<PAGE> PAGE 1
000 B000000 07/31/95
000 C000000 0000900428
000 D000000 N
000 E000000 NF
000 F000000 Y
000 G000000 Y
000 H000000 N
000 I000000 3.0.a
000 J000000 A
001 A000000 MH/KP INVESTMENT TRUST III
001 B000000 811-7630
001 C000000 2127131074
002 A000000 1285 AVENUE OF THE AMERICAS
002 B000000 NEW YORK
002 C000000 NY
002 D010000 10019
003 000000 N
004 000000 N
005 000000 N
006 000000 N
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007 B000000 1
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007 C020100 MH/KP SMALL CAP GROWTH FUND
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020 A000001 INSTINET CORP.
020 B000001 13-3443395
020 C000001 20
020 A000002 KIDDER PEABODY
020 B000002 13-5650440
020 C000002 12
020 A000003 SMITH BARNEY, HARRIS UPHAM & CO.,INC.
020 B000003 13-1912900
020 C000003 8
020 A000004 SHEARSON LEHMAN BROTHERS, INC.
020 B000004 13-2518466
020 C000004 6
020 A000005 KCCI
020 C000005 6
020 A000006 JEFFRIES & CO., INC.
020 C000006 2
020 A000007 CIS
<PAGE> PAGE 2
020 C000007 2
020 A000008 WEEDON & CO., L.P.
020 B000008 13-3364318
020 C000008 2
020 A000009 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.
020 B000009 13-5674085
020 C000009 2
020 A000010 RAYMOND JAMES & ASSOC., INC.
020 B000010 59-1237041
020 C000010 1
021 000000 65
022 A000001 SMITH BARNEY, HARRIS UPHAM & CO.
022 B000001 13-1912900
022 C000001 6086
022 D000001 6641
022 A000002 INSTINET
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022 A000005 MERRILL LYNCH PIERCE FENNER & SMITH
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022 C000005 2794
022 D000005 4661
022 A000006 DONALSON LUFKIN & JENRETTE & CO.
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022 C000006 3509
022 D000006 3109
022 A000007 HERZOG HEINE
022 B000007 13-1955436
022 C000007 3530
022 D000007 2837
022 A000008 JEFFRIES & CO., INC.
022 C000008 2038
022 D000008 3724
022 A000009 MONTGOMERY
022 B000009 13-1701676
022 C000009 2273
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022 A000010 MORGAN STANLEY
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<PAGE> PAGE 3
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<PAGE> PAGE 4
010 C030101 10019
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<PAGE> PAGE 5
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<PAGE> PAGE 6
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<PAGE> PAGE 7
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<PAGE> PAGE 8
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<PAGE> PAGE 9
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SIGNATURE JULIAN SLUYTERS
TITLE SENIOR VP-TREASURER
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For the year ended July 31, 1995 Exhibit 77C
File Number 811-4332
A special meeting of shareholders of the Mitchell Hutchins/Kidder, Peabody
Equity Income Fund, Inc. ("Fund") was held on April 13, 1995. At the
meeting the following agreements were approved for the Fund:
1) An interim investment advisory agreement between the Fund and
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") containing
substantially the same terms, conditions and fees as the previous
investment advisory agreement with Kidder Peabody Asset Management, Inc.
("KPAM").
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
1,664,176 21,228 112,265
2) A new investment advisory and administration agreement between the
Fund and Mitchell Hutchins containing the same fees and substantively
similar material terms and conditions as the previous investment advisory
agreement with KPAM to commence on the termination of the interim
agreement.
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
1,625,299 22,085 123,284
<PAGE>
For the year ended July 31, 1995 Exhibit 77C
File Number 811-4333
A special meeting of shareholders of the Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc. ("Fund") was held on April 13, 1995. At the
meeting the following agreements were approved for the Fund:
1) An interim investment advisory agreement between the Fund and
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") containing
substantially the same terms, conditions and fees as the previous
investment advisory agreement with Kidder Peabody Asset Management, Inc.
("KPAM").
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
2,012,888 9,868 306,455
2) A new investment advisory and administration agreement between the
Fund and Mitchell Hutchins containing the same fees and substantively
similar material terms and conditions as the previous investment advisory
agreement with KPAM to commence on the termination of the interim
agreement.
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
2,016,516 9,231 303,464
<PAGE>
For the year ended July 31, 1995 Exhibit 77C
File Number 811-7630
A special meeting of shareholders of the Mitchell Hutchins/Kidder, Peabody
Small Cap Growth Equity Fund ("Fund") a series of Mitchell Hutchins/Kidder,
Peabody Investment Trust II was held on April 13, 1995. At the meeting the
following agreements were approved for the Fund:
1) An interim investment advisory agreement between the Fund and
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") containing
substantially the same terms, conditions and fees as the previous
investment advisory agreement with Kidder Peabody Asset Management, Inc.
("KPAM").
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
2,328,764 48,452 126,098
2) An interim sub-investment advisory agreement with the Fund"s current
investment adviser containing substantially the same terms, conditions and
fees as its current investment advisory agreement with that investment
adviser.
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
2,325,693 47,355 130,266
3) A new investment advisory and administration agreement between the
Fund and Mitchell Hutchins containing the same fees and substantively
similar material terms and conditions as the previous investment advisory
agreement with KPAM to commence on the termination of the interim
agreement.
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
2,325967 50,312 127,035
<PAGE>
4) An new investment sub-investment advisory agreement with the Fund"s
current investment adviser containing substantially the same terms,
conditions and fees as its previous investment sub-advisory agreement with
that investment adviser.
The votes were as follows:
All Shares Voting as a Single Class
----------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- -----------------
2,347,750 26,908 128,655
<PAGE>
For the year ended July 31, 1995 Exhibit 77C
File Number 811-5168
A special meeting of shareholders of PaineWebber/Kidder, Peabody California
Tax Exempt Money Fund ("Fund") was held on April 13, 1995. At the meeting
the following agreements were approved for the Fund:
The votes were as follows:
1) An interim investment advisory agreement between the Fund and
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") containing
substantially the same terms, conditions and fees as the previous
investment advisory agreement with Kidder Peabody Asset Management, Inc.
("KPAM").
The votes were as follows:
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
77,081,043 599,102 1,530,404
2) A new investment advisory and administration agreement with
PaineWebber containing substantially the same fees and substantially
similar material terms and conditions as the previous investment advisory
agreement with KPAM to commence on the termination of the interim
agreement.
The votes were as follows:
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
77,890,882 658,381 1,661,287
<PAGE>
3) A new sub-advisory and sub-administration agreement between
PaineWebber and Mitchell Hutchins to commence on the termination of the
interim agreement for the Fund.
The votes were as follows:
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
77,420,422 866,938 1,923,191
LETTER FROM ERNST & YOUNG LLP
The Board of Trustees and Shareholders
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
In planning and performing our audit of the financial statements of
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund for the year ended
July 31, 1995, we considered its internal control structure, including
procedures for safeguarding securities, in order to determine our
auditing procedures for the purpose of expressing our opinion on the
financial statements and to comply with the requirements of Form N-SAR,
not to provide assurance on the internal control structure.
The management of Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
is responsible for establishing and maintaining an internal control
structure. In fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs
of internal control structure policies and procedures. Two of the
objectives of an internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are safeguarded against
loss from unauthorized use or disposition and that transactions are executed
in accordance with management's authorization and recorded properly to permit
preparation of financial statements in conformity with generally accepted
accounting principles.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that it
may become inadequate because of changes in conditions or that the
effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weaknesses under standards established by the American Institute of Certified
Public Accountants. A material weakness is a condition in which the design or
operation of the specific internal control structure elements does not reduce
to a relatively low level the risk that errors or irregularities in amounts
that would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. However, we noted no
<PAGE>
matters involving the internal control structure, including procedures for
safeguarding securities, that we consider to be material weaknesses as defined
above as of July 31, 1995.
This report is intended solely for the information and use of management and
the Securities and Exchange Commission.
ERNST & YOUNG LLP
September 21, 1995
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of April 13, 1995 between MITCHELL HUTCHINS/
KIDDER, PEABODY INVESTMENT TRUST III, a Massachusetts business
trust ("Fund") and MITCHELL HUTCHINS ASSET MANAGEMENT INC.
("Manager"), a Delaware corporation registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended ("1934 Act"),
and as an investment adviser under the Investment Advisers Act of
1940, as amended.
WHEREAS the Fund is registered under the Investment Company
Act of 1940, as amended ("1940 Act"), as an open-end management
investment company, and intends to offer for public sale distinct
shares of beneficial interest ("Shares"), which may be offered in
separate and distinct classes of shares, each corresponding to a
distinct portfolio ("Series"); and
WHEREAS the Fund desires to retain Manager as investment
adviser and administrator to furnish certain administrative,
investment advisory and portfolio management services to the Fund
and each Series as now exists and as hereafter may be established,
and Manager is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto
as follows:
1. Appointment. The Fund hereby appoints Manager as
investment adviser and administrator of the Fund and each Series
for the period and on the terms set forth in this Contract.
Manager accepts such appointment and agrees to render the services
herein set forth, for the compensation herein provided.
2. Duties as Investment Adviser.
(a) Subject to the supervision of the Fund's Board of
Trustees ("Board"), Manager will provide a continuous investment
program for each Series, including investment research and
management with respect to all securities and investments and cash
equivalents in each Series. Manager will determine from time to
time what securities and other investments will be purchased,
retained or sold by each Series.
(b) Manager agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and
execution; provided that, on behalf of any Series, Manager may, in
its discretion, use brokers who provide the Series with research,
analysis, advice and similar services to execute portfolio
transactions on behalf of the Series, and Manager may pay to those
brokers in return for brokerage and research services a higher
commission than may be charged by other brokers, subject to
Manager's determining in good faith that such commission is
reasonable in terms either of the particular transaction or of the
overall responsibility of Manager to such Series and its other
clients and that the total commissions paid by such Series will be
reasonable in relation to the benefits to the Series over the long
term. In no instance will portfolio securities be purchased from
or sold to Manager, or any affiliated person thereof, except in
accordance with the federal securities laws and the rules and
regulations thereunder, or any applicable exemptive orders.
Whenever Manager simultaneously places orders to purchase or sell
the same security on behalf of a Series and one or more other
accounts advised by Manager, such orders will be allocated as to
price and amount among all such accounts in a manner believed to be
equitable to each account. The Fund recognizes that in some cases
this procedure may adversely affect the results obtained for the
Series.
(c) Manager will oversee the maintenance of all books and
records with respect to the securities transactions of each Series,
and will furnish the Board with such periodic and special reports
as the Board reasonably may request. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, Manager hereby
agrees that all records which it maintains for the Fund are the
property of the Fund, agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act any records which it maintains for
the Fund and which are required to be maintained by Rule 31a-1
under the 1940 Act and further agrees to surrender promptly to the
Fund any records which it maintains for the Fund upon request by
the Fund.
(d) Manager will oversee the computation of the net asset
value and the net income of each Series as described in the
currently effective registration statement of the Fund under the
Securities Act of 1933, as amended, and the 1940 Act and any
supplements thereto ("Registration Statement") or as more
frequently requested by the Board.
(e) The Fund hereby authorizes Manager and any entity or
person associated with Manager which is a member of a national
securities exchange to effect any transaction on such exchange for
the account of any Series, which transaction is permitted by
Section 11(a) of the 1934 Act, and the Fund hereby consents to the
retention of compensation by Manager or any person or entity
associated with Manager for such transaction.
3. Duties as Administrator. Manager will administer the
affairs of the Fund and each Series subject to the supervision of
the Board and the following understandings:
(a) Manager will supervise all aspects of the operations of
the Fund and each Series, including oversight of transfer agency,
custodial and accounting services, except as hereinafter set forth;
provided, however, that nothing herein contained shall be deemed to
relieve or deprive the Board of its responsibility for and control
of the conduct of the affairs of the Fund and each Series.
(b) Manager will provide the Fund and each Series with such
corporate, administrative and clerical personnel (including
officers of the Fund) and services as are reasonably deemed
necessary or advisable by the Board, including the maintenance of
certain books and records of the Fund and each Series.
(c) Manager will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of
the Fund's Registration Statement, proxy material, tax returns and
required reports to each Series' shareholders and the Securities
and Exchange Commission and other appropriate federal or state
regulatory authorities.
(d) Manager will provide the Fund and each Series with, or
obtain for it, adequate office space and all necessary office
equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items.
(e) Manager will provide the Board on a regular basis with
economic and investment analyses and reports and make available to
the Board upon request any economic, statistical and investment
services normally available to institutional or other customers of
Manager.
4. Further Duties. In all matters relating to the
performance of this Contract, Manager will act in conformity with
the Declaration of Trust, By-Laws and currently effective
Registration Statement of the Fund, as delivered to Manager and
upon which it shall be entitled to rely, and with the instructions
and directions of the Board, and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable
federal and state laws and regulations.
5. Delegation of Manager's Duties as Investment Adviser and
Administrator. With respect to any or all Series, Manager may
enter into one or more contracts ("Sub-Advisory or Sub-
Administration Contract") with a sub-adviser or sub-administrator
in which Manager delegates to such sub-adviser or sub-administrator
any or all of its duties specified in Paragraphs 2 and 3 of this
Contract, provided that each Sub-Advisory or Sub-Administration
Contract imposes on the sub-adviser or sub-administrator bound
thereby all the duties and conditions to which Manager is subject
by Paragraphs 2, 3 and 4 of this Contract, and further provided
that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder.
6. Services Not Exclusive. The services furnished by
Manager hereunder are not to be deemed exclusive and Manager shall
be free to furnish similar services to others so long as its
services under this Contract are not impaired thereby. Nothing in
this Contract shall limit or restrict the right of any director,
officer or employee of Manager, who may also be a Trustee, officer
or employee of the Fund, to engage in any other business or to
devote his or her time and attention in part to the management or
other aspects of any other business, whether of a similar nature or
a dissimilar nature.
7. Expenses.
(a) During the term of this Contract, each Series will bear
all expenses, not specifically assumed by Manager, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each Series will include but not be
limited to the following (or each Series' proportionate share of
the following): (i) the cost (including brokerage commissions) of
securities purchased or sold by the Series and any losses incurred
in connection therewith; (ii) fees payable to and expenses incurred
on behalf of the Series by Manager under this Contract; (iii)
expenses of organizing the Fund and the Series; (iv) filing fees
and expenses relating to the registrations and qualification of the
Series' shares and the Fund under federal and/or state securities
laws and maintaining such registration and qualifications; (v) fees
and salaries payable to the Fund's Trustees and officers who are
not interested persons of the Fund or Manager; (vi) all expenses
incurred in connection with the Trustees' services, including
travel expenses in the case of Trustees who are not interested
persons of the Fund or Manager; (vii) taxes (including any income
or franchise taxes) and governmental fees; (viii) costs of any
liability, uncollectible items of deposit and other insurance and
fidelity bonds; (ix) any costs, expenses or losses arising out of
a liability of or claim for damages or other relief asserted
against the Fund or Series for violation of any law and any
indemnification relating thereto; (x) legal, accounting and
auditing expenses, including legal fees of special counsel for
those Trustees of the Fund who are not interested persons of the
Fund; (xi) charges of custodians, transfer agents and other agents;
(xii) costs of preparing share certificates; (xiii) expenses of
setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto,
reports and proxy materials for existing shareholders; (xiv) costs
of mailing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy
materials to existing shareholders; (xv) any extraordinary expenses
(including fees and disbursements of counsel, costs of actions,
suits or proceedings to which the Fund is a party and the expenses
the Fund may incur as a result of its legal obligation to provide
indemnification to its officers, Trustees, agents and shareholders
or to Manager) incurred by the Fund or Series; (xvi) fees,
voluntary assessments and other expenses incurred in connection
with membership in investment company organizations; (xvii) cost of
mailing and tabulating proxies and costs of meetings of
shareholders, the Board and any committees thereof; (xviii) the
cost of investment company literature and other publications
provided by the Fund to its Trustees and officers; (xix) costs of
mailing, stationery and communications equipment; (xx) expenses
incident to any dividend, withdrawal or redemption options; (xxi)
charges and expenses of any outside pricing service used to value
portfolio securities and (xxii) interest on borrowings of the Fund.
(c) Manager will assume the cost of any compensation for
services provided to the Fund received by the officers of the Fund
and by those Trustees who are interested persons of the Fund.
(d) The payment or assumption by Manager of any expenses of
the Fund or a Series that Manager is not required by this Contract
to pay or assume shall not obligate Manager to pay or assume the
same or any similar expense of the Fund or a Series on any
subsequent occasion.
8. Compensation.
(a) For the services provided and the expenses assumed
pursuant to this Contract with respect to the Mitchell
Hutchins/Kidder, Peabody Small Cap Growth Fund, the Fund will pay
to Manager a fee, computed daily and paid monthly, at an annual
rate of 1.00% of such Series' average daily net assets up to $25
million; and .90% of such Series' average daily net assets over $25
million.
(b) For the services provided and the expenses assumed
pursuant to this Contract with respect to any Series hereafter
established, the Trust will pay to Manager from the assets of such
Series a fee in an amount to be agreed upon in a written fee
agreement ("Fee Agreement") executed by the Fund on behalf of such
Series and by Manager. All such Fee Agreements shall provide that
they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to
Manager on or before the first business day of the next succeeding
calendar month.
(d) If this Contract becomes effective or terminates before
the end of any month, the fee for the period from the effective day
to the end of the month or from the beginning of such month to the
date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full
month in which such effectiveness or termination occurs.
9. Limitation of Liability of Manager. Manager and its
delegates, including any Sub-Adviser or Sub-Administrator to the
Fund, shall not be liable for any error of judgment or mistake of
law or for any loss suffered by any Series, the Fund or any of its
shareholders, in connection with the matters to which this Contract
relates, except to the extent that such a loss results from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Contract. Any person, even
though also an officer, director, employee, or agent of Manager,
who may be or become an officer, Trustee, employee or agent of the
Fund shall be deemed, when rendering services to any Series or the
Fund or acting with respect to any business of such Series or the
Fund, to be rendering such service to or acting solely for the
Series or the Fund and not as an officer, director, employee, or
agent or one under the control or direction of Manager even though
paid by it.
10. Duration and Termination.
(a) This Contract shall become effective upon the date
hereabove written provided that, with respect to any Series, this
Contract shall not take effect unless it has first been approved
(i) by a vote of a majority of those Trustees of the Fund who are
not parties to this Contract or interested persons of any such
party cast in person at a meeting called for the purpose of voting
on such approval, and (ii) by vote of a majority of that Series'
outstanding voting securities.
(b) Unless sooner terminated as provided herein, this
Contract shall continue in effect for two years from the above
written date. Thereafter, if not terminated, this Contract shall
continue automatically for successive periods of twelve months
each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those Trustees of the
Fund who are not parties to this Contract or interested persons of
any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (ii) by the Board or by vote of a
majority of the outstanding voting securities of a Series with
respect to that Series.
(c) Notwithstanding the foregoing, with respect to any Series
this Contract may be terminated at any time, without the payment of
any penalty, by vote of the Board or by a vote of a majority of the
outstanding voting securities of such Series on sixty days' written
notice to Manager or by Manager at any time, without the payment of
any penalty, on sixty days' written notice to the Fund.
Termination of this Contract with respect to any given Series shall
in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series. This
Contract will automatically terminate in the event of its
assignment.
11. Amendment of this Contract. No provision of this
Contract 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, and no material amendment of this Contract as to any
given Series shall be effective until approved by vote of a
majority of such Series' outstanding voting securities.
12. Governing Law. This Contract shall be construed in
accordance with the laws of the State of Delaware, without giving
effect to the conflicts of laws principles thereof, and in
accordance with the 1940 Act, provided, however, that Section 13
below will be construed in accordance with the laws of the
Commonwealth of Massachusetts. To the extent that the applicable
laws of the State of Delaware or the Commonwealth of Massachusetts
conflict with the applicable provisions of the 1940 Act, the latter
shall control.
13. Limitation of Liability of the Trustees and Shareholders
of the Trust. No Trustee, shareholder, officer, employee or agent
of any Series shall be liable for any obligations of any Series or
the Fund under this Contract, and Manager agrees that, in asserting
any rights or claims under this Contract, it shall look only to the
assets and property of the Fund in settlement of such right or
claim, and not to such Trustee, shareholder, officer, employee or
agent. The Fund represents that a copy of its Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts
and the Boston City Clerk.
14. Miscellaneous. The captions in this Contract 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 Contract shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors.
As used in this Contract, the terms "majority of the outstanding
voting securities", "affiliated person", "interested person",
"assignment", "broker", "investment adviser", "national securities
exchange", "net assets", "prospectus", "sale", "sell" and
"security" shall have the same meaning as such terms have in the
1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or
order. Where the effect of a requirement of the 1940 Act reflected
in any provision of this Contract is affected by a rule, regulation
or order of the Securities and Exchange Commission, whether of
special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated as of the
day and year first above written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By _____________________________________
Attest: MITCHELL HUTCHINS/KIDDER, PEABODY
INVESTMENT TRUST III
By _____________________________________
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of April 13, 1995 between MITCHELL HUTCHINS/
KIDDER, PEABODY INVESTMENT TRUST III, a Massachusetts business trust
("Fund") and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Manager"), a
Delaware corporation registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended ("1934 Act"), and as an investment
adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS the Fund is registered under the Investment Company Act
of 1940, as amended ("1940 Act"), as an open-end management investment
company, and intends to offer for public sale distinct shares of
beneficial interest ("Shares"), which may be offered in separate and
distinct classes of shares, each corresponding to a distinct portfolio
("Series"); and
WHEREAS the Fund desires to retain Manager as investment adviser
and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Fund and each Series as now
exists and as hereafter may be established, and Manager is willing to
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as
follows:
1. Appointment. The Fund hereby appoints Manager as
investment adviser and administrator of the Fund and each Series for the
period and on the terms set forth in this Contract. Manager accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. Duties as Investment Adviser.
(a) Subject to the supervision of the Fund's Board of
Trustees ("Board"), Manager will provide a continuous investment program
for each Series, including investment research and management with respect
to all securities and investments and cash equivalents in each Series.
Manager will determine from time to time what securities and other
investments will be purchased, retained or sold by each Series.
(b) Manager agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and
execution; provided that, on behalf of any Series, Manager may, in its
discretion, use brokers who provide the Series with research, analysis,
advice and similar services to execute portfolio transactions on behalf of
the Series, and Manager may pay to those brokers in return for brokerage
<PAGE>
and research services a higher commission than may be charged by other
brokers, subject to Manager's determining in good faith that such
commission is reasonable in terms either of the particular transaction or
of the overall responsibility of Manager to such Series and its other
clients and that the total commissions paid by such Series will be
reasonable in relation to the benefits to the Series over the long term.
In no instance will portfolio securities be purchased from or sold to
Manager, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder, or any
applicable exemptive orders. Whenever Manager simultaneously places
orders to purchase or sell the same security on behalf of a Series and one
or more other accounts advised by Manager, such orders will be allocated
as to price and amount among all such accounts in a manner believed to be
equitable to each account. The Fund recognizes that in some cases this
procedure may adversely affect the results obtained for the Series.
(c) Manager will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and
will furnish the Board with such periodic and special reports as the Board
reasonably may request. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Manager hereby agrees that all records which it
maintains for the Fund are the property of the Fund, agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act any records
which it maintains for the Fund and which are required to be maintained by
Rule 31a-1 under the 1940 Act and further agrees to surrender promptly to
the Fund any records which it maintains for the Fund upon request by the
Fund.
(d) Manager will oversee the computation of the net asset
value and the net income of each Series as described in the currently
effective registration statement of the Fund under the Securities Act of
1933, as amended, and the 1940 Act and any supplements thereto
("Registration Statement") or as more frequently requested by the Board.
(e) The Fund hereby authorizes Manager and any entity or
person associated with Manager which is a member of a national securities
exchange to effect any transaction on such exchange for the account of any
Series, which transaction is permitted by Section 11(a) of the 1934 Act,
and the Fund hereby consents to the retention of compensation by Manager
or any person or entity associated with Manager for such transaction.
3. Duties as Administrator. Manager will administer the
affairs of the Fund and each Series subject to the supervision of the
Board and the following understandings:
(a) Manager will supervise all aspects of the operations of
the Fund and each Series, including oversight of transfer agency,
custodial and accounting services, except as hereinafter set forth;
provided, however, that nothing herein contained shall be deemed to
relieve or deprive the Board of its responsibility for and control of the
conduct of the affairs of the Fund and each Series.
- 2 -
<PAGE>
(b) Manager will provide the Fund and each Series with such
corporate, administrative and clerical personnel (including officers of
the Fund) and services as are reasonably deemed necessary or advisable by
the Board, including the maintenance of certain books and records of the
Fund and each Series.
(c) Manager will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the
Fund's Registration Statement, proxy material, tax returns and required
reports to each Series' shareholders and the Securities and Exchange
Commission and other appropriate federal or state regulatory authorities.
(d) Manager will provide the Fund and each Series with, or
obtain for it, adequate office space and all necessary office equipment
and services, including telephone service, heat, utilities, stationery
supplies and similar items.
(e) Manager will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the
Board upon request any economic, statistical and investment services
normally available to institutional or other customers of Manager.
4. Further Duties. In all matters relating to the
performance of this Contract, Manager will act in conformity with the
Declaration of Trust, By-Laws and currently effective Registration
Statement of the Fund, as delivered to Manager and upon which it shall be
entitled to rely, and with the instructions and directions of the Board,
and will comply with the requirements of the 1940 Act, the rules
thereunder, and all other applicable federal and state laws and
regulations.
5. Delegation of Manager's Duties as Investment Adviser and
Administrator. With respect to any or all Series, Manager may enter into
one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
a sub-adviser or sub-administrator in which Manager delegates to such sub-
adviser or sub-administrator any or all of its duties specified in
Paragraphs 2 and 3 of this Contract, provided that each Sub-Advisory or
Sub-Administration Contract imposes on the sub-adviser or sub-
administrator bound thereby all the duties and conditions to which Manager
is subject by Paragraphs 2, 3 and 4 of this Contract, and further provided
that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder.
6. Services Not Exclusive. The services furnished by
Manager hereunder are not to be deemed exclusive and Manager shall be free
to furnish similar services to others so long as its services under this
Contract are not impaired thereby. Nothing in this Contract shall limit
or restrict the right of any director, officer or employee of Manager, who
may also be a Trustee, officer or employee of the Fund, to engage in any
other business or to devote his or her time and attention in part to the
- 3 -
<PAGE>
management or other aspects of any other business, whether of a similar
nature or a dissimilar nature.
7. Expenses.
(a) During the term of this Contract, each Series will bear
all expenses, not specifically assumed by Manager, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each Series will include but not be
limited to the following (or each Series' proportionate share of the
following): (i) the cost (including brokerage commissions) of securities
purchased or sold by the Series and any losses incurred in connection
therewith; (ii) fees payable to and expenses incurred on behalf of the
Series by Manager under this Contract; (iii) expenses of organizing the
Fund and the Series; (iv) filing fees and expenses relating to the
registrations and qualification of the Series' shares and the Fund under
federal and/or state securities laws and maintaining such registration and
qualifications; (v) fees and salaries payable to the Fund's Trustees and
officers who are not interested persons of the Fund or Manager; (vi) all
expenses incurred in connection with the Trustees' services, including
travel expenses in the case of Trustees who are not interested persons of
the Fund or Manager; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items
of deposit and other insurance and fidelity bonds; (ix) any costs,
expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Fund or Series for violation of any law
and any indemnification relating thereto; (x) legal, accounting and
auditing expenses, including legal fees of special counsel for those
Trustees of the Fund who are not interested persons of the Fund; (xi)
charges of custodians, transfer agents and other agents; (xii) costs of
preparing share certificates; (xiii) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for
existing shareholders; (xiv) costs of mailing prospectuses and supplements
thereto, statements of additional information and supplements thereto,
reports and proxy materials to existing shareholders; (xv) any
extraordinary expenses (including fees and disbursements of counsel, costs
of actions, suits or proceedings to which the Fund is a party and the
expenses the Fund may incur as a result of its legal obligation to provide
indemnification to its officers, Trustees, agents and shareholders or to
Manager) incurred by the Fund or Series; (xvi) fees, voluntary assessments
and other expenses incurred in connection with membership in investment
company organizations; (xvii) cost of mailing and tabulating proxies and
costs of meetings of shareholders, the Board and any committees thereof;
(xviii) the cost of investment company literature and other publications
provided by the Fund to its Trustees and officers; (xix) costs of mailing,
stationery and communications equipment; (xx) expenses incident to any
dividend, withdrawal or redemption options; (xxi) charges and expenses of
any outside pricing service used to value portfolio securities and (xxii)
interest on borrowings of the Fund.
- 4 -
<PAGE>
(c) Manager will assume the cost of any compensation for
services provided to the Fund received by the officers of the Fund and by
those Trustees who are interested persons of the Fund.
(d) The payment or assumption by Manager of any expenses of
the Fund or a Series that Manager is not required by this Contract to pay
or assume shall not obligate Manager to pay or assume the same or any
similar expense of the Fund or a Series on any subsequent occasion.
8. Compensation.
(a) For the services provided and the expenses assumed
pursuant to this Contract with respect to the Mitchell Hutchins/Kidder,
Peabody Small Cap Growth Fund, the Fund will pay to Manager a fee,
computed daily and paid monthly, at an annual rate of 1.00% of such
Series' average daily net assets up to $25 million; and .90% of such
Series' average daily net assets over $25 million.
(b) For the services provided and the expenses assumed pursuant
to this Contract with respect to any Series hereafter established, the
Trust will pay to Manager from the assets of such Series a fee in an
amount to be agreed upon in a written fee agreement ("Fee Agreement")
executed by the Fund on behalf of such Series and by Manager. All such
Fee Agreements shall provide that they are subject to all terms and
conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to
Manager on or before the first business day of the next succeeding
calendar month.
(d) If this Contract becomes effective or terminates before
the end of any month, the fee for the period from the effective day to the
end of the month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full month in which such
effectiveness or termination occurs.
9. Limitation of Liability of Manager. Manager and its
delegates, including any Sub-Adviser or Sub-Administrator to the Fund,
shall not be liable for any error of judgment or mistake of law or for any
loss suffered by any Series, the Fund or any of its shareholders, in
connection with the matters to which this Contract relates, except to the
extent that such a loss results from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this
Contract. Any person, even though also an officer, director, employee, or
agent of Manager, who may be or become an officer, Trustee, employee or
agent of the Fund shall be deemed, when rendering services to any Series
or the Fund or acting with respect to any business of such Series or the
Fund, to be rendering such service to or acting solely for the Series or
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the Fund and not as an officer, director, employee, or agent or one under
the control or direction of Manager even though paid by it.
10. Duration and Termination.
(a) This Contract shall become effective upon the date
hereabove written provided that, with respect to any Series, this Contract
shall not take effect unless it has first been approved (i) by a vote of a
majority of those Trustees of the Fund who are not parties to this
Contract or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by
vote of a majority of that Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this
Contract shall continue in effect for two years from the above written
date. Thereafter, if not terminated, this Contract shall continue
automatically for successive periods of twelve months each, provided that
such continuance is specifically approved at least annually (i) by a vote
of a majority of those Trustees of the Fund who are not parties to this
Contract or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by the
Board or by vote of a majority of the outstanding voting securities of a
Series with respect to that Series.
(c) Notwithstanding the foregoing, with respect to any Series
this Contract may be terminated at any time, without the payment of any
penalty, by vote of the Board or by a vote of a majority of the
outstanding voting securities of such Series on sixty days' written notice
to Manager or by Manager at any time, without the payment of any penalty,
on sixty days' written notice to the Fund. Termination of this Contract
with respect to any given Series shall in no way affect the continued
validity of this Contract or the performance thereunder with respect to
any other Series. This Contract will automatically terminate in the event
of its assignment.
11. Amendment of this Contract. No provision of this
Contract 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, and no material
amendment of this Contract as to any given Series shall be effective until
approved by vote of a majority of such Series' outstanding voting
securities.
12. Governing Law. This Contract shall be construed in
accordance with the laws of the State of Delaware, without giving effect
to the conflicts of laws principles thereof, and in accordance with the
1940 Act, provided, however, that Section 13 below will be construed in
accordance with the laws of the Commonwealth of Massachusetts. To the
extent that the applicable laws of the State of Delaware or the
Commonwealth of Massachusetts conflict with the applicable provisions of
the 1940 Act, the latter shall control.
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<PAGE>
13. Limitation of Liability of the Trustees and Shareholders
of the Trust. No Trustee, shareholder, officer, employee or agent of
any Series shall be liable for any obligations of any Series or the Fund
under this Contract, and Manager agrees that, in asserting any rights or
claims under this Contract, it shall look only to the assets and property
of the Fund in settlement of such right or claim, and not to such Trustee,
shareholder, officer, employee or agent. The Fund represents that a copy
of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts and the Boston City Clerk.
14. Miscellaneous. The captions in this Contract 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 Contract shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this
Contract shall not be affected thereby. This Contract shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors. As used in this Contract, the terms "majority of
the outstanding voting securities", "affiliated person", "interested
person", "assignment", "broker", "investment adviser", "national
securities exchange", "net assets", "prospectus", "sale", "sell" and
"security" shall have the same meaning as such terms have in the 1940 Act,
subject to such exemption as may be granted by the Securities and Exchange
Commission by any rule, regulation or order. Where the effect of a
requirement of the 1940 Act reflected in any provision of this Contract is
affected by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or
order.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated as of the day and
year first above written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
_____________________ By _____________________________________
Attest: MITCHELL HUTCHINS/KIDDER, PEABODY
INVESTMENT TRUST III
_____________________ By _____________________________________
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<PAGE>
The Board of Trustees and Shareholders
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
In planning and performing our audit of the financial statements of
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund for the year ended
July 31, 1995, we considered its internal control structure, including
procedures for safeguarding securities, in order to determine our
auditing procedures for the purpose of expressing our opinion on the
financial statements and to comply with the requirements of Form N-SAR,
not to provide assurance on the internal control structure.
The management of Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
is responsible for establishing and maintaining an internal control
structure. In fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs
of internal control structure policies and procedures. Two of the
objectives of an internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are safeguarded against
loss from unauthorized use or disposition and that transactions are executed
in accordance with management's authorization and recorded properly to permit
preparation of financial statements in conformity with generally accepted
accounting principles.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that it
may become inadequate because of changes in conditions or that the
effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weaknesses under standards established by the American Institute of Certified
Public Accountants. A material weakness is a condition in which the design or
operation of the specific internal control structure elements does not reduce
to a relatively low level the risk that errors or irregularities in amounts
that would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. However, we noted no
matters involving the internal control structure, including procedures for
safeguarding securities, that we consider to be material weaknesses as defined
above as of July 31, 1995.
This report is intended solely for the information and use of management and
the Securities and Exchange Commission.
ERNST & YOUNG LLP
September 21, 1995
