<PAGE>
STRATTON MUTUAL FUNDS
STRATTON MONTHLY DIVIDEND SHARES, INC.
STRATTON GROWTH FUND, INC.
STRATTON SMALL-CAP YIELD FUND
PROSPECTUS
MAY 15, 1997
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
(610) 941-0255
Stratton Mutual Funds is three separate funds (each a "Fund" and collectively
the "Funds"). Each of the Funds has distinct investment objectives and
policies. Information concerning the Funds has been combined into this one
Prospectus to aid investors in understanding the similarities and differences
among the Funds.
STRATTON MONTHLY DIVIDEND SHARES, INC. ("SMDS") is a no-load mutual fund
seeking as its objective a high rate of return from dividend and interest
income on its investments in common stock and securities convertible into
common stock.
STRATTON GROWTH FUND, INC. ("SGF") is a no-load mutual fund seeking as its
primary objective possible growth of capital with current income from interest
and dividends as a secondary objective. The Fund's investments will normally
consist of common stock and securities convertible into common stock.
STRATTON SMALL-CAP YIELD FUND ("SSCY") is a separate, diversified investment
portfolio offered by The Stratton Funds, Inc., a no-load open-end series
management investment company. The Fund's investment objective is to achieve
both dividend income and capital appreciation. The Fund seeks to achieve its
objective by investing in equity securities, primarily common stock, and
securities convertible into common stock, of companies with total market
capitalizations at the time of investment of less than $500 million and which
are outside the Standard & Poor's 500 Index (hereinafter referred to as
"small-cap companies").
This Prospectus sets forth concisely the information about the Funds that
prospective investors ought to know before investing. Investors should read
this Prospectus and retain it for future reference.
Additional information about the Funds has been filed with the Securities and
Exchange Commission and is available upon request and without charge by
calling or writing the Funds at the telephone number or address above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety. The
Statement of Additional Information, material incorporated by reference into
this Prospectus, and any other information regarding the Funds are maintained
electronically with the U.S. Securities and Exchange Commission at its
Internet Web sight (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Introduction.............................................................. 3
Fee Table................................................................. 4
Financial Highlights...................................................... 5
Investment Objectives, Policies, Restrictions and Risk Considerations..... 7
Management of the Funds................................................... 9
Investment Advisor........................................................ 9
Computation of Net Asset Value............................................ 11
How to Buy Fund Shares.................................................... 11
Investing by Mail........................................................ 12
Investing by Wire........................................................ 12
Automatic Investment Plan................................................ 13
Direct Deposit Program................................................... 13
Reinvestment of Income Dividends and Capital Gains Distributions......... 13
Additional Information................................................... 13
How to Redeem Fund Shares................................................. 14
By Written Request....................................................... 14
By Automated Clearing House ("ACH")...................................... 15
Systematic Cash Withdrawal Plan.......................................... 15
Additional Information................................................... 16
Exchange Privilege........................................................ 17
Retirement Plans.......................................................... 17
Tax Treatment: Dividends and Distributions................................ 18
Performance Calculations.................................................. 19
Description of Common Stock............................................... 20
Service Providers and Underwriter......................................... 20
</TABLE>
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FOR MORE DETAILED INFORMATION ABOUT THE ITEMS DISCUSSED IN THIS PROSPECTUS, A
COPY OF THE STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED WITHOUT CHARGE
BY WRITING TO THE FUNDS' DISTRIBUTOR, FPS BROKER SERVICES, INC., 3200 HORIZON
DRIVE, P.O. BOX 61503, KING OF PRUSSIA, PA 19406-0903, OR BY TELEPHONING 800-
634-5726.
2
<PAGE>
INTRODUCTION The securities offered by this Prospectus consist of shares
of common stock of three separate Funds. Each Fund has
distinct investment objectives and policies. The Funds are
no-load, open-end, diversified mutual funds. The three Funds
are identified herein as follows: Stratton Monthly Dividend
Shares, Inc. ("SMDS"); Stratton Growth Fund, Inc. ("SGF");
and Stratton Small-Cap Yield Fund ("SSCY"). As of December
31, 1996, the Funds have changed their various fiscal year
ends to December 31.
Investment SMDS seeks as its objective a high rate of return from
Objectives dividend and interest income on its investments in common
stock and securities convertible into common stock. The Fund
will seek to achieve this objective through investment of at
least 25% of assets in securities of real estate investment
trusts ("REITs") and of public utility companies engaged in
the production, transmission or distribution of electric,
energy, gas, water or telephone services.
SGF seeks as its primary objective possible growth of
capital with current income from interest and dividends as a
secondary objective. The Fund's investments will normally
consist of common stock and securities convertible into
common stock.
SSCY seeks to achieve both dividend income and capital
appreciation by investing in equity securities, primarily
common stock and securities convertible into common stock of
small-cap companies. The Fund will invest at least 80% of
its assets in small-cap companies.
The value of each Fund's shares fluctuate because the value
of the securities in which each Fund invests fluctuates.
Each Fund will earn dividend or interest income to the
extent that it receives dividends or interest from its
investments. An investment in any of the Funds is neither
insured nor guaranteed by the U.S. Government. There can be
no assurance that any Fund's investment objective will be
achieved.
How to Buy Fund The minimum initial investment for SMDS, SGF and SSCY is
Shares $2,000. There is no minimum initial investment requirement
for any retirement plan. Subsequent investments will be
accepted in minimum amounts of $100 or more. The Funds do
not impose any sales load nor bear any fees pursuant to a
Rule 12b-1 Plan. The public offering price for shares of
each Fund is the net asset value per share next determined
after receipt and acceptance of a purchase order at the
transfer agent in proper form with accompanying check or
bank wire arrangement. See "How to Buy Fund Shares."
How to Redeem Shares of the Funds may be redeemed at the net asset value
Fund Shares per share next determined after receipt by the transfer
agent of a redemption request in proper form. Signature
guarantees may be required for certain redemption requests.
See "How to Redeem Fund Shares."
Dividends SMDS intends to pay monthly dividends from its net
investment income and distributions of net capital gains, if
any, will be paid annually.
SGF intends to pay semi-annual dividends from its net
investment income and distributions of net capital gains, if
any, will be paid annually.
3
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SSCY intends to pay quarterly dividends from its net
investment income and distributions of net capital gains, if
any, will be paid annually.
Investment Stratton Management Company (the "Investment Advisor"),
Management, Plymouth Meeting Executive Campus, 610 W. Germantown Pike,
Underwriter and Suite 300, Plymouth Meeting, PA 19462-1050 is the Investment
Servicing Advisor for the Funds.
Agents
FPS Broker Services, Inc. ("FPBS"), 3200 Horizon Drive, P.O.
Box 61503, King of Prussia, PA 19406-0903 serves as the
Funds' Underwriter. FPS Services, Inc. ("FPS"), 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, PA 19406-0903 serves
as the Funds' Administrator, Accounting/Pricing Agent, and
Transfer Agent.
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FEE TABLE Below is a summary of the Operating Expenses that each Fund
incurred during its most recent fiscal period. A
hypothetical example based on the summary is also shown.
<TABLE>
<CAPTION>
SMDS SGF SSCY
---- --- ----
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees................................. 0.63% 0.75% 0.75%/1/
Other Expenses.................................. 0.39% 0.42% 0.84%
----- ----- -----
Total Fund Operating Expenses................... 1.02% 1.17% 1.59%
</TABLE>
Example:
<TABLE>
<S> <C> <C> <C> <C>
You would pay the following expenses 1 year $ 10 $ 12 $ 16
on a $1,000 investment, assuming: (1) 3 years $ 32 $ 37 $ 50
a 5% annual return; and (2) redemption 5 years $ 56 $ 64 $ 87
at the end of each time period: 10 years $124 $141 $189
</TABLE>
WHILE THE FOREGOING EXAMPLE ASSUMES A 5% ANNUAL RETURN, A
FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN MORE OR LESS THAN 5%. THE EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in
understanding the various costs and expenses that investors
will bear directly or indirectly. The Funds do not impose
any sales load, redemption or exchange fees, nor do they
bear any fees pursuant to a Rule 12b-1 Plan; however, the
Transfer Agent currently charges investors who request
redemptions by wire transfer a fee of $9 for each such
payment. For more complete descriptions of the various costs
and expenses, see "Investment Advisor," "How to Buy Fund
Shares," "How to Redeem Fund Shares," "Retirement Plans" and
"Service Providers and Underwriter " and the
4
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financial statements and related notes which appear in the
Funds' Annual Reports to Shareholders.
/1/ This fee represents the basic management fee of 0.75%
payable to SSCY under the Investment Advisory Agreement.
The basic management fee may be increased or decreased by
a performance adjustment. The performance adjustment is a
rolling 24-month comparison to the Frank Russell 2000
Index ("Russell 2000"), see "Investment Advisor" for a
further discussion. For the period ended December 31,
1996 the Investment Advisor received 0.45% of SSCY's
average net assets. Absent such performance adjustment,
the Investment Advisor would have received 0.75% of
SSCY's average net assets.
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FINANCIAL The following information provides financial highlights for
HIGHLIGHTS a share of each Fund outstanding during the periods stated.
The information for each period ended presented below has
been audited by Tait, Weller & Baker, certified public
accountants, whose report appears in the Funds' Annual
Reports to Shareholders dated December 31, 1996. This
information should be read in conjunction with the financial
statements and accompanying notes appearing in the 1996
Annual Reports to Shareholders, which are incorporated by
reference into the Statement of Additional Information.
Further information about the performance of the Funds is
available in the Annual Reports to Shareholders. Both the
Statement of Additional Information and the Annual Reports
to Shareholders may be obtained from the Funds free of
charge by calling 800-634-5726.
The following tables set forth financial data for a share of
capital stock outstanding throughout the periods presented
for each Fund.
STRATTON MONTHLY DIVIDEND SHARES, INC.
<TABLE>
<CAPTION>
11 MONTHS
ENDED YEARS ENDED JANUARY 31
--------- --------------------------------------------------------------------------------------
12/31/96 1996 1995 1994 1993 1992 1991/1/ 1990/1/ 1989/1/ 1988/1/,/2/
--------- -------- -------- -------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02 $ 24.50 $ 24.43 $ 25.11 $ 31.09
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 1.63 1.88 1.94 1.87 1.94 1.97 2.05 2.09 2.10 2.06
Net gains (loss) on
securities (both
realized and
unrealized)............ 0.16 2.60 (3.87) (1.14) 2.08 4.79 (1.33) 0.03 (0.70) (5.33)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations............ 1.79 4.48 (1.93) 0.73 4.02 6.76 0.72 2.12 1.40 (3.27)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)..... (1.63) (1.89) (1.92) (1.94) (1.94) (1.95) (2.20) (2.05) (2.08) (2.06)
Distributions in excess
of net Investment
Income................. (0.13) (0.03) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from net
realized gains from
security
transactions........... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.27)
Distributions from
paid-in capital/3/..... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.38)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total distributions.... (1.76) (1.92) (1.92) (1.95) (1.94) (1.95) (2.20) (2.05) (2.08) (2.71)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02 $ 24.50 $ 24.43 $ 25.11
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 7.12% 18.98% (6.57%) 2.22% 15.18% 30.55% 3.30% 8.69% 5.93% (10.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in 000's)............. $103,780 $129,267 $134,066 $165,798 $98,227 $45,566 $31,178 $33,200 $33,845 $36,305
Ratio of expenses to
average net assets..... 1.02%/4/ 0.99% 1.08% 0.99% 1.10% 1.23% 1.27% 1.25% 1.21% 1.21%
Ratio of net income to
average net assets..... 6.94%/4/ 7.42% 7.71% 6.12% 6.74% 7.63% 8.79% 8.19% 8.54% 7.52%
Portfolio turnover
rate................... 69.19% 53.30% 39.50% 19.15% 35.94% 43.55% 14.00% 39.10% 15.00% 24.44%
Average commission rate
paid................... $ 0.0498 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
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/1/ NOT COVERED BY INDEPENDENT ACCOUNTANTS' REPORT
/2/ PER SHARE INCOME AND EXPENSES AND NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS HAVE BEEN COMPUTED USING THE AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD. THESE COMPUTATIONS HAD NO EFFECT ON NET ASSET
VALUE PER SHARE.
/3/ DISTRIBUTIONS FROM PAID-IN CAPITAL RESULT FROM THE EXCESS OF TAXABLE CAPITAL
GAINS OVER GAINS AVAILABLE FROM BOOK SOURCES.
/4/ ANNUALIZED
5
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STRATTON GROWTH FUND, INC.
<TABLE>
<CAPTION>
7 MONTHS
ENDED YEARS ENDED MAY 31,
-------- ----------------------------------------------------------------------------------------
12/31/96 1996 1995 1994 1993 1992 1991/1/ 1990/1/ 1989/1/ 1988/1/ 1987/1/
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75 $ 19.66 $ 21.84 $ 19.48 $ 22.24 $ 24.25
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.312 0.556 0.537 0.510 0.560 0.64 0.72 0.82 0.55 0.58 0.37
Net gains (loss) on
securities (both
realized and
unrealized)............ 1.298 5.759 2.978 0.665 1.160 1.32 0.65 0.20 3.83 (1.11) (0.03)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............ 1.610 6.315 3.515 1.175 1.720 1.96 1.37 1.02 4.38 (0.53) 0.34
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)..... (0.580) (0.540) (0.540) (0.510) (0.565) (0.725) (0.82) (0.71) (0.53) (0.70) (0.28)
Distributions (from
capital gains)......... (1.210) (0.945) (1.275) (0.905) (0.815) (0.435) (0.46) (2.49) (1.49) (1.53) (2.07)
Total Distributions.... (1.790) (1.485) (1.815) (1.415) (1.380) (1.160) (1.28) (3.20) (2.02) (2.23) (2.35)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75 $ 19.66 $ 21.84 $ 19.48 $ 22.24
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 6.40% 29.62% 18.61% 5.92% 8.91% 10.57% 7.58% 4.94% 24.25% (2.17%) 1.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in 000's)............. $ 44,801 $42,880 $31,719 $25,475 $25,315 $25,311 $25,111 $23,407 $20,268 $16,859 $19,326
Ratio of expenses to
average net assets..... 1.17%/2/ 1.16% 1.31% 1.34% 1.39% 1.35% 1.41% 1.38% 1.41% 1.48% 1.50%
Ratio of net investment
income to average net
assets................. 2.08%/2/ 2.28% 2.70% 2.51% 2.76% 3.20% 3.94% 4.09% 2.79% 2.80% 1.74%
Portfolio turnover
rate................... 20.32% 15.41% 42.54% 49.81% 35.34% 59.76% 56.78% 54.80% 49.85% 34.42% 22.69%
Average commission rate
paid................... $ 0.0537 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
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/1/ NOT COVERED BY INDEPENDENT ACCOUNTANTS' REPORT
/2/ ANNUALIZED
STRATTON SMALL-CAP YIELD FUND
<TABLE>
<CAPTION>
9 MONTHS YEAR YEAR FOR THE PERIOD
ENDED ENDED ENDED 4/12/93/1/
12/31/96 03/31/96 03/31/95 TO 03/31/94
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 31.95 $ 25.88 $ 25.94 $25.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............. 0.53 0.66 0.57 0.43
Net gains (loss) on securities
(both realized and unrealized)... 3.47 6.07 (0.04) 0.91
------- ------- ------- ------
Total from investment operations.. 4.00 6.73 0.53 1.34
------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net investment
income)........................... (0.54) (0.66) (0.59) (0.40)
Distributions (from capital
gains)............................ (1.83) 0.00 0.00 0.00
------- ------- ------- ------
Total distributions............... (2.37) (0.66) (0.59) (0.40)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD..... $ 33.58 $ 31.95 $ 25.88 $25.94
======= ======= ======= ======
TOTAL RETURN....................... 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
000's)........................... $21,691 $19,592 $14,058 $8,257
Ratio of expenses to average net
assets........................... 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net investment income to
average net assets............... 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover rate........... 35.86% 33.50% 30.20% 28.60%/2/
Average commission rate paid...... $0.0579 N/A N/A N/A
</TABLE>
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/1/ COMMENCEMENT OF OPERATIONS
/2/ ANNUALIZED
6
<PAGE>
INVESTMENT The investment objective of SGF is fundamental and may not
OBJECTIVES, be changed without a vote of a majority of the Fund's
POLICIES, shares. The investment objectives of SMDS and SSCY are not
RESTRICTIONS fundamental and may be changed by the Board of Directors of
AND RISK the applicable Fund. Unless otherwise stated in this
CONSIDERATIONS Prospectus or the Statement of Additional Information, each
Fund's investment policies are not fundamental and may be
changed without shareholder approval. While a non-
fundamental policy or restriction may be changed by the
Board of Directors of the applicable Fund without
shareholder approval, the Funds intend to notify
shareholders before making any change in any such policy or
restriction. Fundamental policies may not be changed
without shareholder approval. A complete list of each
Fund's fundamental investment restrictions appears in the
Statement of Additional Information.
SMDS SMDS' objective is to seek a high rate of return from
dividend and interest income on its investments in common
stock and securities convertible into common stock.
Investment decisions will be made on the basis of an
analysis of fundamentals of individual companies and on
relevant economic and social conditions. The Fund will
invest at least 80% of its assets in common stock and
securities convertible into common stock. The Fund intends
to invest at least 25% of its assets in securities of REITs
and of public utility companies engaged in the production,
transmission or distribution of electric, energy, gas,
water or telephone service. This policy of concentration
may not be changed without the approval of the holders of a
majority of the Fund's outstanding shares.
SGF The primary objective of SGF is to seek possible growth of
capital for its shareholders' investments, with current
income from interest and dividends as a secondary
objective. On an overall portfolio basis, the Investment
Advisor will seek appreciation of capital for the Fund by
continuously reviewing both individual securities and
relevant economic and social conditions so that in the view
of the Investment Advisor, the Fund's portfolio has the
greatest possible potential for capital growth consistent
with reasonable risk. The Fund's investments will normally
consist of common stock and securities convertible into
common stock. The Fund may also invest in REITs. In making
its investment decision, the Investment Advisor examines
the securities of domestic companies, generally those with
dividend payment records, with a view to selecting those
securities which it believes will provide a greater
opportunity for growth and return of capital.
Preferred stocks and debt securities which are not
convertible into common stock will normally not be
purchased. However, when the Investment Advisor determines
that a temporary defensive position is warranted, it may
invest in non-convertible preferred stocks, debt securities
and domestic corporate and government fixed income
obligations without limitation and to the extent such
investments are made, the Fund will not be achieving growth
of capital. The Fund's relative equity and cash (or cash
equivalent) positions may also be changed as the Fund
alters its evaluation of trends in general securities price
levels.
The Fund does not intend to obtain short-term trading
profits. It is anticipated that the Fund's annual portfolio
turnover rate will generally fall within a 30% to
7
<PAGE>
70% range; but the rate of portfolio turnover is not a
limiting factor when the Fund's management deems changes
appropriate and could be less than 30% or greater than 70%
in any particular year, depending upon market and other
considerations.
The following investment restrictions are deemed
fundamental policies:
1. The Fund will not invest more than 5% of the value of its
total assets in the securities of any one issuer, except
for securities of the United States Government or
agencies thereof.
2. The Fund will not invest in more than 10% of any class of
securities of any one issuer (except for government
obligations) or in more than 10% of the voting securities
of any one issuer.
SSCY The investment objective of SSCY is to achieve both
dividend income and capital appreciation. The Fund seeks to
achieve its objective by investing in equity securities of
small-cap companies.
On an overall portfolio basis, the Investment Advisor will
seek to achieve the Fund's objective by continuously
reviewing both individual securities and relevant economic
and social conditions so that in the view of the Investment
Advisor, the Fund has the greatest possible potential for
capital appreciation consistent with reasonable risk. The
Investment Advisor generally selects companies which pay
quarterly dividends at an above-average rate.
Under normal market conditions, it is expected that the
Fund will invest at least 80% of its assets in equity
securities, primarily common stock and securities
convertible into common stock of small-cap companies. The
Fund may also invest in other types of securities with
equity characteristics such as REITs, preferred stocks,
warrants, units and rights. The Fund may invest in both
exchange-listed and over-the-counter securities. As a
matter of fundamental policy which cannot be changed
without the vote of a majority of the Fund's outstanding
shares, the Fund will not invest more than 25% of its total
assets in any one industry.
The Fund will not knowingly invest more than 5% of its
total assets in securities that are illiquid. Securities
having legal or contractual restrictions on resale and no
readily available market, and instruments that do not
provide for payment to the Fund within seven days after
notice are subject to this 5% limit. Securities that have
legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for
the purposes of this limitation.
Investments in small-cap companies have certain risks
associated with them. First and foremost is their greater
earnings and price volatility in comparison to large
companies. Earnings risk is partially due to the
undiversified nature of small company business lines. The
Fund attempts to counteract these concerns about investing
in small-cap companies by using strict purchase criteria.
One of these criteria stipulates that these companies must
have been sound and going entities for over three years. In
addition, these companies must be established dividend-
paying entities. The dividend requirement helps to reduce
share price volatility of the issues in the Fund and
ultimately of the Fund itself.
8
<PAGE>
REITs Each Fund may invest in REITs. Equity REITs invest directly
in real property while mortgage REITs invest in mortgages
on real property. REITs may be subject to certain risks
associated with the direct ownership of real estate
including declines in the value of real estate, risks
related to general and local economic conditions,
overbuilding and increased competition, increases in
property taxes and operating expenses, and variations in
rental income. Generally, increases in interest rates will
decrease the value of high yielding securities and increase
the costs of obtaining financing, which could decrease the
value of the portfolio's investments. In addition, equity
REITs may be affected by changes in the value of the
underlying property owned by the trusts, while mortgage
REITs may be affected by the quality of credit extended.
Equity and mortgage REITs are dependent upon management
skill, are not diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers, self liquidation
and the possibility of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code and
to maintain exemption from the Investment Company Act of
1940, as amended (the "1940 Act").
REITs pay dividends to their shareholders based upon
available funds from operations. It is quite common for
these dividends to exceed the REIT's taxable earnings and
profits resulting in the excess portion of such dividends
being designated as a return of capital. A Fund intends to
include the gross dividends from such REITs in its
distributions to shareholders and, accordingly, a portion of
the Funds' distributions may also be designated as a return
of capital. For more information, please see the discussion
under "Tax Treatment: Dividends and Distributions."
Short-Term Although each Fund normally seeks to remain fully invested
Securities in equity securities, a Fund may invest temporarily up to
100% of its assets in certain short-term fixed income
securities. Such securities may be used to invest
uncommitted cash balances, for temporary purposes pending
investments in other securities, to maintain liquidity to
meet shareholder redemptions or for temporary defensive
measures to protect against the erosion of its capital base.
These securities include, but are not limited to,
obligations of the U.S. government, its agencies and
instrumentalities, commercial paper, certificates of
deposit, bankers acceptances and repurchase agreements. When
a Fund invests for defensive purposes, it may affect the
attainment of the Fund's investment objective.
- -------------------------------------------------------------------------------
MANAGEMENT OF The business of each Fund is managed under the direction of
THE FUNDS each Fund's Board of Directors. Information about the
directors and officers of the Funds is included in the
Statement of Additional Information.
- -------------------------------------------------------------------------------
INVESTMENT Stratton Management Company, with offices at Plymouth
ADVISOR Meeting Executive Campus, 610 W. Germantown Pike, Suite 300,
Plymouth Meeting, PA 19462-1050, is the Funds' investment
advisor and manager and is registered as an investment
advisor under the Investment Advisors Act of 1940, as
amended. The Investment Advisor provides investment advisory
services, consisting of portfolio management, for a variety
of individuals and institutions and had approximately $1.4
billion in assets under management as of December 31, 1996.
By reason of
9
<PAGE>
his ownership of all the Investment Advisor's voting stock,
James W. Stratton may be said to be a "controlling person"
of that firm.
Pursuant to Investment Advisory Agreements, Stratton
Management Company provides an investment program in
accordance with each respective Fund's investment policies,
limitations and restrictions.
For providing investment advisory services, the Investment
Advisor receives: for SMDS, a fee at the annual rate of
0.63% of daily net assets; and for SGF, a fee at the annual
rate of 0.75% of daily net assets. The Investment Advisor
has voluntarily agreed to waive $15,000 annually of the
advisory fees due it under the Investment Advisory
Agreements with SMDS and SGF to offset a significant portion
of the fees that the Funds will incur under the
Administration Agreements. See "Service Providers and
Underwriter." During the fiscal periods ended December 31,
1996, SMDS and SGF paid the Investment Advisor advisory fees
at the effective annual rates of .56% and .42%, of such
Fund's respective average daily net assets.
For providing investment advisory services, for SSCY, the
Investment Advisor receives an investment advisory fee
payable monthly at an annual rate of 0.75% of average daily
net assets, subject to a performance adjustment. The
performance adjustment for SSCY is calculated at the end of
each month based upon a rolling 24 month performance period.
The performance adjustment is added to or subtracted from
the basic investment advisory fee. The Fund's gross
performance is compared with the performance of the Frank
Russell 2000, a widely recognized unmanaged index of common
stock prices, over a rolling 24-month performance period.
The Russell 2000 is composed of the smallest 2000 stocks in
the Frank Russell annual ranking of 3000 common stocks by
market capitalization. The Russell 2000 is a widely
recognized common stock index of small to medium size
companies. Total return performance on the Russell 2000
includes dividends and is reported monthly on a market
capitalization-weighted basis. When the Fund performs better
than the Russell 2000, it pays the Investment Advisor an
incentive fee; less favorable performance than the Russell
2000 reduces the basic fee. Each 1.00% of the difference in
performance between the Fund and the Russell 2000 during the
performance period is equal to a 0.10% adjustment to the
basic fee. The maximum annualized performance adjustment
rate is +/- 0.50% of average net assets which would be added
to or deducted from the advisory fee if the Fund
outperformed or underperformed the Russell 2000 by 5.00%.
The effect of this performance fee adjustment is that the
basic advisory fee may be increased as high as an annual
rate of 1.25% or decreased to as low as an annual rate of
0.25% of the Fund's average daily net asset value. Due to
the complexities of researching and investing in small-cap
equity securities, the advisory and incentive fees (if
realized) paid by the Fund are higher than those paid by
most other investment companies. Additionally, the Fund's
incentive fee of plus or minus 0.50% is greater than that of
other mutual funds with similar objectives which pay
incentive fees. Based on the foregoing, during the fiscal
period ended December 31, 1996, SSCY paid the Investment
Advisor a fee at the effective annual rate of .45% of the
Fund's average daily net assets.
10
<PAGE>
Mr. Stratton is the Chief Executive officer of the
Investment Advisor and has been primarily responsible for
the day-to-day investment management of SMDS, SGF and SSCY
since 1980, 1972 and commencement of operations in April of
1993, respectively.
- -------------------------------------------------------------------------------
COMPUTATION OF The net asset value per share of each Fund is determined
NET ASSET VALUE 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."
- -------------------------------------------------------------------------------
HOW TO BUY FUND Shares of each Fund are offered on a continuous basis at the
SHARES net asset value. The net asset value per share of each Fund,
and hence the purchase price of the shares, will vary with
the value of securities held in each Fund's portfolio.
Purchasers of Fund shares pay no "sales load"; the full
amount of the purchase price goes toward the purchase of
shares of a Fund. Purchases are made at the net asset value
next determined following receipt of a purchase order by the
Transfer Agent, at the address set forth below, accompanied
by payment for the purchase. The Funds may also from time to
time accept wire purchase orders from broker/dealers and
institutions who have been approved previously by a Fund.
Orders for shares of a Fund received prior to the close of
regular trading hours on the NYSE are confirmed at the net
asset value determined at the close of regular trading hours
on the NYSE on that day.
Orders received at the address set forth below subsequent to
the close of regular trading hours on the NYSE will be
confirmed at the net asset value determined at the close of
regular trading hours on the next day the NYSE is open.
11
<PAGE>
Investing by An account may be opened and shares of a Fund purchased by
Mail completing the Investment Application (the "Application"),
enclosed within this Prospectus and sending the Application,
together with a check for the desired amount, payable to "
Name of Fund " c/o FPS Services, Inc., 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903. The minimum
amount for the initial purchase of shares for SMDS, SGF and
SSCY is $2,000.
Subsequent purchases may be made in amounts of $100 or more.
(Note: There are no minimum investment amounts applied to
retirement plans.) After each purchase you will receive an
account statement for the shares purchased. Once a
shareholder's account has been established, additional
purchases may be made by sending a check made payable to "
Name of Fund " c/o FPS Services, Inc., P.O. Box 412797,
Kansas City, MO 64141-2797. Please enclose the stub of your
account statement and include your Fund account number on
your check (as well as the attributable year for retirement
plan investments, if applicable).
PLEASE NOTE: The Funds will not accept third party checks
for the purchase of shares. Third party checks are those
that are made out to someone other than the fund and are
endorsed over to the fund. In order to ensure receipt of
good funds, the Funds reserve the right to delay sending
your redemption proceeds up to 15 days if you recently
purchased shares by check. A $20 fee will be charged to your
account for any payment check returned to the custodian.
Investing by You may also pay for shares by instructing your bank to wire
Wire Federal funds to the Transfer Agent. Federal funds are
monies of member banks within the Federal Reserve System.
Your bank must include the full name(s) in which your
account is registered and your Fund account number, and
should address its wire as follows:
UNITED MISSOURI BANK KC NA
ABA # 10-10-00695
For: FPS Services, Inc.
Account # 98-7037-071-9
FBO: "NAME OF FUND"
Account of (exact name(s) of account registration)
Shareholder Account #______________
If you are opening a new account by wire transfer, you must
first telephone the Transfer Agent at 800-441-6580 to
request an account number and furnish the applicable Fund
with your social security or other tax identification
number. A completed Application with signature(s) of
registrant(s) must be filed with the applicable Fund
immediately subsequent to the initial wire. Your bank will
generally charge a fee for this wire. The Funds will not be
responsible for the consequences of delays, including delays
in the banking or Federal Reserve wire systems.
PLEASE NOTE: Your initial Fund account must satisfy the
$2,000 minimum balance requirement in order to participate
in the following programs or plans.
12
<PAGE>
Automatic Shares of a Fund may be purchased through our "Automatic
Investment Plan Investment Plan" (the "Plan"), (a tear-out application is
attached to the back of this Prospectus). The Plan provides
a convenient method by which investors may have monies
deducted directly from their checking, savings or bank money
market accounts for investment in a Fund. The minimum
investment pursuant to this Plan is $100 per month. The
account designated will be debited in the specified amount,
on the date indicated, and Fund shares will be purchased.
Only an account maintained at a domestic financial
institution which is an Automated Clearing House ("ACH")
member may be so designated. A Fund may alter, modify or
terminate this Plan at any time.
Direct Deposit This program enables a shareholder to purchase additional
Program shares by having certain payments from the Federal
Government ONLY (i.e. federal salary, social security and
certain veterans, military or other payments) automatically
deposited into the shareholder's account in a Fund. The
minimum investment is $100.
To elect this privilege, a shareholder must complete a
Direct Deposit Enrollment Form for each type of payment
desired. The form may be obtained by contacting the Transfer
Agent, at the address or telephone number shown below. Death
or legal incapacity will terminate a shareholder's
participation in this program. A shareholder may terminate
their participation by notifying, in writing, the
appropriate Federal agency. In addition, the Funds may
terminate participation upon 30 days' notice to the
shareholder.
Reinvestment of Any shareholder may at any time request and receive
Income automatic reinvestment of any Funds' income dividends and
Dividends and capital gains distributions, or income dividends only, or
Capital Gains capital gains distributions only, in additional shares of a
Distributions Fund unless the Funds' Board of Directors determines
otherwise. Each Fund will send the shareholder an account
statement reflecting all such reinvestments. The $100
minimum requirement for subsequent investments does not
apply to the reinvestment of income dividends and/or capital
gain distributions.
The election to reinvest may be made on the enclosed
Application or by writing to " Name of Fund ", c/o FPS
Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903. Any such election will automatically
continue for subsequent dividends, and/or distributions
until written revocation is received by the applicable Fund.
If no election is chosen each Fund will automatically
reinvest your dividends and capital gains.
Additional Shares of a Fund may be purchased or redeemed through
Information certain broker/dealers who may charge a transaction fee,
which would not otherwise be charged if the shares were
purchased directly from a Fund.
Each Fund reserves the right to reject purchases under
circumstances or in amounts considered disadvantageous to
the Fund. CERTIFICATES WILL NOT BE ISSUED UNLESS REQUESTED
IN WRITING BY THE REGISTERED SHAREHOLDER(S).
13
<PAGE>
Each Fund is required by Federal tax law to withhold 31% of
reportable payments (which may include dividends, capital
gains distributions, and redemptions) paid to shareholders
who have not complied with Internal Revenue Service
regulations regarding Tax Identification Certification. In
order to avoid this withholding requirement, you must
certify via signature on your Application, or on a separate
W-9 Form supplied by the Transfer Agent, that your Social
Security or Taxpayer Identification Number is correct (or
you are waiting for a number to be issued to you), and that
you are currently not subject to backup withholding, or you
are exempt from backup withholding.
While the Funds provide most shareholder services, certain
special services, such as a request for a historical
transcript of an account, may involve an ADDITIONAL FEE. To
avoid having to pay such a fee for these special services,
it is important that you SAVE your last Year-to-Date
Confirmation Statement received each year.
PLEASE REFER ALL QUESTIONS AND CORRESPONDENCE ON NEW AND
EXISTING ACCOUNTS (SUCH AS PURCHASES OR REDEMPTIONS, OR
STATEMENTS NOT RECEIVED), DIRECTLY TO THE TRANSFER AGENT, BY
WRITING TO FPS SERVICES, INC., 3200 HORIZON DRIVE, P.O. BOX
61503, KING OF PRUSSIA, PA 19406-0903, OR BY CALLING FPS'
CUSTOMER SERVICE DEPARTMENT AT 800-441-6580. PLEASE
REFERENCE YOUR FUND NAME AND ACCOUNT NUMBER.
- -------------------------------------------------------------------------------
HOW TO REDEEM Shareholders may redeem shares of a Fund by mail, by writing
FUND SHARES directly to the Transfer Agent, and requesting liquidation
of all or any part of their shares. The redemption request
must be signed exactly as the shareholder's name appears in
By Written the registration and must include the Fund name and account
Request number. If shares are owned by more than one person, the
redemption request must be signed by all owners exactly as
their names appear in the registration. Shareholders holding
stock certificates must deliver them along with their signed
redemption requests. To protect your account, the Transfer
Agent and the Funds from fraud, signature guarantees are
required for certain redemptions. SIGNATURE GUARANTEES ARE
REQUIRED FOR: (1) all redemptions of $10,000 or more; (2)
any redemptions if the proceeds are to be paid to someone
other than the person(s) or organization in whose name the
account is registered; (3) any redemptions which request
that the proceeds be wired to a bank; (4) requests to
transfer the registration of shares to another owner; and
(5) any redemption if the proceeds are to be sent to an
address other than the address of record. The Transfer Agent
requires that signatures be guaranteed by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. Eligible guarantor
institutions include banks, brokers, dealers, credit unions,
national securities exchanges, registered securities
associations, clearing agencies and savings associations.
Broker-dealers guaranteeing signatures must be a member of a
clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted
from any eligible guarantor institution which participates
in a signature guarantee program. The Transfer Agent cannot
accept guarantees from notaries public. In certain
instances,
14
<PAGE>
the Funds may require additional documents, such as
certified death certificates or proof of fiduciary or
corporate authority. (NOTE: PLEASE CALL OUR TRANSFER AGENT
TO VERIFY REQUIRED LANGUAGE FOR ALL RETIREMENT PLAN
REDEMPTION REQUESTS.) No redemption shall be made unless a
shareholder's Application is first on file. In addition, a
Fund will not accept redemption requests until checks
(including certified checks or cashier's checks) received
for the shares purchased have cleared, which can be as long
as 15 days.
Redemption requests mailed to the Investment Advisor must be
forwarded to the Transfer Agent and will not be effected
until they are received in good order by the Transfer Agent.
The Transfer Agent cannot accept redemption requests which
specify a particular forward date for redemption.
By Automated A shareholder may elect to have redemption proceeds, cash
Clearing House distributions or systematic cash withdrawal payments
transferred to his or her bank, savings and loan association
or credit union that is an on-line member of the ACH system.
There are no fees associated with the use of the ACH
service.
Written ACH redemption requests must be received by the
Transfer Agent before 4 p.m. Eastern time to receive that
day's closing net asset value. ACH redemptions will be sent
on the day following the shareholder's request and funds
will be available two days later.
Redemption proceeds (including systematic cash withdrawals),
as well as dividend and capital gains distributions, may be
sent to a shareholder via Federal Funds wire. However, the
Transfer Agent will charge a $9 fee for each Federal Funds
wire transmittal, which will be deducted from the amount of
the payment.
Systematic Cash Each Fund offers a Systematic Cash Withdrawal Plan as
Withdrawal Plan another option which may be utilized by an investor who
wishes to withdraw funds from his or her account on a
regular basis. To participate in this option, an investor
must either own or purchase shares having a value of $10,000
or more. Automatic payments by check will be mailed to the
investor on either a monthly, quarterly, semi-annual or
annual basis in amounts of $50 or more. All withdrawals are
processed on the 25th of the month or, if such day is not a
business day, on the next business day and paid promptly
thereafter. Please complete the appropriate section on the
Application, indicating the amount of the distribution and
the desired frequency.
An investor should realize that if withdrawals exceed income
dividends and capital gains distributions, the invested
principal will be depleted. Thus, depending on the size of
the withdrawal payments and fluctuations in the value of the
shares, the original investment could be exhausted entirely.
An investor may change or stop the Plan at any time by
written notice to the Funds. DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS MUST BE AUTOMATICALLY REINVESTED TO
PARTICIPATE IN THIS PLAN. Stock certificates cannot be
issued under the Systematic Cash Withdrawal Plan.
15
<PAGE>
Additional Due to the relatively high cost of maintaining smaller
Information accounts, the Funds reserve the right to involuntarily
redeem shares in any account for its then current net asset
value (which will be paid to the shareholder within five
business days, or such shorter time period as may be
required applicable Securities and Exchange Commission
("S.E.C.") rules) if at any time the total investment does
not have a value of at least $500. The shareholder will be
notified that the value of his or her account is less than
the required minimum and will be allowed at least 45 days to
bring the value of the account up to at least $500 before
the redemption is processed.
The redemption price will be the net asset value of the
shares to be redeemed as determined at the close of regular
trading hours on the NYSE after receipt at the address set
forth above of a request for redemption in the form
described above and the certificates (if any) evidencing the
shares to be redeemed. No redemption charge will be made.
Payment for shares redeemed is made within five business
days, or such shorter time period as may be required by
applicable S.E.C. rules, after receipt of the certificates
(or of the redemption request where no certificates have
been issued) by mailing a check to the shareholder's address
of record.
PLEASE NOTE: A $9 fee will be charged to your account at the
time of redemption if instructions to wire proceeds are
given; there is no fee to mail proceeds. Also, your
redemption proceeds may be delayed up to 15 days if you
recently purchased shares by check in order to confirm
clearance of check.
THE FUNDS MAY ALSO FROM TIME TO TIME ACCEPT TELEPHONE
REDEMPTION REQUESTS, FROM BROKER/DEALERS AND INSTITUTIONS
WHO HAVE BEEN APPROVED PREVIOUSLY BY THE FUNDS. Neither the
Funds nor any of their service contractors will be liable
for any loss or expense or cost in acting upon any telephone
instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are
genuine, the Funds will use such procedures as are
considered reasonable, including requesting a shareholder to
correctly state his or her Fund account number, the name in
which his or her account is registered, his or her banking
institution, bank account number and the name in which his
or her bank account is registered. To the extent that a Fund
fails to use reasonable procedures to verify the genuineness
of telephone instructions, it and/or its service contractors
may be liable for any such instructions that prove to be
fraudulent or unauthorized. During times of unusual market
conditions it may be difficult to reach the Funds by
telephone. If the Funds cannot be reached by telephone,
shareholders should follow the procedures for redeeming by
mail as set forth above.
The right of redemption may not be suspended or payment upon
redemption deferred for more than five business days, or
such time shorter time period as may be required by
applicable S.E.C. rules, except: (1) when trading on the
NYSE is restricted as determined by the S.E.C. or such NYSE
is closed for other than weekends and holidays; (2) when the
S.E.C. has by order permitted such suspension; or (3) when
an emergency, as defined by the rules of the S.E.C., exists,
16
<PAGE>
making disposal of portfolio securities or valuation of net
assets of a Fund not reasonably practicable. In case of a
suspension of the determination of the net asset value, the
right of redemption is also suspended and unless a
shareholder withdraws his request for redemption, he or she
will receive payment at the net asset value next determined
after termination of the suspension.
As provided in the Funds' Articles of Incorporation, payment
for shares redeemed may be made either in cash or in-kind,
or partly in cash and partly in-kind. However, the Funds
have elected, pursuant to Rule 18f-1 under the 1940 Act to
redeem shares solely in cash up to the lesser of $250,000 or
one percent of the net asset value of the Fund, during any
90 day period for any one shareholder. Payments in excess of
this limit will also be made wholly in cash unless the Board
of Directors of such Fund believes that economic conditions
exist which would make such a practice detrimental to the
best interests of the Fund. Any portfolio securities paid or
distributed in-kind will be in readily marketable
securities, and will be valued as described under
"Computation of Net Asset Value." Subsequent sale of such
securities would require payment of brokerage commissions by
the investor.
The value of a shareholder's shares on redemption may be
more or less than the cost of such shares to the
shareholder, depending upon the net asset value of the
Fund's shares at the time of redemption.
- -------------------------------------------------------------------------------
EXCHANGE Shares of each Fund may be exchanged for shares of the other
PRIVILEGE Funds, provided such other shares may legally be sold in the
state of the investor's residence. Each Fund has a distinct
investment objective which should be reviewed before
executing any exchange of shares.
The sections regarding each Fund, including those on charges
and expenses, should be read prior to seeking any such
exchange. Shares may be exchanged by: (1) written request;
or (2) telephone if a special authorization form has been
completed and is on file with the Transfer Agent in advance.
See "How to Redeem Fund Shares--Additional Information" for
a description of the Funds' policy regarding telephone
instructions.
PLEASE NOTE: Shareholders who have certificated shares in
their possession MUST surrender these shares to the Transfer
Agent to be held on account in unissued form PRIOR to taking
advantage of the exchange privilege. When returning
certificates for this purpose only, signature(s) need NOT be
guaranteed. There are no sales charges involved.
Shareholders who engage in frequent exchange transactions
may be prohibited from further exchanges or otherwise
restricted in placing future orders. The Funds reserve the
right to suspend the telephone exchange privilege at any
time. An exchange for tax purposes constitutes the sale of
one fund and the purchase of another. Consequently, the sale
may involve either a capital gain or loss to the shareholder
for federal income tax purposes.
- -------------------------------------------------------------------------------
RETIREMENT Each Fund has available four types of tax-deferred
PLANS retirement plans for its shareholders: Defined Contribution
Plans, for use by both self-employed individuals and
corporations; an Individual Retirement Account, for use by
certain
17
<PAGE>
eligible individuals with compensation (including earned
income from self-employment), a Simple Individual Retirement
Account, for use by certain small companies, and a 403(b)(7)
Retirement Plan, for use by employees of schools, hospitals,
and certain other tax-exempt organizations or associations.
More detailed information about how to participate in these
plans, the FEES charged by the custodian, and the limits on
contributions can be found in the Statement of Additional
Information. TO INVEST IN ANY OF THE TAX-DEFERRED RETIREMENT
PLANS, PLEASE CALL THE FUNDS FOR INFORMATION AND THE
REQUIRED SEPARATE APPLICATION.
- -------------------------------------------------------------------------------
TAX TREATMENT: During their most recent taxable years, each Fund qualified
DIVIDENDS AND separately as a regulated investment company under
DISTRIBUTIONS Subchapter M of the Internal Revenue Code and each Fund
intends to do so qualify in future years, as long as such
qualification is in the best interest of its shareholders.
Tax Treatment Under Subchapter M of the Internal Revenue Code, a Fund is
not subject to Federal income tax on such part of its
ordinary taxable income or net realized long-term capital
gains that it distributes to shareholders. Distributions
paid by a Fund from net investment income and short-term
capital gains (but not distributions paid from long-term
capital gains) will be taxable as ordinary income to
shareholders, whether received in cash or reinvested in
additional shares of such Fund. Such ordinary income
distributions will qualify for the dividends received
deduction for corporations to the extent of the total
qualifying dividends from domestic corporations received by
a Fund for the year. Shareholders who are citizens or
residents of the United States will be subject to Federal
taxes with respect to long-term realized capital gains which
are distributed to them, whether or not reinvested in the
Funds and regardless of the period of time such shares have
been owned by the shareholders. These distributions do not
qualify for the dividends received deduction. Due to the
nature of REIT dividends, a Fund may or may not realize a
return of capital. Consequently, a portion of a Fund's total
distributions might also include return of capital.
Shareholders will be advised after the end of each calendar
year as to the Federal income tax consequences of dividends
and distributions of the Funds made each year.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date
in such months, will be deemed for Federal tax purposes to
have been received by the shareholders and paid by such Fund
on December 31 of such year in the event such dividends are
paid during January of the following year.
Prior to purchasing shares of a Fund, the impact of
dividends or capital gains distributions which are expected
to be announced or have been announced, but not paid, should
be carefully considered. Any such dividends or capital gains
distributions paid shortly after a purchase of shares by an
investor prior to the record date will have the effect of
reducing the per share net asset value of his or her shares
by the per share amount of the dividends or distributions.
All or a portion of such dividends or distributions,
although in effect a return of capital to the shareholder,
is subject to taxes, which may be at ordinary income tax
rates.
18
<PAGE>
A taxable gain or loss may be realized by an investor upon
his or her redemption, transfer or exchange of shares of a
Fund, depending upon the cost of such shares when purchased
and their price at the time of redemption, transfer or
exchange. If a shareholder has held Fund shares for six
months or less and received a distribution taxable as
capital gains attributable to those shares, any loss he
realizes on a disposition of those shares will be treated as
a capital loss to the extent of the earlier capital gain
distribution.
The information above is only a short summary of some of the
important Federal tax considerations generally affecting the
Funds and their shareholders. Income and capital gains
distributions may also be subject to state and local taxes.
Investors should consult their tax advisor with respect to
their own tax situation.
Dividends and The shareholders of a Fund are entitled to dividends and
Distributions distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the
Fund involved, when declared by the Board of Directors of
such Fund. SMDS declares and pays dividends from net
investment income on a monthly basis. SGF declares and pays
dividends from net investment income on a semi-annual basis.
SSCY declares and pays dividends from net investment income
quarterly. Each Fund will make distributions from net
realized gains, if any, once a year, but may make
distributions on a more frequent basis to comply with the
distribution requirements of Subchapter M of the Internal
Revenue Code. Any distribution paid necessarily reduces a
Fund's net asset value per share by the amount of the
distribution. Distributions may be reinvested in additional
shares of such Fund, see "Reinvestment of Income Dividends
and Capital Gains Distributions."
- -------------------------------------------------------------------------------
PERFORMANCE From time to time, performance information such as total
CALCULATIONS return for the Funds may be quoted in advertisements or in
communications to shareholders. Each Fund's total return may
be calculated on an average annual total return basis, and
may also be calculated on an aggregate total return basis,
for various periods. Average annual total return reflects
the average annual percentage change in value of an
investment in a Fund over the measuring period. Aggregate
total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total
return assume that dividends and capital gains distributions
made by a Fund during the period are reinvested in such
Fund's shares.
The total return of each Fund may be compared to that of
other mutual funds with similar investment objectives and to
bond and other relevant indices or to rankings prepared by
independent services or other financial or industry
publications that monitor the performance of mutual funds.
For example, the total return of a Fund's shares may be
compared to data prepared by Lipper Analytical Services,
Inc., National Association of Real Estate Investment Trusts
and to indices prepared by Dow Jones & Co., Inc. and
Standard & Poor's Ratings Group.
Performance quotations of each Fund represent such Fund's
past performance, and should not be considered as
representative of future results. The investment
19
<PAGE>
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.
- -------------------------------------------------------------------------------
DESCRIPTION OF The Funds are each organized as separate Maryland
COMMON STOCK corporations. SMDS was organized on March 4, 1985, as
successor to a Delaware corporation organized on November
10, 1971; SGF was organized on June 21, 1985, as successor
to a Delaware corporation organized on June 5, 1972; and
SSCY was organized on January 5, 1993. SMDS' authorized
capital is 10,000,000 shares of common stock, par value
$1.00 per share. SGF's authorized capital is 10,000,000
shares of common stock, par value $0.10 per share. SSCY is a
series of The Stratton Funds, Inc. 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 this
Prospectus, a Fund's shares will be fully paid and
nonassessable. Fractional shares of a Fund have
proportionately the same rights as provided for full shares
of the particular Fund.
Each Fund does not presently intend to hold annual meetings
of shareholders except as required by the 1940 Act or other
applicable law. Each Fund is a separate legal entity and
holders vote separately as shareholders of each Fund. Under
certain circumstances, shareholders of a Fund have the right
to call a shareholders meeting of that Fund to consider the
removal of one or more directors.
Investors should be aware that by combining the Prospectus
of each Fund into this one document, there is the
possibility that one Fund may become liable for any
misstatements in the Prospectus about another Fund. To the
extent that a Fund incurs such liability, a shareholders
investment in such Fund could be adversely affected.
- -------------------------------------------------------------------------------
SERVICE Pursuant to arrangements between the Funds, The Bank of New
PROVIDERS AND York and FPS, The Bank of New York serves as custodian of
UNDERWRITER all securities and cash owned by each Fund. The Bank of New
York performs no managerial or policy-making functions for
the Funds. Pursuant to agreements between The Bank of New
York and FPS, FPS performs certain administrative and record
keeping services. The Bank of New York reallows a portion of
its custody fee to FPS for providing such services.
20
<PAGE>
FPS also serves as the Transfer Agent, Administrator and
Fund Accounting/Pricing Agent. FPS is a wholly-owned
subsidiary of FinDaTex, Inc. Certain directors and officers
of Stratton Management Company, the Investment Advisor to
the Funds, and certain directors and officers of each Fund
are controlling shareholders of FinDaTex, Inc.
Administration services include all administrative services
except those relating to the investment portfolios of the
Funds, the distribution of the Funds and the maintenance of
the Funds' financial records. For these administrative
services, the Funds pay a flat fee of $10,000 for SSCY and
$30,000 each for SMDS and SGF.
FPBS acts as underwriter to each Fund pursuant to separate
underwriting agreements. FPBS was paid $3,000 from each Fund
for underwriting services in connection with the
registration of the Fund's shares under state securities
laws. FPBS is a wholly-owned subsidiary of FPS. FPS and FPBS
are affiliates of the Investment Advisor inasmuch as FPBS,
FPS and the Investment Advisor are under common control.
21
<PAGE>
STRATTON MUTUAL FUNDS
NEW ACCOUNT APPLICATION
1.REGISTRATION
Complete A, B or C below. (PLEASE PRINT) No certificates will be issued
unless requested in writing.
A.INDIVIDUAL OR JOINT ACCOUNT*
------------------------------------------------------ -----------------
First NameMiddle InitialLast Name Social Security
Number
------------------------------------------------------ -----------------
First NameMiddle InitialLast Name Social Security
Number
*Registration will be Joint Tenancy with Rights of Survivorship, unless
otherwise specified.
B.GIFT TO MINORS
---------------------------------------------- Under the ____ UGMA/UTMA
Name of Custodian State
---------------------------------------------- ------------------------
As Custodian For (name of minor) Minor's Social Security
Number
C.CORPORATIONS, PARTNERSHIPS, TRUSTS AND OTHERS**
---------------------------------------------- ------------------------
Name of Legal Entity Taxpayer Identification
Number
--------------------------------------------------------------------------
Name of Fiduciary Name of Fiduciary
----------------------------------------------
Date of Trust (month, day, year)
**Complete Corporate Resolution attached, if applicable
2.MAILING ADDRESS
----------------------------------------------------------------------------
Street City State Zip Code
----------------------------
Daytime Telephone
If you have an account in another Stratton Fund that is registered under
the same name as above, please list the account number here: _______________
3.INVESTMENT INFORMATION ($2,000 minimum each)
<TABLE>
<S> <C> <C> <C>
[ ] STRATTON MONTHLY DIVIDEND SHARES, INC. ___________ % or $ ___________
[ ] STRATTON GROWTH FUND, INC. ___________ % or $ ___________
[ ] STRATTON SMALL-CAP YIELD FUND ___________ % or $ ___________
TOTAL 100 % $ ___________
</TABLE>
[ ] BY CHECK: Please make payable to appropriate Fund Name
[ ] BY WIRE: An initial purchase of $ _________ was wired on ___________ by
date
_________________________________________________ to account # _______________
Name of your Bank or Broker Number assigned by
FPS
4.DISTRIBUTION OPTIONS
Check one box only for each; if none are checked, all dividend and capital
gains, if any, will be reinvested.
<TABLE>
<S> <C> <C> <C>
Income Dividends (check one box only) [ ] reinvested [ ] paid in cash
Capital Gains Distributions (check one box only) [ ] reinvested [ ] paid in cash
</TABLE>
Please refer to box 7 for instructions if cash option via Automated
Clearing House ("ACH") is desired.
<PAGE>
5.SYSTEMATIC WITHDRAWAL PLAN
[ ] Check box if you want this service.
To establish a Systematic Withdrawal Plan (SWP), an account must have a
current market value of $10,000 or more. Additionally, an account must
have dividends reinvested.
[ ] Check box if you want withdrawal sent to address of record.
[ ] Check box if you want withdrawal sent via ACH as instructions
indicate in section 7.
Amount and Frequency of Payments:
---------------------------------
Beginning in _________, 19_____, please make payments in the amount
month
of $______________________
$50 minimum
Payments will be processed on the 25th day of the month in the
frequency indicated below:
[ ] Monthly [ ] Quarterly [ ] Semi-annually [ ] Annually
6.TELEPHONE EXCHANGE PRIVILEGE
[ ] Check box if you want this service.
I (We) authorize FPS Services, Inc. to act upon instructions for
exchanges between Funds received by telephone believed by it to be
genuine. I (We) understand this privilege permits switching at any time
between STRATTON MONTHLY DIVIDEND SHARES, INC., STRATTON GROWTH FUND,
INC. and STRATTON SMALL-CAP YIELD FUND, provided such other shares may
legally be sold in the state of the investor's residence.
7.SPECIAL PROGRAMS
All Direct Deposit Programs and ACH transactions will be sent as indicated
below. There will be no charge for ACH transactions. Any changes in ACH
transactions must be made in writing to FPS Services, Inc., 3200 Horizon
Drive, King of Prussia, PA 19406-0903. Please allow one month for ACH
transactions to be effective.
Notify your bank of your intent to establish this option on your bank
account.
----------------------------------------------------------------------------
Bank Name Branch Office (if applicable)
----------------------------------------------------------------------------
Bank Address (Do not use P.O. Box) City State Zip Code
----------------------------------------------------------------------------
Bank Wire Routing Number Name(s) on Bank Account Bank Account Number
8.SIGNATURE AND CERTIFICATION
TAXPAYER IDENTIFICATION NUMBER CERTIFICATION. UNDER THE PENALTIES OF
PERJURY, I (WE) CERTIFY THE FOLLOWING:
[ ] I (WE) CERTIFY THAT THE NUMBER SHOWN ON THIS FORM IS MY (OUR) CORRECT
TAX IDENTIFICATION NUMBER.
[ ] I (WE) AM NOT (ARE NOT) SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A
FAILURE TO REPORT ALL INTEREST AND DIVIDENDS, OR THE INTERNAL REVENUE
SERVICE HAS NOTIFIED ME (US) THAT I (WE) AM (ARE) NO LONGER SUBJECT TO
BACKUP WITHHOLDING.
CITIZEN OF: [ ] UNITED STATES [ ] OTHER (PLEASE INDICATE) ______________
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
-------------------------------------------------------- -----------------
Signature [ ] Owner [ ] Custodian [ ] Trustee Date
-------------------------------------------------------- -----------------
Signature of Joint Owner (if applicable) Date
<PAGE>
AUTOMATIC INVESTMENT PLAN APPLICATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INSTRUCTIONS
- -------------------------------------------------------------------------------
HOW DOES IT WORK?
1. FPS Services, Inc., through our bank, UMB Bank N.A., draws an Automatic
Clearing House (ACH) debit electronically against your personal checking
account or savings account each month.
2. Choose an amount ($100 minimum) that you would like to invest regularly
and your debit will be processed by FPS Services, Inc.
3. Shares will be purchased and a confirmation sent to you.
HOW DO I SET IT UP?
1. Complete this application and a New Account Application Form if you are
establishing a new account.
2. If you are using a Credit Union, please have your financial institution
complete the application.
3. Attach a VOIDED check to the application.
4. Mail applications to FPS Services, Inc., 3200 Horizon Drive, P.O. Box
61503, King of Prussia, PA 19406-0903.
5. As soon as your bank accepts your authorization, debits will be generated
and your Automatic Investment Plan started. In order for you to have ACH
debits from your account, your bank must be able to accept ACH
transactions and/or be a member of an ACH association. We cannot guarantee
acceptance by your bank.
6. Please allow one month for processing before the first debit occurs.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ACCOUNT INFORMATION
- -------------------------------------------------------------------------------
Check One: [ ] I am in the process of establishing a new account
[ ] My account number is #
Deposit my automatic investments in (check one):
[ ] STRATTON MONTHLY DIVIDEND SHARES, INC.
[ ] STRATTON GROWTH FUND, INC.
[ ] STRATTON SMALL-CAP YIELD FUND
Shareholder Name:
- -------------------------------------------------------------------------------
Joint Owner:
- -------------------------------------------------------------------------------
Street Address:
- -------------------------------------------------------------------------------
City: State: ZIP Code:
- -------------------------------------------------------------------------------
Phone Number: [daytime] ( ) [evening] ( )
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AUTHORIZATION
- -------------------------------------------------------------------------------
I authorize the FUND to establish an Automatic Investment Plan for me and
invest $ ______________ on the [ ] 10th, [ ] 15th, or [ ] 20th of each month in
($100 minimum)
the FUND. I understand that my ACH debit will be dated on the day of each month
as indicated above. I agree that if such debit is not honored upon presentation,
FPS Services, Inc. may discontinue this service and any share purchase made upon
deposit of such debit may be canceled. I further agree that if the net asset
value of the shares purchased with such debit is less when said purchase is
canceled than when the purchase was made, FPS Services, Inc. shall be authorized
to liquidate other shares or fractions thereof held in my account to make up the
deficiency. Returned items will result in a $20 fee being deducted from your
account. This Automatic Investment Plan may be discontinued by FPS Services,
<PAGE>
Inc. upon 30 days written notice or at any time by the investor by written
notice to FPS Services, Inc. which is received not later than five (5)
business days prior to the above designed investment date.
Signature of Account Owner Date:
- -------------------------------------------------------------------------------
Signature of Joint Account Owner Date:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BANK INFORMATION AND AUTHORIZATION
- -------------------------------------------------------------------------------
Bank Account Owner
- -------------------------------------------------------------------------------
Bank Account Joint Owner
- -------------------------------------------------------------------------------
Bank Name
- -------------------------------------------------------------------------------
Bank Branch Street Address
- -------------------------------------------------------------------------------
City State ZIP Code
- -------------------------------------------------------------------------------
ABA Number (9 digits) Account Number
- -------------------------------------------------------------------------------
CHECK ONE: [ ] Checking [ ] Savings
As a convenience to me, please honor ACH debits on my account drawn by FPS
Services, Inc., UMB Bank, NA and payable to the FUND.
I agree that your rights with respect to such debit shall be the same as if it
were a check drawn upon you and signed personally by me. This authority shall
remain in effect until you receive written notice to the contrary. I agree
that you shall be fully protected in honoring any such debit.
I further agree that if any debit is dishonored, whether with or without cause
or whether intentionally or inadvertently, you shall be under no liability
whatsoever.
Signature of Bank Account Owner Date:
- -------------------------------------------------------------------------------
Signature of Joint Account Owner Date:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDEMNIFICATION AGREEMENT
- -------------------------------------------------------------------------------
TO: The Bank Named Above:
So that you may comply with your Depositor's request and authorization, the
FUND agrees as follows:
1. To indemnify and hold you harmless from any loss you may suffer arising
from or in connection with the payment of a debit drawn by FPS Services,
Inc. to the order of the FUND, designated on the account of your
depositor's executing the authorization including any costs or expenses
reasonably incurred in connection with such loss. The FUND will not,
however, indemnify you against any loss due to your payment of any debit
generated against insufficient funds.
2. To refund to you any amount erroneously paid by you to FPS Services, Inc.
on any such debit if claim for the amount of such debit on which erroneous
payment was made.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MAIL COMPLETED AUTOMATIC INVESTMENT PLAN APPLICATION TO:
FPS SERVICES, INC., 3200 HORIZON DRIVE, KING OF PRUSSIA, PA 19406-0903
<PAGE>
STRATTON MUTUAL FUNDS
Stratton Monthly Dividend Shares, Inc.
Stratton Growth Fund, Inc.
Stratton Small-Cap Yield Fund
STATEMENT OF ADDITIONAL INFORMATION
May 15, 1997
This Statement of Additional Information provides supplementary information
pertaining to shares of common stock in three separate mutual funds: Stratton
Monthly Dividend Shares, Inc. ("SMDS"); Stratton Growth Fund, Inc. ("SGF"); and
Stratton Small-Cap Yield Fund ("SSCY") of The Stratton Funds, Inc. (each a
"Fund" and collectively the "Funds").
This Statement of Additional Information is not a Prospectus but should be read
in conjunction with the current Prospectus dated May 15, 1997, and is
incorporated by reference in its entirety into the Prospectus. A copy of the
Prospectus for the Funds may be obtained by contacting the Funds' Distributor,
FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
PA 19406-0903, or by telephoning (800) 634-5726.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Statement of Additional Information............................................
Investment Restrictions........................................................
Directors and Officers of the Funds............................................
Compensation Table.............................................................
Control Persons and Principal Holders of Securities............................
The Investment Advisor and Other Service Providers.............................
The Investment Advisor................................................
Service Providers and Underwriter.....................................
Portfolio Transactions and Brokerage Commissions...............................
Retirement Plans...............................................................
Additional Purchase and Redemption Information.................................
Additional Information Concerning Taxes........................................
Additional Information on Performance Calculations.............................
Financial Statements...........................................................
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction with the
Prospectus of the Funds having the same date as this Statement of Additional
Information. Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus. No investment in
shares of the Funds should be made without first reading the Prospectus of the
Funds.
INVESTMENT RESTRICTIONS
A list of the Funds' investment objectives and policies, can be found under "THE
FUNDS' INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISK CONSIDERATIONS" in
the Funds' Prospectus.
The following investment restrictions are deemed fundamental policies and may be
changed with respect to a Fund only by the approval of the holders of a
"majority" of such Fund's outstanding shares. The term "majority" of a Fund's
outstanding shares means the holders of the lesser of: (1) 67% of such Fund's
shares present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy; or (2) more than 50% of such Fund's
outstanding shares.
SMDS WILL NOT:
1. Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 5% of the value of its total assets; or
mortgage, pledge or hypothecate its assets to secure any borrowing
except to secure temporary or emergency borrowing and then only in an
amount not exceeding 15% of the value of its total assets.
2. Invest more than 5% of the value of its total assets in securities of
issuers which, with their predecessors, have not had at least three
years of continuous operation.
3. Issue any senior securities (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), except in so far as investment
restriction 1 may be deemed to be an issuance of a senior security.
Page 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. Invest less than 75% of the value of its total assets in securities
limited in respect to any one issuer to an amount not exceeding 5% of
the value of its total assets, Government securities (as defined in the
1940 Act) cash and cash items. (There is no similar restriction as to
the investment of the balance of the Fund's total assets).
7. Purchase or own 5% or more of the outstanding voting securities of any
electric or gas utility company (as defined in the Public Utility
Holding Company Act of 1935), or purchase or own 10% or more of the
outstanding voting securities of any other issuer.
8. Purchase the securities of an issuer, if, to the Fund's knowledge, one
or more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more
than 0.5% together own beneficially more than 5%, of the outstanding
securities of such issuer.
9. Make loans to other persons, except that the purchase of a portion of
an issue of publicly distributed debt securities (whether or not upon
original issuance) shall not be considered the making of a loan.
10. Purchase securities on margin, except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities.
11. Participate on a joint or a joint-and-several basis in any securities
trading account.
12. Invest in puts, calls or combinations thereof or make short sales.
13. Purchase the securities of other investment companies
14. Purchase securities which do not have readily available market quotations.
Real estate investment trusts ("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.
Page 3
<PAGE>
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).
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.
Page 4
<PAGE>
SSCY WILL NOT:
1. Issue any senior securities (as defined in the Investment Company Act
of 1940); or borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total
assets; or mortgage, pledge or hypothecate its assets.
2. Act as an underwriter of securities, except that, in connection with
the disposition of a security, the Fund may be deemed to be an
"Underwriter" as that term is defined in the Securities Act of 1933.
3. Purchase or sell real estate, commodities, or commodity contracts.
4. As to 75% of the total assets of the Fund, purchase the securities of
any one issuer, other than securities issued by the U.S. government,
its agencies or its instrumentalities, if immediately after such
purchase more than 5% of the total assets of the Fund would be invested
in securities of such issuer.
5. Purchase or own 10% or more of the outstanding voting securities of any
one issuer.
6. Purchase the securities of an issuer, if, to the Fund's knowledge, one
or more Officers or Directors of the Fund or of its Investment Advisor
individually own beneficially more than 0.5%, and those owning more
than 0.5% together own beneficially more than 5%, of the outstanding
securities of such issuer.
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.
Page 5
<PAGE>
12. Invest for the purpose of exercising control over, or management of, the
issuer.
Real estate investment trusts ("REITs") are not considered investment companies,
and therefore are not subject to the restriction in limitation 11 above. The
restriction in limitation 3 on the purchase or sale of real estate does not
include investments by the Fund in securities secured by real estate or
interests therein or issued by companies or investment trusts which invest in
real estate or interests therein.
* * *
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.
Page 6
<PAGE>
DIRECTORS AND OFFICERS OF THE FUNDS
The directors and executive officers of the Funds, their position with the
Funds, their addresses, affiliations, if any, with the Investment Advisor, and
principal occupations during the past five years are set forth below. Each of
the directors named below is a director for each of the Funds and each of the
officers named below holds the same position, unless otherwise noted, with each
of the Funds.
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation during last 5 years
Registrants
<S> <C> <C> <C>
James W. Stratton/1,3/ 60 Director/ Mr. Stratton is the Chairman of the Board and Chief
610 W. Germantown Pike Chairman Executive Officer of the Investment Advisor, Stratton
Suite 300 Management Company. He is a Director of ALCO Standard
Plymouth Meeting, PA 19462 (diversified distribution and manufacturing company),
Amerigas Propane Ltd. (energy), FinDaTex, Inc. (financial
services), Teleflex, Inc. (aerospace controls and medical
products) and UGI Corp., Inc. (utility-natural gas).
Lynne M. Cannon/2/ 41 Director Ms. Cannon is a Senior Vice President of Relationship
3200 Horizon Drive Management of FPS Services, Inc. and a Director of FPS
King of Prussia, PA 19406 Broker Services, Inc. She was formerly employed as Vice
President of Mutual Funds of Independence Capital
Management, Inc. (investment advisor). Prior to
Independence Capital, she was Vice President of AMA
Investment Advisors, Inc. (investment advisor &
broker/dealer).
John J. Lombard, Jr. 62 Director Mr. Lombard is a partner in the law firm of Morgan, Lewis
2000 One Logan Sq. & Bockius LLP.
Philadelphia, PA 19103
Henry A. Rentschler 68 Director Mr. Rentschler is a private investor. He was formerly the
P.O. Box 962 President of Baldwin-Hamilton Company, a division of Joy
Paoli, PA 19301 Environmental Equipment Co. (manufacturer of renewal parts for
Baldwin locomotives and diesel engines) and was also formerly a
Director of the Society for Industrial Archeology (which promotes the
study and preservation of the physical survivals of our technological
and industrial past).
Merritt N. Rhoad, Jr./3/ 67 Director Mr. Rhoad is a private investor. He was formerly a senior
640 Bridle Road systems engineer with International Business Machines
Custis Woods Corporation.
Glenside, PA 19038
Alexander F. Smith 68 Director Mr. Smith is a private investor. He was formerly the
Cricket Springs Chairman and Director of Gilbert Associates, Inc.
Geigertown , PA 19523 (engineering/consulting services).
Richard W. Stevens 63 Director Mr. Stevens is an attorney in private practice. He was
One Jenkintown Station formerly a partner in the law firm of Clark, Ladner,
115 W. Avenue, Suite 108 Fortenbaugh and Young.
Jenkintown, PA 19046
Gerard E. Heffernan/3/ 59 Officer Mr. Heffernan is a Senior Vice President and Director of the
610 W. Germantown Pike Investment Advisor, Stratton Management Company. He is
Suite 300 President of Stratton Monthly Dividend Shares, Inc., Vice
Plymouth Meeting, PA 19462 President of Stratton Growth Fund, Inc. and The Stratton
Funds, Inc. He is Secretary of FinDaTex, Inc.
John A. Affleck/3/ 50 Officer Mr. Affleck is President and Director of the Investment
610 W. Germantown Pike Advisor, Stratton Management Company. He is President
Suite 300 of Stratton Growth Fund, Inc., Vice President of Stratton
Plymouth Meeting, PA 19462 Monthly Dividend Shares, Inc. and The Stratton Funds, Inc.
Joanne E. Kuzma 42 Officer Mrs. Kuzma is the Director of Trading and a Managing
610 W. Germantown Pike Partner of the Investment Advisor, Stratton Management
Suite 300 Company. She is Vice President of Compliance for Stratton
Plymouth Meeting, PA 19462 Growth Fund, Inc., Stratton Monthly Dividend Shares, Inc.
and The Stratton Funds, Inc.
</TABLE>
Page 7
<PAGE>
<TABLE>
<S> <C> <C> <C>
Frank H. Reichel, III 32 Officer Mr. Reichel is a Vice President, a Director and the Director
610 W. Germantown Pike of Research of the Investment Advisor, Stratton
Suite 300 Management Company. He is President of The Stratton
Plymouth Meeting, PA 19462 Funds, Inc., Vice President of Stratton Growth Fund, Inc.
and Stratton Monthly Dividend Shares, Inc.
Patricia L. Sloan 43 Secretary, Ms. Sloan is an employee of the Investment Advisor,
610 W. Germantown Pike Treasurer Stratton Management Company.
Suite 300
Plymouth Meeting, PA 19462
James A. Beers 33 Assistant Mr. Beers is a Vice President of the Investment Advisor,
610 W. Germantown Pike Secretary/ Stratton Management Company; prior thereto, Account
Suite 300 Treasurer Manager of Client Services at FPS Services, Inc. Mr. Beers
Plymouth Meeting PA 19462 is related to Mr. Stratton by marriage.
Carol L. Royce 39 Assistant Mrs. Royce is an employee of the Investment Advisor,
610 W. Germantown Pike Secretary/ Stratton Management Company.
Suite 300 Treasurer
Plymouth Meeting PA 19462
</TABLE>
/1/ As defined in the 1940 Act, Mr. Stratton is an "interested person" of the
Funds by reason of his positions with the
Investment Advisor and his ownership of FPS Services, Inc. ("FPS") and
it's subsidiary FPS Broker Services, Inc. ("FPBS").
/2/ Ms. Cannon is an "interested person" of the Funds by reason of her
employment with FPS and FPBS.
/3/ Mr. Stratton, Rhoad, Jr., Heffernan and Affleck are shareholders of
FinDaTex, Inc.
COMPENSATION TABLE
The officers and directors of the Funds who are also officers or employees of
the Investment Advisor or FPS receive no direct compensation from the Fund for
services to them. The directors of the Funds serve in the same capacity for each
Fund and meet concurrently four times a year. In the aggregate, each director
currently receives $750 for each meeting attended, and an annual retainer of
$4,000. These fees are divided on a percentage basis between each Fund based on
their relative net assets as of the meeting date. There are no separate audit,
compensation or nominating committees of the Board of Directors.
Set forth are the total fees which were paid to each of the directors who are
not "interested persons" from the start of each Fund's fiscal period until
December 31, 1996:
<TABLE>
<CAPTION>
Total Compensation
Name of Aggregate Compensation From Fund and Fund
Director from Fund Complex /(1)/ Paid to Directors
- --------- ---------------------- -------------------------------
<S> <C> <C>
James W. Stratton
SMDS $0 $0
SGF $0
SSCY $0
Lynne M. Cannon
SMDS $0 $0
SGF $0
SSCY $0
</TABLE>
Page 8
<PAGE>
<TABLE>
<S> <C> <C>
John J. Lombard, Jr.
SMDS $4,885.68 $6,848.23
SGF $1,203.86
SSCY $ 758.69
Rose J. Randall/(2)/
SMDS $2,995.49 $3,748.23
SGF $ 387.00
SSCY $ 365.74
Henry A. Rentschler
SMDS $4,885.68 $6,848.23
SGF $1,203.86
SSCY $ 758.69
Merritt N. Rhoad, Jr.
SMDS $4,885.68 $6,848.23
SGF $1,203.86
SSCY $ 758.69
Alexander F. Smith
SMDS $4,885.68 $6,848.23
SGF $1,203.86
SSCY $ 758.69
Richard W. Stevens
SMDS $4,885.68 $6,848.23
SGF $1,203.86
SSCY $ 758.69
</TABLE>
/(1)/ The "Fund Complex" consists of SMDS, SGF and The Stratton Funds, Inc.
/(2)/ Ms. Randall resigned from all of the Boards of Directors on June 25,
1996
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 28, 1997, beneficial ownership in the Funds by the directors and
officers as a group was as follows:
<TABLE>
<CAPTION>
Fund Shares Percentage
- ---- ------ ----------
<S> <C> <C>
1. SMDS $115,834 3.19%
2. SGF $557,969 33.97%
3. SSCY $ 92,003 14.30%
</TABLE>
Page 9
<PAGE>
As of February 28, 1997, the following shareholders owned of record or to the
best of knowledge beneficially more than 5% of the outstanding shares of the
respective Fund.
<TABLE>
<CAPTION>
Shares Percent
Name Address Owned Owned
---- ------- ----- -----
<S> <C> <C> <C> <C>
1. SMDS Charles Schwab 101 Montgomery St. 422,848 11.64%
& Co., Inc. San Francisco, CA
2. SGF James Stratton 610 W. Germantown 117,275 7.14%
Pike, Plymouth Meeting
Greenco P.O. Box 2961 110,058 6.70%
Harrisburg, PA
Sandmeyer Steel 1 Sandmeyer Lane 106,136 6.46%
Company Philadelphia, PA
3. SSCY Boston & Co. P.O. Box 3198 344,674 53.64%
Pittsburgh, PA
Stratton Mgmt. Co. 610 W. Germantown 47,407 7.38%
Profit Sharing Plan Pike, Plymouth Meeting
</TABLE>
THE INVESTMENT ADVISOR AND OTHER SERVICE PROVIDERS
The Investment Advisor
The Investment Advisory Agreements (the "Agreements") require the Investment
Advisor to maintain a continuous review of each Fund's portfolio of investments,
and to manage the investment and reinvestment of each Fund's assets. The
Agreements provide that the Investment Advisor is not required to give the Funds
preferential treatment as compared with the treatment given to any other
customer or investment company. In addition, the Investment Advisor furnishes to
the Funds office space and facilities necessary in connection with the operation
of the Funds. The Funds pay, or arrange for others to pay, all other expenses in
connection with their operations.
The Funds pay the following expenses: (1) the fees and expenses of the Funds'
disinterested directors; (2) interest expenses; (3) taxes; (4) brokerage
commissions and other expenses incurred in acquiring or disposing of portfolio
securities; (5) the expenses of registering shares for sale with the Securities
and Exchange Commission and with various state securities commissions; (6)
accounting and legal costs; (7) insurance premiums; (8) fees and expenses of the
Funds' custodian, administrator, accounting services agent and transfer agent
and any related services; (9) expenses of obtaining quotations of the Funds'
portfolio securities and of pricing the Funds' shares; (10) expenses of
maintaining the Funds' legal existence and of shareholders' meetings; (11)
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and (12) fees and expenses of membership in industry
organizations.
Page 10
<PAGE>
1. SMDS - The investment advisory fee payable under the Agreement is
payable monthly, at an annual rate of 5/8 of 1% of the Fund's daily net
assets. During the fiscal years ended January 31, 1995 and 1996, the
fees paid to the Investment Advisor were $829,796 and $794,629,
respectively. For the period February 1, 1996 through December 31,
1996, the fees paid to the Investment Advisor were $606,818.
2. SGF - 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, 1995 and 1996,
the fees paid to the Investment Advisor were $189,594 and $266,741,
respectively. During the period from June 1, 1996 through December 31,
1996, the fees paid to the Investment Advisor were $177,939.
3. SSCY - The Investment Advisor receives from the Fund a monthly fee at
an annual rate of 0.75% of the Fund's average daily net assets subject
to a performance adjustment and is responsible for paying its expenses.
During the periods ended March 31, 1995 and 1996 the Fund paid the
Investment Advisor $76,075 and $126,638, respectively in fees. For the
period from April 1, 1996 through December 31, 1996, the fees paid to
the Investment Advisor were $91,179.
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. The Fund's gross performance is compared with the performance of
the Frank Russell 2000, a widely recognized unmanaged index of common
stock prices, over a rolling 24-month performance period. The Russell
2000 is composed of the smallest 2000 stocks in the Frank Russell
annual ranking of 3000 common stocks by market capitalization. The
Russell 2000 is a widely recognized common stock index of small to
medium size companies. Total return performance on the Russell 2000
includes dividends and is reported monthly on market capitalization-
weighted basis. When the Fund performs better than the Russell 2000, it
pays the Investment Advisor an incentive fee; less favorable
performance than the Russell 2000 reduces the basic fee. Each 1.00% of
the difference in performance between the Fund and the Russell 2000
during the performance period is equal to a 0.10% adjustment to the
basic fee. The maximum annualized performance adjustment rate is +/-
0.50% of average net assets which would be added to or deducted from
the advisory fee if the Fund outperformed or under performed the
Russell 2000 by 5.00%. The effect of this performance fee adjustment is
that the basic advisory fee may be increased as high as an annual rate
of 1.25% or decreased to as low as an annual rate of 0.25% of the
Fund's average daily net asset value. Due to the complexities of
researching and investing in small-cap equity securities, the advisory
and incentive fees (if realized) paid by the Fund are higher than those
paid by most other investment companies. Additionally, the Fund's
incentive fee of plus or minus 0.50% is greater than that of other
mutual funds with similar objectives which pay incentive fees.
Service Providers and Underwriter
FPS is a wholly-owned subsidiary of FinDaTex, Inc. Certain directors and
officers of Stratton Management Company, the Investment Advisor to the Funds,
and certain directors and officers of each Fund are controlling shareholders of
FinDaTex, Inc. FPS Broker Services ("FPBS) , the Funds underwriter, is a
wholly-owned subsidiary of FPS.
FPS serves as the Funds' accounting services agent, and is responsible for
certain accounting services (e.g. computation of the net asset value of the
Funds' shares and maintenance of the Funds' books and financial records).
Page 11
<PAGE>
1. SMDS - For the fiscal years ended January 31, 1995 and 1996, the Fund
paid FPS $26,000 each year in fees pursuant to the Accounting Services
Agreement . For the period from February 1, 1996 through December 31, 1996,
the Fund paid FPS $23,833 in fees pursuant to the Accounting Services
Agreement.
2. SGF - For the fiscal years ended May 31, 1995 and 1996, the Fund paid
FPS $20,000 each year in fees pursuant to the Accounting Services
Agreement. For the period of June 1, 1996 through December 31, 1996, the
Fund paid FPS $11,667 in fees pursuant to the Accounting Services
Agreement.
3. SSCY - For the fiscal years ended March 31, 1995 and 1996, the Fund paid
FPS $20,000 each year in fees pursuant to the Accounting Services
Agreement. For the period from April 1, 1996 through December 31, 1996, the
Fund paid FPS $15,000 in fees pursuant to the Accounting Services
Agreement.
FPS serves as the Funds' transfer agent and dividend-paying agent. FPS annually
receives $13.00 per account for providing transfer agent and dividend disbursing
agent services.
FPS serves as the Funds' Administrator, and is responsible for certain
administrative services including responsibility for all federal and state
compliance matters.
1. SMDS- FPS is entitled to receive a fee payable monthly at the annual
rate of $30,000 per year. For the fiscal years ended January 31, 1995 and
1996 the Fund paid FPS $30,000 each year in fees for administrative
services. For the period from February 1, 1996 through December 31, 1996,
the Fund paid FPS $27,500. 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. SGF- FPS is entitled to receive a fee payable monthly at the annual rate
of $30,000 per year. For the fiscal years ended May 31, 1995 and 1996 the
Fund paid FPS $30,000 each year in fees for administrative services. For
the period from June 1, 1996 through December 31, 1996, the Fund paid FPS
$17,500. 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- FPS is entitled to receive a fee payable monthly at the annual
rate of $10,000 per year. For the fiscal years ended March 31, 1995 and
1996, the Fund paid FPS $10,000 each year in fees for administrative
services. For the period from April 1, 1996 through December 31, 1996, the
Fund paid FPS $7,500.
The Funds' independent auditor is Tait, Weller & Baker. Their offices are
located at 2 Penn Center Plaza, Suite 700, Philadelphia PA 19102-1707. The
auditor's responsibilities are (1) to ensure that all relevant accounting
principles are being followed by the 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
Page 12
<PAGE>
of the Funds; (4) collects and receives all income and other payments and
distributions on account of the Funds' securities; and (5) makes periodic
reports to the Boards of Directors concerning the Funds' operations.
The Funds have entered into Underwriting Agreements with FPBS. FPBS acts as an
underwriter of the Funds' 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 Funds 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 Funds.
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 Investment Advisor inasmuch as both the
Underwriter and the Investment Advisor are under common control.
For the services to be provided under the Underwriting Agreement in facilitating
the registration of Funds shares under state securities laws, FPBS has received
an annual fee of $3,000 from each Fund for providing these services in each of
the last three fiscal years. This fee is included in the net expenses of the
Funds. The Funds shall continue to bear the expense of all filing or
registration fees incurred in connection with the registration of shares of the
Funds under state securities laws. The Funds pay no compensation to FPBS for its
assistance in sales of Funds shares. The Investment Advisor pays certain
out-of-pocket expenses, plus the cost for each employee to be licensed as a
Registered Representative by 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 Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Funds seek to obtain the best price and execution in all purchases and sales
of securities, except when the authorization to pay higher commissions for
research and services, as provided for in the Investment Advisory Agreements, is
exercised. Purchases and sales of over-the-counter securities are ordinarily
placed with primary market makers acting as principals. Consistent with its
obligation to seek the best price and execution, the Funds may place some
purchases and sales of portfolio securities with dealers or brokers who provide
statistical and research information to the Investment Advisor. Statistical and
research services furnished by brokers through whom the Funds effects securities
transactions in accordance with these procedures are ordinarily of general
application and may be used by the Advisor in servicing other accounts as well
as that of the Funds. In addition, not all such services may be used in
connection with the Investment Advisor's activities on behalf of the Funds.
Portfolio transactions are assigned to brokers, and commission rates negotiated,
based on an assessment of the reliability and quality of a broker's services,
which may include research and statistical information such as reports on
specific companies or groups of companies, pricing information, or broad
overviews of the stock market and the economy.
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
Page 13
<PAGE>
of the Funds to participate with other clients of the Investment Advisor in
volume transactions may produce better executions for the Funds.
The Investment Advisory Agreements contain provisions which authorize the
Investment Advisor to recommend and cause the Funds to pay brokerage commissions
in excess of commissions which might be charged by other brokers, where a
determination is made that the amount of commission paid is reasonable in
relation to the brokerage and research services provided by the broker to the
Funds, viewed in terms of the particular transaction or the overall
responsibilities of the Investment Advisor with respect to the Funds. In
addition, the Investment Advisory Agreements recognize that the Investment
Advisor may, at its expense, acquire statistical and factual information, advice
about economic factors and trends and other appropriate information from others
in carrying out its obligations. For SGF, during the fiscal years ended May 31,
1995 and 1996, and the period June 1, 1996 through December 31, 1996, no
brokerage commissions were paid by the Fund pursuant to this provision. For
SMDS, during the fiscal year ended January 31, 1995 and 1996 and the period
February 1, 1996 through December 31, 1996, no brokerage commissions were paid
by the Fund pursuant to this provision. For SSCY, during the fiscal years ended
March 31, 1995, 1996 and the period April 1, 1996 through December 31, 1996, no
brokerage commissions were paid by the Fund pursuant to this provision.
1. SMDS - During the fiscal years ended January 31, 1995, 1996, and the
period from February 1, 1996 through December 31, 1996, the Fund paid
$274,673, $280,842, and $337,175 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 years ended December 31, 1996 and
January 31, 1996, the Fund's portfolio turnover rate was 69.19% and 53.30%,
respectively.
2. SGF - During the fiscal years ended May 31, 1995, 1996, and the period
from June 1, 1996 through December 31, 1996, the Fund paid $33,383, $13,398
and $24,150 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 years ended December 31, 1996 and May 31, 1996, the Fund's portfolio
turnover rate was 20.32% and 15.41%, respectively.
3. SSCY - During the fiscal years ended March 31, 1995, 1996, and the
period from April 1, 1996 through December 31, 1996, the Fund paid $27,839,
$22,378, and $29,899 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 years
ended December 31, 1996 and March 31, 1996, the Fund's portfolio turnover
rate was 35.86% and 33.50%, respectively.
Each Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b- 1 under the 1940 Act) or their parents held by
such Fund as of the close of its most recent fiscal years. As of December 31,
1996, SMDS held convertible debentures of Interstate/Johnson Lane, Inc. with an
aggregate value of $2,599,172.
Page 14
<PAGE>
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.
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 1996 -- 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 Funds offer an individual retirement account (the "IRA") for use by
individuals with compensation for services rendered (including earned income
from self-employment) who wish to use shares of the Funds as a funding medium
for individual retirement saving. However, except for rollover contributions, an
individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may only contribute to an IRA for a nonworking spouse who is under
age 70 1/2.
The general deductible limit for contributions to an IRA is the lesser of 100%
of compensation or $2,000 ($4,000 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 plan. If such an individual is a married person with adjusted gross
income ("AGI") on his or her joint return in excess of $40,000 but less than
$50,000, or a single person with AGI in excess of $25,000 but less than $35,000,
the individual's $2,000 deduction will be decreased proportionately. A married
individual with AGI on his or her joint return of $50,000 or more, or a single
individual with AGI of $35,000 or more, may not make any deductible contribution
if he or she is an active participant in a retirement plan.
Even if the individual is not an active participant in a retirement plan, if his
or her spouse is a participant in such a plan and if their AGI, filed jointly,
is more than $40,000, the individual and his or her spouse will both be subject
to the phase-out discussed above. If neither the individual nor his or her
spouse is a participant in an employer-sponsored retirement plan, or if their
AGI is less than the $40,000 amount discussed above, the individual may continue
to make deductible contributions of up to the lesser of $2,000 ($4,000), or 100%
of compensation. (Beginning in 1997, if neither spouse is an active participant
in an employer-sponsored retirement plan, or if their combined AGI is less than
$40,000, a married couple filing a joint tax return may make deductible
contributions up to the lesser of $4,000 or 100% of their combined
compensation.)
Page 15
<PAGE>
Nondeductible contributions to the IRA may be made to the extent an individual
is unable to make a deductible contribution under the phase-out rules discussed
above. In addition, an individual may roll over to the IRA funds (in any amount)
that he or she has received in a qualifying distribution from an employer's
retirement plan.
The individual's IRA assets (and earnings thereon) may generally not be
withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
403(b)(7) Retirement Plan
The Funds offer a plan (the "403(b)(7) Plan") for use by schools, hospitals, and
certain other tax-exempt organizations or associations who wish to use shares of
the Funds as a funding medium for a retirement plan for their employees.
Contributions are made to the 403(b)(7) Plan based on a reduction of the
employee's regular compensation. Such contributions, to the extent they do not
exceed applicable limitations (including a generally applicable limitation of
$9,500 per year), are excludable from the gross income of the employee for
Federal income tax purposes. Assets withdrawn from the 403(b)(7) Plan are
subject to Federal income tax and to the additional 10% tax on early withdrawals
discussed above under "Defined Contribution Plans."
Simple Individual Retirement Account
The Funds offer a plan (the "Simple IRA") for use by companies or other
tax-exempt organizations who wish to use shares of the Funds as a funding medium
for a retirement plan for their employees. Contributions are made to the Simple
IRA's based on a reduction of the employee's regular compensation. Such
contributions, to the extent they do not exceed applicable limitations
(including a generally applicable limitation of $6,000 per year), are excludable
from the gross income of the employee for Federal income tax purposes. Assets
withdrawn from the Simple IRA are subject to Federal income tax and to the
additional 10% tax on early withdrawals discussed above under "Defined
Contribution Plans." Also, any distribution within two years of your
participation in the plan then the penalty is increased to 25%.
General Information
In all these Plans, distributions of net investment income and capital gains
will be automatically reinvested in the Funds.
The custodian of the plans is Semper Trust Company ("Semper"), Plymouth Meeting,
Pennsylvania. Semper is controlled by certain directors and officers of the
Funds and certain directors and officers of Stratton Management Company. FPS
serves as the fiduciary agent for Semper and in such capacity is responsible for
all record keeping, applicable tax reporting and fee collection in connection
with the plan accounts. Semper is entitled to deduct its fees and administrative
expenses by liquidating shares annually in September, unless the annual
maintenance fee is paid separately to FPS. The annual maintenance fee is
currently $12.00 per plan account. This fee may be amended without notice by
Stratton Management Company, Semper or FPS in the future.
The foregoing brief descriptions are not complete or definitive explanations of
the Defined Contribution, IRA, 403(b)(7) Plan 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
Page 16
<PAGE>
that investors consider their needs and whether the investment objective of the
Funds as described in this Statement of Additional Information and in the
Prospectus is most likely to fulfill them. The Funds recommend that investors
consult their attorneys or tax advisors to determine if the retirement programs
described herein are appropriate for their needs.
ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION
The computation of the offering price per share of each Fund based on the value
of each Fund's net assets on December 31, 1996 and each Fund's outstanding
securities on such date is as follows:
<TABLE>
<CAPTION>
SMDS SGF SSCY
<S> <C> <C> <C>
Net Assets $103,779,735 $44,801,256 $21,691,076
Outstanding Shares 3,783,660 1,659,408 645,878
Net Asset Value,
Offering Price and
Redemption Price per Share $27.43 $27.00 $33.58
</TABLE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situation.
As stated in the Prospectus, a Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended ("the Code")
for each taxable year. A 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 marginal rate of 39.6%; although
because of limitations on itemized deductions otherwise allowable and the
phase-out of personal exemptions, the maximum effective marginal rate of tax for
certain taxpayers may be more than 39.6% in certain circumstances. Net long-term
capital gains are taxed at a maximum normal rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35%.
A 4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Funds intend to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
If for any fiscal year a Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to Federal income tax at regular corporate rates (without any deduction
for distributions to its shareholders). In such event, dividend distributions
would be taxable as ordinary income to shareholders to the extent of the Fund's
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
Page 17
<PAGE>
The foregoing discussion is based on Federal tax laws and regulations which are
in effect on the date of this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS
From time to time, the Funds' total return may be quoted in advertisements,
shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATIONS
The Funds compute their average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
investment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result.
This calculation can be expressed as follows:
T=[(ERV) 1/n- 1]
---
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical
$1,000 investment made at the beginning of the
period.
P = hypothetical initial investment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The 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:
A=(ERV-P)
-------
P
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Where: A = aggregate total return.
ERV = ending redeemable value at end of the period
covered by the computation of a hypothetical
$1,000 investment made at the beginning of the
period.
P = hypothetical initial investment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the Funds cannot
necessarily be used to compare an investment in the Funds' shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
1. 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, 1996 were 8.58%, 6.75% and 7.60%, respectively. The aggregate
total returns for the five year and ten year periods ended December 31,
1996 were 38.63% and 108.03%, respectively.
2. 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, 1996 were 14.17%, 13.85% and 12.27%, respectively. The
aggregate total returns for the five year and ten year periods ended
December 31, 1996 were 91.31%, and 218.07%, respectively.
3. SSCY - Based on the foregoing calculations, the average annual total
returns for the Fund for the one year period ended December 31, 1996 was
14.96% and from inception was 12.12%. The aggregate total return from
inception to the period ended December 31, 1996 was 53.11%.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for each Fund contained in
each Fund's Annual Report dated December 31, 1996 are incorporated by reference
into this Statement of Additional information and have been audited by Tait,
Weller & Baker, whose reports also appear in the Annual Reports and are also
incorporated by reference herein. No other parts of the Annual Reports are
incorporated by reference herein. Such financial statements and notes thereto
have been incorporated herein in reliance on the reports of Tait, Weller &
Baker, independent accountants, given on the authority of said firm as experts
in auditing and accounting, incorporated by reference from the Funds' 1996
Annual Reports to Shareholders.
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