INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 13,1997
Janus Aspen Series
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Statement of Additional Information
_____, 1997
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CAPITAL APPRECIATION PORTFOLIO
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectus for the
Institutional Shares ("Shares") of Capital Appreciation Portfolio (the
"Portfolio"), a separate series of Janus Aspen Series, a Delaware business trust
(the "Trust"). The Shares are sold under the name "Janus Aspen Series". 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").
The 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 other qualified retirement plans. The Portfolio also
offers a second class of shares to certain other participant directed qualified
plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated _____, 1997, 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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CAPITAL APPRECIATION PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
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Investment Policies, Restrictions and Techniques .....................3
Investment Objective ...............................................3
Portfolio Policies .................................................3
Investment Restrictions ............................................3
Types of Securities and Investment Techniques ......................4
Illiquid Investments .............................................4
Zero Coupon, Pay-In-Kind and Step Coupon Securities ..............4
Pass-Through Securities ..........................................5
Investment Company Securities ....................................6
Depositary Receipts ..............................................6
Other Income-Producing Securities ................................6
Repurchase and Reverse Repurchase Agreements .....................7
High-Yield/High-Risk Securities ..................................7
Futures, Options and Other Derivative Instruments ................8
Investment Adviser ...................................................15
Custodian, Transfer Agent and Certain Affiliations ...................16
Portfolio Transactions and Brokerage .................................17
Officers and Trustees ................................................18
Shares of the Trust ..................................................20
Net Asset Value Determination .....................................20
Purchases .........................................................20
Redemptions .......................................................20
Income Dividends, Capital Gains Distributions and Tax Status .........21
Miscellaneous Information ............................................21
Shares of the Trust ...............................................21
Voting Rights .....................................................21
Independent Accountants ...........................................22
Registration Statement ............................................22
Performance Information ..............................................22
Appendix A ...........................................................24
Explanation of Rating Categories ..................................24
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INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
INVESTMENT OBJECTIVE
As stated in the Prospectus, the Portfolio's investment objective is
long-term growth of capital. There can be no assurance that the Portfolio will
achieve its objective. The investment objective of the Portfolio is 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.
Portfolio turnover is calculated by dividing total long-term purchases or
sales, whichever is less, by the average monthly value of a portfolio's
long-term portfolio securities. The Portfolio anticipates that its portfolio
turnover rate should not exceed 200%.
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 or class of shares if a matter affects just the Portfolio or class of
shares), 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 or class of shares) 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 fifty percent (50%) 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 25% or more of the value of its total 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 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 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.
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(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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. 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").
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 Portfolio 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 ("NRSRO"). A foreign security that may be freely traded on or
through the facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security subject to these
procedures.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest up to 10% of its assets 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.
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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 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
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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.
INVESTMENT COMPANY SECURITIES
From time to time, the Portfolio may invest in securities of other
investment companies, including money market funds managed by Janus Capital. The
Portfolio's investments in such money market funds are subject to the terms of
an exemptive order obtained by the Janus funds which currently provides that the
Portfolio will limit its aggregate investment in a Janus money market fund to
the greater of (i) 5% of the investing Portfolio's total assets or (ii) $2.5
million. The Portfolio is subject to the provisions of Section 12(d)(1) of the
1940 Act.
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.
OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolio may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities have
variable or floating rates of interest and, under certain limited circumstances,
may have varying principal amounts. Variable and floating rate securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to some interest rate index or market interest
rate (the "underlying index"). Certain variable rate securities (including
certain mortgage-backed securities) pay interest at a rate that varied inversely
to prevailing short-term interest rates (sometimes referred to as inverse
floaters). For example, upon reset the interest rate payable on a security may
go down when the underlying index has risen.
Standby commitments. These instruments, which are similar to a put, give
the Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by the Portfolio at a specified price.
Tender option bonds. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker, dealer
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
Inverse floaters. Inverse floaters are instruments whose interest bears an
inverse relationship to the interest rate on another security. The Portfolio
will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of its portfolio.
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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. Using reverse repurchase agreements to
earn additional income involves the risk that the interest earned on the
invested proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Portfolio,
although the Portfolio's intent to segregate assets in the amount of the reverse
repurchase agreement minimizes this effect.
HIGH-YIELD/HIGH-RISK SECURITIES
The Portfolio does not intend to invest 35% or more of it's net assets in
debt securities that are rated below investment grade (e.g., securities rated BB
or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or
lower by Moody's Investors Service, Inc. ("Moody's") and unrated securities of
equivalent quality). Lower rated bonds involve a higher degree of credit risk,
which is the risk that the issuer will not make interest or principal payments
when due. In the event of an unanticipated default, the Portfolio would
experience a reduction in its income, and could expect a decline in the market
value of the securities so affected.
The Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, Janus Capital may treat such securities as unrated debt. Unrated debt
securities will be included in the 35% limit of the Portfolio unless its
portfolio manager deems such securities to be the equivalent of investment grade
securities.
Subject to the above limits, the Portfolio may purchase defaulted
securities only when its portfolio manager believes, based upon their analysis
of the financial condition, results of operations and economic outlook of an
issuer, that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation.
Notwithstanding the portfolio manager's belief as to the resumption of income,
however, the purchase of any security on which payment of interest or dividends
is suspended involves a high degree of risk. Such risk includes, among other
things, the following:
Financial and Market Risks. Investments in securities that are in default
involve a high degree of financial and market risks that can result in
substantial or, at times, even total losses. Issuers of defaulted securities may
have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about the
condition of such issuers. The market prices of such securities also are subject
to abrupt and erratic movements and above average price volatility, and the
spread between the bid and asked prices of such securities may be greater than
normally expected.
Disposition of Portfolio Securities. Although these Portfolios generally
will purchase securities for which their portfolio managers expect an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices.
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The Portfolio will limit holdings of any such securities to amounts that the
portfolio managers believe could be readily sold, and holdings of such
securities would, in any event, be limited so as not to limit the Portfolios'
ability to readily dispose of securities to meet redemptions.
Other. Default securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
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 other 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 other 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 anticipates an increase in the price of stocks,
and it intends to purchase stocks at a later time, the Portfolio could enter
into a futures contract to purchase a stock index as a temporary substitute for
stock purchases. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts will increase, thereby
serving as a hedge against the Portfolio not participating in a market advance.
This technique is sometimes known as an anticipatory hedge. To the extent the
Portfolio enters into futures contracts for this purpose, the segregated assets
maintained to cover the Portfolio's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
the futures contracts. Conversely, if the Portfolio holds stocks and seeks to
protect itself from a decrease in stock prices, the Portfolio might sell stock
index futures contracts, thereby hoping to offset the potential decline in the
value of its portfolio securities by a corresponding increase in the value of
the futures contract position. The Portfolio could protect against a decline in
stock prices by selling portfolio securities and investing in money market
instruments, but the use of futures contracts enables it to maintain a defensive
position without having to sell portfolio securities.
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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 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
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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 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 or exposed to foreign currency
fluctuations 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
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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 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 or whose value is tied
to, 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 other 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 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
curren-
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cies, 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 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 other
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 other 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 other 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
other 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 other
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.
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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 is secured by other
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.
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
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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.
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
other 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 NRSRO 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 other
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.
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<PAGE>
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 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 80206-4928.
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.
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 the agreed to compensate Janus Capital for its services
by the monthly payment of a fee at the annual rate of 1% of the first $30
million of the average daily net assets of the Portfolio, .75% of the next $270
million of the average daily net assets of the Portfolio, .70% of the next $200
million of the average daily net assets of the Portfolio and .65% of the average
daily net assets of the Portfolio in excess of $500 million. The advisory fee is
calculated and payable daily. Janus Capital has voluntarily agreed to cap the
advisory fee of the Portfolio at the effective rate of Janus Olympus Fund (the
"retail fund"). The effective rate of the retail fund is the advisory fee
calculated by such fund on the last day of each calendar quarter. If the assets
of the corresponding retail fund exceed the assets of the Portfolio as of the
last day of any calendar quarter, then the advisory fee payable by the Portfolio
for the following calendar quarter will be a flat rate equal to such effective
rate. The effective rate (annualized) of Janus Olympus Fund was ____% for the
quarter ended March 31, 1997.
In addition, Janus Capital has agreed to reimburse the Portfolio by the
amount, if any, that the Portfolio's normal operating expenses chargeable to its
income account, including the investment advisory fee but excluding brokerage
commissions, interest, taxes and extraordinary expenses, exceed an annual rate
of 1.25% of the average daily net assets of the Portfolio through at least April
30, 1998. Mortality risk, expense risk and other charges imposed by
participating insurance companies are excluded from the above expense
limitation.
Janus Capital may terminate the fee reduction or expense limitation
described above at any time upon at least 90 days' notice to the Trustees.
The current Advisory Agreement became effective on December 10, 1996, and
it will continue in effect until June 16, 1998, and thereafter from year to year
so long as such continuance is approved annually by a majority of
15
<PAGE>
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 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 exemptive 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 does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited circumstances contained in Janus Capital's 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 0351,
Boston, Massachusetts 02117-0351 is the custodian of the domestic securities and
cash of the Portfolio. 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. The custodian 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 related to the
Shares, except for out-of-pocket costs.
The Portfolio pays DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset charge of $1 per million dollars of net assets
(not to exceed $500 per month).
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<PAGE>
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.
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, analysis 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
analysis, 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.
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.
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<PAGE>
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.
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 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, 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 80206-4928
Executive Vice President and Trustee of Janus Investment Fund+. Chief
Investment Officer, Vice President, and Director of Janus Capital.
Scott W. Schoelzel* - Executive Vice President and Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Vice President of Janus Capital. From 1991 to 1993, a Portfolio Manager
with Founders Asset Management, Denver, Colorado. Prior to 1991, a general
partner of Ivy Lane Investments, Denver, Colorado (a real estate investment
partnership).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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).
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
#Member of the Executive Committee.
+Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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<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).
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Retail
Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
- --------------------------------------------------------------------------------
*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 Trust Instrument, Delaware law or
the 1940 Act.
The following table shows the aggregate compensation paid to each Trustee
by the Portfolio described in this SAI 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 Portfolio for fiscal year Janus Funds for calendar year
Name of Person, Position ended December 31, 1996** ended December 31, 1996***
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, Trustee* -- --
John W. Shepardson, Trustee+ N/A $
William D. Stewart, Trustee N/A $
Gary O. Loo, Trustee N/A $
Dennis B. Mullen, Trustee N/A $
Martin H. Waldinger, Trustee N/A $
James T. Rothe, Trustee++ N/A $0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
* 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, 1996.
***As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
+ Mr. Shepardson retired on March 31, 1997.
++ Mr. Rothe began serving as Trustee on January 1, 1997.
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's Shares is determined by dividing the total value of the
Portfolio's securities and other assets, less liabilities attributable to the
Shares of the Portfolio, 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 of the 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 certain 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
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<PAGE>
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.
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Portfolio's Shares to make semiannual distributions
in June and December of substantially all of their investment income and an
annual distribution in June of their net realized capital gains, if any. 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. The Portfolio, may from year
to year make the election permitted under section 853 of the Code to pass
through such taxes to shareholders as a foreign tax credit. If such an election
is not made, any foreign taxes paid or accrued will represent an expense to the
Portfolio which will reduce its investment company taxable income.
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.
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.
As of the date of this SAI, the Trust is offering eleven series of shares, known
as "portfolios," in two classes. Additional series and/or classes 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. The
Shares of the Portfolio participate equally in dividends and other distributions
by the Shares of 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.
The Portfolio currently offers two classes of shares. The Shares discussed
in this SAI are offered only in connection with investment in and payments under
variable contracts and life insurance contracts, as well as certain qualified
retirement plans. A second class of shares, Retirement Shares, are offered only
to participant directed qualified retirement plans whose service providers
require a fee from Trust assets for providing certain services to plan
participants.
VOTING RIGHTS
A participating insurance company issuing a variable insurance contract
will vote shares in the separate account as required by law and interpretations
thereof, as may be amended or changed from time to time. In accordance with
current law and interpretations, a participating insurance company is required
to request voting instructions
21
<PAGE>
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 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 and Mr. Rothe who were appointed
by the Trustees as of June 30, 1995 and as of January 1, 1997, respectively.
Under the Trust Instrument, each Trustee will continue in office until the
termination of the Trust or his earlier death, retirement, 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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 or class of the Trust will vote separately only with respect to those
matters that affect only that portfolio or class or if the interest of a
portfolio or class in a matter differs from the interests of other portfolios or
classes 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.
Yield quotations of the Portfolio's Shares 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
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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 400
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.
23
<PAGE>
APPENDIX A
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the adviser considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
STANDARD & POOR'S RATINGS SERVICES
Bond Rating Explanation
- --------------------------------------------------------------------------------
Investment Grade
AAA Highest rating; extremely strong capacity to pay
principal and interest.
AA High quality; very strong capacity to pay
principal and interest.
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects
of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters,
but adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher rated bonds.
Noninvestment Grade
BB, B, Predominantly speculative with respect to the
CCC, CC, C issuer's capacity to meet required interest and
principal payments. BB - lowest degree of
speculation; C - the highest degree of
speculation. Quality and protective
characteristics outweighed by large uncertainties
or major risk exposure to adverse conditions. D In
default.
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Investment Grade
Aaa Highest quality, smallest degree of investment
risk.
Aa High quality; together with Aaa bonds, they
compose the high-grade bond group.
A Upper-medium grade obligations; many favorable
investment attributes.
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
Noninvestment Grade
Ba
More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other
contract terms over time.
Caa Poor standing, may be in default; elements of
danger with respect to principal or interest
payments.
Ca Speculative in a high degree; could be in default
or have other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever
attaining investment standing.
- --------------------------------------------------------------------------------
Unrated securities are treated as noninvestment grade securities unless the
portfolio manager determines that such securities are the equivalent of
investment grade. Securities that have received different ratings from more than
one agency are considered investment grade if at least one agency has rated the
security investment grade.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 13,1997
JANUS ASPEN SERIES
EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Statement of Additional Information
_______, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectus for the
Institutional Shares (the "Shares") of Equity Income Portfolio (the
"Portfolio"), a separate series of Janus Aspen Series, a Delaware business trust
(the "Trust"). The Shares are sold under the name "Janus Aspen Series." 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").
The 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 also offers
a second class of shares to certain participant directed qualified plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated ______, 1997, 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.
[LOGO] JANUS
<PAGE>
EQUITY INCOME PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
- --------------------------------------------------------------------------------
Investment Policies, Restrictions and Techniques .....................3
Investment Objective ..............................................3
Portfolio Policies ................................................3
Investment Restrictions ...........................................3
Types of Securities and Investment Techniques .....................4
Illiquid Investments ............................................4
Zero Coupon, Pay-In-Kind and Step Coupon Securities .............4
Pass-Through Securities .........................................5
Investment Company Securities ...................................6
Depositary Receipts .............................................6
Other Income-Producing Securities ...............................6
Repurchase and Reverse Repurchase Agreements ....................6
High-Yield/High-Risk Securities .................................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 ........19
Miscellaneous Information ...........................................20
Shares of the Trust ..............................................20
Voting Rights ....................................................20
Independent Accountants ..........................................21
Registration Statement ...........................................21
Performance Information .............................................21
Appendix A ..........................................................22
Explanation of Rating Categories .................................22
- --------------------------------------------------------------------------------
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INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
INVESTMENT OBJECTIVE
As stated in the Prospectus, the Portfolio's investment objective is
current income and long-term growth of capital. There can be no assurance that
the Portfolio will achieve its objective. The investment objective of the
Portfolio is 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.
Portfolio turnover is calculated by dividing total long-term purchases or
sales, whichever is less, by the average monthly value of a portfolio's
long-term portfolio securities. The Portfolio anticipates that its portfolio
turnover rate should not exceed 200%.
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 or class of shares if a matter affects just the Portfolio or class of
shares), 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 or class of shares) 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 25% or more of the value of its total 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 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 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.
(b) 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.
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(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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. 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").
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 Portfolio 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 ("NRSRO"). A foreign security that may be freely traded on or
through the facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security subject to these
procedures.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest up to 10% of its assets 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
4
<PAGE>
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 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.
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INVESTMENT COMPANY SECURITIES
From time to time, the Portfolio may invest in securities of other
investment companies, including money market funds managed by Janus Capital. The
Portfolio's investments in such money market funds are subject to the terms of
an exemptive order obtained by the Janus funds which currently provides that the
Portfolio will limit its aggregate investment in a Janus money market fund to
the greater of (i) 5% of the investing Portfolio's total assets or (ii) $2.5
million. The Portfolio is subject to the provisions of Section 12(d)(1) of the
1940 Act.
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.
OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolio may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities have
variable or floating rates of interest and, under certain limited circumstances,
may have varying principal amounts. Variable and floating rate securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to some interest rate index or market interest
rate (the "underlying index"). Certain variable rate securities (including
certain mortgage-backed securities) pay interest at a rate that varies inversely
to prevailing short-term interest rates (sometimes referred to as inverse
floaters). For example, upon reset the interest rate payable on a security may
go down when the underlying index has risen.
Standby commitments. These instruments, which are similar to a put, give
the Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by the Portfolio at a specified price.
Tender option bonds. Tender option bonds are generally long-term securities
that are coupled with the agreement of a third party (such as a broker, dealer
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
Inverse floaters. Inverse floaters are debt instruments whose interest
bears an inverse relationship to the interest rate on another security. The
Portfolio will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of its portfolio.
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 agree-
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ment, 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. Using reverse repurchase agreements to earn
additional income involves the risk that the interest earned on the invested
proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Portfolio,
although the Portfolio's intent to segregate assets in the amount of the reverse
repurchase agreement minimizes this effect.
HIGH-YIELD/HIGH-RISK SECURITIES
The Portfolio does not intend to invest 35% or more of it's net assets in
debt securities that are rated below investment grade (e.g., securities rated BB
or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or
lower by Moody's Investors Service, Inc. ("Moody's")). Lower rated bonds involve
a higher degree of credit risk, which is the risk that the issuer will not make
interest or principal payments when due. In the event of an unanticipated
default, the Portfolio would experience a reduction in its income, and could
expect a decline in the market value of the securities so affected.
The Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, Janus Capital may treat such securities as unrated debt. Unrated debt
securities will be included in the 35% limit unless the portfolio managers deem
such securities to be the equivalent of investment grade securities.
Subject to the above limits, the Portfolio may purchase defaulted
securities only when its portfolio manager believes, based upon their analysis
of the financial condition, results of operations and economic outlook of an
issuer, that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation.
Notwithstanding the portfolio manager's belief as to the resumption of income,
however, the purchase of any security on which payment of interest or dividends
is suspended involves a high degree of risk. Such risk includes, among other
things, the following:
Financial and Market Risks. Investments in securities that are in default
involve a high degree of financial and market risks that can result in
substantial or, at times, even total losses. Issuers of defaulted securities may
have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about the
condition of such issuers. The market prices of such securities also are subject
to abrupt and erratic movements and above average price volatility, and the
spread between the bid and asked prices of such securities may be greater than
normally expected.
Disposition of Portfolio Securities. Although these Portfolios generally
will purchase securities for which their portfolio managers expect an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices. The Portfolio will limit holdings
of any such securities to amounts that the portfolio managers believe could be
readily sold, and holdings of such securities would, in any event, be limited so
as not to limit the Portfolios' ability to readily dispose of securities to meet
redemptions.
Other. Defaulted securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
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 other 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,
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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 other 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 anticipates an increase in the price of stocks,
and it intends to purchase stocks at a later time, the Portfolio could enter
into a futures contract to purchase a stock index as a temporary substitute for
stock purchases. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts will increase, thereby
serving as a hedge against the Portfolio not participating in a market advance.
This technique is sometimes known as an anticipatory hedge. To the extent the
Portfolio enters into futures contracts for this purpose, the segregated assets
maintained to cover the Portfolio's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
the futures contracts. Conversely, if the Portfolio holds stocks and seeks to
protect itself from a decrease in stock prices, the Portfolio might sell stock
index futures contracts, thereby hoping to offset the potential decline in the
value of its portfolio securities by a corresponding increase in the value of
the futures contract position. The Portfolio could protect against a decline in
stock prices by selling portfolio securities and investing in money market
instruments, but the use of futures contracts enables it to maintain a defensive
position without having to sell portfolio securities.
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 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.
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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 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
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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 or exposed to foreign currency
fluctuations 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 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 or whose value is tied
to, 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 other 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 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.
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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 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 other
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 other 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 other 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
other 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 other
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.
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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 is secured by other
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.
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.
12
<PAGE>
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.
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
other 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 NRSRO 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 other
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
13
<PAGE>
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 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 80206-4928.
The Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolio's investments, provide
office space for the Portfolio and pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital.
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 1% of the first $30 million
of the average daily net assets of the Portfolio, .75% of the next $270 million
of the average daily net assets of the Portfolio, .70% of the next $200 million
of the average daily net assets of the Portfolio and .65% of the average daily
net assets of the Portfolio in excess of $500 million. The advisory fee is
calculated and payable daily. Janus Capital has voluntarily agreed to cap the
advisory fee of the Portfolio at the effective rate of Janus Equity Income Fund
(the "retail fund"). The effective rate of the retail fund is the advisory fee
calculated by such fund on the last day of each calendar quarter. If the assets
of the corresponding retail fund exceed the assets of the Portfolio as of the
last day of any calendar quarter, then the advisory fee payable by the Portfolio
for the following calendar quarter will be a flat rate equal to such effective
rate. The effective rate (annualized) of Janus Equity Income Fund was ____% for
the quarter ended March 31, 1997.
In addition, Janus Capital has agreed to reimburse the Portfolio by the
amount, if any, that the Portfolio's normal operating expenses chargeable to its
imcome account, including the investment advisory fee but excluding brokerage
commissions, interest, taxes and extraordinary expenses, exceed an annual rate
of 1.25% of the average daily net assets of the Portfolio through at least April
30, 1998. Mortality risk, expense risk and other charges imposed by
participating insurance companies are excluded from the above expense
limitation.
Janus Capital may terminate the fee reduction or expense limitation
described above at any time upon at least 90 days' notice to the Trustees.
The current Advisory Agreement became effective on December 10, 1996, and
it will continue in effect until June 16, 1998, 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.
14
<PAGE>
Janus Capital also performs investment advisory services for other mutual
funds, and for individual, charitable, corporate and retirement accounts.
Investment decisions for each account managed by Janus Capital, including the
Portfolio, are made independently from those for any other account that is or
may in the future become managed by Janus Capital or its affiliates. If,
however, a number of accounts managed by Janus Capital are contemporaneously
engaged in the purchase or sale of the same security, the orders may be
aggregated and/or the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by an account or the size of the position obtained or
liquidated for an account. Pursuant to an exemptive 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 does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited circumstances contained in Janus Capital's 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 0351,
Boston, Massachusetts 02117-0351 is the custodian of the domestic securities and
cash of the Portfolio. 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. The custodian 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 related to the
Shares, except for out-of-pocket costs.
The Portfolio pays DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset charge of $1 per million dollars of net assets
(not to exceed $500 per month).
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
15
<PAGE>
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.
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.
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.
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<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 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, 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 80206-4928
Executive Vice President and Trustee of Janus Investment Fund+. Chief
Investment Officer, Vice President, and Director of Janus Capital.
Blaine P. Rollins* - Executive Vice President and Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Formerly, fixed-income trader and equity securities analyst at Janus
Capital (1990-1995).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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).
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).
- --------------------------------------------------------------------------------
* Interested person of the Trust and of Janus Capital.
# Member of the Executive Committee.
+Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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<PAGE>
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).
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Retail
Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
- --------------------------------------------------------------------------------
*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 Trust Instrument, Delaware law or
the 1940 Act.
The following table shows the aggregate compensation paid to each Trustee
by the Portfolio described in this SAI 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 Portfolio for fiscal year Janus Funds for calendar year
Name of Person, Position ended December 31, 1996** ended December 31, 1996***
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, Trustee* -- --
John W. Shepardson, Trustee+ N/A $
William D. Stewart, Trustee N/A $
Gary O. Loo, Trustee N/A $
Dennis B. Mullen, Trustee N/A $
Martin H. Waldinger, Trustee N/A $
James T. Rothe, Trustee++ N/A $0
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1996.
***As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
+Mr. Shepardson retired on March 31, 1997.
++Mr. Rothe began serving as Trustee on January 1, 1997.
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<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's Shares is determined by dividing the total value of the
Portfolio's securities and other assets, less liabilities attributable to the
Shares of the Portfolio, 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 of the 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.
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INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Portfolio's Shares to make semiannual distributions
in June and December of substantially all of their investment income and an
annual distribution in June of their net realized capital gains, if any. 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. The Portfolio, may from year
to year make the election permitted under section 853 of the Code to pass
through such taxes to shareholders as a foreign tax credit. If such an election
is not made, any foreign taxes paid or accrued will represent an expense to the
Portfolio which will reduce its investment company taxable income.
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.
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.
As of the date of this SAI, the Trust is offering eleven series of shares, known
as "portfolios," in two classes. Additional series and/or classes 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 Shares of 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.
The Portfolio currently offers two classes of shares. The Shares discussed
in this SAI are offered only in connection with investment in and payments under
variable contracts and life insurance contracts, as well as certain qualified
retirement plans. A second class of shares, Retirement Shares, are offered only
to certain participant directed qualified plans whose service providers require
a fee from Trust assets for providing certain services to plan participants.
VOTING RIGHTS
A participating insurance company issuing a variable insurance contract
will vote shares in the separate account as required by law and interpretations
thereof, as may be amended or changed from time to time. In accordance with
current law and interpretations, a participating insurance company is required
to request voting instructions from policy owners and must vote shares in the
separate account, including shares for which no instructions have been received,
in proportion to the voting instructions received. Additional information may be
found in the participating insurance company's separate account prospectus.
The 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 and Mr. Rothe who were appointed
by the Trustees as of June 30, 1995 and as of January 1, 1997, respectively.
Under the Trust Instrument, each Trustee will continue in office until the
termination of the Trust or his earlier death, retirement, 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
20
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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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 or class of the Trust will vote separately only with respect to those
matters that affect only that portfolio or class or if an interest of a
portfolio or class in a matter differs from the interests of other portfolios or
classes 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.
Yield quotations of the Portfolio's Shares 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
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 400
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.
21
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APPENDIX A
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the adviser considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
STANDARD & POOR'S RATINGS SERVICES
Bond Rating Explanation
- --------------------------------------------------------------------------------
Investment Grade
AAA Highest rating; extremely strong capacity to pay principal
and interest.
AA High quality; very strong capacity to pay principal and
interest.
A Strong capacity to pay principal and interest; somewhat more
susceptible to the adverse effects of changing circumstances
and economic conditions.
BBB Adequate capacity to pay principal and interest; normally
exhibit adequate protection parameters, but adverse economic
conditions or changing circumstances more likely to lead to
a weakened capacity to pay principal and interest than for
higher rated bonds.
Non-Investment Grade
BB, B, Predominantly speculative with respect to the issuer's
CCC, CC, C capacity to meet required interest and principal payments.
BB - lowest degree of speculation; C - the highest degree of
speculation. Quality and protective characteristics
outweighed by large uncertainties or major risk exposure to
adverse conditions.
D In default.
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Investment Grade
Aaa Highest quality, smallest degree of investment risk.
Aa High quality; together with Aaa bonds, they compose the
high-grade bond group.
A Upper-medium grade obligations; many favorable investment
attributes.
Baa Medium-grade obligations; neither highly protected nor
poorly secured. Interest and principal appear adequate for
the present but certain protective elements may be lacking
or may be unreliable over any great length of time.
Non-Investment Grade
Ba More uncertain, with speculative elements. Protection of
interest and principal payments not well safeguarded during
good and bad times.
B Lack characteristics of desirable investment; potentially
low assurance of timely interest and principal payments or
maintenance of other contract terms over time.
Caa Poor standing, may be in default; elements of danger with
respect to principal or interest payments.
Ca Speculative in a high degree; could be in default or have
other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever attaining
investment standing.
- --------------------------------------------------------------------------------
Unrated securities will be treated as noninvestment grade securities unless
the portfolio manager determines that such securities are the equivalent of
investment grade securities. Securities that have received ratings from more
than one agency are considered investment grade if at least one agency has rated
the security investment grade.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 13,1997
Janus Aspen Series
- --------------------------------------------------------------------------------
Statement of Additional Information
_____, 1997
- --------------------------------------------------------------------------------
GROWTH PORTFOLIO BALANCED PORTFOLIO
AGGRESSIVE GROWTH PORTFOLIO FLEXIBLE INCOME PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO HIGH-YIELD PORTFOLIO
WORLDWIDE GROWTH PORTFOLIO SHORT-TERM BOND PORTFOLIO
RETIREMENT SHARES
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectus for the
Retirement Shares (the "Shares") of the portfolios listed above, each of which
is a separate series of Janus Aspen Series, a Delaware business trust (the
"Trust"). Each of these series of the Trust represents shares of beneficial
interest in a separate portfolio of securities and other assets with its own
objective and policies (individually, a "Portfolio" and collectively, the
"Portfolios"). Each Portfolio is managed separately by Janus Capital Corporation
("Janus Capital").
The Shares may be purchased only by certain participant directed qualified
plans. Each Portfolio also offers a second class of shares to the separate
accounts of insurance companies for the purpose of funding variable life
insurance policies and variable annuity contracts (collectively, "variable
insurance contracts") and certain other qualified retirement plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated _____, 1997, which is incorporated by reference into this SAI
and may be obtained from your plan sponsor. This SAI contains additional and
more detailed information about the Portfolios' operations and activities than
the Prospectus.
<PAGE>
JANUS ASPEN SERIES
RETIREMENT SHARES
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
- --------------------------------------------------------------------------------
Investment Policies, Restrictions and Techniques..................... 3
Investment Objectives............................................. 3
Portfolio Policies................................................ 3
Investment Restrictions Applicable to All Portfolios...............4
Investment Policies Applicable to Certain Portfolios...............5
Types of Securities and Investment Techniques......................5
Illiquid Investments ............................................5
Zero Coupon, Pay-In-Kind and Step Coupon Securities..............6
Pass-Through Securities..........................................6
Investment Company Securities ...................................7
Depositary Receipts .............................................7
Municipal Obligations............................................7
Other Income-Producing Securities................................8
Repurchase and Reverse Repurchase Agreements.....................8
High-Yield/High-Risk Securities..................................8
Futures, Options and Other Derivative Instruments................9
Investment Adviser....................................................16
Custodian, Transfer Agent and Certain Affiliations....................18
Portfolio Transactions and Brokerage..................................19
Officers and Trustees.................................................21
Shares of the Trust...................................................24
Net Asset Value Determination......................................24
Purchases..........................................................24
Distribution Plan..................................................25
Redemptions........................................................25
Income Dividends, Capital Gains Distributions and Tax Status..........25
Miscellaneous Information.............................................26
Shares of the Trust................................................26
Voting Rights......................................................26
Independent Accountants............................................26
Registration Statement.............................................26
Performance Information...............................................27
Financial Statements .................................................28
Appendix A ...........................................................29
Explanation of Ratings Categories .................................29
- --------------------------------------------------------------------------------
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INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
Each Portfolio's investment objective is discussed in the Prospectus and
summarized below. There is no assurance that the Portfolios will achieve their
respective objectives. The investment objectives of the Portfolios are not
fundamental and may be changed by the Trustees without shareholder approval.
INVESTMENT OBJECTIVES
Growth Portfolio is a diversified fund that seeks long-term growth of
capital in a manner consistent with the preservation of capital by investing
primarily in common stocks of issuers of any size. Generally, this Portfolio
emphasizes issuers with larger market capitalizations.
Aggressive Growth Portfolio is a nondiversified fund that seeks long-term
growth of capital by investing primarily in common stocks. The Portfolio intends
to normally invest at least 50% of its equity assets in securities issued by
medium-sized companies (as defined in the Prospectus).
International Growth Portfolio is a diversified fund that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers of
any size. The Portfolio normally invests at least 65% of its total assets in
issuers from at least five different countries excluding the United States.
Worldwide Growth Portfolio is a diversified fund that seeks long-term
growth of capital in a manner consistent with the preservation of capital by
investing primarily in common stocks of foreign and domestic issuers of any
size. Worldwide Growth Portfolio normally invests in issuers from at least five
different countries including the United States.
Balanced Portfolio is a diversified fund that seeks long-term capital
growth, consistent with preservation of capital and balanced by current income.
The Portfolio normally invests 40-60% of its assets in securities selected
primarily for growth potential and 40-60% of its assets in securities selected
primarily for their income potential.
Flexible Income Portfolio is a diversified fund that seeks to maximize
total return consistent with preservation of capital. Total return is expected
to result from a combination of current income and capital appreciation,
although income will normally be the dominant component of total return. The
Portfolio invests in all types of income-producing securities, and may have
substantial holdings of debt securities rated below investment grade.
High-Yield Portfolio is a diversified fund that seeks high current income
as its primary objective and capital appreciation as its secondary objective
when consistent with the primary objective by investing in high-yield/ high-risk
fixed income securities. The Portfolio emphasizes investments in high-yield
corporate debt securities ("junk bonds") and may invest all of its assets in
such securities.
Short-Term Bond Portfolio is a diversified fund that seeks as high a level
of current income as is consistent with the preservation of capital by investing
primarily in short- and intermediate-term fixed-income securities. It will
normally maintain an average weighted effective maturity not to exceed three
years.
PORTFOLIO POLICIES
The Prospectus discusses the types of securities in which the Portfolios
will invest, policies of the Portfolios and the investment techniques of the
Portfolios. The Prospectus includes a discussion of portfolio turnover policies.
Portfolio turnover is calculated by dividing total purchases or sales, whichever
is less, by the average monthly value of a Portfolio's securities. The following
table summarizes the portfolio turnover rates for the fiscal periods indicated.
The information below is for fiscal years ended December 31.
[TO BE FILED BY AMENDMENT]
Portfolio Name 1996 1995
---------------------------------------------------------------------------
Growth Portfolio % 185%
Aggressive Growth Portfolio % 155%
International Growth Portfolio % 211%
Worldwide Growth Portfolio % 113%
Balanced Portfolio % 149%
Flexible Income Portfolio % 236%
High-Yield Portfolio %(1) N/A
Short-Term Bond Portfolio % 417%
---------------------------------------------------------------------------
(1) May 1, 1996 (inception) to December 31, 1996, annualized.
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INVESTMENT RESTRICTIONS APPLICABLE TO ALL PORTFOLIOS
As indicated in the Prospectus, the Portfolios are 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 a particular
Portfolio or particular class of Shares if a matter affects just that Portfolio
or that class of Shares), 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 a particular Portfolio or class of Shares) are
present or represented by proxy. As fundamental policies, each of the Portfolios
may not:
(1) Own more than 10% of the outstanding voting securities of any one
issuer and, as to fifty percent (50%) of the value of the total assets of
Aggressive Growth Portfolio and as to seventy-five percent (75%) of the value of
the total assets of the other Portfolios, 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 a Portfolio
in the securities of such issuer exceeds 5% of the value of such Portfolio's
total assets. With respect to the other 50% of the value of its total assets,
Aggressive Growth Portfolio may invest in the securities of as few as two
issuers.
(2) Invest 25% or more of the value of their respective total assets in any
particular industry (other than U.S. government securities).
(3) Invest directly in real estate or interests in real estate; however,
the Portfolios 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 Portfolios 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 a Portfolio's 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 a Portfolio may be deemed an underwriter in connection with the
disposition of its portfolio securities.
As a fundamental policy, each 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 objective, policies and
limitations as such Portfolio.
The Trustees have adopted additional investment restrictions for the
Portfolios. These restrictions are operating policies of the Portfolios and may
be changed by the Trustees without shareholder approval. The additional
investment restrictions adopted by the Trustees to date include the following:
(a) A 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 that do not fall within the definition of bona
fide hedging transactions will exceed 5% of the fair market value of a
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 such Portfolio's commitments
under outstanding futures contracts positions would exceed the market value of
its total assets.
(b) The Portfolios do not currently intend to sell securities short, unless
they own or have 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.
(c) The Portfolios do not currently intend to purchase securities on
margin, except that the Portfolios 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.
(d) A Portfolio may not mortgage or pledge any securities owned or held by
such Portfolio in amounts that exceed, in the aggregate, 15% of that 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.
4
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(e) The Portfolios may borrow money for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of their respective total assets (including the amount borrowed) less
liabilities (other than borrowings). If borrowings exceed 25% of the value of a
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.
(f) The Portfolios do not currently intend to purchase any security or
enter into a repurchase agreement, if as a result, more than 15% of their
respective 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
Portfolios' 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.
(g) The Portfolios may not invest in companies for the purpose of
exercising control of management.
For the purposes of these investment restrictions, the identification of
the issuer of a municipal obligation depends on the terms and conditions of the
security. When assets and revenues of a political subdivision are separate from
those of the government that created the subdivision and the security is backed
only by the assets and revenues of the subdivision, the subdivision is deemed to
be the sole issuer. Similarly, in the case of an industrial development bond, if
the bond is backed only by assets and revenues of a nongovernmental user, then
the nongovernmental user would be deemed to be the sole issuer. If, however, in
either case, the creating government or some other entity guarantees the
security, the guarantee would be considered a separate security that would be
treated as an issue of the guaranteeing entity.
For purposes of the Portfolios' restriction on investing in a particular
industry, the Portfolios will rely primarily on industry classifications as
published by Bloomberg L.P. To the extent that Bloomberg L.P. classifications
are so broad that the primary economic characteristics in a single class are
materially different, the Portfolios may further classify issuers in accordance
with industry classifications as published by the Securities and Exchange
Commission ("SEC").
INVESTMENT POLICIES APPLICABLE TO CERTAIN PORTFOLIOS
Balanced Portfolio. As an operational policy, at least 25% of the assets of
Balanced Portfolio normally will be invested in fixed-income senior securities,
which include debt securities and preferred stock.
Flexible Income Portfolio. As a fundamental policy, this Portfolio may not
purchase a non-income-producing security if, after such purchase, less than 80%
of the Portfolio's total assets would be invested in income-producing
securities. Income-producing securities include securities that make periodic
interest payments as well as those that make interest payments on a deferred
basis or pay interest only at maturity (e.g., Treasury bills or zero coupon
bonds).
Short-Term Bond Portfolio. As an operational policy, this Portfolio will
not invest in any debt security that, at the time of purchase, causes its
portfolio of debt securities to have a dollar-weighted average, then remaining
effective term to maturity of three years or more. The portfolio manager may
consider estimated prepayment dates or call dates of certain securities in
computing the portfolio's effective maturity.
TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
ILLIQUID INVESTMENTS
Each 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 Portfolios have authorized Janus Capital to make liquidity determinations
with respect to its securities, including Rule 144A Securities, commercial paper
and municipal lease obligations. 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 the 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
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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 ("NRSRO"). A foreign security that may be freely
traded on or through the facilities of an offshore exchange or other established
offshore securities market is not deemed to be a restricted security subject to
these procedures.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
Each Portfolio may invest up to 10% (without limit for High-Yield
Portfolio) of its assets 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"), a Portfolio must
distribute its investment company taxable income, including the original issue
discount accrued on zero coupon or step coupon bonds.Because a 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 that Portfolio may have to
distribute cash obtained from other sources in order to satisfy the distribution
requirements under the Code. A Portfolio might obtain such cash from selling
other portfolio holdings which might cause that Portfolio to incur capital gains
or losses on the sale. Additionally, these actions are likely to reduce the
assets to which Portfolio expenses could be allocated and to reduce the rate of
return for that Portfolio. 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 a 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 Portfolios 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 Portfolios. 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. A 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 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
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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 Portfolios), 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 a
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 a Portfolio might be
converted to cash and that 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 a 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 nor 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.
INVESTMENT COMPANY SECURITIES
From time to time, a Portfolio may invest in securities of other investment
companies, including money market funds managed by Janus Capital. The
Portfolios' investments in such money market funds are subject to the terms of
an exemptive order obtained by the Janus funds which currently provides that
each Portfolio will limit its aggregate investment in a Janus money market fund
to the greater of (i) 5% of the investing Portfolio's total assets or (ii) $2.5
million. The Portfolios are subject to the provisions of Section 12(d)(1) of the
1940 Act.
DEPOSITARY RECEIPTS
The Portfolios 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 Portfolios 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.
MUNICIPAL OBLIGATIONS
The Portfolios may invest in municipal obligations issued by states,
territories and possessions of the United States and the District of Columbia.
The value of municipal obligations can be affected by changes in their actual or
perceived credit quality. The credit quality of municipal obligations can be
affected by, among other things, the financial condition of the issuer or
guarantor, the issuer's future borrowing plans and sources of revenue, the
economic feasibility of the revenue bond project or general borrowing purpose,
political or economic developments in the region where the security is issued,
and the liquidity of the security. Because municipal securities are generally
traded over-the-counter, the liquidity of a particular issue often depends on
the willingness of dealers to make a market in the security. The liquidity of
some municipal obligations may be enhanced by demand features, which would
enable a Portfolio to demand payment on short notice from the issuer or a
financial intermediary.
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OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolios may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities are
relatively long-term instruments that often carry demand features permitting the
holder to demand payment of principal at any time or at specified intervals
prior to maturity.
Standby commitments. These instruments, which are similar to a put, give a
Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by that Portfolio at a specified price.
Tender option bonds. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker, dealer
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
Inverse floaters. Inverse floaters are debt instruments whose interest
bears an inverse relationship to the interest rate on another security. The
Portfolios will not invest more than 5% of their respective assets in inverse
floaters.
The Portfolios will purchase standby commitments, tender options and
instruments with demand features primarily for the purpose of increasing the
liquidity of its portfolio.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, a 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." A 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 a 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, a 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 Portfolios to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by Janus Capital.
A 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, or to earn
additional income on portfolio securities, such as Treasury bills or notes. In a
reverse repurchase agreement, a 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, a Portfolio will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolios will enter into reverse
repurchase agreements only with parties that Janus Capital deems creditworthy.
Using reverse repurchase agreements to earn additional income involves the risk
that the interest earned on the invested proceeds is less than the expense of
the reverse repurchase agreement transaction. This technique may also have a
leveraging effect on the Portfolio, although the Portfolio's intent to segregate
assets in the amount of the reverse repurchase agreement minimizes this effect.
HIGH-YIELD/HIGH-RISK SECURITIES
Flexible Income Portfolio and High-Yield Portfolio may invest without limit
in debt securities that are rated below investment grade (e.g., securities rated
BB or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or
lower by Moody's Investors Service, Inc. ("Moody's")). No other Portfolio
intends to invest 35% or more of its net assets in such securities. Lower rated
securities involve a higher degree of credit risk, which is the risk that the
issuer will not make interest or principal payments when due. In the event of an
unanticipated default, a Portfolio would experience a reduction in its income,
and could expect a decline in the market value of the securities so affected.
Each Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Because these ratings do not
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take into account individual factors relevant to each issue and may not be
updated regularly, Janus Capital may treat such securities as unrated debt.
Unrated debt securities will be included in the 35% limit of each Portfolio
unless its manager deems such securities to be the equivalent of investment
grade securities.
Subject to the above limits, each Portfolio may purchase defaulted
securities only when their portfolio managers believe, based upon their analysis
of the financial condition, results of operations and economic outlook of an
issuer, that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation.
Notwithstanding the respective portfolio manager's belief as to the resumption
of income, however, the purchase of any security on which payment of interest or
dividends is suspended involves a high degree of risk. Such risk includes, among
other things, the following:
Financial and Market Risks. Investments in securities that are in default
involve a high degree of financial and market risks that can result in
substantial or, at times, even total losses. Issuers of defaulted securities may
have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about the
condition of such issuers. The market prices of such securities also are subject
to abrupt and erratic movements and above average price volatility, and the
spread between the bid and asked prices of such securities may be greater than
normally expected.
Disposition of Portfolio Securities. Although these portfolios generally
will purchase securities for which their portfolio managers expect an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices. The Portfolios will limit holdings
of any such securities to amounts that the portfolio managers believe could be
readily sold, and holdings of such securities would, in any event, be limited so
as not to limit the Portfolio's ability to readily dispose of securities to meet
redemptions.
Other. Defaulted securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. The Portfolios 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 other liquid assets by the Portfolios' custodian or subcustodian 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 a Portfolio, that Portfolio may be entitled to return of
margin owed to such 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 Portfolios
do business and by depositing margin payments in a segregated account with the
Portfolios' custodian.
The Portfolios intend 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 Portfolios will use futures contracts and related options
primarily for bona fide hedging purposes within the meaning of CFTC regulations.
To the extent that the Portfolios hold 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 a Portfolio's net
assets, after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into.
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Although a Portfolio will segregate cash and liquid assets in an amount
sufficient to cover its open futures obligations, the segregated assets would be
available to that Portfolio immediately upon closing out the futures position,
while settlement of securities transactions could take several days. However,
because a Portfolio's cash that may otherwise be invested would be held
uninvested or invested in other liquid assets so long as the futures position
remains open, such Portfolio's return could be diminished due to the opportunity
losses of foregoing other potential investments.
A Portfolio's primary purpose in entering into futures contracts is to
protect that 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 anticipates an increase in the price of stocks,
and it intends to purchase stocks at a later time, that Portfolio could enter
into a futures contract to purchase a stock index as a temporary substitute for
stock purchases. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts will increase, thereby
serving as a hedge against that Portfolio not participating in a market advance.
This technique is sometimes known as an anticipatory hedge. To the extent a
Portfolio enters into futures contracts for this purpose, the segregated assets
maintained to cover such Portfolio's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by that Portfolio with respect to
the futures contracts. Conversely, if a Portfolio holds stocks and seeks to
protect itself from a decrease in stock prices, the Portfolio might sell stock
index futures contracts, thereby hoping to offset the potential decline in the
value of its portfolio securities by a corresponding increase in the value of
the futures contract position. A Portfolio could protect against a decline in
stock prices by selling portfolio securities and investing in money market
instruments, but the use of futures contracts enables it to maintain a defensive
position without having to sell portfolio securities.
If a Portfolio owns Treasury bonds and the portfolio manager expects
interest rates to increase, that Portfolio may take a short position in interest
rate futures contracts. Taking such a position would have much the same effect
as that 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 that Portfolio's interest rate futures contract will increase, thereby
keeping the net asset value of that Portfolio from declining as much as it may
have otherwise. If, on the other hand, a portfolio manager expects interest
rates to decline, that Portfolio may take a long position in interest rate
futures contracts in anticipation of later closing out the futures position and
purchasing the bonds. Although a 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 Portfolios believe that use of
such contracts will benefit the Portfolios, a Portfolio's overall performance
could be worse than if such Portfolio had not entered into futures contracts if
the portfolio manager's investment judgement proves incorrect. For example, if a
Portfolio has hedged against the effects of a possible decrease in prices of
securities held in its portfolio and prices increase instead, that 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 a
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 such 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 a
Portfolio will not match exactly such Portfolio's current or potential
investments. A Portfolio may buy and sell futures contracts based on underlying
instruments with different characteristics from the securities in which it
typically
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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
such Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments closely correlate with a
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 a 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. A 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 a 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 that 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 a 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, a 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, such Portfolio's access to other assets held to cover its futures
positions also could be impaired.
Options on Futures Contracts. The Portfolios may buy and write put and call
options on futures contracts. An option on a future gives a Portfolio the right
(but not the obligation) to buy or sell a futures contract at a 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 a 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, a
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in that Portfolio's
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,
a Portfolio will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which that
Portfolio is considering buying. If a call or put option a Portfolio has written
is exercised, such 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, a 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, a 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 a 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.
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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 Portfolios 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 Portfolios' principal uses of
forward foreign currency exchange contracts ("forward currency contracts"). A
Portfolio may enter into forward currency contracts with stated contract values
of up to the value of that 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). A 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"). A Portfolio also may hedge some or all of its
investments denominated in a foreign currency or exposed to foreign currency
fluctuations 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. A 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 a 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 a 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 hedge generally
will not be precise. Shifting a Portfolio's currency exposure from one foreign
currency to another removes that Portfolio's opportunity to profit from
increases in the value of the original currency and involves a risk of increased
losses to such 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 a Portfolio than if it had not
entered into such contracts.
The Portfolios will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated or whose value is tied to,
in the currency underlying the forward contract or the currency being hedged. To
the extent that a Portfolio is not able to cover its forward currency positions
with underlying portfolio securities, the Portfolios' custodian will segregate
cash or other liquid assets having a value equal to the aggregate amount of such
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,
a Portfolio will find alternative cover or segregate additional cash or liquid
assets on a daily basis so that the value of the covered and segregated assets
will be equal to the amount of such Portfolio's commitments with respect to such
contracts. As an alternative to segregating assets, a Portfolio may buy call
options permitting such Portfolio to buy the amount of foreign currency being
hedged by a forward sale contract or a 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 contracts. In such event,
the Portfolios' ability to utilize forward contracts may be restricted. In
addition, a 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 Portfolios 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
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<PAGE>
against such diminutions in the value of portfolio securities, a Portfolio may
buy put options on the foreign currency. If the value of the currency declines,
such 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, a 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 a 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, a Portfolio could sustain losses on
transactions in foreign currency options that would require such Portfolio to
forego a portion or all of the benefits of advantageous changes in those rates.
The Portfolios 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, a
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, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow that 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 a 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, a Portfolio also may lose all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
The Portfolios may write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if that
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 a Portfolio has a call on the
same foreign currency in the same 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 such Portfolio in cash or other
liquid assets in a segregated account with the Portfolios' custodian.
The Portfolios 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
a 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, a Portfolio will collateralize the option by segregating cash or
other 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 Portfolios 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
Portfolios may write and buy options on the same types of securities that the
Portfolios may purchase directly.
A put option written by a Portfolio is "covered" if that Portfolio (i)
segregates cash not available for investment or other liquid assets with a value
equal to the exercise price of the put with the Portfolios' 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 a Portfolio is "covered" if that 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 Portfolios'
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also deemed to be covered if a 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
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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 that
Portfolio in cash and other liquid assets in a segregated account with its
custodian.
The Portfolios also may write call options that are not covered for
cross-hedging purposes. A Portfolio collateralizes its obligation under a
written call option for cross-hedging purposes by segregating cash or other
liquid assets in an amount not less than the market value of the underlying
security, marked-to-market daily. A 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 a 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 a Portfolio to write another
put option to the extent that the exercise price is secured by other liquid
assets. Effecting a closing transaction also will permit a Portfolio to use the
cash or proceeds from the concurrent sale of any securities subject to the
option for other investments. If a Portfolio desires to sell a particular
security from its portfolio on which it has written a call option, such
Portfolio will effect a closing transaction prior to or concurrent with the sale
of the security.
A 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. A 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 a 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 a 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.
A Portfolio may write options in connection with buy-and-write
transactions. In other words, a 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-
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<PAGE>
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, a Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between that
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 a 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, a Portfolio may elect to close the
position or take delivery of the security at the exercise price and that
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.
A Portfolio may buy put options to hedge against a decline in the value of
its portfolio. By using put options in this way, a 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.
A 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
such Portfolio upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to that
Portfolio.
Eurodollar Instruments. A 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 funds and sellers to obtain a fixed rate for
borrowings. A 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.
Swaps and Swap-Related Products. A 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 a 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 a 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
other liquid assets having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Portfolios'
custodian. If a 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. A 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 NRSRO 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, a 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 a
Portfolio sells (i.e., writes) caps and floors, it will segregate cash or other
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 a Portfolio. These transactions may in some instances involve
the delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those
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markets, the risk of loss with respect to interest rate swaps is limited to the
net amount of the payments that a Portfolio is contractually obligated to make.
If the other party to an interest rate swap that is not collateralized defaults,
a Portfolio would risk the loss of the net amount of the payments that it
contractually is entitled to receive. A 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 Portfolios 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 a 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 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 a
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, each Portfolio has an Investment Advisory
Agreement with Janus Capital, 100 Fillmore Street, Denver, Colorado 80206-4928.
Each Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolios' investments, provide
office space for the Portfolios and pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital.
Janus Capital also may make payments to selected broker-dealer firms or
institutions which were instrumental in the acquisition of shareholders for the
Portfolios or other Janus Funds or which perform 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
Portfolios.
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The Portfolios pay 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 Portfolio 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 Agreements, Janus Capital
furnishes certain other services, including net asset value determination,
portfolio accounting and recordkeeping, for which the Portfolios may reimburse
Janus Capital for its costs.
Growth Portfolio, Aggressive Growth Portfolio, International Growth
Portfolio, Worldwide Growth Portfolio and Balanced Portfolio have each agreed to
compensate Janus Capital for its services by the monthly payment of a fee at the
annual rate of 1% of the first $30 million of the average daily net assets of
each Portfolio, .75% of the next $270 million of the average daily net assets of
each Portfolio, .70% of the next $200 million of the average daily net assets of
each Portfolio and .65% of the average daily net assets of each Portfolio in
excess of $500 million. The advisory fee is calculated and payable daily. Janus
Capital has voluntarily agreed to cap the advisory fee of Growth Portfolio,
Aggressive Growth Portfolio, International Growth Portfolio, Worldwide Growth
Portfolio and Balanced Portfolio at the effective rate of Janus Fund, Janus
Enterprise Fund, Janus Overseas Fund, Janus Worldwide Fund and Janus Balanced
Fund (the "retail funds"), respectively. The effective rate of each retail fund
is the advisory fee calculated by such fund on the last day of each calendar
quarter. If the assets of the corresponding retail fund exceed the assets of a
Portfolio as of the last day of any calendar quarter, then the advisory fee
payable by that Portfolio for the following calendar quarter will be a flat rate
equal to such effective rate. The effective rate (annualized) of Janus Fund,
Janus Enterprise Fund, Janus Overseas Fund, Janus Worldwide Fund and Janus
Balanced Fund were ___%, ___%, ___%, ___% and ___%, respectively, for the
quarter ended March 31, 1997.
In addition, Janus Capital has agreed to reimburse International Growth
Portfolio by the amount, if any, that such Portfolio's normal operating expenses
chargeable to its income account in any fiscal year, including the investment
advisory fee but excluding the distribution fee and participant administration
fee described on page 18, brokerage commissions, interest, taxes and
extraordinary expenses, exceed 1.25% of the average daily net assets of the
Portfolio for a fiscal year through April 30, 1998.
High-Yield 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 average daily assets of the Portfolio and .65% of the average
daily net assets in excess of $300 million. Flexible Income Portfolio and
Short-Term Bond Portfolio have each agreed to compensate Janus Capital for its
services by the monthly payment of a fee at the annual rate of .65% of the first
$300 million of the average daily net assets of the Portfolio, plus .55% of the
average daily net assets of the Portfolio in excess of $300 million. The fee is
calculated and payable daily. Janus Capital has agreed to waive the advisory fee
payable by each of these Portfolios in an amount equal to the amount, if any,
that such 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 Flexible Income Portfolio and
High-Yield Portfolio and .65% of the average daily net assets for a fiscal year
for Short-Term Bond Portfolio.
Janus Capital may terminate any of the fee reductions, waivers or expense
limitation arrangements described above at any time upon at least 90 days'
notice to the Trustees.
The following table summarizes the advisory fees paid by the Portfolios and any
advisory fee waivers for the periods indicated. The information below is for
fiscal years ended December 31.
<TABLE>
[TO BE FILED BY AMENDMENT]
1996 1995 1994
Portfolio Name Advisory Fees Waivers(3) Advisory Fees Waivers(3) Advisory Fees Waivers(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio $505,442 -- $173,369 --
Aggressive Growth Portfolio 809,493 -- 109,603 --
International Growth Portfolio 15,182 $12,920 9,008 (2) $ 9,008(1,2)
Worldwide Growth Portfolio 402,832 -- 157,194 --
Balanced Portfolio 46,900 -- 19,489 --
Flexible Income Portfolio 36,114 160 10,635 5,688
High-Yield Portfolio (4) (4) N/A N/A N/A N/A
Short-Term Bond Portfolio 17,725 17,725(1) 11,530 11,530(1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fee waiver by Janus Capital exceeded the advisory fee.
(2) May 2, 1994 (inception) to December 31, 1994.
(3) In addition to these fee waivers, Janus Capital has agreed to reduce the
advisory fee of the Growth, Aggressive Growth, International Growth,
Worldwide Growth, and Balanced Portfolios to the extent that such fee
exceeds the effective rate of the Janus retail fund corresponding to such
Portfolio. See the prospectus for details.
(4) May 1, 1996 (inception) to December 31, 1996.
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The current Advisory Agreement for International Growth Portfolio became
effective on February 10, 1994 and the current Advisory Agreement for High-Yield
Portfolio became effective on March 12, 1996. The current Advisory Agreements
for the other Portfolios became effective on June 16, 1993. Each Advisory
Agreement 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
Portfolios' Trustees who are not parties to the Advisory Agreements or
interested persons of any such party, and by either a majority of the
outstanding voting shares or the Trustees of the Portfolios. Each Advisory
Agreement i) may be terminated without the payment of any penalty by any
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 of the
affected Portfolio, including the Trustees who are not interested persons of
that Portfolio or Janus Capital and, to the extent required by the 1940 Act, the
vote of a majority of the outstanding voting securities of that 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
Portfolios, are made independently from those for any other account that is or
may in the future become managed by Janus Capital or its affiliates. If,
however, a number of accounts managed by Janus Capital are contemporaneously
engaged in the purchase or sale of the same security, the orders may be
aggregated and/or the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by an account or the size of the position obtained or
liquidated for an account. Pursuant to an exemptive order granted by the SEC,
the Portfolios 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 does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited exceptions contained in Janus Capital's policy regarding personal
investing by directors, officers and employees of Janus Capital and the
Portfolios. The policy requires investment personnel and officers of Janus
Capital, inside directors of Janus Capital and the Portfolios 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 Portfolios.
In addition to the pre-clearance requirement described above, the policy
subjects investment personnel, officers and directors/Trustees of Janus Capital
and the Portfolios 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 0351,
Boston, Massachusetts 02117-0351 is the custodian of the domestic securities and
cash of the Portfolios. State Street and the foreign subcustodians selected by
it and approved by the Trustees, have custody of the assets of the Portfolios
held outside the U.S. and cash incidental thereto. The custodians and
subcustodians hold the Portfolios' assets in safekeeping and collect and remit
the income thereon, subject to the instructions of each Portfolio.
Janus Service Corporation ("Janus Service"), P.O. Box 173375, Denver,
Colorado 80217-3375, a wholly-owned subsidiary of Janus Capital, is the
Portfolios' transfer agent. In addition, Janus Service provides certain other
administrative, recordkeeping and shareholder relations services to the
Portfolios. Janus Service receives a participant administration fee at an annual
rate of up to .25% of the average daily net assets of the Shares of each
Portfolio for providing or procuring recordkeeping, subaccounting and other
administrative services to plan participants who invest in the Shares. Janus
Service expects to use substantially all of this fee to compensate qualified
plan service
18
<PAGE>
providers for providing these services (at an annual rate of up to .25% of the
average daily net assets of the Shares attributable to plan participants
receiving services from each service provider). Services provided by qualified
plan service providers may include but are not limited to participant
recordkeeping, processing and aggregating purchase and redemption transactions,
providing periodic statements, forwarding prospectuses, shareholder reports and
other materials to existing plan participants, and other participant
administrative services.
The Portfolios pay DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset fee of $1 per million of net assets (not to
exceed $500 per month).
The Trustees have authorized the Portfolios 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. DST charges
shown above are net of such credits. See "Portfolio Transactions and Brokerage."
Janus Distributors, Inc. ("Janus Distributors"), 100 Fillmore Street,
Denver, Colorado 80206-4928, a wholly-owned subsidiary of Janus Capital, is a
distributor of the Shares. Janus Distributors is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "Exchange Act") and is a member
of the National Association of Securities Dealers, Inc.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Decisions as to the assignment of portfolio business for the Portfolios 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 Portfolios 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.
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 a 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.
19
<PAGE>
For the year ended December 31, 1996, the total brokerage commissions paid
by the Portfolios to brokers and dealers in transactions identified for
execution primarily on the basis of research and other services provided to the
Portfolios are summarized below:
Portfolio Name Commissions Transactions
- --------------------------------------------------------------------------------
Growth Portfolio $ $
Aggressive Growth Portfolio $ $
International Growth Portfolio $ $
Worldwide Growth Portfolio $ $
Balanced Portfolio $ $
Flexible Income Portfolio $ $
High-Yield Portfolio(1,2) $ $
Short-Term Bond Portfolio $ $
- --------------------------------------------------------------------------------
(1) Most of the securities transactions for this Fund involved dealers acting
as principal.
(2) May 1, 1996 (inception) to December 31, 1996.
NOTE:Portfolios that are not included in the table did not pay any commissions
related to research for the stated period.
Janus Capital may use research products and services in servicing other
accounts in addition to the Portfolios. 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
Portfolios. 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 or shares of other
Janus funds 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 a Portfolio i) to
the Portfolio or ii) to other persons on behalf of the Portfolio for services
provided to the Portfolio for which it would be obligated to pay. In placing
Portfolio business with such broker-dealers, Janus Capital will seek the best
execution of each transaction.
When the Portfolios purchase or sell a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where in the opinion
of Janus Capital better prices and executions will be achieved through the use
of a broker.
The Portfolios' 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.
The following table lists the total amount of brokerage commissions paid by
each Portfolio for the fiscal periods ending on December 31st of each year:
<TABLE>
[TO BE FILED BY AMENDMENT]
Portfolio Name 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio $ $355,523 $85,851
Aggressive Growth Portfolio $ $574,631 $86,296
International Growth Portfolio $ $ 14,394 $ 987(1)
Worldwide Growth Portfolio $ $345,216 $33,299
Balanced Portfolio $ $ 18,745 $ 4,171
Flexible Income Portfolio $ N/A N/A
High-Yield Portfolio $ (2) N/A N/A
Short-Term Bond Portfolio $ N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) May 2, 1994 (inception) to December 31, 1994.
(2) May 1, 1996 (inception) to December 31, 1996.
NOTE:Portfolios that are not included in the table did not pay brokerage
commissions because securities transactions for such Portfolios involved
dealers acting as principals.
20
<PAGE>
Included in such brokerage commissions are the following amounts paid to
DSTS, which served to reduce each Portfolio's out-of-pocket expenses as follows:
<TABLE>
Commission
Paid through DSTS
for the Period Ended Reduction % of Total % of Total
Fund Name December 31, 1996* of Expenses* Commissions+ Transactions+
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio $ $ % %
Aggressive Growth Portfolio $ $ % %
International Growth Portfolio $ $ % %
Worldwide Growth Portfolio $ $ % %
Balanced Portfolio $ $ % %
Flexible Income Portfolio $ $ % %
High-Yield Portfolio $(1) $ % %
Short-Term Bond Portfolio $ $ % %
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) May 1, 1996 (inception) to December 31,1996.
* The difference between commissions paid through DSTS and expenses reduced
constitute commissions paid to an unaffiliated clearing broker.
+ Differences in the percentage of total commissions versus the percentage of
total transactions are due, in part, to variations among share prices and
number of shares traded, while average price per share commission rates
were substantially the same.
NOTE:Portfolios that did not execute trades with DSTS during the periods
indicated are not included in the table.
<TABLE>
Commission Commission Paid
Paid Through through DSTS
DSTS for the for the Period Reduction of
Period Ended Reduction of % of Total % of Total Ended Expenses for
Portfolio Name 12/31/95* Expenses* Commissions= Transactions= 12/31/94* that Period*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio $ 9,498 $ 7,123 2.67% 2.29% $2,466 $1,850
Aggressive Growth Portfolio $17,564 $13,173 3.06% 3.00% $2,775 $2,081
International Growth Portfolio $ 37 $ 28 0.26% 0.23% N/A N/A
Worldwide Growth Portfolio $ 4,499 $ 3,374 1.30% 1.71% $ 201 $ 151
Balanced Portfolio $ 450 $ 337 2.40% 2.12% $ 77 $ 57
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The difference between commissions paid to DSTS and expenses reduced
constitute commissions paid to an unaffiliated clearing broker.
+ Differences in the percentage of total commissions versus the percentage of
total transactions are due, in part, to variations among share prices and
number of shares traded, while average price per share commission rates
were substantially the same.
NOTE:Portfolios that did not execute trades with DSTS during the periods indi-
cated are not included in the table.
As of December 31, 1996, certain Portfolios owned securities of their
regular broker-dealers (or parents), as shown below:
Portfolio Name Name of Broker-Dealer Value of Securities Owned
- --------------------------------------------------------------------------------
$
$
$
$
- --------------------------------------------------------------------------------
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 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, 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 80206-4928
Executive Vice President, Trustee and Portfolio Manager of Janus Investment
Fund+. Chief Investment Officer, Vice President and Director of Janus
Capital.
- --------------------------------------------------------------------------------
* 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.
21
<PAGE>
James P. Goff* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund.
Vice President of Janus Capital. Formerly, securities analyst at Janus
Capital (1988 to 1992).
Warren B. Lammert* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund.
Vice President of Janus Capital. Formerly, securities analyst at Janus
Capital (1990 to 1992).
Ronald V. Speaker* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
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).
Helen Young Hayes* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund.
Vice President of Janus Capital. Formerly (1987 to 1993), securities
analyst at Janus Capital.
Blaine P. Rollins* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund.
Formerly, fixed-income trader and equity securities analyst at Janus
Capital (1990-1995).
Sandy R. Rufenacht* - Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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 80206-4928
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. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street, Suite 300
Denver, CO 80206-4928
Treasurer and Chief Accounting Officer of Janus Investment Fund. Director
of Fund Accounting of Janus Capital.
- --------------------------------------------------------------------------------
* 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.
22
<PAGE>
Kelley Abbott Howes* - Secretary
100 Fillmore Street
Denver, CO 80206-4928
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).
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, Suite 500
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. President and a Director of High Valley
Group, Inc., Colorado Springs, Colorado (investments).
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Specialty
Retail Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
The Trustees are responsible for major decisions relating to each
Portfolio's objective, policies and techniques. The Trustees also supervise the
operation of the Portfolios 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 Trust Instrument, Delaware law or
the 1940 Act.
- --------------------------------------------------------------------------------
* 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.
23
<PAGE>
The following table shows the aggregate compensation paid to each Trustee
by the Portfolios and all funds advised and sponsored by Janus Capital
(collectively, the "Janus Funds") for the periods indicated. None of the
Trustees receive pension or retirement benefits from the Portfolios or the Janus
Funds.
<TABLE>
Aggregate Compensation Total Compensation
from the Portfolios for from the Janus Funds
fiscal year ended for calendar year ended
Name of Person, Position December 31, 1996 December 31, 1996**
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, III* -- --
John W. Shepardson, Trustee+ $ $
William D. Stewart, Trustee $ $
Gary O. Loo, Trustee $ $
Dennis B. Mullen, Trustee $ $
Martin H. Waldinger, Trustee $ $
James T. Rothe, Trustee++ N/A $0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* An interested person of the Portfolio and of Janus Capital. Compensated by
Janus Capital and not the Portfolio.
** As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
+ Mr. Shepardson retired on March 31, 1997.
++ Mr. Rothe began serving as Trustee on January 1, 1997.
SHARES OF THE TRUST
NET ASSET VALUE DETERMINATION
As stated in the Prospectus, the net asset value ("NAV") of the Shares of
each Portfolio 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 the Shares of each Portfolio 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 Shares of each Portfolio is determined by dividing the
total value of the securities and other assets, less liabilities, attributable
to the Shares of a Portfolio, 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 Portfolios are traded primarily in the over-the-counter
market. Valuations of such securities are furnished by one or more pricing
services employed by the Portfolios and are based upon last trade or closing
sales prices or 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. Each
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 a Portfolio's NAV is not calculated. A 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
The Shares of the Portfolios can be purchased only by certain participant
directed qualified plans. The Shares of the Portfolios are purchased at the NAV
per Share as determined at the close of the regular trading session of the
24
<PAGE>
NYSE next occurring after a purchase order is received and accepted by a
Portfolio or its authorized agent. Your plan documents contain detailed
information about investing in the different Portfolios.
DISTRIBUTION PLAN
Under a distribution plan ("Plan") adopted in accordance with Rule 12b-1
under the 1940 Act, the Shares may pay Janus Distributors, Inc. ("JDI"), the
distributor of the Retirement Shares, a fee at an annual rate of up to 0.25% of
the average daily net assets of the Shares of a Portfolio. Under the terms of
the Plan, the Trust is authorized to make payments to JDI for remittance to
qualified plan service providers as compensation for distribution and
shareholder servicing performed by such service providers. The Plan is a
compensation type plan and permits the payment at an annual rate of up to 0.25%
of the average daily net assets of the Shares of a Portfolio for activities
which are primarily intended to result in sales of the Shares, including but not
limited to preparing, printing and distributing prospectuses, Statements of
Additional Information, shareholder reports, and educational materials to
prospective and existing plan participants; responding to inquiries by qualified
plan participants; receiving and answering correspondence and similar
activities. On December 10, 1996, Trustees unanimously approved the Plan which
became effective May 1, 1997. The Plan and any Rule 12b-1 related agreement that
is entered into by the Portfolios or JDI in connection with the Plan will
continue in effect for a period of more than one year only so long as
continuance is specifically approved at least annually by a vote of a majority
of the Trustees, and of a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any related
agreements ("12b-1 Trustees"). All material amendments to the Plan must be
approved by a majority vote of the Trustees, including a majority of the 12b-1
Trustees, at a meeting called for that purpose. In addition, the Plan may be
terminated at any time upon 60 days' notice, without penalty, by vote of a
majority of the outstanding Shares of a Portfolio or by vote of a majority of
12b-1 Trustees.
REDEMPTIONS
Redemptions, like purchases, may only be effected through participant
directed qualified 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
Portfolios are governed by Rule 18f-1 under the 1940 Act, which requires each
Portfolio to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the NAV of that Portfolio during any 90-day period for any one shareholder.
Should redemptions by any shareholder exceed such limitation, a 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 Portfolios to redeem their 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.
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Shares of the Portfolios to make semiannual
distributions in June and December of substantially all of their respective
investment income and an annual distribution in June of their respective net
realized capital gains, if any. The Portfolios intend to qualify as regulated
investment companies by satisfying certain requirements prescribed by Subchapter
M of the Code. In addition, because a class of shares of each Portfolio is sold
in connection with variable insurance contracts, each 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 a
Portfolio's Shares are reinvested automatically in additional Shares of that
Portfolio at the NAV determined on the first business day following the record
date.
The Portfolios may purchase 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 Portfolios if these
instruments are profitable, the Portfolios may make various elections permitted
by the tax laws. However, these elections could require that the Portfolios
recognize taxable income, which in turn must be distributed, before the
securities are sold and before cash is received to pay the distributions.
25
<PAGE>
Some foreign securities purchased by the Portfolios 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. The Portfolios may from year
to year make the election permitted under section 853 of the Code to pass
through such taxes to shareholders as a foreign tax credit. If such an election
is not made, any foreign taxes paid or accrued will represent an expense to each
Portfolio which will reduce its investment company taxable income.
Because Shares can only be purchased through 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 plans. See the
plan documents for additional information.
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.
As of the date of this SAI, the Trust offers eleven separate series, known as
"portfolios," each of which offers two classes of shares. Additional series
and/or classes of shares 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 each Portfolio are fully paid and nonassessable when issued.
The Shares of a Portfolio participate equally in dividends and other
distributions by the Shares of such Portfolio, and in residual assets of that
Portfolio in the event of liquidation. Shares of each Portfolio have no
preemptive, conversion or subscription rights.
The Portfolios currently each offer two classes of shares. The Shares
discussed in this SAI are offered only to certain participant directed qualified
plans. A second class of shares, Institutional Shares, is offered only in
connection with investments in and payments under variable insurance contracts
as well as other qualified retirement plans.
VOTING RIGHTS
The Trustees are responsible for major decisions relating to each
Portfolio's policies and objectives; the Trustees oversee the operation of each
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, and were approved by the initial shareholder on May 25, 1993, with
the exception of Mr. Craig and Mr. Rothe who were appointed by the Trustees as
of June 30, 1995 and as of January 1, 1997, respectively. Under the Trust
Instrument, each Trustee will continue in office until the termination of the
Trust or his earlier death, retirement, 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 their
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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 or class of the Trust will vote separately only with respect to those
matters that affect only that portfolio or class or if an interest of the
portfolio or class in the matter differs from the interests of other portfolios
or classes of the Trust.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 950 Seventeenth Street, Suite 2500, Denver, Colorado
80202, independent accountants for the Portfolios, audit the Portfolios' annual
financial statements and prepare their 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 Portfolios or such securities, reference is made to the
Registration Statement and the exhibits filed as a part thereof.
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PERFORMANCE INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
Quotations of average annual total return for the Shares of a Portfolio
will be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in such Shares 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 average annual total return of the Institutional Shares of each
Portfolio, computed as of December 31, 1996, is shown in the table below. The
Retirement Shares were not yet available as of December 31, 1996. The Retirement
Shares of each Portfolio bear additional fees that are not borne by the
Institutional Shares, and thus the performance of the Retirement Shares is
expected to be lower than that of the Institutional Shares.
<TABLE>
Average Annual Total Return
Date Number of ___________________________________________
Available Months in Five Ten Life of
Portfolio Name for Sale Lifetime One Year Years Years Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio - Institutional Shares 9/13/93 39.5 18.45% N/A N/A 16.22%
Aggressive Growth Portfolio -
Institutional Shares 9/13/93 39.5 7.95% N/A N/A 21.33%
International Growth Portfolio -
Institutional Shares 5/2/94 32 34.71% N/A N/A 19.62%
Worldwide Growth Portfolio -
Institutional Shares 9/13/93 39.5 29.04% N/A N/A 23.20%
Balanced Portfolio - Institutional Shares 9/13/93 39.5 16.18% N/A N/A 14.63%
Flexible Income Portfolio -
Institutional Shares 9/13/93 39.5 9.19% N/A N/A 9.54%
High-Yield Portfolio - Institutional Shares 5/1/96 8 N/A N/A N/A 12.40%
Short-Term Bond Portfolio -
Institutional Shares 9/13/93 39.5 3.98% N/A N/A 4.42%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Yield quotations for a Portfolio's Shares 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
The yield for the 30-day period ending December 31, 1996, for the
Institutional Shares of the following Portfolios is shown below:
Flexible Income Portfolio - Institutional Shares - 7.39%
Short-Term Bond Portfolio - Institutional Shares - 5.37%
High-Yield Portfolio - Institutional Shares - 8.93%
The Retirement Shares were not yet available as of December 31, 1996. The
Retirement Shares of each Portfolio bear additional fees that are not borne by
the Institutional Shares, and thus the performance of the Retirement Shares is
expected to be lower than that of the Institutional Shares.
From time to time in advertisements or sales material, the Portfolios may
discuss their performance ratings or other information as published by
recognized mutual fund statistical rating services, including, but not limited
to,
27
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Lipper Analytical Services, Inc., Ibbotson Associates, Micropal or Morningstar
or by publications of general interest such as Forbes or Money. The Portfolios
may also compare their 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 400 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 Portfolios may compare their total return or yield to the yield on
U.S. Treasury obligations and to the percentage change in the Consumer Price
Index. Worldwide Growth Portfolio and International Growth Portfolio may also
compare their performance to the record of global market indicators, such as the
Morgan Stanley International World Index or Morgan Stanley Capital International
Europe, Australia, Far East Index (EAFE Index). Such performance ratings or
comparisons may be made with funds that may have different investment
restrictions, objectives, policies or techniques than the Portfolios and such
other funds or market indicators may be comprised of securities that differ
significantly from the Portfolios' investments.
The Retirement Shares of the Portfolios were established on May 1, 1997.
FINANCIAL STATEMENTS
The following audited financial statements for Institutional Shares of the
Portfolios for the fiscal year ended December 31, 1996 are hereby incorporated
into this Statement of Additional Information by reference to the Annual Report
relating to the Institutional Shares of the Portfolios dated December 31, 1996.
Copies of such reports accompany this SAI. The Retirement Shares had not yet
commenced operations as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT:
Schedules of Investments as of December 31, 1996
Statements of Operations for the period ended December 31, 1996
Statements of Assets and Liabilities as of December 31, 1996
Statements of Changes in Net Assets for the periods ended December 31, 1996
and December 31, 1995
Financial Highlights for each of the periods indicated
Notes to Financial Statements
The portions of such Annual Report that are not specifically listed above
are not incorporated by reference into this Statement of Additional Information
and are not part of the Registration Statement.
28
<PAGE>
APPENDIX A
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the adviser considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
STANDARD &POOR'S RATINGS SERVICES
Bond Rating Explanation
- --------------------------------------------------------------------------------
Investment Grade
AAA Highest rating; extremely strong capacity to pay
principal and interest.
AA High quality; very strong capacity to pay
principal and interest.
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects
of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters,
but adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher rated bonds.
Noninvestment Grade
BB, B, Predominantly speculative with respect to the
CCC, CC, C issuer's capacity to meet required interest and
principal payments. BB - lowest degree of
speculation; C - the highest degree of
speculation. Quality and protective
characteristics outweighed by large uncertainties
or major risk exposure to adverse conditions.
D In default.
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Investment Grade
Aaa Highest quality, smallest degree of investment
risk.
Aa High quality; together with Aaa bonds, they
compose the high-grade bond group.
A Upper-medium grade obligations; many favorable
investment attributes.
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
Noninvestment Grade
Ba More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other
contract terms over time.
Caa Poor standing, may be in default; elements of
danger with respect to principal or interest
payments.
Ca Speculative in a high degree; could be in default
or have other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever
attaining investment standing.
- --------------------------------------------------------------------------------
Unrated securites are treated as noninvestment grade securities unless the
portfolio manager determines that such securities are the equivalent of
investment grade. Securities that have received different ratings from more than
one agency are considered investment grade if at least one agency has rated the
security investment grade.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
[LOGO] PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 13,1997
Janus Aspen Series
- --------------------------------------------------------------------------------
Statement of Additional Information
______, 1997
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
RETIREMENT SHARES
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the Prospectus for the Retirement
Shares (the "Shares") of the Capital Appreciation Portfolio (the "Portfolio"), 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").
The Shares of the Portfolio may be purchased only by certain participant
directed qualified plans. The Portfolio also offers a second class of shares to
the separate accounts of insurance companies for the purpose of funding variable
life insurance contracts and variable annuity contracts (collectively, "variable
insurance contracts") and certain other qualified retirement plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated _____, 1997, 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.
<PAGE>
Capital Appreciation Portfolio
Retirement Shares
Statement of Additional Information
Table of Contents
Page
- --------------------------------------------------------------------------------
Investment Policies, Restrictions and Techniques ..................... 3
Investment Objectives ............................................. 3
Portfolio Policies .................................................3
Investment Restrictions ............................................3
Types of Securities and Investment Techniques ......................4
Illiquid Investments .............................................4
Zero Coupon, Pay-In-Kind and Step Coupon Securities ..............4
Pass-Through Securities ..........................................5
Investment Company Securities ....................................6
Depositary Receipts ..............................................6
Other Income-Producing Securities ................................6
Repurchase and Reverse Repurchase Agreements .....................7
High-Yield/High-Risk Securities ..................................7
Futures, Options and Other Derivative Instruments ................8
Investment Adviser ...................................................15
Custodian, Transfer Agent and Certain Affiliations ...................16
Portfolio Transactions and Brokerage .................................17
Officers and Trustees ................................................18
Shares of the Trust ..................................................20
Net Asset Value Determination .....................................20
Purchases .........................................................20
Distribution Plan .................................................21
Redemptions .......................................................21
Income Dividends, Capital Gains Distributions and Tax Status .........21
Miscellaneous Information ............................................22
Shares of the Trust ...............................................22
Voting Rights .....................................................22
Independent Accountants ...........................................23
Registration Statement ............................................23
Performance Information ..............................................23
Appendix A ...........................................................24
Explanation of Rating Categories ..................................24
- --------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
INVESTMENT OBJECTIVE
As stated in the Prospectus, the Portfolio's investment objective is
long-term growth of capital. There can be no assurance that the Portfolio will
achieve its objective. The investment objective of the Portfolio is 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.
Portfolio turnover is calculated by dividing total long-term purchases or
sales, whichever is less, by the average monthly value of a portfolio's
long-term portfolio securities. The Portfolio anticipates that its portfolio
turnover rate should not exceed 200%.
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 or class of shares if a matter affects just the Portfolio or class of
shares), 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 or class of shares) 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 fifty percent (50%) 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 25% or more of the value of its total 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 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 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.
3
<PAGE>
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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. 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").
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 Portfolio 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 ("NRSRO"). A foreign security that may be freely traded on or
through the facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security subject to these
procedures.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest up to 10% of its assets 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.
4
<PAGE>
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 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
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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.
INVESTMENT COMPANY SECURITIES
From time to time, the Portfolio may invest in securities of other
investment companies, including money market funds managed by Janus Capital. The
Portfolio's investments in such money market funds are subject to the terms of
an exemptive order obtained by the Janus funds which currently provides that the
Portfolio will limit its aggregate investment in a Janus money market fund to
the greater of (i) 5% of the investing Portfolio's total assets or (ii) $2.5
million. The Portfolio is subject to the provisions of Section 12(d)(1) of the
1940 Act.
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.
OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolio may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities have
variable or floating rates of interest and, under certain limited circumstances,
may have varying principal amounts. Variable and floating rate securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to some interest rate index or market interest
rate (the "underlying index"). Certain variable rate securities (including
certain mortgage-backed securities) pay interest at a rate that varied inversely
to prevailing short-term interest rates (sometimes referred to as inverse
floaters). For example, upon reset the interest rate payable on a security may
go down when the underlying index has risen.
Standby commitments. These instruments, which are similar to a put, give
the Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by the Portfolio at a specified price.
Tender option bonds. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker, dealer
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
Inverse floaters. Inverse floaters are instruments whose interest bears an
inverse relationship to the interest rate on another security. The Portfolio
will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of its portfolio.
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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. Using reverse repurchase agreements to
earn additional income involves the risk that the interest earned on the
invested proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Portfolio,
although the Portfolio's intent to segregate assets in the amount of the reverse
repurchase agreement minimizes this effect.
HIGH-YIELD/HIGH-RISK SECURITIES
The Portfolio does not intend to invest 35% or more of it's net assets in
debt securities that are rated below investment grade (e.g., securities rated BB
or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or
lower by Moody's Investors Service, Inc. ("Moody's") and unrated securities of
equivalent quality). Lower rated bonds involve a higher degree of credit risk,
which is the risk that the issuer will not make interest or principal payments
when due. In the event of an unanticipated default, the Portfolio would
experience a reduction in its income, and could expect a decline in the market
value of the securities so affected.
The Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, Janus Capital may treat such securities as unrated debt. Unrated debt
securities will be included in the 35% limit of the Portfolio unless its
portfolio manager deems such securities to be the equivalent of investment grade
securities.
Subject to the above limits, the Portfolio may purchase defaulted
securities only when its portfolio managers believes based upon their analysis
of the financial condition, results of operations and economic outlook of an
issuer that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation. Not
withstanding the portfolio manager's belief as to the resumption of income,
however, the purchase of any security on which payment of interest or dividends
is suspended involves a high degree of risk. Such risk includes, among other
things, the following:
Financial and Market Risks. Investments in securities that are in default
involve a high degree of financial and market risks that can result in
substantial or, at times, even total losses. Issuers of defaulted securities may
have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about the
condition of such issuers. The market prices of such securities also are subject
to abrupt and erratic movements and above average price volatility and the
spread between the bid and asked prices of such securities may be greater than
normally expected.
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Disposition of Portfolio Securities. Although the Portfolio generally will
purchase securities for which the portfolio manager expects an active market to
be maintained, defaulted securities may be less actively traded than other
securities and it may be difficult to dispose of substantial holdings of such
securities at prevailing market prices. The Portfolio will limit holdings of any
such securities to amounts that the portfolio manager believes could be readily
sold and holdings of such securities would, in any event, be limited so as not
to limit the Portfolio's ability to readily dispose of securities to meet
redemptions.
Other. Default securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
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 other 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 other 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 anticipates an increase in the price of stocks,
and it intends to purchase stocks at a later time, the Portfolio could enter
into a futures contract to purchase a stock index as a temporary substitute for
stock purchases. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts will increase, thereby
serving as a hedge against the Portfolio not participating in a market advance.
This technique is sometimes known as an anticipatory hedge. To the extent the
Portfolio enters into futures contracts for this purpose, the segregated assets
maintained to cover the Portfolio's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
the futures contracts. Conversely, if the Portfolio holds stocks and seeks to
protect itself from a decrease in
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stock prices, the Portfolio might sell stock index futures contracts, thereby
hoping to offset the potential decline in the value of its portfolio securities
by a corresponding increase in the value of the futures contract position. The
Portfolio could protect against a decline in stock prices by selling portfolio
securities and investing in money market instruments, but the use of futures
contracts enables it to maintain a defensive position without having to sell
portfolio securities.
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 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
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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 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 or exposed to foreign currency
fluctuations 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
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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 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 or whose value is tied
to, 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 other 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 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
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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 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 other
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 other 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 other 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
other 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 other
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
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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 is secured by other
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.
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.
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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.
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
other 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 NRSRO 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 other
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.
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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 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 80206-4928.
The Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolio's investments, provide
office space for the Portfolio and pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital.
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 the agreed to compensate Janus Capital for its services
by the monthly payment of a fee at the annual rate of 1% of the first $30
million of the average daily net assets of the Portfolio, .75% of the next $270
million of the average daily net assets of the Portfolio, .70% of the next $200
million of the average daily net assets of the Portfolio and .65% of the average
daily net assets of the Portfolio in excess of $500 million. The advisory fee is
calculated and payable daily. Janus Capital has voluntarily agreed to cap the
advisory fee of the Portfolio at the effective rate of Janus Olympus Fund (the
"retail fund"). The effective rate of the retail fund is the advisory fee
calculated by such fund on the last day of each calendar quarter. If the assets
of the corresponding retail fund exceed the assets of the Portfolio as of the
last day of any calendar quarter, then the advisory fee payable by the Portfolio
for the following calendar quarter will be a flat rate equal to such effective
rate. The effective rate (annualized) of Janus Olympus Fund was ____% for the
quarter ended March 31, 1997.
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In addition, Janus Capital has agreed to reimburse the Portfolio by the
amount, if any, that the Portfolio's normal operating expenses chargeable to its
income account, including the investment advisory fee but excluding the
distribution fee and participant administration fee described on page 16,
brokerage commissions, interest, taxes and extraordinary expenses, exceed an
annual rate of 1.25% of the average daily net assets of the Portfolio through at
least April 30, 1998.
Janus Capital may terminate the fee reduction or expense limitation
described above at any time upon at least 90 days' notice to the Trustees.
The current Advisory Agreement became effective on December 10, 1996, and
it will continue in effect until June 16, 1998, 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 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 exemptive 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 does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited circumstances contained in Janus Capital's 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 0351,
Boston, Massachusetts 02117-0351 is the custodian of the domestic securities and
cash of the Portfolio. 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. The custodian and subcustodians
hold the Portfolio's assets in safekeeping and collect and remit the income
thereon, subject to the instructions of the Portfolio.
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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 receives a participant administration fee at an annual
rate of up to .25% of the average daily net assets of the Shares of the
Portfolio for providing or procuring recordkeeping, subaccounting and other
administrative services to plan participants who invest in the Shares. Janus
Service expects to use substantially all of this fee to compensate qualified
plan service providers for providing these services (at and annual rate of up to
.25% of the average daily net assets of the Shares attributable to plan
participants receiving services from each service provider). Services provided
by qualified plan service providers may include but are not limited to
participant recordkeeping, processing and aggregating purchase and redemption
transactions, providing periodic statements, forwarding prospectuses,
shareholder reports and other materials to existing plan participants, and other
participant administrative services.
The Portfolio pays DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset charge of $1 per million dollars of net assets
(not to exceed $500 per month).
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."
Janus Distributors, Inc. ("Janus Distributors"), 100 Fillmore Street,
Denver, Colorado 80206-4928, a wholly-owned subsidiary of Janus Capital, is a
distributor of the Shares. Janus Distributors is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "Exchange Act") and is a member
of the National Association of Securities Dealers, Inc.
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.
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, analysis 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
analysis, 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.
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
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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.
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 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, 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 80206-4928
Executive Vice President and Trustee of Janus Investment Fund+. Chief
Investment Officer, Vice President, and Director of Janus Capital.
Scott W. Schoelzel* - Executive Vice President and Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Vice President of Janus Capital. From 1991 to 1993, a Portfolio Manager
with Founders Asset Management, Denver, Colorado. Prior to 1991, a general
partner of Ivy Lane Investments, Denver, Colorado (a real estate investment
partnership).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
Denver, CO 80206-4928
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.
- --------------------------------------------------------------------------------
* 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.
18
<PAGE>
Steven R. Goodbarn* - Vice President and Chief Financial Officer
100 Fillmore Street
Denver, CO 80206-4928
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. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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).
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).
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Retail
Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
- --------------------------------------------------------------------------------
* 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.
19
<PAGE>
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 Trust Instrument, Delaware law or
the 1940 Act.
The following table shows the aggregate compensation paid to each Trustee
by the Portfolio described in this SAI 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 Portfolio for fiscal year Janus Funds for calendar year
Name of Person, Position ended December 31, 1996** ended December 31, 1996***
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, Trustee* -- --
John W. Shepardson, Trustee+ N/A $
William D. Stewart, Trustee N/A $
Gary O. Loo, Trustee N/A $
Dennis B. Mullen, Trustee N/A $
Martin H. Waldinger, Trustee N/A $
James T. Rothe, Trustee++ N/A $
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1996.
***As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
+ Mr. Shepardson retired on March 31, 1997.
++ Mr. Rothe began serving as Trustee on January 1, 1997.
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's Shares is determined by dividing the total value of the
Portfolio's securities and other assets, less liabilities, attributable to the
Shares, 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.
20
<PAGE>
PURCHASES
Shares of the Portfolio can be purchased only by certain participant
directed qualified plans. Shares of the Portfolio are purchased at the NAV per
Share as determined at the close of the regular trading session of the NYSE next
occurring after a purchase order is received and accepted by the Portfolio or
its authorized agent. Your plan documents contain detailed information about
investing in the Portfolio.
DISTRIBUTION PLAN
Under a distribution plan ("Plan") adopted in accordance with Rule 12b-1
under the 1940 Act, the Shares may pay Janus Distributors, Inc. ("JDI"), the
distributor of the Retirement Shares, a fee at an annual rate of up to 0.25% of
the average daily net assets of the Shares of the Portfolio. Under the terms of
the Plan, the Trust is authorized to make payments to JDI for remittance to
qualified plan service providers as compensation for distribution and
shareholder servicing performed by such service providers. The Plan is a
compensation type plan and permits the payment at an annual rate of up to 0.25%
of the average daily net assets of the Shares of the Portfolio for activities
which are primarily intended to result in sales of the Shares, including but not
limited to preparing, printing and distributing prospectuses, Statements of
Additional Information, shareholder reports, and educational materials to
prospective and existing plan participants; responding to inquiries by qualified
plan participants; receiving and answering correspondence and similar
activities. On December 10, 1996, the Trustees unanimously approved the Plan
which became effective May 1, 1997. The Plan and any Rule 12b-1 related
agreement that is entered into by the Portfolio or JDI in connection with the
Plan will continue in effect for a period of more than one year only so long as
continuance is specifically approved at least annually by a vote of a majority
of the Trustees, and of majority to the Trustees who are not interested persons
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or any related agreements
("12b-1 Trustees"). All material amendments to the Plan must be approved by a
majority vote of the Trustees, including a majority of the 12b-1 Trustees, at a
meeting called for that purpose. In addition, the Plan may be terminated at any
time upon 60 days' notice, without penalty, by vote of a majority of the
outstanding Shares of the Portfolio or by vote of a majority of 12b-1 Trustees.
REDEMPTIONS
Redemptions, like purchases, may only be effected through certain
participant directed qualified plans. Shares normally will be redeemed for cash,
although the 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.
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Shares of the Portfolio to make semiannual
distributions in June and December of substantially all of their investment
income and an annual distribution in June of their net realized capital gains,
if any. 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, because a class of shares of the Portfolio is sold in
connection with variable insurance contracts, 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.
21
<PAGE>
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. The Portfolio, may from year
to year make the election permitted under section 853 of the Code to pass
through such taxes to shareholders as a foreign tax credit. If such an election
is not made, any foreign taxes paid or accrued will represent an expense to the
Portfolio which will reduce its investment company taxable income.
Because Shares of the Portfolio can only be purchased through 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 plan documents for additional information.
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.
As of the date of this SAI, the Trust offers eleven series of shares, known as
"portfolios," in two classes. Additional series and/or classes 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. The
Shares of the Portfolio participate equally in dividends and other distributions
by the Shares of 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.
The Portfolio currently offers two classes of shares. The Shares discussed
in this SAI are offered only in connection with certain participant directed
qualified plans. A second class of shares, Institutional Shares, is offered only
in connection with investments in and payments to variable insurance contracts
as well as certain qualified retirement plans.
VOTING RIGHTS
The 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 and Mr. Rothe who were appointed
by the Trustees as of June 30, 1995 and as of January 1, 1997, respectively.
Under the Trust Instrument, each Trustee will continue in office until the
termination of the Trust or his earlier death, retirement, 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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 class or if an interest of a portfolio or
class in a matter differs from the interests of other portfolios or classes of
the Trust.
22
<PAGE>
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.
Yield quotations for the Portfolio's Shares 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
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 400
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.
23
<PAGE>
APPENDIX A
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the adviser considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
STANDARD &POOR'S RATINGS SERVICES
Bond Rating Explanation
- --------------------------------------------------------------------------------
Investment Grade
AAA Highest rating; extremely strong capacity to pay
principal and interest.
AA High quality; very strong capacity to pay
principal and interest.
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects
of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters,
but adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher rated bonds.
Noninvestment Grade
BB, B, Predominantly speculative with respect to the
CCC, CC, C issuer's capacity to meet required interest and
principal payments. BB - lowest degree of
speculation; C - the highest degree of
speculation. Quality and protective
characteristics outweighed by large uncertainties
or major risk exposure to adverse conditions.
D In default.
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Investment Grade
Aaa Highest quality, smallest degree of investment
risk.
Aa High quality; together with Aaa bonds, they
compose the high-grade bond group.
A Upper-medium grade obligations; many favorable
investment attributes.
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
Noninvestment Grade
Ba
More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other
contract terms over time.
Caa Poor standing, may be in default; elements of
danger with respect to principal or interest
payments.
Ca Speculative in a high degree; could be in default
or have other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever
attaining investment standing.
- --------------------------------------------------------------------------------
Unrated securities are treated as noninvestment grade securities unless the
portfolio manager determines that such securities are the equivalent of
investment grade. Securities that have received different ratings from more than
one agency are considered investment grade if at least one agency has rated the
security investment grade.
24
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 13,1997
JANUS ASPEN SERIES
EQUITY INCOME PORTFOLIO
RETIREMENT SHARES
- --------------------------------------------------------------------------------
Statement of Additional Information
______, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectus for the
Retirement Shares (the "Shares") of the Equity Income Portfolio (the
"Portfolio"), 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").
The Shares of the Portfolio may be purchased only by certain participant
directed qualified plans. The Portfolio also offers a second class of Shares to
the separate accounts of insurance companies for the purpose of funding variable
life insurance policies and variable annuity contracts (collectively, "variable
insurance contracts") and certain other qualified retirement plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated _____, 1997, which is incorporated by reference into this SAI
and may be obtained from plan sponsor. This SAI contains additional and more
detailed information about the Portfolio's operations and activities than the
Prospectus.
[LOGO] JANUS
<PAGE>
EQUITY INCOME PORTFOLIO
RETIREMENT SHARES
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
- --------------------------------------------------------------------------------
Investment Policies, Restrictions and Techniques .................... 3
Investment Objectives ............................................ 3
Portfolio Policies ............................................... 3
Investment Restrictions .......................................... 3
Types of Securities and Investment Techniques .................... 4
Illiquid Investments ........................................... 4
Zero Coupon, Pay-In-Kind and Step Coupon Securities ............ 4
Pass-Through Securities ........................................ 5
Investment Company Securities .................................. 6
Depositary Receipts ............................................ 6
Other Income-Producing Securities .............................. 6
Repurchase and Reverse Repurchase Agreements ................... 6
High-Yield/High-Risk Securities ................................ 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
Distribution Plan ................................................ 19
Redemptions ...................................................... 20
Income Dividends, Capital Gains Distributions and Tax Status ........ 20
Miscellaneous Information ........................................... 20
Shares of the Trust .............................................. 20
Voting Rights .................................................... 21
Independent Accountants .......................................... 21
Registration Statement ........................................... 21
Performance Information ............................................. 21
Appendix A .......................................................... 23
Explanation of Rating Categories ................................. 23
- --------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT POLICIES, RESTRICTIONS AND TECHNIQUES
INVESTMENT OBJECTIVE
As stated in the Prospectus, the Portfolio's investment objective is
current income and long-term growth of capital by investing primarily in common
stocks. There can be no assurance that the Portfolio will achieve its objective.
The investment objective of the Portfolio is 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.
Portfolio turnover is calculated by dividing total long-term purchases or
sales, whichever is less, by the average monthly value of a portfolio's
long-term portfolio securities. The Portfolio anticipates that its portfolio
turnover rate should not exceed 200%.
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 or class of Shares if a matter affects just the Portfolio or the class
of Shares), 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 or class of Shares) 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 25% or more of the value of its total 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 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 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.
(b) 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.
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(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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. 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").
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 Portfolio 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 ("NRSRO"). A foreign security that may be freely traded on or
through the facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security subject to these
procedures.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest up to 10% of its assets 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
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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 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.
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INVESTMENT COMPANY SECURITIES
From time to time, the Portfolio may invest in securities of other
investment companies, including money market funds managed by Janus Capital. The
Portfolio's investments in such money market funds are subject to the terms of
an exemptive order obtained by the Janus funds which currently provides that the
Portfolio will limit its aggregate investment in a Janus money market fund to
the greater of (i) 5% of the investing Portfolio's total assets or (ii) $2.5
million. The Portfolio is subject to the provisions of Section 12(d)(1) of the
1940 Act.
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.
OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolio may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities have
variable or floating rates of interest and, under certain limited circumstances,
may have varying principal amounts. Variable and floating rate securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to some interest rate index or market interest
rate (the "underlying index"). See also "Inverse Floaters."
Standby commitments. These instruments, which are similar to a put, give
the Portfolio the option to obligate a broker, dealer or bank to repurchase a
security held by the Portfolio at a specified price.
Tender option bonds. Tender option bonds are generally long-term securities
that are coupled with the option to tender the securities to a bank,
broker-dealer or other financial institution at periodic intervals and receive
the face value of the bond. This type of security is commonly used as a means of
enhancing the security's liquidity.
Inverse floaters. Inverse floaters are debt instruments whose interest
bears an inverse relationship to the interest rate on another security. The
Portfolio will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of its portfolio.
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
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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.
Using reverse repurchase agreements to earn additional income involves the risk
that the interest earned on the invested proceeds is less than the expense of
the reverse repurchase agreement transaction. This technique may also have a
leveraging effect on the Portfolio, although the Portfolio's intent to segregate
assets in the amount of the reverse repurchase agreement minimizes this effect.
HIGH-YIELD/HIGH-RISK SECURITIES
The Portfolio does not intend to invest 35% or more of its net assets in
debt securities that are rated below investment grade (e.g., securities rated BB
or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or
lower by Moody's Investors Service, Inc. ("Moody's")). Lower rated bonds involve
a higher degree of credit risk, which is the risk that the issuer will not make
interest or principal payments when due. In the event of an unanticipated
default, the Portfolio would experience a reduction in its income, and could
expect a decline in the market value of the securities so affected.
The Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, Janus Capital may treat such securities as unrated debt. Unrated debt
securities will be included in the 35% limit unless the portfolio managers deem
such securities to be the equivalent of investment grade securities.
Subject to the above limits, the Portfolio may purchase defaulted
securities only when its portfolio manager believes, based upon their analysis
of the financial condition, results of operations and economic outlook of an
issuer, that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation.
Notwithstanding the portfolio manager's belief as to the resumption of income,
however, the purchase of any security on which payment of interest or dividends
is suspended involves a high degree of risk. Such risk includes, among other
things, the following:
Financial and Market Risks. Investments in securities that are in default
involve a high degree of financial and market risks that can result in
substantial or, at times, even total losses. Issuers of defaulted securities may
have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about the
condition of such issuers. The market prices of such securities also are subject
to abrupt and erratic movements and above average price volatility, and the
spread between the bid and asked prices of such securities may be greater than
normally expected.
Disposition of Portfolio Securities. Although these Portfolios generally
will purchase securities for which their portfolio managers expect an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices. The Portfolio will limit holdings
of any such securities to amounts that the portfolio managers believe could be
readily sold, and holdings of such securities would, in any event, be limited so
as not to limit the Portfolios' ability to readily dispose of securities to meet
redemptions.
Other. Defaulted securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
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 other 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
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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 other 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 anticipates an increase in the price of stocks,
and it intends to purchase stocks at a later time, the Portfolio could enter
into a futures contract to purchase a stock index as a temporary substitute for
stock purchases. If an increase in the market occurs that influences the stock
index as anticipated, the value of the futures contracts will increase, thereby
serving as a hedge against the Portfolio not participating in a market advance.
This technique is sometimes known as an anticipatory hedge. To the extent the
Portfolio enters into futures contracts for this purpose, the segregated assets
maintained to cover the Portfolio's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
the futures contracts. Conversely, if the Portfolio holds stocks and seeks to
protect itself from a decrease in stock prices, the Portfolio might sell stock
index futures contracts, thereby hoping to offset the potential decline in the
value of its portfolio securities by a corresponding increase in the value of
the futures contract position. The Portfolio could protect against a decline in
stock prices by selling portfolio securities and investing in money market
instruments, but the use of futures contracts enables it to maintain a defensive
position without having to sell portfolio securities.
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 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.
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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 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
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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 or exposed to foreign currency
fluctuations 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 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 or whose value is tied
to, 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 other 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 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.
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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 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 other
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 other 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 other 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
other 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 other
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.
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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 is secured by other
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.
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.
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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.
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
other 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 NRSRO 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 other
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
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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 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 80206-4928.
The Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolio's investments, provide
office space for the Portfolio and pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital.
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 1% of the first $30 million
of the average daily net assets of the Portfolio, .75% of the next $270 million
of the average daily net assets of the Portfolio, .70% of the next $200 million
of the average daily net assets of the Portfolio and .65% of the average daily
net assets of the Portfolio in excess of $500 million. The advisory fee is
calculated and payable daily. Janus Capital has voluntarily agreed to cap the
advisory fee of the Portfolio at the effective rate of Janus Equity Income Fund
(the "retail fund"). The effective rate of the retail fund is the advisory fee
calculated by such fund on the last day of each calendar quarter. If the assets
of the corresponding retail fund exceed the assets of the Portfolio as of the
last day of any calendar quarter, then the advisory fee payable by the Portfolio
for the following calendar quarter will be a flat rate equal to such effective
rate. The effective rate (annualized) of Janus Equity Income Fund was ____% for
the quarter ended March 31, 1997.
In addition, Janus Capital has agreed to reimburse the Portfolio by the
amount, if any, that the Portfolio's normal operating expenses chargeable to its
income account, including the investment advisory fee but excluding the
distribution fee and participant administration fee described on page 15,
brokerage commissions interest, taxes and extraordinary expenses, exceed an
annual rate 1.25% of the average daily net assets of the Portfolio through at
least April 30, 1998.
Janus Capital may terminate either the fee reduction or expense discussed
above at any time upon at least 90 days' notice to the Trustees.
The current Advisory Agreement became effective on December 10, 1996, and
it will continue in effect until June 16, 1998, 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.
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Janus Capital also performs investment advisory services for other mutual
funds, and for individual, charitable, corporate and retirement accounts.
Investment decisions for each account managed by Janus Capital, including the
Portfolio, are made independently from those for any other account that is or
may in the future become managed by Janus Capital or its affiliates. If,
however, a number of accounts managed by Janus Capital are contemporaneously
engaged in the purchase or sale of the same security, the orders may be
aggregated and/or the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by an account or the size of the position obtained or
liquidated for an account. Pursuant to an exemptive 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 does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited circumstances contained in Janus Capital's 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 0351,
Boston, Massachusetts 02117-0351 is the custodian of the domestic securities and
cash of the Portfolio. 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. The custodian 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 receives a participant administration fee at an annual
rate of up to .25% of the average daily net assets of the Shares of the
Portfolio for providing or procuring recordkeeping, subaccounting and other
administrative services to plan participants who invest in the Shares. Janus
Service expects to use substantially all of this fee to compensate qualified
plan service providers for providing these services (at an annual rate of up to
.25% of the average daily net assets of the Shares attributable to plan
participants receiving services from each service provider). Services provided
by qualified plan service providers may include but are not limited to
participant recordkeeping, processing and aggregating purchase and redemption
transactions, providing periodic statements, forwarding prospectuses,
shareholder reports and other materials to existing plan participants, and other
participant administrative services.
The Portfolio pays DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset charge of $1 per million dollars of net assets
(not to exceed $500 per month).
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."
15
<PAGE>
Janus Distributors, Inc. ("Janus Distributors"), 100 Fillmore Street,
Denver, Colorado 80206-4928, a wholly-owned subsidiary of Janus Capital, is a
distributor of the Shares. Janus Distributors is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "Exchange Act") and is a member
of the National Association of Securities Dealers, Inc.
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.
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.
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.
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 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, 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 80206-4928
Executive Vice President and Trustee of Janus Investment Fund+. Chief
Investment Officer, Vice President, and Director of Janus Capital.
Blaine P. Rollins* - Executive Vice President and Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President and Portfolio Manager of Janus Investment Fund+.
Formerly, fixed-income trader and equity securities analyst at Janus
Capital (1990-1995).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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).
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).
- --------------------------------------------------------------------------------
* 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>
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).
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Retail
Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
- --------------------------------------------------------------------------------
*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 Trust Instrument, Delaware law or
the 1940 Act.
The following table shows the aggregate compensation earned by and paid to
each Trustee by the Portfolio described in this SAI 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 Portfolio for fiscal year Janus Funds for calendar year
Name of Person, Position ended December 31, 1996** ended December 31, 1996***
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, Trustee* -- --
John W. Shepardson, Trustee+ N/A $
William D. Stewart, Trustee N/A $
Gary O. Loo, Trustee N/A $
Dennis B. Mullen, Trustee N/A $
Martin H. Waldinger, Trustee N/A $
James T. Rothe, Trustee++ N/A $0
- ------------------------------------------------------------------------------------------------------------------------------------
</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, 1996.
*** As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
+ Mr. Shepardson retired on March 31, 1997.
++ Mr. Rothe began serving as Trustee on January 1, 1997.
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's Shares is determined by dividing the total value of the
Portfolio's securities and other assets, less liabilities, attributable to the
Shares, 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 certain participant
directed qualified 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. Your plan documents contain detailed information about
investing in the Portfolio.
DISTRIBUTION PLAN
Under a distribution plan ("Plan") adopted in accordance with Rule 12b-1
under the 1940 Act, the Shares may pay Janus Distributors, Inc. ("JDI"), the
distributor of the Retirement Shares, a fee at an annual rate of up to 0.25% of
the average daily net assets of the Shares of the Portfolio. Under the terms of
the Plan, the Trust is authorized to make payments to JDI for remittance to
qualified plan service providers as compensation for distribution and
shareholder servicing performed by such service providers. The Plan is a
compensation type plan and permits the payment at an annual rate of up to 0.25%
of the average daily net assets of the Shares of the Portfolio for activities
which are primarily intended to result in sales of the Shares, including but not
limited to preparing, printing and distributing prospectuses, Statements of
Additional Information, shareholder reports and educational materials to
prospective and existing plan participants; responding to inquiries by qualified
plan participants; receiving and answering correspondence and similar
activities. On December 10, 1996, Trustees unanimously approved the Plan which
became effective May 1, 1997. The Plan and any Rule 12b-1 related agreement that
is entered into by the Portfolios or JDI in connection with the Plan will
continue in effect for a period of more than one year only so long as
continuance is specifically approved at least annually by a vote of a majority
of the Trustees, and of a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any related
agreements ("12b-1 Trustees"). All material amendments to the Plan must be
approved by a majority vote of the Trustees, including a majority of the 12b-1
Trustees, at a meeting called for that purpose. In addition, the Plan may be
terminated at any time upon 60 days' notice, without penalty, by vote of a
majority of the outstanding Shares of a Portfolio or by vote of a majority of
12b-1 Trustees.
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<PAGE>
REDEMPTIONS
Redemptions, like purchases, may only be effected through participant
directed qualified 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.
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Shares of the Portfolio to make semiannual
distributions in June and December of substantially all of their investment
income and an annual distribution in June of their net realized capital gains,
if any. 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, because a class of shares of the Portfolio is sold in
connection with variable insurance contracts, 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. The Portfolio, may from year
to year make the election permitted under section 853 of the Code to pass
through such taxes to shareholders as a foreign tax credit. If such an election
is not made, any foreign taxes paid or accrued will represent an expense to the
Portfolio which will reduce its investment company taxable income.
Because Shares of the Portfolio can only be purchased through 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 plan documents for additional information.
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 and classes
of shares. As of the date of this SAI, the Trust is offering eleven series of
shares, known as "Portfolios," in two classes. Additional series and/or classes
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. The
Shares of the Portfolio participate equally in dividends and other distributions
by the Shares of 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.
20
<PAGE>
The Portfolio currently offers two classes of shares. The Shares discussed
in this SAI are offered only in connection with certain participant directed
qualified plans. A second class of shares, Institutional Shares, is offered only
in connection with investment in and payments under variable insurance contracts
as well as certain qualified retirement plans.
VOTING RIGHTS
The 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 and Mr. Rothe who were appointed
by the Trustees as of June 30, 1995 and as of January 1, 1997, respectively.
Under the Trust Instrument, each Trustee will continue in office until the
termination of the Trust or his earlier death, retirement, 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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 or class of the Trust will vote separately only with respect to those
matters that affect only that portfolio or class or if the interest of a
portfolio or class in a matter differs from the interests of other portfolios or
classes 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.
Yield quotations for the Portfolio's Shares 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>
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 400
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.
22
<PAGE>
APPENDIX A
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the adviser considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
Standard & Poor's Ratings Services
Bond Rating Explanation
- --------------------------------------------------------------------------------
Investment Grade
AAA Highest rating; extremely strong capacity to pay principal
and interest.
AA High quality; very strong capacity to pay principal and
interest.
A Strong capacity to pay principal and interest; somewhat more
susceptible to the adverse effects of changing circumstances
and economic conditions.
BBB Adequate capacity to pay principal and interest; normally
exhibit adequate protection parameters, but adverse economic
conditions or changing circumstances more likely to lead to
a weakened capacity to pay principal and interest than for
higher rated bonds.
Non-Investment Grade
BB, B, Predominantly speculative with respect to the issuer's
CCC, CC, C capacity to meet required interest and principal payments.
BB - lowest degree of speculation; C - the highest degree of
speculation. Quality and protective characteristics
outweighed by large uncertainties or major risk exposure to
adverse conditions.
D In default.
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Investment Grade
Aaa Highest quality, smallest degree of investment risk.
Aa High quality; together with Aaa bonds, they compose the
high-grade bond group.
A Upper-medium grade obligations; many favorable investment
attributes.
Baa Medium-grade obligations; neither highly protected nor
poorly secured. Interest and principal appear adequate for
the present but certain protective elements may be lacking
or may be unreliable over any great length of time.
Non-Investment Grade
Ba More uncertain, with speculative elements. Protection of
interest and principal payments not well safeguarded during
good and bad times.
B Lack characteristics of desirable investment; potentially
low assurance of timely interest and principal payments or
maintenance of other contract terms over time.
Caa Poor standing, may be in default; elements of danger with
respect to principal or interest payments.
Ca Speculative in a high degree; could be in default or have
other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever attaining
investment standing.
- --------------------------------------------------------------------------------
Unrated securities will be treated as noninvestment grade securities unless
the portfolio manager determines that such securities are the equivalent of
investment grade securities. Securities that have received ratings from more
than one agency are considered investment grade if at least one agency has rated
the security investment grade.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 13, 1997
Janus Aspen Series
Money Market Portfolio
Retirement Shares
- --------------------------------------------------------------------------------
Statement of Additional Information
_____, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the Prospectus for the Retirement
Shares (the "Shares") of the Money Market Portfolio (the "Portfolio"), 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").
The Shares of the Portfolio may be purchased only by certain participant
directed qualified plans. The Portfolio also offers a second class of shares to
the separate accounts of insurance companies for the purpose of funding variable
life insurance contracts and variable annuity contracts (collectively, "variable
insurance contracts") and certain other qualified retirement plans.
This SAI is not a Prospectus and should be read in conjunction with the
Prospectus dated _____, 1997, which is incorporated by reference into this SAI
and may be obtained from your plan sponsor. This SAI contains additional
and more detailed information about the Portfolio's operations and activities
than the Prospectus.
[LOGO] JANUS
<PAGE>
Money Market Portfolio
Retirement Shares
Statement of Additional Information
Table of Contents
Page
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Investment Policies and Restrictions...............................3
Types of Securities and Investment Techniques......................4
Performance Data...................................................7
Determination of Net Asset Value...................................8
Investment Adviser.................................................8
Custodian, Transfer Agent and Certain Affiliations.................9
Portfolio Transactions and Brokerage...............................9
Officers and Trustees..............................................10
Purchase of Shares.................................................12
Redemption of Shares...............................................12
Dividends and Tax Status...........................................13
Principal Shareholders.............................................13
Miscellaneous Information...........................................13
The Trust.......................................................13
Shares of the Trust.............................................13
Voting Rights...................................................13
Independent Accountants.........................................14
Registration Statement..........................................14
Financial Statements...............................................14
Appendix A - Description of Securities Ratings.....................15
Appendix B - Description of Municipal Securities...................17
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INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
As discussed in the Prospectus, the Portfolio's investment objective is to
seek maximum current income to the extent consistent with stability of capital.
There can be no assurance that the Portfolio will achieve its investment
objective or maintain a stable net asset value of $1.00 per share. The
investment objective of the Portfolio is not fundamental and may be changed by
the Trustees of the Trust (the "Trustees") without shareholder approval.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio has adopted certain
fundamental investment restrictions that cannot be changed without shareholder
approval. Shareholder approval means approval by the lesser of (i) more than 50%
of the outstanding voting securities of the Trust (or the Portfolio or class of
shares if a matter affects just the Portfolio or class of shares), 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 or
class of shares) are present or represented by proxy.
As used in the restrictions set forth below and as used elsewhere in this
SAI, the term "U.S. Government Securities" shall have the meaning set forth in
the Investment Company Act of 1940, as amended (the "1940 Act"). The 1940 Act
defines U.S. government securities as securities issued or guaranteed by the
United States government, its agencies or instrumentalities and has been
interpreted to include repurchase agreements covered and municipal securities
refunded with escrowed U.S. government securities.
The Portfolio has adopted the following fundamental policies:
(1) With respect to 75% of its assets, the Portfolio may not purchase a
security other than a U.S. Government Security, if, as a result, more than 5% of
its total assets would be invested in the securities of a single issuer or the
Portfolio would own more than 10% of the outstanding voting securities of any
single issuer. (As noted in the Prospectus, the Portfolio is currently subject
to the greater diversification standards of Rule 2a-7, which are not
fundamental.)
(2) The Portfolio may not purchase securities if 25% or more of the value
of its total assets would be invested in the securities of issuers conducting
their principal business activities in the same industry; provided that: (i)
there is no limit on investments in U.S. Government Securities or in obligations
of domestic commercial banks (including U.S. branches of foreign banks subject
to regulations under U.S. laws applicable to domestic banks and, to the extent
that its parent is unconditionally liable for the obligation, foreign branches
of U.S. banks); (ii) this limitation shall not apply to the Portfolio's
investments in municipal securities; (iii) there is no limit on investment in
issuers domiciled in a single country; (iv) financial service companies are
classified according to the end users of their services (for example, automobile
finance, bank finance and diversified finance are each considered to be a
separate industry); and (v) utility companies are classified according to their
services (for example, gas, gas transmission, electric, and telephone are each
considered to be a separate industry).
(3) The Portfolio may not act as an underwriter of securities issued by
others, except to the extent that it may be deemed an underwriter in connection
with the disposition of its portfolio securities.
(4) The Portfolio may not lend any security or make any other loan if, as a
result, more than 25% of its total assets would be lent to other parties (but
this limitation does not apply to purchases of commercial paper, debt securities
or repurchase agreements).
(5) The Portfolio may not purchase or sell real estate or any interest
therein, except that the Portfolio may invest in debt obligations secured by
real estate or interests therein or securities issued by companies that invest
in real estate or interests therein.
(6) The Portfolio may borrow money for temporary or emergency purposes (not
for leveraging) in an amount not exceeding 25% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings). If
borrowings exceed 25% of the value of the Portfolio's total assets by reason of
a decline in net assets, it will reduce its borrowings within three business
days to the extent necessary to comply with the 25% limitation. Reverse
repurchase agreements or the segregation of assets in connection with such
agreements shall not be considered borrowing for the purposes of this limit.
(7) The Portfolio may, notwithstanding any other investment policy or
restriction (whether or not fundamental), invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies and restrictions as the
Portfolio.
The Portfolio has adopted the following nonfundamental investment
restrictions that may be changed by the Trustees without shareholder approval:
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(1) The Portfolio may not invest in securities or enter into repurchase
agreements with respect to any securities if, as a result, more than 10% of its
net assets would be invested in repurchase agreements not entitling the holder
to payment of principal within seven days and in other securities that are not
readily marketable ("illiquid securities"). The Trustees, or the Portfolio's
investment adviser acting pursuant to authority delegated by the Trustees, may
determine that a readily available market exists for certain securities such as
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, Section 4(2) commercial paper and municipal
lease obligations. Accordingly, such securities may not be subject to the
foregoing limitation.
(2) The Portfolio may not purchase securities on margin, or make short
sales of securities, except for short sales against the box and the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities.
(3) The Portfolio may not pledge, mortgage, hypothecate or encumber any of
its assets except to secure permitted borrowings or in connection with permitted
short sales.
(4) The Portfolio may not invest in companies for the purpose of exercising
control of management.
For purposes of the Portfolio's restriction on investing in a particular
industry, the Portfolio will rely primarily on industry classifications as
published by Bloomberg L.P., subject to the exceptions noted in fundamental
restriction number two above. To the extent that such classifications are so
broad that the primary economic characteristics in a single class are materially
different, the Portfolio may further classify issuers in accordance with
industry classifications as published by the Securities and Exchange Commission.
TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
The Portfolio may invest only in "eligible securities" as defined in Rule
2a-7 adopted under the 1940 Act. Generally, an eligible security is a security
that (i) is denominated in U.S. dollars and has a remaining maturity of 397 days
or less (as calculated pursuant to Rule 2a-7); (ii) is rated, or is issued by an
issuer with short-term debt outstanding that is rated, in one of the two highest
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or, if only one NRSRO has issued a rating, by that
NRSRO (the "Requisite NRSROs") or is unrated and of comparable quality to a
rated security, as determined by Janus Capital; and (iii) has been determined by
Janus Capital to present minimal credit risks pursuant to procedures approved by
the Trustees. In addition, the Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less. A description of the ratings of some
NRSROs appears in Appendix A.
Under Rule 2a-7, the Portfolio may not invest more than five percent of its
total assets in the securities of any one issuer other than U.S. Government
Securities, provided that in certain cases it may invest more than 5% of its
assets in a single issuer for a period of up to three business days.
Pursuant to Rule 2a-7, the Portfolio will invest at least 95% of its total
assets in "first-tier" securities. First-tier securities are eligible securities
that are rated, or are issued by an issuer with short-term debt outstanding that
is rated, in the highest rating category by the Requisite NRSROs or are unrated
and of comparable quality to a rated security. In addition, the Portfolio may
invest in "second-tier" securities which are eligible securities that are not
first-tier securities. However, the Portfolio may not invest in a second-tier
security if immediately after the acquisition thereof it would have invested
more than (i) the greater of one percent of its total assets or one million
dollars in second-tier securities issued by that issuer, or (ii) five percent of
its total assets in second-tier securities.
The following discussion of types of securities in which the Portfolio may
invest supplements and should be read in conjunction with the Prospectus.
PARTICIPATION INTERESTS
The Portfolio may purchase participation interests in loans or securities
in which it may invest directly. Participation interests are generally sponsored
or issued by banks or other financial institutions. A participation interest
gives the Portfolio an undivided interest in the underlying loans or securities
in the proportion that the Portfolio's interest bears to the total principal
amount of the underlying loans or securities. Participation interests, which may
have fixed, floating or variable rates, may carry a demand feature backed by a
letter of credit or guarantee of a bank or institution permitting the holder to
tender them back to the bank or other institution. For certain participation
interests, the Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or a part of the Portfolio's participation interest.
The Portfolio intends to exercise any demand rights it may have upon default
under the terms of the loan or security, to provide liquidity or to maintain or
improve the quality of the Portfolio's investment portfolio. The Portfolio will
only purchase participation interests that Janus Capital determines present
minimal credit risks.
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VARIABLE AND FLOATING RATE NOTES
The Portfolio also may purchase variable and floating rate demand notes of
corporations, which are unsecured obligations redeemable upon not more than 30
days' notice. These obligations include master demand notes that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a seven day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid investment.
MORTGAGE- AND ASSET-BACKED SECURITIES
The Portfolio may invest in mortgage-backed securities, which represent an
interest in a pool of mortgages made by lenders such as commercial banks,
savings and loan institutions, mortgage bankers, mortgage brokers and savings
banks. Mortgage-backed securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. In
contrast, mortgage-backed securities provide periodic payments which consist of
interest and, in most cases, principal. In effect, these payments are a
"pass-through" of the periodic payments and optional prepayments made by the
individual borrowers on their mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Additional payments to holders of
mortgage-backed securities are caused by prepayments resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
As prepayment rates of individual pools of mortgage loans vary widely, it
is not possible to predict accurately the average life of a particular security.
Although mortgage-backed securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably the effective maturities.
Mortgage-backed securities may have varying assumptions for average life. The
volume of prepayments of principal on a pool of mortgages underlying a
particular security will influence the yield of that security, and the principal
returned to the Portfolio may be reinvested in instruments whose yield may be
higher or lower than that which might have been obtained had the prepayments not
occurred. When interest rates are declining, prepayments usually increase, with
the result that reinvestment of principal prepayments will be at a lower rate
than the rate applicable to the original mortgage-backed security.
The Portfolio may invest in mortgage-backed securities that are issued by
agencies or instrumentalities of the U.S. government. The Government National
Mortgage Association ("GNMA") is the principal federal government guarantor of
mortgage-backed securities. GNMA is a wholly-owned U.S. government corporation
within the Department of Housing and Urban Development. GNMA Certificates are
debt securities which represent an interest in one mortgage or a pool of
mortgages which are insured by the Federal Housing Administration or the Farmers
Home Administration or are guaranteed by the Veterans Administration. The
Portfolio may also invest in pools of conventional mortgages which are issued or
guaranteed by agencies of the U.S. government. GNMA pass-through securities are
considered to be riskless with respect to default in that (i) the underlying
mortgage loan portfolio is comprised entirely of government-backed loans and
(ii) the timely payment of both principal and interest on the securities is
guaranteed by the full faith and credit of the U.S. government, regardless of
whether or not payments have been made on the underlying mortgages. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the market value of the Portfolio's GNMA
securities can be expected to fluctuate in response to changes in prevailing
interest rate levels.
Residential mortgage loans are pooled also by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a privately managed, publicly chartered
agency created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. FHLMC issues
participation certificates ("PCs") which represent interests in mortgages from
FHLMC's national portfolio. The mortgage loans in FHLMC's portfolio are not U.S.
government backed; rather, the loans are either uninsured with loan-to-value
ratios of 80% or less, or privately insured if the loan-to-value ratio exceeds
80%. FHLMC guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs; the U.S. government does not guarantee any aspect of
FHLMC PCs.
The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private shareholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/servicers
which include savings and loan associations, savings banks, commercial banks,
credit unions and mortgage bankers. FNMA guarantees the timely payment of
principal and interest on the pass-through securities issued by FNMA; the U.S.
government does not guarantee any aspect of the FNMA pass-through securities.
The Portfolio may also invest in privately-issued mortgage-backed
securities to the extent permitted by their investment restrictions.
Mortgage-backed securities offered by private issuers include pass-through
securities comprised of pools of
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conventional residential mortgage loans; mortgage-backed bonds which are
considered to be debt obligations of the institution issuing the bonds and which
are collateralized by mortgage loans; and collateralized mortgage obligations
("CMOs") which are collateralized by mortgage-backed securities issued by GNMA,
FHLMC or FNMA or by pools of conventional mortgages.
Asset-backed securities represent direct or indirect participation in, or
are secured by and payable from, assets other than mortgage-backed assets such
as motor vehicle installment sales contracts, installment loan contracts, leases
of various types of real and personal property and receivables from revolving
credit agreements (credit cards). Asset-backed securities have yield
characteristics similar to those of mortgage-backed securities and, accordingly,
are subject to many of the same risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which the Portfolio sells
a security and simultaneously commits to repurchase that security from the buyer
at an agreed upon price on an agreed upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate. The
Portfolio will use the proceeds of reverse repurchase agreements only to satisfy
unusually heavy redemption requests or for other temporary or emergency purposes
without the necessity of selling portfolio securities.
Generally, a reverse repurchase agreement enables the Portfolio to recover
for the term of the reverse repurchase agreement all or most of the cash
invested in the portfolio securities sold and to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Portfolio of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise. In addition,
interest costs on the money received in a reverse repurchase agreement may
exceed the return received on the investments made by the Portfolio with those
monies.
INVESTMENT COMPANY SECURITIES
From time to time, the Portfolio may invest in securities of other
investment companies. The Portfolio is subject to the provisions of Section
12(d)(1) of the 1940 Act.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. The Portfolio will enter into such transactions only when it has the
intention of actually acquiring the securities. To facilitate such acquisitions,
the Portfolio's custodian will segregate cash or high quality liquid assets in
an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities, sales of
the segregated securities or from other available sources of cash. If it chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, the Portfolio could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. At the time it makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, the Portfolio will record the transaction as a purchase and thereafter
reflect the value of such securities in determining its net asset value.
MUNICIPAL LEASES
The Portfolio may invest in municipal leases. Municipal leases frequently
have special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
government issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations of many
state constitutions and statutes are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. The Portfolio
will only purchase municipal leases subject to a non-appropriation clause when
the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, or guarantee of a bank or other entity that meets
the criteria described in the Prospectus under "Taxable Investments."
In evaluating municipal lease obligations, Janus Capital will consider such
factors as it deems appropriate, including: (a) whether the lease can be
canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor; (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality; (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding; (f) whether the security is backed by a
credit enhancement such as insurance; and (g) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services other
than those covered by the lease obligation. If a lease is backed by an
unconditional letter of credit or other unconditional
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credit enhancement, then Janus Capital may determine that a lease is an eligible
security solely on the basis of its evaluation of the credit enhancement.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of the Portfolio.
PERFORMANCE DATA
As described in the Prospectus, the Portfolio may provide current
annualized and effective annualized yield quotations of the Shares based on the
Shares' daily dividends. These quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. All
performance information supplied by the Portfolio in advertising is historical
and is not intended to indicate future returns.
In performance advertising, the Portfolio may compare any of its
performance information with data published by independent evaluators such as
Morningstar, Inc., Lipper Analytical Services, Inc., or CDC/Wiesenberger,
Donoghue's Money Fund Report or other companies which track the investment
performance of investment companies ("Fund Tracking Companies"). The Funds may
also compare their performance information with the performance of recognized
stock, bond and other indices, including but not limited to the Municipal Bond
Buyers Indices, the Salomon Brothers Bond Index, the Lehman Brothers Bond Index,
the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, U.S. Treasury bonds, bills or notes and changes in the Consumer Price
Index as published by the U.S. Department of Commerce. The Portfolio may refer
to general market performance over past time periods such as those published by
Ibbotson Associates (for instance, its "Stocks, Bonds, Bills and Inflation
Yearbook"). The Portfolio may also refer in such materials to mutual fund
performance rankings and other data published by Fund Tracking Companies.
Performance advertising may also refer to discussions of the Portfolio and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
Any current yield quotation of the Portfolio's Shares which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the Securities
Act of 1933, as amended, shall consist of an annualized historical yield,
carried at least to the nearest hundredth of one percent, based on a specific
seven calendar day period. The current yield of the Portfolio's Shares shall be
calculated by (a) determining the net change during a seven calendar day period
in the value of a hypothetical account having a balance of one share at the
beginning of the period, (b) dividing the net change by the value of the account
at the beginning of the period to obtain a base period return, and (c)
multiplying the quotient by 365/7 (i.e., annualizing). For this purpose, the net
change in account value will reflect the value of additional shares purchased
with dividends declared on the original share and dividends declared on both the
original share and any such additional shares, but will not reflect any realized
gains or losses from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, the Portfolio may advertise
effective yield quotations. Effective yield quotations are calculated by adding
1 to the base period return, raising the sum to a power equal to 365/7, and
subtracting 1 from the result (i.e., compounding).
Income calculated for the purpose of determining the yield of the
Portfolio's Shares differs from income as determined for other accounting
purposes. Because of the different accounting methods used, and because of the
compounding assumed in yield calculations, the yield quoted for the Portfolio's
Shares may differ from the rate of distribution the Shares paid over the same
period or the rate of income reported in the Portfolio's financial statements.
Although published yield information is useful to investors in reviewing
the performance of the Portfolio's Shares, investors should be aware that the
Shares' yield fluctuates from day to day and that the Shares' yield for any
given period is not an indication or representation by the Portfolio of future
yields or rates of return on the Portfolio's Shares. The Shares' yield is not
fixed or guaranteed, and an investment in the Portfolio is not insured.
Accordingly, the Shares' yield information may not necessarily be used to
compare Portfolio Shares with investment alternatives which, like money market
instruments or bank accounts, may provide a fixed rate of interest. In addition,
because investments in the Portfolio are not insured or guaranteed, the Shares'
yield information may not necessarily be used to compare the Portfolio with
investment alternatives which are insured or guaranteed.
The current yield and effective yield for the Institutional Shares of the
Portfolio for the seven day period ended December 31, 1996, were 5.27% and
5.41%, respectively. The Retirement Shares had not yet commenced operations as
of December 31, 1996. The performance of the Retirement Shares is expected to be
lower from that of the Institutional Shares because the Retirement Shares are
subject to additional fees.
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DETERMINATION OF NET ASSET VALUE
Pursuant to the rules of the Securities and Exchange Commission, the
Trustees have established procedures to stabilize the Portfolio's net asset
value at $1.00 per Share. These procedures include a review of the extent of any
deviation of net asset value per Share as a result of fluctuating interest
rates, based on available market rates, from the Portfolio's $1.00 amortized
cost price per Share. Should that deviation exceed 1/2 of 1%, the Trustees will
consider whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to shareholders. Such action may include
redemption of shares in kind, selling portfolio securities prior to maturity,
reducing or withholding dividends and utilizing a net asset value per share as
determined by using available market quotations. The Portfolio i) will maintain
a dollar-weighted average portfolio maturity of 90 days or less; ii) will not
purchase any instrument with a remaining maturity greater than 397 days or
subject to a repurchase agreement having a duration of greater than 397 days;
iii) will limit portfolio investments, including repurchase agreements, to those
U.S. dollar-denominated instruments that Janus Capital has determined present
minimal credit risks pursuant to procedures established by the Trustees; and iv)
will comply with certain reporting and recordkeeping procedures. The Trust has
also established procedures to ensure that portfolio securities meet the
Portfolio's high quality criteria.
INVESTMENT ADVISER
As stated in the Prospectus, the Portfolio has an Investment Advisory
Agreement with Janus Capital, 100 Fillmore Street, Denver, Colorado 80206-4928.
The Advisory Agreement provides that Janus Capital will furnish continuous
advice and recommendations concerning the Portfolio's investments, provide
office space for the Portfolio and pay the salaries, fees and expenses of all
Portfolio officers and of those Trustees who are affiliated with Janus Capital.
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 which perfomed services with respect to shareholder accounts. The
minimum aggregate size required for eligibility for such payments, and the
factors in selecting the broker-dealer firms and institutions to which they will
be made, are determined from time to time by Janus Capital. Janus Capital is
also authorized to perform the management and administrative services necessary
for the operation of the Portfolio.
The Portfolio pays custodian agent fees and expenses, brokerage commissions
and dealer spreads and other expenses in connection with the execution of
Portfolio transactions, legal and accounting expenses, interest and taxes,
registration fees, expenses of shareholders' meetings, and reports to
shareholders, fees and expenses of Trustees who are not affiliated with Janus
Capital, and other costs of complying with applicable laws regulating the sale
of Portfolio shares. Pursuant to the Advisory Agreement, Janus Capital furnishes
certain other services, including net asset value determination, portfolio
accounting and record keeping for which the Portfolio may reimburse Janus
Capital for its costs.
The Portfolio has agreed to compensate Janus Capital for its advisory
services by the monthly payment of an advisory fee at the annual rate of .25% of
the Portfolio's average daily net assets. Janus Capital has agreed to reimburse
the Portfolio by the amount, if any, that the Portfolio's normal operating
expenses chargeable to its income account in any fiscal year, including the
investment advisory fee but excluding brokerage commissions, interest, taxes and
extraordinary expenses, exceed .50% of average daily net assets. Mortality risk,
expense risk and other charges imposed by participating insurance companies are
excluded from the above expense limitation.
For the period from the commencement of the Portfolio's operations (May 1,
1995) until December 31, 1995 and for the fiscal year ended December 31, 1996,
the Portfolio paid no advisory fees, after applicable fee waivers. Without the
waivers, the advisory fee would have been $2,590 and $___, respectively, for
these periods.
The Advisory Agreement became effective on March 10, 1995 and 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 or the
Trustees. The Advisory Agreement i) may be terminated without the payment of any
penalty by the Portfolio or Janus Capital on 60 days' written notice; ii)
terminates automatically in the event of its assignment; and iii) generally, may
not be amended without the approval by vote of a majority of the Trustees,
including the Trustees who are not interested persons of the Portfolio or Janus
Capital and, to the extent required by the 1940 Act, the vote of a majority of
the outstanding voting securities of the Portfolio.
Janus Capital also performs investment advisory services for other mutual
funds, and for individual, charitable, corporate and retirement accounts.
Investment decisions for each account managed by Janus Capital, including the
Portfolio, are made independently from those for any other account that is or
may in the future become managed by Janus Capital or its affiliates. If,
however, a number of accounts managed by Janus Capital are contemporaneously
engaged in the purchase or sale of the same security, the orders may be
aggregated and/or the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by an account or the size of the position obtained or
liquidated for an account. Pursuant to an exemptive order granted by the SEC,
the Portfolios and other funds 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 funds on a pro rata basis.
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Each account managed by Janus Capital has its own investment objective and
is managed in accordance with that objective by a particular portfolio manager
or team of portfolio managers. As a result, from time to time two or more
different managed accounts may pursue divergent investment strategies with
respect to investments or categories of investments.
As indicated in the Prospectus, Janus Capital does not permit portfolio
managers to purchase and sell securities for their own accounts except under the
limited exceptions contained in Janus Capital's 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 12% of
its voting stock and, by agreement with KCSI, selects a majority of Janus
Capital's Board.
CUSTODIAN, TRANSFER AGENT AND CERTAIN AFFILIATIONS
United Missouri Bank, N.A., P.O. Box 419226, Kansas City, Missouri
64141-6226, is the Portfolio's custodian. The custodian holds the Portfolio's
assets in safekeeping and collects and remits the income thereon, subject to the
instructions of the Portfolio.
Janus Service Corporation ("Janus Service"), P.O. Box 173375, Denver,
Colorado 80217-3375, a wholly-owned subsidiary of Janus Capital, is the
Portfolio's transfer agent. In addition, Janus Service provides certain other
administrative, recordkeeping and shareholder relations services to the
Portfolio. Janus Service receives a participant administration fee at an annual
rate of up to .25% of the average daily net assets of the Shares of the
Portfolio for providing or procuring recordkeeping, subaccounting and other
administrative services to plan participants who invest in the Shares. Janus
Service expects to use substantially all of this fee to compensate qualified
plan service providers for providing these services (at an annual rate of up to
.25% of the average daily net assets of the Shares attributable to plan
participants receiving services from each service provider). Services provided
by qualified plan service providers may include but are not limited to
participant recordkeeping, processing and aggregating purchase and redemption
transactions, providing periodic statements, forwarding prospectuses,
shareholder reports and other materials to existing plan participants, and other
participant administrative services.
Janus Distributors, Inc. ("Janus Distributors"), 100 Fillmore Street,
Denver, Colorado 80206-4928, a wholly-owned subsidiary of Janus Capital, is a
distributor of the Shares. Janus Distributors is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "Exchange Act") and is a member
of the National Association of Securities Dealers, Inc.
The Portfolio pays DST Systems, Inc. ("DST"), a subsidiary of KCSI, license
fees for the use of DST's portfolio and fund accounting system a base fee paid
monthly between $250 to $1,250 per month based on the number of Janus funds
utilizing the system and an asset charge of $1 per million dollars of net assets
(not to exceed $500 per month).
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.
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
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<PAGE>
and expected in the market for the particular security; confidentiality; the
quality of the execution, clearance and settlement services; financial stability
of the broker or dealer; the existence of actual or apparent operational
problems of any broker or dealer; and research products or services provided. In
recognition of the value of the foregoing factors, Janus Capital may place
portfolio transactions with a broker or dealer with whom it has negotiated a
commission that is in excess of the commission another broker or dealer would
have charged for effecting that transaction if Janus Capital determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research provided by such broker or dealer viewed in terms of
either that particular transaction or of the overall responsibilities of Janus
Capital. These research and other services may include, but are not limited to,
general economic and security market reviews, industry and company reviews,
evaluations of securities, recommendations as to the purchase and sale of
securities, and access to third party publications, computer and electronic
equipment and software. Research received from brokers or dealers is
supplemental to Janus Capital's own research efforts.
Brokerage commissions are not normally charged on the purchase and sale of
money market instruments.
For the fiscal year ended December 31, 1996, the total brokerage
commissions paid by the Portfolio to brokers and dealers in transactions
identified for execution primarily on the basis of research and other services
provided to the Portfolio are summarized below:
Portfolio Name Commissions Transactions
- --------------------------------------------------------------------------------
Money Market Portfolio $ $
For the fiscal period from the commencement of the Portfolio's operations
(May 1, 1995) to December 31, 1995 and the fiscal year ended December 31, 1996,
the total brokerage commissions paid by the Portfolio are summarized below:
Portfolio Name 1996 1995
- --------------------------------------------------------------------------------
Money Market Portfolio $ $
The Portfolio generally buys and sells securities in principal and agency
transactions in which no commissions are paid. However, the Portfolio may engage
an agent and pay commissions for such transactions if Janus Capital believes
that the net result of the transaction to the Portfolio will be no less
favorable than that of contemporaneously available principal transactions.
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 may consider sales of Portfolio shares or shares of other
Janus funds by a broker-dealer or the recommendation of a broker-dealer to its
customers that they purchase such shares as a factor in the selection of
broker-dealers to execute Portfolio transactions. Janus Capital may also
consider payments made by brokers effecting transactions for a Portfolio i) to
the Portfolio or ii) to other persons on behalf of the Portfolio for services
provided to the Portfolio for which it would be obligated to pay. In placing
portfolio business with such broker-dealers, Janus Capital will seek the best
execution of each transaction.
When the Funds purchase or sell a security in the over-the-counter market,
the transaction takes place directly with a principal market-maker, without the
use of a broker, except in those circumstances where in the opinion of Janus
Capital better prices and executions will be achieved through the use of a
broker.
OFFICERS AND TRUSTEES
The following are the names of the Trustees and officers of Janus Aspen
Series, a Delaware business trust of which the Portfolio is a series, together
with a brief description of their principal occupations during the last five
years.
Thomas H. Bailey*# - Trustee, Chairman and President
100 Fillmore Street
Denver, CO 80206-4928
Trustee, Chairman and President of Janus Investment Fund+. Chairman, Chief
Executive Officer, Director and President of Janus Capital. Chairman of
IDEX Management, Inc., Largo, Florida (50% subsidiary of Janus Capital and
investment adviser to a group of mutual funds) ("IDEX").
James P. Craig, III*# - Trustee and Executive Vice President
100 Fillmore Street
Denver, CO 80206-4928
Trustee and Executive Vice President of Janus Investment Fund+. Chief
Investment Officer, Vice President and Director of Janus Capital. Portfolio
Manager of Janus Fund.
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
#Member of the Executive Committee.
+Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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<PAGE>
Sharon S. Pichler* - Executive Vice President and Portfolio Manager
100 Fillmore Street
Denver, CO 80206-4928
Executive Vice President of Janus Money Market Fund, Janus Tax-Exempt Money
Market Fund and Janus Government Money Market Fund series of Janus
Investment Fund+. Vice President of Janus Capital. Formerly, Assistant Vice
President and portfolio manager at USAA Investment Management Co.
(1990-1994).
David C. Tucker* - Vice President and General Counsel
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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. Formerly (1979 to 1992), with the accounting firm of Price
Waterhouse LLP, Denver, Colorado. Formerly (1992-1996), Treasurer of Janus
Investment Fund and Janus Aspen Series.
Glenn P. O'Flaherty* - Treasurer and Chief Accounting Officer
100 Fillmore Street
Denver, CO 80206-4928
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 80206-4928
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).
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.
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).
James T. Rothe - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
#Member of the Executive Committee.
+Includes comparable office with various Janus funds that were reorganized into
Janus Investment Fund on August 7, 1992.
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Trustee of Janus Investment Fund+. Professor of Business, University of
Colorado, Colorado Springs, Colorado. Principal, Phillips-Smith Retail
Group, Colorado Springs, Colorado (a venture capital firm). Formerly
(1986-1994), Dean of the College of Business, University of Colorado,
Colorado Springs, Colorado.
The Trustees are responsible for major decisions relating to the
Portfolio's objective, policies and techniques. The Trustees also supervise the
operation of the Portfolio by its officers and review the investment decisions
of the officers although they do not actively participate on a regular basis in
making such decisions.
The Executive Committee of the Trustees shall have and may exercise all the
powers and authority of the Board except for matters requiring action by the
whole Board pursuant to the Trust's Bylaws or Trust Instrument, Delaware Law or
the 1940 Act.
The Money Market Funds Committee, consisting of Messrs. Craig, Loo,
Waldinger and ______, monitors the compliance with policies and procedures
adopted particularly for money market funds.
- --------------------------------------------------------------------------------
*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 following table shows the aggregate compensation paid to each Trustee
by the Portfolio and all funds advised and sponsored by Janus Capital
(collectively, the "Janus Funds") for the periods indicated. None of the
Trustees receive pension or retirement benefits from the Portfolio or the Janus
Funds.
<TABLE>
Aggregate Compensation Total Compensation
from the Portfolio for from the Janus Funds
fiscal year ended for calendar year ended
Name of Person, Position December 31, 1996 December 31, 1996**
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman* -- --
James P. Craig, III, Trustee*, -- --
John W. Shepardson, Trustee+ *** --
William D. Stewart, Trustee *** --
Gary O. Loo, Trustee *** --
Dennis B. Mullen, Trustee *** --
Martin H. Waldinger, Trustee *** --
James T. Rothe, Trustee++ N/A $0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*An interested person of the Portfolio and of Janus Capital. Compensated by
Janus Capital and not the Portfolio.
**As of December 31, 1996, Janus Funds consisted of two registered investment
companies comprised of a total of 29 funds.
***Aggregate compensation for the period was de minimis.
+Mr. Shepardson retired on March 31, 1997.
++Mr. Rothe began serving as Trustee on January 1, 1997.
PURCHASE OF SHARES
Shares of the Portfolio can be purchased only by certain participant
directed qualified plans. Shares of the Portfolio are purchased at the NAV per
share as determined at the close of regular trading session of the New York
Stock Exchange ("NYSE") next occurring after a purchase order is received and
accepted by the Portfolio or its authorized agent. Your plan documents contain
detailed information about investing in the Portfolio.
DISTRIBUTION PLAN
Under a distribution plan ("Plan") adopted in accordance with Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act"), the Shares may pay
Janus Distributors, Inc. ("JDI"), the distributor of the Retirement Shares, a
fee at an annual rate of up to 0.25% of the average daily net assets of the
Shares of the Portfolio. Under the terms of the Plan, the Trust is authorized to
make payments to JDI for remittance to qualified plan service providers as
compensation for distribution and shareholder servicing performed by such
providers. The Plan is a compensation type plan and permits the payment at an
annual rate of up to 0.25% of the average daily net assets of the Shares of the
Portfolio for activities which are primarily intended to result in sales of the
Shares, including but not limited to preparing, printing and distributing
prospectuses, Statements of Additional Information, shareholder reports, and
educational materials to prospective and existing plan participants; responding
to inquiries by qualified plan participants; receiving and answering
correspondence and similar activities. On December 10, 1996, Trustees
unanimously approved the Plan which became effective May 1, 1997. The Plan and
any Rule 12b-1 related agreement that is entered into by the Portfolio or JDI in
connection with the Plan will continue in effect for a period of more than one
year only so long as continuance is specifically approved at least annually by a
vote of a majority of the Trustees, and of a majority of
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the Trustees who are not interested persons (as defined in the 1940 Act) of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any related agreements ("12b-1 Trustees"). All material amendments
to the Plan must be approved by a majority vote of the Trustees, including a
majority of the 12b-1 Trustees, at a meeting called for that purpose. In
addition, the Plan may be terminated at any time upon 60 days' notice, without
penalty, by vote of a majority of the outstanding Shares of the Portfolio or by
vote of a majority of 12b-1 Trustees.
REDEMPTION OF SHARES
Redemptions, like purchases, may only be effected through participant
directed qualified plans. Shares normally will be redeemed for cash, although
the 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 net asset value of the Portfolio during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such limitation, their
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 "Determination of Net Asset Value" and such valuation
will be made as of the same time the redemption price is determined.
The right to require the 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 Securities and Exchange Commission, or the NYSE
is closed except for holidays and weekends, (2) the Securities and Exchange
Commission permits such suspension and so orders, or (3) an emergency exists as
determined by the Securities and Exchange Commission so that disposal of
securities or determination of NAV is not reasonably practicable.
DIVIDENDS AND TAX STATUS
Dividends representing substantially all of the net investment income and
any net realized gains on sales of securities are declared daily, Saturdays,
Sundays and holidays included, and distributed on the last business day of each
month. If a month begins on a Saturday, Sunday, or holiday, dividends for those
days are declared at the end of the preceding month and distributed on the first
business day of the month. The Portfolio intends to qualify as a "regulated
investment company" by satisfying certain requirements prescribed by Subchapter
M of the Internal Revenue Code of 1986. In addition, because a class of shares
of the Portfolio are sold in connection with variable insurance contracts, the
Portfolio intends to comply with the diversification requirements of Internal
Revenue Code Section 817(h) related to the tax-deferred status of insurance
company separate accounts.
All income dividends and capital gains distributions, if any, on the
Portfolio's Shares are reinvested automatically in additional Shares of the
Portfolio at the NAV determined on the first business day following the record
date.
Because Shares of the Portfolio can only be purchased through 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 plan documents for additional information.
MISCELLANEOUS INFORMATION
THE TRUST
The Portfolio is an open-end management investment company registered under
the 1940 Act as a series of the Trust, which was organized as a Delaware
business trust on May 20, 1993. The Trust Instrument permits the Trustees to
issue an unlimited number of shares of beneficial interest from an unlimited
number of series and classes of shares. As of the date of this SAI, the Trust
offers eleven series of shares, known as "portfolios," in two classes.
Additional series and/or classes may be created from time to time.
SHARES OF THE TRUST
The Trust is authorized to issue an unlimited number of shares of
beneficial interest with a par value of $0.001 per share for each series of the
Trust. Shares of each series of the Trust are fully paid and nonassessable when
issued. The Shares of the Portfolio participate equally in dividends and other
distributions by the Shares of 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.
Each Portfolio currently offers two classes of shares. The Shares discussed
in this SAI are offered only to certain participant directed qualified plans
whose service providers require a fee from Trust assets for providing certain
services to plan participants.
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A second class of shares, Institutional Shares, are offered only in connection
with investment in and payments under variable contracts and life insurance
contracts, as well as certain qualified retirement plans.
VOTING RIGHTS
The Trustees are responsible for major decisions relating to the
Portfolio's policies and objectives; the Trustees oversee the operation of the
Portfolio by its officers.
The present Trustees were elected by the initial trustee of the Trust on
May 25, 1993, and were approved by the initial shareholder on May 25, 1993 with
the exception of Mr. Craig and Mr. Rothe who were appointed by the Trustees as
of June 30, 1995 and as of January 1, 1997, respectively. Under the Trust
Instrument, each Trustee will continue in office until the termination of the
Trust or his earlier death, retirement, 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 portfolio of the Trust has one vote (and fractional
votes for fractional shares). Shares of all portfolios of the Trust have
noncumulative voting rights, which means that the holders of more than 50% of
the shares of all portfolios 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 class or if an interest of a portfolio or
class in the matter differs from the interests of other portfolios or classes 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 Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities to which this SAI relates. If further
information is desired with respect to the Portfolio or such securities,
reference is made to the Registration Statement and the exhibits filed as a part
thereof.
FINANCIAL STATEMENTS
The following audited financial statements for Institutional Shares of the
Portfolio the period ended December 31, 1996 are hereby incorporated into this
Statement of Additional Information by reference to the Portfolio's Annual
Report dated December 31, 1996. A copy of such report accompanies this Statement
of Additional Information. The Retirement Shares had not yet commenced
operations as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT
Schedule of Investments as of December 31, 1996
Statement of Operations for the period May 1, 1996 to December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Changes in Net Assets for the period May 1, 1996 to December
31, 1996
Financial Highlights for the period May 1, 1996 to December 31, 1996
Notes to Financial Statements
The portions of such Annual Report that are not specifically listed above
are not incorporated by reference into this Statement of Additional Information
and are not part of the Registration Statement.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S AND STANDARD & POOR'S
MUNICIPAL AND CORPORATE BONDS AND MUNICIPAL LOANS
The two highest ratings of Standard & Poor's Ratings Services ("S&P") for
municipal and corporate bonds are AAA and AA. Bonds rated AAA have the highest
rating assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. The AA rating may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within that rating category.
The two highest ratings of Moody's Investors Service, Inc. ("Moody's") for
municipal and corporate bonds are Aaa and Aa. Bonds rated Aaa are judged by
Moody's to be of the best quality. Bonds rated Aa are judged to be of high
quality by all standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. Moody's states that Aa bonds are rated
lower than the best bonds because margins of protection or other elements make
long-term risks appear somewhat larger than Aaa securities. The generic rating
Aa may be modified by the addition of the numerals 1, 2 or 3. The modifier 1
indicates that the security ranks in the higher end of the Aa rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of such rating category.
SHORT TERM MUNICIPAL LOANS
S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have a strong
capacity to pay principal and interest. Those issues rated SP-1 which are
determined to possess a very strong capacity to pay debt service will be given a
plus (+) designation. Issues rated SP-2 have satisfactory capacity to pay
principal and interest with some vulnerability to adverse financial and economic
changes over the term of the notes.
Moody's highest rating for short-term municipal loans is MIG-1/VMIG-1.
Moody's states that short-term municipal securities rated MIG-1/VMIG-1 are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2 designation are
of high quality, with margins of protection ample although not so large as in
the MIG-1/VMIG-1 group.
OTHER SHORT-TERM DEBT SECURITIES
Prime-1 and Prime-2 are the two highest ratings assigned by Moody's for
other short-term debt securities and commercial paper, and A-1 and A-2 are the
two highest ratings for commercial paper assigned by S&P. Moody's uses the
numbers 1, 2 and 3 to denote relative strength within its highest classification
of Prime, while S&P uses the numbers 1, 2 and 3 to denote relative strength
within its highest classification of A. Issuers rated Prime-1 by Moody's have a
superior ability for repayment of senior short-term debt obligations and have
many of the following characteristics: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structure with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well established access to a range of
financial markets and assured sources of alternate liquidity. Issuers rated
Prime-2 by Moody's have a strong ability for repayment of senior short-term debt
obligations and display many of the same characteristics displayed by issuers
rated Prime-1, but to a lesser degree. Issuers rated A-1 by S&P carry a strong
degree of safety regarding timely repayment. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) designation.
Issuers rated A-2 by S&P carry a satisfactory degree of safety regarding timely
repayment.
FITCH
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than
issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is
not as great as the F-1+ and F-1 ratings.
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DUFF & PHELPS INC.
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative sources
of funds, is clearly outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
THOMSON BANKWATCH, INC.
TBW-1 The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
IBCA, INC.
A1+ Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
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APPENDIX B
DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Notes generally are used to provide for short-term capital needs
and usually have maturities of one year or less. They include the following:
1. Project Notes, which carry a U.S. government guarantee, are issued by
public bodies (called "local issuing agencies") created under the laws of a
state, territory, or U.S. possession. They have maturities that range up to one
year from the date of issuance. Project Notes are backed by an agreement between
the local issuing agency and the Federal Department of Housing and Urban
Development. These Notes provide financing for a wide range of financial
assistance programs for housing, redevelopment, and related needs (such as
low-income housing programs and renewal programs).
2. Tax Anticipation Notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
3. Revenue Anticipation Notes are issued in expectation of receipt of other
types of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
4. Bond Anticipation Notes are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the Notes.
5. Construction Loan Notes are sold to provide construction financing.
After successful completion and acceptance, many projects receive permanent
financing through the Federal Housing Administration under the Federal National
Mortgage Association ("Fannie Mae") or the Government National Mortgage
Association ("Ginnie Mae").
6. Tax-Exempt Commercial Paper is a short-term obligation with a stated
maturity of 365 days or less. It is issued by agencies of state and local
governments to finance seasonal working capital needs or as short-term financing
in anticipation of longer term financing.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
1. General Obligation Bonds are issued by such entities as states,
counties, cities, towns, and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind General Obligation Bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
2. Revenue Bonds in recent years have come to include an increasingly wide
variety of types of municipal obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist of virtually any form of
state or local governmental entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide additional
security in the form of a debt service reserve fund to be used to make principal
and interest payments. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Housing authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.
In recent years, revenue bonds have been issued in large volumes for
projects that are privately owned and operated (see 3 below).
3. Private Activity Bonds are considered municipal bonds if the interest
paid thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and ports. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property as security for such
payment.
While, at one time, the pertinent provisions of the Internal Revenue Code
permitted private activity bonds to bear tax-exempt interest in connection with
virtually any type of commercial or industrial project (subject to various
restrictions as to authorized
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costs, size limitations, state per capita volume restrictions, and other
matters), the types of qualifying projects under the Code have become
increasingly limited, particularly since the enactment of the Tax Reform Act of
1986. Under current provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain privately owned and operated
rental multi-family housing facilities, nonprofit hospital and nursing home
projects, airports, docks and wharves, mass commuting facilities and solid waste
disposal projects, among others, and for the refunding (that is, the tax-exempt
refinancing) of various kinds of other private commercial projects originally
financed with tax-exempt bonds. In future years, the types of projects
qualifying under the Code for tax-exempt financing are expected to become
increasingly limited.
Because of terminology formerly used in the Internal Revenue Code,
virtually any form of private activity bond may still be referred to as an
"industrial development bond," but more and more frequently revenue bonds have
become classified according to the particular type of facility being financed,
such as hospital revenue bonds, nursing home revenue bonds, multi-family housing
revenues bonds, single family housing revenue bonds, industrial development
revenue bonds, solid waste resource recovery revenue bonds, and so on.
Other Municipal Obligations, incurred for a variety of financing purposes,
include: municipal leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local governments
and authorities to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, telecommunications equipment and other capital
assets. Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations of many state constitutions and statutes are deemed to
be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Portfolio will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by an unconditional irrevocable letter
of credit, or guarantee of a bank or other entity that meets the criteria
described in the Prospectus.
Tax-exempt bonds are also categorized according to whether the interest is
or is not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to the
increasing complexity of Internal Revenue Code and related requirements
governing the issuance of tax-exempt bonds, industry practice has uniformly
required, as a condition to the issuance of such bonds, but particularly for
revenue bonds, an opinion of nationally recognized bond counsel as to the
tax-exempt status of interest on the bonds.
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