<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[x] Preliminary proxy statement
[_] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
M.S.D & T. Funds, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement if
other than Registrant)
Payment of filing fee (Check the appropriate box):
[x] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
(5) Total fee paid:
________________________________________________________________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
________________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
(3) Filing Party:
________________________________________________________________________________
(4) Date Filed:
________________________________________________________________________________
<PAGE>
[PRELIMINARY COPY]
M.S.D. & T. FUNDS, INC.
____________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF THE INTERNATIONAL EQUITY FUND
____________
April 19, 1996
To the Shareholders of the
International Equity Fund of
M.S.D. & T. Funds, Inc.
A Special Meeting of Shareholders of the International Equity Fund (the
"Fund") of M.S.D. & T. Funds, Inc. (the "Company") will be held on May 17, 1996,
at 2:00 P.M. Eastern Time, at the offices of Mercantile-Safe Deposit and Trust
Company ("Mercantile"), Second Floor Board Room, Two Hopkins Plaza, Baltimore,
Maryland 21201, for the following purposes:
(1) The approval or disapproval of a new Sub-Advisory Agreement
between Mercantile and CastleInternational Asset Management Limited with
respect to the Fund; and
(2) The transaction of such other business as may properly come
before the meeting or any adjournment thereof.
The proposal referred to above is discussed in the Proxy Statement attached
to this Notice. Each shareholder is invited to attend the Special Meeting of
Shareholders in person. Shareholders of record at the close of business on
April 3, 1996 have the right to vote at the meeting. If you cannot be present
at the meeting, we urge you to fill in, sign and promptly return the enclosed
proxy in order that the meeting can be held and a maximum number of shares may
be voted.
W. BRUCE McCONNEL, III
Secretary
<PAGE>
WE NEED YOUR PROXY VOTE IMMEDIATELY
A SHAREHOLDER MAY THINK HIS OR HER VOTE IS NOT IMPORTANT, BUT IT IS VITAL. BY
-----
LAW, THE SPECIAL MEETING OF SHAREHOLDERS OF THE COMPANY'S INTERNATIONAL EQUITY
FUND SCHEDULED FOR MAY 17, 1996 WILL HAVE TO BE ADJOURNED WITHOUT CONDUCTING ANY
BUSINESS IF LESS THAN A MAJORITY OF THE SHARES ELIGIBLE TO VOTE ARE REPRESENTED.
IN THAT EVENT, THE COMPANY WOULD CONTINUE TO SOLICIT VOTES IN AN ATTEMPT TO
ACHIEVE A QUORUM. CLEARLY, YOUR VOTE COULD BE CRITICAL IN ALLOWING THE COMPANY
TO HOLD THE MEETING AS SCHEDULED, SO PLEASE RETURN YOUR PROXY CARD IMMEDIATELY.
-----------
<PAGE>
[PRELIMINARY COPY]
M.S.D. & T. FUNDS, INC.
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of M.S.D. & T. Funds, Inc. (the "Company") for
use at a Special Meeting of Shareholders of the Company's International Equity
Fund (the "Fund") to be held at the offices of Mercantile-Safe Deposit and Trust
Company ("Mercantile"), Second Floor Board Room, Two Hopkins Plaza, Baltimore,
Maryland 21201 on May 17, 1996, at 2:00 P.M. Eastern Time (such meeting and any
adjournment thereof referred to as the "Meeting"). It is expected that the
solicitation of proxies will be primarily by mail. The Company's officers and
service contractors may also solicit proxies by telephone, telegraph, facsimile
or personal interview. The Company will bear all proxy solicitation costs. Any
shareholder giving a proxy may revoke it at any time before it is exercised by
submitting to the Company a written notice of revocation or a subsequently
executed proxy or by attending the Meeting and electing to vote in person. This
Proxy Statement and the enclosed Proxy are expected to be distributed to
shareholders on or about April 22, 1996.
A proxy is enclosed with respect to the shares you own in the Fund. If the
proxy is executed properly and returned, the shares represented by it will be
voted at the Meeting in accordance with the instructions thereon. Each full
share is entitled to one vote and each fractional share to a proportionate
fractional vote. If you do not expect to be present at the Meeting and wish
your shares to be voted, please complete the enclosed proxy and mail it in the
enclosed reply envelope.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE NEW SUB-ADVISORY AGREEMENT DESCRIBED IN THIS PROXY STATEMENT.
INTRODUCTION
Mercantile, the investment adviser for the Fund, appointed Dunedin Fund
Managers Ltd ("Dunedin") as sub-adviser to the Fund pursuant to a sub-advisory
agreement dated June 29, 1993 (the "Dunedin Agreement"). On or about February
20, 1996, Mercantile was notified that DFM Holdings Limited ("DFM"), the owner
of all of the outstanding shares of Dunedin, had entered into a Purchase and
Sale Agreement with Edinburgh Fund Managers Group plc ("EFM") pursuant to which
EFM agreed to purchase all of the outstanding
<PAGE>
shares of DFM. Mercantile was advised that this transaction, which would
constitute an "assignment" of, and automatically terminate, the Dunedin
Agreement under the Investment Company Act of 1940, as amended (the "1940 Act"),
would be completed on March 19, 1996.
In response to the announcement of this proposed sale, Mercantile advised
the Board of Directors of the Company that it was in the process of evaluating
several investment sub-advisers as possible successors to Dunedin and would make
a recommendation to the Board prior to March 19, 1996.
At a special meeting of the Board of Directors of the Company held on March
11, 1996, Mercantile recommended that CastleInternational Asset Management
Limited ("CastleInternational" or the "Sub-Adviser"), a newly formed investment
advisory firm based in Edinburgh, Scotland and a wholly-owned subsidiary of PNC
Holding Corp., be engaged to serve as sub-adviser to the Fund. At that meeting,
a new sub-advisory agreement (the "New Agreement") for the Fund between
Mercantile and CastleInternational was approved by a majority of the Board of
Directors, as well as by a majority of those members of the Board of Directors
who were not "interested persons" (as that term is defined in the 1940 Act) of
any party to the New Agreement, subject to shareholder approval at the Meeting.
In order to provide for continued sub-advisory services to the Fund,
CastleInternational began serving as sub-adviser to the Fund pursuant to the New
Agreement upon the automatic termination of the Dunedin Agreement on March 19,
1996. However, any fees payable to Mercantile and CastleInternational for
providing advisory and sub-advisory services, respectively, to the Fund are
being withheld by the Fund pending approval of the New Agreement by shareholders
at the Meeting.
A copy of the New Agreement is attached to this Proxy Statement as Exhibit
A. Except as set forth below, the New Agreement is substantially the same as
the Dunedin Agreement. The description of the New Agreement that follows is
qualified in its entirety by Exhibit A.
If the New Agreement is approved by shareholders at the Meeting, the New
Agreement will be ratified and CastleInternational will continue to serve as the
Fund's sub-adviser under the New Agreement dated March 19, 1996. Mercantile
will receive compensation from the Fund, and CastleInternational will receive
compensation from Mercantile, for their advisory and sub-advisory services,
respectively, for the period beginning on the effective date of the New
Agreement, i.e. March 19, 1996.
CastleInternational's headquarters are in Edinburgh, Scotland. Marketing
and client services are provided from
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<PAGE>
Chicago. The two managing directors of CastleInternational are Gordon Anderson,
the former investment director of Dunedin, and Douglas B. Waggoner, Dunedin's
former director for marketing and client servicing. Mr. Anderson serves as
chief investment officer of CastleInternational and runs its investment
management operations from Edinburgh. Mr. Waggoner is based in Chicago, where
he directs marketing and client servicing for CastleInternational.
CastleInternational is a value-based (including low price to earnings
ratio) international equity manager. The investment process focuses on
identifying opportunities in undervalued countries and stocks through a
disciplined quantitative approach and fundamental analysis.
CastleInternational's investment professionals cover equities of issuers in
countries included in the Morgan Stanley Capital International Europe, Australia
Far East (EAFE) Index, equities of issuers in emerging markets, international
small-capitalization equities and regional equities in Europe and the Pacific
Basin.
DESCRIPTION OF THE NEW AGREEMENT
TERMS AND FEES. Except as set forth below, the terms and conditions of,
and the fees payable under, the New Agreement with CastleInternational are
substantially the same as those in the Dunedin Agreement.
As investment adviser, Mercantile has agreed, subject to the general
supervision of the Company's Board of Directors and in accordance with the
Fund's investment objective and policies, either directly or through a sub-
adviser, to manage the Fund's assets, and to provide investment research and to
be responsible for, make decisions with respect to and place orders for all
purchases and sales of portfolio securities.
The New Agreement provides that, subject to the supervision of the
Company's Board of Directors, CastleInternational will assist the Adviser in
providing a continuous investment program for the Fund, including research and
management with respect to all securities, investments and cash equivalents.
Pursuant to the New Agreement, CastleInternational will: (i) prepare, subject
to Mercantile's approval, lists of foreign countries for investment by the Fund
and determine from time to time what securities and other investments will be
purchased, retained or sold for the Fund; (ii) manage in consultation with
Mercantile the Fund's temporary investments in securities; (iii) place orders
for all purchases and sales of portfolio securities; (iv) provide the value of
the portfolio securities and other assets of the Fund; (v) manage the Fund's
overall cash position and determine from time to time what portion of the
Fund's assets will be held in different currencies; (vi) provide Mercantile
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<PAGE>
with international investment research; (vii) attend regular business and
investment-related meetings of the Company's Board of Directors and Mercantile
if so requested; and (vii) maintain books and records with respect to the Fund's
securities transactions. Unlike the Dunedin Agreement, the New Agreement
provides that CastleInternational may from time to time engage one or more
persons to assist it in the performance of certain ministerial or administrative
services required by the New Agreement, provided that such person or persons
shall have been approved by the Board of Directors of the Company, that the
compensation of such person or persons shall be paid by CastleInternational, and
that CastleInternational shall be as fully responsible to Mercantile and the
Company for the acts and omissions of any such person or persons as it is for
its own acts or omissions.
The annual rates of the advisory fees payable by the Fund to Mercantile,
and the sub-advisory fees payable by Mercantile to CastleInternational under the
New Agreement, will not change. The annual advisory fee rate payable to
Mercantile is .80% of the Fund's average daily net assets, computed daily and
payable monthly, and the annual sub-advisory fee rate payable to the Sub-Adviser
is .45% of the Fund's average daily net assets, computed daily and payable
quarterly. The sub-advisory fees payable by Mercantile to the Sub-Adviser are
the responsibility of Mercantile and do not represent an additional charge to
the Fund. Unlike the Dunedin Agreement, the New Agreement provides that all
fees payable to CastleInternational pursuant to the New Agreement will be
withheld until such time as the New Agreement has been approved by shareholders
of the Fund. Upon such shareholder approval, the Fund will remit all withheld
advisory fees to Mercantile, which in turn will remit all withheld sub-advisory
fees to CastleInternational, with interest at a rate to be agreed upon by
Mercantile and CastleInternational. If shareholder approval is not obtained
within 120 days of the effective date of the New Agreement, then the New
Agreement will terminate, all withheld fees will be paid to Mercantile and
Mercantile will continue as investment adviser to the Fund.
The aggregate investment advisory and sub-advisory fees (net of waivers)
paid with respect to the Fund for the fiscal year ended May 31, 1995 were
$454,894 and $255,878, respectively, and the corresponding effective rates of
the advisory and sub-advisory fees (net of waivers) paid by the Fund during the
fiscal year ended May 31, 1995 were .74% and .42%, respectively, of the Fund's
average daily net assets. CastleInternational has advised the Board of
Directors that, until further notice to the Company, it will voluntarily waive a
portion of its sub-advisory fees with respect to the Fund if the annualized
ratio of ordinary operating expenses to average net assets of the Fund,
calculated daily, exceeds 1.05%.
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<PAGE>
The New Agreement provides that the Sub-Adviser will pay all expenses
incurred by it in connection with its activities under the New Agreement other
than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The New Agreement also provides that the Sub-Adviser will exercise due
care and diligence and use the same skill and care in providing services under
the New Agreement as it uses in providing services to other investment
companies, but that the Sub-Adviser shall not be liable for any action taken or
omitted by it in the absence of bad faith, willful misconduct, negligence or
reckless disregard of its duties.
Under the New Agreement, in placing orders with brokers and dealers, the
Sub-Adviser will use its reasonable best efforts to seek the most favorable
execution of orders, after taking into consideration all factors that the Sub-
Adviser deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. Consistent with this
obligation, the Sub-Adviser may, to the extent permitted by law, purchase and
sell portfolio securities to and from brokers and dealers that provide brokerage
and research services. These brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks or bonds and their comparative earnings and yields, or broad
overviews of the securities markets and the economy. Commissions paid to
brokers or dealers providing these services may be higher than those which other
qualified brokers or dealers would charge for effecting the same transactions,
provided that the Sub-Adviser determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either a particular
transaction or the Sub-Adviser's overall responsibility to the Fund and to the
Company.
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by Mercantile and the Sub-Adviser,
and does not reduce the advisory fees payable to Mercantile by the Fund. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other accounts
for which Mercantile or the Sub-Adviser exercises investment discretion.
Conversely, the Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Investment decisions for the Fund and for other investment accounts managed
by Mercantile and the Sub-Adviser will be made
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<PAGE>
independently of each other in light of differing conditions. However, the same
investment decision may be made for two or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
allocated in a manner believed by Mercantile or the Sub-Adviser to be equitable
to each such account. While in some cases this practice could have a
detrimental effect on the price or value of the security as far as the Fund is
concerned, in other cases it may be beneficial to the Fund. To the extent
permitted by law, the Sub-Adviser may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions. Portfolio securities will not
be purchased from or sold to Mercantile, the Sub-Adviser, the Company's
principal underwriter, or any affiliated person except as permitted by the
Securities and Exchange Commission.
If approved by the shareholders of the Fund, the New Agreement will
continue in effect with respect to the Fund until July 20, 1997. Thereafter,
the New Agreement will continue in effect with respect to the Fund for
successive annual periods, provided that its continuance is approved at least
annually (i) by the vote of a majority of those members of the Board of
Directors who are not "interested persons" (as that term is defined in the 1940
Act) of any party to the New Agreement cast in person at a meeting called for
the purpose of voting on such approval and (ii) by the Board of Directors or by
vote of a majority of the outstanding shares of the Fund.
The New Agreement provides that it will terminate automatically in the
event of its "assignment" (as that term is defined in the 1940 Act). The New
Agreement also provides that it is terminable without penalty, by the Fund (by
vote of the Board of Directors of the Company or by vote of a majority of the
outstanding shares of the Fund) or by Mercantile or the Sub-Adviser on 60 days'
written notice. In addition, the New Agreement provides that it will terminate
if shareholder approval of the New Agreement is not obtained within 120 days of
its effective date.
EVALUATION BY THE COMPANY'S DIRECTORS. The New Agreement was approved by a
majority of the Company's Board of Directors and by a majority of those members
of the Board of Directors who were not "interested persons" (as that term is
defined in the 1940 Act) of any party to the New Agreement at a meeting held on
March 11, 1996. The New Agreement was proposed in response to the anticipated
termination of the Dunedin Agreement on March 19, 1996. The Directors
considered that the New Agreement is substantially identical to the Dunedin
Agreement, and Mercantile's recommendation that the New Agreement be approved.
In reaching their decision, the Directors evaluated CastleInternational's
capabilities and resources, including the fact that it is a wholly-owned
subsidiary of PNC Holding Corp.,
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and the experience of Mr. Anderson and other portfolio personnel in
international equity management prior to the formation of CastleInternational.
The Board noted that Mr. Anderson and other portfolio personnel at
CastleInternational were the same individuals who had previously provided sub-
advisory services to the Fund when employed at Dunedin. The Board considered
each of these factors to be of material importance in connection with its
recommendation of the New Agreement. The Directors also considered
CastleInternational's "value" style of investment management, its research and
investment practices and considered the benefits which CastleInternational may
derive from the New Agreement, including receipt of investment research and
information in return for allocating portfolio brokerage. Based on their
consideration, analysis and evaluation of the above factors and other
information deemed by them to be relevant, the Board has concluded that the
approval of the New Agreement would be in the best interests of the Fund and its
shareholders.
VOTING PROCEDURES. The approval of the New Agreement requires the
affirmative vote of the holders of a "majority of the outstanding shares" of the
Fund (as defined by the 1940 Act), which means the lesser of (a) the holders of
67% or more of the shares of the Fund present at the Meeting if the holders of
more than 50% of the outstanding shares of the Fund are present in person or by
proxy or (b) more than 50% of the outstanding shares of the Fund.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE NEW AGREEMENT
VOTING INFORMATION
RECORD DATE. Only shareholders of record at the close of business on April
3, 1996 will be entitled to vote at the Meeting. On that date, there were
6,025,063.053 shares of the Fund outstanding and entitled to be voted at the
Meeting.
QUORUM. A quorum is constituted with respect to the Fund by the presence
in person or by proxy of the holders of more than 50% of the outstanding shares
of the Fund entitled to vote at the Meeting. For purposes of determining the
presence of a quorum for transacting business at the Meeting, abstentions, but
not broker "non-votes" (that is, proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owners or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power), will be treated
as shares that are present at the Meeting but which have not been voted.
Abstentions and broker "non-votes" will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the New Agreement.
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In the event that a quorum is not present at the Meeting, or in the event
that a quorum is present at the Meeting but sufficient votes to approve the
proposal are not received, the persons named as proxies, or their substitutes,
may propose one or more adjournments of the Meeting to permit the further
solicitation of proxies. Any such adjournment will require the affirmative vote
of a majority of those shares affected by the adjournment that are represented
at the Meeting in person or by proxy. If a quorum is present, the persons named
as proxies will vote those proxies which they are entitled to vote FOR the
proposal in favor of such adjournments, and will vote those proxies required to
be voted AGAINST the proposal against any adjournment.
OTHER SHAREHOLDER INFORMATION. At the record date for the Meeting,
Mercantile held of record 82.9% of the outstanding shares of the Fund in a
fiduciary or other representative capacity for the benefit of its customers. To
the Company's knowledge, at that date no other person possessed sole or shared
voting or investment power with respect to more than 5% of the outstanding
shares of the Fund. Mercantile has advised the Company that it intends to vote
the shares of the Fund over which it possesses voting power at the Meeting FOR
the approval of the New Agreement.
ADDITIONAL INFORMATION
CASTLEINTERNATIONAL. CastleInternational's principal offices are located
at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.
CastleInternational is registered as an investment adviser under the
Investment Advisers Act of 1940 and a member of the Investment Management
Regulatory Organization in the United Kingdom. CastleInternational is a wholly-
owned subsidiary of PNC Holding Corp. All of the capital stock of PNC Holding
Corp., which is located at 222 Delaware Avenue, Wilmington, DE 19899, is owned
by PNC Bank Corp., which is located at One PNC Plaza, 249 Fifth Avenue,
Pittsburgh, PA 15222-2707. At February 29, 1996 Cede & Company (the nominee of
Depository Trust Company) owned the following securities issued by PNC Bank
Corp.: 246,171,470 shares (72.05%) of Common Stock; 3,486 shares (19.56%) of
Cumulative Convertible Preferred Series A Stock; 1,281 shares (27.09%) of
Cumulative Convertible Preferred Series B Stock; 47,099 shares (13.72%) of
Cumulative Convertible Preferred Series C Stock; and 111,954 shares (24.01%) of
Convertible Preferred Series D Stock. The address of Cede & Company is P.O. Box
20, Bowling Green Station, New York, New York 10004. To the Company's
knowledge, no other persons owned beneficially or of record 10% or more of any
class of issued and
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outstanding voting securities of PNC Bank Corp. at February 29, 1996.
The name and principal occupation of the principal executive officers and
each director of CastleInternational as of March 5, 1996 were as follows:
Gordon Anderson, Managing Director; Douglas B. Waggoner, Managing Director; and
Young D. Chin, Director of CastleInternational and President and Chief Executive
Officer of Provident Capital Management, Inc. All of the above persons may be
reached c/o PNC Asset Management Group, Inc., 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103.
The Board of Trustees of Compass Capital Funds has approved the selection
of CastleInternational as sub-adviser to the following portfolios (the "Compass
Portfolios"), subject to shareholder approval at a meeting scheduled to be held
on April 19, 1996:
<TABLE>
<CAPTION>
Annual Rate of
Compensation
Net Assets (computed daily and
Compass Portfolio at 2/29/96 payable monthly)
----------------- ---------- -------------------
<S> <C> <C>
International Equity .60% of the first $1 billion
Portfolio $522,590,405 of average daily net assets,
.55% of the next $1 billion of
average daily net assets,
.525% of the next $1 billion
of average daily net assets
and .50% of average daily net
assets in excess of $3 billion
International Emerging 1.10% of the first $1 billion
Markets Portfolio $ 71,741,622 of average daily net assets,
1.05% of the next $1 billion
of average daily net assets,
1.005% of the next $1 billion
of average daily net assets
and .95% of average daily net
assets in excess of $3 billion
</TABLE>
CastleInternational has agreed under its proposed sub-advisory agreement with
respect to the Compass Portfolios to bear its proportionate share of any fee
waivers made by the Compass Portfolios' adviser under its investment advisory
agreement with respect to a Compass Portfolio or any reimbursement in the event
that the aggregate expenses of a Compass Portfolio exceed the applicable expense
limitation of any state having jurisdiction over the Compass Portfolio.
PAYMENTS TO AFFILIATES. Mercantile, with principal offices located at Two
Hopkins Plaza, Baltimore, Maryland 21201, serves as administrator to the
Company. For its services as
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administrator, Mercantile receives fees from the Fund and each other portfolio
by the Company, computed daily and payable monthly, calculated at the annual
rate of .125% of the Company's aggregate average daily net assets. For the
fiscal year ended May 31, 1995, Mercantile received administration fees (net of
waivers) of $46,079 from the Fund. It is expected that Mercantile will continue
to provide administrative services to the Fund after the Meeting.
BANKING MATTERS. The Glass-Steagall Act, among other things, generally
prohibits banks from engaging in the business of underwriting securities,
although national and state-chartered banks are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
------------------------------------
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank-holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
---------------------------------------------------------------
Company Institute that the Board did not exceed its authority under the Holding
- -----------------
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
The Sub-Adviser believes that it may perform the services contemplated by
the New Agreement without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. If, however, the Sub-Adviser were
prevented by judicial or administrative decisions or interpretations from
performing the services by the New Agreement, it is anticipated that the Board
would consider the possibility of selecting another qualified company. Any new
sub-advisory agreement would normally be subject to shareholder approval.
DUNEDIN AGREEMENT. The Dunedin Agreement was approved by the Company's
Board of Directors and by the Fund's sole shareholder on June 29, 1993, in
connection with the appointment of Mercantile as the Fund's investment adviser.
Dunedin served as sub-adviser under the Dunedin Agreement, which was last
approved by the Company's Board of Directors on April 24, 1995,
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until March 19, 1996 when the Dunedin Agreement automatically terminated as a
result of the sale of Dunedin.
DISTRIBUTOR. BISYS Fund Services (the "Distributor") serves as the
exclusive distributor of the shares of the Company. The Distributor's principal
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219.
OTHER MATTERS
The Company does not intend to hold Annual Meetings of Shareholders except
to the extent that such meetings may be required under the 1940 Act or state
law. Shareholders who wish to submit proposals for inclusion in the Proxy
Statement for a subsequent shareholder meeting should send their written
proposals to the Company at its principl office within a reasonable time before
such meeting.
No business other than the matter described above is expected to come
before the Meeting, but should any other matter requiring a vote of shareholders
arise, including any question as to an adjournment of the Meeting, the persons
named in the enclosed Proxy will vote thereon according to their best judgment
in the interests of the Fund.
Dated: April 19, 1996
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH TO
HAVE THEIR SHARES VOTED ARE REQUESTED TO COMPLETE THE ENCLOSED PROXY AND RETURN
IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
THE COMPANY WILL FURNISH, WITHOUT CHARGE, COPIES OF THE COMPANY'S
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS DATED MAY 31, 1995 AND NOVEMBER
30, 1995, RESPECTIVELY, TO ANY SHAREHOLDER UPON REQUEST. THE COMPANY'S ANNUAL
AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS MAY BE OBTAINED FROM THE COMPANY BY
WRITING TO THE COMPANY AT TWO HOPKINS PLAZA, BALTIMORE, MARYLAND 21201 OR BY
CALLING 1-800-551-2145.
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<PAGE>
EXHIBIT A
SUB-ADVISORY AGREEMENT
(INTERNATIONAL EQUITY FUND)
AGREEMENT made as of March 19, 1996 between MERCANTILE-SAFE DEPOSIT &
TRUST COMPANY, a Maryland trust company (the "Adviser"), and CASTLEINTERNATIONAL
ASSET MANAGEMENT LIMITED, a U.K. corporation registered under the U.S.
Investment Advisers Act of 1940, as amended, and a member of the Investment
Management Regulatory Organization ("IMRO") and regulated by IMRO in the conduct
of its affairs ("Sub-Adviser").
WHEREAS, M.S.D. & T. Funds, Inc. ("M.S.D. & T.") is registered as an
open-end, management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser has been appointed investment adviser to M.S.D. &
T.'s International Equity Fund (the "Fund"); and
WHEREAS, the Adviser desires to retain Sub-Adviser to assist it in the
provision of a continuous investment program for the Fund and Sub-Adviser is
willing to do so; and
WHEREAS, the Board of Directors of the Fund has approved this
Agreement, subject to approval by the shareholders of the Fund, and Sub-Adviser
is willing to furnish such services upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Effective March 19, 1996, the Adviser hereby
-----------
appoints Sub-Adviser to act as sub-adviser to the Fund as permitted by the
Adviser's Advisory Agreement with M.S.D. & T. pertaining to the Fund. Intending
to be legally bound, Sub-Adviser accepts such appointment and agrees to render
the services herein set forth for the compensation herein provided.
2. Sub-Advisory Services. Subject to the supervision of M.S.D. &
---------------------
T.'s Board of Directors, Sub-Adviser will assist the Adviser in providing a
continuous investment program for the Fund, including research and management
with respect to all securities and investments and cash equivalents in the Fund.
Sub-Adviser will provide services under this Agreement in accordance with the
Fund's investment objective, policies and restrictions as stated in the Fund's
prospectuses and resolutions of M.S.D. & T.'s Board of Directors applicable to
the Fund.
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<PAGE>
Adviser hereby undertakes to provide Sub-Adviser with copies of such
prospectuses and resolutions as the same became available from time to time.
Without limiting the generality of the foregoing, Sub-Adviser further
agrees that it will:
(a) prepare, subject to the Adviser's approval, lists of foreign
countries for investment by the Fund and determine from time to time what
securities and other investments will be purchased, retained or sold for
the Fund, including, with the assistance of the Adviser, the Fund's
investments in futures and forward currency contracts; provided, however,
-------- -------
that Sub-Adviser shall not be responsible for taking action with respect to
any proxies, notices, reports or other communications relating to any of
the Fund's portfolio securities;
(b) manage in consultation with the Adviser the Fund's temporary
investments in securities;
(c) place orders for the Fund either directly with the issuer or
with any broker or dealer;
(d) provide, at Sub-Adviser's expense, using one or more pricing
services believed by Sub-Adviser to be reliable, the value of the portfolio
securities and other assets of the Fund in accordance with the 1940 Act,
the Fund's current prospectuses and applicable resolutions of the Board of
Directors of M.S.D. & T. on each day that the Fund's assets are required to
be valued, such information to be transmitted by telephone, telecopy or
other transmission as soon as possible and in any event within 24 hours of
the time of valuation to BISYS Fund Services Ohio, Inc., as fund
accountant, or to such other person(s) as the Adviser may direct for the
benefit of the Fund;
(e) manage the Fund's overall cash position, and determine from
time to time what portion of the Fund's assets will be held in different
currencies;
(f) provide the Adviser with foreign broker research, a
quarterly review of international economic and investment developments, and
occasional "White Papers" on international investment issues;
(g) attend regular business and investment-related meetings with
M.S.D. & T.'s Board of Directors and the Adviser if requested to do so by
M.S.D. & T. and/or the Adviser; and
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<PAGE>
(h) maintain books and records with respect to the securities
transactions for the Fund, furnish to the Adviser and M.S.D. & T.'s Board
of Directors such periodic and special reports as they may request with
respect to the Fund, and provide in advance to the Adviser all reports to
the Board of Directors for examination and review within a reasonable time
prior to M.S.D. & T. Board meetings. Adviser hereby undertakes to provide
Sub-Adviser with at least fourteen days prior written notice of the date,
time and location of all M.S.D. & T. Board meetings pertaining to the Fund.
3. Subcontractors. It is understood that Sub-Adviser may from time
--------------
to time engage or associate itself with such person or persons as Sub-Adviser
may believe to be particularly fitted to assist Sub-Adviser in the performance
of certain ministerial or administrative services required by this Agreement;
provided, however, that such person or persons shall have been approved by the
- -------- -------
Board of Directors of M.S.D. & T., that the compensation of such person or
persons shall be paid by Sub-Adviser and that Sub-Adviser shall be as fully
responsible to the Adviser and M.S.D. & T. for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
4. Covenants by Sub-Adviser. Sub-Adviser agrees with respect to the
------------------------
services provided to the Fund that it:
(a) will conform with all Rules and Regulations of the Securities
and Exchange Commission ("SEC") applicable to it and will also conform with
all Rules and Regulations of IMRO;
(b) will telecopy trade information to the Adviser on the first
business day following the day of the trade and cause broker confirmations
to be sent directly to the Adviser; and
(c) will treat confidentially and as proprietary information of
M.S.D. & T. all records and other information relative to the Fund and
prior, present or potential shareholders, and will not use such records and
information for any purpose other than performance of its responsibilities
and duties hereunder (except after prior notification to and approval in
writing by M.S.D. & T., which approval shall not be unreasonably withheld
and may not be withheld and will be deemed granted where Sub-Adviser may be
exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities,
or when so requested by M.S.D. & T.).
A-3
<PAGE>
5. Services Not Exclusive.
----------------------
(a) The services furnished by Sub-Adviser hereunder are deemed
not to be exclusive, and nothing in this Agreement shall (i) prevent Sub-Adviser
or any affiliated person (as defined in the 1940 Act) of Sub-Adviser from acting
as investment adviser or manager for any other person or persons, including
other management investment companies with investment objectives and policies
the same as or similar to those of the Fund or (ii) limit or restrict Sub-
Adviser or any such affiliated person from buying, selling or trading any
securities or other investments (including any securities or other investments
which the Fund is eligible to buy) for its or their own accounts or for the
accounts of others for whom it or they may be acting; provided, however, that
-------- -------
Sub-Adviser agrees that it will not undertake any activities which, in its
reasonable judgment, will adversely affect the performance of its obligations to
the Fund under this Agreement.
(b) Nothing contained herein, however, shall prohibit Sub-
Adviser from advertising or soliciting the public generally with respect to
products or services, regardless of whether such advertisement or solicitation
may include prior, present or potential shareholders of M.S.D. & T.
6. Portfolio Transactions. Investment decisions for the Fund shall
----------------------
be made by Sub-Adviser independently from those for any other investment
companies and accounts advised or managed by Sub-Adviser. The Fund and such
investment companies and accounts may, however, invest in the same securities.
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Fund and/or another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Sub-Adviser believes to be equitable to the Fund
and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained or sold by the Fund. To the extent
permitted by law, Sub-Adviser may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in order to obtain best execution.
Sub-Adviser shall place orders for the purchase and sale of portfolio
securities and will solicit broker-dealers to execute transactions in accordance
with the Fund's policies and restrictions regarding brokerage allocations. Sub-
Adviser shall place orders pursuant to its investment determination for the Fund
either directly with the issuer or with any broker or dealer selected by Sub-
Adviser. In executing portfolio transactions and selecting brokers or dealers,
Sub-Adviser shall use its reasonable best efforts to seek the most favorable
execution of
A-4
<PAGE>
orders, after taking into account all factors Sub-Adviser deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. Consistent with this obligation, Sub-Adviser may, to
the extent permitted by law, purchase and sell portfolio securities to and from
brokers and dealers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Fund and/or other accounts over which Sub-Adviser or any of its
affiliates exercises investment discretion. Sub-Adviser is authorized to pay to
a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund which is in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction if Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Sub-Adviser's overall responsibilities to the Fund and
to M.S.D. & T. In no instance will portfolio securities be purchased from or
sold to Sub-Adviser, or the Fund's principal underwriter, or any affiliated
person thereof except as permitted by the Securities and Exchange Commission.
7. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for M.S.D. & T. are the property of M.S.D. & T. and further agrees to
surrender promptly to M.S.D. & T. any of such records upon M.S.D. & T.'s
request; provided, however, that the Sub-Adviser may make and retain photocopies
-------- -------
of such records in order to comply with applicable regulatory requirements.
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
8. Expenses. During the term of this Agreement, Sub-Adviser will
--------
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction charges, if any)
purchased for the Fund.
9. Compensation. For the services provided and the expenses assumed
------------
with respect to the Fund pursuant to this Agreement, Sub-Adviser will be
entitled to a fee, computed daily and payable quarterly, from the Adviser,
calculated at the annual rate of .45% of the Fund's average daily net assets.
Notwithstanding any other provision of the Agreement, all fees payable to Sub-
Adviser pursuant to this Agreement shall be
A-5
<PAGE>
withheld by Adviser until such time as this Agreement shall have been approved
by vote of the lesser (1) 67% of the shares of the Fund represented at a meeting
if holders of more than 50% of the outstanding shares of the Fund are present
in person or by proxy or (b) more than 50% of the outstanding shares of the
Fund. Upon such approval, the Adviser shall forthwith remit to the Sub-Adviser
all withheld fees, with interest at a rate to be agreed upon by the Adviser and
Sub-Adviser. If such approval is not obtained within 120 days after the
effective date of this Agreement, this Agreement shall terminate and all
withheld fees shall be retained by the Adviser, but all other provisions of this
Agreement shall be effective in accordance with their terms.
10. Standard of Care; Limitation of Liability. Sub-Adviser shall
-----------------------------------------
exercise due care and diligence and use the same skill and care in providing its
services hereunder as it uses in providing services to other investment
companies, but shall not be liable for any action taken or omitted by Sub-
Adviser in the absence of bad faith, willful misconduct, negligence or reckless
disregard of its duties. Notwithstanding the foregoing it is agreed that the
relative investment performance of the Fund shall not constitute a breach by the
Sub-Adviser of these obligations.
11. Reference to Sub-Adviser. Neither the Adviser nor any affiliate
------------------------
or agent of it shall make reference to or use the name of Sub-Adviser or any of
its affiliates, or any of their clients, except references concerning the
identity of and services provided by Sub-Adviser to the Fund, which references
shall not differ in substance from those included in the current registration
statement pertaining to the Fund, this Agreement and the Advisory Agreement
between the Adviser and M.S.D. & T. with respect to the Fund, in any advertising
or promotional materials without the prior approval of Sub-Adviser, which
approval shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause M.S.D. & T. and any affiliate
thereof to satisfy the foregoing obligation.
12. Duration and Termination. Unless sooner terminated, this
------------------------
Agreement shall continue until July 20, 1997 and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by M.S.D. & T.'s Board of Directors or
vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting
if holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy or (b) more than 50% of the outstanding shares of the Fund,
provided that in either event its continuance also is approved by a majority of
M.S.D. & T.'s Directors who are not "interested persons" (as defined in the 1940
Act) of any party to this Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval. This Agreement is terminable at any
time without penalty, on 60 days' notice, by Adviser, Sub-Adviser or by M.S.D.
A-6
<PAGE>
& T.'s Board of Directors or by vote of the lesser of (a) 67% of the shares of
the Fund represented at a meeting if holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund. This Agreement will terminate automatically in
the event of its assignment (as defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective with respect to the Fund until approved by the vote of a majority of
the outstanding voting securities of the Fund.
14. Notice. Any notice, advice or report to be given pursuant to
------
this Agreement shall be delivered or mailed:
To Sub-Adviser at:
-----------------
125 S. Wacker Drive
Suite 300
Chicago, IL 60606
To the Adviser at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
To M.S.D. & T. at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by
Maryland law.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an
A-7
<PAGE>
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
[SIGNATURES OMITTED]
A-8
<PAGE>
[PRELIMINARY COPY]
PROXY
M.S.D. & T. FUNDS, INC.
INTERNATIONAL EQUITY FUND
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS of M.S.D. & T. Funds,
Inc. (the "Company") for use at a Special Meeting of Shareholders to be held at
the offices of Mercantile-Safe Deposit and Trust Company, Second Floor Board
Room, Two Hopkins Plaza, Baltimore, Maryland 21201 on May 17, 1996 at 2:00 P.M.
Eastern Time.
The undersigned hereby appoints Linda A. Durkin and Brian S. Humphrey, and
each of them, with full power of substitution, as proxies of the undersigned to
vote at the above-stated Special Meeting, and at all adjournments or
postponements thereof, all shares of Class H Common Stock (evidencing interests
in the International Equity Fund) held of record by the undersigned on April 3,
1996, the record date for the meeting, upon the following matter AND UPON ANY
OTHER MATTER WHICH MAY COME BEFORE THE MEETING, IN THEIR DISCRETION:
1. Proposal to approve a new Sub-Advisory Agreement dated March 19, 1996
between Mercantile-Safe Deposit and Trust Company and
CastleInternational Asset Management Limited with respect to the
International Equity Fund.
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
Every properly signed proxy will be voted in the manner specified hereon
and, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE FOR PROPOSAL 1.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as
<PAGE>
executor, administrator, trustee or guardian,
please give full title as such. If a corporation,
please sign in full corporate name by president or
other authorized officer. If a partnership,
please sign in partnership name by authorized
person.
Dated: _________________________
X
---------------------------------
Signature
X
---------------------------------
Signature, if held jointly
-2-
