Semiannual Report to Shareholders dated June 30, 1998 for:
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Emerging Markets Portfolio
International Securities Portfolio
International SmallCap Portfolio
Mortgage-Backed Securities Portfolio
A MESSAGE FROM THE PRESIDENT
Dear Shareholder:
During the first half of 1998, continued low inflation, low interest rates,
modest economic growth and good corporate earnings created strong U.S. stock
prices and stable bond returns. International markets did experience some
difficulties, but as fears of financial collapse in Asia subsided many rebounded
nicely.*
Here are comments from the managers of the Principal Special Markets Fund:
"Weak relative performance of emerging markets, which began in the second half
of 1997, continued in 1998. At the beginning of 1998, fund managers believed
currencies in Asia had devalued past their fair value and searched the universe
for ideas. Fund managers continue to focus on financial strength as evidenced by
balance sheet numbers." - Kurt Spieler, Manager, Principal Special Markets Fund
- - International Emerging Markets Portfolio
"Continued heavy exposure in Europe and minimal weightings in Japan allowed the
International Securities Portfolio to perform well. Positions in defensive
stocks and stocks which offer above average long-term business growth performed
very well. Limited exposure in Asia hurt relative performance as those markets
rebounded, but paid off as Asian markets have faltered more recently." - Scott
Opsal, Manager, Principal Special Markets Fund - International Securities
Portfolio
"Fund managers continue to favor European stocks even in the face of their
increasing valuations. We continue searching for value in Japan and are finding
some interesting opportunities. Managers anticipate re-entering the Asian region
at some point, but prefer to see a more stable economic outlook first." - Darren
Sleister, Manager, Principal Special Markets Fund - International SmallCap
Portfolio
"Falling interest rates led to a strong performance from the Mortgage-Backed
Securities Portfolio, due mainly to the duration of the portfolio. Fund results
were increased by identifying and selecting certain undervalued securities for a
portion of the portfolio. These securities have now become very popular with
both Wall Street and other investors, resulting in an increase in value." -
Marty Schafer, Manager, Principal Special Markets Fund - Mortgage-Backed
Portfolio
Thank you for helping us enjoy another successful year. We look forward to
continuing to serve your investment needs.
Sincerely,
/s/ Stephan L. Jones
Stephan L. Jones
President
*Past performance does not guarantee future results.
CONTENTS
Page
Financial Statements and Highlights
Statements of Assets and Liabilities.......................... 2
Statements of Operations ..................................... 4
Statements of Changes in Net Assets........................... 6
Notes to Financial Statements................................. 8
Schedules of Investments
International Emerging Markets Portfolio................. 16
International Securities Portfolio....................... 18
International SmallCap Portfolio......................... 21
Mortgage-Backed Securities Portfolio..................... 23
Financial Highlights.......................................... 24
<TABLE>
<CAPTION>
June 30, 1998
STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
Mortgage-
International International International Backed
Emerging Markets Securities SmallCap Securities
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Investment in securities -- at cost.............................. $97,613,359 $39,708,140 $82,527,551 $14,047,608
Assets
Investment in securities -- at value (Note 4).................... $86,416,409 $49,710,770 $92,870,005 $14,423,541
Cash............................................................. 17,815 10,709 13,960 2,052
Receivables:
Dividends and interest........................................ 223,032 131,745 105,305 76,627
Investment securities sold.................................... -- 32,372 339,562 --
Other assets..................................................... -- 109 -- 127
Total Assets 86,657,256 49,885,705 93,328,832 14,502,347
Liabilities
Accrued expenses................................................. 83,677 37,007 74,971 5,261
Investment securities purchased.................................. -- -- 1,369,723 193,634
Total Liabilities 83,677 37,007 1,444,694 198,895
Net Assets Applicable to Outstanding Shares ................... $86,573,579 $49,848,698 $91,884,138 $14,303,452
Net Assets Consist of:
Capital Stock.................................................... $ 95,254 $ 30,676 74,822 $ 13,857
Additional paid-in capital....................................... 97,049,512 38,670,993 82,065,196 14,991,723
Accumulated undistributed net investment income.................. 750,264 544,913 521,699 --
Accumulated undistributed net realized gain (loss) from:
Investment transactions ...................................... (106,857) 618,494 (1,103,712) (1,078,061)
Foreign currency transactions................................. (12,201) (19,505) (15,889) --
Net unrealized appreciation (depreciation) of investments........ (11,196,950) 10,002,630 10,342,454 375,933
Net unrealized appreciation (depreciation) on translation of
assets and liabilities in foreign currencies.................. (5,443) 497 (432) --
Total Net Assets $86,573,579 $49,848,698 $91,884,138 $14,303,452
Capital Stock (par value: $.01 a share):
Shares authorized................................................ 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding.................................... 9,525,354 3,067,583 7,482,223 1,385,728
Net Asset Value Per Share ...................................... $9.09 $16.25 $12.28 $10.32
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
STATEMENTS OF OPERATIONS
(unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
Mortgage-
International International International Backed
Emerging Markets Securities SmallCap Securities
Portfolio Portfolio Portfolio Portfolio
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends....................................................... $ 1,027,338 $ 710,242 $ 743,582 $ --
Withholding tax on foreign dividends............................ (56,383) (82,479) (63,211) --
Interest........................................................ 190,595 96,516 166,057 468,202
Total Income 1,161,550 724,279 846,428 468,202
Expenses:
Management and investment advisory fees (Note 3) .......... 405,182 204,935 324,331 31,124
Net Investment Income 756,368 519,344 522,097 437,078
Net Realized and Unrealized Gain (Loss) on Investments and
Foreign Currencies Net realized gain (loss) from:
Investment transactions......................................... (102,826) 642,959 (1,100,263) --
Foreign currency transactions................................... (12,201) (19,505) (15,889) --
Change in unrealized appreciation/depreciation of:
Investments..................................................... (11,550,399) 4,067,109 10,482,074 70,844
Translation of assets and liabilities in foreign currencies..... (5,409) (3,761) 4,362 --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (11,670,835) 4,686,802 9,370,284 70,844
Net Increase (Decrease) in Net Assets
Resulting from Operations $(10,914,467) $5,206,146 $ 9,892,381 $507,922
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
International International
Emerging Markets Securities
Portfolio Portfolio
Six Months Period Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1998 1997(a) 1998 1997
Operations
<S> <C> <C> <C> <C>
Net investment income ........................................... $ 756,368 $ 76,490 $ 519,344 $ 596,269
Net realized gain (loss) from:
Investment transactions....................................... (102,826) 62,185 642,959 1,823,607
Foreign currency transactions................................. (12,201) (4,044) (19,505) (16,939)
Change in unrealized appreciation/
depreciation of investments and translation of
assets and liabilities in foreign currencies.................. (11,555,808) 353,415 4,063,348 824,126
Net Increase (Decrease) in Net Assets
Resulting from Operations (10,914,467) 488,046 5,206,146 3,227,063
Dividends and Distributions to Shareholders
From net investment income....................................... (23,074) (59,520) -- (581,224)
From net realized gain on investments and
foreign currency transactions................................. (62,172) -- (273,638) (1,645,552)
Total Dividends and Distributions (85,246) (59,520) (273,638) (2,226,776)
Capital Share Transactions (Note 5)
Shares sold...................................................... 65,000,000 32,000,000 7,642,636 15,749,696
Shares issued in reinvestment of dividends
and distributions............................................. 85,246 59,520 169,792 1,327,125
Shares redeemed.................................................. -- -- (580,249) (8,553,721)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 65,085,246 32,059,520 7,232,179 8,523,100
Total Increase (Decrease) 54,073,332 32,488,046 12,164,687 9,523,387
Net Assets
Beginning of period.............................................. 32,488,046 -- 37,684,011 28,160,624
End of period (including undistributed net investment
income as set forth below).................................... $86,573,579 $32,488,046 $49,848,698 $37,684,011
Undistributed Net Investment Income .......................... $ 750,264 $ 16,970 $ 544,913 $ 25,569
(a)Period from November 17, 1997 (date operations commenced)
through December 31, 1997.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
SmallCap Securities
Portfolio Portfolio
Six Months Period Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1998 1997(a) 1998 1997
Operations
<S> <C> <C> <C> <C>
Net investment income ........................................... $ 522,097 $ 54,940 $ 437,078 $ 956,959
Net realized gain (loss) from:
Investment transactions....................................... (1,100,263) 57,172 -- 22,412
Foreign currency transactions................................. (15,889) (37) -- --
Change in unrealized appreciation/
depreciation of investments and translation of
assets and liabilities in foreign currencies.................. 10,486,436 (144,414) 70,844 495,704
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,892,381 (32,339) 507,922 1,475,075
Dividends and Distributions to Shareholders
From net investment income....................................... (4,808) (50,530) (437,078) (956,959)
From net realized gain on investments and
foreign currency transactions................................. (60,584) -- -- --
Total Dividends and Distributions (65,392) (50,530) (437,078) (956,959)
Capital Share Transactions (Note 5)
Shares sold...................................................... 50,024,096 32,000,000 -- --
Shares issued in reinvestment of dividends
and distributions............................................. 65,392 50,530 437,078 827,979
Shares redeemed.................................................. -- -- -- (2,518,823)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 50,089,488 32,050,530 437,078 (1,690,844)
Total Increase (Decrease) 59,916,477 31,967,661 507,922 (1,172,728)
Net Assets
Beginning of period.............................................. 31,967,661 -- 13,795,530 14,968,258
End of period (including undistributed net investment
income as set forth below).................................... $91,884,138 $31,967,661 $14,303,452 $13,795,530
Undistributed Net Investment Income .......................... $ 521,699 $ 4,410 $ -- $ --
(a)Period from November 17, 1997 (date operations commenced)
through December 31, 1997.
See accompanying notes.
</TABLE>
June 30, 1998
NOTES TO FINANCIAL STATEMENTS
(unaudited)
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 four portfolios (International Emerging Markets Portfolio,
International Securities Portfolio, International SmallCap Portfolio and
Mortgage-Backed Securities Portfolio) (known as the "Portfolios").
On November 17, 1997, the initial purchases of 3,100,000 shares of Capital Stock
of International Emerging Markets and International SmallCap Portfolios were
made by Principal Mutual Life Insurance Company (see Note 3). Effective November
26, 1997, International Emerging Markets and International SmallCap Portfolios
began offering shares to the public.
The Portfolios value 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, preferred stocks and
foreign securities, 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.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing net asset value per share are usually
determined as of such times. Occasionally, events which affect the values of
such securities and foreign currency exchange rates may occur between the times
at which they are generally determined and the close of the New York Stock
Exchange and would therefore not be reflected in the computation of each
portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities are valued at their
fair value as determined in good faith by Principal Management Corporation
(formerly known as Princor Management Corporation) (the "Manager") under
procedures established and regularly reviewed by the Fund's Board of Directors.
To the extent each portfolio invests in foreign securities listed on foreign
exchanges which trade on days on which a portfolio does not determine its net
asset value, for example Saturdays and other customary national U.S. holidays,
each portfolio's net asset value could be significantly affected on days when
shareholders have no access to the portfolio.
Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Emerging Markets, International Securities and International SmallCap Portfolios
to value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
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 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 Portfolios record investment transactions generally one day after the trade
date, except for short-term investment transactions which are recorded generally
on 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. The Portfolios record dividend
income on the ex-dividend date, except dividend income from foreign securities
whereby the ex-dividend date has passed; such dividends are recorded as soon as
the Portfolios are informed of the ex-dividend date. 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 security transactions, and the difference between the amount
of dividends and foreign withholding taxes recorded on the books and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation on translation of assets and liabilities in foreign currencies
arise from changes in the exchange rate relating to assets and liabilities,
other than investments in securities, purchased and held in non-U.S. denominated
currencies.
The Portfolios may, pursuant to an exemptive order issued by the Securities and
Exchange Commission, transfer uninvested funds into a joint trading account. The
order permits the Portfolios' cash balances to be deposited into a single joint
account along with the cash of other registered investment companies managed by
Principal Management Corporation. These balances may be invested in one or more
short-term instruments.
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 other portfolios are recorded on the ex-dividend date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investments and foreign currency transactions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as distributions of paid-in-capital.
Reclassifications made for the period ended December 31, 1997 were not material.
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.
Note 3 -- Management Agreement and Transactions With Affiliates
The Fund has agreed to pay investment advisory and management fees, computed at
an annual percentage rate of each portfolio's average daily net assets, to
Principal Management Corporation and to Invista Capital Management, Inc.
("Invista"). Principal Management Corporation is wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Mutual Life Insurance
Company. Effective July 1, 1998, as approved by policyowners, Principal Mutual
Life Insurance Company became a stock life company renamed Principal Life
Insurance Company. Principal Life Insurance Company became a subsidiary of a new
corporation, Principal Mutual Holding Company. Invista is 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 to reimburse the Manager for the other costs it
incurs under the management agreement. The annual rate used in this calculation
for the Portfolios is as follows:
Net Asset Value of Portfolio
(in millions)
First Next Over
$250 $250 $500
International Emerging Markets Portfolio 1.15% 1.05% .95%
International Securities Portfolio .90 .90 .90
International SmallCap Portfolio 1.00 .90 .80
Mortgage-Backed Securities Portfolio .45 .45 .45
Note 3 -- Management Agreement and Transactions With Affiliates (Continued)
Brokerage commissions were paid to other affiliates by the following Portfolios:
Six Months Period
Ended Ended
June 30, December 31,
1998 1997
International Emerging Markets Portfolio $25,472 $10,074
International Securities Portfolio 3,042 1,394
International SmallCap Portfolio 17,209 --
At June 30, 1998, Principal Mutual Life Insurance Company owned shares of the
Fund's portfolios as follows:
International Emerging Markets Portfolio 7,909,784
International SmallCap Portfolio 7,381,722
International Securities Portfolio 1,325,824
Mortgage-Backed Securities Portfolio 1,385,728
Note 4 -- Investment Transactions
For the six months ended June 30, 1998, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Portfolios were as follows:
Purchases Sales
International Emerging Markets Portfolio $69,424,307 $ 6,761,591
International Securities Portfolio 14,023,874 6,124,317
International SmallCap Portfolio 70,598,065 20,065,104
Mortgage-Backed Securities Portfolio 599,396 390,514
At June 30, 1998, net unrealized appreciation (depreciation) of investments by
the Portfolios was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
International Emerging Markets Portfolio $ 5,072,095 $(16,269,045) $(11,196,950)
International Securities Portfolio 12,836,191 (2,833,562) 10,002,629
International SmallCap Portfolio 15,778,089 (5,435,635) 10,342,454
Mortgage-Backed Securities Portfolio 388,754 (12,821) 375,933
</TABLE>
The Mortgage-Backed Securities Portfolio may trade portfolio securities on a
"to-be-announced" (TBA) basis. In a TBA transaction, the portfolio commits to
purchase or sell securities for which all specific information is not known at
the time of the trade. Securities purchased on a TBA basis are not settled until
they are delivered to the portfolio, normally 15 to 30 days later. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other portfolio securities. As of June 30,
1998, Mortgage-Backed Securities Portfolio had TBA purchase commitments
involving securities with a face amount of $199,751, cost of $193,634 and market
value of $193,649. The portfolio has set aside investment securities and other
assets in excess of the commitments to serve as collateral.
At June 30, 1998, the Portfolios held the following securities which were
purchased in private placement transactions and may require registration in
order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of June 30, Percentage of
Security Description Acquisition Cost 1998 Net Assets
International Emerging Markets Portfolio
<S> <C> <C> <C> <C>
Al Ahram Beverages Co. ADR 2/4/98 $ 194,250 $ 222,250 0.26%
2/13/98 58,500 63,500 0.07
2/23/98 26,400 25,400 0.03
3/5/98 90,000 95,250 0.11
3/20/98 90,750 95,250 0.11
Bank Handlowy GDR 2/17/98 220,500 286,500 0.33
2/23/98 233,250 286,500 0.33
3/5/98 147,500 191,000 0.22
4/2/98 133,000 152,800 0.18
4/21/98 96,600 114,600 0.13
Banque Libanaise Le Commerce SAL ADR 1/15/98 210,000 168,600 0.19
2/13/98 104,013 74,465 0.09
2/19/98 55,800 42,150 0.05
2/23/98 124,575 92,730 0.11
3/9/98 106,500 84,300 0.10
3/20/98 53,400 42,150 0.05
Banque Marocaine Du Commerce Exterieur 11/17/97 190,000 238,500 0.28
12/3/97 20,100 23,850 0.03
1/16/98 73,815 88,245 0.10
2/13/98 70,740 85,860 0.10
2/23/98 99,500 119,250 0.14
3/5/98 102,500 119,250 0.14
4/6/98 67,050 71,550 0.08
Eesti Uhispank GDR 3/24/98 319,000 165,288 0.19
4/2/98 106,750 57,851 0.07
4/3/98 61,500 33,057 0.04
Industrial Credit & Investment
Corp. of India ADR 11/17/97 420,000 304,124 0.35
11/20/97 177,125 131,787 0.15
12/17/97 46,688 45,619 0.05
1/13/98 38,700 36,495 0.04
2/13/98 277,500 202,750 0.23
2/23/98 236,300 172,338 0.20
3/5/98 155,000 101,375 0.12
3/20/98 137,500 101,375 0.12
5/8/98 239,250 152,063 0.18
Mol Magyar Olaj-es Gazipari ADR 3/20/98 1,110,000 997,805 1.15
5/20/98 124,200 121,355 0.14
Paints & Chemical Industries Co. GDR 11/17/97 148,125 140,250 0.16
11/18/97 146,250 140,250 0.16
11/24/97 210,000 196,350 0.23
1/26/98 17,250 18,700 0.02
2/16/98 114,125 102,850 0.12
2/23/98 187,000 158,950 0.18
3/5/98 139,800 112,200 0.13
3/20/98 84,000 65,450 0.08
4/2/98 69,000 56,100 0.06
4/6/98 67,500 56,100 0.06
5/8/98 99,900 84,150 0.10
6/5/98 78,800 74,800 0.09
Reliance Industries GDR 12/2/97 170,000 132,000 0.15
12/12/97 72,500 66,000 0.08
1/2/98 52,605 41,580 0.05
1/13/98 23,250 20,460 0.02
2/13/98 131,400 118,800 0.14
2/23/98 140,600 125,400 0.14
3/5/98 132,800 105,600 0.12
4/6/98 92,000 66,000 0.08
Tata Engineering & Locomotive
Ltd. Co. GDR 12/30/97 212,500 93,114 0.11
1/8/98 39,375 18,623 0.02
2/13/98 133,200 29,797 0.03
2/23/98 76,500 37,246 0.04
3/5/98 87,750 48,420 0.06
Videsh Sanchar Nigam Ltd. GDR 11/17/97 312,375 217,350 0.25
11/24/97 104,000 82,800 0.10
12/12/97 30,820 23,805 0.03
1/2/98 55,400 41,400 0.05
1/13/98 24,970 22,770 0.03
2/13/98 236,250 186,300 0.22
2/23/98 161,925 131,445 0.15
3/5/98 261,000 207,000 0.24
3/20/98 83,650 72,450 0.08
4/30/98 123,750 103,500 0.12
5/8/98 225,900 186,300 0.22
8,791,542 10.18
International Securities Portfolio
Fokus Bank 10/3/96 79,958 108,555 0.22
Fokus Bank Rights 6/29/98 0 201 0.00
Kemira OY 12/10/96 286,318 237,693 0.48
2/24/97 88,695 79,576 0.16
4/11/97 95,955 94,044 0.19
Voest-Alpine Stahl 10/27/95 103,583 136,278 0.27
1/11/96 54,207 68,139 0.14
3/27/96 55,366 68,139 0.14
12/9/96 109,873 124,254 0.25
916,879 1.85
International SmallCap Portfolio
Bure Investment Aktiebolaget AB 11/18/97 276,498 366,273 0.40
6/25/98 205,962 200,653 0.22
6/26/98 229,442 229,318 0.25
Computacenter PLC 5/21/98 841,949 962,275 1.05
Industrial & Financial Systems 11/18/97 473,303 1,048,596 1.14
12/30/97 75,867 153,794 0.17
2/9/98 192,117 475,364 0.52
2/25/98 304,600 699,064 0.76
4/6/98 77,831 125,832 0.13
Newsquest PLC 11/18/97 505,613 670,338 0.73
12/2/97 78,410 97,307 0.10
2/26/98 242,366 302,733 0.33
2/27/98 129,705 162,178 0.18
4/15/98 113,176 118,931 0.13
5,612,656 6.11
</TABLE>
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
while the other portfolios' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk for Mortgage-Backed Securities Portfolio by
issuers and the other portfolios by industry and issuer.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by portfolio were as follows:
<TABLE>
<CAPTION>
International International International Mortgage-Backed
Emerging Securities SmallCap Securities
Markets Portfolio Portfolio Portfolio Portfolio
Six Months Ended June 30, 1998:
<S> <C> <C> <C> <C>
Shares sold ................................. 6,311,934 483,035 4,270,347 --
Shares issued in reinvestment of
dividends and distributions .................. 8,690 11,495 6,398 42,442
Shares redeemed ............................. -- (35,070) -- --
Net Increase (Decrease) 6,320,624 459,460 4,276,745 42,442
Periods Ended December 31, 1997:
Shares sold ................................. 3,198,619* 966,897 3,200,301* --
Shares issued in reinvestment of
dividends and distributions .................. 6,111* 93,449 5,177* 82,583
Shares redeemed ............................. -- * (512,039) -- * (246,872)
Net Increase (Decrease) 3,204,730* 548,307 3,205,478* (164,289)
* Period from November 17, 1997 (date operations commenced) through
December 31, 1997.
</TABLE>
Note 6 -- Line of Credit
The Portfolios participate with other funds and accounts managed by Principal
Management Corporation in an unsecured joint line of credit with a bank, which
allows them to borrow up to $60,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each participant, based on its
borrowings, at a rate equal to the Fed Funds Rate plus .50%. Additionally, a
commitment fee is charged at the annual rate of .08% on the average unused
portion of the line of credit. The commitment fee is allocated among the
participating funds, accounts and portfolios in proportion to their average net
assets during each quarter. At June 30, 1998, the Portfolios had no outstanding
borrowings under the line of credit.
Note 7 -- Year 2000 Problem
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Manager and other service providers do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Manager is taking steps it
believes are reasonably designed to address the Year 2000 Problem with respect
to computer systems that it uses and to obtain reasonable assurances that
comparable steps are being taken by the Fund's other major service providers. At
this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
June 30, 1998
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Emerging Markets Portfolio
Shares
Held Value
Common Stocks (82.63%)
Air Transportation, Scheduled (0.51%)
Cintra Sa De Cv Ser'anpv 494,000 $ 438,694
Bakery Products (0.66%)
Nong Shim Co. Ltd. 13,300 575,397
Beer, Wine, & Distilled
Beverages (1.29%)
Guangdong Brewery 2,472,000(a) 188,226
South African Breweries Ltd. 45,000 932,085
1,120,311
Beverages (7.87%)
Al Ahram Beverages Co. ADR 15,800(a)(b) 501,650
Embotelladora Andina ADR, Series A 64,800 1,134,000
Fomento Economico Mexicano ADR,
Class B 53,550(a) 1,686,825
PanAmerican Beverages ADR 53,100 1,669,331
Quilmes Industrial Quines SA ADR 186,400 1,817,400
6,809,206
Blast Furnace & Basic Steel
Products (2.07%)
Hylsamex SA, Class B 208,100 664,639
Tubos De Acero De Mexico ADR 87,800 1,124,938
1,789,577
Cable & Other Pay TV Services (0.84%)
Ceske Radiokomunikace GDR 34,500(a) 727,950
Central Reserve Depositories (2.16%)
Banco Ganadero SA ADR Preference 48,800 860,100
Banco Santiago SA ADR 47,200 790,600
Ergo Bank 2,567 219,386
1,870,086
Chemicals & Allied Products (0.79%)
Sarantis SA 33,500(a) 679,842
Commercial Banks (4.98%)
Banco Rio De La Plata ADR 97,300 1,027,731
Bank Handlowy GDR 54,000(b) 1,031,400
Banque Libanaise Le
Commerce SAL ADR 35,900(a)(b) 504,395
Banque Marocaine du Commerce
Exterieur 31,300(b) 746,505
Big Bank Gdanski SA 562,000 749,436
Eesti Uhispank GDR 31,000(a)(b) 256,196
4,315,663
Communications Equipment (2.32%)
ECI Telecommunications Ltd. ADR 53,100 2,011,163
Computer & Data Processing
Services (0.93%)
Tecnomatix Technologies Ltd. ADR 40,200(a) 804,000
Computer & Office Equipment (2.69%)
Orbotech Ltd. ADR 55,000(a) 2,000,625
Sindo Ricoh Co. 12,000 326,875
2,327,500
Construction & Related
Machinery (0.92%)
Barlow Ltd. 150,793 800,045
Consumer Products (1.75%)
Rothmans Industries Ltd. 244,000 1,083,173
Souza Cruz SA 59,200 435,065
1,518,238
Crude Petroleum & Natural Gas (1.29%)
Mol Magyar Olaj-es Gazipari ADR 41,500(b) 1,119,160
Drugs (1.28%)
Teva Pharmaceutical ADR 31,500 1,108,406
Electric Services (3.55%)
Companhia Paranaense De
Enersis-Copel ADR 125,900 1,164,575
Electricidade De Portugal SA 37,800 878,698
Enersis SA ADR 42,200 1,031,263
3,074,536
Electrical Goods (1.11%)
Empresa Nacional De Electric
Sponsored ADR 67,300 959,025
Electrical Industrial Apparatus (0.19%)
Guangdong Kelon Electric Holdings 204,000 160,597
Electronic Components
Accessories (2.38%)
Elec & Eltek International ADR 193,100 652,678
Varitronix 603,000 1,206,222
Wong Circuits Holdings Ltd. ADR 479,000 198,785
2,057,685
Electronic Distribution
Equipment (4.29%)
KCE Electronics Public Co. Ltd. 37,000 139,953
Tadiran Ltd. ADR 34,300 1,136,187
Techtronic Industries Co. 6,180,000 1,276,105
Vtech Holdings Ltd. 313,000 1,165,382
3,717,627
Engines & Turbines (0.37%)
First Tractor Co. Ltd. 1,202,000 318,007
Federal & Federally Sponsored
Credit (1.44%)
Industrial Credit & Investment Corp.
of India ADR 123,100(b) 1,247,926
Fire, Marine, & Casualty
Insurance (0.66%)
Alfa, Series A 139,300 570,467
Foreign Banks & Branches &
Agencies (1.19%)
Credicorp Ltd. ADR 70,240 1,031,650
Furniture & Home Furnishing
Stores (1.04%)
Grupo Elektra SA CPO 916,000 $ 901,114
Grocery Stores (1.23%)
Blue Square Chain Investments &
Property Ltd. 86,375(a) 1,063,557
Holding Offices (1.58%)
Education Investment Corp. 75,000 136,884
The India Fund, Inc. ADR 193,700(a) 1,234,838
1,371,722
Life Insurance (0.41%)
National Mutual Asia Ltd. 550,000 351,355
Measuring & Controlling
Devices (1.21%)
IDT Holdings Singapore Ltd. ADR 744,000 554,280
Moulin International Holding 4,980,000 494,878
1,049,158
Medical Instruments & Supplies (1.94%)
Medison Co. 191,000 1,683,247
Metal Cans & Shipping
Containers (0.75%)
Colep 49,000(a) 649,637
Miscellaneous Electrical Equipment &
Supplies (1.08%)
G.P. Batteries International 513,000 935,222
Miscellaneous Food & Kindred
Products (0.52%)
Thai Union Frozen Products 146,500 450,236
Miscellaneous Investing (0.89%)
Banco Latino Americano De
Exportaciones 25,040 769,980
Miscellaneous Non-Durable
Goods (1.52%)
Desc SA ADR 66,400 1,319,700
Miscellaneous Textile Goods (1.63%)
Esprit Holdings Ltd. 2,420,000 733,941
Reliance Industries GDR 102,400(b) 675,840
1,409,781
Motor Vehicles & Equipment (0.26%)
Tata Engineering & Locomotive
Ltd. Co. GDR 71,000(b) 227,200
Newspapers (0.61%)
Investec-Consultadoria Internacional SA11,400(a) 524,516
Non-Classifiable Establishments (0.19%)
QPL International Holdings Ltd. 831,000 160,868
Oil & Gas Field Services (0.22%)
Gulf Indonesia Resources Ltd. ADR 16,500(a) $ 189,750
Paints & Allied Products (1.39%)
Paints & Chemical Industries Co. GDR129,000(b) 1,206,150
Paperboard Containers & Boxes (0.63%)
Hung Hing Print Group 1,364,000 541,299
Petroleum Refining (3.35%)
Sasol Ltd. 191,000 1,113,892
YPF Sociedad Anonima ADR 59,500 1,788,719
2,902,611
Radio & Television Broadcasting (0.64%)
Television Broadcasts Ltd. 208,000 550,295
Search & Navigation Equipment (1.79%)
Elbit Systems Ltd. ADR 120,100 1,553,794
Security & Commodity
Exchanges (0.66%)
OTK Holdings Ltd. ADR 835,000 567,061
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 160,000(c) 0
Services, NEC (0.38%)
IDT International 3,700,000 329,480
Telephone Communications (10.35%)
Compania Anonima Telefonos De
Venezuela ADR 32,800 820,000
Global Telesystems Group, Inc. ADR 24,600(a) 1,199,250
Hellenic Telecommunication 37,889 971,254
Matav Rt ADR 49,800 1,465,988
Telecomunicacoes Brasileiras SA 26,690,000 2,123,003
Telefonica De Argentina ADR 34,000 1,102,875
Videsh Sanchar Nigam Ltd. GDR 123,200(a)(b) 1,275,120
8,957,490
Water Supply (0.83%)
Companhia De Saneamento
Basico Do Estado De Sao Paulo 6,040,000 720,660
Total Common Stocks 71,538,641
Preferred Stocks (8.63%)
Cement, Hydraulic (1.49%)
Titan Cement Co. 22,500 1,294,038
Communications Equipment (0.68%)
Ericsson Telecomunicacoes 30,700,000 586,604
Electric Services (1.42%)
Centrais Electricas De Santa Catarina1,524,000 1,225,412
Industrial Inorganic Chemicals (0.42%)
Fertilizantes Fosfatados Fosfertil95,000,000 $ 361,402
Telephone Communications (4.62%)
Telec De Sao Paulo SA 7,030,000 1,677,562
Telec De Sao Paulo SA Rights 330,394(a) 6,707
Telec Do Rio Janiero SA 9,100,000 692,370
Telecomunicacoes De minus Gerais 7,700,000 545,907
Telemig Celular 5,850,000(a) 170,957
Telerj Celular SA 7,500,000(a) 440,945
Telesp Celular SA 5,590,000(a) 468,811
4,003,259
Total Preferred Stocks 7,470,715
Principal
Amount Value
Commercial Paper (8.56%)
Personal Credit Institutions (4.16%)
Associates Corp. of North America;
6.15%; 7/1/98 $3,600,000 $3,600,000
Security Brokers & Dealers (4.40%)
Merrill Lynch & Co., Inc. 3,810,000 3,807,053
Total Commercial Paper 7,407,053
Total Portfolio Investments (99.82%) 86,416,409
Cash and receivables, net of liabilities (0.18%) 157,170
Total Net Assets (100.00%) $86,573,579
(a) Non-income producing security - No dividend paid during
the period.
(b) Restricted security - See Note 4 to the financial statements.
(c) On January 12, 1998 Peregrine Investment Holdings filed a plan of
liquidation.
International Emerging Markets Portfolio
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $5,736,725 6.64%
Brazil 10,619,980 12.29
Chile 3,914,888 4.53
China 666,829 0.77
Colombia 860,100 1.00
Czech Republic 1,927,200 2.23
Egypt 1,707,800 1.98
Estonia 256,196 0.30
Greece 3,164,521 3.66
Hong Kong 6,809,825 7.88
Hungary 2,585,147 2.99
India 4,660,924 5.40
Indonesia 189,750 0.22
Israel 9,677,732 11.20
Lebanon 504,395 0.58
Mexico 8,375,708 9.69
Morocco 746,505 0.86
Panama 769,980 0.89
Peru 1,031,650 1.19
Poland 1,780,836 2.06
Portugal 2,052,851 2.38
Singapore 3,424,138 3.96
South Africa 3,549,968 4.11
South Korea 2,585,519 2.99
Thailand 590,189 0.68
United States 7,407,053 8.57
Venezuela 820,000 0.95
Total $86,416,409 100.00%
International Securities Portfolio
Shares
Held Value
Common Stocks (95.53%)
Advertising (1.15%)
WPP Group PLC 86,700 $ 570,680
Beverages (1.33%)
PanAmerican Beverages ADR 21,100 663,331
Blast Furnace & Basic Steel
Products(1.23%)
Tubos De Acero De Mexico ADR 17,000 217,813
Voest-Alpine Stahl 9,900(b) 396,810
614,623
Central Reserve Depositories (1.34%)
National Westminster Bank 37,408 669,716
Commercial Banks (12.28%)
ABN-AMRO Holdings NV 21,913 $ 512,756
Australia & New Zealand Banking Group111,000 765,724
Bank of Ireland 39,536 813,349
Barclays PLC 16,600 479,437
BG Bank 8,800 545,031
Fokus Bank 14,000(b) 108,555
Fokus Bank Rights 14,000(a)(b) 201
Istituto Mobiliare Italiano 34,000 535,569
National Australia Bank Ltd. 45,734 603,230
Nordbanken Holding 42,000 308,090
Royal Bank of Canada Montreal, Quebec11,600 698,110
Svenska Handelsbanken AB Free 17,050 748,281
6,118,333
Communications Equipment (1.91%)
ECI Telecommunications Ltd. ADR 25,100 950,663
Communications Services (1.60%)
Koninklijke KPN N.V. 20,714 797,310
Computer & Office Equipment (1.26%)
Canon, Inc. 2,000 45,394
Orbotech Ltd. ADR 16,000(a) 582,000
627,394
Concrete, Gypsum, & Plaster
Products (0.56%)
Lafarge SA 2,700 279,109
Consumer Products (4.59%)
Imasco Ltd. 41,295 762,421
Imperial Tobacco Group PLC 146,000 1,073,064
Swedish Match Co. 136,000 451,915
2,287,400
Copper Ores (1.00%)
Trelleborg AB Series `B' 38,000 500,317
Crude & Petroleum & Natural
Gas (0.44%)
Hardy Oil & Gas 63,000 220,217
Deep Sea Foreign Transportation of
Freight (0.64%)
Van Ommeren NV 7,642 320,824
Department Stores (0.49%)
Vendex NV 6,414 246,568
Drugs (4.91%)
Elan Corp. PLC ADR 9,000(a) 578,813
Pharmacia & Upjohn, Inc. 16,500 761,063
Novartis AG 578 961,802
Rhodia, Inc. SA 5,200(a) 145,008
2,446,686
Electric Services (1.00%)
Enersis SA ADR 20,500 500,969
Electronic Components &
Accessories (1.20%)
Amtek Engineering 78,500 18,586
Elec & Eltek International ADR 105,600 356,928
Varitronix 111,000 222,041
597,555
Electronic Distribution
Equipment (1.92%)
Phillips Electronics 11,400 958,302
Engines & Turbines (1.54%)
RHI AG 8,900 431,018
Scapa Group PLC 106,000 338,689
769,707
Farm & Garden Machinery (1.04%)
New Holland NV 26,500 520,063
Finance Services (0.35%)
Takefuji Corp. 3,800 175,235
Gas Production & Distribution (0.98%)
OMV AG 3,650 488,908
General Industrial Machinery (0.80%)
SKF AB `B' Free 21,900 398,184
Hose & Belting & Gaskets
& Packing (1.27%)
Phoenix AG 27,600 633,794
Industrial Inorganic Chemicals (0.83%)
Kemira OY 39,800(b) 411,313
Investment Offices (1.29%)
AMVESCAP PLC 64,400 640,948
Life Insurance (1.56%)
National Mutual Asia Ltd. 697,000 445,262
QBE Insurance Group Ltd. 93,586 330,332
775,594
Meat Products (5.50%)
Danisco AS 14,800 994,269
Orkla B 41,600 875,528
Unilever NV 11,000 872,766
2,742,563
Miscellaneous Chemical Products (1.12%)
Hoechst AG 11,200 559,059
Miscellaneous Converted Paper
Products (1.47%)
Bunzl PLC 156,000 734,007
Miscellaneous Food & Kindred
Products (2.19%)
Bols Wessanen (Kon) CVA 47,000 676,966
Greencore Group PLC 78,000 416,458
1,093,425
Miscellaneous Non-Durable Goods (2.59%)
Desc SA ADR 18,000 357,750
Diageo PLC 78,515 934,702
1,292,452
Miscellaneous Primary Metal
Products (1.28%)
Charter PLC 61,000 638,661
Miscellaneous Textile Goods (0.67%)
Esprit Holdings Ltd. 1,094,000 331,790
Miscellaneous Transportation
Equipment (1.82%)
Tnt Post Group NV 20,714(a) $ 529,504
Autoliv, Inc. 12,000 379,500
909,004
Motor Vehicles & Equipment (1.06%)
E.C.I.A. Equipment & Composants 1,900 527,950
Newspapers (0.74%)
Publishing & Broadcasting Ltd. 86,000 370,124
Oil & Gas Field Services (1.49%)
Eni Spa 113,000 740,598
Paperboard Containers & Boxes (0.83%)
Koninklijke KNP BT NV 16,000 412,934
Personnel Supply Services (0.36%)
Vedior NV 6,329(a) 178,907
Petroleum Refining (4.89%)
Sasol Ltd. 69,000 402,401
Repsol Petroleo SA 19,600 1,081,847
YPF Sociedad Anonima ADR 31,700 952,981
2,437,229
Plastic Materials & Synthetics (0.69%)
Astra AB 17,333 345,576
Pulp Mills (2.16%)
Lassila & Tikanoja Ltd. OY 16,400 454,353
Upm-Kymmene OY 22,700 624,753
1,079,106
Radio & Television Broadcasting (3.46%)
Carlton Communications PLC 91,000 811,551
Mirror Group PLC 172,000 648,580
Television Broadcasts Ltd. 100,000 264,565
1,724,696
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 227,000(c) 0
Soap, Cleaners, & Toilet Goods (2.90%)
Benckiser NV B Shares 11,900(a) 731,823
Reckitt & Colman PLC 37,292 711,817
1,443,640
Sugar & Confectionery Products (2.15%)
Nestle 500 1,070,008
Special Industry Machinery (1.82%)
Cookson Group 264,000 907,398
Telephone Communications (7.35%)
Nokia Corp., Class A ADR 17,400 $1,262,588
Telecom Corp. of New Zealand Ltd. 168,000 692,420
Telecom Italia-DI 118,000 571,230
Telefonica De Espana SA 24,500 1,134,659
3,660,897
Watches, Clocks, Watchcases &
Parts (0.48%)
Tag Heuer International SA 2,500 236,928
Total Common Stocks 47,620,695
Preferred Stock (0.39%)
Commercial Banks (0.39%)
National Australia Bank ECU 6,800 195,075
Principal
Amount Value
Commercial Paper (3.80%)
Crude Pretroleum & Natural Gas (2.23%)
Chevron Oil Finance Co.;
5.52%; 7/1/98 $1,110,000 $1,110,000
Personal Credit Institutions (1.57%)
Associates Corp. of North America;
6.15%; 7/1/98 785,000 785,000
Total Commercial Paper (3.80%) 1,895,000
Total Portfolio Investments (99.72%) 49,710,770
Cash, receivables and other assets,
net of liabilities (0.28%) 137,928
Total Net Assets (100.00%) $49,848,698
(a) Non-income producing security - No dividend paid during
the period.
(b) Restricted security - See Note 4 to the financial statements.
(c) On January 12, 1998 Peregrine Investment Holdings filed a plan of
liquidation.
International Securities Portfolio
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $ 952,981 1.92%
Australia 2,264,486 4.55
Austria 1,316,736 2.65
Canada 1,460,531 2.94
Chile 500,969 1.01
Denmark 1,539,299 3.10
Finland 2,753,007 5.54
France 952,066 1.92
Germany 1,192,853 2.40
Hong Kong 1,263,658 2.54
Israel 1,532,663 3.08
Italy 1,847,397 3.72
Japan 220,629 0.44
Mexico 1,238,894 2.49
Netherlands 6,758,723 13.60
New Zealand 692,420 1.39
Norway 984,284 1.98
Singapore 375,514 0.75
South Africa 402,401 0.81
Spain 2,216,506 4.46
Sweden 3,131,863 6.30
Switzerland 2,268,738 4.56
United Kingdom 11,188,090 22.51
United States 2,656,062 5.34
Total $49,710,770 100.00%
International SmallCap Portfolio
Shares
Held Value
Common Stocks (95.76%)
Advertising (4.07%)
Industrial & Financial Systems 179,000(a)(b)$2,502,650
United Group Ltd. 639,000 1,238,538
3,741,188
Air Transportation, Scheduled (1.62%)
Ryanair Holdings PLC ADR 41,900(a) 1,492,688
Airports, Flying Fields &
Services (1.21%)
Aeroporti Di Roma 107,400 676,102
Virgin Express Holdings ADR 33,800(a) 437,288
1,113,390
Automotive Rentals, No Drivers (0.79%)
Avis Europe PLC 160,000 724,351
Cable & Other Pay TV Services (0.73%)
Tri-Vision International Ltd. 808,000(a) 631,876
Tri-Vision International Ltd.
Warrants 685,000(a) 37,265
669,141
Central Reserve Depositories (0.88%)
Union Bank of Norway 28,300 811,360
Commercial Banks (1.24%)
Banco Pastor SA 20,200 $1,141,354
Communications Equipment (0.76%)
ASM Pacific 439,000 186,963
Research In Motion Ltd. 126,000(a) 514,096
701,059
Computer & Data Processing
Services (4.77%)
Agresso Group ASA 81,400(a) 360,668
Computacenter PLC 77,000(a)(b) 962,275
Computershare Ltd. 200,000 693,557
Intentia International AB 34,600(a) 1,253,852
Merkantildata ASA 68,200 862,105
The Descartes Systems Group, Inc. 41,000(a) 245,352
4,377,809
Computer & Office Equipment (1.83%)
Orbotech Ltd. ADR 46,300(a) 1,684,163
Crude Petroleum & Natural Gas (1.47%)
Hardy Oil & Gas 112,000 391,497
Vermilion Resources 210,000(a) 956,790
1,348,287
Drugs (1.62%)
Fabrica Espanola de Productos 21,690 1,487,654
Electric Services (1.08%)
Vestas Wind Systems 25,200(a) 994,879
Electrical Industrial Apparatus (1.27%)
Doncasters PLC ADR 41,800(a) 1,162,562
Electrical Work (2.00%)
Internatio-Muller NV 23,000 769,975
Telesystem Intl. Wireless, Inc. 55,300(a) 1,071,748
1,841,723
Electronic Components &
Accessories (0.49%)
Elec & Eltek International ADR 134,000 452,920
Electronic Distribution
Equipment (3.99%)
C/TAC NV 73,400(a) 1,897,944
Techtronic Industries Co. 3,494,000 721,474
Vtech Holdings Ltd. 282,000 1,049,961
3,669,379
Engines & Turbines (1.53%)
RHI AG 29,000 1,404,440
Fabricated Rubber
Products, NEC (0.59%)
Semperit AG Holding 3,800 537,727
Functions Closely Related to
Banking (0.57%)
Irish Permanent PLC 44,000 523,075
Hose, Belting, Gaskets &
Packing (1.58%)
Phoenix AG 63,100 1,449,000
Hotels & Motels (2.01%)
Choice Hotels Scandinavia 445,700(a) 1,335,902
Melia Inversiones Americanas NV 11,500(a) 507,055
1,842,957
Household Furniture (0.53%)
Ekornes ASA 39,600 485,096
Investment Offices (0.50%)
Tyndall Australia Ltd. 353,850 460,153
Life Insurance (1.33%)
Scor SA 19,200 1,217,857
Measuring & Controlling
Devices (1.11%)
Sensonor ASA 223,400(a) 1,018,956
Meat Products (0.72%)
Perkins Foods PLC 277,600 664,658
Medical Instruments & Supplies (0.58%)
Cochlear Ltd. 136,000 528,045
Metalworking Machinery (1.93%)
Mikron Holding AG 7,000 1,776,754
Miscellaneous Amusement, Recreation
Service (1.90%)
Tab Ltd. 1,186,300(a) 1,748,380
Miscellaneous Business Services (1.75%)
Enator AB 54,000 1,604,775
Miscellaneous Electrical Equipment &
Supplies (1.45%)
Kaba Holding AG, Class B 2,600 1,328,445
Miscellaneous Food & Kindred
Products (1.56%)
Greencore Group PLC 269,000 1,436,247
Miscellaneous Manufacturers (1.42%)
Docdata NV 45,400(a) 1,301,146
Miscellaneous Non-Durable
Goods (1.22%)
Austria Tabakwerke AG 20,100 1,119,040
Miscellaneous Primary Metal
Products (0.54%)
YBM Magnex International, Inc. 107,000(a) 498,422
Miscellaneous Textile Goods (0.03%)
Esprit Holdings Ltd. 92,000 27,902
Miscellaneous Transportation
Services (1.02%)
ASG AB, Class B 30,600 940,069
Motor Vehicles & Equipment (2.96%)
E.C.I.A. Equipment & Composants 4,200 $1,167,047
Mayflower Corp. PLC 465,000 1,551,707
2,718,754
Newspapers (1.47%)
Newsquest PLC 250,000(a)(b) 1,351,487
Non-Classifiable Establishments (0.87%)
Bure Investment Aktiebolaget AB 50,000(b) 796,244
Nonresidential Building
Construction (1.77%)
Algeco 16,400 1,627,515
Oil & Gas Field Services (4.72%)
Cie Generale de Geophysique 7,800(a) 1,144,321
Cie Generale de Geophysique ADR 22,000(a) 646,250
Det Sondenfjelds-Norske
Dampskibsselskab 36,200(a) 636,864
Hydralift ASA, A Shares 75,000(a) 742,813
Hydralift ASA, B Shares 15,000(a) 152,472
Petrolia Drilling Asa 260,000(a) 1,016,480
4,339,200
Personnel Supply Services (2.74%)
Dis Deutshcer Industries Service AG 8,900 739,598
Unique International NV 52,400 1,777,387
2,516,985
Pulp Mills (2.91%)
Lassila & Tikanoja Ltd. OY 51,900 1,437,861
Miquel Y Costas 26,700 1,238,291
2,676,152
Real Estate Agents &
Managers (1.45%)
Tornet Fastighet 83,000 1,332,172
Sanitary Services (1.87%)
De Sammensluttede Vognmand AS 16,200 1,719,641
Security & Commodity Services (0.79%)
Dundee Bancorp, Inc., Class A 46,000(a) 727,283
Security Brokers & Dealers (7.57%)
AOT NV 19,000 1,932,483
Kempen & Co. NV 24,820 1,921,693
Van Der Moolen Holdings 27,412 3,098,000
6,952,176
Services To Buildings (0.54%)
Spotless Group Ltd. 243,000 496,575
Special Industry Machinery (0.62%)
Aixtron 3,400 568,854
Telegraph & Other
Communications (0.89%)
Colt Telecom Group PLC ADR 5,000 817,500
Telephone Communications (9.21%)
AAPT Ltd. 451,000(a) 865,770
Colt Telecom Group PLC 18,600(a) 745,595
Energis PLC 89,200(a) 1,358,077
Esprit Telecom Group PLC ADR 72,700(a) 1,335,863
Global Telesystems Group, Inc. ADR 27,200(a) 1,326,000
Metronet Communications ADR, Class B100,300(a) 2,833,475
8,464,780
Trusts (0.65%)
Nursing Home Properties PLC 220,000 596,489
Women's & Children's
Undergarments (1.04%)
CSP International SPA 100,300(a) 959,242
Total Common Stocks 87,988,100
Principal
Amount Value
Commercial Paper (5.31%)
Personal Credit Institutions (0.96%)
Associates Corp. of North America;
6.15%; 7/1/98 $ 885,000 $ 885,000
Security Brokers & Dealers (4.35%)
Merrill Lynch & Co., Inc.;
5.57%; 7/6/98 3,996,905 3,996,905
Total Commercial Paper 4,881,905
Total Portfolio Investments (101.07%) 92,870,005
Liabilities, net of cash
and receivables (-1.07%) (985,867)
Total Net Assets (100.00%) $91,884,138
(a) Non-income producing security - No dividend paid during
the period.
(b) Restricted security - See Note 4 to the financial statements.
International SmallCap Portfolio
Investments by Country
Total Percentage of
Country Value Total Value
Australia $6,031,019 6.49%
Austria 3,061,207 3.30
Belgium 437,287 0.47
Canada 7,516,306 8.09
Czech Republic 1,326,000 1.43
Denmark 2,714,521 2.92
Finland 1,437,861 1.55
France 5,802,990 6.25
Germany, Federal Republic 2,757,452 2.97
Hong Kong 1,986,300 2.14
Ireland 1,492,688 1.61
Israel 1,684,163 1.81
Italy 1,635,344 1.76
Netherlands 12,698,628 13.67
Norway 7,422,716 7.99
Singapore 452,920 0.49
Spain 4,374,354 4.71
Sweden 8,429,761 9.08
Switzerland 3,105,199 3.34
United Kingdom 13,621,383 14.67
United States 4,881,906 5.26
Total $92,870,005 100.00%
Mortgage-Backed Securities Portfolio
Description of Issue Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (27.44%)
FNMA 6.25% 4/1/2026 $ 390,145 $ 382,955
FNMA 7.00 8/1/2023 2,803,999 2,848,667
FNMA 7.50 6/1/2023 673,957 692,908
Total FNMA Certificates 3,924,530
Government National Mortgage Association (GNMA)
Certificates (58.26%)
GNMA I 6.00 5/20/2028 199,751 193,649
GNMA I 6.50 12/15/2023-1/15/2024 2,310,419 2,313,564
GNMA I 7.00 4/15/2028 399,313 405,710
GNMA I 7.50 6/15/2023-3/15/2027 1,120,887 1,153,139
GNMA II 5.50 3/20/2026 179,675 169,667
GNMA II 6.00 9/20/2023-9/20/2026 3,859,551 3,747,637
GNMA II 6.50 10/20/2025 351,622 349,812
Total GNMA Certificates 8,333,178
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (13.64%)
FHLMC 5.50 2/1/2024-3/1/2024 593,891 568,039
FHLMC 6.00 4/1/2024 161,241 157,716
FHLMC 6.50 12/1/2013-12/1/2027 1,222,614 1,225,377
Total FHLMC Certificates 1,951,132
Federal Agency Short-Term Obligations (1.50%)
Principal
Amount Value
Federal Home Loan Mortgage Corp.;
5.85%; 7/1/98 $ 214,701 $ 214,701
Total Portfolio Investments (100.84%) 14,423,541
Liabilities, net of cash, receivables and
other assets (-0.84%) (120,089)
Total Net Assets (100.00%) $14,303,452
FINANCIAL HIGHLIGHTS
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
PRINCIPAL SPECIAL MARKETS FUND, INC.
INTERNATIONAL EMERGING
MARKETS PORTFOLIO 1998* 1997(a)
Net Asset Value, Beginning of Period................... $10.14 $9.94
Income from Investment Operations:
Net Investment Income............................... .08 .01
Net Realized and Unrealized Gain (Loss) on Investments (1.10) .21
Total from Investment Operations (1.02) .22
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.01) (.02)
Distributions from Capital Gains.................... (.02) -
Total Dividends and Distributions (.03) (.02)
Net Asset Value, End of Period......................... $9.09 $10.14
Total Return........................................... (10.11)%(b) 1.40%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $86,574 $32,488
Ratio of Expenses to Average Net Assets............. 1.15%(c) 1.15%(c)
Ratio of Net Investment Income to Average Net Assets 2.14%(c) .91%(c)
Portfolio Turnover Rate............................. 21.3%(c) 12.3%(c)
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES PORTFOLIO
1998* 1997 1996 1995 1994 1993(d)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.45 $13.67 $11.70 $11.29 $12.87 $10.01
Income from Investment Operations:
Net Investment Income............................... .17 .24 .31 .19 .13 .07
Net Realized and Unrealized Gain (Loss) on Investments 1.74 1.46 2.46 1.11 (.95) 2.91
Total from Investment Operations 1.91 1.70 2.77 1.30 (.82) 2.98
Less Dividends and Distributions:
Dividends from Net Investment Income................ - (.24) (.16) (.10) (.12) (.10)
Excess Distributions from Net Investment Income..... - - (.07) (.07) (.13) -
Distributions from Capital Gains.................... (.11) (.68) (.57) (.72) (.51) (.02)
Total Dividends and Distributions (.11) (.92) (.80) (.89) (.76) (.12)
Net Asset Value, End of Period......................... $16.25 $14.45 $13.67 $11.70 $11.29 $12.87
Total Return........................................... 13.25%(b) 12.55% 24.12% 12.02% 6.45% 29.95%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $49,849 $37,684 $28,161 $17,251 $15,542 $16,838
Ratio of Expenses to Average Net Assets............. .90%(c) .90% .90% .90% .90% .90%(c)
Ratio of Net Investment Income to Average Net Assets 2.28%(c) 1.73% 1.90% 1.79% .94% 1.21%(c)
Portfolio Turnover Rate............................. 28.8%(c) 30.8% 25.5% 46.0% 37.0% 6.9%(c)
* Six Months Ended June 30, 1998.
See accompanying notes.
</TABLE>
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
INTERNATIONAL SMALLCAP PORTFOLIO 1998* 1997(a)
Net Asset Value, Beginning of Period................... $9.97 $9.86
Income from Investment Operations:
Net Investment Income............................... .07 .01
Net Realized and Unrealized Gain (Loss) on Investments 2.26 .12
Total from Investment Operations 2.33 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ - (.02)
Distributions from Capital Gains.................... (.02) -
Total Dividends and Distributions (.02) (.02)
Net Asset Value, End of Period......................... $12.28 $9.97
Total Return........................................... 23.42%(b) 1.59%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $91,884 $31,968
Ratio of Expenses to Average Net Assets............. 1.00%(c) 1.00%(c)
Ratio of Net Investment Income to Average Net Assets 1.60%(c) .91%(c)
Portfolio Turnover Rate............................. 65.4%(c) 30.3%(c)
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES PORTFOLIO
1998* 1997 1996 1995 1994 1993(d)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.27 $9.93 $10.17 $9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income............................... .32 .64 .64 .65 .63 .34
Net Realized and Unrealized Gain (Loss) on Investments .05 .34 (.24) 1.06 (.99) .09
Total from Investment Operations .37 .98 .40 1.71 (.36) .43
Less Dividends from Net Investment Income........... (.32) (.64) (.64) (.65) (.63) (.34)
Net Asset Value, End of Period......................... $10.32 $10.27 $9.93 $10.17 $9.11 $10.10
Total Return........................................... 3.66%(b) 10.18% 4.20% (3.60)% 4.47% 4.47%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $14,303 $13,796 $14,968 $14,253 $14,714 $24,309
Ratio of Expenses to Average Net Assets............. .45%(c) .45% .45% .45% .45% .45%(c)
Ratio of Net Investment Income to Average Net Assets 6.32%(c) 6.37% 6.51% 6.66% 6.56% 5.23%(c)
Portfolio Turnover Rate................................ 11.7%(c) 15.5% 28.7% 41.8% 41.8% 9.6%(c)
* Six Months Ended June 30, 1998.
</TABLE>
Notes to Financial Highlights
(a) Period from November 26, 1997, date shares first offered to the public,
through December 31, 1997. Net investment income, aggregating $.02 per
share for the International Emerging Markets Portfolio and $.01 per share
for the International SmallCap Portfolio for the period from the initial
purchase of shares on November 17, 1997 through November 25, 1997, was
recognized, none of which was distributed to the sole shareholder,
Principal Mutual Life Insurance Company. Additionally, the portfolios
incurred unrealized losses on investments of ($.08) per share and ($.15)
per share respectively, during the interim period. This represents
activities of each portfolio prior to the initial offering.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) 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.
