<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:
[_] Preliminary proxy statement
[X] 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):
[_] $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:
------------------------------------------------------------------------
[X] 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>
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
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>
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 24, 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 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
<PAGE>
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 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 Mercantile 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
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
2
<PAGE>
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%.
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
3
<PAGE>
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 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, unlike the Dunedin Agreement, 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., 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 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. The Board considered each of these factors
to be of material importance in connection with its recommendation of the New
Agreement. 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.
Leslie B. Disharoon, Chairman of the Board of Directors and President of the
Company, and his wife each own shares of Mercantile Bankshares Corporation,
the parent of the Fund's investment adviser. Decatur H. Miller, a member of
the Board of Directors and Treasurer of the Company, serves as a co-trustee of
a trust of which Mercantile is also a co-trustee and is a retired partner of a
law firm which has rendered legal services for Mercantile. In addition, Mr.
Disharoon and Mr. Miller each own shares of the Fund.
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.
4
<PAGE>
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.
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 is 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 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
5
<PAGE>
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.
CastleInternational presently serves as sub-adviser to the following
portfolios (the "Compass Portfolios") of Compass Capital Funds, a registered
investment company:
<TABLE>
<CAPTION>
ANNUAL RATE OF
COMPENSATION
NET ASSETS (COMPUTED DAILY AND
COMPASS PORTFOLIO AT 2/29/96 PAYABLE MONTHLY)
----------------- ---------- -------------------
<C> <C> <S>
International Equity Portfolio............ $522,590,405 .60% of the first $1
billion 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 Markets Portfolio.. $ 71,741,622 1.10% of the first $1
billion 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 administrator, Mercantile receives fees from the
Fund and each other portfolio of 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
6
<PAGE>
contemplated 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, 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 principal 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.
7
<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. 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
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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
(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.).
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.
A-2
<PAGE>
(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 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
A-3
<PAGE>
Agreement shall be withheld by Adviser until such time as this Agreement
shall have been approved by vote of the lesser (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. 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. & 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
A-4
<PAGE>
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 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]
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<PAGE>
PROXY
Carefully fold & detach along perforation
- --------------------------------------------------------------------------------
________________________________________________________________________________
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 of the
International Equity Fund 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.
(continued, and to be signed, on other side)
________________________________________________________________________________
<PAGE>
PROMPTLY COMPLETE AND RETURN THE
PROXY/VOTING INSTRUCTION FORM BELOW
IN THE ENVELOPE PROVIDED
Carefully fold & detach along perforation
- --------------------------------------------------------------------------------
________________________________________________________________________________
(continued from other side)
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.
Dated ________________
Signature ____________ Signature, if held jointly ___________
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as 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.
________________________________________________________________________________
