Officers of the Fund are controlling
shareholders of FinDaTex, Inc., which acquired Fund/Plan on January 1, 1986.
The officers and directors of the Fund who are also officers or employees of the
Advisor or Fund/Plan
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Services, Inc. receive no direct compensation from the Fund for services to it.
The Directors who are not "interested persons" of the Fund receive fees and
expenses for each meeting of the Board of Directors they attend. Such Directors
currently receive $750 for each Board Meeting attended, and an annual retainer
of $4,000. The Directors serve in the same capacity for the other two funds in
the Stratton Family of Funds complex. There are no separate audit, compensation
or nominating committees of the Board of Directors.
Set forth below are the total fees which were paid to each of the directors
who are not "interested persons" during the fiscal period ended May 31,
1995:
<TABLE>
<CAPTION>
Aggregate Fees Total Fees Paid
Director Paid by the Company By the Fund Complex
- -------- ------------------- -------------------
<S> <C> <C>
John J. Lombard, Jr. $1,260.73 $7,750
Rose J. Randall $1,133.75 $7,000
Henry A. Rentschler $1,260.73 $7,750
Merritt N. Rhoad, Jr. $1,260.73 $7,750
Alexander F. Smith $1,143.26 $7,000
Richard Stevens $1,143.26 $7,000
Gordon L. Wahls $123.86 $800
</TABLE>
Shares of the Fund over which the officers and directors as a group exercise
voting control or are owners of record aggregated 209,714 shares, or
14.2% of the outstanding shares at August 31, 1995.
As of August 31, 1995, James W. Stratton owned of record and beneficially or
exercised voting control over 26,128 shares, or 8.5% of the outstanding shares
of the Fund; as of that same date, the Profit Sharing Plan of the Investment
Advisor owned 41,461 shares, or 2.8% of the Fund.
THE INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
The Investment Advisor
The Investment Advisory Agreement (the "Agreement") requires the Advisor to
furnish research, statistical and administrative services and advice, reports
and recommendations with respect to the Fund's portfolio, and to compute the net
asset value of the Fund's shares and maintain the books and records of the Fund.
The Agreement provides that the Advisor is not required to give the Fund
preferential treatment as compared with the treatment given to any other
customer or investment company. In addition, the Advisor furnishes to the Fund
office space and facilities necessary in connection with the operation of the
Fund. The Fund pays, or arranges for others to pay, all other expenses in
connection with its operations.
The investment advisory fee payable under the Agreement is payable monthly, at
an annual rate of 3/4 of 1% of the daily net asset value of the Fund. During
the fiscal years ended May 31, 1993, 1994 and 1995, the fees paid
to the Advisor were $171,718, $170,554 and $189,594 respectively.
The Advisor may charge the Fund monthly for its cost in providing (1) any
equipment used in the Fund's operations; and (2) any administrative and
accounting services for the Fund including, without limitation,
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maintaining financial records and bookkeeping, daily computation of net asset
value per share, registration of the Fund and its securities with the SEC and
under various state laws, and holding shareholders' meetings. The Advisor will
in no event seek reimbursement of costs which would result in the net operating
expenses of the Fund being in excess of two percent (2%) of the average net
asset value of the Fund for any fiscal year. The Advisor's costs which are to be
reimbursed are not intended to include any profit to the Advisor.
The Advisor has agreed to reimburse the Fund in an amount equal to the expenses
of the Fund in any fiscal year which exceed the permissible limits applicable to
the Fund in any state in which its shares are qualified for sale. At the
present time, the most restrictive state limitation limits the Fund's annual
expenses (excluding interest, taxes, brokerage commissions, extraordinary
expenses and other expenses) subject to approval by state securities
administrators to 2 1/2 % of the first $30 million, 2% of the next $70 million,
and 1 1/2 % of the remaining average net assets. The operating expenses of the
Fund will be accrued daily and any excess over the above described limitation
will be reimbursed monthly. For the fiscal years ended May 31, 1993,
1994 and 1995, no such reimbursement of expenses was necessary.
Accounting Agent
Commencing in 1988, Fund/Plan Services, Inc. ("Fund/Plan") became the Fund's
accounting services agent, and responsibility for certain accounting services
(e.g. computation of the net asset value of the Fund's shares and maintenance of
the Fund's books and financial records) were transferred from the Advisor to
Fund/Plan. At that time the Advisor stopped receiving a monthly expense
reimbursement from the Fund, and the Fund started to pay a monthly fee to
Fund/Plan for these services. For this reason, the Advisor is not expected to
receive expense reimbursements from the Fund in the foreseeable future.
During the fiscal years ended May 31, 1993, 1994 and 1995, there were no
reimbursements paid to the Advisor. For the fiscal years ended May 31, 1993,
1994 and 1995, the Fund paid Fund/Plan $20,000 in fees pursuant to the
accounting services agreement.
The Administrator & Transfer Agent
The Fund has also entered into an Administration Agreement with Fund/Plan dated
March 1, 1990. As a result of this Administration Agreement, certain
administrative responsibilities previously performed by the Advisor were
transferred to Fund/Plan, including responsibility for all federal and state
compliance matters. Fund/Plan is entitled to receives a fee payable
monthly at the annual rate of $30,000. For the fiscal years ended May 31,
1993, 1994 and 1995 the Fund paid Fund/Plan $30,000. Although the Advisor
was entitled to receive reimbursement from the Fund for the expenses incurred in
the performance of these services, such reimbursement was never sought.
Accordingly, the Advisor has voluntarily agreed to waive $15,000 annually of the
compensation due it under the Investment Advisory Agreement, to offset a
significant portion of the fee that the Fund will incur under the Administration
Agreement. This fee waiver can be terminated or reduced by the Advisor upon 60
days prior written notice to the Fund.
The Fund's transfer agent and dividend-paying agent is Fund/Plan Services,
Inc., 2 W. Elm Street, Conshohocken, PA 19428. Fund/Plan was acquired by
FinDaTex, Inc. on January 1, 1986. Certain directors and officers of Stratton
Management Company, the Advisor to the Fund, and certain directors and officers
of the Fund are controlling shareholders of FinDaTex, Inc. During the last
fiscal year, Fund/Plan received $13.00 per account for providing this
service.
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Auditor and Custodian
The Fund's independent auditor is Tait, Weller & Baker. Their offices are
located at 2 Penn Center Plaza, Suite 700, Philadelphia PA 19102-1707. The
auditor's responsibilities are (1) to audit the annual financial statements of
the Fund; and (2) to report to the Fund's Board of Directors on the internal
control structure of the Fund.
The Bank of New York, 48 Wall Street, New York, NY 10286 serves as the custodian
of the Fund's assets pursuant to a custodian agreement. Under such agreement,
The Bank of New York (1) maintains a separate account or accounts in the name of
the Fund; (2) holds and transfers portfolio securities on account of the Fund;
(3) accepts receipts and makes disbursements on money on behalf of the Fund; (4)
collects and receives all income and other payments and distributions on account
of the Fund's securities; and (5) makes periodic reports to the Board of
Directors concerning the Fund's operations.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund seeks to obtain the best price and execution in all purchases and
sales of securities, except when the authorization to pay higher commissions
for research and services, as provided for in the Investment Advisory
Agreement, 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 Fund may place
some purchases and sales of portfolio securities with dealers or brokers who
provide statistical and research information to the Advisor. Statistical and
research services furnished by brokers through whom the Fund effects securities
transactions in accordance with these procedures are ordinarily of general
application and may be used by the Advisor in servicing other accounts as well
as that of the Fund. In addition, not all such services may be used in
connection with the Advisor's activities on behalf of the Fund. Portfolio
transactions are assigned to brokers, and commission rates negotiated, based on
an assessment of the reliability and quality of a broker's services, which may
include research and statistical information such as reports on specific
companies or groups of companies, pricing information, or broad overviews of the
stock market and the economy.
Although investment decisions will be made independently from investment
decisions made with respect to other clients advised by the Advisor,
simultaneous transactions may occur on occasion when the same security is
suitable for the investment objectives of more than one client. When two or
more such clients are simultaneously engaged in the purchase or sale of the same
security, to the extent possible the transactions will be averaged as to price
and allocated among the clients in accordance with an equitable formula. In
some cases this system could have a detrimental effect on the price or quantity
of a security available to the Fund. In other cases, however, the ability of the
Fund to participate with other clients of the Advisor in volume transactions may
produce better executions for the Fund.
The Investment Advisory Agreement contains provisions which authorize the
Advisor to recommend and cause the Fund to pay brokerage commissions in excess
of commissions which might be charged by other brokers, where a determination is
made that the amount of commission paid is reasonable in relation to the
brokerage and research services provided by the broker to the Fund, viewed in
terms of the particular transaction or the overall responsibilities of the
Advisor with respect to the Fund. In addition, the Investment Advisory
Agreement recognizes that the Advisor may, at its expense, acquire statistical
and factual information, advice about economic factors and trends and other
appropriate information from others in
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carrying out its obligations. During the fiscal years ended May 31 1993,
1994 and 1995, no brokerage commissions were paid by the Fund pursuant to
the provision in the Investment Advisory Agreement permitting the Fund to pay
commissions for brokerage and research services in excess of commissions that
might have been charged by other brokers.
During the fiscal years ended May 31, 1993, 1994 and 1995, the Fund paid
$29,061, $44,751 and $33,383 respectively, in brokerage commissions,
substantially all of which were paid to brokers which had provided research,
statistical data or pricing information to the 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
years ended May 31, 1993, 1994 and 1995, the Fund's portfolio turnover rate was
35.34%, 49.81% and 42.54 %, respectively.
RETIREMENT PLANS
Defined Contribution Plans
The Fund offers a profit sharing and a money purchase plan (the "Defined
Contribution Plans") for use by both self-employed individuals (sole
proprietorships and partnerships) and corporations who wish to use shares of the
Fund as a funding medium for a retirement plan qualified under the Internal
Revenue Code.
Annual deductible contributions to the Defined Contribution Plans may
generally be made on behalf of each participant in a total amount of up
to the lesser of 20% of a self-employed participant's pre-contribution earned
income (after reducing the earned income by the self-employed's deduction for
50% of his or her self-employment tax) (25% of a non-self-employed participant's
wages) or $30,000. Unless the employer chooses to take Social Security
contributions into account, the same percentage of earned income (or wages) must
be contributed on behalf of each participant in the Defined Contribution Plans.
Earned income and wages are generally limited for this purpose to $150,000 (for
1995 --- indexed for cost-of-living).
The Internal Revenue Code provides certain tax benefits for participants
in a Defined Contribution Plan. For example, amounts contributed to a
Defined Contribution Plan and earnings on such amounts are not taxed
until distributed. However, distributions to a participant from a Defined
Contribution Plan before the participant attains age 59 1/2 will (with certain
exceptions) result in an additional 10% tax on the amount included in the
participant's gross income.
Individual Retirement Account
The Fund offers a retirement account (the "IRA") for use by individuals with
compensation for services rendered (including earned income from
self-employment) who wish to use shares of the Fund as a funding medium for
individual retirement saving. However, except for rollover contributions, an
individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may only contribute to an IRA for his or her nonworking spouse
under age 70 1/2.
The general deductible limit for contributions to an IRA is the lesser of 100%
of compensation or $2,000 ($2,250 total for the individual and the individual's
nonworking spouse with two separate accounts). However, this limit is phased
out for certain individuals who are active participants in an employer-
maintained retirement
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plan. If such an individual is a married person with adjusted gross income
("AGI") on his or her joint return in excess of $40,000 but less than $50,000,
or a single person with AGI in excess of $25,000 but less than $35,000, the
individual's $2,000 deduction will be decreased proportionately. A married
individual with AGI on his or her joint return of $50,000 or more, or a single
individual with AGI of $35,000 or more, may not make any deductible contribution
if he or she is an active participant in a retirement plan.
Even if the individual is not an active participant in a retirement plan, if his
or her spouse is a participant in such a plan and if their AGI, filed jointly,
is more than $40,000, the individual and his or her spouse will both be subject
to the phase-out discussed above. If neither the individual nor his or her
spouse is a participant in an employer-sponsored retirement plan, or if their
AGI is less than the $40,000 or $25,000 amounts discussed above, the individual
may continue to make deductible contributions of up to the lesser of $2,000
($2,250), or 100% of compensation.
Nondeductible contributions to the IRA may be made to the extent an individual
is unable to make a deductible contribution under the phase-out rules discussed
above. In addition, an individual may rollover to the IRA funds (in any amount)
that he or she has received in a qualifying distribution from an employer's
retirement plan.
The individual's IRA assets (and earnings thereon) may generally not be
withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
403(b)(7) Retirement Plan
The Fund offers a plan (the "403(b)(7) Plan") for use by schools, hospitals, and
certain other tax-exempt organizations or associations who wish to use shares of
the Fund as a funding medium for a retirement plan for their employees.
Contributions are made to the 403(b)(7) Plan based on a reduction of the
employee's regular compensation. Such contributions, to the extent they do not
exceed applicable limitations (including a generally applicable limitation of
$9,500 per year), are excludable from the gross income of the employee for
Federal income tax purposes. Assets withdrawn from the 403(b)(7) Plan are
subject to Federal income tax and to the additional 10% tax on early withdrawals
discussed above under "Defined Contribution Plans".
General Information
In all these Plans, distributions of net investment income and capital gains
will be automatically reinvested in the Fund.
The Custodian of the plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Fund/Plan Services, Inc. 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. Fund/Plan
Services, Inc. is also the transfer agent for the Funds. The Custodian is
entitled to deduct its fees and administrative expenses by liquidating shares
annually in September, unless the annual maintenance fee is paid separately to
Fund/Plan Services, Inc. The annual maintenance fee is currently $12.00 per
plan account. This fee may be amended without notice by Stratton Management
Company, the Custodian or Fund/Plan Services, Inc. in the future.
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The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution, IRA, or 403(b)(7) Plans available for investment in
the Fund. Any person who wishes to establish a retirement plan account may do
so by contacting the Fund directly. The complete Plan documents and
applications will be provided to existing or prospective shareholders upon
request, without obligation. Since all these Plans involve setting aside assets
for future years, it is important that investors consider their needs and
whether the investment objective of the Fund as described in this Statement of
Additional Information and in the Prospectus is most likely to fulfill them.
The Fund recommends that investors consult their attorneys or tax advisors to
determine if the retirement programs described herein are appropriate for their
needs.
UNDERWRITER
The Fund has entered into an Underwriting Agreement with Fund/Plan Broker
Services, Inc. ("FPBS"). FPBS acts as an underwriter of the Fund's shares for
the purpose of facilitating the registration of shares. In this regard, FPBS
has agreed at its own expense to qualify as a broker/dealer under all applicable
federal or state laws in those states which the Fund shall from time to time
identify to FPBS as states in which it wishes to offer its shares for sale, in
order that state registrations may be maintained for the Fund.
FPBS is a broker/dealer registered with the Securities and Exchange Commission
and a member in good standing of the National Association of Securities Dealers,
Inc. FPBS is an affiliate of the Advisor inasmuch as both the Underwriter and
the Advisor are under common control.
For the services to be provided under the Underwriting Agreement in facilitating
the registration of the Fund shares under state securities laws, FPBS has
received an annual fee of $3,000 for providing these services in each of the
last three fiscal years. This fee is included in the net expenses of the
Fund. The Fund shall continue to bear the expense of all filing or registration
fees incurred in connection with the registration of shares of the Fund under
state securities laws. The Fund pays no compensation to FPBS for its assistance
in sales of Fund shares. The Advisor pays certain out-of-pocket expenses, plus
the cost for each employee to be licensed as a Registered
Representative by FPBS.
The Underwriting Agreement may be terminated by either party upon 60 days prior
written notice to the other party, and if so terminated, the pro-rata portion of
the unearned fee will be returned to the Fund.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situation.
As stated in the Prospectus, the Fund intends to qualify as a regulated
investment company under the Internal Revenue Code for each taxable year. The
Fund will not be treated as a regulated investment company for a taxable year
if, among other things, the Fund derives 30% or more of its gross income
from the sale or other disposition of securities and certain other investments
held for less than three months.
Ordinary income of individuals is taxable at a maximum nominal rate of 39.6%;
although because of limitations
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on itemized deductions otherwise allowable and the phase-out of personal
exemptions, the maximum effective marginal rate of tax for certain taxpayers
may be more than 39.6% in certain circumstances. Net long-term capital gains
are taxed at a maximum nominal rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
If for any fiscal year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to Federal income tax at regular corporate rates (without any deduction
for distributions to its shareholders). In such event, dividend distributions
would be taxable as ordinary income to shareholders, to the extent of the Fund's
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
The foregoing discussion is based on Federal tax laws and regulations which are
in effect on the date of this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS
From time to time, the Fund's total return may be quoted in advertisements,
shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATIONS
The Fund computes its average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result.
This calculation can be expressed as follows:
ERV
T= [(-----) /1/n/ -1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 investment made at
the
36
<PAGE>
beginning of the period.
P = hypothetical initial investment of $1,000.
n = period covered by the computation, expressed in terms of
years.
The Fund computes its 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.
P = hypothetical initial investment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the Fund cannot
necessarily be used to compare an investment in the Fund's shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
Based on the foregoing calculations, the average annual total returns for the
Fund for the one year, five year and ten year periods ended May 31,
1995 were 18.6%, 10.2% and 11.0% respectively. The aggregate
total returns for the same five year and ten year periods were 62.8% and
184.0%, respectively.
MISCELLANEOUS
As of August 31, 1995, James W. Stratton owned of record and beneficially or
exercised voting control over 126,128 shares, or 8.5% of the outstanding shares
of the Fund. As of the same date, Greenco, located at
37
<PAGE>
P.O. Box 2961, Harrisburg, Pennsylvania, was the record owner of 92,978 shares
or 6.3% of the outstanding shares of the Fund. However, at such date, no other
single shareholder owned of record or beneficially more than 5% of the
outstanding shares of the Fund.
FINANCIAL STATEMENTS
The financial statements of the Fund, which appear in this Statement of
Additional Information and the Financial Highlights which appears in the Fund's
Prospectus were examined by Tait, Weller & Baker, independent certified public
accountants, whose report thereon appears elsewhere herein, and have been
included herein and in the Fund's Prospectus in reliance upon the report of said
firm of accountants given upon their authority as experts in accounting and
auditing.
38
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each year presented.
<TABLE>
<CAPTION>
Years ended May 31,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year...................... $20.65 $20.89 $20.55 $19.75 $19.66
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income.................................. 0.537 0.510 0.560 0.640 0.720
Net gains on securities (both realized
and unrealized)....................................... 2.978 0.665 1.160 1.320 0.650
-------- -------- -------- -------- --------
Total from investment operations..................... 3.515 1.175 1.720 1.960 1.370
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income)............................................... (0.540) (0.510) (0.565) (0.725) (0.820)
Distributions (from capital gains)..................... (1.275) (0.905) (0.815) (0.435) (0.460)
-------- -------- -------- -------- --------
Total distributions.................................. (1.815) (1.415) (1.380) (1.160) (1.280)
-------- -------- -------- -------- --------
Net Asset Value, End of Year............................ $22.35 $20.65 $20.89 $20.55 $19.75
======== ======== ======== ======== ========
Total Return............................................ 18.61% 5.92% 8.91% 10.57% 7.58%
Ratios/Supplemental Data
Net assets, end of year (in 000's)..................... $31,719 $25,475 $25,315 $25,311 $25,111
Ratio of expenses to average
net assets............................................ 1.31% 1.34% 1.39% 1.35% 1.41%
Ratio of net investment
income to average net assets.......................... 2.70% 2.51% 2.76% 3.20% 3.94%
Portfolio turnover rate................................ 42.54% 49.81% 35.34% 59.76% 56.78%
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Stratton Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Stratton Growth Fund, Inc., including the schedule of investments, as of May 31,
1995, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Stratton Growth Fund, Inc. as of May 31, 1995, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
Philadelphia, PA
June 9, 1995 TAIT, WELLER & BAKER
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
Note 1. - Significant Accounting Policies - Stratton Growth Fund, Inc. (the
"Fund") is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The Fund's primary
investment objective is to seek possible growth of capital with current income
from interest and dividends as a secondary objective. The Fund's investments
will normally consist of common stock and securities convertible into or
exchangeable for common stock. Due to the inherent risks of investments there
can be no assurance that the objective of the Fund will be achieved. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
Investments and Related Income: The investments in securities are carried at
market value in the accompanying financial statements. Securities traded on a
national exchange or securities quoted on the NASD National Market System are
valued at the last sale price. Other over-the-counter securities and securities
traded on exchanges for which there is no sale valued at the mean between the
closing bid and asked prices. Security transactions are accounted for on the
trade date and dividend income is recorded on the ex-dividend date; interest
income is recorded on the accrual basis. Realized gains and losses from security
transactions are based on the specific identification method for both financial
reporting and federal income tax purposes.
Federal Income Taxes: No provision is made for federal income taxes as the Fund
intends to qualify as a regulated investment company and to make the requisite
distribution of taxable income to its shareholders, which will be sufficient to
relieve it from all or substantially all federal income taxes.
Note 2. - During the year ended May 31, 1995, the Fund paid advisory fees
aggregating $189,594 to Stratton Management Company, (the "Advisor"). Management
services are provided by the Advisor under an agreement whereby the Advisor
furnishes all investment advice, office space and facilities to the Fund and
pays the salaries of the Fund's officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, the Fund pays to the Advisor a monthly
fee of 3/48 of 1% (annually 3/4 of 1%) of the daily net asset value of the Fund
for such month. The Advisor has voluntarily agreed to waive $15,000 annually of
the compensation due it under the agreement to offset a significant portion of
the cost of certain administrative responsibilities delegated to Fund/Plan
Services, Inc. Because of certain undertakings to comply with various state
securities laws, if in any fiscal year the expenses of the Fund (excluding
taxes, brokerage commissions and interest) exceed 2 1/2% of the first $30
million of the Fund's average net assets, 2% of the net $70 million and 1 1/2%
of the remaining, the Advisor shall reimburse the Fund for such excess. Certain
officers and directors of the Fund are also officers and directors of the
Advisor. None of the Fund's officers receives compensation from the Fund.
The Fund's Transfer Agent, Fund/Plan Services, Inc. ("Fund/Plan"), is a
wholly-owned subsidiary of FinDaTex, Inc. Certain directors and officers of the
Fund are shareholders of FinDaTex, Inc. Fund/Plan received fees of $28,724 for
providing shareholder services, $30,000 for certain administrative services and
$20,000 for accounting/pricing services during the year ended May 31, 1995.
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
Fund/Plan, the Custodian reallows a portion of its custody fee to Fund/Plan for
certain services delegated to Fund/Plan. The amount is not readily determinable.
Fund/Plan Broker Services, Inc. serves as the Fund's principal underwriter and
receives no fees for services in assisting in sales of the Fund's shares but
does receive an annual fee of $3,000 for its services in connection with the
registration of the Fund's shares under state securities laws.
Note 3. - Purchases and sales of securities, excluding short-term notes,
aggregated $14,246,762 and $10,729,779, respectively, for the year ended May 31,
1995.
43
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended May 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income........................ $ 737,061 $ 620,174
Net realized gain on investments............. 1,177,804 2,109,557
Net increase (decrease) in unrealized
appreciation of investments................. 2,819,135 (1,295,859)
------------ ------------
Net increase in net assets
resulting from operations.............. 4,734,000 1,433,872
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
($.540 and $.510 per share, respectively)... (692,621) (611,090)
Distributions from net realized gains
from security transactions ($1.275 and
$.905 per share, respectively).............. (1,590,137) (1,081,416)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from
the net change in the number of outstanding
shares (a).................................. 3,793,151 418,409
------------ ------------
Total increase in net assets............ 6,244,393 159,775
NET ASSETS AT THE BEGINNING OF THE YEAR....... 25,474,788 25,315,013
------------ ------------
NET ASSETS AT THE END OF THE YEAR
(including undistributed net investment income
of $365,355 and $320,915, respectively)..... $ 31,719,181 $ 25,474,788
============ ============
</TABLE>
(a) A summary of capital share transactions follows:
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------
1995 1994
--------------------- ----------------------
Shares Value Shares Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares issued.................. 251,048 $5,232,197 139,168 $2,845,500
Shares reinvested from net
investment income and capital
gains distributions........... 102,301 1,968,319 72,130 1,451,800
--------- ---------- --------- ----------
353,349 7,200,516 211,298 4,297,300
Shares redeemed................ (167,783) (3,407,365) (189,761) (3,878,891)
--------- ---------- --------- ----------
Net increase............. 185,566 $3,793,151 21,537 $ 418,409
========= ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value
(identified cost $26,247,995) (Note 1)................... $ 32,589,125
Cash 102,528
Dividends and interest receivable.......................... 184,813
Receivable for capital stock sold.......................... 250
Receivable for securities sold............................. 299,795
-----------
Total Assets............................................. 33,176,511
===========
LIABILITIES
Payable for securities purchased........................... 1,403,078
Payable for capital stock redeemed......................... 31,746
Accrued expenses........................................... 22,506
-----------
Total Liabilities........................................ 1,457,330
-----------
NET ASSETS
Applicable to 1,419,210 shares; $.10 par value;
10,000,000 shares authorized.............................. $ 31,719,181
===========
Net asset value, offering and redemption price per share
($31,719,181 / 1,419,210 shares).......................... $ 22.35
===========
SOURCE OF NET ASSETS
Paid-in capital............................................ $ 24,028,056
Undistributed net investment income........................ 365,355
Accumulated net realized gain on investments............... 984,640
Net unrealized appreciation of investments................. 6,341,130
-----------
Net Assets............................................... $ 31,719,181
===========
</TABLE>
___________________________________________________________________________
STATEMENT OF OPERATIONS
Year Ended May 31, 1995
<TABLE>
<S> <C>
INCOME
Dividends.................................................. $ 966,697
Interest................................................... 128,251
-----------
Total Income............................................. 1,094,948
-----------
EXPENSES
Advisory fees (Note 2)..................................... 189,594
Administrative services fee (Note 2)....................... 30,000
Shareholder services fee (Note 2).......................... 28,724
Registration fees (Note 2)................................. 24,735
Accounting/Pricing services fees (Note 2).................. 20,000
Custodian fees (Note 2).................................... 16,476
Audit fees................................................. 14,584
Printing and postage fees.................................. 11,269
Directors' fees............................................ 7,326
Taxes other than income taxes.............................. 5,896
Legal fees................................................. 4,709
Miscellaneous fees......................................... 4,574
-----------
Total Expenses........................................... 357,887
-----------
Net Investment Income.................................. 737,061
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments........................... 1,177,804
Net increase in unrealized appreciation of investments..... 2,819,135
-----------
Net gain on investments.................................. 3,996,939
-----------
Net increase in net assets resulting from operations... $ 4,734,000
===========
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
SCHEDULE OF INVESTMENTS MAY 31, 1995
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- ----------
<C> <S> <C>
COMMON STOCKS - 93.0% (continued)
Insurance/Services - 6.8%
20,000 American General Corp. ................. $ 690,000
15,000 Aon Corp. .............................. 547,500
20,000 Lincoln National Corp. ................. 905,000
-------------
2,142,500
-------------
Metals - 8.1%
23,000 Carpenter Technology Corp. ............. 1,477,750
20,000 Phelps Dodge Corp. NY................... 1,102,500
-------------
2,580,250
-------------
Paper - 12.8%
45,000 Federal Paper Board Co., Inc. ............ 1,462,500
15,000 Potlatch Corp. ........................... 643,125
30,000 Westvaco Corp. ........................... 1,282,500
15,000 Weyerhaeuser Co. ......................... 658,125
-------------
4,046,250
-------------
Total Common Stocks (cost $23,167,995)... 29,509,125
-------------
<CAPTION>
Principal
Amount
- -----------
<C> <S> <C>
SHORT-TERM NOTES - 9.7%
$ 400,000 Associates Corp. of North America Note
6.15% due 06/01/95..................... 400,000
$ 600,000 Ford Motor Credit Corp. Note 5.97% due
06/02/95............................... 600,000
$1,040,000 General Electric Capital Corp. Note 5.98%
due 06/07/95........................... 1,040,000
$1,040,000 American Express Credit Corp. Note 5.96%
due 06/14/95........................... 1,040,000
-------------
Total Short-Term Notes (cost $3,080,000). 3,080,000
-------------
Total Investments - 102.7%
(cost $26,247,995)*..................... 32,589,125
Liabilities in Excess of Cash and Other
Assets - (2.7%)......................... (869,944)
-------------
NET ASSETS - 100.0%...................... $ 31,719,181
=============
</TABLE>
* Aggregate cost for federal income tax purposes is $26,247,995; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation............ $ 6,341,130
Gross unrealized depreciation............ 0
------------
Net unrealized appreciation.......... $ 6,341,130
============
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
SCHEDULE OF INVESTMENTS MAY 31, 1995
<TABLE>
<CAPTION>
Market
Number of Value
Shares Security (Note 1)
- --------- -------- -------------
<C> <S> <C>
COMMON STOCKS - 93.0%
Banking/Financial - 16.6%
25,000 Beneficial Corp. ........................... $ 1,112,500
30,000 Comerica, Inc. ............................. 948,750
40,000 CoreStates Financial Corp. ................. 1,330,000
25,000 Meridian Bancorp. Inc. ..................... 800,000
40,000 PNC Bank Corp. ............................. 1,080,000
-----------
5,271,250
-----------
Business Services - 5.7%
30,000 American Express Co. ....................... 1,068,750
20,000 Pitney Bowes, Inc. ......................... 740,000
-----------
1,808,750
-----------
Capital Goods/Technology - 8.5%
90,000 EG & G, Inc. ............................... 1,631,250
20,000 Harris Corp. ............................... 1,062,500
-----------
2,693,750
-----------
Chemical - 6.4%
10,000 Du Pont (E.I.) De Nemours & Co. ............ 678,750
25,000 Olin Corp. ................................. 1,350,000
-----------
2,028,750
-----------
Consumer Products - 11.8%
14,000 Kimberly-Clark Corp. ....................... 840,000
50,000 Sturm, Ruger & Co., Inc. ................... 1,456,250
20,000 Tambrands, Inc. ............................ 857,500
20,000 UST, Inc. .................................. 597,500
-----------
3,751,250
-----------
Energy - 6.0%
10,000 Exxon Corp. ................................ 713,750
12,000 Mobil Corp. ................................ 1,204,500
-----------
1,918,250
-----------
Health Care - 10.3%
10,000 American Home Products Corp. ............... 736,250
20,000 Shared Medical Systems Corp. ............... 667,500
20,000 U.S. Healthcare, Inc. ...................... 621,250
15,000 Warner-Lambert Co. ......................... 1,243,125
-----------
3,268,125
-----------
</TABLE>
See accompanying notes to financial statements.
39
