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JANUS ASPEN SERIES
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Statement of Additional Information
May 1, 1996 as supplemented October 24, 1996
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HIGH-YIELD PORTFOLIO
High-Yield 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, 1996 as
supplemented October 24, 1996, 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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HIGH-YIELD PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
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Investment Policies, Restrictions and Techniques ........................ 3
Investment Objectives ................................................ 3
Portfolio Policies ................................................... 3
Investment Restrictions .............................................. 3
Types of Securities and Investment Techniques ........................ 5
Illiquid Investments ............................................... 5
Zero Coupon, Pay-In-Kind and Step Coupon Securities ................ 5
Pass-Through Securities ............................................ 5
Repurchase and Reverse Repurchase Agreements ....................... 6
Depositary Receipts ................................................ 7
Futures, Options and Other Derivative Instruments .................. 7
Investment Adviser ..................................................... 14
Custodian, Transfer Agent and Certain Affiliations ..................... 15
Portfolio Transactions and Brokerage ................................... 15
Officers and Trustees .................................................. 17
Shares of the Trust .................................................... 19
Net Asset Value Determination ....................................... 19
Purchases ........................................................... 19
Redemptions ......................................................... 19
Income Dividends, Capital Gains Distributions and Tax Status ........... 20
Principal Shareholders ................................................. 20
Miscellaneous Information .............................................. 20
Shares of the Trust ................................................. 20
Voting Rights ....................................................... 20
Independent Accountants ............................................. 21
Registration Statement .............................................. 21
Performance Information ................................................ 21
Financial Statements ................................................... 22
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INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
INVESTMENT OBJECTIVES
As stated in the Prospectus, the Portfolio's investment objective is high
current income with capital appreciation as a secondary objective. There can be
no assurance that the Portfolio will achieve its objectives. The investment
objectives of the Portfolio are not fundamental and may be changed by the
Trustees without shareholder approval.
PORTFOLIO POLICIES
The Prospectus discusses the types of securities in which the Portfolio
will invest, portfolio policies of the Portfolio and the investment techniques
of the Portfolio. The Prospectus includes a discussion of portfolio turnover
rates.
The Portfolio's annualized portfolio turnover rate (total long-term
purchases or sales, whichever is less, divided by the average monthly value of a
portfolio's long-term portfolio securities) for the period ended August 31, 1996
was 313%.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions that may not 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 fundamental policies, the Portfolio may not:
(1) Own more than 10% of the outstanding voting securities of any one
issuer and, as to seventy-five percent (75%) of the value of its total assets,
purchase the securities of any one issuer (except cash items and "government
securities" as defined under the Investment Company Act of 1940, as amended (the
"1940 Act")), if immediately after and as a result of such purchase, the value
of the holdings of the Portfolio in the securities of such issuer exceeds 5% of
the value of the Portfolio's total assets.
(2) Invest more than 25% of the value of its assets in any particular
industry (other than U.S. government securities).
(3) Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
(4) Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this limitation
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other instruments
backed by physical commodities).
(5) 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).
(6) Act as an underwriter of securities issued by others, except to the
extent that the Portfolio may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.
As a fundamental policy, the Portfolio may, notwithstanding any other
investment policy or limitation (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
limitations as the Portfolio.
The Trustees have adopted additional investment restrictions for the
Portfolio. These restrictions are operating policies of the Portfolio and may be
changed by the Trustees without shareholder approval. The additional investment
restrictions adopted by the Trustees to date include the following:
(a) The Portfolio's investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within that
amount, but not to exceed 2% of the value of the Portfolio's net assets, may be
warrants that are not listed on the New York or American Stock Exchange.
Warrants acquired by the Portfolio in units or attached to securities shall be
deemed to be without value for the purpose of monitoring this policy.
(b) The Portfolio will not (i) enter into any futures contracts and related
options for purposes other than bona fide hedging transactions within the
meaning of Commodity Futures Trading Commission ("CFTC") regulations if the
aggregate initial margin and premiums required to establish positions in futures
contracts and related options
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that do not fall within the definition of bona fide hedging transactions will
exceed 5% of the fair market value of the Portfolio's net assets, after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into; and (ii) enter into any futures contracts if the aggregate
amount of the Portfolio's commitments under outstanding futures contracts
positions would exceed the market value of its total assets.
(c) The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
(d) The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities on
margin.
(e) The Portfolio does not currently intend to (i) purchase securities of
other investment companies, except in the open market where no commission except
the ordinary broker's commission is paid, or (ii) purchase or retain securities
issued by other open-end investment companies. Limitations (i) and (ii) do not
apply to money market funds or to securities received as dividends, through
offers of exchange, or as a result of a reorganization, consolidation, or
merger. If the Portfolio invests in a money market fund, Janus Capital will
reduce its advisory fee by the amount of any investment advisory and
administrative services fees paid to the investment manager of the money market
fund.
(f) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements, deposits of assets to margin, guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.
(g) The Portfolio does not intend to purchase securities of any issuer
(other than U.S. government agencies and instrumentalities or instruments
guaranteed by an entity with a record of more than three years' continuous
operation, including that of predecessors) with a record of less than three
years' continuous operation (including that of predecessors) if such purchase
would cause the cost of the Portfolio's investments in all such issuers to
exceed 5% of the Portfolio's total assets taken at market value at the time of
such purchase.
(h) The Portfolio does not currently intend to invest directly in oil, gas,
or other mineral development or exploration programs or leases; however, the
Portfolio may own debt or equity securities of companies engaged in those
businesses.
(i) The Portfolio may borrow money for temporary or emergency purposes (not
for leveraging or investment) 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, the Portfolio will reduce its
borrowings within three business days to the extent necessary to comply with the
25% limitation. This policy shall not prohibit reverse repurchase agreements,
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
(j) The Portfolio does not currently intend to purchase any security or
enter into a repurchase agreement, if as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. 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 securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A Securities"),
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.
(k) 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., provided that financial service companies will be
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). To the extent that Bloomberg L.P. 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
("SEC").
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TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in illiquid
investments (i.e., securities that are not readily marketable). The Trustees of
the Fund have authorized Janus Capital to make liquidity determinations with
respect to its securities, including Rule 144A Securities and commercial paper.
Under the guidelines established by the Trustees, Janus Capital will consider
the following factors: 1) the frequency of trades and quoted prices for the
obligation; 2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; 3) the willingness of dealers to
undertake to make a market in the security; and 4) the nature of the security
and the nature of marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the transfer.
In the case of commercial paper, Janus Capital will also consider whether the
paper is traded flat or in default as to principal and interest and any ratings
of the paper by a Nationally Recognized Statistical Rating Organization.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest in zero coupon, pay-in-kind and step coupon
securities. Zero coupon bonds are issued and traded at a discount from their
face value. They do not entitle the holder to any periodic payment of interest
prior to maturity. Step coupon bonds trade at a discount from their face value
and pay coupon interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. The discount from the face amount
or par value depends on the time remaining until cash payments begin, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. Pay-in-kind bonds normally give the issuer an option to pay cash at
a coupon payment date or give the holder of the security a similar bond with the
same coupon rate and a face value equal to the amount of the coupon payment that
would have been made.
Current federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue discount
on such securities that accrues during a given year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal Revenue
Code of 1986 and the regulations thereunder (the "Code"), the Portfolio must
distribute its investment company taxable income, including the original issue
discount accrued on zero coupon or step coupon bonds. Because the Portfolio will
not receive cash payments on a current basis in respect of accrued
original-issue discount on zero coupon bonds or step coupon bonds during the
period before interest payments begin, in some years the Portfolio may have to
distribute cash obtained from other sources in order to satisfy the distribution
requirements under the Code. The Portfolio might obtain such cash from selling
other portfolio holdings which might cause the Portfolio to incur capital gains
or losses on the sale. In some circumstances, such sales might be necessary in
order to satisfy cash distribution requirements even though investment
considerations might otherwise make it undesirable for the Portfolio to sell the
securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
PASS-THROUGH SECURITIES
The Portfolio may invest in various types of pass-through securities, such
as mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as a
bank or broker-dealer. The purchaser of a pass-through security receives an
undivided interest in the underlying pool of securities. The issuers of the
underlying securities make interest and principal payments to the intermediary
which are passed through to purchasers, such as the Portfolio. The most common
type of pass-through securities are mortgage-backed securities. Government
National Mortgage Association ("GNMA") Certificates are mortgage-backed
securities that evidence an undivided interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly by the
borrowers over the term of the loan rather than returned in a lump sum at
maturity. The Portfolio will generally purchase "modified pass-through" GNMA
Certificates, which entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool, net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment. GNMA Certificates are backed as to the timely payment of principal and
interest by the full faith and credit of the U.S. government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble
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GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owned on the underlying pool. FHLMC guarantees
timely payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. This type of security is guaranteed by FHLMC as to timely payment of
principal and interest but it is not guaranteed by the full faith and credit of
the U.S. government.
The Federal National Mortgage Association ("FNMA") issues guaranteed
mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro rata
share of all interest and principal payments made and owned on the underlying
pool. This type of security is guaranteed by FNMA as to timely payment of
principal and interest but it is not guaranteed by the full faith and credit of
the U.S. government.
Except for GMCs, each of the mortgage-backed securities described above is
characterized by monthly payments to the holder, reflecting the monthly payments
made by the borrowers who received the underlying mortgage loans. The payments
to the security holders (such as the Portfolio), like the payments on the
underlying loans, represent both principal and interest. Although the underlying
mortgage loans are for specified periods of time, such as 20 or 30 years, the
borrowers can, and typically do, pay them off sooner. Thus, the security holders
frequently receive prepayments of principal in addition to the principal that is
part of the regular monthly payments. A portfolio manager will consider
estimated prepayment rates in calculating the average weighted maturity of the
Portfolio. A borrower is more likely to prepay a mortgage that bears a
relatively high rate of interest. This means that in times of declining interest
rates, higher yielding mortgage-backed securities held by the Portfolio might be
converted to cash and the Portfolio will be forced to accept lower interest
rates when that cash is used to purchase additional securities in the
mortgage-backed securities sector or in other investment sectors. Additionally,
prepayments during such periods will limit the Portfolio's ability to
participate in as large a market gain as may be experienced with a comparable
security not subject to prepayment.
Asset-backed securities represent interests in pools of consumer loans and
are backed by paper or accounts receivables originated by banks, credit card
companies or other providers of credit. Generally, the originating bank or
credit provider is neither the obligor or guarantor of the security and interest
and principal payments ultimately depend upon payment of the underlying loans by
individuals. Tax-exempt asset-backed securities include units of beneficial
interests in pools of purchase contracts, financing leases, and sales agreements
that may be created when a municipality enters into an installment purchase
contract or lease with a vendor. Such securities may be secured by the assets
purchased or leased by the municipality; however, if the municipality stops
making payments, there generally will be no recourse against the vendor. The
market for tax-exempt asset-backed securities is still relatively new. These
obligations are likely to involve unscheduled prepayments of principal.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon incremental amount that is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked to market daily) of the underlying security or
"collateral." The Portfolio may engage in a repurchase agreement with respect to
any security in which it is authorized to invest. A risk associated with
repurchase agreements is the failure of the seller to repurchase the securities
as agreed, which may cause the Portfolio to suffer a loss if the market value of
such securities declines before they can be liquidated on the open market. In
the event of bankruptcy or insolvency of the seller, the Portfolio may encounter
delays and incur costs in liquidating the underlying security. Repurchase
agreements that mature in more than seven days will be subject to the 15% limit
on illiquid investments. While it is not possible to eliminate all risks from
these transactions, it is the policy of the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by Janus Capital.
The Portfolio may use reverse repurchase agreements to provide cash to
satisfy unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities. In a reverse
repurchase agreement, the Portfolio sells a portfolio security to another party,
such as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Portfolio will maintain cash and appropriate liquid assets
in a segregated custodial account to cover its obligation under the agreement.
The Portfolio will enter into reverse repurchase agreements only with parties
that Janus Capital deems creditworthy.
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DEPOSITARY RECEIPTS
The Portfolio may invest in sponsored and unsponsored American Depositary
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs, in registered form, are designed for use in U.S. securities
markets. Unsponsored ADRs may be created without the participation of the
foreign issuer. Holders of these ADRs generally bear all the costs of the ADR
facility, whereas foreign issuers typically bear certain costs in a sponsored
ADR. The bank or trust company depositary of an unsponsored ADR may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass through voting rights. The Portfolio may also invest in
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
in other similar instruments representing securities of foreign companies. EDRs
are receipts issued by a European financial institution evidencing an
arrangement similar to that of ADRs. EDRs, in bearer form, are designed for use
in European securities markets. GDRs are securities convertible into equity
securities of foreign issuers.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities, foreign currencies or
contracts based on financial indices, including indices of U.S. government
securities, foreign government securities, equity or fixed-income securities.
U.S. futures contracts are traded on exchanges which have been designated
"contract markets" by the CFTC and must be executed through a futures commission
merchant ("FCM"), or brokerage firm, which is a member of the relevant contract
market. Through their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
The buyer or seller of a futures contract is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of the FCM when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or
certain high-grade liquid assets by the Portfolio's custodian for the benefit of
the FCM. Initial margin payments are similar to good faith deposits or
performance bonds. Unlike margin extended by a securities broker, initial margin
payments do not constitute purchasing securities on margin for purposes of the
Portfolio's investment limitations. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments for the benefit of the FCM to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion of
this amount. In the event of the bankruptcy of the FCM that holds margin on
behalf of the Portfolio, the Portfolio may be entitled to return of margin owed
to the Portfolio only in proportion to the amount received by the FCM's other
customers. Janus Capital will attempt to minimize the risk by careful monitoring
of the creditworthiness of the FCMs with which the Portfolio does business and
by depositing margin payments in a segregated account with the Portfolio's
custodian.
The Portfolio intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" adopted by
the CFTC and the National Futures Association, which regulate trading in the
futures markets. The Portfolio will use futures contracts and related options
primarily for bona fide hedging purposes within the meaning of CFTC regulations.
To the extent that the Portfolio holds positions in futures contracts and
related options that do not fall within the definition of bona fide hedging
transactions, the aggregate initial margin and premiums required to establish
such positions will not exceed 5% of the fair market value of the Portfolio's
net assets, after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into.
Although the Portfolio will segregate cash and liquid assets in an amount
sufficient to cover its open futures obligations, the segregated assets would be
available to the Portfolio immediately upon closing out the futures position,
while settlement of securities transactions could take several days. However,
because the Portfolio's cash that may otherwise be invested would be held
uninvested or invested in high-grade liquid assets so long as the futures
position remains open, the Portfolio's return could be diminished due to the
opportunity losses of foregoing other potential investments.
The Portfolio's primary purpose in entering into futures contracts is to
protect the Portfolio from fluctuations in the value of securities or interest
rates without actually buying or selling the underlying debt or equity security.
For example, if the Portfolio owns Treasury bonds and the portfolio manager
expects interest rates to increase, the Portfolio may take a short position in
interest rate futures contracts. Taking such a position would have much the same
effect as the Portfolio selling Treasury bonds in its portfolio. If interest
rates increase as anticipated, the value of the Treasury bonds would decline,
but the value of the Portfolio's interest rate futures contract will increase,
thereby keeping the net asset value of the Portfolio from declining as much as
it may have otherwise. If, on the other hand, a portfolio manager expects
interest rates to decline, the Portfolio may take a long position in interest
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rate futures contracts in anticipation of later closing out the futures position
and purchasing the bonds. Although the Portfolio can accomplish similar results
by buying securities with long maturities and selling securities with short
maturities, given the greater liquidity of the futures market than the cash
market, it may be possible to accomplish the same result more easily and more
quickly by using futures contracts as an investment tool to reduce risk.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery of the instrument underlying a futures contract. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced and prices in the futures market distorted. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by a portfolio manager
still may not result in a successful use of futures.
Futures contracts entail risks. Although the Portfolio believes that use of
such contracts will benefit the Portfolio, the Portfolio's overall performance
could be worse than if the Portfolio had not entered into futures contracts if
the portfolio manager's investment judgement proves incorrect. For example, if
the Portfolio has hedged against the effects of a possible decrease in prices of
securities held in its portfolio and prices increase instead, the Portfolio will
lose part or all of the benefit of the increased value of these securities
because of offsetting losses in its futures positions. In addition, if the
Portfolio has insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. Those sales may be, but
will not necessarily be, at increased prices which reflect the rising market and
may occur at a time when the sales are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Portfolio will not match exactly the Portfolio's current or potential
investments. The Portfolio may buy and sell futures contracts based on
underlying instruments with different characteristics from the securities in
which it typically invests - for example, by hedging investments in portfolio
securities with a futures contract based on a broad index of securities - which
involves a risk that the futures position will not correlate precisely with the
performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments closely correlate with the
Portfolio's investments. Futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instruments and the time remaining until expiration of the contract.
Those factors may affect securities prices differently from futures prices.
Imperfect correlations between the Portfolio's investments and its futures
positions also may result from differing levels of demand in the futures markets
and the securities markets, from structural differences in how futures and
securities are traded, and from imposition of daily price fluctuation limits for
futures contracts. The Portfolio may buy or sell futures contracts with a
greater or lesser value than the securities it wishes to hedge or is considering
purchasing in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases. If price changes in the Portfolio's futures
positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of three days for some
types of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance that a liquid secondary
market will exist for any particular futures contract at any particular time. In
addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for the Portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, the Portfolio may not be able to promptly liquidate unfavorable
futures positions and potentially could be required to continue to hold a
futures position until the delivery date, regardless of changes in its value. As
a result, the Portfolio's access to other assets held to cover its futures
positions also could be impaired.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may buy and write put and call
options on futures contracts. An option on a future gives the Portfolio the
right (but not the obligation) to buy or sell a futures contract at a
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specified price on or before a specified date. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying instrument, ownership of the option may or may not be less risky
than ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, when the Portfolio is not fully invested it may
buy a call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures' price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract. If
the futures' price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Portfolio is considering buying. If a call or put option the Portfolio has
written is exercised, the Portfolio will incur a loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between the change in the value of its portfolio securities and changes in the
value of the futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Portfolio may buy a put option on a futures contract to hedge its
portfolio against the risk of falling prices or rising interest rates.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A forward contract is an agreement between two parties
in which one party is obligated to deliver a stated amount of a stated asset at
a specified time in the future and the other party is obligated to pay a
specified amount for the assets at the time of delivery. The Portfolio may enter
into forward contracts to purchase and sell government securities, equity or
income securities, foreign currencies or other financial instruments. Forward
contracts generally are traded in an interbank market conducted directly between
traders (usually large commercial banks) and their customers. Unlike futures
contracts, which are standardized contracts, forward contracts can be
specifically drawn to meet the needs of the parties that enter into them. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated exchange.
The following discussion summarizes the Portfolio's principal uses of
forward foreign currency exchange contracts ("forward currency contracts"). The
Portfolio may enter into forward currency contracts with stated contract values
of up to the value of the Portfolio's assets. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed price
(which may be in U.S. dollars or a foreign currency). The Portfolio will
exchange foreign currencies for U.S. dollars and for other foreign currencies in
the normal course of business and may buy and sell currencies through forward
currency contracts in order to fix a price for securities it has agreed to buy
or sell ("transaction hedge"). The Portfolio also may hedge some or all of its
investments denominated in a foreign currency against a decline in the value of
that currency relative to the U.S. dollar by entering into forward currency
contracts to sell an amount of that currency (or a proxy currency whose
performance is expected to replicate or exceed the performance of that currency
relative to the U.S. dollar) approximating the value of some or all of its
portfolio securities denominated in that currency ("position hedge") or by
participating in options or futures contracts with respect to the currency. The
Portfolio also may enter into a forward currency contract with respect to a
currency where the Portfolio is considering the purchase or sale of investments
denominated in that currency but has not yet selected the specific investments
("anticipatory hedge"). In any of these circumstances the Portfolio may,
alternatively, enter into a forward currency contract to purchase or sell one
foreign currency for a second currency that is expected to perform more
favorably relative to the U.S. dollar if the portfolio manager believes there is
a reasonable degree of correlation between movements in the two currencies
("cross-hedge").
These types of hedging minimize the effect of currency appreciation as well
as depreciation, but do not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the proceeds of or rates of return on the Portfolio's
foreign currency denominated portfolio securities. The matching of the increase
in value of a forward contract and the decline in the U.S. dollar equivalent
value of the foreign currency denominated asset that is the subject of the
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hedge generally will not be precise. Shifting the Portfolio's currency exposure
from one foreign currency to another removes the Portfolio's opportunity to
profit from increases in the value of the original currency and involves a risk
of increased losses to the Portfolio if its portfolio manager's projection of
future exchange rates is inaccurate. Proxy hedges and cross-hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which hedged securities are denominated. Unforeseen changes in currency
prices may result in poorer overall performance for the Portfolio than if it had
not entered into such contracts.
The Portfolio will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency underlying
the forward contract or the currency being hedged. To the extent that the
Portfolio is not able to cover its forward currency positions with underlying
portfolio securities, the Portfolio's custodian will segregate cash or
high-grade liquid assets having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges, cross-hedges and anticipatory hedges. If the value of the
securities used to cover a position or the value of segregated assets declines,
the Portfolio will find alternative cover or segregate additional cash or
high-grade liquid assets on a daily basis so that the value of the covered and
segregated assets will be equal to the amount of the Portfolio's commitments
with respect to such contracts. As an alternative to segregating assets, the
Portfolio may buy call options permitting the Portfolio to buy the amount of
foreign currency being hedged by a forward sale contract or the Portfolio may
buy put options permitting it to sell the amount of foreign currency subject to
a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contacts. In such event,
the Portfolio's ability to utilize forward contracts may be restricted. In
addition, the Portfolio may not always be able to enter into forward contracts
at attractive prices and may be limited in its ability to use these contracts to
hedge Portfolio assets.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may buy and write options on
foreign currencies in a manner similar to that in which futures or forward
contracts on foreign currencies will be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Portfolio may buy put
options on the foreign currency. If the value of the currency declines, the
Portfolio will have the right to sell such currency for a fixed amount in U.S.
dollars, thereby offsetting, in whole or in part, the adverse effect on its
portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may buy call options on the foreign
currency. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, if currency exchange rates do not move
in the direction or to the extent desired, the Portfolio could sustain losses on
transactions in foreign currency options that would require the Portfolio to
forego a portion or all of the benefits of advantageous changes in those rates.
The Portfolio may also write options on foreign currencies. For example, to
hedge against a potential decline in the U.S. dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates, the
Portfolio could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the decline in value of portfolio securities will be offset
by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Portfolio
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Portfolio to hedge the
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium. If exchange rates do not move
in the expected direction, the option may be exercised and the Portfolio would
be required to buy or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, the Portfolio also may lose all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the foreign currency underlying the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currencies held
in its portfolio. A call option is also covered if the Portfolio has a call on
the same foreign currency in the same
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principal amount as the call written if the exercise price of the call held (i)
is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, if the difference is
maintained by the Portfolio in cash or high-grade liquid assets in a segregated
account with the Portfolio's custodian.
The Portfolio also may write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline due to an
adverse change in the exchange rate in the U.S. dollar value of a security which
the Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option. Call options on foreign currencies which are
entered into for cross-hedging purposes are not covered. However, in such
circumstances, the Portfolio will collateralize the option by segregating cash
or high-grade liquid assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
OPTIONS ON SECURITIES. In an effort to increase current income and to
reduce fluctuations in net asset value, the Portfolio may write covered put and
call options and buy put and call options on securities that are traded on
United States and foreign securities exchanges and over-the-counter. The
Portfolio may write and buy options on the same types of securities that the
Portfolio may purchase directly.
A put option written by the Portfolio is "covered" if the Portfolio (i)
segregates cash not available for investment or high-grade liquid assets with a
value equal to the exercise price of the put with the Portfolio's custodian or
(ii) holds a put on the same security and in the same principal amount as the
put written and the exercise price of the put held is equal to or greater than
the exercise price of the put written. The premium paid by the buyer of an
option will reflect, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.
A call option written by the Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Portfolio's
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also deemed to be covered if the Portfolio holds a
call on the same security and in the same principal amount as the call written
and the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash and
high-grade liquid assets in a segregated account with its custodian.
The Portfolio also may write call options that are not covered for
cross-hedging purposes. The Portfolio collateralizes its obligation under a
written call option for cross-hedging purposes by segregating cash or high-grade
liquid assets in an amount not less than the market value of the underlying
security, marked to market daily. The Portfolio would write a call option for
cross-hedging purposes, instead of writing a covered call option, when the
premium to be received from the cross-hedge transaction would exceed that which
would be received from writing a covered call option and its portfolio manager
believes that writing the option would achieve the desired hedge.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or bought, in the case of
a put option, since with regard to certain options, the writer may be assigned
an exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount of
the premium. This amount, of course, may, in the case of a covered call option,
be offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
In the case of a written call option, effecting a closing transaction will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both. In the case
of a written put option, such transaction will permit the Portfolio to write
another put option to the extent that the exercise price thereof is secured by
deposited high-grade liquid assets. Effecting a closing transaction also will
permit the Portfolio to use the cash or proceeds from the concurrent sale of any
securities subject to the option for other investments. If the Portfolio desires
to sell a particular security from its portfolio on which it has written a call
option, the Portfolio will effect a closing transaction prior to or concurrent
with the sale of the security.
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The Portfolio will realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing the
option or the price received from a sale transaction is more than the premium
paid to buy the option. The Portfolio will realize a loss from a closing
transaction if the price of the purchase transaction is more than the premium
received from writing the option or the price received from a sale transaction
is less than the premium paid to buy the option. Because increases in the market
of a call option generally will reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Portfolio.
An option position may be closed out only where a secondary market for an
option of the same series exists. If a secondary market does not exist, the
Portfolio may not be able to effect closing transactions in particular options
and the Portfolio would have to exercise the options in order to realize any
profit. If the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. The absence
of a liquid secondary market may be due to the following: (i) insufficient
trading interest in certain options, (ii) restrictions imposed by a national
securities exchange ("Exchange") on which the option is traded on opening or
closing transactions or both, (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities, (iv) unusual or unforeseen circumstances that interrupt
normal operations on an Exchange, (v) the facilities of an Exchange or of the
Options Clearing Corporation ("OCC") may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions. In other words, the Portfolio may buy a security and then write a
call option against that security. The exercise price of such call will depend
upon the expected price movement of the underlying security. The exercise price
of a call option may be below ("in-the-money"), equal to ("at-the-money") or
above ("out-of-the-money") the current value of the underlying security at the
time the option is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Portfolio's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Portfolio's purchase price of the security and the
exercise price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset by the amount of
premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
The Portfolio may buy put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Portfolio will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Portfolio may buy call options to hedge against an increase in the
price of securities that it may buy in the future. The premium paid for the call
option plus any transaction costs will reduce the benefit, if any, realized by
the Portfolio upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Portfolio.
EURODOLLAR INSTRUMENTS. The Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of portfolios and sellers to obtain a fixed rate for
borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
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SWAPS AND SWAP-RELATED PRODUCTS. The Portfolio may enter into interest rate
swaps, caps and floors on either an asset-based or liability-based basis,
depending upon whether it is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis (i.e., the two payment
streams are netted out, with the Portfolio receiving or paying, as the case may
be, only the net amount of the two payments). The net amount of the excess, if
any, of the Portfolio's obligations over its entitlement with respect to each
interest rate swap will be calculated on a daily basis and an amount of cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the Portfolio's
custodian. If the Portfolio enters into an interest rate swap on other than a
net basis, it would maintain a segregated account in the full amount accrued on
a daily basis of its obligations with respect to the swap. The Portfolio will
not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated in one of the three highest rating categories of at least one nationally
recognized statistical rating organization at the time of entering into such
transaction. Janus Capital will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Janus Capital has determined that, as
a result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent the
Portfolio sells (i.e., writes) caps and floors, it will segregate cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the full amount, accrued on a daily basis, of its obligations with respect to
any caps or floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that it contractually is entitled to receive.
The Portfolio may buy and sell (i.e., write) caps and floors without limitation,
subject to the segregation requirement described above.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain Exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
Exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the buyer of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. Moreover, an option writer and a buyer or
seller of futures or forward contracts could lose amounts substantially in
excess of any premium received or initial margin or collateral posted due to the
potential additional margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on Exchanges are within the
jurisdiction of the SEC, as are other securities traded on Exchanges. As a
result, many of the protections provided to traders on organized Exchanges will
be available with respect to such transactions. In particular, all foreign
currency option positions entered into on an Exchange are cleared and guaranteed
by the OCC, thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on an Exchange may be more readily available
than in the over-the-counter market, potentially permitting the Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions
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or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing member,
impose special procedures on exercise and settlement, such as technical changes
in the mechanics of delivery of currency, the fixing of dollar settlement prices
or prohibitions on exercise.
In addition, options on U.S. government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume.
INVESTMENT ADVISER
As stated in the Prospectus, the Portfolio has an Investment Advisory
Agreement with Janus Capital, 100 Fillmore Street, Denver, Colorado 80206-4923.
The Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolio's 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 Portfolio or other Janus Funds or which performed recordkeeping or other
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 and transfer 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 recordkeeping, for which the Portfolio may reimburse Janus
Capital for its costs.
The Portfolio has agreed to compensate Janus Capital for its services by
the monthly payment of a fee at the annual rate of .75% of the first $300
million of the average daiy net assets of the Portfolio and .65% of the average
daily net assets in excess of $300 million. The advisory fee will be calculated
and payable daily. Janus Capital has agreed to waive the advisory fee payable by
the Portfolio in an amount equal to 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 1% of the average daily net
assets for a fiscal year for the Portfolio. Mortality risk, expense risk and
other charges imposed by participating insurance companies are excluded from the
above expense limitation. Janus Capital may terminate this waiver at any time
upon 90 days' notice to the Trustees.
For the period ended August 31, 1996, the investment advisory fee was $829
prior to waiver by Janus Capital. The advisory fee was $0 after waiver for this
period.
The current Advisory Agreement became effective on March 12, 1996, and it
will continue in effect until June 16, 1997, 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 of the
Portfolio 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
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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. Pursuant to an
exemp- tive order granted by the SEC, the Portfolio and other portfolios advised
by Janus Capital may also transfer daily uninvested cash balances into one or
more joint trading accounts. Assets in the joint trading accounts are invested
in money market instruments and the proceeds are allocated to the participating
portfolios on a pro rata basis.
Each account managed by Janus Capital has its own investment objective and
policies and is managed accordingly 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 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
approximately 12% of its voting stock and, by agreement with KCSI, selects a
majority of Janus Capital's Board.
CUSTODIAN, TRANSFER AGENT AND CERTAIN AFFILIATIONS
State Street Bank and Trust Company ("State Street"), P.O. Box 351, Boston,
Massachusetts 02101 is the custodian of the securities and cash of the Fund.
State Street and the foreign subcustodians selected by it and approved by the
Trustees, have custody of the assets of the Portfolio held outside the U.S. and
cash incidental thereto. State Street may also have custody of certain domestic
and foreign securities held in connection with repurchase agreements. The
custodians and subcustodians hold the Portfolio's assets in safekeeping and
collect and remit 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.
The Portfolio pays DST Systems, Inc. ("DST") license fees for the use of
DST's fund accounting systems.
During the period ended August 31, 1996, the Portfolio did not make any
payments to DST, net of credits.
The Trustees have authorized the Portfolio to use another affiliate of DST
as introducing broker for certain Portfolio transactions as a means to reduce
Portfolio expenses through a credit against the charges of DST and its
affiliates with regard to commissions earned by such affiliate. See "Portfolio
Transactions and Brokerage."
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 Portfolio may trade foreign
securities in foreign countries because the best available market for these
securities is often on foreign exchanges. In transactions on foreign stock
exchanges, brokers' commissions are frequently fixed and are often higher than
in the United States, where commissions are negotiated.
15
<PAGE>
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; rebates of commissions by a broker to the portfolio or to a
third party service provider to the portfolio to pay portfolio expenses; 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. Most brokers and dealers
used by Janus Capital provide research and other services described above.
For the period ended August 31, 1996, the Portfolio did not pay any
brokerage commissions to brokers and dealers in transactions identified for
execution primarily on the basis of research and other services. Research
received from brokers or dealers is supplemental to Janus Capital's own research
efforts.
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.
Janus Capital does not enter into agreements with any brokers regarding the
placement of securities transactions because of the research services they
provide. It does, however, have an internal procedure for allocating
transactions in a manner consistent with its execution policy to brokers that it
has identified as providing superior executions and research, research-related
products or services which benefit its advisory clients, including the
Portfolio. Research products and services incidental to effecting securities
transactions furnished by brokers or dealers may be used in servicing any or all
of Janus Capital's clients and such research may not necessarily be used by
Janus Capital in connection with the accounts which paid commissions to the
broker-dealer providing such research products and services.
Janus Capital may consider sales of Portfolio shares by a broker-dealer or
the recommendation of a broker-dealer to its customers that they purchase
Portfolio 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 the 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 Portfolio purchases or sells 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.
The Portfolio's Trustees have authorized Janus Capital to place
transactions with DST Securities, Inc. ("DSTS"), a wholly-owned broker-dealer
subsidiary of DST. Janus Capital may do so if it reasonably believes that the
quality of the transaction and the associated commission are fair and reasonable
and if, overall, the associated transaction costs, net of any credits described
above under "Custodian, Transfer Agent and Certain Affiliations," are lower than
those that would otherwise be incurred.
During the period ended August 31, 1996, the Portfolio did not pay any
brokerage commissions. In addition, there were no commissions paid through DSTS.
16
<PAGE>
OFFICERS AND TRUSTEES
The following are the names of the Trustees and officers of the Trust,
together with a brief description of their principal occupations during the last
five years.
Thomas H. Bailey*# - Trustee, Chairman and President
100 Fillmore Street
Denver, CO 80206-4923
Trustee, Chairman and President of Janus Investment Fund+. Chairman,
Director and President of Janus Capital. Chairman and Director of IDEX
Management, Inc., Largo, Florida (50% subsidiary of Janus Capital and
investment adviser to a group of mutual funds) ("IDEX").
James P. Craig, III*# - Trustee and Executive Vice President
100 Fillmore Street
Denver, CO 80206-4923
Executive Vice President and Trustee of Janus Investment Fund+. Chief
Investment Officer, Vice President, and Director of Janus Capital.
Ronald V. Speaker* - Executive Vice President and Co-Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4923
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Vice President of Janus Capital. Formerly, securities analyst and research
associate at Janus Capital (1986 to 1992).
Sandy R. Rufenacht* - Co-Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4923
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Formerly, senior accountant, fixed-income trader and fixed-income research
analyst at Janus Capital (1990-1995).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
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.
Director, Vice President and Secretary of Janus Capital International Ltd.
Steven R. Goodbarn* - Vice President and Chief Financial Officer
100 Fillmore Street
Denver, CO 80206-4923
Vice President and Chief Financial Officer of Janus Investment Fund+. Vice
President of Finance, Treasurer and Chief Financial Officer of Janus
Service, Janus Distributors and Janus Capital. Director of IDEX and Janus
Distributors. Director, Treasurer and Vice President of Finance of Janus
Capital International Ltd. Formerly (1979 to 1992), with the accounting
firm of Price Waterhouse LLP, Denver, Colorado.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4923
Treasurer and Chief Accounting Officer of Janus Investment Fund. Director
of Fund Accounting of Janus Capital.
Kelley Abbott Howes* - Secretary
100 Fillmore Street
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 services).
John W. Shepardson# - Trustee
P.O. Box 9591
Denver, CO 80209
Trustee of Janus Investment Fund+. Historian.
- --------------------------------------------------------------------------------
* 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.
17
<PAGE>
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 Chicken, 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).
- --------------------------------------------------------------------------------
* 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.
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 their 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 Agreement and Declaration of Trust
("Declaration of Trust"), Massachusetts law or the 1940 Act.
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 any pension or retirement from the Portfolio or the Janus
Funds.
<TABLE>
Aggregate Compensation Total Compensation from the
from the Fund for fiscal year Janus Funds for calendar year
Name of Person, Position ended December 31, 1995** ended December 31, 1995***
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, Trustee*+ -- --
John W. Shepardson, Trustee N/A $56,101
William D. Stewart, Trustee N/A $53,228
Gary O. Loo, Trustee N/A $50,365
Dennis B. Mullen, Trustee N/A $53,228
Martin H. Waldinger, Trustee N/A $53,228
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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, 1995.
***As of December 31, 1995, Janus Funds consisted of two registered investment
companies comprised of a total of 26 funds.
+Mr. Craig became a Trustee as of June 30, 1995.
18
<PAGE>
SHARES OF THE TRUST
NET ASSET VALUE DETERMINATION
As stated in the Prospectus, the net asset value ("NAV") of Portfolio
shares is determined once each day on which the NYSE is open, at the close of
its regular trading session (normally 4:00 p.m., New York time, Monday through
Friday). The NAV of Portfolio shares is not determined on days the NYSE is
closed (generally, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas). The per share NAV of
the Portfolio is determined by dividing the total value of the Portfolio's
securities and other assets, less liabilities, by the total number of shares
outstanding. In determining NAV, securities listed on an Exchange, the NASDAQ
National Market and foreign markets are valued at the closing prices on such
markets, or if such price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their current
bid price. Municipal securities held by the Portfolio are traded primarily in
the over-the-counter market. Valuations of such securities are furnished by one
or more pricing services employed by the Portfolio and are based upon a
computerized matrix system or appraisals obtained by a pricing service, in each
case in reliance upon information concerning market transactions and quotations
from recognized municipal securities dealers. Other securities that are traded
on the over-the-counter market are valued at their closing bid prices. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the NYSE. The Portfolio will determine the market
value of individual securities held by it, by using prices provided by one or
more professional pricing services which may provide market prices to other
funds, or, as needed, by obtaining market quotations from independent
broker-dealers. Short-term securities maturing within 60 days are valued on the
amortized cost basis. Securities for which quotations are not readily available,
and other assets, are valued at fair values determined in good faith under
procedures established by and under the supervision of the Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the NYSE is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which the Portfolio's NAV is not calculated. The Portfolio calculates its
NAV per share, and therefore effects sales, redemptions and repurchases of its
shares, as of the close of the NYSE once on each day on which the NYSE is open.
Such calculation may not take place contemporaneously with the determination of
the prices of the foreign portfolio securities used in such calculation.
PURCHASES
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 the
regular trading session NYSE 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.
REDEMPTIONS
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 Portfolio 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 Portfolio is governed
by Rule 18f-1 under the 1940 Act, which requires the Portfolio to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Portfolio
during any 90-day period for any one shareholder. Should redemptions by any
shareholder exceed such limitation, the Portfolio 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 "Shares
of the Trust - Net Asset Value Determination" and such valuation will be made as
of the same time the redemption price is determined.
The right to require the Portfolio 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 SEC, or the NYSE is closed except for holidays
and weekends, (2) the SEC permits such suspension and so orders, or (3) an
emergency exists as determined by the SEC so that disposal of securities or
determination of NAV is not reasonably practicable.
19
<PAGE>
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Portfolio to make distributions of substantially all
of its investment income and any net realized capital gains, if any, in June and
December of each year. It is also a policy of the Portfolio to qualify as
regulated investment company by satisfying certain requirements prescribed by
Subchapter M of the Code. In addition, the Portfolio intends to comply with the
diversification requirements of Code Section 817(h) related to the tax-deferred
status of insurance company separate accounts.
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.
The Portfolio may purchase the securities of certain foreign corporations
considered to be passive foreign investment companies by the IRS. In order to
avoid taxes and interest that must be paid by the Portfolio if these investments
are profitable, the Portfolio may make various elections permitted by the tax
laws. However, these elections could require that the Portfolio recognize
taxable income, which in turn must be distributed, before the securities are
sold and before cash is received to pay the distributions.
Some foreign securities purchased by the Portfolio may be subject to
foreign taxes which could reduce the yield on such securities. The amount of
such foreign taxes is expected to be insignificant. Accordingly, the Portfolio
does not intend to make the election permitted under section 853 of the Code to
pass through such taxes to shareholders as a foreign tax credit. As a result,
any foreign taxes paid or accrued will represent an expense to the Portfolio
which will reduce its investment company taxable income as this would increase
the taxable income reported to shareholders and require shareholders to take the
credit on their tax returns, complicating the preparation of such returns.
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
September 30, 1996, 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 separate
account owning more than 5% of the Portfolio is as follows:
JANUS CAPITAL - 24.64%
WESTERN RESERVE - 75.36%
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 is an open-end management investment company registered under the
1940 Act and organized as a Delaware business trust, which was created 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.
Currently, the Trust is offering nine series of shares, known as "Portfolios."
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 $.001 per share for each series of the
Trust. Shares of the Portfolio 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
20
<PAGE>
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 and review the investment decisions of the
officers.
The present Trustees were elected by the initial trustee of the Trust 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 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 portfolio of the
Trust will vote separately only with respect to those matters that affect only
that portfolio or if a portfolio's interest in a matter differs from the
interests of other portfolios of the Trust.
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 SEC, 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.
PERFORMANCE INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
Quotations of average annual total return for the Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over periods of 1, 5, and 10 years (up
to the life of the Portfolio). These are the annual total rates of return that
would equate the initial amount invested to the ending redeemable value. These
rates of return are calculated pursuant to the following formula: P(1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Portfolio
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid.
The Portfolio was made available for sale on May 1, 1996. The lifetime
total return, for the period May 1, 1996 through August 31, 1996 was 4.42%.
Quotations of the Portfolio's yield are based on the investment income per
share earned during a particular 30-day period (including dividends, if any, and
interest), less expenses accrued during the period ("net investment income"),
and are computed by dividing net investment income by the net asset value per
share on the last day of the period, according to the following formula:
YIELD = 2 [(a-b + 1)6 - 1]
cd
where a = dividend and interest income
b = expenses accrued for the period
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = maximum net asset value per share on the last day of the
period
21
<PAGE>
The yield for the 30-day period ended August 31, 1996 was 9.03%.
Quotations of yield or total return for the Portfolio will not take into
account charges and deductions against any variable annuity contracts and
variable life insurance contracts to which the Portfolio shares are sold. The
Portfolio's yield and total return should not be compared with other mutual
funds that sell their shares directly to the public since the figures provided
do not reflect charges against the variable annuity contracts and variable life
insurance contracts.
From time to time in advertisements or sales material, the Portfolio may
discuss its performance ratings or other information as published by recognized
mutual fund statistical rating services, including, but not limited to, Lipper
Analytical Services, Inc., Ibbotson Associates, Micropal or Morningstar or by
publications of general interest such as FORBES or MONEY. The Portfolio may also
compare its performance to that of other selected mutual funds, mutual fund
averages or recognized stock market indicators, including, but not limited to,
the Standard & Poor's 500 Composite Stock Price Index, the Standard & Poor's
Midcap Index, the Dow Jones Industrial Average, the Lehman Brothers
Government/Corporate Bond Index, the Lehman Brothers Government/Corporate 1-3
Year Bond Index, the Lehman Brothers Long Government/Corporate Bond Index, the
Lehman Brothers Intermediate Government Bond Index, the Lehman Brothers
Municipal Bond Index, the Russell 2000 Index and the NASDAQ composite. In
addition, the Portfolio may compare its total return to the yield on U.S.
Treasury obligations and to the percentage change in the Consumer Price Index.
Such performance ratings or comparisons may be made with funds that may have
different investment restrictions, objectives, policies or techniques than the
Portfolio and such other funds or market indicators may be comprised of
securities that differ significantly from the Portfolio's investments.
FINANCIAL STATEMENTS
The following unaudited financial statements for the period ended August
31, 1996 are included in this SAI.
Schedule of Investments as of August 31, 1996
Statement of Operations for the period May 1, 1996 to August 31, 1996
Statement of Assets and Liabilities as of August 31, 1996
Statement of Changes in Net Assets for the period May 1, 1996 to August 31,
1996
Financial Highlights for the period May 1, 1996 to August 31, 1996
22
<PAGE>
- --------------------------------------------------------------------------------
JANUS ASPEN HIGH-YIELD PORTFOLIO SCHEDULE OF INVESTMENTS AUGUST 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares or
Principal Amount Market Value
- --------------------------------------------------------------------------------
Corporate Bonds - 51.5%
- --------------------------------------------------------------------------------
Chemicals - 2.7%
$15,000 Sterling Chemicals, Inc., 11.75%
senior subordinated notes,
due 8/15/06 $15,375
- --------------------------------------------------------------------------------
Commercial Services - 2.8%
15,000 Prime Succession Acquisition Co.,
10.75% senior subordinated notes,
due 8/15/04 15,412
- --------------------------------------------------------------------------------
Electronics - 1.9%
10,000 Alpine Group, Inc., 12.25%
senior notes, due 7/15/03 10,350
- --------------------------------------------------------------------------------
Furniture and Home Appliances - 4.6%
15,000 Cort Furniture Rental, 12.00%
senior notes, due 9/1/00 15,656
10,000 Lifestyle Furnishings, Inc., 10.875%
senior subordinated notes,
due 8/1/06 10,063
- --------------------------------------------------------------------------------
25,719
- --------------------------------------------------------------------------------
Homebuilders - 3.6%
10,000 Fortress Group, 13.75%
senior notes, due 5/15/03 10,363
10,000 M.D.C. Holdings, Inc., 11.125%
senior notes, due 12/15/03 9,750
- --------------------------------------------------------------------------------
20,113
- --------------------------------------------------------------------------------
Iron and Steel - 1.7%
10,000 Weirton Steel Corp., 11.375%
senior notes, due 7/1/04 9,625
- --------------------------------------------------------------------------------
Medical - Hospital Management Services - 2.7%
15,000 Paracelsus Healthcare Corp., 10.00%
senior subordinated notes,
due 8/15/06 15,094
- --------------------------------------------------------------------------------
Publishing - Newspaper - 2.0%
10,000 Park Newspapers, Inc., 11.875%
senior notes, due 5/15/06 11,363
- --------------------------------------------------------------------------------
Retail - General Merchandise - 2.7%
15,000 Guitar Center Management, 11.00%
senior notes, due 7/1/06 15,131
- --------------------------------------------------------------------------------
Retail - Grocery - 4.5%
10,000 Carr-Gottstein Foods Co., 12.00%
senior subordinated notes,
due 11/15/05 10,250
15,000 Grand Union Co., 12.00%
senior notes, due 9/1/04 14,812
- --------------------------------------------------------------------------------
25,062
- --------------------------------------------------------------------------------
Services - Amusement and Recreation - 6.4%
20,000 California Hotel Finance, 11.00%
senior subordinated notes,
due 12/1/02 20,800
15,000 Cobblestone Golf Group, 11.50%
senior notes, due 6/1/03 15,188
- --------------------------------------------------------------------------------
35,988
- --------------------------------------------------------------------------------
Shares or
Principal Amount Market Value
- --------------------------------------------------------------------------------
Telecommunications - 14.0%
$10,000 A+ Network, Inc., 11.875%
senior subordinated notes,
due 11/1/05 $ 9,375
20,000 Galaxy Telecom, L.P., 12.375%
senior subordinated notes,
due 10/1/05 20,575
25,000 Millicom International Cellular, zero
coupon, senior discount notes,
due 6/1/06 13,406
10,000 NEXTLINK Communications, L.L.C.,
12.50% senior notes, due 4/15/06 9,912
15,000 Omnipoint Corp., 11.625%
senior notes, due 8/15/06 15,094
10,000 Peoples Telephone Co., Inc., 12.25%
senior notes, due 7/15/02 10,025
- --------------------------------------------------------------------------------
78,387
- --------------------------------------------------------------------------------
Tobacco - 1.9%
10,000 Consolidated Cigar Acquisition Corp.,
10.50% senior subordinated notes,
due 3/1/03 10,463
- --------------------------------------------------------------------------------
Total Corporate Bonds (cost $286,166) 288,082
- --------------------------------------------------------------------------------
Convertible Bonds - 2.7%
15,000 Grupo Financiero Banamex Accival,
S.A. de C.V., 11.00 % junior
convertible subordinated notes,
due 7/15/03 (cost $ 13,983) 14,962
- --------------------------------------------------------------------------------
Preferred Stock - 5.5%
- --------------------------------------------------------------------------------
Financial - Bank Commercial - 3.3%
600 Chevy Chase Savings, 13.00%,
Non-Cumulative 18,450
- --------------------------------------------------------------------------------
Food Processing - 2.2%
300 Dole Food Co., 7.00%, Convertible 12,337
- --------------------------------------------------------------------------------
Total Preferred Stock (cost $30,375) 30,787
- --------------------------------------------------------------------------------
U.S. Government Agency - 8.9%
$50,000 Federal Home Loan Mortgage Corp.
5.16%, 9/3/96, (amortized
cost $50,000) 50,000
- --------------------------------------------------------------------------------
Total Investments - 68.6% (total cost $380,524) 383,831
- --------------------------------------------------------------------------------
Cash, Receivables and Other Assets,
net of Liabilities - 31.4% 175,565
- --------------------------------------------------------------------------------
Net Assets - 100% $559,396
- --------------------------------------------------------------------------------
23
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
For the period May 1, 1996 (inception) through August 31, 1996 Janus Aspen Series
(all numbers in thousands) (unaudited) High-Yield Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest $10
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income 10
Expenses:
Advisory fees 1
System fees 1
Audit fees 3
Other expenses 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 7
- ------------------------------------------------------------------------------------------------------------------------------------
Expense and fee offsets (6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 1
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 9
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from securities transactions 1
Change in net unrealized appreciation or depreciation of investments 3
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain/(loss) on investments 4
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from operations $13
====================================================================================================================================
</TABLE>
24
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
As of August 31, 1996 Janus Aspen Series
(all numbers in thousands except net asset value per share) (unaudited) High-Yield Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Investments at cost $381
====================================================================================================================================
Investments at value $384
Cash --
Receivables:
Investments sold 15
Fund shares sold 173
Interest 8
Other assets 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 582
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investments purchased 19
Accrued expenses 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 23
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets $559
Shares Outstanding, $.001 Par Value (unlimited shares authorized) 54
====================================================================================================================================
Net Asset Value Per Share $10.34
====================================================================================================================================
</TABLE>
25
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
For the period May 1, 1996 (inception) through August 31, 1996 Janus Aspen Series
(in thousands) (unaudited) High-Yield Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income/(loss) $ 9
Net realized gain/(loss) from investment transactions 1
Change in unrealized net appreciation or depreciation of investments 3
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from operations $ 13
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends and Distributions to Shareholders:
Net investment income (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease from dividends and distributions (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Shares sold 634
Reinvested dividends and distributions 3
Shares repurchased (88)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from capital share transactions 549
Net increase/(decrease) in net assets 559
Net Assets:
Beginning of period --
- ------------------------------------------------------------------------------------------------------------------------------------
End of Period $559
====================================================================================================================================
Net Assets consist of:
Capital (par value and paid-in surplus) $549
Undistributed net investment income/(distribution in excess) 6
Undistributed net realized gain/(loss) from investments 1
Unrealized appreciation/(depreciation) of investments 3
- ------------------------------------------------------------------------------------------------------------------------------------
$559
====================================================================================================================================
Transactions in Fund Shares:
Shares sold 62
Reinvested distributions --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 62
Shares repurchased (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 54
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding beginning of period --
Shares outstanding end of period 54
====================================================================================================================================
Purchases and Sales of Investment Securities:
(excluding Short-Term Securities)
Purchases of Securities $634
Proceeds from Sales of Securities 309
Purchases of Long-Term U.S. Government Obligations --
Proceeds from Sales of Long-Term Government Obligations --
====================================================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
For a share outstanding for the period May 1, 1996 (inception) through August 31, 1996 Janus Aspen Series
(unaudited) High-Yield Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .21
Net gains or (losses) on securities (both realized and unrealized) .23
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 10.44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends (from net investment income) (.10)
Distributions (from capital gains) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.34
====================================================================================================================================
Total return** 4.42%
====================================================================================================================================
Net assets, end of period (in thousands) $559
Average net assets for the period (in thousands) $329
Ratio of gross expenses to average net assets* 1.01%(1)
Ratio of net expenses to average net assets** 1.00%
Ratio of net investment income to average net assets* 8.36
Portfolio turnover rate** 313%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The ratio was 6.82% before voluntary waiver of certain fees incurred by the Portfolio.
**Total return not annualized for periods less than one year.
**Annualized.
</TABLE>
27
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