<PAGE>
DEAR FELLOW SHAREHOLDER:
The Pacific Rim financial and currency markets have rebounded significantly
from the bottoms that were set in late 1997. However, you should not confuse a
rebound in short-term trading markets with the end of economic turmoil. In
fact, we believe the pressures on the Asian economies are just beginning. To
obtain IMF assistance with their currencies, many Asian countries had to agree
to implement severe austerity programs in their economy. These programs are
just beginning and they will result in recessions in many Asian countries with
corresponding sharp increases in unemployment rates. Asia as a market for U.S.
goods and services will be much weaker in 1998 than it was in 1997.
Coupled with this, there is worldwide concern about how Asian producers will
react to reduced Pacific Rim demand. The expectation is that they will expand
their efforts to increase exports to Europe and the United States. The means
they will use to increase market share will be substantially lower prices.
Therefore, producers of domestic goods in both Europe and the U.S. can expect
to see intensified price competition in 1998 from their Asian counterparts.
Despite this, consumer confidence remains high in the United States and the
unemployment rate is at a low 4.7%. The Federal Reserve Board has one eye on
the pricing pressures coming from an Asia in recession and the other eye on the
upward inflationary pressure on wages and benefits coming from a full
employment economy in the U.S. These counter balancing pressures have resulted
in no changes in Federal Funds rates since last March. We continue to believe
that they will offset each other and keep Federal Reserve policy neutral. The
bond market, obviously is acting this way with U.S. Treasury rates at 5.75% for
the long maturity.
The last three years have produced over a 100% gain in the S&P 500, averaging
almost 30% per year. This kind of total return cannot be expected in the
future. While we are bullish for the American economy, we recognize both the
profit margin problems of wage pressures and the final demand problems of a
significantly weakened Asian export market. We continue to review our
portfolio, trying to weed out those stocks that are overvalued in today's
environment and replace them with undervalued securities. We use our
traditional yield-value styles applied to all three Fund portfolios focusing on
low price-earnings ratio, low price-cash flow ratios and above average dividend
yields.
We welcome all of our new shareholders to the Funds and thank our existing
shareholders for your continued support in recommendations to your friends. As
a 100% No-Load Fund, there are no fees that our shareholders bear for marketing
costs. We can only ask you to support us through your positive referrals. If
you have any investment policy questions, please do not hesitate to contact Jim
Beers, Vice President for Mutual Funds at (800)578-8261.
Sincerely yours,
/s/James W. Stratton
James W. Stratton
Chairman
February 9, 1998
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
The full year 1997 was another extraordinarily good one for the stock market.
The S&P 500 returned 33.3% for the year. Your Fund was able to improve upon
that with a total return of 36.1%. Over the last three years, the S&P 500 has
returned over 100% in total. These have been extraordinary years for the market
and the wise investor should not expect a continuation of returns at that
level. Our leading industry group once again, was banking and financial stocks
with 24.0% of assets, followed by insurance services with 12.3% and consumer
products with 9.7%. During the last quarter, we continued to increase our cash
position so that by year end cash represented 10.1% of total assets.
In the fourth quarter, we took advantage of the market declines in industrial
companies caused by concerns about the Southeast Asia crisis. We purchased a
new holding in Cooper Industries, a diversified tool and equipment company. We
also reinitiated a position in an old favorite, Phelps Dodge Corp., the leading
worldwide producer of copper. The Fund also added to four other holdings during
the quarter. We eliminated three stocks from our portfolio; Exxon because of a
relatively high price earnings ratio for a slow growing company; Jostens
because of continued earnings disappointments and Weyerhaeuser because of its
exposure to Pacific Rim economies and continued weakness in paper and pulp
prices. Our portfolio turnover level for the entire year was 34.4%, which is at
the low end of the range for growth and income funds in today's market
environment.
Continued growth in assets to a new all time high has helped reduce our expense
ratio for the full year to 1.11%. This is a significant improvement over last
year's expense ratio. On December 22, the Fund paid an income dividend of $0.34
bringing the total income dividends to $0.54. This coupled with the earlier
payments of capital gains distributions of $2.52 meant that total distributions
for the year were $3.06.
Total net assets for the year were $60,177,483. Net asset value per share ended
the year at $33.39.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Growth Fund with all dividend income and capital gains distributions
reinvested.
LOGO
<TABLE>
<CAPTION>
9/30/72 73-74 75-76 77-76 79-80 81-82 63-64 85-86 87-88 89-90 91-92 93-94 95-96 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10,000 7630 11,280 14,155 14,597 17,299 24,755 38,310 30,774 31,059 32,464 32,622 42,938 42,654
45 43 458 1,217 2,147 3,703 6,347 10,805 11,062 14,859 21,871 26,652 41,919 44,981
- 0 0 0 0 0 0 3,857 10,945 22,901 27,527 35,156 60,327 66,844
</TABLE>
Average Annual Total Return
for the period ending 12/31/97
1 year................... +36.06%
5 year................... +19.52
10 year................... +16.24
15 year................... +14.22
20 year................... +14.59
25 year................... +12.37
*Prior to 12/31/96, SGF had a fiscal year-end of 5/31.
2
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
DECEMBER 31, 1997 September 30, 1997
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $60,177,483 $54,924,340
- ---------------------------------------------------------------
Net Asset Value Per Share $33.39 $33.82
- ---------------------------------------------------------------
Shares Outstanding 1,802,433 1,623,888
- ---------------------------------------------------------------
Number of Shareholders 1,214 1,216
- ---------------------------------------------------------------
Average Size Account $49,570 $45,168
- ---------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ------------------------------------------------------------
<S> <C>
Chrysler Corp. American Express Co.
Cooper Industries, Inc. (1) CoreStates Financial Corp.
HSB Group, Inc. Exxon Corp. (2)
Phelps Dodge Corp. NY (1) Jostens, Inc. (2)
Springs Industries, Inc. Class A Weyerhaeuser Co. (2)
Thomas & Betts Corp.
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------------
<S> <C> <C>
CoreStates Financial Corp. $ 3,652,852 6.1%
- ------------------------------------------------------------
PNC Bank Corp. 2,853,125 4.7
- ------------------------------------------------------------
American General Corp. 2,703,125 4.5
- ------------------------------------------------------------
Pitney Bowes, Inc. 2,698,125 4.5
- ------------------------------------------------------------
Commerce Bancorp, Inc. (NJ) 2,601,000 4.3
- ------------------------------------------------------------
Du Pont (E.I.) de Nemours & Co. 2,402,500 4.0
- ------------------------------------------------------------
Thomas & Betts Corp. 2,362,500 3.9
- ------------------------------------------------------------
Olin Corp. 2,343,750 3.9
- ------------------------------------------------------------
Carpenter Technology Corp. 2,210,875 3.7
- ------------------------------------------------------------
American Express Co. 2,142,000 3.6
- ------------------------------------------------------------
$25,969,852 43.2%
- ------------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
During the year 1997, the Fund provided a total return of 18.1%. Shareholders
approved changing the name to Stratton Monthly Dividend REIT Shares and
concentrating the portfolio in the real estate sector. At the present time, we
have 94.1% of the portfolio in REITs.
During the quarter, activity in the portfolio remained relatively light. We
added two new securities; Storage Trust Realty, a nationwide owner of self-
storage facilities, our first investment in this industry, and Tower Realty
Trust, an office property owner in major cities, especially New York. During
the quarter we also eliminated two holdings; The Rouse Company Convertible
Preferred and Evans Withycombe Residential. Evans was acquired by Equity
Residential Properties in a merger transaction that was beneficial to the Fund.
The portfolio turnover for the year was 42.47%. With the conversion to a 100%
REIT Fund, it is our expectation that the portfolio turnover will remain at a
relatively low level.
The portfolio changes did not alter significantly the weightings of holdings in
the Fund. We continue to have 22.9% in our largest category, shopping centers.
This is followed by 16.7% in hotels-motels, 16.0% in apartments and 15.0% in
health care facilities, primarily nursing homes. Our cash position was 4.4% at
year end.
We continue to seek value within the REIT category. Our average dividend yield
paid on the portfolio securities was 7.26%. The Fund sells at 10.2x price to
Funds From Operations (FFO) for 1998. The FFO is expected to grow at 10.5%
during the year; with payout ratios declining, the dividend growth rate should
be about 6%. The average market capitalization of the REITs is $537 million
which would be classified as mid-cap for this industry. Our expense ratio
remained at a low 1.02% for the full year.
Total net assets were $101,956,224. Net asset value per share rose to $30.25.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Monthly Dividend REIT Shares with all dividend income and capital
gains distributions reinvested.
LOGO
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
9,113 9,354 10,806 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084 14,609 15,701 15,060 13,039 14,383 14,399
583 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388 26,570 31,818 33,590 32,499 39,890 43,821
$ - - - - - - 503 1,043 1,015 1,018 956 1,156 1,242 1,192 1,032 1,138 1,139
<CAPTION>
<S>
12/31/97
15,879
52,959
1,257
</TABLE>
STRATTON MONTHLY DIVIDEND SHARES
Average Annual Total Return
for the period ending 12/31/97
1 year................... +18.09%
5 year................... + 8.20
10 year................... +10.74
15 year................... +11.63
*Prior to 12/31/96, SMDS had a fiscal year-end of 1/31.
4
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
DECEMBER 31, 1997 September 30, 1997
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $101,956,224 $104,337,882
- ---------------------------------------------------------------
Net Asset Value Per Share $30.25 $30.06
- ---------------------------------------------------------------
Shares Outstanding 3,370,941 3,470,991
- ---------------------------------------------------------------
Number of Shareholders 4,957 5,100
- ---------------------------------------------------------------
Average Size Account $20,568 $20,458
- ---------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- -------------------------------------------------------------------------------
<S> <C>
Berkshire Realty Co., Inc. Evans Withycombe Residential, Inc. (2)
Boykin Lodging Co. Excel Realty Trust, Inc.
Cornerstone Realty Income Trust, Inc. Health Care REIT, Inc.
First Industrial Realty Trust, Inc. National Health Investors, Inc.
Health & Retirement Properties Trust Rouse Co. $3.00 Cv. Pfd. Series B (2)
Mid-America Apartment Communities, Inc.
Oasis Residential, Inc.
Storage Trust Realty (1)
Tower Realty Trust, Inc. (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -----------------------------------------------------------------
<S> <C> <C>
Health Care REIT, Inc. $ 4,921,875 4.8%
- -----------------------------------------------------------------
Excel Realty Trust, Inc. 4,725,000 4.6
- -----------------------------------------------------------------
Glimcher Realty Trust 3,610,000 3.5
- -----------------------------------------------------------------
Mid-Atlantic Realty Trust 3,497,020 3.4
- -----------------------------------------------------------------
Developers Diversified Realty Corp. 3,442,500 3.4
- -----------------------------------------------------------------
Mid-America Realty Investments, Inc. 3,432,375 3.4
- -----------------------------------------------------------------
EastGroup Properties, SBI 2,948,569 2.9
- -----------------------------------------------------------------
Equity Inns, Inc. 2,802,500 2.8
- -----------------------------------------------------------------
The Price REIT, Inc. 2,763,281 2.7
- -----------------------------------------------------------------
Gables Residential Trust 2,762,500 2.7
- -----------------------------------------------------------------
$34,905,620 34.2%
- -----------------------------------------------------------------
</TABLE>
5
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
Your Fund had an exceptional year in 1997 returning 42.4% compared to the
Russell 2000's 22.4% total return. For the trailing three year period SSCY has
risen 27.7% per annum compared to the Russell's 22.3% annual rise. Last year
was an especially good year for small-cap value stocks relative to small-cap
growth issues. The Fund's less volatile dividend-based value strategy resulted
in significant outperformance when the markets declined sharply during March
and October. December was an especially strong performance month for the
financial stocks--some of which we gave back in the first month of 1998. Banks
are our second largest industry group at 20% behind our 25% weighting in a
diverse collection of industrial companies. We are comfortable with this
exposure to manufacturing given that smaller companies are less vulnerable to a
slowdown in the Asian Economies. With the markets still at peak valuations, our
cash level at year-end was slightly above normal at 6.2% of total net assets.
Our fourth quarter performance exceeded the Russell by 5.3% rising 1.95% versus
a -3.35% drop for the index. We attribute this performance to having lightened
our exposure to the technology stocks in the third quarter. In fact, we sold
two REITs and our only utility to repurchase some of our holdings in Helix
Technology and Technitrol at much lower prices after October's market turmoil.
We also added to several industrial and financial names as well as starting a
new position in JeffBanks. Our sales included two banks, Affiliated Community
Bancorp due to a merger agreement and PonceBank due to ongoing credit concerns.
Portfolio turnover stayed low at an 26.3% annual rate.
Despite the increase in assets, the expense ratio rose to 1.62% reflecting the
performance based fee adjustment. On December 22, the Fund paid an income
dividend of $0.09 for stockholders of record December 12. Also on that date, we
declared a capital gains distribution of $1.80 of which $1.42 was long term and
$.38 was short term. Total income distributed for the year was $2.66. Your Fund
was split 2 for 1 in the form of a 100% stock dividend payable on December 18
with a record date of December 17. All per share income figures provided above
are pre-split.
Total net assets have grown to $39,376,948. Net asset value per share was
$22.47 at year end.
The graph below illustrates the increase in value of a $10,000 investment in
the Stratton Small-Cap Yield Fund beginning April 12, 1993 with all dividend
income and capital gains distributions reinvested.
LOGO
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
4/12/93 4-93 3/31/94 3/31/95 3/31/96 12/31/97
10,000 10,000 10,376 10,352 12,780 13,432 17,976
- - - 158 402 789 1,067 1,633
- - - - - - 813 2,190
</TABLE>
Average Annual Total Return
for the period ending 12/31/97
1 year.................... +42.37%
3 year.................... +27.71
*Prior to 12/31/96, SSCY had a fiscal year-end of 3/31.
6
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
DECEMBER 31, 1997 September 30, 1997
- ---------------------------------------------------------------
<S> <C> <C>
Total Net Assets $39,376,948 $35,449,310
- ---------------------------------------------------------------
Net Asset Value Per Share $22.47 $45.98
- ---------------------------------------------------------------
Shares Outstanding 1,752,053 771,053
- ---------------------------------------------------------------
Number of Shareholders 1,190 1,101
- ---------------------------------------------------------------
Average Size Account $33,090 $32,197
- ---------------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ---------------------------------------------------------------
<S> <C>
EastGroup Properties, SBI (1) Affiliated Community Bancorp (2)
Greenbrier Companies, Inc. Camden Property Trust (2)
Helix Technology Corp. PonceBank (2)
Hunt Corp. Sovran Self Storage, Inc. (2)
JeffBanks, Inc. (1) Technitrol, Inc.
Mobile America Corp. (FL) (1) WICOR, Inc. (2)
Primesource Corp.
Quaker Chemical Corp.
SIS Bancorp, Inc. (1)
Standard Motor Products, Inc.
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ----------------------------------------------------------
<S> <C> <C>
Interra Financial, Inc. $1,173,000 3.0%
- ----------------------------------------------------------
Eaton Vance Corp. 1,019,250 2.6
- ----------------------------------------------------------
Primex Technologies, Inc. 1,012,500 2.5
- ----------------------------------------------------------
Kuhlman Corp. 978,125 2.5
- ----------------------------------------------------------
TB Wood's Corp. 956,250 2.4
- ----------------------------------------------------------
Commercial Intertech Corp. 933,750 2.4
- ----------------------------------------------------------
Standard Motor Products, Inc. 902,500 2.3
- ----------------------------------------------------------
Technitrol, Inc. 900,000 2.3
- ----------------------------------------------------------
Greenbrier Companies, Inc. 865,625 2.2
- ----------------------------------------------------------
A.O. Smith Corp. 845,000 2.1
- ----------------------------------------------------------
$9,586,000 24.3%
- ----------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
The Stratton Growth Fund seeks, as its primary objective, possible growth of
capital with current income from interest and income as a secondary objective.
Studies of historical data show that investing in high yielding common stocks
can produce above-average returns while lowering risk and preserving capital.
From an overall equity universe of more than 2500 companies, we screen down to
about 350 companies by selecting stocks with a market capitalization over $200
million which also possess a dividend yield at least one-third greater than the
yield on the S&P 500. Our second screen then reduces the universe to
approximately 60 stocks by measuring additional yield characteristics such as
dividend growth rates and dividend coverage. These tend to be done more on a
specific industry basis. Our third step in the review involves fundamental
analysis of important characteristics such as earnings, cash flow, management
strengths and relative industry competitive position. In this manner we reduce
the Stratton Growth Fund's buy candidate list to less than 40 stocks. These
stocks are then available for addition to the Fund. The final selection of
stocks for the portfolio of Stratton Growth Fund is made by James W. Stratton,
who has served as portfolio manager for 25 years. In his absence, a back-up
manager, Gerard E. Heffernan, serves.
The primary investment characteristics of the portfolio are as follows:
approximately 30 to 40 companies will be held; volatility, as measured by the
Beta, of the stocks should be below average; the average portfolio yield should
exceed the S&P 500 yield by 50%. By combining high dividend yields and lower
than average price volatility, the Fund should produce good relative
performance in up markets and superior relative performance in down markets.
This is our long-term objective.
LOGO
Average Annual Total Return
1 Year 5 Year 10 Year
36.06% 19.52% 16.24%
<TABLE>
<CAPTION>
SGF S&P 500
<S> <C> <C>
1987 $10,000 $10,000
1988 $12,259 $11,658
1989 $15,176 $15,346
1990 $14,156 $14,899
1991 $17,296 $19,445
1992 $18,457 $20,922
1993 $19,640 $23,034
1994 $21,051 $23,327
1995 $28,982 $32,083
1996 $33,090 $39,459
1997 $45,023 $52,616
</TABLE>
8
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
Under normal conditions, the Fund will invest at least 65% of its assets in the
equity securities of Real Estate Investment Trusts ( "REITs"). The remaining
35% of its assets may be invested, though it is not required, in real estate
related companies or in any other U.S. companies. REITs own income producing
commercial real estate properties such as apartment complexes, health care
facilities, shopping centers, regional malls, office buildings, hotels,
industrial buildings, and storage facilities.
The chart below depicts a hypothetical $10,000 investment in SMDS and several
security indexes. The U.S. Securities and Exchange Commission requires that
this chart include a "broad-based" index like the S&P 500 Index. However, the
characteristics of the securities held in the SMDS portfolio do not directly
compare to the characteristics of the securities that make up the S&P 500.
Prior to 11/96, 65% of the Fund was invested in the securities of public
utility companies. As a result, we have included the Dow Jones Utility Index.
From 12/96 to the present, at least 65% of the Fund has been invested in REITs.
As a result, we have included the NAREIT Equity Index. Our goal is to provide a
clear picture of the Fund's performance relative to other relevant benchmarks
so that investors can make accurate comparisons to other investment
opportunities. Investors should remember that a high rate of return from
dividend and interest income is at the forefront of SMDS' investment objective,
with growth of capital as a secondary goal.
From an overall equity universe of more than 2,500 companies, Stratton
Management Co., through computer techniques, screens down to about 100
companies by selecting stocks which possess a dividend yield of at least 6%.
Our second screen then reduces that universe to approximately 60 stocks by
measuring additional yield characteristics such as dividend growth rates and
dividend coverage of companies that also operate within the real estate
industry. The portfolio contains approximately 30 to 50 companies that meet
these tests. Fundamental security analysis is applied to those companies on a
continuing basis. The final selection of stocks for the portfolio of SMDS is
made by James W. Stratton, who has served as portfolio manager for seventeen
years. In his absence, John A. Affleck serves as a back-up portfolio manager.
Research and analysis of the Fund's REIT holdings is performed by James A.
Beers, Vice President of Mutual Funds.
The volatility of the portfolio as measured by the Beta of the stocks is
considerably below average when compared to other stock mutual funds. By
combining high dividend yields and lower than average price volatility, the
Fund tries to produce good relative performance in up markets and superior
relative performance in down markets.
LOGO
Average Annual Total Return
1 Year 5 Year 10 Year
18.09% 8.20% 10.74%
<TABLE>
<CAPTION>
SMDS NAREIT DOW JONES S&P 500
EQUITY UTILITY
<S> <C> <C> <C> <C>
1987 $10,000 $10,000 $10,000 $10,000
1988 $10,976 $11,349 $11,588 $11,658
1989 $13,036 $12,352 $15,721 $15,346
1990 $12,537 $10,456 $15,005 $14,899
1991 $16,938 $14,189 $17,029 $19,445
1992 $18,701 $16,259 $17,723 $20,922
1993 $19,935 $19,454 $19,440 $23,034
1994 $17,517 $20,071 $16,473 $23,327
1995 $21,624 $23,136 $21,806 $32,083
1996 $23,480 $31,296 $23,833 $39,459
1997 $27,727 $37,636 $29,307 $52,616
</TABLE>
9
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
Discussion of Investment Process and Performance
Stratton Small-Cap Yield Fund's investment philosophy is to achieve both
dividend income and capital appreciation. The Fund seeks to achieve its
objective by investing in dividend-paying small-cap common stocks. Under normal
market conditions, the Fund will invest at least 80% of its assets in equity
securities. The Fund will invest at least 65% of its assets in small-cap
companies. The Fund may not invest more than 25% in any one industry at cost.
From an overall equity universe of 6,000 companies, Stratton Management screens
down to about 800 companies by identifying stocks which possess a greater than
average dividend yield and a market capitalization of less than $1 billion. Our
stock selection process ranks that universe according to additional security
characteristics such as relative valuation and earnings momentum. The portfolio
contains approximately sixty companies that meet these criteria. Fundamental
security analysis is applied to those companies on a continuing basis. The
final decision to buy or sell stocks for the portfolio of Stratton Small-Cap
Yield is made by Frank H. Reichel, III and James W. Stratton.
The volatility of the portfolio, as measured by the Standard Deviation and/or
Beta of the stocks, is considerably below that of the average small-cap fund.
By combining above average dividend yields and lower than average
price/earnings ratios, the Fund tries to produce good performance in up markets
and strong relative performance in down markets.
Average Annual Total Return
1 Year Since Inception
42.37% 17.93%
<TABLE>
<CAPTION>
SSCY RUSS 2000
<S> <C> <C>
4/12/93 $10,000 $10,000
12/31/93 $10,754 $11,663
12/31/94 $10,464 $11,450
12/31/95 $13,318 $14,707
12/31/96 $15,311 $17,133
12/31/97 $21,799 $20,965
</TABLE>
10
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1997
- --------------------------------------------------------------------------------
Stratton Growth Fund
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 89.9%
BANKING/FINANCIAL - 24.0%
Comerica, Inc. .......................................... 15,000 $ 1,353,750
Commerce Bancorp, Inc. (NJ).............................. 51,000 2,601,000
CoreStates Financial Corp. .............................. 45,625 3,652,852
First Commerce Corp. .................................... 20,000 1,345,000
PNC Bank Corp. .......................................... 50,000 2,853,125
Summit Bancorp, Inc. .................................... 30,000 1,597,500
Union Planters Corp. .................................... 15,000 1,019,062
-----------
14,422,289
-----------
BUSINESS SERVICE - 8.0%
American Express Co. .................................... 24,000 2,142,000
Pitney Bowes, Inc. ...................................... 30,000 2,698,125
-----------
4,840,125
-----------
CAPITAL GOODS/TECHNOLOGY - 7.0%
Harris Corp. ............................................ 40,000 1,835,000
Thomas & Betts Corp. .................................... 50,000 2,362,500
-----------
4,197,500
-----------
CHEMICAL - 7.9%
Du Pont (E.I.) de Nemours & Co. ......................... 40,000 2,402,500
Olin Corp. .............................................. 50,000 2,343,750
-----------
4,746,250
-----------
CONSUMER PRODUCTS - 9.7%
Chrysler Corp. .......................................... 52,000 1,829,750
Kimberly-Clark Corp. .................................... 28,000 1,380,750
Springs Industries, Inc. Class A......................... 20,000 1,040,000
The Quaker Oats Co. ..................................... 30,000 1,582,500
-----------
5,833,000
-----------
ENERGY - 4.0%
El Paso Energy Corp. .................................... 10,000 665,000
Mobil Corp. ............................................. 24,000 1,732,500
-----------
2,397,500
-----------
HEALTH CARE - 4.4%
American Home Products Corp. ............................ 18,000 1,377,000
Shared Medical Systems Corp. ............................ 10,000 660,000
SmithKline Beecham PLC ADRs.............................. 12,000 617,250
-----------
2,654,250
-----------
INDUSTRIAL - 4.0%
Cooper Industries, Inc. ................................. 15,000 735,000
Fleetwood Enterprises, Inc. ............................. 40,000 1,697,500
-----------
2,432,500
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
INSURANCE/SERVICES - 12.3%
American General Corp. ............................... 50,000 $ 2,703,125
Aon Corp. ............................................ 22,500 1,319,062
HSB Group, Inc. ...................................... 15,000 827,813
Lincoln National Corp. ............................... 20,000 1,562,500
Unitrin, Inc. ........................................ 15,000 969,375
-----------
7,381,875
-----------
METALS - 5.7%
Carpenter Technology Corp. ........................... 46,000 2,210,875
Phelps Dodge Corp. NY................................. 20,000 1,245,000
-----------
3,455,875
-----------
PAPER - 1.9%
Glatfelter (P.H.) Co. ................................ 60,000 1,117,500
-----------
RETAILING - 1.0%
Penney (J.C.) Co., Inc. .............................. 10,000 603,125
-----------
Total Common Stocks
(cost $29,620,301)................................... 54,081,789
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 10.4%
General Motors Acceptance Corp.
5.65% due 01/02/98................................... $2,000,000 2,000,000
General Electric Capital Corp.
6.03% due 01/05/98................................... 2,000,000 2,000,000
Ford Motor Credit Corp.
6.11% due 01/08/98................................... 2,250,000 2,250,000
-----------
Total Short-Term Notes
(cost $6,250,000).................................... 6,250,000
-----------
TOTAL INVESTMENTS - 100.3%
(cost $35,870,301*).................................. 60,331,789
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -
(0.3%).............................................. (154,306)
-----------
NET ASSETS - 100.00%.................................. $60,177,483
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $35,870,301; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $24,567,209
Gross unrealized depreciation...................................... (105,721)
-----------
Net unrealized appreciation....................................... $24,461,488
===========
</TABLE>
11
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1997
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ------------
<S> <C> <C>
COMMON STOCKS - 94.1%
APARTMENTS - 16.0%
Berkshire Realty Co., Inc. .............................. 150,000 $ 1,800,000
Cornerstone Realty Income Trust, Inc. ................... 130,000 1,568,125
Gables Residential Trust................................. 100,000 2,762,500
Home Properties of New York, Inc. ....................... 80,000 2,175,000
Mid-America Apartment Communities, Inc. ................. 60,000 1,713,750
Oasis Residential, Inc. ................................. 70,000 1,561,875
Town & Country Trust..................................... 153,300 2,711,494
Walden Residential Properties, Inc. ..................... 80,000 2,040,000
------------
16,332,744
------------
DIVERSIFIED - 6.7%
Colonial Properties Trust................................ 75,000 2,259,375
EastGroup Properties, SBI................................ 136,350 2,948,569
Pacific Gulf Properties, Inc. ........................... 70,000 1,662,500
------------
6,870,444
------------
HEALTH CARE - 15.0%
American Health Properties, Inc. ........................ 100,000 2,756,250
Health & Retirement Properties Trust..................... 90,000 1,800,000
Health Care REIT, Inc. .................................. 175,000 4,921,875
LTC Properties, Inc. .................................... 80,000 1,660,000
National Health Investors, Inc. ......................... 60,000 2,512,500
Universal Health Realty Income Trust..................... 75,000 1,640,625
------------
15,291,250
------------
HOTELS/MOTELS - 16.7%
Boykin Lodging Co. ...................................... 60,000 1,586,250
Equity Inns, Inc. ....................................... 190,000 2,802,500
Hospitality Properties Trust............................. 50,000 1,643,750
Innkeepers USA Trust..................................... 160,000 2,480,000
Jameson Inns, Inc. ...................................... 155,000 1,811,563
RFS Hotel Investors, Inc. ............................... 110,000 2,193,125
Sunstone Hotel Investors, Inc. .......................... 130,000 2,242,500
Winston Hotels, Inc. .................................... 170,000 2,241,875
------------
17,001,563
------------
OFFICE INDUSTRIAL - 8.4%
Commercial Net Lease Realty, Inc. ....................... 90,000 1,608,750
First Industrial Realty Trust, Inc. ..................... 50,000 1,806,250
Liberty Property Trust................................... 75,000 2,142,187
Tower Realty Trust, Inc. ................................ 60,000 1,477,500
TriNet Corporate Realty Trust, Inc. ..................... 40,000 1,547,500
------------
8,582,187
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- ------------
<S> <C> <C>
OUTLET CENTERS - 4.0%
Mills Corp. .......................................... 53,700 $ 1,315,650
Tanger Factory Outlet Centers, Inc. .................. 90,000 2,750,625
------------
4,066,275
------------
REGIONAL MALLS - 3.4%
Mid-America Realty Investments, Inc. ................. 339,000 3,432,375
------------
SHOPPING CENTERS - 22.9%
Bradley Real Estate, Inc. ............................ 85,000 1,785,000
Developers Diversified Realty Corp. .................. 90,000 3,442,500
Excel Realty Trust, Inc. ............................. 150,000 4,725,000
Glimcher Realty Trust................................. 160,000 3,610,000
IRT Property Co. ..................................... 166,000 1,960,875
Mid-Atlantic Realty Trust............................. 238,095 3,497,020
The Price REIT, Inc. ................................. 67,500 2,763,281
Western Investment Real Estate Trust.................. 110,000 1,512,500
------------
23,296,176
------------
STORAGE - 1.0%
Storage Trust Realty.................................. 40,000 1,052,500
------------
Total Common Stocks
(cost $81,292,760)................................... 95,925,514
------------
PREFERRED STOCKS - 1.5%
(cost $1,777,330)
Psychiatric Group Preferred Depositary Shares
(each depositary share represents 1/10th of a share
of American Health Properties Psychiatric Group Pfd.
Stock)............................................... 100,000 1,487,500
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 4.9%
American Express Credit Corp.
6.65% due 01/02/98................................... $2,500,000 2,500,000
Ford Motor Credit Corp.
5.91% due 01/05/98................................... 2,500,000 2,500,000
------------
Total Short-Term Notes
(cost $5,000,000).................................... 5,000,000
------------
TOTAL INVESTMENTS - 100.5%
(cost $88,070,090*).................................. 102,413,014
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -
(0.5%).............................................. (456,790)
------------
NET ASSETS - 100.00%.................................. $101,956,224
============
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $88,070,090; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $14,998,123
Gross unrealized depreciation...................................... (655,199)
-----------
Net unrealized appreciation....................................... $14,342,924
===========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1997
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 93.8%
BANKING/FINANCIAL - 20.2%
American Bank of Connecticut............................. 7,500 $ 365,156
CCB Financial Corp. ..................................... 4,000 430,000
Centura Banks, Inc. (NC)................................. 8,000 552,000
CFX Corp. ............................................... 19,000 579,500
Colonial BancGroup, Inc. ................................ 14,000 482,125
Commerce Bancorp, Inc. (NJ).............................. 15,000 765,000
Community Bank Systems, Inc. ............................ 12,000 375,750
Eagle Financial Corp. ................................... 9,900 544,500
First Essex Bancorp, Inc. ............................... 20,000 465,000
First Financial Holdings, Inc. .......................... 9,000 478,125
Firstbank of Illinois Co. ............................... 6,750 248,484
JeffBanks, Inc. ......................................... 6,500 299,000
Medford Bancorp, Inc. ................................... 13,000 510,250
ML Bancorp, Inc. ........................................ 10,000 300,000
Reliance Bancorp, Inc. .................................. 10,000 366,250
SIS Bancorp, Inc. ....................................... 8,000 321,500
Trans Financial, Inc. ................................... 13,000 505,375
Vermont Financial Services Corp. ........................ 14,000 388,500
-----------
7,976,515
-----------
BUSINESS SERVICE - 9.2%
Eaton Vance Corp. ....................................... 27,000 1,019,250
Interra Financial, Inc. ................................. 17,000 1,173,000
Primesource Corp. ....................................... 80,000 800,000
True North Communications, Inc. ......................... 25,000 618,750
-----------
3,611,000
-----------
CHEMICAL - 4.2%
Primex Technologies, Inc. ............................... 30,000 1,012,500
Quaker Chemical Corp. ................................... 34,500 653,344
-----------
1,665,844
-----------
CONSUMER DURABLES - 5.6%
Hunt Corp. .............................................. 30,400 720,100
K2, Inc. ................................................ 23,000 523,250
TB Wood's Corp. ......................................... 45,000 956,250
-----------
2,199,600
-----------
CONSUMER NON-DURABLES - 6.3%
International Multifoods Corp. .......................... 25,000 707,813
Riviana Foods, Inc. (DE)................................. 25,000 521,875
Tasty Baking Co. ........................................ 34,375 663,867
Velcro Industries, N.V. ................................. 6,000 585,000
-----------
2,478,555
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
HEALTH CARE - 3.5%
Morrison Health Care, Inc. ............................... 9,200 $ 184,000
Shared Medical Systems Corp. ............................. 9,000 594,000
West Co., Inc. ........................................... 20,000 595,000
-----------
1,373,000
-----------
INDUSTRIAL - 25.4%
A.O. Smith Corp. ......................................... 20,000 845,000
Carpenter Technology Corp. ............................... 12,000 576,750
Commercial Intertech Corp. ............................... 45,000 933,750
Defiance, Inc. ........................................... 60,000 480,000
Excel Industries, Inc. ................................... 40,000 722,500
Florida Rock Industries, Inc. ............................ 30,800 700,700
Greenbrier Companies, Inc. ............................... 50,000 865,625
Guilford Mills, Inc. ..................................... 30,000 821,250
Kuhlman Corp. ............................................ 25,000 978,125
Quanex Corp. ............................................. 30,000 843,750
Republic Group, Inc. ..................................... 32,000 524,000
Roanoke Electric Steel Corp. ............................. 30,000 798,750
Standard Motor Products, Inc. ............................ 40,000 902,500
-----------
9,992,700
-----------
INSURANCE/SERVICES - 6.6%
American Heritage Life Investment Corp. .................. 20,000 720,000
Donegal Group, Inc. ...................................... 33,333 737,493
Mobile America Corp. (FL)................................. 25,000 350,000
Selective Insurance Group, Inc. .......................... 30,000 810,000
-----------
2,617,493
-----------
REAL ESTATE - 4.3%
Brandywine Realty Trust................................... 6,000 150,750
CCA Prison Realty Trust................................... 3,500 156,188
Chateau Communities, Inc. ................................ 9,378 295,407
Colonial Properties Trust................................. 8,000 241,000
EastGroup Properties, SBI................................. 10,000 216,250
Innkeepers USA Trust...................................... 20,000 310,000
Parkway Properties, Inc. ................................. 10,000 343,125
-----------
1,712,720
-----------
TECHNOLOGY - 8.5%
Boston Acoustics, Inc. ................................... 19,500 515,531
Helix Technology Corp. ................................... 40,000 780,000
Marc, Inc. ............................................... 41,000 738,000
Technitrol, Inc. ......................................... 30,000 900,000
Wireless Telecom Group, Inc. ............................. 65,000 402,187
-----------
3,335,718
-----------
Total Common Stocks
(cost $24,418,770)....................................... 36,963,145
-----------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1997 (continued)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 7.9%
American Express Credit Corp. 6.15% due 01/02/98...... $1,250,000 $ 1,250,000
Ford Motor Credit Corp.
5.80% due 01/07/98................................... 1,850,000 1,850,000
-----------
Total Short-Term Notes
(cost $3,100,000).................................... 3,100,000
-----------
TOTAL INVESTMENTS - 101.7%
(cost $27,518,770*).................................. 40,063,145
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -
(1.7%).............................................. (686,197)
-----------
NET ASSETS - 100.00%.................................. $39,376,948
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $27,518,770; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $12,844,987
Gross unrealized depreciation...................................... (300,612)
-----------
Net unrealized appreciation....................................... $12,544,375
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1997
<TABLE>
<CAPTION>
SGF SMDS SSCY
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities at value
(cost $35,870,301, $88,070,090 and
$27,518,770, respectively) (Note 1)... $60,331,789 $102,413,014 $40,063,145
Cash................................... 51,519 8,139 54,816
Subscriptions receivable............... 212,272 7,960 42,038
Receivable for securities sold......... 0 414,486 31,972
Dividends and interest receivable...... 121,142 576,575 80,640
Prepaid expenses....................... 6,234 0 0
----------- ------------ -----------
Total Assets......................... 60,722,956 103,420,174 40,272,611
----------- ------------ -----------
LIABILITIES:
Redemptions payable.................... 0 18,090 88,400
Accrued expenses and other liabili-
ties.................................. 29,404 43,630 43,261
Payable for investment securities pur-
chased................................ 516,069 1,402,230 764,002
----------- ------------ -----------
Total Liabilities.................... 545,473 1,463,950 895,663
----------- ------------ -----------
NET ASSETS:
Applicable to 1,802,433, 3,370,941 and
1,752,053 shares outstanding,
respectively/1/....................... $60,177,483 $101,956,224 $39,376,948
=========== ============ ===========
Net asset value, offering and redemp-
tion price per share.................. $ 33.39 $ 30.25 $ 22.47
=========== ============ ===========
SOURCE OF NET ASSETS:
Paid-in capital........................ $34,635,994 $104,388,858 $26,728,579
Undistributed net investment income ... 35,727 0 23,765
Accumulated net realized gain (loss) on
investments........................... 1,044,274 (16,775,558) 80,229
Net unrealized appreciation of invest-
ments................................. 24,461,488 14,342,924 12,544,375
----------- ------------ -----------
Net Assets........................... $60,177,483 $101,956,224 $39,376,948
=========== ============ ===========
</TABLE>
- --------
/1SGF:/$.10 par value, 10,000,000 shares authorized; SMDS: $1.00 par value,
10,000,000 shares authorized; SSCY: $.001 par value, 1,000,000,000 shares
authorized.
See accompanying notes to financial statements.
15
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
<TABLE>
<CAPTION>
SGF SMDS SSCY
<S> <C> <C> <C>
----------- ----------- ----------
INCOME:
Dividends................................ $ 1,304,813 $ 5,815,780 $ 674,508
Interest................................. 211,454 581,348 100,095
Other income............................. 956 0 0
----------- ----------- ----------
Total Income........................... 1,517,223 6,397,128 774,603
----------- ----------- ----------
EXPENSES:
Accounting/Pricing services fees (Note
2)...................................... 20,000 26,000 21,666
Administration services fees (Note 2).... 30,000 30,000 10,833
Advisory fees (Note 2)................... 366,356 600,138 312,050
Audit fees............................... 18,336 21,455 12,900
Custodian fees (Note 2).................. 24,203 40,579 20,569
Directors' fees.......................... 10,304 19,043 5,903
Insurance fees........................... 1,209 2,297 657
Legal fees............................... 6,681 12,786 4,191
Miscellaneous fees....................... 6,027 12,525 3,233
Printing and postage fees................ 18,930 42,518 11,043
Registration fees (Note 2)............... 26,248 37,066 28,382
Shareholder services fees (Note 2)....... 34,813 155,097 30,109
Taxes other than income taxes............ 2,585 6,944 1,900
----------- ----------- ----------
Total Expenses......................... 565,692 1,006,448 463,436
----------- ----------- ----------
Net Investment Income................ 951,531 5,390,680 311,167
----------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on investments.. 4,397,086 (775,344) 1,579,761
Net increase in unrealized appreciation
on investments.......................... 10,314,063 11,680,867 8,011,586
----------- ----------- ----------
Net gain on investments.................. 14,711,149 10,905,523 9,591,347
----------- ----------- ----------
Net increase in net assets resulting
from operations....................... $15,662,680 $16,296,203 $9,902,514
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
--------------------------------------- -----------------------------
YEAR ENDED 7 MONTHS ENDED YEAR ENDED YEAR ENDED 11 MONTHS ENDED
12/31/97 12/31/96 05/31/96 12/31/97 12/31/96
----------- -------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 951,531 $ 514,358 $ 854,333 $ 5,390,680 $ 6,886,732
Net realized gain
(loss) on
investments........... 4,397,086 749,571 2,277,319 (775,344) 1,855,839
Net increase (decrease)
in unrealized
appreciation
(depreciation) of
investments........... 10,314,063 1,414,784 6,391,511 11,680,867 (2,376,846)
----------- ----------- ----------- ------------ ------------
Net increase in net
assets resulting from
operations............ 15,662,680 2,678,713 9,523,163 16,296,203 6,365,725
----------- ----------- ----------- ------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income ($0.54, $0.58
and $0.54 per share,
respectively, for SGF,
$1.54 and $1.63,
respectively, for
SMDS)................. (924,887) (936,276) (788,687) (5,390,680) (6,886,732)
From realized gains on
investments ($2.52,
$1.21 and $0.945 per
share, respectively,
for SGF).............. (4,096,574) (1,910,237) (1,357,531) -- --
In excess of net
investment income
($0.13 for SMDS)...... -- -- -- -- (531,985)
Return of capital
($0.38 for SMDS)...... (1,315,783)
CAPITAL SHARE
TRANSACTIONS:/2/ 4,735,008 2,089,016 3,783,914 (11,413,251) (24,434,759)
----------- ----------- ----------- ------------ ------------
Total increase
(decrease) in net
assets................ 15,376,227 1,921,216 11,160,859 (1,823,511) (25,487,751)
NET ASSETS:
Beginning of period.... 44,801,256 42,880,040 31,719,181 103,779,735 129,267,486
----------- ----------- ----------- ------------ ------------
End of period
(including
undistributed net
investment income of
$35,727, $9,083 and
$431,001,
respectively, for SGF,
$0 and $0,
respectively, for
SMDS)................. $60,177,483 $44,801,256 $42,880,040 $101,956,224 $103,779,735
=========== =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
SSCY
-------------------------------
YEAR ENDED 9 MONTHS ENDED
12/31/97 12/31/96
----------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income......................... $ 311,167 $ 310,419
Net realized gain on investments.............. 1,579,761 946,175
Net increase in unrealized appreciation of in-
vestments.................................... 8,011,586 1,260,568
----------- -----------
Net increase in net assets resulting from op-
erations..................................... 9,902,514 2,517,162
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.20/3/ and
$0.27/3/, respectively)...................... (287,402) (333,221)
From realized gains on investments ($1.13/3/
and $0.92/3/, respectively).................. (1,798,916) (1,129,636)
CAPITAL SHARE TRANSACTIONS:/2/ 9,869,676 1,044,806
----------- -----------
Total increase in net assets.................. 17,685,872 2,099,111
NET ASSETS:
Beginning of period........................... 21,691,076 19,591,965
----------- -----------
End of period (including undistributed net in-
vestment income of $23,765 and $0, respec-
tively)...................................... $39,376,948 $21,691,076
=========== ===========
</TABLE>
/3/ Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997
- --------
See accompanying notes to financial statements.
17
<PAGE>
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
-------------------------------------------------------------------------
YEAR ENDED 12/31/97 7 MONTHS ENDED 12/31/96 YEAR ENDED 05/31/96
----------------------- -------------------------- --------------------
SHARES VALUE SHARES VALUE SHARES VALUE
--------- ------------ ------------ ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued........... 237,474 $ 7,625,883 84,152 $ 2,143,395 234,168 $5,879,301
Shares reinvested from
net investment income
and capital gains
distributions.......... 140,717 4,398,631 96,302 2,447,768 80,419 1,841,377
--------- ------------ ----------- ------------- -------- ----------
378,191 12,024,514 180,454 4,591,163 314,587 7,720,678
Shares redeemed......... (235,166) (7,289,506) (98,426) (2,502,147) (156,417) (3,936,764)
--------- ------------ ----------- ------------- -------- ----------
Net increase.......... 143,025 $ 4,735,008 82,028 $ 2,089,016 158,170 $3,783,914
========= ============ =========== ============= ======== ==========
<CAPTION>
SMDS
---------------------------------------------------
YEAR ENDED 12/31/97 11 MONTHS ENDED 12/31/96
----------------------- --------------------------
SHARES VALUE SHARES VALUE
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued........... 346,467 $ 9,958,751 238,241 $ 6,238,119
Shares reinvested from
net investment income.. 134,590 3,765,100 165,671 4,298,372
--------- ------------ ----------- -------------
481,057 13,723,851 403,912 10,536,491
Shares redeemed......... (893,776) (25,137,102) (1,338,319) (34,971,250)
--------- ------------ ----------- -------------
Net decrease.......... (412,719) $(11,413,251) (934,407) $ (24,434,759)
========= ============ =========== =============
<CAPTION>
SSCY
---------------------------------------------------
YEAR ENDED 12/31/97 9 MONTHS ENDED 12/31/96
----------------------- --------------------------
SHARES VALUE SHARES VALUE
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued........... 333,827 $ 12,981,282 28,881 $ 940,160
Shares issued from stock
split.................. 864,479
Shares reinvested from
net investment income
and capital gains
distributions.......... 39,255 1,672,816 32,327 1,049,304
--------- ------------ ----------- -------------
1,237,561 14,654,098 61,208 1,989,464
Shares redeemed......... (131,386) (4,784,422) (28,629) (944,658)
--------- ------------ ----------- -------------
Net increase.......... 1,106,175 $ 9,869,676 32,579 $ 1,044,806
========= ============ =========== =============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1997
NOTE 1. - Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT Shares, Inc. ("SMDS") and The Stratton
Funds, Inc. The Stratton Funds, Inc. (the "Company") operates as a series,
consisting of Stratton Small-Cap Yield Fund ("SSCY") and Stratton Special
Value Fund, which began operations on December 31, 1997. The Funds and Company
are registered under the Investment Company Act of 1940, as amended, as open-
end management investment companies. The Funds offer diversified portfolios.
Investments in the Funds normally consist of common stock and securities
convertible into or exchangeable into common stock. Each Fund has specific
investment objectives:
The objective of SGF is to seek possible growth of capital with current income
from interest and dividends as a secondary objective.
The objective of SMDS is to seek a high rate of return from dividend and
interest income. Under normal conditions, at least 65% of the Fund's total
assets will be in securities of real estate investment trusts.
The objective of SSCY is to achieve both dividend income and capital
appreciation through investment in the securities of small-cap companies which
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.
Due to the inherent risk of investments there can be no assurance that the
objectives of the Funds will be met. The Funds' fiscal years changed to
December 31, commencing with December 31, 1996.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale price
on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last
reported bid and asked prices. Securities traded in the over-the-
counter market are valued at the last sale price, if carried in the
National Market Issues section by NASDAQ; other over-the-counter
securities are valued at the mean between the closing bid and asked
prices obtained from a principal market maker. All other securities
and assets are valued at their fair value as determined in good
faith by the Boards of Directors of the Funds, which may include the
amortized cost method for securities maturing in sixty days or less
and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
December 31, 1997
to their shareholders. Therefore, no federal income tax provision is
required. SMDS has a capital loss carryover available to offset
future capital gains, if any, of approximately $16,775,000 of which
$11,277,000 expires in 2003, $4,331,000 expires in 2004 and
$1,167,000 expires in 2005.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
E. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
Distributions to Shareholders - Distributions to shareholders are recorded on
the ex-dividend date. The character of distributions paid to shareholders is
determined by reference to income as determined for income tax purposes, after
giving effect to temporary differences between the financial reporting and tax
basis of assets and liabilities, rather than income as determined for
financial reporting purposes.
SMDS has made certain investments in real estate investment trusts ("REITS")
which pay dividends to their shareholders based upon available funds from
operations. It is quite common for these dividends to exceed the REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends to include the gross
dividends from such REITS in its monthly distributions to its shareholders
and, accordingly, a portion of the Fund's distributions will also be
designated as a return of capital.
NOTE 2. - During the year ended December 31, 1997, the Funds paid advisory
fees to Stratton Management Company, (the "Advisor") as follows: SGF -
$366,356; SMDS - $600,138; SSCY - $312,050. Management services are provided
by the Advisor under agreements whereby the Advisor furnishes all investment
advice, office space and facilities to the Funds and pays the salaries of the
Funds' officers and employees, except to the extent that those employees are
engaged in administrative and accounting services activities. In return for
these services, SGF pays to the Advisor a monthly fee of /3///4//8/ of 1%
(annually 3/4 of 1%) of the daily net asset value of the Fund for such month.
SMDS pays a monthly fee at an annual rate of 5/8 of 1% of the daily net asset
value of the Fund for such month. The Advisor has voluntarily agreed to waive
$15,000 annually of the compensation due it under the agreement with each of
these Funds to offset a portion of the cost of certain administrative
responsibilities delegated to FPS Services, Inc. ("FPS").
SSCY pays a monthly fee at an annual rate of 0.75% of the daily net asset
value of the Fund for such month, subject to a performance adjustment. The
performance adjustment will be 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 Index,
("Russell 2000"). When the Fund performs better than the Russell 2000, it pays
the 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
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
December 31, 1997
performed the Russell 2000 by 5.00%. The performance fee adjustment for the
year ended December 31, 1997 caused the advisory fee to increase by $96,670.
Certain officers and Directors of the Funds are also officers and directors of
the Advisor. None of the Funds' officers receive compensation from the Funds.
FPS, the Funds' Administrator, Accounting Agent and Transfer Agent, is a
wholly-owned subsidiary of FinDaTex, Inc. Certain Directors and officers of
the Funds are shareholders of FinDaTex, Inc. FPS received fees for providing
shareholder services, for certain administrative services and for
accounting/pricing services during the year ended December 31, 1997 as
follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY
----------- ----------- -----------
<S> <C> <C> <C>
Shareholder Services....................... $ 34,813 $ 155,097 $ 30,109
Administration............................. 30,000 30,000 10,833
Accounting/Pricing......................... 20,000 26,000 21,666
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
FPS, the Custodian reallows a portion of its custody fees to FPS for certain
services delegated to FPS. The amount is not readily determinable. FPS Broker
Services, Inc., a wholly-owned subsidiary of FPS, serves as the Funds'
principal underwriter and receives no fees for services in assisting in sales
of the Funds' shares but does receive an annual fee of $3,000 for each Fund
for its services in connection with the registration of the Funds' shares
under state securities laws.
NOTE 3. - Purchases and sales of investment securities, excluding short-term
notes, for the year ended December 31, 1997 were as follows:
<CAPTION>
SGF SMDS SSCY
----------- ----------- -----------
<S> <C> <C> <C>
Cost of purchases.......................... $16,124,004 $38,747,857 $14,280,151
Proceeds of sales.......................... 18,045,865 48,246,972 7,076,206
</TABLE>
NOTE 4. - Stock Split
A two-for-one stock split effected in the form of a dividend was issued to
shareholders of record of SSCY as of the close of business on December 17,
1997, payable December 18, 1997.
21
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Growth Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
YEAR 7 MONTHS YEARS ENDED MAY 31,
ENDED ENDED -------------------------------------------
12/31/97 12/31/96 1996 1995 1994 1993 1992
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55 $ 19.75
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.550 0.312 0.556 0.537 0.510 0.560 0.640
Net gains on
securities (both
realized and
unrealized).......... 8.900 1.298 5.759 2.978 0.665 1.160 1.320
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations......... 9.450 1.610 6.315 3.515 1.175 1.720 1.960
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.540) (0.580) (0.540) (0.540) (0.510) (0.565) (0.725)
Distributions (from
capital gains)....... (2.520) (1.210) (0.945) (1.275) (0.905) (0.815) (0.435)
------- ------- ------- ------- ------- ------- -------
Total
distributions...... (3.060) (1.790) (1.485) (1.815) (1.415) (1.380) (1.160)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 36.06% 6.40% 29.62% 18.61% 5.92% 8.91% 10.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $60,177 $44,801 $42,880 $31,719 $25,475 $25,315 $25,311
Ratio of expenses to
average net assets... 1.11% 1.17%/1/ 1.16% 1.31% 1.34% 1.39% 1.35%
Ratio of net
investment income to
average net assets... 1.87% 2.08%/1/ 2.28% 2.70% 2.51% 2.76% 3.20%
Portfolio turnover
rate................. 34.40% 20.32% 15.41% 42.54% 49.81% 35.34% 59.76%
Average commission
rate paid............ $0.0509 $0.0537 N/A N/A N/A N/A N/A
</TABLE>
- --------
/1Annualized/
See accompanying notes to financial statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
YEAR 11 MONTHS YEARS ENDED JANUARY 31,
ENDED ENDED -----------------------------------------------
12/31/97 12/31/96 1996 1995 1994 1993 1992
-------- --------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83 $ 23.02
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 1.540 1.630 1.880 1.940 1.870 1.940 1.970
Net gains (losses) on
securities (both
realized and
unrealized).......... 3.200 0.160 2.600 (3.870) (1.140) 2.080 4.790
-------- -------- -------- -------- -------- ------- -------
Total from
investment
operations......... 4.740 1.790 4.480 (1.930) 0.730 4.020 6.760
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (1.540) (1.630) (1.890) (1.920) (1.940) (1.940) (1.950)
Distributions (in
excess of net
investment income)... 0.000 (0.130) (0.030) 0.000 (0.010) 0.000 0.000
Return of capital..... (0.380) 0.000 0.000 0.000 0.000 0.000 0.000
-------- -------- -------- -------- -------- ------- -------
Total
distributions...... (1.920) (1.760) (1.920) (1.920) (1.950) (1.940) (1.950)
-------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN............ 18.09% 7.12% 18.98% (6.57)% 2.22% 15.18% 30.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period
(in 000's)........... $101,956 $103,780 $129,267 $134,066 $165,798 $98,227 $45,566
Ratio of expenses to
average net assets... 1.02% 1.02%/1/ 0.99% 1.08% 0.99% 1.10% 1.23%
Ratio of net
investment income to
average net assets... 5.48% 6.94%/1/ 7.42% 7.71% 6.12% 6.74% 7.63%
Portfolio turnover
rate................. 42.47% 69.19% 53.30% 39.50% 19.15% 35.94% 43.55%
Average commission
rate paid............ $ 0.0505 $ 0.0498 N/A N/A N/A N/A N/A
</TABLE>
- --------
/1Annualized/
See accompanying notes to financial statements.
23
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
YEAR 9 MONTHS YEAR YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED 04/12/93/1/
12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ TO 03/31/94/3/
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 16.79 $ 15.98 $ 12.94 $ 12.97 $12.50
------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.210 0.260 0.330 0.290 0.220
Net gains (loss) on
securities (both
realized and
unrealized).......... 6.800 1.740 3.040 (0.020) 0.450
------- ------- ------- ------- ------
Total from
investment
operations......... 7.010 2.000 3.370 0.270 0.670
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.200) (0.270) (0.330) (0.300) (0.200)
Distributions (from
capital gains)....... (1.130) (0.920) 0.000 0.000 0.000
------- ------- ------- ------- ------
Total
distributions...... (1.330) (1.190) (0.330) (0.300) (0.200)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................. $ 22.47 $ 16.79 $ 15.98 $ 12.94 $12.97
======= ======= ======= ======= ======
TOTAL RETURN............ 42.37% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's).... $39,377 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets... 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net
investment income to
average net assets... 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................. 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission
rate paid............ $0.0548 $0.0579 N/A N/A N/A
</TABLE>
- --------
/1Commencement/of operations
/2Annualized/
/3Adjusted/for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997
See accompanying notes to financial statements.
24
<PAGE>
STRATTON GROWTH FUND
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF STRATTON GROWTH FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Stratton Growth Fund, Inc., including the schedule of investments, as of
December 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for the year then ended for the
seven months ended December 31, 1996 and for the year ended May 31, 1996 and
the financial highlights for the year then ended, for the seven months ended
December 31, 1996 and for the five years ended May 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Stratton Growth Fund, Inc. as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, for the seven months ended December 31, 1996 and for the year
ended May 31, 1996, and the financial highlights for each of the periods
indicated thereon, in conformity with generally accepted accounting
principles.
TAIT, WELLER & BAKER
Philadelphia, PA
January 16, 1998
25
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF STRATTON MONTHLY DIVIDEND REIT
SHARES, INC.
We have audited the accompanying statement of assets and liabilities of
Stratton Monthly Dividend REIT Shares, Inc., including the schedule of
investments, as of December 31, 1997, and the related statement of operations
for the year then ended, the statement of changes in net assets for the year
then ended and the eleven months ended December 31, 1996, and the financial
highlights for the year then ended, the eleven months ended December 31, 1996
and for each of the five years ended January 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all respects, the financial position of Stratton
Monthly Dividend REIT Shares, Inc. as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, for the eleven months ended December 31, 1996 and the financial
highlights for each of the periods indicated thereon, in conformity with
generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, PA
January 16, 1998
26
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE STRATTON FUNDS, INC.
We have audited the accompanying statement of assets and liabilities of
Stratton Small-Cap Yield Fund, a series of The Stratton Funds, Inc., including
the schedule of investments, as of December 31, 1997, and the related
statement of operations for the year then ended, the statement of changes in
net assets for the year then ended and for the nine months ended December 31,
1996, and the financial highlights for the year then ended, for the nine
months ended December 31, 1996, for each of the two years ended March 31, 1996
and for the period April 12, 1993, (commencement of operations) to March 31,
1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all respects, the financial position of Stratton
Small-Cap Yield Fund as of December 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for the year then
ended, for the nine months ended December 31, 1996 and the financial
highlights for each of the periods indicated thereon, in conformity with
generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, PA
January 16, 1998
27
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
SPECIAL MEETING OF STOCKHOLDERS
A Special Meeting of Stockholders of SGF, SMDS, and SSCY was held December 9,
1997, for purposes of considering and acting upon the matters set forth in the
Proxy Statement and summarized below. A quorum was represented at the Meeting
and the voting results are also set forth below.
STRATTON GROWTH FUND, INC.
A. Election of Eight Directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
--------- ---------
<S> <C> <C>
James W. Stratton.................................... 1,268,569 5,009
Lynne M. Cannon...................................... 1,268,030 5,548
John J. Lombard, Jr. ................................ 1,268,569 5,009
Douglas J. MacMaster, Jr. ........................... 1,268,569 5,009
Henry A. Rentschler.................................. 1,268,569 5,009
Merritt N. Rhoad, Jr. ............................... 1,268,249 5,329
Alexander F. Smith................................... 1,268,403 5,175
Richard W. Stevens................................... 1,268,569 5,009
</TABLE>
B. Selection of Tait, Weller & Baker as the Fund's independent public
accountants for the fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
1,261,022 1,542 11,014
</TABLE>
STRATTON MONTHLY DIVIDEND REIT SHARES, INC.
A. Election of Eight Directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
--------- ---------
<S> <C> <C>
James W. Stratton.................................... 2,324,792 62,858
Lynne M. Cannon...................................... 2,316,485 71,165
John J. Lombard, Jr. ................................ 2,315,429 72,221
Douglas J. MacMaster, Jr. ........................... 2,306,301 81,349
Henry A. Rentschler.................................. 2,313,337 74,313
Merritt N. Rhoad, Jr. ............................... 2,321,045 66,605
Alexander F. Smith................................... 2,318,704 68,946
Richard W. Stevens................................... 2,322,043 65,607
</TABLE>
B. Selection of Tait, Weller & Baker as the Fund's independent public
accountants for the fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
2,317,676 17,875 52,099
</TABLE>
28
<PAGE>
SHAREHOLDER INFORMATION (Continued)
- -------------------------------------------------------------------------------
C. Approval of the change to the industry concentration policy in order that
the Fund's concentration will be only in Real Estate Investment Trusts:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NOT VOTED
--------- ------- ------- ---------
<S> <C> <C> <C>
1,906,702 158,926 57,236 264,786
</TABLE>
D. Approval of the change of the name of the Fund from Stratton Monthly
Dividend Shares, Inc. to Stratton Monthly Dividend REIT Shares, Inc.:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
2,170,552 167,943 49,155
</TABLE>
STRATTON SMALL-CAP YIELD FUND
A. Election of Eight Directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
------- ---------
<S> <C> <C>
James W. Stratton...................................... 659,468 560
Lynne M. Cannon........................................ 659,455 573
John J. Lombard, Jr. .................................. 659,288 740
Douglas J. MacMaster, Jr. ............................. 659,436 592
Henry A. Rentschler.................................... 659,267 761
Merritt N. Rhoad, Jr. ................................. 659,255 773
Alexander F. Smith..................................... 659,423 605
Richard W. Stevens..................................... 659,288 740
</TABLE>
B. Selection of Tait, Weller & Baker as the Fund's independent public
accountants for the fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------- ------- -------
<S> <C> <C>
658,239 87 1,702
</TABLE>
29
<PAGE>
SHAREHOLDER INFORMATION (Continued)
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT
The minimum amount for the initial purchase of shares of SGF, SMDS or SSCY is
$2,000 each. Subsequent purchases may be made in amounts of $100 or more.
TELEPHONE EXCHANGE
Shares of each Fund may be exchanged for shares of the other 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. 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" in the Prospectus for a
description of the Funds' policy regarding telephone instructions.
DIVIDENDS AND DISTRIBUTIONS
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. Distributions may be reinvested in additional shares of such
fund, see "Reinvestment of Income Dividends and Capital Gains Distribution" in
the Prospectus.
AUTOMATIC INVESTMENT PLAN
Shares of a Fund may be purchased through our "Automatic Investment Plan" (the
"Plan"), (a tear-out application is attached to the back of our Prospectus).
The Plan provides a convenient method by which investors may have monies
debited 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 member may be so designated. A Fund may alter, modify or terminate this
Plan at any time.
SHARE PRICE INFORMATION
The daily share price of our Funds can be found in the mutual fund section of
most major daily newspapers as well as The Wall Street Journal and Investor's
Daily, where the Funds are listed under Stratton Funds. The Funds' stock
ticker symbols for SGF, SMDS and SSCY are STRGX, STMDX and STSCX,
respectively.
RETIREMENT PLANS
Stratton Mutual Funds has IRA, Defined Contribution Plans and 403(b)(7)
Retirement Plans available at no minimum investment.
30
<PAGE>
SHAREHOLDER INFORMATION (Continued)
- -------------------------------------------------------------------------------
GENERAL INFORMATION ON THE FUNDS
Requests for a prospectus and financial information, past performance figures
and an application, should be directed to the Funds' Distributor:
FPS BROKER SERVICES, INC.
3200 Horizon Drive, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 800-634-5726
EXISTING SHAREHOLDER ACCOUNT SERVICES
Shareholders seeking information regarding their accounts and other fund
services, and shareholders executing redemption requests, should continue to
call or write our Transfer Agent and Dividend Paying Agent:
FPS SERVICES, INC.
3200 Horizon Drive, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600 . 800-472-4266
INVESTMENT PORTFOLIO ACTIVITIES
Questions regarding any of our Funds' investment portfolios should be directed
to the Funds' Investment Advisor:
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
ADDITIONAL PURCHASES ONLY TO EXISTING ACCOUNTS SHOULD BE MAILED TO A SEPARATE
LOCK BOX UNIT:
c/o FPS SERVICES, INC.
P. O. Box 412797, Kansas City, MO 64141-2797
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION TO SHAREHOLDERS AND TO OTHERS WHO
HAVE
RECEIVED A COPY OF THE COMBINED PROSPECTUS OF STRATTON MUTUAL FUNDS.
31
<PAGE>
DIVIDEND NOTICES
- --------------------------------------------------------------------------------
December 31, 1997
Note the following information is required by section 854(b)(2) of the Internal
Revenue Code.
<TABLE>
<CAPTION>
PERCENTAGE OF ORDINARY DIVIDEND
INCOME QUALIFYING FOR THE
70% CORPORATE DIVIDEND
RECEIVED DEDUCTION
-------------------------------
<S> <C>
Stratton Growth Fund, Inc..................... 100%
Stratton Monthly Dividend REIT Shares, Inc.... 30%
Stratton Small Cap-Yield Fund................. 96%
</TABLE>
32
