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LOGO
Janus Aspen Series
Service Shares
Growth Portfolio
Aggressive Growth Portfolio
Capital Appreciation Portfolio
International Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Equity Income Portfolio
Growth and Income Portfolio
Flexible Income Portfolio
High-Yield Portfolio
100 Fillmore Street
Denver, CO 80206-4928
(800) 29JANUS
Statement of Additional Information
December 31, 1999
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus
for the Service Shares (the "Shares") of the portfolios listed
above, each of which is a separate series of Janus Aspen
Series, a Delaware business 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. Each Portfolio is managed separately by Janus
Capital Corporation.
The Service Shares of the Portfolios may be purchased only by
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.
This SAI is not a Prospectus and should be read in conjunction
with the Portfolios' Prospectus dated December 31, 1999, which
is incorporated by reference into this SAI and may be obtained
from your insurance company or plan sponsor. This SAI contains
additional and more detailed information about the Portfolios'
operations and activities than the Prospectus. The Annual
Reports, which contain important financial information about
the Portfolios, are incorporated by reference into this SAI and
are also available, without charge from your insurance company
or plan sponsor.
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LOGO
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Table of contents
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Classification, Portfolio Turnover, Investment Policies and
Restrictions, and Investment Strategies and Risks........... 2
Investment Adviser.......................................... 22
Custodian, Transfer Agent and Certain Affiliations.......... 25
Portfolio Transactions and Brokerage........................ 26
Trustees and Officers....................................... 30
Shares of the Trust......................................... 35
Net Asset Value Determination............................ 35
Purchases................................................ 35
Distribution and Shareholder Servicing Plan.............. 36
Redemptions.............................................. 36
Income Dividends, Capital Gains Distributions and Tax
Status...................................................... 38
Miscellaneous Information................................... 39
Shares of the Trust...................................... 39
Shareholder Meetings..................................... 39
Voting Rights............................................ 39
Independent Accountants.................................. 40
Registration Statement................................... 40
Performance Information..................................... 41
Financial Statements........................................ 43
Appendix A.................................................. 44
Explanation of Rating Categories......................... 44
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Classification, portfolio turnover, investment policies
and restrictions, and investment
strategies and risks
CLASSIFICATION
Each Portfolio is a series of the Trust, an open-end, management
investment company. The Investment Company Act of 1940 ("1940 Act")
classifies mutual funds as either diversified or nondiversified.
Aggressive Growth Portfolio and Capital Appreciation Portfolio are
nondiversified funds. Each of these Portfolios reserves the right to
become a diversified fund by limiting the investments in which more
than 5% of its total assets are invested. Growth Portfolio,
International Growth Portfolio, Worldwide Growth Portfolio, Balanced
Portfolio, Equity Income Portfolio, Growth and Income Portfolio,
Flexible Income Portfolio and High-Yield Portfolio are diversified
funds.
PORTFOLIO TURNOVER
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.
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Portfolio Name 1998 1997
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Growth Portfolio............................................ 73% 122%
Aggressive Growth Portfolio................................. 132% 130%
Capital Appreciation Portfolio.............................. 91% 101%(1)
International Growth Portfolio.............................. 93% 86%
Worldwide Growth Portfolio.................................. 77% 80%
Balanced Portfolio.......................................... 70% 139%
Equity Income Portfolio..................................... 79% 128%(1)
Growth and Income Portfolio................................. 62%(2) N/A
Flexible Income Portfolio................................... 145% 119%
High-Yield Portfolio........................................ 301% 299%
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(1) May 1, 1997 (inception) to December 31, 1997, annualized.
(2) May 1, 1998 (inception) to December 31, 1998, annualized.
INVESTMENT POLICIES AND RESTRICTIONS APPLICABLE TO ALL PORTFOLIOS
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 Capital Appreciation 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, 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 and Capital
Appreciation 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).
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(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.
(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
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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.
Under the terms of an exemptive order received from the Securities and
Exchange Commission ("SEC"), each of the Portfolios may borrow money
from or lend money to other funds that permit such transactions and
for which Janus Capital serves as investment adviser. All such
borrowing and lending will be subject to the above limits. A Portfolio
will borrow money through the program only when the costs are equal to
or lower than the cost of bank loans. Interfund loans and borrowings
normally extend overnight, but can have a maximum duration of seven
days. A Portfolio will lend through the program only when the returns
are higher than those available from other short-term instruments
(such as repurchase agreements). A Portfolio may have to borrow from a
bank at a higher interest rate if an interfund loan is called or not
renewed. Any delay in repayment to a lending Portfolio could result in
a lost investment opportunity or additional borrowing costs.
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 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
securities.
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
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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).
INVESTMENT STRATEGIES AND RISKS
Cash Position
As discussed in the Prospectus, when a portfolio manager believes that
market conditions are unfavorable for profitable investing, or when he
or she is otherwise unable to locate attractive investment
opportunities, the Portfolio's investment in cash and similar
investments may increase. Securities that the Portfolios may invest in
as a means of receiving a return on idle cash include commercial
paper, certificates of deposit, repurchase agreements or other
short-term debt obligations. The Portfolios may also invest in money
market funds, including funds managed by Janus Capital. (See
"Investment Company Securities" on page 8).
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 have authorized Janus Capital to make liquidity
determinations with respect to certain securities, including Rule 144A
Securities, commercial paper and municipal lease obligations purchased
by the Portfolios. 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
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.
If illiquid securities exceed 15% of a Portfolio's net assets after
the time of purchase the Portfolio will take steps to reduce in an
orderly fashion its holdings of illiquid securities. Because illiquid
securities may not be readily marketable, a portfolio manager may not
be able to dispose of them in a timely manner. As a result, a
Portfolio may be forced to hold illiquid securities while their price
depreciates. Depreciation in the price of illiquid securities may
cause the net asset value of a Portfolio to decline.
Securities Lending
The Portfolios may lend securities to qualified parties (typically
brokers or other financial institutions) who need to borrow securities
in order to complete certain transactions such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
activities. The Portfolios may seek to earn additional income through
securities lending. Since there is the risk of delay in recovering a
loaned security or the risk of loss in collateral rights if the
borrower fails financially, securities lending will only be made to
parties that Janus Capital deems creditworthy and in good standing. In
addition, such loans will only be made if Janus Capital believes the
benefit from granting such loans justifies the risk. The Portfolios
will not have the right to vote on securities while they are being
lent, but they will call a loan in anticipation of any important vote.
All loans will be continuously secured by collateral which consists of
cash, U.S. government securities, letters of credit and such other
collateral permitted by the Securities and Exchange Commission and
policies approved by the Trustees. Cash collateral may be invested in
money
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market funds advised by Janus Capital to the extent consistent with
exemptive relief obtained from the SEC.
Short Sales
Each Portfolio may engage in "short sales against the box." This
technique involves selling either a security that a Portfolio owns, or
a security equivalent in kind and amount to the security sold short
that the Portfolio has the right to obtain, for delivery at a
specified date in the future. A Portfolio may enter into a short sale
against the box to hedge against anticipated declines in the market
price of portfolio securities. If the value of the securities sold
short increases prior to the scheduled delivery date, a Portfolio
loses the opportunity to participate in the gain.
Zero Coupon, Step Coupon and Pay-In-Kind Securities
Each Portfolio may invest up to 10% (without limit for High-Yield
Portfolio and Flexible Income 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. For the purposes of any Portfolio's
restriction on investing 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).
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.
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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 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.
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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 the
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 Portfolios may invest in securities of other
investment companies, subject to the provisions of Section 12(d)(1) of
the 1940 Act. The Portfolios may invest in securities of money market
funds managed by Janus Capital in excess of the limitations of Section
12(d)(1) under the terms of an SEC exemptive order obtained by Janus
Capital and the Janus funds.
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. GDRs are securities convertible into
equity securities of foreign issuers. Depositary Receipts are
generally subject to the same sort of risks as direct investments in a
foreign country, such as, currency risk, political and economic risk,
and market risk, because their values depend on the performance of a
foreign security denominated in its home currency. The risks of
foreign investing are addressed in some detail in the Portfolios'
prospectus.
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 have
variable or floating rates of interest and, under certain limited
circumstances, may have varying principal amounts. These 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 floating rate tends to decrease the
security's price sensitivity to changes in interest rates. 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. In order to
most effectively use these investments, a portfolio manager must
correctly assess probable movements in interest rates. This involves
different skills than those used to select most portfolio securities.
If the portfolio manager incorrectly forecasts such movements, a
Portfolio could be adversely affected by the use of variable or
floating rate obligations.
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. No Portfolio will invest more than 5% of its assets in
inverse floaters. Similar to variable and floating rate obligations,
effective use of inverse floaters requires skills different from those
needed to select most portfolio securities. If movements in interest
rates are incorrectly anticipated, a fund could lose money or its NAV
could decline by the use of inverse floaters.
STRIP BONDS. Strip bonds are debt securities that are stripped of
their interest (usually by a financial intermediary) after the
securities are issued. The market value of these securities generally
fluctuates more in response to changes in interest rates than
interest-paying securities of comparable maturity.
The Portfolios will purchase standby commitments, tender option bonds
and instruments with demand features primarily for the purpose of
increasing the liquidity of their holdings.
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 consists of 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 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
are subject to the 15% limit on illiquid investments. While it is not
possible to eliminate all risks from these transactions, it
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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 obtain 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 securities that are rated below investment grade (e.g.,
securities rated BB or lower by Standard & Poor's Ratings Services or
Ba or lower by Moody's Investors Service, Inc.). 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.
Any 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
of the size and perceived demand of the issue, among other factors,
certain municipalities may not incur the costs of obtaining a rating.
A Portfolio's manager will analyze the creditworthiness of the issuer,
as well as any financial institution or other party responsible for
payments on the security, in determining whether to purchase unrated
municipal bonds. 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 its portfolio manager believes, based upon
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 about 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 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 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 Portfolios.
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.
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
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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 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.
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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
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
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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.
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
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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 in or whose value
is tied to 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 other 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 against such
diminutions in the value of portfolio securities, a
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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 projected, 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, should 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
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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 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
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extent that the exercise price is secured by deposited 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-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.
18
<PAGE>
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
19
<PAGE>
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
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.
20
<PAGE>
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.
21
<PAGE>
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.
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, Capital Appreciation
Portfolio, International Growth Portfolio, Worldwide Growth Portfolio,
Balanced Portfolio, Equity Income Portfolio and Growth and Income
Portfolio have each agreed to compensate Janus Capital for its
services by the monthly payment of a fee at the annual rate of 0.75%
of the first $300 million of the average daily net assets of each
Portfolio, 0.70% of the next $200 million of the average daily net
assets of each Portfolio and 0.65% on 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,
Capital Appreciation Portfolio, International Growth Portfolio,
Worldwide Growth Portfolio, Balanced Portfolio, Equity Income
Portfolio and Growth and Income Portfolio at the effective rate of
Janus Fund, Janus Enterprise Fund, Janus Olympus Fund, Janus Overseas
Fund, Janus Worldwide Fund, Janus Balanced Fund, Janus Equity Income
Fund and Janus Growth and Income 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 Twenty Fund, Janus Overseas Fund, Janus Worldwide Fund, Janus
Balanced Fund, Janus Equity Income Fund and Janus Growth and Income
Fund were 0.65%, 0.67%, 0.65%, 0.66%, 0.65%, 0.67%, 0.71% and 0.66%,
respectively, for the quarter ended September 30, 1999. Janus Capital
has agreed to continue such reductions until at least the next annual
renewal of the advisory agreements.
In addition, Janus Capital has agreed to reimburse Equity Income
Portfolio and Growth and Income Portfolio by the amount, if any, that
such Portfolio's normal operating expenses in any fiscal year,
including the investment advisory fee but excluding the distribution
fee described below, brokerage commissions, interest, taxes and
extraordinary expenses, exceed an annual rate of 1.25% of the average
daily net assets of the Portfolio until at least the next annual
renewal of the advisory agreements. Mortality risk, expense risk and
other charges imposed by participating insurance companies are also
excluded from the above expense limitation.
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<PAGE>
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 net assets of the Portfolio
and .65% of the average daily net assets in excess of $300 million.
Flexible Income Portfolio has 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 in any fiscal year, including
the investment advisory fee but excluding the distribution fee
described below, 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.
Mortality risk, expense risk and other charges imposed by
participating insurance companies are also excluded from the above
expense limitation. Janus Capital has agreed to continue such waivers
until at least the next annual renewal of the advisory agreements.
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>
<CAPTION>
1998 1997 1996
Portfolio Name Advisory Fees Waivers(1) Advisory Fees Waivers(1) Advisory Fees Waivers(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio $ 5,144,931 $3,119,619 -- $1,410,362 --
Aggressive Growth Portfolio $ 4,159,741 $3,036,239 -- $2,102,177 --
Capital Appreciation Portfolio $ 181,285 $ 12,832(2) $ 9,172(2) -- --
International Growth Portfolio $ 1,547,572 $ 645,307 -- $ 55,211 $51,880
Worldwide Growth Portfolio $14,485,092 $7,532,715 -- $2,015,059 --
Balanced Portfolio $ 4,020,954 $1,348,363 -- $ 344,791 --
Equity Income Portfolio $ 42,337 $34,357 $ 5,959(2) $ 5,959(2,3) -- --
Growth and Income Portfolio $ 12,900 $12,900(3,4) -- -- -- --
Flexible Income Portfolio $ 563,148 $ 237,601 -- $ 116,279 --
High-Yield Portfolio $ 24,691 $24,691(3) $ 11,790 $11,790(3) $ 2,304(5) $ 2,304(3)(5)
</TABLE>
(1) In addition to these fee waivers, Janus Capital has agreed to reduce the
advisory fee of the Growth, Aggressive Growth, Capital Appreciation,
International Growth, Worldwide Growth, Balanced, Equity Income Growth and
Income Portfolios to the extent that such fee exceeds the effective rate of
the Janus retail fund corresponding to such Portfolio.
(2) May 1, 1997 (inception) to December 31, 1997.
(3) Fee waiver by Janus Capital exceeded the advisory fee.
(4) May 1, 1998 (inception) to December 31, 1998.
(5) May 1, 1996 (inception) to December 31, 1996.
The Advisory Agreement for each of the Portfolios is dated July 1,
1997 and will continue in effect 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 acts as sub-adviser for a number of private-label mutual
funds and provides separate account advisor services for institutional
accounts. Investment decisions for each account managed by Janus
23
<PAGE>
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.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 82%
of the outstanding voting stock of Janus Capital, most of which it
acquired in 1984. KCSI is a publicly traded holding company whose
primary subsidiaries are engaged in transportation, information
processing and financial services. Thomas H. Bailey, 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.
KCSI has announced its intention to separate its transportation and
financial services businesses. KCSI anticipates the separation to be
completed in the first quarter of 2000.
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.
Janus Capital does not permit the Portfolios' 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/Trustees, officers and employees of
Janus Capital and the Trust. The policy requires investment personnel
and officers of Janus Capital, inside directors/Trustees 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 Trust to various trading restrictions and
reporting obligations. All reportable transactions are required to be
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.
24
<PAGE>
Custodian, transfer agent and certain affiliations
State Street Bank and Trust Company, 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
it selects, 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, 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 Corporation is not
compensated for its services related to the Shares, except for
out-of-pocket costs.
The Portfolios pay DST Systems, Inc., a subsidiary of KCSI, license
fees at the rate of $3.06 per shareholder account for the growth and
combination portfolios and $3.98 per shareholder account for the
fixed-income portfolios for the use of DST's shareholder accounting
system. The Portfolios also pay DST $1.10 per closed shareholder
account. The Portfolios pay DST for the use of its portfolio and fund
accounting system a monthly base fee of $250 to $1,250 per month based
on the number of Janus funds using 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 Portfolios to use another affiliate
of DST as introducing broker for certain Portfolio transactions as a
means to reduce Portfolio expenses through credits 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., 100 Fillmore Street, Denver, Colorado
80206-4928, a wholly-owned subsidiary of Janus Capital, is the Trust's
distributor. Janus Distributors is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc.
25
<PAGE>
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.
26
<PAGE>
For the year ended December 31, 1998, 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:
<TABLE>
<CAPTION>
Portfolio Name Commissions Transactions
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Growth Portfolio $413,532 $417,034,639
Aggressive Growth Portfolio $486,104 $392,999,344
Capital Appreciation Portfolio $ 6,456 $ 8,627,008
International Growth Portfolio $ 67,747 $ 21,378,002
Worldwide Growth Portfolio $650,580 $258,735,559
Balanced Portfolio $ 91,836 $ 76,576,730
Equity Income Portfolio $ 1,272 $ 1,058,786
Growth and Income Portfolio $ 642 $ 627,984
</TABLE>
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.
27
<PAGE>
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>
<CAPTION>
Portfolio Name 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio $1,062,104 $1,249,908 $ 415,247
Aggressive Growth Portfolio $1,157,439 $ 974,825 $ 616,051
Capital Appreciation Portfolio $ 39,464 $ 2,570(2) N/A
International Growth Portfolio $ 810,115 $ 512,690 $ 49,472
Worldwide Growth Portfolio $5,334,034 $4,223,192 $1,332,024
Balanced Portfolio $ 337,008 $ 408,226 $ 86,264
Equity Income Portfolio $ 6,415 $ 1,055(2) N/A
Growth and Income Portfolio $ 3,844(1) N/A N/A
Flexible Income Portfolio $ 4,050 $ 2,841 $ 0
High-Yield Portfolio $ 679 $ 103 $ 186(3)
</TABLE>
(1) May 1, 1998 (inception) to December 31, 1998.
(2) May 1, 1997 (inception) to December 31, 1997.
(3) 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.
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>
<CAPTION>
Commission Paid
through DSTS for the
Period Ended Reduction of % of Total % of Total
Portfolio Name December 31, 1998* Expenses* Commissions+ Transactions
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio $6,937 $5,203 0.65% 0.49%
Aggressive Growth Portfolio $9,626 $7,219 0.83% 0.60%
Capital Appreciation Portfolio $ 0 $ 0 0% 0%
International Growth Portfolio $ 0 $ 0 0% 0%
Worldwide Growth Portfolio $ 0 $ 0 0% 0%
Balanced Portfolio $ 0 $ 0 0% 0%
Equity Income Portfolio $ 7 $ 6 0.12% 0.08%
Growth and Income Portfolio $ 0 $ 0 0% 0%
</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
indicated are not included in the table.
<TABLE>
<CAPTION>
Commission Paid through
DSTS for the Commission
Period Paid through DSTS
May 1, 1997 (inception) - Reduction of for the Period Ended Reduction
Portfolio Name December 31, 1997* Expenses* October 31, 1996* of Expenses*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio $2,819 $2,114 $4,645 $3,484
Aggressive Growth Portfolio $6,780 $5,085 $1,929 $1,447
International Growth Portfolio $ 0 $ 0 $ 67 $ 51
Worldwide Growth Portfolio $6,697 $5,023 $6,189 $4,642
Balanced Portfolio $ 391 $ 293 $2,565 $1,924
Equity Income Portfolio $ 15 $ 11 $ 0 $ 0
</TABLE>
* The difference between commissions paid through DSTS and expenses reduced
constitute commissions paid to an unaffiliated clearing broker.
NOTE: Portfolios that did not execute trades with DSTS during the periods
indicated are not included in the table.
28
<PAGE>
As of December 31, 1998, certain Portfolios owned securities of their
regular broker-dealers (or parents), as shown below:
<TABLE>
<CAPTION>
Value of
Name of Securities
Portfolio Name Broker-Dealer Owned
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Growth Portfolio Charles Schwab Corporation $30,555,043
Aggressive Growth Portfolio Charles Schwab Corporation $13,697,389
Balanced Portfolio Charles Schwab Corporation $24,251,649
Equity Income Portfolio Charles Schwab Corporation $379,659
Growth and Income Portfolio Charles Schwab Corporation $63,211
</TABLE>
29
<PAGE>
Trustees and officers
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, Age 62 - 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.
Director of Janus Distributors, Inc.
James P. Craig, III, Age 43 - Trustee*#
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. Chief Investment Officer, Director
of Research, Vice Chairman and Director of Janus Capital. Formerly
Executive Vice President and Portfolio Manager of Growth Portfolio and
Janus Fund (from inception and 1986, respectively, until December
1999). Formerly Executive Vice President and Co-Manager of Janus
Venture Fund (from inception until December 1999).
Gary O. Loo, Age 59 - Trustee#
102 N. Cascade, Suite 500
Colorado Springs, CO 80903
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. President and Director of High
Valley Group, Inc., Colorado Springs, CO (investments).
Dennis B. Mullen, Age 56 - Trustee
7500 E. McCormick Parkway, #24
Scottsdale, AZ 85258
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. Private Investor. Formerly
(1997-1998), Chief Financial Officer-Boston Market Concepts, Boston
Chicken, Inc., Golden, CO (restaurant chain); (1993-1997), President
and Chief Executive Officer of BC Northwest, L.P., a franchise of
Boston Chicken, Inc., Bellevue, WA (restaurant chain).
James T. Rothe, Age 56 - Trustee
102 South Tejon Street, Suite 1100
Colorado Springs, CO 80903
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. Professor of Business, University of
Colorado, Colorado Springs, CO. Principal, Phillips-Smith Retail
Group, Colorado Springs, CO (a venture capital firm).
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
#Member of the Trust's Executive Committee.
30
<PAGE>
William D. Stewart, Age 55 - Trustee#
5330 Sterling Drive
Boulder, CO 80302
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. President of HPS Division of MKS
Instruments, Boulder, CO (manufacturer of vacuum fittings and valves).
Martin H. Waldinger, Age 61 - Trustee
4940 Sandshore Court
San Diego, CA 92130
- --------------------------------------------------------------------------------
Trustee of Janus Investment Fund. Private Consultant. Formerly
(1993-1996), Director of Run Technologies, Inc., a software
development firm, San Carlos, CA.
Laurence J. Chang, Age 34 - Executive Vice President, Co-Manager Worldwide
Growth Portfolio and International Growth Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Co-Manager of Janus Investment Fund. Vice President of Janus Capital.
David J. Corkins, Age 33 - Executive Vice President, Portfolio Manager Growth
and Income Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President of Janus Investment Fund. Vice President of
Janus Capital. Formerly, (1995-1997), research analyst at Janus
Capital and (1993-1995), Chief Financial Officer of Chase U.S.
Consumer Services, Inc., a Chase Manhattan mortgage business.
James P. Goff, Age 35 - Executive Vice President, Portfolio Manager of
Aggressive Growth Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager of Janus Investment
Fund. Vice President of Janus Capital.
Helen Young Hayes, Age 37 - Executive Vice President, Co-Manager Worldwide
Growth and International Growth Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President, Co-Manager of Janus Investment Fund. Vice
President of Janus Capital.
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
31
<PAGE>
Karen L. Reidy, Age 32 - Executive Vice President and Portfolio Manager of
Balanced Portfolio and Equity Income Portfolio*
100 Fillmore Street
Denver, CO 80206-4648
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager and Assistant Manager
of Janus Investment Fund. Vice President of Janus Capital.
Blaine P. Rollins, Age 32 - Executive Vice President, Portfolio Manager of
Growth Portfolio*
100 Fillmore Street
Denver, CO 80206-4648
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager of Janus Investment
Fund. Vice President of Janus Capital.
Sandy R. Rufenacht, Age 34 - Executive Vice President, Portfolio Manager of
High-Yield Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager of Janus Investment
Fund. Vice President of Janus Capital. Formerly, senior accountant,
fixed-income trader and fixed-income research analyst at Janus Capital
(1990-1995).
Scott W. Schoelzel, Age 41 - Executive Vice President, Portfolio Manager of
Capital Appreciation Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager of Janus Investment
Fund. Vice President of Janus Capital.
Ronald V. Speaker, age 35 - Executive Vice President, Portfolio Manager of
Flexible Income Portfolio*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Executive Vice President and Portfolio Manager of Janus Investment
Fund. Vice President of Janus Capital.
Thomas A. Early, Age 45 - Vice President and General Counsel*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Vice President and General Counsel of Janus Investment Fund. Vice
President, General Counsel and Secretary of Janus Capital. Vice
President and General Counsel of Janus Service Corporation, Janus
Distributors, Inc. and Janus Capital International, Ltd. Director of
Janus World Funds Plc. Formerly (1997 to 1998), Executive Vice
President and General Counsel of Prudential Investments Fund
Management LLC, Newark, NJ. Formerly (1994 to 1997), Vice President
and General Counsel of Prudential Retirement Services, Newark, NJ.
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
32
<PAGE>
Steven R. Goodbarn, Age 42 - 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 Capital, Janus Service Corporation, and Janus Distributors, Inc.
Director of Janus Service Corporation, Janus Distributors, Inc. and
Janus World Funds Plc. Director, Treasurer and Vice President of
Finance of Janus Capital International Ltd. Formerly (1992-1996),
Treasurer of Janus Investment Fund and Janus Aspen Series.
Kelley Abbott Howes, Age 34 - Vice President and Secretary*
100 Fillmore Street
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Vice President and Secretary of Janus Investment Fund. Vice President
of Janus Distributors, Inc. Assistant Vice President of Janus Service
Corporation. Vice President and Assistant General Counsel of Janus
Capital.
Glenn P. O'Flaherty, Age 41 - Treasurer and Chief Accounting Officer*
100 Fillmore Street, Suite 300
Denver, CO 80206-4928
- --------------------------------------------------------------------------------
Treasurer and Chief Accounting Officer of Janus Investment Fund. Vice
President of Janus Capital. Formerly (1991-1997), Director of Fund
Accounting, Janus Capital.
- --------------------------------------------------------------------------------
*Interested person of the Trust and of Janus Capital.
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 Trust's Executive Committee shall have and may exercise all the
powers and authority of the Trustees except for matters requiring
action by all Trustees pursuant to the Trust's Bylaws or Trust
Instrument, Delaware law or the 1940 Act.
33
<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>
<CAPTION>
Aggregate Compensation Total Compensation
from the Portfolios for from the Janus Funds for
fiscal year ended calendar year ended
Name of Person, Position December 31, 1998 December 31, 1998**
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas H. Bailey, Chairman and Trustee* $ 0 $ 0
James P. Craig, III, Trustee* $ 0 $ 0
William D. Stewart, Trustee $5,426 $82,000
Gary O. Loo, Trustee $4,432 $74,000
Dennis B. Mullen, Trustee $4,801 $82,000
Martin H. Waldinger, Trustee $4,883 $74,000
James T. Rothe, Trustee $4,941 $82,000
</TABLE>
* An interested person of the Portfolios and of Janus Capital. Compensated by
Janus Capital and not the Portfolios.
** As of December 31, 1998, Janus Funds consisted of two registered investment
companies comprised of a total of 32 funds.
34
<PAGE>
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, Martin Luther King 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 a Portfolio's 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 an 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
Shares of the Portfolios can be purchased only by (i) the separate
accounts of participating insurance companies for the purpose of
funding variable insurance contracts and (ii) qualified retirement
plans. Participating insurance companies and certain designated
organizations are authorized to receive purchase orders on the
Portfolios' behalf and those organizations are authorized to designate
their agents and affiliates as intermediaries to receive purchase
orders. Purchase orders are deemed received by a Portfolio when
authorized organizations, their agents or affiliates receive the
order. The Portfolios are not responsible for the failure of any
designated organization or its agents or affiliates to carry out its
obligations to its customers. Shares of the Portfolios 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 a Portfolio or its authorized agent. In order to
receive a day's price, your order must be received by the close of the
regular trading session of the NYSE as described above in "Net Asset
Value Determination." The
35
<PAGE>
prospectus for your insurance company's separate account or your plan
documents contain detailed information about investing in the
different Portfolios.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
Under a distribution and shareholder servicing plan ("Plan") adopted
in accordance with Rule 12b-1 under the 1940 Act, the Shares may pay
Janus Distributors, the Trust's distributor, 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 Janus Distributors for remittance to insurance
companies and 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 recordkeeping and
administrative services as well as 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 contract owners and plan participants;
responding to inquiries by contract owners and plan participants;
receiving and answering correspondence; contract owner and participant
level recordkeeping and administrative services; and similar
activities. On September 14, 1999, Trustees unanimously approved the
Plan which became effective on that date. The Plan and any Rule 12b-1
related agreement that is entered into by the Portfolios or Janus
Distributors 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,
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 the separate
accounts of participating insurance companies or qualified retirement
plans. Certain designated organizations are authorized to receive
redemption orders on the Portfolios' behalf and those organizations
are authorized to designate their agents and affiliates as
intermediaries to receive redemption orders. Redemption orders are
deemed received by a Portfolio when authorized organizations, their
agents or affiliates receive the order. The Portfolios are not
responsible for the failure of any designated organization or its
agents or affiliates to carry out its obligations to its customers.
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.
36
<PAGE>
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.
37
<PAGE>
Income dividends, capital gains distributions and tax status
It is a policy of the Shares of the Portfolios to distribute
substantially all of their respective investment income at least
semi-annually and their respective net realized gains, if any, at
least annually. The Portfolios intend to qualify as regulated
investment companies by satisfying certain requirements prescribed by
Subchapter M of the Internal Revenue Code ("Code"). In addition, 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 appreciate in value, 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.
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. If
such 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 of the Portfolios 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 plans.
See the prospectus for the separate account of the related insurance
company or the plan documents for additional information.
38
<PAGE>
Miscellaneous information
Each Portfolio is a series of the Trust, an open-end management
investment company registered under the 1940 Act and organized as a
Delaware business trust on May 20, 1993. As of the date of this SAI,
the Trust is offering eleven series of shares, known as "Portfolios,"
each of which consists of three classes of shares. 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 each Portfolio are fully paid and
nonassessable when issued. 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 each offer three classes of shares. The Shares
discussed in this SAI are offered only in connection with investment
in and payments under variable insurance contracts and to qualified
retirement plans that require a fee from Portfolio assets to procure
distribution and administrative services to contract owners and plan
participants. A second class of shares, Retirement Shares, is offered
only to qualified plans whose service providers require a fee from the
Trust assets for providing certain services to plan participants. The
third 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.
SHAREHOLDER MEETINGS
The Trust does not intend to hold annual shareholder meetings.
However, special meetings may be called for a specific Portfolio or
for the Trust as a whole for purposes such as electing or removing
Trustees, terminating or reorganizing the Trust, changing fundamental
policies, or for any other purpose requiring a shareholder vote under
the 1940 Act. Separate votes are taken by each Portfolio or class only
if a matter affects or requires the vote of only that Portfolio or
class or that Portfolio's or class' interest in the matter differs
from the interest of other Portfolios of the Trust. A shareholder is
entitled to one vote for each Share owned.
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 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
39
<PAGE>
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.
As mentioned above in "Shareholder Meetings," 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 series of the Trust voting for the election
of Trustees can elect 100% of the Trustees if they choose to do so
and, in such event, the holders of the remaining shares will not be
able to elect any Trustees.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
40
<PAGE>
Performance information
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 the Shares of such
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 expenses of the
Shares of a Portfolio on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The average
annual total return of the Shares of each Portfolio, computed as of
June 30, 1999, is shown in the table below.
The Service Shares commenced operations on January 1, 2000. The
returns shown for the Service Shares of these Portfolios reflect the
historical performance of a different class of shares (the
Institutional Shares) prior to January 1, 2000. The historical
performance of the Institutional Shares has been restated for purposes
of the Service Shares performance based on the Service Shares
estimated fees and expenses (ignoring any fee and expense limitations)
except where that restatement results in higher performance than the
actual historical performance of the Institutional Shares.
<TABLE>
<CAPTION>
Portfolio Number Average Annual Total Return
Inception of Months One Five Ten Life of
Portfolio Name Date in Lifetime Year Years Years Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio - Service Shares 9/13/93 69.5 32.43% 25.04% N/A 21.78%
Aggressive Growth Portfolio - Service Shares 9/13/93 69.5 49.36% 27.24% N/A 25.28%
Capital Appreciation Portfolio - Service Shares 5/1/97 26 51.36% N/A N/A 53.15%
International Growth Portfolio - Service Shares 5/2/94 62 5.25% 21.19% N/A 19.11%
Worldwide Growth Portfolio - Service Shares 9/13/93 69.5 13.11% 24.61% N/A 24.05%
Balanced Portfolio - Service Shares 9/13/93 69.5 27.84% 21.58% N/A 20.00%
Equity Income Portfolio - Service Shares 5/1/97 26 43.07% N/A N/A 48.55%
Growth and Income Portfolio - Service Shares 5/1/98 14 36.78% N/A N/A 37.14%
Flexible Income Portfolio - Service Shares 9/13/93 69.5 2.45% 10.01% N/A 8.74%
High-Yield Portfolio - Service Shares 5/1/96 38 (.68)% 10.21% N/A 10.77%
</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 (net of reimbursements)
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
41
<PAGE>
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, Lipper Analytical Services, Inc.,
Ibbotson Associates, Micropal or Morningstar, Inc. or by publications
of general interest such as Forbes, Money, The Wall Street Journal,
Mutual Funds Magazine, Kiplinger's or Smart Money. The Portfolios may
also compare their performance to that of other selected mutual funds
(for example, peer groups created by Lipper or Morningstar), 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, Australasia, 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.
42
<PAGE>
Financial statements
The following audited financial statements for Institutional Shares
and Retirement Shares for the period ended December 31, 1998 and the
unaudited Semiannual Report for Institutional Shares and Retirement
Shares for the period ended June 30, 1999 are hereby incorporated into
this Statement of Additional Information by reference to the
Portfolios' Annual Report dated December 31, 1998 and the Portfolios'
Semiannual Report dated June 30, 1999. A copy of each report
accompanies this SAI. The Service Shares had not yet commenced
operations as of June 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT AND SEMIANNUAL REPORT
Schedules of Investments as of December 31, 1998 and June 30, 1999
Statements of Operations for the period ended December 31, 1998 and
June 30, 1999
Statements of Assets and Liabilities as of December 31, 1998 and June
30, 1999
Statements of Changes in Net Assets for the periods ended December 31,
1998 and 1997 and for the six months ended June 30, 1999
Financial Highlights for each of the periods indicated
Notes to Financial Statements
Report of Independent Accountants dated December 31, 1998
The portions of the Annual Report and Semiannual 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.
43
<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 Janus
Capital 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
<TABLE>
<S> <C>
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, CCC, CC, C........... Predominantly speculative with respect to the 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.
</TABLE>
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
BOND RATING EXPLANATION
-----------------------------------------------------------------------------------------
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.
</TABLE>
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<PAGE>
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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