A MESSAGE FROM THE PRESIDENT
Dear Shareholder
Securities markets rebounded in 1995, and typically finished the year with
returns far above those of 1994. Shareholders of the Principal Special Markets
Fund benefited from these strong markets. The Fund's two
portfolios--Mortgage-Backed Securities Portfolio and International Securities
Portfolio--posted double-digit returns for the one-year period ending 12/31/95.
The Funds returned 19.26% and 12.02%, respectively.
Marty Schafer--Mortgage-Backed Securities Portfolio
"Though rates did not fall as much in 1995 as they rose in 1994, it was a still
a favorable year for fixed-income securities. U.S. Treasury securities with
maturities between three and ten years rallied anywhere from 225 basis points to
as many as 260 basis points. The drop in interest rates combined with the Fund's
controlled duration, contributed to superior investment results. At this time,
mortgage-backed security spreads seem priced for higher volatility coupled with
the possibility of increasing prepayments. Looking forward, we will maintain our
disciplined investment approach in hopes of producing good long-term total
returns."
Scott Opsal--International Securities Portfolio
"International stock markets performed fairly well in 1995, but their gains were
overshadowed by the spectacular run in U.S. equities. Europe was the strongest
international region, as it was up over 20% for the year. Japanese markets were
essentially flat and the category of emerging markets lost 7% lead by a drop in
Latin America of 15%. Last year, markets which offered good economic investment
values beat overpriced markets almost across the board. Entering 1996, Europe
continues to command most of our attention due to ongoing economic growth and
falling interest rates. Asia appears fairly valued, and thus is not able to bite
into our European weighting. At this time we view Mexico as too unpredictable,
so our interest in this area remains light. Though Japan did reach more
reasonable levels during the past year, it rebounded so quickly and strongly
that investment there currently looks uninteresting to us."
We hope you find this Annual Report informative. We look forward to another fine
year in 1996. Please feel free to contact us at (800) 521-1502 if you have any
questions.
Sincerely,
STEPHAN L. JONES
Stephan L. Jones
President
<PAGE>
INDEX TO REPORT FOR
PRINCIPAL SPECIAL MARKETS FUND, INC.
Page
Statements of Assets and Liabilities...................................... 2
Statements of Operations ................................................. 3
Statements of Changes in Net Assets....................................... 4
Notes to Financial Statements............................................. 5
Schedules of Investments ................................................. 8
Financial Highlights...................................................... 12
Report of Independent Auditors............................................ 13
Federal Income Tax Information............................................ 14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Assets
Investment in securities -- at value (cost -- $15,474,733
and $14,116,194, respectively) (Note 4)....................... $17,288,230 $14,243,770
Cash............................................................. 13,456 235,170
Dividends and interest receivable................................ 45,869 84,644
Other assets..................................................... 111 128
Total Assets 17,347,666 14,563,712
Liabilities
Accrued expenses................................................. 27,136 18,817
Payables:
Dividends to shareholders..................................... -- 21,847
Investment securities purchased............................... 69,396 --
Total Liabilities 96,532 40,664
Net Assets Applicable to Outstanding Shares ................. $17,251,134 $14,523,048
Capital Stock (par value: $.01 a share)
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 1,474,162 1,427,438
Net Asset Value Per Share ..................................... $11.70 $10.17
Net Assets Consist of:
Capital Stock.................................................... $ 14,742 $ 14,274
Additional paid-in capital....................................... 15,225,941 15,456,231
Accumulated overdistributed net investment income................ (97,960) --
Accumulated undistributed net realized gain (loss) from:
Investment transactions....................................... 297,589 (1,075,033)
Foreign currency transactions................................. (3,282) --
Net unrealized appreciation of investments....................... 1,813,497 127,576
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies............................. 607 --
Total Net Assets $17,251,134 $14,523,048
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Net Investment Income
Income:
Dividends..................................................... $ 446,386 $ --
Less: Withholding tax on foreign dividends.................... (52,376) --
Interest...................................................... 42,252 970,720
Total Income 436,262 970,720
Expenses:
Management and investment advisory fees (Note 3) .......... 146,209 61,455
Net Investment Income 290,053 909,265
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency
Net realized gain (loss) from:
Investment transactions....................................... 962,249 (299,517)
Foreign currency transactions................................. (3,282) --
Net increase in unrealized appreciation/ depreciation on:
Investments................................................... 620,454 1,764,884
Translation of assets and liabilities in foreign currencies... 34 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency 1,579,455 1,465,367
Net Increase in Net Assets
Resulting from Operations $1,869,508 $2,374,632
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 290,053 $ 153,520 $ 909,265 $ 1,497,893
Net realized gain (loss) from investment transactions............ 962,249 1,155,739 (299,517) (775,513)
Net realized (loss) from foreign currency transactions........... (3,282) (61,574) -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and liabilities in
foreign currencies............................................ 620,488 (2,325,292) 1,764,884 (1,838,174)
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,869,508 (1,077,607) 2,374,632 (1,115,794)
Dividends and Distributions to Shareholders
From net investment income....................................... (142,902) (153,520) (909,265) (1,497,893)
Excess distribution of net investment income (Note 1)............ (97,960) (174,931) -- --
From net realized gain on investments and
foreign currency transactions................................. (1,015,198) (680,385) -- --
(1,256,060) (1,008,836) (909,265) (1,497,893)
Capital Share Transactions (Note 5)
Shares sold ..................................................... 100,000 -- -- 2,500,000
Shares issued in reinvestment of dividends
and distributions............................................. 996,091 790,090 739,171 1,168,333
Shares redeemed ................................................ -- -- (2,395,23) (10,649,933)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 1,096,091 790,090 (1,656,064) (6,981,600)
Total Increase (Decrease) 1,709,539 (1,296,353) (190,697) (9,595,287)
Net Assets
Beginning of period.............................................. 15,541,595 16,837,948 14,713,745 24,309,032
End of period (including overdistributed net
investment income as set forth below)......................... $17,251,134 $15,541,595 $14,523,048 $14,713,745
Overdistributed Net Investment Income ................ $ (97,960) $ (114,791) $ -- $ --
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
Note 1 -- Significant Accounting Policies
Principal Special Markets Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company and operates in the mutual fund industry. The Fund
currently consists of two portfolios (known as the International Securities and
Mortgage-Backed Securities Portfolios).
The Fund values securities for which market quotations are readily available at
market value, which is determined using the last reported sale price or, if no
sales are reported, as is regularly the case for some securities traded
over-the-counter, the last reported bid price. When reliable market quotations
are not considered to be readily available, which may be the case, for example,
with respect to certain debt securities and preferred stocks, the investments
are valued by using market quotations, prices provided by market makers or
estimates of market values obtained from yield data and other factors relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to the International Securities Portfolio, the value of foreign
securities in foreign currency amounts is expressed in U.S. dollars at the
closing daily rate of exchange. The identified cost of the portfolio holdings is
translated at approximate rates prevailing when acquired. Income and expense
amounts are translated at approximate rates prevailing when received or paid,
with daily accruals of such amounts reported at approximate rates prevailing at
the date of valuation.
Since the carrying amount of the foreign securities of the International
Securities Portfolio is determined based on the exchange rate and market values
at the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The Fund records investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date and interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the portfolio's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
With respect to the Mortgage-Backed Securities Portfolio, all net investment
income is declared as a dividend daily to shareholders of record as of that day,
and all distributions of realized gains from investment transactions are
recorded on the ex-dividend date. Dividends and distributions to shareholders of
the International Securities Portfolio are recorded on the ex-dividend date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment and foreign currency transactions is determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. To the extent these "book/tax" differences are
permanent in nature (i.e. that they result from other than timing of recognition
- - "temporary"), such amounts are reclassified within the capital accounts based
on their federal tax-basis treatment; temporary differences do not require
reclassification. Reclassifications made for the years ended December 31, 1995
and 1994 were not material.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the portfolio. The differences between the
income and gains distributed on a book versus tax basis are shown as excess
distributions of net investment income and net realized gain on investments in
the accompanying Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because the Fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year, substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
At December 31, 1995, Principal Special Markets Mortgage-Backed Securities
Portfolio had a net capital loss carryforward of approximately $1,075,000
expiring in 2002 and 2003.
Note 3 -- Management Agreement and Transactions With Affiliates
The Fund has agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager") and to
Invista Capital Management, Inc. ("Invista"), an indirect wholly-owned
subsidiary of Principal Mutual Life Insurance Company, pursuant to a
sub-advisory agreement. Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Fund in return for the
advisory fee paid by the Fund and to reimburse the Manager for the other costs
it incurs under the management agreement. The annual rate used in this
calculation for the International Securities Portfolio and the Mortgage-Backed
Securities Portfolio is .90% and .45%, respectively, of the average daily value
of each portfolio's net assets.
Brokerage commissions were paid to an affiliate by the International Securities
Portfolio in the amount of $2,888 during the year ended December 31, 1995. No
brokerage commissions were paid to this affiliate during the year ended December
31, 1994.
At December 31, 1995, Principal Mutual Life Insurance Company owned shares of
the Fund's portfolios as follows:
International Securities Portfolio 1,163,843
Mortgage-Backed Securities Portfolio 1,180,567
Note 4 -- Investment Transactions
For the year ended December 31, 1995, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Fund were as follows:
Purchases Sales
International Securities Portfolio $7,199,936 $7,245,885
Mortgage-Backed Securities Portfolio 948,531 302,720
At December 31, 1995, net unrealized appreciation of investments by the Fund was
composed of the following:
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments
International
Securities Portfolio $3,112,559 $(1,299,062) $1,813,497
Mortgage-Backed
Securities Portfolio 200,793 (73,217) 127,576
At December 31, 1995, Principal Special Markets Fund, Inc. - International
Securities Portfolio held the following securities which may require
registration under the Securities Act of 1933 or an exemption therefrom in order
to effect a sale in the ordinary course of business.
Value at Value as a
Date of December 31, Percentage of
Security Description Acquisition Cost 1995 Net Assets
Alfa SA; Convertible
Subordinated Debentures 9/26/95 $199,250 $196,000 1.14%
Royal Plastics Group 11/23/94 58,057 102,816 .59%
Voest-Alpine Stahl 10/27/95 103,583 97,574 .56%
396,390 2.29%
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
while the International Securities Portfolio's investments are with various
issuers in various industries. The Schedules of Investments contained herein
summarize the concentration of credit risk for Mortgage-Backed Securities
Portfolio by issuers and International Securities Portfolio by country, industry
and issuer.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by portfolio were as follows:
International Mortgage-Backed
Securities Portfolio Securities Portfolio
Year Ended December 31, 1995:
Shares sold ...................... 9,107 --
Shares issued in reinvestment of
dividends and distributions ..... 88,579 75,504
Shares redeemed .................. -- (262,636)
Net Increase (Decrease) 97,686 (187,132)
Year Ended December 31, 1994:
Shares sold ...................... -- 246,548
Shares issued in reinvestment of
dividends and distributions ..... 67,888 123,599
Shares redeemed .................. -- (1,161,754)
Net Increase (Decrease) 67,888 (791,607)
Note 6 -- Line of Credit
The Fund has an unsecured line of credit with a bank which allows each portfolio
to borrow up to $500,000. Borrowings are made solely to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Interest is
charged to each portfolio, based on its borrowings, at a rate equal to the
bank's Fed Funds Unsecured Rate plus 100 basis points. Additionally, a
commitment fee is charged at the annual rate of .25% on the line of credit. At
December 31, 1995, the Fund had no outstanding borrowings under the line of
credit.
<PAGE>
December 31, 1995
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Shares
Held Value
Common Stocks (96.50%)
AUSTRALIA (4.92%)
Commercial Banks (2.47%)
National Australia Bank, Ltd. 47,255 $ 425,332
Crude Petroleum & Natural
Gas (0.58%)
Ampolex Ltd. 45,600(a) 99,726
Gas Production &
Distribution (0.91%)
Australia Gas & Light 42,000 157,774
Miscellaneous Food & Kindred
Products (0.96%)
Burns, Philp & Co., Ltd. 73,998 165,684
848,516
AUSTRIA (2.31%)
Blast Furnace & Basic Steel
Products (0.56%)
Voest - Alpine Stahl 3,400(b) 97,574
Gas Production & Distribution (1.16%)
Omv AG 2,300 199,846
Railroad Equipment (0.59%)
Vae AG 1,200 101,288
398,708
CANADA (1.03%)
Coal Mining Services (0.44%)
Morgan Hydrocarbons, Inc. 25,000(a) 76,072
Miscellaneous Plastics Products,
NEC (0.59%)
Royal Plastics Group 7,100(a)(b) 102,816
178,888
CHILE (0.62%)
Telephone Communication (0.62%)
Compania De
Telecomunicaciones ADR 1,300 107,738
DENMARK (0.92%)
Telephone Communication (0.92%)
Tele Danmark B 2,900 158,559
FINLAND (4.15%)
Forest Products (0.43%)
Metsa-Serla 2,400 74,067
Miscellaneous Wood Products (0.63%)
Enso-Gutzeit 16,300 108,867
Pulp Mills (1.23%)
Kymmene 8,000 211,884
Sugar & Confectionary
Products (0.67%)
Huhtamake I Free 4,800 116,075
Telephone Communication (1.19%)
Nokia Corp. Class A ADR 5,300 206,037
716,930
FRANCE (2.03%)
Drugs (2.03%)
Roussel-Uclaf 2,060 349,625
GERMANY (4.27%)
Flat Glass (0.37%)
Weru AG 180 63,510
Industrial Inorganic
Chemicals (1.85%)
Bayer AG 1,200 319,267
Miscellaneous Chemical
Products (2.05%)
Hoechst AG 1,300 354,229
737,006
GREECE (0.51%)
Central Reserve Depositories (0.51%)
Ergo Bank 2,200 87,834
HONG KONG (5.17%)
Communications Equipment (0.29%)
ABC Communications Holdings Ltd. 278,000 50,337
Electric Services (0.54%)
CEP-A Consolidated Electric
Power-Asia 51,200 93,037
Electronic Components
& Accessories (0.50%)
Varitronix 47,000 87,229
Holding Offices (1.09%)
First Pacific Co., Ltd. 168,893 187,854
Miscellaneous Textile Goods (0.44%)
Espirit Asia 220,000 75,402
Office Furniture (0.55%)
Lamex Holdings 382,000 94,364
Personal Credit Institutions (0.65%)
Manhattan Card Co. 263,000 112,249
Security Brokers & Dealers (1.11%)
Peregrine Investment Holdings 148,000 191,414
891,886
INDIA (0.78%)
Coppor Ores (0.78%)
Reliance Industries 9,600(a) 134,400
INDONESIA (1.34%)
Broadwoven Fabric Mills,
Cotton (0.51%)
Roda Vivatex 150,000 88,566
Miscellaneous Furniture
& Fixtures (0.28%)
PT Surya Toto 22,200 48,547
Pulp Mills (0.55%)
Asia Pacific Resources 20,000(a) 95,000
232,113
ITALY (2.87%)
Metalworking Machinery (0.19%)
Danieli & Co.-DR 12,400 33,6110
Telephone Communication (2.68%)
Telecom Italia-DI 203,000 248,504
Telecom Italia Mobile 203,000(a) 213,698
462,202
495,812
JAPAN (1.03%)
Computer & Office Equipment (0.21%)
Canon, Inc. 2,000 36,258
Electronic Components
& Accessories (0.43%)
Murata Mfg. 2,000 73,678
Engines & Turbines (0.39%)
Mabuchi Motor 1,100 68,462
178,398
KOREA (2.06%)
Concrete Work (0.60%)
Hanil Cemet 1,800 104,418
Construction & Related
Machinery (0.56%)
Keumkang 1,300 97,032
Electric Services (0.90%)
Korea Electric Power Corp. 3,900 154,849
356,299
MALAYSIA (0.55%)
Holding Offices (0.55%)
C. I. Holdings 27,000 95,711
MEXICO (1.88%)
Aircraft & Parts (0.19%)
Cemex SA NPV 9,928 32,987
Cement, Hydraulic (0.47%)
Apasco SA 20,000 81,897
Commercial Banks (0.24%)
Groupo Financiero Bancomer
Series B 141,000(a) 39,712
Groupo Financiero Bancomer
Series L 5,222(a) 1,342
41,054
Department Stores (0.18%)
Sears Roebuck De Mexico SA 13,200(a) 30,804
Miscellaneous Food Kindred
Products (0.06%)
Grupo Herdez SA 45,000(a) 9,812
Telephone Communication (0.74%)
Telefonos De Mexico SA ADR 4,000 127,500
324,054
NETHERLANDS (14.53%)
Beer, Wine, & Distilled
Beverages (0.55%)
Heineken Holdings 575 94,339
Commercial Banks (2.05%)
ABN - Amro Holdings NV 7,746 353,234
Communications Services, NEC (1.99%)
KPN Royal PTT Nederland 9,472 344,493
Electric Light & Wiring
Equipment (0.52%)
Otra NV 5,000 88,896
Electronic Distribution
Equipment (1.76%)
Phillips Electronics 8,400 303,932
Grocery Stores (1.40%)
Koninklijke Ahold NV 5,903 241,204
Meat Products (2.40%)
Unilever NV 2,950 414,990
Miscellaneous Durable Goods (2.03%)
Hagemeyer NV 6,700 350,258
Miscellaneous Transporation
Services (0.68%)
Koninklijke Pakhoed NV 4,253 117,005
Special Industry Machinery (1.15%)
IHC Caland NV 5,900 198,754
2,507,107
NEW ZEALAND (2.67%)
Beverages (1.19%)
Lion Nathan 86,000 205,213
Household Appliances (0.97%)
Fisher & Paykel 55,000 167,198
Miscellaneous Manufacturers (0.51%)
Carter Holt Harvey Ltd. 41,000 88,453
460,864
NORWAY (3.47%)
Commercial Banks (0.71%)
Christiana Bank 52,000 121,813
Drugs (0.46%)
Hafslund Nycomed 3,113 79,083
Meat Products (1.58%)
Orkla B 5,700 272,466
Ship & Boat Building &
Repairing (0.72%)
Unitor Ships Service 9,100 125,312
598,674
SINGAPORE (1.05%)
Electric Light & Wiring
Equipment (0.26%)
Clipsal Industries Holdings 20,000 45,200
Electronic Components &
Accessories (0.79%)
Amtek Engineering 94,500 136,960
182,160
SPAIN (6.03%)
Combination Utility
Services (0.76%)
Iberdrola 1 SA 14,300 130,840
Commercial Banks (1.79%)
Banco Popular 1,675 308,861
Oil & Gas Field Services (2.30%)
Repsol Petroleo, SA 12,100 396,464
Telephone Communication (1.18%)
Telefonica De Espana, SA 14,700 203,567
1,039,732
SWEDEN (7.89%)
Commercial Banks (1.98%)
Svenska Handelsbanken AB Free 17,050 342,173
Household Audio & Video
Equipment (0.71%)
SKF 'B' Free 6,400 122,646
Miscellaneous Transporation
Equipment (0.73%)
Autoliv AB 2,150 125,876
Motor Vehicles & Equipment (1.39%)
Volvo AB 11,700 240,101
Plastic Materials &
Synthetics (1.43%)
Astra AB 6,200 246,046
Water Transporation of
Freight, NEC (1.65%)
Argonaut AB 'B' Free 25,000(a) 37,535
ICB Shipping AB 'B' Free 28,666 246,553
284,088
1,360,930
SWITZERLAND (11.10%)
Combination Utility Services (1.15%)
BBC AG (Brown Boveri) 170 197,975
Drugs (2.11%)
Galenica Holdings AG 350 106,461
Sandoz AG 280 256,968
363,429
Functions Closely Related
To Banking (1.37%)
BIL GT Group 400 236,388
Miscellaneous Chemical
Products (1.99%)
CIBA Geigy Ag-Reg 390 344,023
Pulp Mills (0.24%)
Attisholz AG 70 39,786
Special Industry Machinery (1.86%)
Bobst SA 120 187,720
Sulzer AG 250 133,620
321,340
Sugar & Confectionary Products (2.38%)
Nestle 370 410,307
1,913,248
THAILAND (2.61%)
Commercial Banks (1.21%)
Bangkok Bank 17,000 206,517
Non-Classifiable
Establishments (1.40%)
Thailand International Fund 8 242,000
448,517
UNITED KINGDOM (10.71%)
Commerical Banks (0.89%)
Bank of Ireland 21,000 153,894
Construction & Related
Machinery (0.68%)
Powerscreen International PLC 19,400 116,717
Crude Petroleum & Natural
Gas (1.15%)
Hardy Oil & Gas 63,000 198,562
Electric Services (1.91%)
Northern Ireland Electric 49,100 330,087
Investment Offices (0.36%)
Invesco PLC 16,000 $ 62,974
Miscellaneous Non-Durable
Goods (2.02%)
Grand Metropolitan PLC 48,300 347,956
Primary Nonferrous Metals (1.36%)
British Steel PLC 93,000 234,998
Pulp Mills (0.35%)
Babcock International Group 27,740 61,158
Sand & Gravel (0.26%)
Bardon Group PLC 87,700 44,593
Telephone Communication (0.62%)
Cable & Wireless PLC 14,900 106,415
Water Supply (1.11%)
Wessex Water PLC 35,012 189,713
1,847,067
Total Common Stocks 16,650,776
Preferred Stocks (0.54%)
AUSTRIA (0.54%)
Highway & Street Construction (0.54%)
BAU Holdings AG 2,430 91,454
Principal
Amount Value
Bonds (1.14%)
MEXICO (1.14%)
Fire Marine & Casualty
Insurance (1.14%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $200,000(b) $ 196,000
Federal Agency Short-Term
Obligations (2.03%)
Federal Home Loan Mortgage
Corporation
5.75%; 1/2/96 350,000 350,000
Total Portfolio Investments (100.21%) 17,288,230
Liabilities, net of cash, receivables
and other assets (0.21%) (37,096)
Total Net Assets (100.00%) $17,251,134
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Securities - See Note 4 to the financial statements.
<PAGE>
Mortgage-Backed Securities Portfolio
Description of Issue
--------------------------------- Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (50.20%)
FNMA 6.00% 11/1/23 $ 731,628 $ 707,404
FNMA 7.00 8/1/23 3,589,996 3,620,332
FNMA 7.50 6/1/23 938,323 962,335
FNMA 8.00 7/1/19-3/1/23 1,442,973 1,498,623
FNMA 8.50 1/1/25 480,063 501,277
Total FNMA Certificates 7,289,971
Government National Mortgage Association (GNMA)
Certificates (41.08%)
GNMA I 6.00 12/15/23 983,527 956,982
GNMA I 6.50 12/15/23-1/15/24 2,787,967 2,766,722
GNMA I 7.50 6/15/23-9/15/23 1,075,234 1,107,061
GNMA I 8.00 5/15/23 711,584 741,868
GNMA II 6.50 10/20/25 399,295 393,257
Total GNMA Certificates 5,965,890
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (6.80%)
FHLMC Gold 5.50 2/1/24-3/1/24 786,609 743,563
FHLMC Gold 6.00 4/1/24 252,551 244,346
Total FHLMC Certificates 987,909
Total Portfolio Investments (98.08%) 14,243,770
Cash, receivables and other assets,
net of liabilities (1.92%) 279,278
Total Net Assets (100.00%) $14,523,048
See accompanying notes.
<PAGE>
FINANCIAL HIGHLIGHTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
<TABLE>
<CAPTION>
International Securities Mortgage-Backed Securities
Portfolio Portfolio
------------------------------- ------------------------------
Year Year Period Year Year Period
Ended Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993(a) 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period....... $11.29 $12.87 $10.01 $ 9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income..................... .19 .13 .07 .65 .63 .34
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency..... 1.11 (.95) 2.91 1.06 (.99) .09
Total from Investment Operations 1.30 (.82) 2.98 1.71 (.36) .43
Less Distributions:
Dividends (from net investment income).... (.10) (.12) (.10) (.65) (.63) (.34)
Excess distribution of net investment
income.................................. (.07) (.13) - - - -
Distributions (from capital gains)........ (.72) (.51) (.02) - - -
Total Distributions (.89) (.76) (.12) (.65) (.63) (.34)
Net Asset Value at End of Period............. $11.70 $11.29 $12.87 $10.17 $ 9.11 $10.10
Total Return................................. 12.02% (6.45)% 29.95%(c) 19.26% (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).. $17,251 $15,542 $16,838 $14,523 $14,714 $24,309
Ratio of Expenses to Average Net Assets... .90% .90% .90%(b) .45% .45% .45%(b)
Ratio of Net Investment Income to Average
Net Assets.............................. 1.79% .94% 1.21%(b) 6.66% 6.56% 5.23%(b)
Portfolio Turnover Rate................... 46.0% 37.0% 6.9%(b) 9.9% 41.8% 9.6%(b)
<FN>
(a)Period from May 7, 1993, date shares first offered to the public, through
December 31, 1993. Net investment income, aggregating $.01 per share for
the International Securities Portfolio and $.01 per share for the
Mortgage-Backed Securities Portfolio for the period from the initial
purchase of shares on April 26, 1993 through May 6, 1993, was recognized,
none of which was distributed from the International Securities Portfolio
and all of which was distributed from the Mortgage-Backed Securities
Portfolio to the sole shareholder, Principal Mutual Life Insurance Company,
during the period. Additionally, the Mortgage-Backed Securities Portfolio
incurred unrealized gains on investments of $.01 per share during the
intitial interim period. This represented activities of each portfolio
prior to the initial offering.
(b)Computed on an annualized basis.
(c)Total return amounts have not been annualized.
</FN>
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Shareholders
Principal Special Markets Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Principal Special Markets Fund, Inc.
(comprising, respectively, the International Securities and Mortgage-Backed
Securities Portfolios) as of December 31, 1995, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Principal Special Markets Fund,
Inc. at December 31, 1995, and the results of their operations for the year then
ended, and the changes in their net assets and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Des Moines, Iowa
January 19, 1996
<PAGE>
FEDERAL INCOME TAX INFORMATION
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
International
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Portfolio 1/31/95 $.0362 - 1/31/95 $.2722 $ -
12/28/95 .1345 12/28/95 .3400 .1100
$.1707 $.7222 $.8929
</TABLE>
<TABLE>
<CAPTION>
Per Share Income Dividend Distributions/Payable Date
2/1/95 3/1/95 4/3/95 5/1/95 6/1/95 7/3/95 8/1/95 9/1/95 10/2/95 11/1/95 12/1/95 12/29/95
Mortgage-Backed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Portfolio $.0513 $.0553 $.0585 $.0510 $.0547 $.0575 $.0480 $.0542 $.0555 $.0526 $.0545 $.0554
*Percent qualifying for deduction by shareholders who are corporations.
**Taxable as long-term capital gain.
***Taxable at ordinary income rates.
</TABLE>
