A MESSAGE FROM THE PRESIDENT
Dear Shareholder:
The U.S. stock market achieved its fourth-consecutive year of strong returns in
1998 after staging one of the century's most rapid recoveries from a steep
descent. However, the fourth-quarter recovery was led by a relatively small
number of blue chip growth companies, and investors had to sustain significant
volatility to achieve these returns.*
Domestic bond market returns last year varied widely across sectors. The highest
quality, longer-maturity bonds produced the best results. This reflected the
decline in interest rates and the 'flight to quality' caused by Asian economic
problems, the Russian financial crisis and concerns about currency stability in
Latin America, particularly Brazil. Yield spreads between mortgage-backed
securities, high-yield bonds, municipal bonds and emerging market debt relative
to Treasury bonds reached high levels.
Also of interest, European markets provided competitive returns to the U.S.
market, despite the Asian and Russian struggles and a severe slowdown in Latin
America. And inflation, as measured by the Consumer Price Index, rose 1.61
percent. This is the second lowest inflation rate in the last 33 years.
We hope you are pleased with the performance of your Principal Special Markets
Fund account. Thank you for investing with the Principal. We look forward to
serving all your future 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............................ 20
Mortgage-Backed Securities Portfolio........................ 23
Financial Highlights............................................. 24
Report of Independent Auditors....................................... 26
Federal Income Tax Information....................................... 28
<TABLE>
<CAPTION>
December 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
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.............................. $92,740,587 $41,928,912 $84,301,092 $14,771,415
Assets
Investment in securities -- at value (Note 4).................... $79,789,603 $47,843,896 $83,218,319 $15,243,626
Cash............................................................. 67,146 46,337 199,711 50,293
Receivables:
Dividends and interest........................................ 176,693 89,263 98,316 76,595
Investment securities sold.................................... -- -- 71,346 --
Other assets..................................................... -- 109 -- 127
Total Assets 80,033,442 47,979,605 83,587,692 15,370,641
Liabilities
Accrued expenses................................................. 76,485 35,942 66,752 5,646
Payables:
Investment securities purchased............................... 352,853 -- 191,083 504,453
Net payable for foreign currency contracts (Note 5)........... 123,594 31,504 -- --
Total Liabilities 552,932 67,446 257,835 510,099
Net Assets Applicable to Outstanding Shares ................... $79,480,510 $47,912,159 $83,329,857 $14,860,542
Net Assets Consist of:
Capital Stock.................................................... $ 96,835 $ 32,152 $ 75,338 $ 14,298
Additional paid-in capital....................................... 98,328,517 40,865,888 82,608,638 15,450,048
Accumulated undistributed net investment income.................. 40,240 33,810 24,067 --
Accumulated undistributed net realized gain (loss) from
investment and foreign currency transactions.................. (5,911,305) 1,095,871 1,701,706 (1,076,015)
Net unrealized appreciation (depreciation) of investments........ (12,950,984) 5,914,984 (1,082,773) 472,211
Net unrealized appreciation (depreciation) on translation of
assets and liabilities in foreign currencies.................. (122,793) (30,546) 2,881 --
Total Net Assets $79,480,510 $47,912,159 $83,329,857 $14,860,542
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.................................... 9,683,451 3,215,199 7,533,783 1,429,826
Net Asset Value Per Share ...................................... $8.21 $14.90 $11.06 $10.39
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
STATEMENTS OF OPERATIONS
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....................................................... $ 2,190,065 $ 1,124,874 $1,119,264 $ --
Withholding tax on foreign dividends............................ (111,270) (127,991) (98,201) --
Interest........................................................ 351,296 153,277 278,613 960,039
Total Income 2,430,091 1,150,160 1,299,676 960,039
Expenses:
Management and investment advisory fees (Note 3) ............. 856,612 413,285 731,367 64,195
Net Investment Income 1,573,479 736,875 568,309 895,844
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies
Net realized gain (loss) from:
Investment transactions......................................... (5,887,011) 2,908,081 1,723,164 2,046
Foreign currency transactions................................... (24,294) (19,515) (17,896) --
Change in unrealized appreciation/depreciation of:
Investments..................................................... (13,304,433) (20,537) (943,153) 167,122
Translation of assets and liabilities in foreign currencies..... (122,759) (34,804) 7,675 --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (19,338,497) 2,833,225 769,790 169,168
Net Increase (Decrease) in Net Assets
Resulting from Operations $(17,765,018) $3,570,100 $1,338,099 $1,065,012
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International International
Emerging Markets Securities
Portfolio Portfolio
1998 1997(a) 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income ........................................... $ 1,573,479 $ 76,490 $ 736,875 $ 596,269
Net realized gain (loss) from investment and foreign
currency transactions......................................... (5,911,305) 58,141 2,888,566 1,806,668
Change in unrealized appreciation/depreciation of investments
and translation of assets and liabilities in foreign currencies (13,427,192) 353,415 (55,341) 824,126
Net Increase (Decrease) in Net Assets
Resulting from Operations (17,765,018) 488,046 3,570,100 3,227,063
Dividends and Distributions to Shareholders
From net investment income....................................... (1,546,178) (59,520) (703,066) (581,224)
From net realized gain on investments and foreign
currency transactions......................................... (62,172) -- (2,066,333) (1,645,552)
Total Dividends and Distributions (1,608,350) (59,520) (2,769,399) (2,226,776)
Capital Share Transactions (Note 6)
Shares sold...................................................... 65,000,000 32,000,000 8,238,836 15,749,696
Shares issued in reinvestment of dividends
and distributions............................................. 1,365,832 59,520 1,857,180 1,327,125
Shares redeemed.................................................. -- -- (668,569) (8,553,721)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 66,365,832 32,059,520 9,427,447 8,523,100
Total Increase (Decrease) 46,992,464 32,488,046 10,228,148 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).................................... $79,480,510 $32,488,046 $47,912,159 $37,684,011
Undistributed Net Investment Income .......................... $ 40,240 $ 16,970 $ 33,810 $ 25,569
<FN>
(a) Period from November 17, 1997 (date operations commenced)
through December 31, 1997.
</FN>
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
SmallCap Securities
Portfolio Portfolio
1998 1997(a) 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income ........................................... $ 568,309 $ 54,940 $ 895,844 $ 956,959
Net realized gain (loss) from investment and foreign
currency transactions......................................... 1,705,268 57,135 2,046 22,412
Change in unrealized appreciation/depreciation of investments
and translation of assets and liabilities in foreign currencies (935,478) (144,414) 167,122 495,704
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,338,099 (32,339) 1,065,012 1,475,075
Dividends and Distributions to Shareholders
From net investment income....................................... (548,766) (50,530) (895,844) (956,959)
From net realized gain on investments and foreign
currency transactions......................................... (60,583) -- -- --
Total Dividends and Distributions (609,349) (50,530) (895,844) (956,959)
Capital Share Transactions (Note 6)
Shares sold...................................................... 50,024,097 32,000,000 -- --
Shares issued in reinvestment of dividends
and distributions............................................. 609,349 50,530 895,844 827,979
Shares redeemed.................................................. -- -- -- (2,518,823)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 50,633,446 32,050,530 895,844 (1,690,844)
Total Increase (Decrease) 51,362,196 31,967,661 1,065,012 (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).................................... $83,329,857 $31,967,661 $14,860,542 $13,795,530
Undistributed Net Investment Income .......................... $ 24,067 $ 4,410 $ -- $ --
<FN>
(a) Period from November 17, 1997 (date operations commenced)
through December 31, 1997.
</FN>
See accompanying notes.
</TABLE>
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 each of the International Emerging Markets and International SmallCap
Portfolios were made by Principal Life Insurance Company (see Note 3) (formerly
known as Principal Mutual Life Insurance Company). 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 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 do not have 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-advisor is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
occasionally 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 or depreciation 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 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.
Reclassifications made for the periods ended December 31,1998 and 1997 were not
material.
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 tax return of capital distributions.
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 each
portfolio 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 approximates that used for
financial reporting purposes.
At December 31, 1998, the following Portfolios had approximate net capital loss
carryforwards as follows:
International Mortgaged-Backed
Net Capital Loss Emerging Markets Securities
Carryforwards Expire In: Portfolio Portfolio
2002 $ -- $ 751,000
2003 -- 300,000
2004 -- 25,000
2006 6,004,000 --
$6,004,000 $1,076,000
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, LLC
("Invista"). Principal Management Corporation is wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Life Insurance
Company. Invista is an indirect wholly owned subsidiary of Principal 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
No brokerage commissions were paid by the Fund to Princor Financial Services
Corporation during the periods ended December 31, 1998 and 1997. Brokerage
commissions were paid to other affiliates by the following portfolios:
Year Periods
Ended Ended
December 31, December 31,
1998 1997
International Emerging Markets Portfolio $54,096 $10,074
International Securities Portfolio 15,932 1,394
International SmallCap Portfolio 35,554 --
At December 31, 1998, Principal Life Insurance Company owned shares of the
Fund's portfolios as follows:
International Emerging Markets Portfolio 8,065,929
International Securities Portfolio 1,398,736
International SmallCap Portfolio 7,432,590
Mortgage-Backed Securities Portfolio 1,429,826
Note 4 -- Investment Transactions
For the year ended December 31, 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 $ 91,451,269 $24,592,461
International Securities Portfolio 25,092,857 15,827,438
International SmallCap Portfolio 113,752,659 60,042,408
Mortgage-Backed Securities Portfolio 1,104,787 1,060,456
At December 31, 1998, net unrealized appreciation (depreciation) of investments
by the Portfolios was composed of the following:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
------------------------------------ Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
International Emerging Markets Portfolio $ 7,507,374 $(20,458,358) $(12,950,984)
International Securities Portfolio 10,912,860 (4,997,876) 5,914,984
International SmallCap Portfolio 9,456,364 (10,539,137) (1,082,773)
Mortgage-Backed Securities Portfolio 483,618 (11,407) 472,211
</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 December
31, 1998, Mortgage-Backed Securities Portfolio had a TBA purchase commitment
involving a security with a face amount of $500,000, cost of $504,453 and market
value of $505,005. The portfolio has set aside investment securities and other
assets in excess of the commitment to serve as collateral.
At December 31, 1998, the Portfolios held the following securities which were
purchased in private placement transactions and may require registration, or an
exemption therefrom, in order to effect a sale in the ordinary course of
business.
<TABLE>
<CAPTION>
Value at Value as a
Date of December 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets
International Emerging Markets Portfolio
<S> <C> <C> <C> <C>
Al Ahram Beverages Co. GDR 2/4/98 $ 194,250 $ 202,125 0.25%
2/13/98 58,500 57,750 0.07
2/23/98 26,400 23,100 0.03
3/5/98 90,000 86,625 0.11
3/20/98 90,750 86,625 0.11
9/28/98 116,100 103,950 0.13
11/6/98 249,546 245,438 0.31
11/25/98 29,750 28,875 0.04
12/14/98 158,600 176,137 0.22
Bank Handlowy w Warszawie GDR 2/17/98 220,500 195,000 0.25
2/23/98 233,250 195,000 0.25
3/5/98 147,500 130,000 0.16
4/2/98 66,500 52,000 0.06
4/21/98 96,600 78,000 0.10
Banque Libanaise Pour Le Commerce SAL ADR 1/15/98 210,000 223,500 0.29
2/13/98 104,013 98,712 0.12
2/19/98 55,800 55,875 0.07
2/23/98 124,575 122,925 0.15
3/9/98 106,500 111,750 0.14
3/20/98 53,400 55,875 0.07
Banque Marocaine du Commerce Exterieur 11/17/97 $ 190,000 $ 234,000 0.29%
12/3/97 20,100 23,400 0.03
1/16/98 73,815 86,580 0.11
2/13/98 70,740 84,240 0.10
2/23/98 99,500 117,000 0.15
3/5/98 102,500 117,000 0.15
4/6/98 4,470 4,680 0.01
Eesti Uhispank GDR 3/24/98 319,000 96,500 0.12
4/2/98 106,750 33,775 0.04
4/3/98 61,500 19,300 0.03
Industrial Credit & Investment Corp. 11/17/97 420,000 199,500 0.25
of India ADR 11/20/97 177,125 86,450 0.11
12/17/97 46,688 29,925 0.04
1/13/98 38,700 23,940 0.03
2/13/98 277,500 133,000 0.17
2/23/98 236,300 113,050 0.14
3/5/98 155,000 66,500 0.08
3/20/98 137,500 66,500 0.08
5/8/98 239,250 99,750 0.13
8/28/98 65,700 47,880 0.06
Mol Magyar Olaj-es Gazipari Rt. ADR 3/20/98 1,110,000 1,014,847 1.28
5/20/98 124,200 123,427 0.16
9/2/98 60,375 82,285 0.10
9/23/98 115,940 170,056 0.21
Paints & Chemical Industries Co. SAE GDR 11/17/97 148,125 97,500 0.12
11/18/97 146,250 97,500 0.12
11/24/97 210,000 136,500 0.17
1/26/98 17,250 13,000 0.02
2/16/98 114,125 71,500 0.09
2/23/98 187,000 110,500 0.14
3/5/98 139,800 78,000 0.10
3/20/98 84,000 45,500 0.06
4/2/98 69,000 39,000 0.05
4/6/98 67,500 39,000 0.05
5/8/98 99,900 58,500 0.07
6/5/98 78,800 52,000 0.06
7/20/98 101,370 70,850 0.09
Pick Szeged RT GDR 7/7/98 $ 169,905 $ 119,853 0.15%
7/8/98 174,840 119,853 0.15
7/14/98 90,650 59,501 0.08
9/2/98 81,600 102,002 0.13
9/23/98 96,600 170,004 0.21
10/22/98 95,140 113,903 0.14
10/27/98 113,040 122,403 0.16
Reliance Industries Ltd. GDR 12/2/97 170,000 113,500 0.14
12/12/97 72,500 56,750 0.07
1/2/98 52,605 35,753 0.05
1/13/98 23,250 17,593 0.02
2/13/98 131,400 102,150 0.13
2/23/98 140,600 107,825 0.14
3/5/98 132,800 90,800 0.11
4/6/98 92,000 56,750 0.07
7/14/98 102,950 80,585 0.10
12/22/98 183,150 188,977 0.24
Videsh Sanchar Nigam Ltd. GDR 11/17/97 312,375 257,250 0.32
11/24/97 104,000 98,000 0.12
12/12/97 30,820 28,175 0.04
1/2/98 55,400 49,000 0.06
1/13/98 24,970 26,950 0.03
2/13/98 236,250 220,500 0.28
2/23/98 161,925 155,575 0.20
3/5/98 261,000 245,000 0.31
3/20/98 83,650 85,750 0.11
4/30/98 123,750 122,500 0.15
5/8/98 225,900 220,500 0.28
7/30/98 65,250 73,500 0.09
9,553,100 12.02
International Securities Portfolio
Kemira OY 12/10/96 286,318 165,801 0.35
2/24/97 88,695 55,507 0.11
4/11/97 95,955 65,600 0.14
286,908 0.60
International SmallCap Portfolio
Bure Investment Aktiebolaget AB 11/18/97 $ 276,498 $ 326,320 0.39%
6/25/98 205,963 178,767 0.21
6/26/98 229,443 204,305 0.25
8/5/98 178,129 173,091 0.21
8/26/98 77,749 83,708 0.10
8/27/98 47,868 52,495 0.06
11/30/98 194,948 198,629 0.24
Computacenter PLC 5/21/98 733,979 510,986 0.61
9/30/98 273,953 234,263 0.28
10/2/98 75,597 69,547 0.09
Industrial & Financial Systems 12/4/98 113,329 263,582 0.31
12/7/98 813,251 847,846 1.02
12/8/98 200,853 206,482 0.25
Newsquest PLC 11/18/97 505,613 505,463 0.60
12/2/97 78,410 73,374 0.09
2/26/98 242,366 228,273 0.27
2/27/98 129,705 122,289 0.15
4/15/98 113,176 89,679 0.11
8/26/98 125,641 114,136 0.14
11/3/98 111,131 114,136 0.14
4,597,371 5.52
</TABLE>
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
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 -- Foreign Currency Contracts
At December 31, 1998, International Securities Portfolio and International
Emerging Markets Portfolio each owned a forward contract to sell Hong Kong
Dollars ("HKD") at a specified future date at a fixed exchange rate. Forward
foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by each portfolio
as an unrealized gain or loss. When the contract is closed, each portfolio
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
<TABLE>
<CAPTION>
Value At
Contracts In Exchange Settlement December 31 Net Unrealized
To Deliver For Date 1998 (Depreciation)
<S> <C> <C> <C> <C> <C>
International Emerging Markets Portfolio 20,718,750 HKD $2,550,000 3/1/99 $2,673,594 $(123,594)
International Securities Portfolio 5,281,250 HKD 650,000 3/1/99 681,504 (31,504)
</TABLE>
The use of forward foreign currency contracts does not eliminate fluctuations in
underlying prices of each portfolio's investments, but it does establish a rate
of exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, the portfolios could be exposed to
risks if the counterparties to the contract are unable to meet the terms of
their contract.
Note 6 -- 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
Year Ended December 31, 1998:
<S> <C> <C> <C> <C>
Shares sold ................................. 6,311,934 521,541 4,270,347 --
Shares issued in reinvestment of
dividends and distributions .................. 166,787 126,754 57,958 86,540
Shares redeemed ............................. -- (41,219) -- --
Net Increase 6,478,721 607,076 4,328,305 86,540
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)
</TABLE>
Note 7 -- 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 December 31, 1998, the Portfolios had no
outstanding borrowings under the line of credit.
December 31, 1998
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Emerging Markets Portfolio
Shares
Held Value
Common Stocks (88.09%)
Bakery Products (0.67%)
Nong Shim Co., Ltd. 9,300 $ 535,201
Beer, Wine & Distilled
Beverages (1.39%)
South African Breweries Ltd. 65,391 1,101,593
Beverages (9.15%)
Al-Ahram Beverages Co. GDR 35,000(a)(b) 1,010,625
Embotelladora Andina SA ADR,
Series A 59,300 859,850
Fomento Economico Mexicano SA ADR 63,050 1,678,706
PanAmerican Beverages, Inc. ADR 57,100 1,245,494
Pepsi-Gemex SA DE CV GDR 89,500 699,219
Quilmes Industrial Quines SA ADR 191,100 1,779,619
7,273,513
Blast Furnace & Basic Steel
Products (1.08%)
Hylsamex SA, Class B 234,100 291,154
Tubos De Acero De Mexico SA ADR 87,800 565,212
856,366
Cable & Other Pay TV Services (1.49%)
Ceske Radiokomunikace GDR 36,600(a) 1,180,350
Central Reserve Depositories (0.59%)
Banco Santiago SA ADR 31,500 468,562
Chemicals & Allied Products (0.79%)
Sarantis SA 44,043 629,085
Commercial Banks (5.77%)
Banco Portugues Do Atlantico 36,900(a) 756,255
Banco Rio De La Plata SA ADR 82,300 1,069,900
Bank Handlowy w Warszawie GDR 50,000(b) 650,000
Banque Libanaise Pour Le
Commerce SAL ADR 35,900(b) 668,637
Banque Marocaine du Commerce
Exterieur 28,500(b) 666,900
Big Bank Gdanski SA 699,000 627,323
Eesti Uhispank GDR 31,000(a)(b) 149,575
4,588,590
Communications Equipment (2.11%)
ECI Telecommunications Ltd. ADR 47,000 1,674,375
Computer & Data Processing
Services (1.21%)
Tecnomatix Technologies Ltd. ADR 55,000(a) 962,500
Computer & Office Equipment (2.69%)
Orbotech Ltd. ADR 36,100(a) 1,710,237
Sindo Ricoh Co. 12,000 430,117
2,140,354
Construction & Related
Machinery (0.73%)
Barlow Ltd. 150,793 579,321
Consumer Products (2.17%)
Rothmans Industries Ltd. 217,000 $1,302,034
Souza Cruz SA 65,800 424,798
1,726,832
Crude Petroleum & Natural Gas (1.75%)
Mol Magyar Olaj-es Gazipari Rt. ADR 50,700(b) 1,390,615
Drugs (1.34%)
Teva Pharmaceutical Industries Ltd.
ADR 26,100 1,061,944
Eating & Drinking Places (0.87%)
Cafe De Coral Holdings Ltd. 2,215,000 693,322
Electric Services (3.60%)
Companhia Paranaense de
Enersis-Copel ADR 155,500 1,107,938
Electricidade De Portugal SA 34,500 759,608
Enersis SA ADR 38,400 991,200
2,858,746
Electrical Industrial Apparatus (0.67%)
Guangdong Kelon Electric
Holdings Ltd. 598,000 532,598
Electronic Components &
Accessories (3.35%)
Elec & Eltek International Co.
Ltd. ADR 231,100 1,247,940
Varitronix International Ltd. 549,000 1,027,519
Wong Circuits Holdings Ltd. ADR 479,000 383,200
2,658,659
Electronic Distribution
Equipment (2.58%)
Techtronic Industries Co. 6,180,000 1,100,822
Vtech Holdings Ltd. 217,000 946,730
2,047,552
Engines & Turbines (0.59%)
First Tractor Co. Ltd. 2,062,000 471,098
Federal & Federally Sponsored
Credit (1.09%)
Industrial Credit & Investment Corp.
of India ADR 130,300(b) 866,495
Fire, Marine & Casualty
Insurance (0.69%)
Aksigorta AS 18,000,000 547,892
Foreign Banks, Branches &
Agencies (1.33%)
Bank Leumi Le - Israel 343,000 484,818
Credicorp Ltd. ADR 63,840 574,560
1,059,378
Furniture & Home Furnishing
Stores (0.86%)
Grupo Elektra SA CPO 1,354,000 681,812
Glass & Glassware, Pressed or
Blown (1.25%)
Vitro SA ADR 218,000 994,625
Grocery Stores (1.08%)
Blue Square Chain Investments &
Property Ltd. 71,675(a) 859,756
Holding Offices (1.82%)
The India Fund, Inc. ADR 229,700(a) $1,449,981
Measuring & Controlling
Devices (2.60%)
IDT Holdings Singapore Ltd. ADR 1,116,000 1,004,400
Moulin International Holding Ltd. 8,780,000 1,065,300
2,069,700
Meat Products (1.02%)
Pick Szeged RT GDR 95,000(b) 807,519
Medical Instruments & Supplies (1.71%)
Medison Co. Ltd. 116,500 1,356,381
Metal Cans & Shipping
Containers (0.46%)
Colep Portugal-Embalagens, Produtos,
Enchimentos e. Equipamentos, SA 49,000(a) 365,935
Miscellaneous Electrical Equipment &
Supplies (1.31%)
G.P. Batteries International Ltd. 488,000 1,041,094
Miscellaneous Food & Kindred
Products (0.92%)
Thai Union Frozen Products
Public Co. Ltd. 166,500 728,616
Miscellaneous Investing (1.02%)
Banco Latino Americano De
Exportaciones ADR 48,540 806,978
Miscellaneous Non-Durable
Goods (1.76%)
Desc SA, Series B 1,664,000 1,396,522
Miscellaneous Services, NEC (0.77%)
IDT International Ltd. 4,582,000 615,089
Miscellaneous Textile Goods (2.39%)
Esprit Holdings Ltd. 2,430,000 1,050,753
Reliance Industries Ltd. GDR 149,900(b) 850,683
1,901,436
Oil & Gas Field Services (0.13%)
Gulf Indonesia Resources Ltd. ADR 16,500(a) 107,250
Paints & Allied Products (1.14%)
Paints & Chemical Industries
Co. SAE GDR 139,900(b) 909,350
Paperboard Containers & Boxes (0.67%)
Hung Hing Print Group 1,364,000 532,586
Petroleum Refining (3.44%)
Sasol Ltd. 247,000 934,235
YPF Sociedad Anonima ADR 64,300 1,796,381
2,730,616
Search & Navigation Equipment (1.72%)
Elbit Systems Ltd. ADR 114,100 1,369,200
Security & Commodity
Exchanges (0.55%)
OTK Holdings Ltd. ADR 835,000 440,025
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings Ltd. 160,000(a)(c)$ 0
Telephone Communication (13.77%)
Compania Anonima Telefonos De
Venezuela ADR 25,300 450,656
Compania De Telecomunicacion De
Chile ADR 33,700 697,169
Global Telesystems Group, Inc. ADR 24,100(a) 1,343,575
Hellenic Telecom
Organization SA - ADR 71,000 940,750
Hellenic Telecommunication 31,989 851,006
Investec-Consultadoria
Internacional SA 11,400 392,627
Matav Tavkozlesi Rt ADR 55,300 1,648,631
Panafon SA 17,200(a) 460,646
Tele Norte Leste Participacoes
SA 22,000,000(a) 180,269
Tele Norte Leste Participacoes
SA ADR 9,200(a) 114,425
Telecelular Sul Participacoes SA 92,000,000 155,339
Tele Celular Sul Participacoes
SA ADR 10,200(a) 177,863
Telecomunicacoes Brasileiras
SA - Receipts 22,990,000 1,027,530
Telefonica De Argentina SA ADR 33,000 921,938
Videsh Sanchar Nigam Ltd. GDR 129,200(b) 1,582,700
10,945,124
Total Common Stocks 70,014,536
Preferred Stocks (7.11%)
Cement, Hydraulic (1.81%)
Titan Cement Co. SA 22,500 1,441,794
Central Reserve Depositories (0.55%)
Banco Ganadero SA ADR Preference 48,800 442,250
Electric Services (1.18%)
Centrais Electricas De Santa
Catarina SA 2,094,000 935,906
Industrial Inorganic Chemicals (0.31%)
Fertilizantes Fosfatados SA
Fosfertil NPV 95,000,000 243,752
Telephone Communication (3.26%)
Telemig Celular SA - Pref C 4,890,000(a) 95,922
Telesp Celular SA - Pref B 7,870,000(a) 358,261
Telecentro Sul Participacoes SA 57,000,000(a) 494,894
Telec De Sao Paulo SA 12,030,000 1,639,914
2,588,991
Total Preferred Stocks 5,652,693
Principal
Amount Value
Commercial Paper (5.19%)
Business Credit Institutions (2.24%)
General Electric Capital Corp.;
4.90%; 1/7/1999 $1,780,000 $1,778,546
Personal Credit Institutions (2.95%)
Household Finance Corp.;
6.00%; 1/4/1999 $2,345,000 $2,343,828
Total Commercial Paper 4,122,374
Total Portfolio Investments (100.39%) 79,789,603
Liabilities, net of cash and receivables (-0.39%) (309,093)
Total Net Assets (100.00%) $79,480,510
(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 $5,567,838 6.98%
Brazil 6,956,809 8.72
Chile 3,016,781 3.78
China 1,003,697 1.26
Colombia 442,250 0.55
Czech Republic 2,523,925 3.16
Egypt 1,919,975 2.41
Estonia 149,575 0.19
Greece 4,323,281 5.42
Hong Kong 7,032,121 8.81
Hungary 3,846,765 4.82
India 4,749,859 5.95
Indonesia 107,250 0.13
Israel 8,122,831 10.18
Korea, Republic of 2,321,699 2.91
Lebanon 668,638 0.84
Mexico 7,552,745 9.47
Morocco 666,900 0.84
Panama 806,977 1.01
Peru 574,560 0.72
Poland 1,277,323 1.60
Portugal 2,274,425 2.85
Singapore 4,978,668 6.24
South Africa 3,055,174 3.83
Thailand 728,616 0.91
Turkey 547,892 0.69
United States 4,122,373 5.17
Venezuela 450,656 0.56
Total $79,789,603 100.00%
International Securities Portfolio
Shares
Held Value
Common Stocks (98.45%)
Advertising (2.07%)
WPP Group PLC 163,700 $ 991,405
Beverages (0.96%)
PanAmerican Beverages, Inc. ADR 21,100 460,244
Blast Furnace & Basic Steel
Products (0.23%)
Tubos De Acero De Mexico SA ADR 17,000 109,438
Central Reserve Depositories (2.58%)
National Westminster Bank 37,408 720,732
Union Bank of Norway 26,480 514,393
1,235,125
Commercial Banks (12.99%)
Australia & New Zealand Banking
Group 129,000 845,038
Bank of Ireland 53,536 1,176,646
Barclays PLC 16,600 357,115
Kapital Holdings 4,441 219,805
Merita PLC, Class A 149,950 953,608
National Australia Bank Ltd. 45,734 690,064
Royal Bank of Canada Montreal,
Quebec 11,600 578,134
San Paolo-Imi SPA 35,530 629,196
Svenska Handelsbanken AB Free 17,050 654,188
Svenska Handelsbanken, Class A 2,800 118,141
6,221,935
Communications Equipment (2.10%)
ECI Telecommunications Ltd. ADR 28,200 1,004,625
Communications Services, NEC (1.83%)
Koninklijke KPN NV 17,514 877,255
Computer & Office Equipment (1.58%)
Orbotech Ltd. ADR 16,000(a) 758,000
Concrete, Gypsum & Plaster
Products (1.53%)
Lafarge SA 7,700 731,954
Consumer Products (6.23%)
Imasco Ltd. 51,541 1,097,300
Imperial Tobacco Group PLC 38,000 407,797
Swedish Nationale D'Exploitation
Industrielle Des Tabacs Et
Allumettes 11,000 689,222
Swedish Match Co. 217,000 789,768
2,984,087
Copper Ores (0.82%)
Trelleborg AB, Class B 48,000 390,844
Deep Sea Foreign Transportation of
Freight (0.34%)
Van Ommeren NV 5,238 163,281
Drugs (4.32%)
Novartis AG 578 1,136,236
Pharmacia & Upjohn, Inc. 16,500 934,313
2,070,549
Electric Services (1.10%)
Enersis SA ADR 20,500 $ 529,156
Electrical Goods (0.99%)
Smiths Industries PLC 34,000 476,312
Electronic Components &
Accessories (1.62%)
Elec & Eltek International Co.
Ltd. ADR 105,600 570,240
Varitronix International Ltd. 111,000 207,750
777,990
Electronic Distribution
Equipment (2.73%)
Philips Electronics 19,500 1,309,236
Engines & Turbines (0.51%)
RHI AG 8,900 232,031
Scapa Group PLC 6,000 9,933
241,964
Farm & Garden Machinery (0.76%)
New Holland NV 26,500 362,719
Finance Services (1.19%)
Takefuji Corp. 7,800 570,496
Gas Production & Distribution (0.72%)
OMV AG 3,650 344,191
Industrial Inorganic Chemicals (0.60%)
Kemira OY 39,800(b) 286,908
Investment Offices (1.38%)
AMVESCAP PLC 85,400 660,711
Life Insurance (1.90%)
National Mutual Asia Ltd. 697,000 521,807
QBE Insurance Group Ltd. 93,586 387,464
909,271
Meat Products (5.24%)
Danisco AS 14,800 802,282
Orkla ASA, Class A 15,000 223,461
Orkla ASA, Class B 41,600 543,290
Unilever NV 11,000 940,764
2,509,797
Miscellaneous Chemical Products (1.42%)
Hoechst AG 16,500 682,578
Miscellaneous Converted Paper
Products (1.28%)
Bunzl PLC 156,000 611,247
Miscellaneous Food & Kindred
Products (2.00%)
Bols Wessanen CVA 47,000 606,074
Greencore Group PLC 78,000 352,992
959,066
Miscellaneous Non-Durable
Goods (2.53%)
Desc SA, Class B 392,000 328,988
Diageo PLC 78,515 882,427
1,211,415
Miscellaneous Primary Metal
Products (0.69%)
Charter PLC 61,000 $ 330,863
Miscellaneous Textile Goods (0.99%)
Esprit Holdings Ltd. 1,094,000 473,055
Miscellaneous Transportation
Equipment (1.32%)
Autoliv, Inc. 5,200 186,687
Autoliv, Inc. ADR 12,000 446,250
632,937
Motor Vehicles & Equipment (3.54%)
DaimlerChrysler AG 5,300 526,651
E.C.I.A. Equipment & Composants 1,900 254,762
Lucasvarity PLC 149,000 490,854
Mayflower Corp. PLC 196,000 423,936
1,696,203
Newspapers (0.78%)
Publishing & Broadcasting Ltd. 86,000 376,100
Oil & Gas Field Services (0.97%)
Eni Spa 71,000 465,040
Paperboard Containers & Boxes (0.87%)
Buhrmann NV 23,200 415,375
Personnel Supply Services (1.41%)
Vedior NV 34,329 676,824
Petroleum Refining (3.78%)
Repsol Petroleo SA 10,600 566,316
Sasol Ltd. 95,000 359,321
YPF Sociedad Anonima ADR 31,700 885,619
1,811,256
Plastic Materials & Synthetics (0.74%)
Astra AB 17,333 352,838
Pulp Mills (2.17%)
Lassila & Tikanoja Ltd. OY 16,400 404,875
Upm-Kymmene OY 22,700 636,622
1,041,497
Radio & Television Broadcasting (2.63%)
Carlton Communications PLC 91,000 834,246
Mirror Group PLC 172,000 427,829
1,262,075
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 227,000(a)(c) 0
Soap, Cleaners & Toilet Goods (3.12%)
Benckiser NV, Class B 11,900 779,947
Reckitt & Colman PLC 54,292 717,228
1,497,175
Special Industry Machinery (1.52%)
Cookson Group 336,000 726,748
Sugar & Confectionery Products (2.27%)
Nestle 500 1,088,475
Telephone Communication (7.74%)
Hellenic Telecom Organization SA ADR 60,000 $ 795,000
Nokia Corp. ADR, Class A 7,800 939,412
Telecom Corp. of New Zealand Ltd. 168,000 732,165
Telecom Italia-DI 197,000 1,242,531
3,709,108
Watches, Clocks, Watchcases &
Parts (0.36%)
Tag Heuer International SA 2,500 172,190
Total Common Stocks 47,169,558
Preferred Stock (0.40%)
Commercial Banks (0.40%)
National Australia Bank ECU Convertible6,800 189,550
Principal
Amount Value
Commercial Paper (1.01%)
Business Credit Institutions (1.01%)
General Electric Capital Corp.;
5.25%; 1/4/1999 $485,000 484,788
Total Portfolio Investments (99.86%) 47,843,896
Cash, receivables and other assets,
net of liabilities (0.14%) 68,263
Total Net Assets (100.00%) $47,912,159
(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 $ 885,619 1.85%
Australia 2,488,217 5.20
Austria 576,222 1.20
Canada 1,675,434 3.50
Chile 529,156 1.11
Denmark 1,022,087 2.14
Finland 3,221,426 6.73
France 1,675,938 3.50
Germany 1,209,229 2.53
Greece 795,000 1.66
Hong Kong 1,202,613 2.52
Israel 1,762,625 3.68
Italy 2,336,766 4.89
Japan 570,496 1.19
Mexico 898,670 1.88
Netherlands 6,131,474 12.82
New Zealand 732,165 1.53
Norway 1,281,145 2.68
Singapore 570,240 1.19
South Africa 359,321 0.75
Spain 566,316 1.18
Sweden 2,938,717 6.14
Switzerland 2,396,901 5.01
United Kingdom 10,599,021 22.15
United States 1,419,098 2.97
Total $47,843,896 100.00%
International SmallCap Portfolio
Shares
Held Value
Common Stocks (99.08%)
Advertising (2.95%)
Industrial & Financial Systems 114,250(a)(b)$1,317,910
United Group Ltd. 639,000 1,136,618
2,454,528
Air Transportation, Scheduled (1.89%)
Ryanair Holdings PLC ADR 41,800(a) 1,577,950
Airports, Flying Fields &
Services (3.54%)
Aeroporti Di Roma 70,400 614,813
Auckland International Airport
Ltd. 1,201,000(a) 1,681,259
Virgin Express Holdings ADR 81,800(a) 654,400
2,950,472
Bakery Products (1.07%)
Kamps AG 14,000(a) 891,011
Central Reserve Depositories (1.19%)
Union Bank of Norway 50,940 989,546
Commercial Banks (1.52%)
Banco Pastor SA 20,200 $1,268,815
Communications Equipment (2.36%)
Gilat Satellite Networks Ltd. 7,000(a) 385,875
Research In Motion Ltd. 236,900(a) 1,580,936
1,966,811
Communications Services, NEC (1.62%)
RSL Communications Ltd. 45,900(a) 1,354,050
Computer & Data Processing
Services (9.39%)
Computacenter PLC 111,300(a)(b) 814,796
Computershare Ltd. 220,000 1,081,268
Ecsoft Group PLC ADR 30,800(a) 1,085,700
Equant ADR 30,700(a) 2,081,844
Intentia International AB 17,300(a) 586,944
Ixos Software AG 3,900(a) 878,102
Merkantildata ASA 73,200 720,589
New Dimension Software Ltd. 12,000(a) 577,500
7,826,743
Computer & Office Equipment (2.22%)
Orbotech Ltd. ADR 39,000(a) 1,847,625
Drugs (1.46%)
Fabrica Espanola de Productos 75,160 1,220,032
Electric Services (3.32%)
Independent Energy Holdings ADR 132,700(a) 1,194,300
Vestas Wind Systems 29,400(a) 1,575,244
2,769,544
Electrical Industrial Apparatus (0.35%)
Doncasters PLC ADR 18,200(a) 294,613
Electrical Work (1.92%)
Internatio-Muller NV 6,600 163,535
Telesystem International Wireless,
Inc. 114,900(a) 1,440,046
1,603,581
Electronic Components &
Accessories (2.65%)
Celestica, Inc. 43,000(a) 1,061,563
Elec & Eltek International ADR 212,000 1,144,800
2,206,363
Electronic Distribution
Equipment (4.26%)
C/TAC NV 43,500(a) 897,043
Jot Automation Group OYJ 20,600(a) 858,454
PMG Automec Corp. OYJ 13,500(a) 309,285
Techtronic Industries Co. 3,494,000 622,374
Vtech Holdings Ltd. 198,000 863,836
3,550,992
Fabricated Rubber
Products, NEC (0.91%)
Semperit AG Holding 6,900 758,272
Grocery Stores (1.00%)
Superdiplo SA 29,500(a) 831,755
Hose, Belting, Gaskets &
Packing (1.59%)
Phoenix AG 70,200 1,327,690
Hotels & Motels (0.68%)
Choice Hotels Scandinavia 400,700(a) $ 562,754
Household Furniture (0.60%)
Ekornes ASA 62,000 496,406
Hunting, Trapping & Game
Propagation (1.59%)
Rapala Normark Corp. 152,500(a) 1,325,226
Investment Offices (0.86%)
Tyndall Australia Ltd. 466,729 715,682
Life Insurance (1.11%)
Scor SA 14,000 926,064
Measuring & Controlling
Devices (0.70%)
Sensonor ASA 223,400(a) 586,447
Meat Products (0.90%)
Perkins Foods PLC 323,600 748,384
Medical Instruments & Supplies (0.92%)
Cochlear Ltd. 136,000 767,436
Medical & Dental Laboratories (0.55%)
Qiagen NV 7,100(a) 459,543
Metalworking Machinery (1.73%)
Mikron Holding AG 7,200 1,438,970
Miscellaneous Amusement, Recreation
Service (2.04%)
Aristocrat Leisure Ltd. 54,273 229,693
Tab Ltd. 738,300(a) 1,467,214
1,696,907
Miscellaneous Business Services (0.40%)
Enator AB 12,000 333,105
Miscellaneous Electrical Equipment &
Supplies (2.18%)
Kaba Holding AG, Class B 3,700 1,818,371
Miscellaneous Food & Kindred
Products (1.46%)
Greencore Group PLC 269,000 1,217,369
Miscellaneous Manufacturers (0.87%)
Docdata NV 71,100(a) 727,417
Miscellaneous Non-Durable
Goods (2.23%)
Austria Tabakwerke AG 24,200 1,856,605
Miscellaneous Plastics Products (1.28%)
Airspray NV 37,800(a) 1,067,531
Miscellaneous Primary Metal
Products (0.00%)
YBM Magnex International, Inc. 107,000(a) 697
Miscellaneous Transportation (0.34%)
ASG AB, Class B 15,100 285,959
Motor Vehicles & Equipment (0.99%)
E.C.I.A. Equipment & Composants 3,323 $ 445,565
Mayflower Corp. PLC 176,000 380,677
826,242
Newspapers (1.50%)
Newsquest PLC 306,000(b) 1,247,350
Non-Classifiable Establishments (1.46%)
Bure Investment Aktiebolaget AB 85,800(b) 1,217,315
Non-Residential Building
Construction (1.00%)
Algeco 9,400 836,340
Oil & Gas Field Services (3.51%)
Cie Generale de Geophysique 2,800(a) 163,258
Cie Generale de Geophysique ADR 22,000(a) 239,250
Det Sondenfjelds-Norske
Dampskibsselskab 49,200(a) 387,464
Fortum Corp. 214,400(a) 1,439,697
Hydralift ASA, A Shares 75,000 334,700
Hydralift ASA, B Shares 15,000 55,127
Petrolia Drilling ASA 260,000(a) 303,724
2,923,220
Personnel Supply Services (2.80%)
Dis Deutshcer Industries Service AG 9,000 421,489
Unique International NV 83,400 1,910,941
2,332,430
Pulp Mills (2.46%)
Lassila & Tikanoja Ltd. OY 46,200 1,140,563
Miquel Y Costas 26,700 904,502
2,045,065
Real Estate Agents &
Managers (1.46%)
Tornet Fastighet 83,000 1,213,429
Sanitary Services (1.83%)
De Sammensluttede Vognmand AS 17,300 1,522,230
Security Brokers & Dealers (4.12%)
AOT NV 101,400 1,242,735
Kempen & Co. NV 27,520 1,463,497
Van Der Moolen Holdings 11,312 729,352
3,435,584
Services To Buildings (0.54%)
Spotless Group Ltd. 195,000 450,912
Special Industry Machinery (1.26%)
Aixtron 5,700 1,048,949
Telephone Communication (9.39%)
AAPT Ltd. 501,700(a) 1,292,435
Esat Telecom Group PLC ADR 47,700(a) 1,836,450
Esprit Telecom Group PLC ADR 27,800(a) 1,299,650
Metronet Communications ADR,
Class B 101,300(a) 3,393,550
7,822,085
Trusts (1.11%)
NHP PLC 366,666 $ 921,189
Total Common Stocks 82,563,606
Principal
Amount Value
Commercial Paper (0.79%)
Business Credit Institutions (0.79%)
General Electric Capital Corp.;
5.25%; 1/4/1999 $655,000 $ 654,713
Total Portfolio Investments (99.87%) 83,218,319
Cash and receivables, net of liabilities (0.13%) 111,538
Total Net Assets (100.00%) $83,329,857
(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 $7,141,257 8.58%
Austria 2,614,877 3.14
Belgium 654,400 0.79
Canada 7,476,791 8.98
Denmark 3,097,474 3.72
Finland 5,073,225 6.10
France 2,610,476 3.14
Germany 4,567,241 5.49
Hong Kong 1,486,211 1.79
Ireland 3,414,400 4.10
Israel 2,811,000 3.38
Italy 614,813 0.74
Netherlands 10,743,438 12.91
New Zealand 1,681,259 2.02
Norway 4,436,758 5.33
Singapore 1,144,800 1.37
Spain 4,225,104 5.08
Sweden 4,954,663 5.95
Switzerland 3,257,342 3.91
United Kingdom 10,558,077 12.69
United States 654,713 0.79
Total $83,218,319 100.00%
Mortgage-Backed Securities Portfolio
Description of Issue Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (26.55%)
FNMA 6.25% 4/1/2026 $ 315,547 $ 315,358
FNMA 6.50 12/1/2028 500,000 503,442
FNMA 7.00 8/1/2023 2,488,184 2,540,759
FNMA 7.50 6/1/2023 570,324 586,127
Total FNMA Certificates 3,945,686
Government National Mortgage Association (GNMA)
Certificates (60.25%)
GNMA I 6.50 12/15/2023-1/15/2029 3,169,178 3,201,502
GNMA I 7.00 4/15/2028 356,637 364,887
GNMA I 7.50 6/15/2023-3/15/2027 995,895 1,026,756
GNMA II 5.50 3/20/2026 178,423 172,016
GNMA II 6.00 9/20/2023-5/20/2028 3,911,305 3,857,524
GNMA II 6.50 10/20/2025 329,157 330,712
Total GNMA Certificates 8,953,397
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (12.08%)
FHLMC 5.50 2/15/2024-3/1/2024 567,889 549,966
FHLMC 6.00 4/1/2024 101,547 100,433
FHLMC 6.50 12/1/2013-12/1/2027 1,132,414 1,144,001
Total FHLMC Certificates 1,794,400
Federal Agency Short-Term Obligations (3.70%)
Investment in Joint Trade Account;
Federal Home Loan Bank System;
4.30%; 1/4/1999 550,340 550,143
Total Portfolio Investments (102.58%) 15,243,626
Liabilities, net of cash, receivables and
other assets (-2.58%) (383,084)
Total Net Assets (100.00%) $14,860,542
FINANCIAL HIGHLIGHTS
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............................... .17 .01
Net Realized and Unrealized Gain (Loss) on Investments (1.91) .21
Total from Investment Operations (1.74) .22
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.17) (.02)
Distributions from Capital Gains.................... (.02) --
Total Dividends and Distributions (.19) (.02)
Net Asset Value, End of Period......................... $8.21 $10.14
Total Return........................................... (17.21)% 1.40%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $79,481 $32,488
Ratio of Expenses to Average Net Assets............. 1.15% 1.15%(c)
Ratio of Net Investment Income to Average Net Assets 2.11% .91%(c)
Portfolio Turnover Rate............................. 36.5% 12.3%(c)
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES PORTFOLIO 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.45 $13.67 $11.70 $11.29 $12.87
Income from Investment Operations:
Net Investment Income............................... .24 .24 .31 .19 .13
Net Realized and Unrealized Gain (Loss) on Investments 1.12 1.46 2.46 1.11 (.95)
Total from Investment Operations 1.36 1.70 2.77 1.30 (.82)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.23) (.24) (.16) (.10) (.12)
Excess Distributions from Net Investment Income..... -- -- (.07) (.07) (.13)
Distributions from Capital Gains.................... (.68) (.68) (.57) (.72) (.51)
Total Dividends and Distributions (.91) (.92) (.80) (.89) (.76)
Net Asset Value, End of Period......................... $14.90 $14.45 $13.67 $11.70 $11.29
Total Return........................................... 9.55% 12.55% 24.12% 12.02% (6.45%)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $47,912 $37,684 $28,161 $17,251 $15,542
Ratio of Expenses to Average Net Assets............. .90% .90% .90% .90% .90%
Ratio of Net Investment Income to Average Net Assets 1.60% 1.73% 1.90% 1.79% .94%
Portfolio Turnover Rate............................. 36.7% 30.8% 25.5% 46.0% 37.0%
</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 1.11 .12
Total from Investment Operations 1.18 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.07) (.02)
Distributions from Capital Gains.................... (.02) --
Total Dividends and Distributions (.09) (.02)
Net Asset Value, End of Period......................... $11.06 $9.97
Total Return........................................... 11.92% 1.59%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,330 $31,968
Ratio of Expenses to Average Net Assets............. 1.00% 1.00%(c)
Ratio of Net Investment Income to Average Net Assets .78% .91%(c)
Portfolio Turnover Rate............................. 88.5% 30.3%(c)
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES PORTFOLIO 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.27 $9.93 $10.17 $9.11 $10.10
Income from Investment Operations:
Net Investment Income............................... .65 .64 .64 .65 .63
Net Realized and Unrealized Gain (Loss) on Investments .12 .34 (.24) 1.06 (.99)
Total from Investment Operations .77 .98 .40 1.71 (.36)
Less Dividends from Net Investment Income.............. (.65) (.64) (.64) (.65) (.63)
Net Asset Value, End of Period......................... $10.39 $10.27 $9.93 $10.17 $9.11
Total Return........................................... 7.74% 10.18% 4.20% 19.26% (3.60)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $14,861 $13,796 $14,968 $14,253 $14,714
Ratio of Expenses to Average Net Assets............. .45% .45% .45% .45% .45%
Ratio of Net Investment Income to Average Net Assets 6.28% 6.37% 6.51% 6.66% 6.56%
Portfolio Turnover Rate................................ 13.8% 15.5% 28.7% 41.8% 41.8%
</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 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.
REPORT OF INDEPENDENT AUDITORS
The Board 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. (comprised
of the International Emerging Markets, International Securities, International
SmallCap and Mortgage-Backed Securities Portfolios) as of December 31, 1998, and
the related statements of operations, 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
Fund's 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodians
and brokers. As to securities relating to uncompleted transactions, we performed
other audit procedures. 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, 1998, and the results of their operations, 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 22, 1999
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, 1998
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International 2/6/98 $.0072 00.00% 2/6/98 $.0194
Emerging Markets 12/24/98 .1599 00.00%
Portfolio $.1671 $.0194 $.1865
International 2/6/98 $.1027 $.0018
Securities 12/24/98 $.2268 00.00% 12/24/98 .5783 .0000
Portfolio $.2268 $.6828 $.9096
International 2/6/98 $.0015 00.00% 2/6/98 $.0189
SmallCap 12/24/98 .0727 00.00%
Portfolio $.0742 $.0189 $.0931
</TABLE>
<TABLE>
<CAPTION>
Per Share Income Dividend Distributions/Payable Date
1/30/98 2/27/98 3/31/98 4/30/98 5/29/98 6/30/98 7/31/98 8/31/98 9/30/98 10/30/98 11/30/98 12/31/98
Mortgage-Backed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Portfolio $.0537 $.0529 $.0531 $.0548 $.0533 $.0533 $.0585 $.0507 $.0538 $.0549 $.0515 $.0674
</TABLE>
* Percent qualifying for deduction by shareholders who are corporations.
** Taxable as long-term capital gain.
***Taxable at ordinary income rates.
