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JANUS ASPEN SERIES
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995 as supplemented August 25, 1995
MONEY MARKET PORTFOLIO
Money Market Portfolio (the "Portfolio") is a separate series of Janus
Aspen Series, a Delaware business trust (the "Trust"). Each series of the Trust
represents shares of beneficial interest in a separate portfolio of securities
and other assets with its own objective and policies. The Portfolio is managed
separately by Janus Capital Corporation ("Janus Capital").
Shares of the Portfolio may be purchased only by the separate accounts of
insurance companies for the purpose of funding variable life insurance policies
and variable annuity contracts (collectively "variable insurance contracts") and
by certain qualified retirement plans. The Portfolio is recently organized and
has a limited operating history.
This Statement of Additional Information ("SAI") is not a Prospectus and
should be read in conjunction with the Prospectus dated May 1, 1995, as
supplemented August 25, 1995, which is incorporated by reference into this SAI
and may be obtained from your insurance company. This SAI contains additional
and more detailed information about the Portfolio's operations and activities
than the Prospectus.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
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Investment Policies and Restrictions ...................................... 3
Types of Securities and Investment Techniques ............................. 4
Performance Data .......................................................... 7
Determination of Net Asset Value .......................................... 8
Investment Adviser ........................................................ 9
Custodian, Transfer Agent and Certain Affiliations ........................ 10
Portfolio Transactions and Brokerage ...................................... 10
Officers and Trustees ..................................................... 11
Purchase of Shares ........................................................ 13
Redemption of Shares ...................................................... 13
Dividends and Tax Status .................................................. 13
Principal Shareholders .................................................... 14
Miscellaneous Information ................................................. 14
The Trust ............................................................... 14
Shares of the Trust ..................................................... 14
Voting Rights ........................................................... 14
Independent Accountants ................................................. 15
Registration Statement .................................................. 15
Financial Statements ...................................................... 15
Appendix A - Description of Securities Ratings ............................ 16
Appendix B - Description of Municipal Securities .......................... 18
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INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
As discussed in the Prospectus, the Portfolio's investment objective is to
seek maximum current income to the extent consistent with stability of capital.
There can be no assurance that the Portfolio will achieve its investment
objective or maintain a stable net asset value of $1.00 per share. The
investment objective of the Portfolio is not fundamental and may be changed by
the Trustees of the Trust (the "Trustees") without shareholder approval.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio has adopted certain
fundamental investment restrictions that cannot be changed without shareholder
approval. Shareholder approval means approval by the lesser of (i) more than 50%
of the outstanding voting securities of the Trust (or the Portfolio if a matter
affects just the Portfolio), or (ii) 67% or more of the voting securities
present at a meeting if the holders of more than 50% of the outstanding voting
securities of the Trust (or the Portfolio) are present or represented by proxy.
As used in the restrictions set forth below and as used elsewhere in this
SAI, the term "U.S. Government Securities" shall have the meaning set forth in
the Investment Company Act of 1940, as amended (the "1940 Act"). The 1940 Act
defines U.S. government securities as securities issued or guaranteed by the
United States government, its agencies or instrumentalities and has been
interpreted to include repurchase agreements covered and municipal securities
refunded with escrowed U.S. government securities ("U.S. Government
Securities").
The Portfolio has adopted the following fundamental policies:
(1) With respect to 75% of its assets, the Portfolio may not purchase a
security other than a U.S. Government Security, if, as a result, more than 5% of
its total assets would be invested in the securities of a single issuer or the
Portfolio would own more than 10% of the outstanding voting securities of any
single issuer. (As noted in the Prospectus, the Portfolio is currently subject
to the greater diversification standards of Rule 2a-7, which are not
fundamental.)
(2) The Portfolio may not purchase securities if more than 25% of the value
of its total assets would be invested in the securities of issuers conducting
their principal business activities in the same industry; provided that: (i)
there is no limit on investments in U.S. Government Securities or in obligations
of domestic commercial banks (including U.S. branches of foreign banks subject
to regulations under U.S. laws applicable to domestic banks and, to the extent
that its parent is unconditionally liable for the obligation, foreign branches
of U.S. banks); (ii) this limitation shall not apply to the Portfolio's
investments in municipal securities; (iii) there is no limit on investment in
issuers domiciled in a single country; (iv) financial service companies are
classified according to the end users of their services (for example, automobile
finance, bank finance and diversified finance are each considered to be a
separate industry); and (v) utility companies are classified according to their
services (for example, gas, gas transmission, electric, and telephone are each
considered to be a separate industry).
(3) The Portfolio may not act as an underwriter of securities issued by
others, except to the extent that it may be deemed an underwriter in connection
with the disposition of its portfolio securities.
(4) The Portfolio may not lend any security or make any other loan if, as a
result, more than 25% of its total assets would be lent to other parties (but
this limitation does not apply to purchases of commercial paper, debt securities
or repurchase agreements).
(5) The Portfolio may not purchase or sell real estate or any interest
therein, except that the Portfolio may invest in debt obligations secured by
real estate or interests therein or securities issued by companies that invest
in real estate or interests therein.
(6) The Portfolio may borrow money for temporary or emergency purposes (not
for leveraging) in an amount not exceeding 25% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings). If
borrowings exceed 25% of the value of the Portfolio's total assets by reason of
a decline in net assets, it will reduce its borrowings within three business
days to the extent necessary to comply with the 25% limitation. Reverse
repurchase agreements or the segregation of assets in connection with such
agreements shall not be considered borrowing for the purposes of this limit.
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(7) The Portfolio may, notwithstanding any other investment policy or
restriction (whether or not fundamental), invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies and restrictions as the
Portfolio.
The Portfolio has adopted the following nonfundamental investment
restrictions that may be changed by the Trustees without shareholder approval:
(1) The Portfolio may not invest in securities or enter into repurchase
agreements with respect to any securities if, as a result, more than 10% of its
net assets would be invested in repurchase agreements not entitling the holder
to payment of principal within seven days and in other securities that are not
readily marketable ("illiquid securities"). The Trustees, or the Portfolio's
investment adviser acting pursuant to authority delegated by the Trustees, may
determine that a readily available market exists for certain securities such as
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, Section 4(2) commercial paper and municipal
lease obligations. Accordingly, such securities may not be subject to the
foregoing limitation.
(2) The Portfolio may not invest in the securities of another investment
company, except to the extent permitted by the 1940 Act.
(3) The Portfolio may not purchase securities on margin, or make short
sales of securities, except for short sales against the box and the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities.
(4) The Portfolio may not invest more than 5% of the value of its total
assets in the securities of any issuer that has conducted continuous operations
for less than three years, including operations of predecessors, except that
this shall not affect the Portfolio's ability to invest in U.S. Government
Securities, fully collateralized debt obligations, municipal obligations,
securities that are rated by at least one nationally recognized statistical
rating organization and securities guaranteed as to principal and interest by an
issuer in whose securities the Portfolio could invest.
(5) The Portfolio may not pledge, mortgage, hypothecate or encumber any of
its assets except to secure permitted borrowings or in connection with permitted
short sales.
(6) The Portfolio may not invest directly in interests in oil and gas or
interests in other mineral exploration or development programs or leases;
however, the Portfolio may own debt securities of companies engaged in those
businesses.
(7) The Portfolio may not invest in companies for the purpose of exercising
control of management.
For purposes of the Portfolio's restriction on investing in a particular
industry, the Portfolio will rely primarily on industry classifications as
published by Bloomberg L.P., subject to the exceptions noted in fundamental
restriction number two above. To the extent that such classifications are so
broad that the primary economic characteristics in a single class are materially
different, the Portfolio may further classify issuers in accordance with
industry classifications as published by the Securities and Exchange Commission.
TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
The Portfolio may invest only in "eligible securities" as defined in Rule
2a-7 adopted under the 1940 Act. Generally, an eligible security is a security
that (i) is denominated in U.S. dollars and has a remaining maturity of 397 days
or less (as calculated pursuant to Rule 2a-7); (ii) is rated, or is issued by an
issuer with short-term debt outstanding that is rated, in one of the two highest
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or, if only one NRSRO has issued a rating, by that
NRSRO (the "Requisite NRSROs") or is unrated and of comparable quality to a
rated security, as determined by Janus Capital; and (iii) has been determined by
Janus Capital to present minimal credit risks pursuant to procedures approved by
the Trustees. In addition, the Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less. A description of the ratings of some
NRSROs appears in Appendix A.
Under Rule 2a-7, the Portfolio may not invest more than five percent of its
total assets in the securities of any one issuer other than U.S. Government
Securities, provided that in certain cases it may invest more than 5% of its
assets in a single issuer for a period of up to three business days.
Pursuant to Rule 2a-7, the Portfolio will invest at least 95% of its total
assets in "first-tier" securities. First-tier securities are eligible securities
that are rated, or are issued by an issuer with short-term debt
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outstanding that is rated, in the highest rating category by the Requisite
NRSROs or are unrated and of comparable quality to a rated security. In
addition, the Portfolio may invest in "second-tier" securities which are
eligible securities that are not first-tier securities. However, the Portfolio
may not invest in a second-tier security if immediately after the acquisition
thereof it would have invested more than (i) the greater of one percent of its
total assets or one million dollars in second-tier securities issued by that
issuer, or (ii) five percent of its total assets in second-tier securities.
The following discussion of types of securities in which the Portfolio may
invest supplements and should be read in conjunction with the Prospectus.
PARTICIPATION INTERESTS
The Portfolio may purchase participation interests in loans or securities
in which it may invest directly. Participation interests are generally sponsored
or issued by banks or other financial institutions. A participation interest
gives the Portfolio an undivided interest in the underlying loans or securities
in the proportion that the Portfolio's interest bears to the total principal
amount of the underlying loans or securities. Participation interests, which may
have fixed, floating or variable rates, may carry a demand feature backed by a
letter of credit or guarantee of a bank or institution permitting the holder to
tender them back to the bank or other institution. For certain participation
interests, the Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or a part of the Portfolio's participation interest.
The Portfolio intends to exercise any demand rights it may have upon default
under the terms of the loan or security, to provide liquidity or to maintain or
improve the quality of the Portfolio's investment portfolio. The Portfolio will
only purchase participation interests that Janus Capital determines present
minimal credit risks.
VARIABLE AND FLOATING RATE NOTES
The Portfolio also may purchase variable and floating rate demand notes of
corporations, which are unsecured obligations redeemable upon not more than 30
days' notice. These obligations include master demand notes that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a seven day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid security.
MORTGAGE- AND ASSET-BACKED SECURITIES
The Portfolio may invest in mortgage-backed securities, which represent an
interest in a pool of mortgages made by lenders such as commercial banks,
savings and loan institutions, mortgage bankers, mortgage brokers and savings
banks. Mortgage-backed securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. In
contrast, mortgage-backed securities provide periodic payments which consist of
interest and, in most cases, principal. In effect, these payments are a
"pass-through" of the periodic payments and optional prepayments made by the
individual borrowers on their mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Additional payments to holders of
mortgage-backed securities are caused by prepayments resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
As prepayment rates of individual pools of mortgage loans vary widely, it
is not possible to predict accurately the average life of a particular security.
Although mortgage-backed securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably the effective maturities.
Mortgage-backed securities may have varying assumptions for average life. The
volume of prepayments of principal on a pool of mortgages underlying a
particular security will influence the yield of that security, and the principal
returned to the Portfolio may be reinvested in instruments whose yield may be
higher or lower than that which might have been obtained had the prepayments not
occurred. When interest rates are declining, prepayments usually increase, with
the result that reinvestment of principal prepayments will be at a lower rate
than the rate applicable to the original mortgage-backed security.
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The Portfolio may invest in mortgage-backed securities that are issued by
agencies or instrumentalities of the U.S. government. The Government National
Mortgage Association ("GNMA") is the principal federal government guarantor of
mortgage-backed securities. GNMA is a wholly-owned U.S. government corporation
within the Department of Housing and Urban Development. GNMA Certificates are
debt securities which represent an interest in one mortgage or a pool of
mortgages which are insured by the Federal Housing Administration or the Farmers
Home Administration or are guaranteed by the Veterans Administration. The
Portfolio may also invest in pools of conventional mortgages which are issued or
guaranteed by agencies of the U.S. government. GNMA pass-through securities are
considered to be riskless with respect to default in that (i) the underlying
mortgage loan portfolio is comprised entirely of government-backed loans and
(ii) the timely payment of both principal and interest on the securities is
guaranteed by the full faith and credit of the U.S. government, regardless of
whether or not payments have been made on the underlying mortgages. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the market value of the Portfolio's GNMA
securities can be expected to fluctuate in response to changes in prevailing
interest rate levels.
Residential mortgage loans are pooled also by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a privately managed, publicly chartered
agency created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. FHLMC issues
participation certificates ("PCs") which represent interests in mortgages from
FHLMC's national portfolio. The mortgage loans in FHLMC's portfolio are not U.S.
government backed; rather, the loans are either uninsured with loan-to-value
ratios of 80% or less, or privately insured if the loan-to-value ratio exceeds
80%. FHLMC guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs; the U.S. government does not guarantee any aspect of
FHLMC PCs.
The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private shareholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/servicers
which include savings and loan associations, savings banks, commercial banks,
credit unions and mortgage bankers. FNMA guarantees the timely payment of
principal and interest on the pass-through securities issued by FNMA; the U.S.
government does not guarantee any aspect of the FNMA pass-through securities.
The Portfolio may also invest in privately-issued mortgage-backed
securities to the extent permitted by their investment restrictions.
Mortgage-backed securities offered by private issuers include pass-through
securities comprised of pools of conventional residential mortgage loans;
mortgage-backed bonds which are considered to be debt obligations of the
institution issuing the bonds and which are collateralized by mortgage loans;
and collateralized mortgage obligations ("CMOs") which are collateralized by
mortgage-backed securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages.
Asset-backed securities represent direct or indirect participation in, or
are secured by and payable from, assets other than mortgage-backed assets such
as motor vehicle installment sales contracts, installment loan contracts, leases
of various types of real and personal property and receivables from revolving
credit agreements (credit cards). Asset-backed securities have yield
characteristics similar to those of mortgage-backed securities and, accordingly,
are subject to many of the same risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which the Portfolio sells
a security and simultaneously commits to repurchase that security from the buyer
at an agreed upon price on an agreed upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate. The
Portfolio will use the proceeds of reverse repurchase agreements only to satisfy
unusually heavy redemption requests or for other temporary or emergency purposes
without the necessity of selling portfolio securities or to earn additional
income on portfolio securities.
Generally, a reverse repurchase agreement enables the Portfolio to recover
for the term of the reverse repurchase agreement all or most of the cash
invested in the portfolio securities sold and to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Portfolio of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise. In addition,
interest costs on the money received in a reverse repurchase agreement may
exceed the return received on the investments made by the Portfolio with those
monies.
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WHEN ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. The Portfolio will enter into such transactions only when it has the
intention of actually acquiring the securities. To facilitate such acquisitions,
the Portfolio's custodian will segregate cash or high quality liquid assets in
an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities, sales of
the segregated securities or from other available sources of cash. If it chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, the Portfolio could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. At the time it makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, the Portfolio will record the transaction as a purchase and thereafter
reflect the value of such securities in determining its net asset value.
MUNICIPAL LEASES
The Portfolio may invest in municipal leases. Municipal leases frequently
have special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
government issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations of many
state constitutions and statutes are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. The Portfolio
will only purchase municipal leases subject to a non-appropriation clause when
the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, or guarantee of a bank or other entity that meets
the criteria described in the Prospectus under "Taxable Investments."
In evaluating municipal lease obligations, Janus Capital will consider such
factors as it deems appropriate, including: (a) whether the lease can be
canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor; (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality; (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding; (f) whether the security is backed by a
credit enhancement such as insurance; and (g) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services other
than those covered by the lease obligation. If a lease is backed by an
unconditional letter of credit or other unconditional credit enhancement, then
Janus Capital may determine that a lease is an eligible security solely on the
basis of its evaluation of the credit enhancement.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of the Portfolio.
PERFORMANCE DATA
As described in the Prospectus, the Portfolio may provide current
annualized and effective annualized yield quotations based on its daily
dividends. These quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. All performance
information supplied by the Portfolio in advertising is historical and is not
intended to indicate future returns.
In performance advertising, the Portfolio may compare any of its
performance information with data published by independent evaluators such as
Morningstar, Inc., Lipper Analytical Services, Inc., or CDC/Wiesenberger,
Donoghue's Money Fund Report or other companies which track the investment
performance of investment companies ("Fund Tracking Companies"). The Funds may
also compare their performance information with the performance of recognized
stock, bond and other indices, including but not limited to the Municipal Bond
Buyers Indices, the Salomon Brothers Bond Index, the Lehman Brothers Bond Index,
the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, U.S. Treasury bonds, bills or notes and changes in the Consumer Price
Index as published by the U.S. Department of
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Commerce. The Portfolio may refer to general market performance over past time
periods such as those published by Ibbotson Associates (for instance, its
"Stocks, Bonds, Bills and Inflation Yearbook"). The Portfolio may also refer in
such materials to mutual fund performance rankings and other data published by
Fund Tracking Companies. Performance advertising may also refer to discussions
of the Portfolio and comparative mutual fund data and ratings reported in
independent periodicals, such as newspapers and financial magazines.
Any current yield quotation of the Portfolio which is used in such a manner
as to be subject to the provisions of Rule 482(d) under the Securities Act of
1933, as amended, shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent, based on a specific seven
calendar day period. The Portfolio's current yield shall be calculated by (a)
determining the net change during a seven calendar day period in the value of a
hypothetical account having a balance of one share at the beginning of the
period, (b) dividing the net change by the value of the account at the beginning
of the period to obtain a base period return, and (c) multiplying the quotient
by 365/7 (i.e., annualizing). For this purpose, the net change in account value
will reflect the value of additional shares purchased with dividends declared on
the original share and dividends declared on both the original share and any
such additional shares, but will not reflect any realized gains or losses from
the sale of securities or any unrealized appreciation or depreciation on
portfolio securities. In addition, the Portfolio may advertise effective yield
quotations. Effective yield quotations are calculated by adding 1 to the base
period return, raising the sum to a power equal to 365/7, and subtracting 1 from
the result (i.e., compounding).
Income calculated for the purpose of determining the Portfolio's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for the Portfolio may differ from the rate
of distribution the Portfolio paid over the same period or the rate of income
reported in the Portfolio's financial statements.
Although published yield information is useful to investors in reviewing
the Portfolio's performance, investors should be aware that the Portfolio's
yield fluctuates from day to day and that the Portfolio's yield for any given
period is not an indication or representation by the Portfolio of future yields
or rates of return on the Portfolio's shares. Also, because shares of the
Portfolio may only be purchased through variable insurance contracts, the
prospectus of the participating insurance company sponsoring such contract
should be carefully reviewed for information on relevant charges and expenses.
The Portfolio's yield is not fixed or guaranteed, and an investment in the
Portfolio is not insured. Accordingly, the Portfolio's yield information may not
necessarily be used to compare Portfolio shares with investment alternatives
which, like money market instruments or bank accounts, may provide a fixed rate
of interest. In addition, because investments in the Portfolio are not insured
or guaranteed, the Portfolio's yield information may not necessarily be used to
compare the Portfolio with investment alternatives which are insured or
guaranteed.
The Portfolio's current yield and effective yield for the seven day period
ended June 30, 1995, were 5.39% and 5.53%, respectively.
DETERMINATION OF NET ASSET VALUE
Pursuant to the rules of the Securities and Exchange Commission, the
Trustees have established procedures to stabilize the Portfolio's net asset
value at $1.00 per share. These procedures include a review of the extent of any
deviation of net asset value per share as a result of fluctuating interest
rates, based on available market rates, from the Portfolio's $1.00 amortized
cost price per share. Should that deviation exceed 1/2 of 1%, the Trustees will
consider whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to shareholders. Such action may include
redemption of shares in kind, selling portfolio securities prior to maturity,
reducing or withholding dividends and utilizing a net asset value per share as
determined by using available market quotations. The Portfolio i) will maintain
a dollar-weighted average portfolio maturity of 90 days or less; ii) will not
purchase any instrument with a remaining maturity greater than 397 days or
subject to a repurchase agreement having a duration of greater than 397 days;
iii) will limit portfolio investments, including repurchase agreements, to those
U.S. dollar-denominated instruments that Janus Capital has determined present
minimal credit risks pursuant to procedures established by the Trustees; and iv)
will comply with certain reporting and recordkeeping procedures. The Trust has
also established procedures to ensure that portfolio securities meet the
Portfolio's high quality criteria.
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INVESTMENT ADVISER
As stated in the Prospectus, the Portfolio has an Investment Advisory
Agreement with Janus Capital, 100 Fillmore Street, Suite 300, Denver, Colorado
80206-4923. The Advisory Agreement provides that Janus Capital will furnish
continuous advice and recommendations concerning the Funds' investments, provide
office space for the Portfolio, pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital,
and pay all expenses of promoting the sale of Portfolio shares other than the
cost of complying with applicable laws relating to the offer or sale of shares
of the Portfolio. Janus Capital also may make payments to selected broker-dealer
firms or institutions which were instrumental in the acquisition of shareholders
for the Funds or which performed services with respect to shareholder accounts.
The minimum aggregate size required for eligibility for such payments, and the
factors in selecting the broker-dealer firms and institutions to which they will
be made, are determined from time to time by Janus Capital. Janus Capital is
also authorized to perform the management and administrative services necessary
for the operation of the Portfolio.
The Portfolio pays custodian agent fees and expenses, brokerage commissions
and dealer spreads and other expenses in connection with the execution of
Portfolio transactions, legal and accounting expenses, interest and taxes,
registration fees, expenses of shareholders' meetings, and reports to
shareholders, fees and expenses of Trustees who are not affiliated with Janus
Capital, and other costs of complying with applicable laws regulating the sale
of Portfolio shares. Pursuant to the Advisory Agreement, Janus Capital furnishes
certain other services, including net asset value determination, portfolio
accounting and record keeping for which the Portfolio may reimburse Janus
Capital for its costs.
The Portfolio has agreed to compensate Janus Capital for its advisory
services by the monthly payment of an advisory fee at the annual rate of .25% of
the Portfolio's average daily net assets. Janus Capital has agreed to reimburse
the Portfolio by the amount, if any, that the Portfolio's normal operating
expenses chargeable to its income account in any fiscal year, including the
investment advisory fee but excluding brokerage commissions, interest, taxes and
extraordinary expenses, exceed 0.50% of average daily net assets. Mortality
risk, expense risk and other charges imposed by participating insurance
companies are excluded from the above expense limitation.
For the semiannual period ended June 30, 1995, the Portfolio paid an
advisory fee of $308, after applicable fee waivers. Without the waiver, the
advisory fee would have been $1723.
The Advisory Agreement became effective on March 10, 1995 and will continue
in effect until June 16, 1996, and thereafter from year to year so long as such
continuance is approved annually by a majority of the Portfolio's Trustees who
are not parties to the Advisory Agreement or interested persons of any such
party, and by either a majority of the outstanding voting shares or the
Trustees. The Advisory Agreement i) may be terminated without the payment of any
penalty by the Portfolio or Janus Capital on 60 days' written notice; ii)
terminates automatically in the event of its assignment; and iii) generally, may
not be amended without the approval by vote of a majority of the Trustees,
including the Trustees who are not interested persons of the Portfolio or Janus
Capital and, to the extent required by the 1940 Act, the vote of a majority of
the outstanding voting securities of the Portfolio.
Janus Capital also performs investment advisory services for other mutual
funds, and for individual, charitable, corporate and retirement accounts.
Investment decisions for each account managed by Janus Capital, including the
Portfolio, are made independently from those for any other account that is or
may in the future become managed by Janus Capital or its affiliates. If,
however, a number of accounts managed by Janus Capital are contemporaneously
engaged in the purchase or sale of the same security, the orders may be
aggregated and/or the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by an account or the size of the position obtained or
liquidated for an account.
Each account managed by Janus Capital has its own investment objective and
is managed in accordance with that objective by a particular portfolio manager
or team of portfolio managers. As a result, from time to time two or more
different managed accounts may pursue divergent investment strategies with
respect to investments or categories of investments.
As indicated in the Prospectus, Janus Capital permits investment and other
personnel to purchase and sell securities for their own accounts in accordance
with a Janus Capital policy regarding personal investing by directors, officers
and employees of Janus Capital and the Portfolio. The policy requires investment
personnel and officers of Janus Capital, inside directors of Janus Capital and
the Portfolio and other designated persons deemed to have access to current
trading information to pre-clear all transactions in
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securities not otherwise exempt under the policy. Requests for trading authority
will be denied when, among other reasons, the proposed personal transaction
would be contrary to the provisions of the policy or would be deemed to
adversely affect any transaction then known to be under consideration for or to
have been effected on behalf of any client account, including the Portfolio.
In addition to the pre-clearance requirement described above, the policy
subjects investment personnel, officers and directors/Trustees of Janus Capital
and the Portfolio to various trading restrictions and reporting obligations. All
reportable transactions are reviewed for compliance with Janus Capital's policy.
Those persons also may be required under certain circumstances to forfeit their
profits made from personal trading.
The provisions of the policy are administered by and subject to exceptions
authorized by Janus Capital.
Kansas City Southern Industries, Inc., a publicly traded holding company
whose primary subsidiaries are engaged in transportation, information processing
and financial services ("KCSI") owns approximately 83% of Janus Capital. Thomas
H. Bailey, the President and Chairman of the Board of Janus Capital, owns 12% of
its voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's Board.
CUSTODIAN, TRANSFER AGENT AND CERTAIN AFFILIATIONS
United Missouri Bank, N.A., P.O. Box 419226, Kansas City, Missouri
64141-6226, is the Portfolio's custodian. The custodian holds the Portfolio's
assets in safekeeping and collects and remits the income thereon, subject to the
instructions of the Portfolio.
Janus Service Corporation ("Janus Service"), P.O. Box 173375, Denver,
Colorado 80217-3375, a wholly-owned subsidiary of Janus Capital, is the
Portfolio's transfer agent. In addition, Janus Service provides certain other
administrative, recordkeeping and shareholder relations services to the
Portfolio. Janus Service is not compensated for its services, except for
out-of-pocket costs.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Decisions as to the assignment of portfolio business for the Portfolio and
negotiation of its commission rates are made by Janus Capital whose policy is to
obtain the "best execution" (prompt and reliable execution at the most favorable
security price) of all portfolio transactions. The Advisory Agreement
specifically provides that in placing portfolio transactions for the Portfolio,
Janus Capital may agree to pay brokerage commissions for effecting a securities
transaction in an amount higher than another broker or dealer would have charged
for effecting that transaction as authorized, under certain circumstances, by
the Exchange Act.
In selecting brokers and dealers and in negotiating commissions, Janus
Capital considers a number of factors, including but not limited to: Janus
Capital's knowledge of currently available negotiated commission rates or prices
of securities currently available and other current transaction costs; the
nature of the security being traded; the size and type of the transaction; the
nature and character of the markets for the security to be purchased or sold;
the desired timing of the trade; the activity existing and expected in the
market for the particular security; confidentiality; the quality of the
execution, clearance and settlement services; financial stability of the broker
or dealer; the existence of actual or apparent operational problems of any
broker or dealer; and research products or services provided. In recognition of
the value of the foregoing factors, Janus Capital may place portfolio
transactions with a broker or dealer with whom it has negotiated a commission
that is in excess of the commission another broker or dealer would have charged
for effecting that transaction if Janus Capital determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research provided by such broker or dealer viewed in terms of
either that particular transaction or of the overall responsibilities of Janus
Capital. Research may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and government
officials; comparative performance evaluation and technical measurement services
and quotation services, and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist Janus Capital in carrying out its responsibilities. Research received
from brokers or dealers is supplemental to Janus Capital's own research efforts.
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For the semiannual period ended June 30, 1995, the Portfolio did not incur
any brokerage commissions.
Janus Capital may use research products and services in servicing other
accounts in addition to the Portfolio. If Janus Capital determines that any
research product or service has a mixed use, such that it also serves functions
that do not assist in the investment decision-making process, Janus Capital may
allocate the costs of such service or product accordingly. Only that portion of
the product or service that Janus Capital determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for Janus Capital.
The Advisory Agreement also authorizes Janus Capital to consider sales of
Portfolio shares or shares of other Janus funds by a broker-dealer or the
recommendation of a broker-dealer to its customers that they purchase such
shares as a factor in the selection of broker-dealers to execute Portfolio
transactions. Janus Capital may also consider payments made by brokers effecting
transactions for a Portfolio i) to the Portfolio or ii) to other persons on
behalf of the Portfolio for services provided to the Portfolio for which it
would be obligated to pay. In placing portfolio business with such
broker-dealers, Janus Capital will seek the best execution of each transaction.
When the Funds purchase or sell a security in the over-the-counter market,
the transaction takes place directly with a principal market-maker, without the
use of a broker, except in those circumstances where in the opinion of Janus
Capital better prices and executions will be achieved through the use of a
broker.
OFFICERS AND TRUSTEES
The following are the names of the Trustees and officers of Janus Aspen
Series, a Delaware business trust of which the Portfolio is a series, together
with a brief description of their principal occupations during the last five
years.
Thomas H. Bailey*# - Trustee, Chairman and President
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Trustee, Chairman and President of Janus Investment Fund+. Chairman,
Director and President of Janus Capital. Chairman of IDEX Management, Inc.,
Largo, Florida (50% subsidiary of Janus Capital and investment adviser to a
group of mutual funds) ("IDEX").
James P. Craig*# - Trustee and Executive Vice President
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Trustee and Executive Vice President of Janus Investment Fund+. Vice
President and Director of Janus Capital. Portfolio Manager of Janus Fund
and Janus Balanced Fund series of Janus Investment Fund.
Sharon S. Pichler* - Executive Vice President and Portfolio Manager
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Executive Vice President of Janus Money Market Fund, Janus Tax-Exempt Money
Market Fund and Janus Government Money Market Fund series of Janus
Investment Fund. Vice President of Janus Capital. Formerly, Assistant Vice
President and portfolio manager at USAA Investment Management Co.
(1990-1994) and teaching associate at The University of Texas at San
Antonio (1984-1990).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Vice President and General Counsel of Janus Investment Fund+. Vice
President, Secretary and General Counsel of Janus Capital. Vice President,
General Counsel and Director of Janus Service and Janus Distributors.
- --------------------------------------------------------------------------------
* Interested person of the Trust and of Janus Capital.
# Member of the Executive Committee.
+ Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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Steven R. Goodbarn* - Treasurer and Chief Financial Officer
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Treasurer and Chief Financial Officer of Janus Investment Fund+. Vice
President of Finance, Chief Financial Officer and Treasurer of Janus
Service, Janus Distributors and Janus Capital. Director of IDEX. Formerly
(1979 to 1992), with the accounting firm of Price Waterhouse, Denver,
Colorado, and Kansas City, Missouri.
Kelley Abbott Howes* - Secretary
100 Fillmore Street, Suite 300
Denver, CO 80206-4923
Secretary of Janus Investment Fund. Associate Counsel of Janus Capital.
Formerly (1990 to 1994), with The Boston Company Advisors, Inc., Boston,
Massachusetts (mutual fund administration and advisory services).
John W. Shepardson# - Trustee
910 16th Street, Suite 222
Denver, CO 80202
Trustee of Janus Investment Fund+. Historian.
William D. Stewart# - Trustee
5330 Sterling Drive
Boulder, CO 80302
Trustee of Janus Investment Fund+. President of HPS Corporation, Boulder,
Colorado (manufacturer of vacuum fittings and valves).
Gary O. Loo - Trustee
102 N. Cascade Avenue, Suite 500
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. President and a Director of High Valley
Group, Inc., Colorado Springs, Colorado (investments) since 1987.
Dennis B. Mullen - Trustee
1601 114th Avenue, SE
Alderwood Building, Suite 130
Bellevue, WA 98004
Trustee of Janus Investment Fund+. President and Chief Executive Officer of
BC Northwest, L.P., a franchise of Boston Markets, Inc., Bellevue,
Washington (restaurant chain). Formerly (1982 to 1993), Chairman, President
and Chief Executive Officer of Famous Restaurants, Inc., Scottsdale,
Arizona (restaurant chain).
Martin H. Waldinger - Trustee
4940 Sandshore Court
San Diego, CA 92130
Trustee of Janus Investment Fund+. Private Consultant and Director of Run
Technologies, Inc., a software development firm, San Carlos, California.
Formerly (1989 to 1993), President and Chief Executive Officer of
Bridgecliff Management Services, Campbell, California (a condominium
association management company).
The Trustees are responsible for major decisions relating to the
Portfolio's objective, policies and techniques. The Trustees also supervise the
operation of the Portfolio by its officers and review the investment decisions
of the officers although they do not actively participate on a regular basis in
making such decisions.
The Executive Committee of the Trustees shall have and may exercise all the
powers and authority of the Board except for matters requiring action by the
whole Board pursuant to the Trust's Bylaws or Trust Instrument, Delaware Law or
the 1940 Act.
- --------------------------------------------------------------------------------
* An interested person of the Trust and of Janus Capital.
# Member of the Executive Committee.
+ Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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The following table shows the aggregate compensation paid to each Trustee
by the Portfolio and all funds advised and sponsored by Janus Capital
(collectively, the "Janus Funds") for the periods indicated. None of the
Trustees receive pension or retirement benefits from the Portfolio or the Janus
Funds.
Aggregate Compensation Total Compensation
from the Portfolio for from the Janus Funds
fiscal year ended for calendar year ended
Name of Person, Position December 31, 1994** December 31, 1994***
- ------------------------ ------------------- --------------------
Thomas H. Bailey, Chairman* $0 $ 0
James P. Craig, Trustee*+ $0 $ 0
John W. Shepardson, Trustee $0 $39,250
William D. Stewart, Trustee $0 $39,250
Gary O. Loo, Trustee $0 $39,250
Dennis B. Mullen, Trustee $0 $39,250
Martin H. Waldinger, Trustee $0 $39,250
- --------------------------------------------------------------------------------
* An interested person of the Portfolio and of Janus Capital. Compensated by
Janus Capital and not the Portfolio.
** The Portfolio had not commenced operations as of December 31, 1994.
*** As of December 31, 1994, Janus Funds consisted of two registered investment
companies comprised of a total of 20 funds.
+ Mr. Craig became a Trustee as of June 30, 1995.
PURCHASE OF SHARES
Shares of the Portfolio can be purchased only by i) the separate accounts
of participating insurance companies for the purpose of funding variable
insurance contracts and ii) certain qualified retirement plans. Shares of the
Portfolio are purchased at the NAV per share as determined at the close of
regular trading session of the New York Stock Exchange next occurring after a
purchase order is received and accepted by the Portfolio or its authorized
agent. The prospectus for your insurance company's separate account or your plan
documents contain detailed information about investing in the Portfolio.
REDEMPTION OF SHARES
Redemptions, like purchases, may only be effected through the separate
accounts of participating insurance companies or qualified retirement plans.
Shares normally will be redeemed for cash, although each Fund retains the right
to redeem its shares in kind under unusual circumstances, in order to protect
the interests of remaining shareholders, by delivery of securities selected from
its assets at its discretion. However, the Funds are governed by Rule 18f-1
under the 1940 Act, which requires each Fund to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of that Fund during any
90-day period for any one shareholder. Should redemptions by any shareholder
exceed such limitation, their Fund will have the option of redeeming the excess
in cash or in kind. If shares are redeemed in kind, the redeeming shareholder
might incur brokerage costs in converting the assets to cash. The method of
valuing securities used to make redemptions in kind will be the same as the
method of valuing portfolio securities described under "Determination of Net
Asset Value" and such valuation will be made as of the same time the redemption
price is determined.
The right to require the Funds to redeem its shares may be suspended, or
the date of payment may be postponed, whenever (1) trading on the NYSE is
restricted, as determined by the Securities and Exchange Commission, or the NYSE
is closed except for holidays and weekends, (2) the Securities and Exchange
Commission permits such suspension and so orders, or (3) an emergency exists as
determined by the Securities and Exchange Commission so that disposal of
securities or determination of NAV is not reasonably practicable.
DIVIDENDS AND TAX STATUS
Dividends representing substantially all of the net investment income and
any net realized gains on sales of securities are declared daily, Saturdays,
Sundays and holidays included, and distributed on the last business day of each
month. The Portfolio intends to qualify as a "regulated investment company" by
satisfying certain requirements prescribed by Subchapter M of the Internal
Revenue Code of 1986. In addition, the Portfolio intends to comply with the
diversification requirements of Internal Revenue Code Section 817(h) related to
the tax-deferred status of insurance company separate accounts.
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All income dividends and capital gains distributions, if any, on the
Portfolio's shares are reinvested automatically in additional shares of the
Portfolio at the NAV determined on the first business day following the record
date.
Because shares of the Portfolio can only be purchased through variable
insurance contracts or qualified plans, it is anticipated that any income
dividends or capital gains distributions will be exempt from current taxation if
left to accumulate within such contracts or plans. See the prospectus for the
separate account of the related insurance company or the plan documents for
additional information.
PRINCIPAL SHAREHOLDERS
The officers and Trustees of the Portfolio cannot directly own shares of
the Portfolio without purchasing an insurance contract through one of the
participating insurance companies. As a result, such officers and Trustees as a
group own less than 1% of the outstanding shares of the Portfolio. As of July
31, 1995, all of the outstanding shares of the Portfolio were owned by certain
insurance company separate accounts and by Janus Capital, which provided seed
capital for the Portfolio. The percentage ownership of each entity is as
follows:
Record Owners as of July 31, 1995
----------------------------------------
Portfolio Name Western Reserve Janus Capital
Money Market Portfolio 99.08% *
* Owned less than 5%.
The shares held by the separate accounts of each insurance company,
including shares for which no voting instructions have been received, will be
voted by each insurance company in proportion to instructions received from
contract owners.
MISCELLANEOUS INFORMATION
THE TRUST
The Portfolio is an open-end management investment company registered under
the 1940 Act as a series of the Trust, which was organized as a Delaware
business trust on May 20, 1993. The Trust Instrument permits the Trustees to
issue an unlimited number of shares of beneficial interest from an unlimited
number of series of shares. As of the date of this SAI, the Trust consists of 8
series of shares, known as "portfolios." The other 7 series of the Trust are
offered by a separate prospectus. Additional series may be created from time to
time.
SHARES OF THE TRUST
The Trust is authorized to issue an unlimited number of shares of
beneficial interest with a par value of $0.001 per share for each series of the
Trust. Shares of each series of the Trust are fully paid and nonassessable when
issued. All shares of the Portfolio participate equally in dividends and other
distributions by the Portfolio, and in residual assets of the Portfolio in the
event of liquidation. Shares of the Portfolio have no preemptive, conversion or
subscription rights.
VOTING RIGHTS
A participating insurance company issuing a variable insurance contract
will vote shares in the separate account as required by law and interpretations
thereof, as may be amended or changed from time to time. In accordance with
current law and interpretations, a participating insurance company is required
to request voting instructions from policy owners and must vote shares in the
separate account, including shares for which no instructions have been received,
in proportion to the voting instructions received. Additional information may be
found in the participating insurance company's separate account prospectus.
The Portfolio's Trustees are responsible for major decisions relating to
the Portfolio's policies and objectives; the Trustees oversee the operation of
the Portfolio by its officers.
The present Trustees were elected by the initial trustee of the Trust on
May 25, 1993, and were approved by the initial shareholder on May 25, 1993 with
the exception of Mr. Craig who was appointed by the Trustees as of June 30,
1995. Under the Trust Instrument, each Trustee will continue in office until the
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termination of the Trust or his earlier death, resignation, bankruptcy,
incapacity or removal. Vacancies will be filled by a majority of the remaining
Trustees, subject to the 1940 Act. Therefore, no annual or regular meetings of
shareholders normally will be held, unless otherwise required by the Trust
Instrument or the 1940 Act. Subject to the foregoing, shareholders have the
power to vote to elect or remove Trustees, to terminate or reorganize the
Portfolio, to amend the Trust Instrument, to bring certain derivative actions
and on any other matters on which a shareholder vote is required by the 1940
Act, the Trust Instrument, the Trust's Bylaws or the Trustees.
Each share of each series of the Trust has one vote (and fractional votes
for fractional shares). Shares of all series of the Trust have noncumulative
voting rights, which means that the holders of more than 50% of the shares of
all series of the Trust voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any Trustees. Each series of the
Trust will vote separately only with respect to those matters that affect only
that series.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 950 Seventeenth Street, Suite 2500, Denver, Colorado
80202, independent accountants for the Portfolio, audit the Portfolio's annual
financial statements and prepare its tax returns.
REGISTRATION STATEMENT
The Trust has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities to which this SAI relates. If further
information is desired with respect to the Portfolio or such securities,
reference is made to the Registration Statement and the exhibits filed as a part
thereof.
FINANCIAL STATEMENTS
The following unaudited financial statements for the period ended June 30,
1995 are hereby incorporated into this SAI by reference to the Portfolio's
Semiannual Report dated June 30, 1995. A copy of such report accompanies this
SAI.
DOCUMENTS INCORPORATED BY REFERENCE TO THE SEMIANNUAL REPORT
Schedule of Investments as of June 30, 1995
Statement of Operations for the period May 1, 1995 to June 30, 1995
Statement of Assets and Liabilities as of June 30, 1995
Statement of Changes in Net Assets for the period May 1, 1995 to June 30,
1995
Financial Highlights for the period May 1, 1995 to June 30, 1995
Notes to Financial Statements
The portions of such Semiannual Report that are not specifically listed
above are not incorporated by reference into this SAI and are not part of the
Registration Statement.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S AND STANDARD & POOR'S
MUNICIPAL AND CORPORATE BONDS AND MUNICIPAL LOANS
The two highest ratings of Standard & Poor's Ratings Services ("S&P") for
municipal and corporate bonds are AAA and AA. Bonds rated AAA have the highest
rating assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. The AA rating may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within that rating category.
The two highest ratings of Moody's Investors Service, Inc. ("Moody's") for
municipal and corporate bonds are Aaa and Aa. Bonds rated Aaa are judged by
Moody's to be of the best quality. Bonds rated Aa are judged to be of high
quality by all standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. Moody's states that Aa bonds are rated
lower than the best bonds because margins of protection or other elements make
long-term risks appear somewhat larger than Aaa securities. The generic rating
Aa may be modified by the addition of the numerals 1, 2 or 3. The modifier 1
indicates that the security ranks in the higher end of the Aa rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of such rating category.
SHORT TERM MUNICIPAL LOANS
S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have a strong
capacity to pay principal and interest. Those issues rated SP-1 which are
determined to possess a very strong capacity to pay debt service will be given a
plus (+) designation. Issues rated SP-2 have satisfactory capacity to pay
principal and interest with some vulnerability to adverse financial and economic
changes over the term of the notes.
Moody's highest rating for short-term municipal loans is MIG-1/VMIG-1.
Moody's states that short-term municipal securities rated MIG-1/VMIG-1 are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2 designation are
of high quality, with margins of protection ample although not so large as in
the MIG-1/VMIG-1 group.
OTHER SHORT-TERM DEBT SECURITIES
Prime-1 and Prime-2 are the two highest ratings assigned by Moody's for
other short-term debt securities and commercial paper, and A-1 and A-2 are the
two highest ratings for commercial paper assigned by S&P. Moody's uses the
numbers 1, 2 and 3 to denote relative strength within its highest classification
of Prime, while S&P uses the numbers 1, 2 and 3 to denote relative strength
within its highest classification of A. Issuers rated Prime-1 by Moody's have a
superior ability for repayment of senior short-term debt obligations and have
many of the following characteristics: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structure with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well established access to a range of
financial markets and assured sources of alternate liquidity. Issuers rated
Prime-2 by Moody's have a strong ability for repayment of senior short-term debt
obligations and display many of the same characteristics displayed by issuers
rated Prime-1, but to a lesser degree. Issuers rated A-1 by S&P carry a strong
degree of safety regarding timely repayment. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) designation.
Issuers rated A-2 by S&P carry a satisfactory degree of safety regarding timely
repayment.
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FITCH
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is
not as great as the F-1+ and F-1 ratings.
DUFF & PHELPS INC.
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative sources
of funds, is clearly outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
THOMSON BANKWATCH, INC.
TBW-1 The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
IBCA, INC.
A1+ Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
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APPENDIX B
DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Notes generally are used to provide for short-term capital needs
and usually have maturities of one year or less. They include the following:
1. Project Notes, which carry a U.S. government guarantee, are issued by
public bodies (called "local issuing agencies") created under the laws of a
state, territory, or U.S. possession. They have maturities that range up to one
year from the date of issuance. Project Notes are backed by an agreement between
the local issuing agency and the Federal Department of Housing and Urban
Development. These Notes provide financing for a wide range of financial
assistance programs for housing, redevelopment, and related needs (such as
low-income housing programs and renewal programs).
2. Tax Anticipation Notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
3. Revenue Anticipation Notes are issued in expectation of receipt of other
types of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
4. Bond Anticipation Notes are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the Notes.
5. Construction Loan Notes are sold to provide construction financing.
After successful completion and acceptance, many projects receive permanent
financing through the Federal Housing Administration under the Federal National
Mortgage Association ("Fannie Mae") or the Government National Mortgage
Association ("Ginnie Mae").
6. Tax-Exempt Commercial Paper is a short-term obligation with a stated
maturity of 365 days or less. It is issued by agencies of state and local
governments to finance seasonal working capital needs or as short-term financing
in anticipation of longer term financing.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
1. General Obligation Bonds are issued by such entities as states,
counties, cities, towns, and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind General Obligation Bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
2. Revenue Bonds in recent years have come to include an increasingly wide
variety of types of municipal obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist of virtually any form of
state or local governmental entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide additional
security in the form of a debt service reserve fund to be used to make principal
and interest payments. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Housing authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.
In recent years, revenue bonds have been issued in large volumes for
projects that are privately owned and operated (see 3 below).
3. Private Activity Bonds are considered municipal bonds if the interest
paid thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various
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privately operated facilities for business and manufacturing, housing and
health. These bonds are also used to finance public facilities such as airports,
mass transit systems and ports. The payment of the principal and interest on
such bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of real and personal property as
security for such payment.
While, at one time, the pertinent provisions of the Internal Revenue Code
permitted private activity bonds to bear tax-exempt interest in connection with
virtually any type of commercial or industrial project (subject to various
restrictions as to authorized costs, size limitations, state per capita volume
restrictions, and other matters), the types of qualifying projects under the
Code have become increasingly limited, particularly since the enactment of the
Tax Reform Act of 1986. Under current provisions of the Code, tax-exempt
financing remains available, under prescribed conditions, for certain privately
owned and operated rental multi-family housing facilities, nonprofit hospital
and nursing home projects, airports, docks and wharves, mass commuting
facilities and solid waste disposal projects, among others, and for the
refunding (that is, the tax-exempt refinancing) of various kinds of other
private commercial projects originally financed with tax-exempt bonds. In future
years, the types of projects qualifying under the Code for tax-exempt financing
are expected to become increasingly limited.
Because of terminology formerly used in the Internal Revenue Code,
virtually any form of private activity bond may still be referred to as an
"industrial development bond," but more and more frequently revenue bonds have
become classified according to the particular type of facility being financed,
such as hospital revenue bonds, nursing home revenue bonds, multi-family housing
revenues bonds, single family housing revenue bonds, industrial development
revenue bonds, solid waste resource recovery revenue bonds, and so on.
Other Municipal Obligations, incurred for a variety of financing purposes,
include: municipal leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local governments
and authorities to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, telecommunications equipment and other capital
assets. Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations of many state constitutions and statutes are deemed to
be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase municipal
leases subject to a non-appropriation clause when the payment of principal and
accrued interest is backed by an unconditional irrevocable letter of credit, or
guarantee of a bank or other entity that meets the criteria described in the
Prospectus.
Tax-exempt bonds are also categorized according to whether the interest is
or is not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to the
increasing complexity of Internal Revenue Code and related requirements
governing the issuance of tax-exempt bonds, industry practice has uniformly
required, as a condition to the issuance of such bonds, but particularly for
revenue bonds, an opinion of nationally recognized bond counsel as to the
tax-exempt status of interest on the bonds.
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