A MESSAGE TO SHAREHOLDERS
Comments from the managers of the Portfolios of the Principal Special Markets
Fund, Inc.:
Kurt Spieler, International Emerging Markets Portfolio
Emerging markets have had a phenomenal run over the past 12 months. Asian
countries continue to show solid economic recoveries with the initial rebound
sparked by companies that were more speculative in nature. Although current
account surpluses have peaked, there still exists excess capacity in some of the
sectors including manufacturing and property. Thus, portfolio managers do not
expect Asia to experience the level of investment activity that was typical
before the financial downturn, and continue to favor companies in the technology
sector as well as companies that could benefit from global outsourcing trends.
Scott Opsal, International Securities Portfolio
Global equity markets experienced a strong recovery from the lows reached in
October 1998. The Asian economies stabilized and Russia's real economic impact
on the rest of the world was minimal. The equity markets of Japan and the rest
of the Far East have been the biggest beneficiaries of the more benign economic
outlook. Those markets had been among the poorest performers over the previous
two years, but finally bottomed out in late 1998. They began outperforming
Europe strongly early in 1999, and continued to outperform through the end of
the year. Management's strategy going forward will be to continue to invest in
the same high quality companies at discounts to fair value that have generated
the superior performance over the long-term.
Darren Sleister, International SmallCap Portfolio
Japanese small capitalization companies were the outstanding performers this
year. The portfolio managers' outlook on Japan became more favorable as
companies began to place emphasis on restructuring and focusing on improving
their balance sheets. Japanese small cap returns have resulted from the end of a
lengthy bear market and the likely turning point of the Japanese economy. The
SmallCap Portfolio continues to benefit from themes such as outsourcing of
electronic components, increasing advertising expenditures, market research
companies and indirect e-commerce solutions. The portfolio managers continue to
look for companies that are attractive valuations and also offer long-term
earnings growth potential.
Marty Schafer, Mortgage-Backed Securities Portfolio
Over the last year, the Federal Reserve cut interest rates to stabilize the
global financial turmoil, only to reverse course and start raising rates as
markets stabilized and global growth resumed. Portfolio managers view the
Federal Reserve actions as the equivalent of a doctor prescribing aspirin to
treat a patient. These are mild treatments, needed to keep inflation low and
growth reasonable. The quality and composition of the Portfolio are generally
within its benchmarks. Portfolio managers continue to hold more discount
mortgage-backed securities than the Index as they believe homeowners' propensity
to refinance and mortgage bankers technology-driven inducement to refinance
loans puts greater risk on securities priced above par.
CONTENTS
Page
Financial Statements and Highlights
Statements of Assets and Liabilities.......................... 4
Statements of Operations ..................................... 6
Statements of Changes in Net Assets........................... 8
Notes to Financial Statements................................. 10
Schedules of Investments
International Emerging Markets Portfolio.................. 16
International Securities Portfolio........................ 18
International SmallCap Portfolio.......................... 21
Mortgage-Backed Securities Portfolio...................... 23
Financial Highlights.......................................... 24
Report of Independent Auditors..................................... 26
Federal Income Tax Information..................................... 28
December 31, 1999
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
<TABLE>
<CAPTION>
International International
Emerging Markets Securities
Portfolio Portfolio
<S> <C> <C>
Investment in securities -- at cost.............................. $ 93,829,300 $47,454,314
Assets
Investment in securities -- at value (Note 4).................... $128,543,037 $60,795,236
Cash............................................................. 647,172 458,719
Receivables:
Dividends and interest........................................ 109,694 95,900
Investment securities sold.................................... 325,194 --
Other assets..................................................... -- 109
Total Assets 129,625,097 61,349,964
Liabilities
Accrued expenses................................................. 24,211 8,998
Payables:
Investment securities purchased............................... 26,199 --
Foreign currency contract..................................... -- --
Total Liabilities 50,410 8,998
Net Assets Applicable to Outstanding Shares ................... $129,574,687 $61,340,966
Net Assets Consist of:
Capital Stock.................................................... $ 97,964 $ 36,861
Additional paid-in capital....................................... 99,733,670 48,580,266
Accumulated undistributed (overdistributed)
net investment income......................................... (850,091) (20,992)
Accumulated undistributed (overdistributed) net realized gain
(loss) from investment and foreign currency transactions...... (4,125,463) (593,482)
Net unrealized appreciation (depreciation) of investments........ 34,713,737 13,340,922
Net unrealized appreciation (depreciation) on translation of
assets and liabilities in foreign currencies.................. 4,870 (2,609)
Total Net Assets $129,574,687 $61,340,966
Capital Stock (par value: $.01 a share):
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 9,796,386 3,686,143
Net Asset Value Per Share ...................................... $13.23 $16.64
<CAPTION>
International Mortgage-Backed
SmallCap Securities
Portfolio Portfolio
<S> <C> <C>
Investment in securities -- at cost.............................. $109,577,035 $5,030,935
Assets
Investment in securities -- at value (Note 4).................... $155,136,600 $4,916,488
Cash............................................................. 466,137 200,005
Receivables:
Dividends and interest........................................ 66,043 28,658
Investment securities sold.................................... 157,901 --
Other assets..................................................... -- 127
Total Assets 155,826,681 5,145,278
Liabilities
Accrued expenses................................................. 25,159 371
Payables:
Investment securities purchased............................... 599,079 100,063
Foreign currency contract..................................... 310,281 --
Total Liabilities 934,519 100,434
Net Assets Applicable to Outstanding Shares ................... $154,892,162 $5,044,844
Net Assets Consist of:
Capital Stock.................................................... $ 82,231 $ 5,154
Additional paid-in capital....................................... 93,814,958 6,357,393
Accumulated undistributed (overdistributed)
net investment income......................................... -- --
Accumulated undistributed (overdistributed) net realized gain
(loss) from investment and foreign currency transactions...... 15,437,757 (1,203,256)
Net unrealized appreciation (depreciation) of investments........ 45,559,565 (114,447)
Net unrealized appreciation (depreciation) on translation of
assets and liabilities in foreign currencies.................. (2,349) --
Total Net Assets $154,892,162 $5,044,844
Capital Stock (par value: $.01 a share):
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 8,223,111 515,431
Net Asset Value Per Share ...................................... $18.84 $9.79
See accompanying notes.
</TABLE>
Year Ended December 31, 1999
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC.
<TABLE>
<CAPTION>
International International
Emerging Markets Securities
Portfolio Portfolio
<S> <C> <C>
Net Investment Income
Income:
Dividends....................................................... $ 2,046,683 $ 1,922,522
Withholding tax on foreign dividends............................ (140,441) (132,048)
Interest........................................................ 79,537 82,638
Total Income 1,985,779 1,873,112
Expenses:
Management and investment advisory fees (Note 3) ......... 1,092,430 463,180
Net Investment Income (Operating Loss) 893,349 1,409,932
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions......................................... 1,940,265 4,561,398
Foreign currency transactions................................... (270,799) (49,945)
Change in unrealized appreciation/depreciation of:
Investments..................................................... 47,664,721 7,425,938
Translation of assets and liabilities in foreign currencies..... 127,663 27,937
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies 49,461,850 11,965,328
Net Increase (Decrease) in Net Assets
Resulting from Operations $50,355,199 $13,375,260
<CAPTION>
International Mortgage-Backed
SmallCap Securities
Portfolio Portfolio
<S> <C> <C>
Net Investment Income
Income:
Dividends....................................................... $ 1,008,730 $ --
Withholding tax on foreign dividends............................ (118,144) --
Interest........................................................ 96,842 641,423
Total Income 987,428 641,423
Expenses:
Management and investment advisory fees (Note 3) ......... 1,045,204 43,225
Net Investment Income (Operating Loss) (57,776) 598,198
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain (loss) from:
Investment transactions......................................... 25,404,995 (127,241)
Foreign currency transactions................................... (422,022) --
Change in unrealized appreciation/depreciation of:
Investments..................................................... 46,642,338 (586,658)
Translation of assets and liabilities in foreign currencies..... (5,230) --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies 71,620,081 (713,899)
Net Increase (Decrease) in Net Assets
Resulting from Operations $71,562,305 $(115,701)
See accompanying notes.
</TABLE>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
<TABLE>
<CAPTION>
International International
Emerging Markets Securities
Portfolio Portfolio
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income (operating loss) .......................... $ 893,349 $ 1,573,479 $ 1,409,932 $ 736,875
Net realized gain (loss) from investment and foreign
currency transactions......................................... 1,669,466 (5,911,305) 4,511,453 2,888,566
Change in unrealized appreciation/depreciation of investments
and translation of assets and liabilities in foreign currencies 47,792,384 (13,427,192) 7,453,875 (55,341)
Net Increase (Decrease) in Net Assets
Resulting from Operations 50,355,199 (17,765,018) 13,375,260 3,570,100
Dividends and Distributions to Shareholders
From net investment income....................................... (933,589) (1,546,178) (1,393,762) (703,066)
Excess distribution of net investment income..................... (733,291) -- -- --
From net realized gain on investments and foreign
currency transactions......................................... -- (62,172) (5,607,324) (2,066,333)
Excess distribution from net realized gain on investments
and foreign currency transactions............................. -- -- (662,686) --
Total Dividends and Distributions (1,666,880) (1,608,350) (7,663,772) (2,769,399)
Capital Share Transactions (Note 5)
Shares sold...................................................... -- 65,000,000 3,943,130 8,238,836
Shares issued in reinvestment of dividends
and distributions............................................. 1,405,858 1,365,832 4,961,789 1,857,180
Shares redeemed.................................................. -- -- (1,187,600) (668,569)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 1,405,858 66,365,832 7,717,319 9,427,447
Total Increase (Decrease) 50,094,177 46,992,464 13,428,807 10,228,148
Net Assets
Beginning of year................................................ 79,480,510 32,488,046 47,912,159 37,684,011
End of year [including undistributed (overdistributed)
net investment income as set forth below]..................... $129,574,687 $79,480,510 $61,340,966 $47,912,159
Undistributed (Overdistributed) Net Investment Income ....... $ (850,091) $ 40,240 $ (20,992) $ 33,810
<CAPTION>
International Mortgage-Backed
SmallCap Securities
Portfolio Portfolio
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income (operating loss) .......................... $ (57,776) $ 568,309 $ 598,198 $ 895,844
Net realized gain (loss) from investment and foreign
currency transactions......................................... 24,982,973 1,705,268 (127,241) 2,046
Change in unrealized appreciation/depreciation of investments
and translation of assets and liabilities in foreign currencies 46,637,108 (935,478) (586,658) 167,122
Net Increase (Decrease) in Net Assets
Resulting from Operations 71,562,305 1,338,099 (115,701) 1,065,012
Dividends and Distributions to Shareholders
From net investment income....................................... -- (548,766) (598,198) (895,844)
Excess distribution of net investment income..................... (6,027) -- -- --
From net realized gain on investments and foreign
currency transactions......................................... (11,206,022) (60,583) -- --
Excess distribution from net realized gain on investments
and foreign currency transactions............................. -- -- -- --
Total Dividends and Distributions (11,212,049) (609,349) (598,198) (895,844)
Capital Share Transactions (Note 5)
Shares sold...................................................... -- 50,024,097 -- --
Shares issued in reinvestment of dividends
and distributions............................................. 11,212,049 609,349 598,201 895,844
Shares redeemed.................................................. -- -- (9,700,000) --
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 11,212,049 50,633,446 (9,101,799) 895,844
Total Increase (Decrease) 71,562,305 51,362,196 (9,815,698) 1,065,012
Net Assets
Beginning of year................................................ 83,329,857 31,967,661 14,860,542 13,795,530
End of year [including undistributed (overdistributed)
net investment income as set forth below]..................... $154,892,162 $83,329,857 $ 5,044,844 $14,860,542
Undistributed (Overdistributed) Net Investment Income ....... $ -- $ 24,067 $ -- $ --
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").
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 (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.
Net realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between 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 International Emerging Markets Portfolio and
International SmallCap Portfolio for the period ended December 31, 1999
aggregated $179,291 and $481,340, respectively.
Other reclassifications made for the years ended December 31, 1999 and 1998 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, 1999, the Fund had approximate net capital loss carryforwards as
follow:
International Mortgage-Backed
Net Capital Loss Emerging Markets Securities
Carryforwards Expire In: Portfolio Portfolio
2002 $ -- $ 751,000
2003 -- 300,000
2004 -- 25,000
2005 -- --
2006 4,125,000 --
2007 -- 127,000
$4,125,000 $1,203,000
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 Financial Services,
Inc. Invista is an indirect wholly owned subsidiary of Principal Life Insurance
Company. Pursuant to a sub-advisory agreement, Invista has agreed to provide
investment advisory services in return for the advisory fee paid by the Fund and
to reimburse the Manager for the other costs it incurs under the management
agreement. The annual rate used in this calculation for the 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. Brokerage commissions were paid to other
affiliates by the following portfolios:
Year Year
Ended Ended
December 31, December 31,
1999 1998
International Emerging Markets Portfolio $ 69,761 $54,096
International Securities Portfolio 33,250 15,932
International SmallCap Portfolio 178,716 35,554
At December 31, 1999, Principal Life Insurance Company owned shares of the
Fund's portfolios as follows:
International Emerging Markets Portfolio 8,177,469
International Securities Portfolio 1,601,734
International SmallCap Portfolio 8,112,659
Mortgage-Backed Securities Portfolio 515,431
Note 4 -- Investment Transactions
For the year ended December 31, 1999, 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 $101,265,733 $ 98,744,912
International Securities Portfolio 37,036,130 35,518,437
International SmallCap Portfolio 241,333,441 245,603,164
Mortgage-Backed Securities Portfolio 932,779 4,426,929
At December 31, 1999, 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 $38,038,812 $(3,325,075) $34,713,737
International Securities Portfolio 16,193,048 (2,852,126) 13,340,922
International SmallCap Portfolio 50,058,115 (4,498,550) 45,559,565
Mortgage-Backed Securities Portfolio 14,260 (128,707) (114,447)
</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, 1999, Mortgage-Backed Securities Portfolio had a TBA purchase commitment
involving a security with a face amount of $100,000, cost of $100,063 and market
value of $99,031. The portfolio has set aside investment securities and other
assets in excess of the commitment to serve as collateral.
At December 31, 1999, 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 1999 Net Assets
<S> <C> <C> <C> <C>
International Emerging Markets Portfolio
Agora SA GDR 2/23/99 $523,956 $ 814,670 0.63%
Al-Ahram Beverages Co. ADR 2/4/98 194,250 275,800 0.21
2/13/98 58,500 78,800 0.06
2/23/98 26,400 31,520 0.02
3/5/98 90,000 118,200 0.09
3/20/98 90,750 118,200 0.09
9/28/98 116,100 141,840 0.11
11/06/98 249,546 334,900 0.26
11/25/98 29,750 39,400 0.03
12/14/98 158,600 240,340 0.19
3/19/99 240,375 295,500 0.23
4/1/99 301,740 370,360 0.29
8/20/99 108,850 137,900 0.11
Ceske Radiokomunikace GDR 6/12/98 346,196 776,876 0.60
Estonian Telecom GDR 2/11/99 350,550 391,400 0.30
Hindalco Industries Ltd. GDR 5/6/99 262,255 351,268 0.27
5/19/99 180,125 259,325 0.20
6/3/99 230,140 348,910 0.27
Indian Hotels Co. Ltd. 7/13/99 99,000 96,750 0.07
8/9/99 138,600 135,450 0.10
8/10/99 108,350 106,425 0.08
8/16/99 143,200 154,800 0.12
Mol Magyar Olaj-es Gazipari Rt. ADR 5/20/98 33,120 24,801 0.02%
9/2/98 60,375 62,003 0.05
9/23/98 115,940 128,140 0.10
6/16/99 375,750 310,015 0.24
7/2/99 196,219 165,342 0.12
Reliance Industries Ltd. GDR 7/14/98 84,825 125,664 0.10
12/22/98 183,150 357,658 0.28
State Bank of India GDR 5/5/99 473,000 454,485 0.35
5/6/99 448,525 397,674 0.31
5/20/99 170,800 144,609 0.11
8/30/99 152,625 113,621 0.09
Suez Cement Co. GDR 10/7/99 251,800 266,090 0.21
10/8/99 194,800 199,567 0.15
Videsh Sanchar Nigam Ltd. GDR 11/24/97 27,300 51,660 0.04
1/13/98 24,970 54,120 0.04
2/23/98 161,925 312,420 0.24
3/20/98 83,650 172,200 0.13
4/30/98 123,750 246,000 0.19
5/8/98 225,900 442,800 0.34
7/30/98 65,250 147,600 0.11
2/11/99 210,900 560,880 0.43
5/20/99 95,600 196,800 0.15
$10,552,783 8.13%
International SmallCap Portfolio
Neopost SA 2/23/99 $85,898 $ 217,600 0.14%
2/23/99 267,390 682,091 0.44
3/31/99 226,415 585,845 0.38
$1,485,536 0.96%
</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 -- Capital Share Transactions
<TABLE>
<CAPTION>
Transactions in Capital Shares by portfolio were as follows:
International International International Mortgage-Backed
Emerging Securities SmallCap Securities
Markets Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Shares sold ................................. -- 235,392 -- --
Shares issued in reinvestment of
dividends and distributions .................. 112,935 313,912 689,328 59,088
Shares redeemed ............................. -- (78,360) -- (973,483)
Net Increase (Decrease) 112,935 470,944 689,328 (914,395)
Year Ended December 31, 1998:
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
</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 two banks which
allows the portfolios to borrow up to $75,000,000, 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 .09% 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, 1999, the Portfolios had no
outstanding borrowings under the line of credit.
December 31, 1999
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Emerging Markets Portfolio
- --------------------------------------------------------------
Shares
Held Value
- --------------------------------------------------------------
Common Stocks (91.81%)
Advertising (1.15%)
Cheil Communications, Inc. 19,700 $ 1,493,847
Bakery Products (0.63%)
Nong Shim Co. Ltd. 18,300 814,195
Beer, Wine & Distilled Beverages (2.61%)
Hite Brewery Co. Ltd. 60,492(a) 2,077,276
South African Breweries Ltd. 128,282 1,304,167
3,381,443
Beverages (4.62%)
Al-Ahram Beverages Co. ADR 110,800(a)(b) 2,182,760
Embotelladora Andina SA ADR, Series A36,300 646,594
Fomento Economico Mexicano SA ADR 45,650 2,031,425
PanAmerican Beverages ADR 55,000 1,130,937
5,991,716
Blast Furnace & Basic Steel
Products (1.58%)
Pohang Iron & Steel ADR 33,400 1,169,000
Tubos de Acero de Mexico SA ADR 64,700 877,494
2,046,494
Cable & Other Pay TV Services (0.60%)
Ceske Radiokomunikace GDR 21,200(a)(b) 776,876
Central Reserve Depositories (0.40%)
Dao Heng Bank Group Ltd. 101,500 523,593
Coal Mining Services (0.31%)
Yanzhou Coal Mining Co. Ltd. 1,460,000 403,809
Commercial Banks (11.05%)
ABSA Group Ltd. 206,844 927,137
Banco Rio De La Plata SA ADR 59,600 726,375
Bank Hapoalim Ltd. 596,000 1,853,979
Bank Sinopac 1,956,330 1,154,453
Bank Slaski SA w Katowicach 13,379 908,097
BOE Ltd. 1,005,000 979,288
Grupo Financiero Banamex 376,000(a) 1,507,165
H&CB 47,000(a) 1,493,644
Malayan Banking Berhad 288,000 1,023,158
Overseas Union Bank Ltd. 213,320 1,248,418
Shinhan Bank 128,000 1,389,831
State Bank of India GDR 107,500(b) 1,110,389
14,321,934
Communications Equipment (2.02%)
ECI Telecommunications Ltd. ADR 27,600 872,850
Netas Northern Electric
Telekomunikasyon AS 13,169,000 1,748,097
2,620,947
Communications Services, NEC (1.46%)
Korea Telecom Corp. ADR 25,300 1,891,175
Computer & Data Processing (4.24%)
Check Point Software Technologies Ltd.6,400(a) $1,272,000
Datatec Ltd. 112,800 1,989,445
El Sitio, Inc. 29,846(a) 1,096,841
Ixchange Technology Holdings Ltd. 20,800(a) 87,827
Korea Thrunet Co. Ltd. 15,433(a) 1,047,515
5,493,628
Computer & Office Equipment (4.22%)
Asustek Computer, Inc. 149,000 1,573,174
Compal Electronics, Inc. 473,973 1,595,028
Orbotech Ltd. ADR 20,850(a) 1,615,875
Trigem Computer, Inc. 6,100 678,496
5,462,573
Concrete Work (0.36%)
Suez Cement Co. GDR 28,000(b) 465,657
Concrete, Gypsum & Plaster
Products (1.14%)
Cemex SA de CV 264,000 1,475,941
Construction & Related Materials (0.81%)
Barlow Ltd. 146,093 1,051,057
Crude Petroleum & Natural Gas (0.53%)
Mol Magyar Olaj-es Gazipari Rt. ADR 33,400(b) 690,301
Crushed & Broken Stone (1.25%)
Taiwan Cement Corp. 1,563,000 1,615,349
Department Stores (2.31%)
Keumkang Development Industries Co. 117,985(a) 1,406,071
Pt Matahari Putra Prima 4,134,000(a) 688,999
Shinsegae Department Store Co. 17,795 901,689
2,996,759
Eating & Drinking Places (1.02%)
Cafe De Coral Holdings Ltd. 1,915,000 769,843
Jollibee Foods Warrants 1,295,000(a) 546,277
1,316,120
Electric Services (1.03%)
Korean Electric Power ADR 79,700 1,334,975
Electrical Work (0.94%)
Pacific Electrical
Wire & Cable Co. Ltd. 1,714,000(a) 1,213,741
Electronic Components &
Accessories (6.36%)
Acer Peripherals, Inc. 320,160 1,327,617
Elec & Eltek International ADR 223,100 722,844
Flextech Holdings Ltd. 207,000 232,347
JIT Holdings Ltd. 188,000 654,500
Taiwan Semiconductor
Manufacturing Co. 293,000(a) 1,560,797
Unisem (M) Berhad 138,000 886,105
United Microelectronics Corp. 589,000(a) 2,104,242
Varitronix International Ltd. 328,000 755,284
8,243,736
Electronic Distribution
Equipment (0.59%)
Serome Technology, Inc. 2,200(a) 469,986
Serome Technology, Inc. Rights 714(a) 103,432
Techtronic Industries Co. 1,125,000 183,797
757,215
Family Clothing Stores (0.91%)
Giordano International Ltd. 1,140,000 $ 1,173,217
Finance Services (0.49%)
Grupo Financiero Banorte SA 424,000(a) 639,575
Fire, Marine & Casualty
Insurance (1.49%)
Aksigorta AS 31,796,000 1,934,491
Foreign Banks, Branches &
Agencies (1.91%)
Credicorp Ltd. ADR 63,940 767,280
Yapi ve Kredi Bankasi AS 55,064,800 1,700,471
2,467,751
Furniture & Home Furnishing
Stores (1.33%)
Grupo Elektra SA de CV 1,751,000 1,725,132
Gas Production & Distribution (0.38%)
Ultrapar Particpacoes SA ADR 43,000(a) 494,500
Gasoline Service Stations (1.08%)
President Chain Store Corp. 316,000 1,396,045
Gold & Silver Ores (0.26%)
Harmony Gold Mining Co. Ltd. 43,698 280,319
Harmony Gold Mining Co. Ltd. ADR 8,100 50,878
331,197
Holding Offices (2.36%)
The India Fund, Inc. ADR 182,300(a) 3,053,525
Hotels & Motels (1.48%)
Indian Hotels Co. Ltd. 51,000(b) 493,425
Resorts World Berhad 498,000 1,428,474
1,921,899
Measuring & Controlling Devices (0.69%)
IDT Holdings Singapore Ltd. 404,750 898,902
Medical Instruments & Supplies (0.76%)
Medison Co. Ltd. 67,500 986,162
Metal Mining Services (0.86%)
Compahia Vale do Rio Doce 40,100 1,117,920
Miscellaneous Food & Kindred
Products (0.42%)
Thai Union Frozen Products
Public Co. Ltd. 143,500 546,120
Miscellaneous Investing (0.83%)
Banco Latino Americano
de Exportaciones 45,940 1,079,590
Miscellaneous Non-Durable
Goods (0.45%)
Desc SA, Series B 701,000(a) 576,769
Miscellaneous Textile Goods (1.32%)
Esprit Holdings Ltd. 1,130,000 $ 1,221,072
Reliance Industries Ltd. GDR 45,000(b) 483,322
1,704,394
Newspapers (2.27%)
Agora SA GDR 56,400(a)(b) 814,670
Dogan Sirketler Grubu Holding AS 54,268,800(a) 1,600,849
New Straits Times Press Berhad 219,000(a) 527,329
2,942,848
Oil & Gas Field Services (0.74%)
Gulf Indonesia Resources Ltd. ADR 118,600(a) 963,625
Paper & Paper Products (0.78%)
Aracruz Celulose SA ADR 38,700 1,015,875
Petroleum Refining (0.89%)
Sasol Ltd. 141,000 1,156,388
Primary Non-Ferrous Metals (0.74%)
Hindalco Industries Ltd. GDR 40,700(b) 959,503
Producers, Orchestras &
Entertainers (0.97%)
Corporacion Interamericana
de Enretenimiento SA, Class B 313,700(a) 1,252,477
Radio & Television Broadcasting (1.40%)
Grupo Televisa SA GDR 26,600(a) 1,815,450
Real Estate Operators & Lessors (0.40%)
SM Prime Holdings, Inc. 2,740,000 516,724
Savings Institutions (0.69%)
ICICI Ltd. ADR 50,800(a) 749,300
ICICI Ltd. ADS 10,300(a) 142,913
892,213
Security Brokers & Dealers (0.47%)
Polaris Securities Co. Ltd. 702,000(a) 604,593
Telephone Communication (14.21%)
Carso Global Telecom, Class A1 140,000(a) 1,314,339
Compania Anonima Telefonos de
Venezuela ADR 31,700 780,613
Dacom Corp. 2,400(a) 1,239,407
Embratel Participacoes SA 82,000,000 1,380,757
Embratel Participacoes SA ADR 38,300 1,043,675
Hellenic Telecom Organization SA ADR 8,800 105,050
Hellenic Telecommunication 72,589 1,717,187
Matav Tavkozlesi Rt. ADR 59,900 2,156,400
Mobinil-Egypt Moblie Phone 20,000(a) 923,761
Partner Communications Co. Ltd. ADR 51,000(a) 1,319,625
SK Telecom Co. Ltd. 44,290(a) 1,699,629
Tele Norte Leste Participacoes SA26,400,000 478,392
Telecomunicacoes Brasileiras SA 17,190,000(a) 383
Telefonica De Argentina SA ADR 21,100 651,462
Telefonos De Mexico SA ADR 12,600 1,417,500
Videsh Sanchar Nigam Ltd. GDR 88,800(b) 2,184,480
18,412,660
Total Common Stocks 118,962,626
Preferred Stocks (6.81%)
Beverages (055%)
Quilmes Industrial Quines SA ADR 60,200 $ 718,637
Cement, Hydraulic (0.53%)
Titan Cement Co. SA 12,898 683,045
Commercial Banks (0.68%)
Banco Estado de Sao Paulo SA 24,700,000(a) 881,401
Gasoline Service Stations (1.22%)
Petroleo Brasileiro SA 6,160,000 1,579,919
Telephone Communication (3.83%)
Estonian Telecom GDR 19,000(b) 391,400
Tele Celular Sul
Participacoes SA ADR 24,800 787,400
Tele Centro Sul Participacoes SA ADR 15,700 1,424,775
Tele Norte Leste Participacoes ADR 64,246 1,638,273
Telesp Celular SA Preference B 9,100,000 725,561
4,967,409
Total Preferred Stocks 8,830,411
- --------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------
Commercial Paper (0.58%)
Personal Credit Institutions (0.58%)
Associates First Capital Corp.;
4.00%; 1/3/2000 $750,000 $ 750,000
Total Portfolio Investments (99.20%) 128,543,037
Cash and receivables, net of liabilities (0.80%) 1,031,650
Total Net Assets (100.00%) $129,574,687
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
International Emerging Markets Portfolio
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $3,193,316 2.48%
Brazil 12,568,831 9.78
Chile 646,594 0.50
Czech Republic 776,876 0.60
Egypt 3,572,178 2.78
Ethiopia 391,400 0.30
Greece 2,505,282 1.95
Hong Kong 5,030,614 3.91
Hungary 2,846,701 2.22
India 9,176,857 7.14
Indonesia 1,652,624 1.29
Israel 6,934,329 5.40
Korea, Republic Of 20,196,329 15.71
Malaysia 3,865,066 3.01
Mexico 15,764,203 12.26
Panama 1,079,590 0.84
Peru 767,280 0.60
Philippines 1,063,001 0.83
Poland 1,722,767 1.34
Singapore 3,757,011 2.92
South Africa 7,826,507 6.09
Taiwan, Province Of China 14,145,041 11.00
Thailand 546,120 0.43
Turkey 6,983,908 5.43
United States 750,000 0.58
Venezuela 780,612 0.61
Total $128,543,037 100.00%
International Securities Portfolio
- --------------------------------------------------------------
Shares
Held Value
- --------------------------------------------------------------
Common Stocks (98.80%)
Advertising (2.30%)
AEGIS Group PLC 222,600 $ 807,221
WPP Group PLC 38,240 600,907
1,408,128
Cable & Other Pay TV Service (0.61%)
United Pan-Europe Communications NV 2,950(a) 375,512
Central Reserve Depositories (1.05%)
Union Bank of Norway 27,940 646,601
Combination Utility Services (2.20%)
Alcatel Alsthom 5,910 1,350,581
Commercial Banks (11.92%)
Australia & New Zealand
Banking Group 116,080 $ 841,664
Bank of Ireland 113,954 902,308
Deutsche Bank AG NPV 8,400 707,645
H&CB 11,580(a) 368,009
Merita PLC, Class A 149,950 879,226
National Australia Bank Ltd. 48,974 746,661
Nordbanken Holding AB 34,510 201,978
Royal Bank of Canada
Montreal, Quebec 19,300 844,436
Sanwa Bank Ltd. 76,000 922,945
Shinhan Bank 24,280 263,633
Svenska Handelsbanken, Class A 2,630 32,940
Svenska Handelsbanken, Class B 51,150 601,727
7,313,172
Communications Equipment (4.24%)
Ericsson LM, Class B 27,320 1,749,267
Siemens AG 6,750 854,487
2,603,754
Communications Services, NEC (3.64%)
Koninklijke KPN NV 18,504 1,797,164
Korea Telecom Corp. ADR 5,800(a) 433,550
2,230,714
Computer & Data Processing (4.99%)
Cap Gemini SA 6,220 1,571,047
Getronics NV 18,740 1,487,624
3,058,671
Computer & Office Equipment (7.42%)
Canon, Inc. 25,000 991,647
Fujitsu Ltd. 34,000 1,547,946
NEC Corp. 50,000 1,189,487
Orbotech Ltd. ADR 10,650(a) 825,375
4,554,455
Concrete, Gypsum & Plaster
Products (1.30%)
Lafarge SA 6,860 794,841
Consumer Products (1.63%)
Japan Tobacco, Inc. 27 206,282
Swedish Match Co. 228,950 795,949
1,002,231
Copper Ores (0.32%)
Trelleborg AB, Class B 22,000 197,003
Crude Petroleum & Natural Gas (2.11%)
Total Fina 9,737 1,293,121
Drugs (4.75%)
AstraZeneca Group PLC 11,327 477,315
Novartis AG 508 741,976
Rhodia, Inc. SA 24,560 552,395
Taisho Pharmaceutical Co. 17,000 498,266
Takeda Chemical Industries 13,000 641,395
2,911,347
Electronic Components &
Accessories (0.25%)
Elec & Eltek International ADR 47,600 154,224
Electronic Distribution Equipment (2.89%)
Koninklijke Philips Electronics 13,104 1,773,111
Finance Services (0.94%)
Takefuji Corp. 4,600 $ 574,803
Fire, Marine & Casualty
Insurance (1.32%)
Royal & Sun Alliance 109,000 812,499
Foreign Banks, Branches &
Agencies (2.64%)
Bank Austria AG 10,570 593,282
UBS AG 3,810 1,023,469
1,616,751
Gas Production & Distribution (0.91%)
OMV AG 5,760 557,119
General Industrial Machinery (0.75%)
Mannesmann AG 1,900 457,811
Industrial Inorganic Chemicals (2.21%)
Aventis SA 23,668 1,356,931
Industrial Organic Chemicals (1.14%)
Clariant AG 1,480 701,754
Investment Offices (2.16%)
Amvescap PLC 111,200 1,326,238
Life Insurance (2.57%)
AXA 3,900 541,002
ING Groep NV 17,200 1,033,341
1,574,343
Meat Products (2.28%)
Danisco AS 17,600 682,728
Orkla ASA, Class A 41,600 714,282
1,397,010
Medical Instruments & Supplies (0.96%)
Terumo Corp. 22,000 586,781
Miscellaneous Business Services (1.01%)
Brisa-Auto Estradas De Portugal SA 81,470 622,230
Miscellaneous Investing (1.55%)
Investor AB, Class B 67,550 948,844
Miscellaneous Non-Durable
Goods (3.63%)
Desc SA, Series B 313,660(a) 258,073
Diageo PLC 103,785 832,171
Lagardere SCA 21,020 1,137,692
2,227,936
Miscellaneous Primary Metal
Products (0.43%)
Charter PLC 61,000 262,006
Miscellaneous Transportation
Equipment (0.72%)
Autoliv, Inc. 15,200 443,028
Motion Picture Production &
Services (0.94%)
News Corp. LTD. ADS 15,000 573,750
Motor Vehicles & Equipment (0.65%)
Honda Motor Co. Ltd. 6,000 $ 222,754
Mitsubishi Motor Corp. 52,000(a) 177,305
400,059
Newspapers (3.07%)
Publishing & Broadcasting Ltd. 86,000 654,456
United News & Media PLC 98,460 1,229,833
1,884,289
Oil & Gas Field Services (0.55%)
Petroleum Geo-Services 19,100(a) 339,834
Paperboard Containers & Boxes (0.79%)
Buhrmann NV 32,260 483,397
Periodicals (2.33%)
VNU NV 27,317 1,428,681
Personnel Supply Services (0.68%)
Vedior NV 40,847 417,598
Pulp Mills (1.19%)
UPM-Kymmene OYJ 18,270 732,482
Radio & Television Broadcasting (1.75%)
Carlton Communications PLC 64,697 634,497
Fuji Television Network 32 437,692
1,072,189
Radio, Television & Computer
Stores (1.47%)
Yamada Denki 8,300 900,103
Soap, Cleaners & Toilet Goods (1.04%)
Reckitt Benckiser, Inc. 68,042 640,435
Special Industry Machinery (1.35%)
Cookson Group 198,120 827,014
Telephone Communication (6.15%)
KPNQwest NV 8,621(a) 549,589
Nokia Corp. ADR, Class A 4,140 786,600
Telecom Corp. of New Zealand Ltd. 228,840 1,074,063
Telecom Italia-DI 153,150 928,690
Vodafone Group 88,000 435,063
3,774,005
Total Common Stocks 60,607,386
- --------------------------------------------------------------
Shares
Held Value
- --------------------------------------------------------------
Preferred Stock (0.31%)
Commercial Banks (0.31%)
National Australia Bank ECU 6,800 $ 187,850
Total Portfolio Investments (99.11%) 60,795,236
Cash, receivables and other assets,
net of liabilities (0.89%) 545,730
Total Net Assets (100.00%) $61,340,966
(a) Non-income producing security - No dividend paid during the period.
International Securities Portfolio
Investments by Country
Total Percentage of
Country Value Total Value
Australia $2,430,631 4.00%
Austria 1,150,401 1.89
Canada 844,436 1.39
Denmark 682,728 1.12
Finland 2,398,308 3.95
France 8,597,610 14.14
Germany 2,019,943 3.32
Israel 825,375 1.36
Italy 928,690 1.53
Japan 8,897,406 14.64
Korea, Republic of 1,065,192 1.75
Mexico 258,073 0.43
Netherlands 9,346,016 15.37
New Zealand 1,074,063 1.77
Norway 1,700,717 2.80
Portugal 622,230 1.02
Singapore 154,224 0.25
Sweden 5,448,051 8.96
Switzerland 2,467,199 4.06
United Kingdom 9,310,193 15.31
United States 573,750 0.94
Total $60,795,236 100.00%
International SmallCap Portfolio
- --------------------------------------------------------------
Shares
Held Value
- --------------------------------------------------------------
Common Stocks (97.06%)
Advertising (1.92%)
DMS, Inc. 17,000 $ 264,081
Secure Network Solutions 297,500(a) 1,343,192
SR Teleperformance 7,300 1,360,925
2,968,198
Air Transportation, Scheduled (2.68%)
H.I.S. Co., Ltd. 39,000 2,777,685
Ryanair Holdings PLC ADR 24,918(a) 1,373,605
4,151,290
Airports, Flying Fields & Services (0.27%)
Auckland International Airport Ltd. 275,000 415,897
Business Credit Institutions (1.05%)
Japan Securities Finance 181,000 1,016,804
Phileo Allied Berhad 691,000(a) 610,990
1,627,794
Commercial Banks (1.13%)
Koram Bank 230,400(a) 1,749,153
Commercial Printing (2.79%)
Creo Products, Inc. 76,466(a) 2,939,162
Orell Fuessli Holdings AG 100(a) 267,065
Sato Corp. 48,400 1,111,231
4,317,458
Communications Equipment (0.88%)
Indra Sistemas SA 73,100 1,366,452
Communications Services, NEC (0.94%)
A-Com AB 64,300(a) 1,460,161
Computer & Data Processing
Services (11.78%)
AIT Group PLC 73,000 1,788,345
Articon Info Systems 9,600(a) 485,916
CI Technologies Group Ltd. 221,800 1,233,623
Computershare Ltd. 492,221 2,415,592
Cresco Ltd. 10,500 1,210,493
Enea Data AB 18,900 1,449,076
F-Secure Oyj 21,100(a) 613,308
Freenet.De AG 2,603(a) 286,467
GFI Informatique 21,250 2,724,130
Norman 68,129(a) 737,477
Scoot.Com 259,000(a) 621,972
Solution 6 Holding 394,100(a) 4,280,719
Telinfo - Strip VVPR 2,800(a) 28
Visma ASA 53,600(a) 400,141
18,247,287
Computer & Office Equipment (3.01%)
Baltimore Technologies 31,400(a) 2,537,964
Imagination Tech Group 176,000(a) 1,154,495
Venture Manufacturing Ltd. 85,000 974,487
4,666,946
Construction &
Related Machinery (1.26%)
Swisslog Holding AG 6,700 1,946,297
Department Stores (0.86%)
Keumkang Development 112,015(a) 1,334,925
Drug Stores & Proprietary
Stores (1.29%)
Seijo Corp. 25,000 $ 512,921
Tsuruha Co. Ltd. 11,300 1,490,401
2,003,322
Drugs (1.39%)
PT Tempo Scan Pacific TBK 1,253,000 1,048,608
SS Pharmaceutical Co. Ltd. 164,000 1,108,769
2,157,377
Eating & Drinking Places (0.87%)
Daisyo Corp. 13,500 151,282
Matsuya Foods Ltd. 24,000 902,740
Meiki Co. Ltd. 12,000 287,236
1,341,258
Electric Services (3.33%)
Energy Developments Ltd. 185,922 1,277,386
Independent Energy Holdings ADR 62,900(a) 2,095,356
Vestas Wind Systems 10,100(a) 1,782,113
5,154,855
Electronic Components &
Accessories (11.48%)
Acer Peripherals, Inc. 512,288 2,124,320
C-Mac Industries, Inc. 59,900(a) 3,404,994
Chloride Group PLC 325,000 508,089
Elmos Semiconductor AG 39,700(a) 1,711,028
Fuji Electronics Co. Ltd. 21,000 488,301
JIT Holdings Ltd. 975,000 3,394,350
Perlos OYJ 84,500(a) 2,964,306
Prodisc Technology, Inc. 336,000(a) 1,575,502
Tokyo Denpa Co. Ltd. 41,000 1,602,267
17,773,157
Electronic Distribution
Equipment (3.04%)
Austria Technologies &
Systemtechnik AG 26,400(a) 1,373,313
JOT Automation Group OYJ 223,000 2,067,497
PMJ Automotive Corp. OYJ 107,800 1,260,921
4,701,731
Engineering & Architectural
Services (1.13%)
ALTEN 10,200(a) 1,750,259
Engines & Turbines (1.08%)
Moritex Corp. 26,000 1,270,090
NEG Micon 19,240 396,496
1,666,586
Family Clothing Stores (0.73%)
Giordano International Ltd. 1,096,000 1,127,935
Fire, Marine & Casualty
Insurance (0.37%)
Malaysian National
Reinsurance Berhad 453,000 574,595
Furniture & Home Furnishings (0.74%)
SHADDY CO. LTD. 35,200 1,141,752
General Industrial Machinery (1.01%)
Kyoritsu Electric Corp. 6,000 345,269
Nippon Thompson Co. Ltd. 81,000 667,911
Whatman 26,000 544,755
1,557,935
Groceries & Related Products (0.32%)
Bon Appetit Group AG 500 $ 491,962
Hardware Stores (0.18%)
Kohnan Shoji Co. Ltd. 16,000 273,558
Highway & Street Construction (0.88%)
PT Komatsu Indonesia TBK 4,890,000(a) 1,369,892
Holding Offices (0.87%)
Edipresse SA 2,449 1,346,334
Hotels & Motels (0.59%)
Resorts World Berhad 318,000 912,158
Household Appliance Stores (0.37%)
Kojima Co. Ltd. 14,700 574,471
Insurance Carriers, NEC (0.27%)
Limit PLC 172,000 413,047
Management & Public Relations (0.53%)
IPSOS 10,000(a) 822,889
Measuring & Controlling Devices (0.98%)
Mirae Co. 194,000 1,512,200
Medical Instruments & Supplies (1.86%)
Cochlear Ltd. 217,000 2,875,325
Metalworking Machinery (1.22%)
Mikron Holding AG 4,317 1,884,981
Miscellaneous Amusement,
Recreation Services (3.41%)
Aristocrat Leisure Ltd. 241,514 3,460,896
SNAI SPA 166,000 1,813,564
5,274,460
Miscellaneous Business Services (0.99%)
GFK AG 37,299(a) 1,532,778
Miscellaneous Chemical Products (0.27%)
Milbon Co. Ltd. 4,500 417,664
Miscellaneous Electrical Equipment &
Supplies (0.64%)
Kaba Holding AG, Class B 1,100 996,419
Miscellaneous Fabricated Metal
Products (0.18%)
Nadex Co. Ltd. 51,000 274,046
Miscellaneous Food & Kindred
Products (0.25%)
ROCK FIELD CO. LTD. 10,000 385,912
Miscellaneous Primary Metal
Products (0.00%)
YBM Magnex International, Inc. 107,000(a) $ 737
Miscellaneous Publishing (0.50%)
Shoeisha Co. Ltd. 20 781,593
Miscellaneous Services, NEC (0.52%)
Lindeteves-Jacoberg Ltd. 528,000 811,331
Motion Picture Production &
Services (0.75%)
Endemol Entertainment 21,700 1,160,359
Motorcycles, Bicycles & Parts (0.66%)
Ducati Motor Holding SPA 395,700(a) 1,021,272
Pens, Pencils, Office & Art
Supplies (1.20%)
The Sailor Pen Co. Ltd. 91,000 1,867,031
Periodicals (1.76%)
Informa Group PLC 195,000 1,912,405
Paramount Publishing 6,024,000(a) 813,688
2,726,093
Personal Credit Institutions (0.03%)
Daiei OMC, Inc. 13,000(a) 44,453
Personnel Supply Services (1.16%)
NIC Corp. 38,000 1,540,716
Unique International NV 12,680 260,538
1,801,254
Professional & Commercial
Equipment (2.14%)
Quality Healthcare Asia Ltd. 3,504,000(a) 1,352,287
Transiciel SA 16,400 1,970,885
3,323,172
Pulp Mills (1.03%)
Rottneros AB 1,208,000 1,597,841
Radio & Television Broadcasting (1.03%)
Comptel PLC 22,853(a) 1,599,727
Radio, Television & Computer
Stores (3.41%)
Distefora Holding AG 10,200(a) 2,465,997
Yamada Denki 26,000 2,819,598
5,285,595
Residential Building Construction (0.26%)
Urban Corp. 10,000 400,567
Sanitary Services (0.89%)
De Sammensluttede Vognmand AS 14,600 1,383,929
Security Brokers & Dealers (0.86%)
Dongwon Securities 27,000 583,951
OSK Holdings Berhad 528,000 452,969
OSK Holdings Berhad Rights 132,000 5,325
Tokai Maruman Secs Co. 42,000 291,339
1,333,584
Special Industry Machinery (1.56%)
Chen Hsong Holdings Ltd. 2,056,000 542,201
Neopost SA 35,500(a)(b) 1,485,536
Sez Holding AG 700 389,634
2,417,371
Telephone Communications (8.55%)
Esat Telecom Group ADR 22,200(a) $2,031,300
Microcell Telecommunications 45,000(a) 1,472,793
Net Insight Series B 28,583(a) 1,375,111
One Tel Ltd. 946,000 1,454,659
Powerlan Ltd. 2,404,000 2,328,082
Techniche Ltd. 348,100(a) 1,195,819
Versatel Telecom NV 96,400(a) 3,381,765
13,239,529
Trusts (0.22%)
NHP PLC 146,016 335,352
Variety Stores (1.55%)
Buecher.De AG 32,000(a) 891,647
Ricardo.De AG 10,900(a) 1,283,698
THANKS JAPAN CORP. 15,000 249,133
2,424,478
Water Transportation Services (0.14%)
Johor Port Berhad 502,000 220,616
Total Common Stocks 150,336,600
- --------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------
Commercial Paper (3.10%)
Personal Credit Institutions (3.10%)
Associates First Capital Corp.;
4.00%; 1/3/2000 $4,800,000 $ 4,800,000
Total Portfolio Investments (100.16%) 155,136,600
Liabilities, net of cash and receivables (-0.16%) (244,438)
Total Net Assets (100.00%) $154,892,162
(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 $21,865,295 14.09%
Austria 1,373,313 0.89
Belgium 28 0.00
Canada 7,817,687 5.04
Denmark 3,562,538 2.30
Finland 8,505,759 5.48
France 10,114,623 6.52
Germany 6,191,534 3.99
Hong Kong 3,836,110 2.47
Indonesia 2,418,500 1.56
Ireland 3,404,905 2.19
Italy 2,834,837 1.83
Japan 26,269,313 16.93
Korea, Republic of 5,180,228 3.34
Malaysia 2,776,651 1.79
Netherlands $ 4,802,663 3.10%
New Zealand 415,897 0.27
Norway 1,137,618 0.73
Singapore 5,180,168 3.34
Spain 1,366,452 0.88
Sweden 5,882,189 3.79
Switzerland 9,788,690 6.31
Taiwan, Province of China 3,699,822 2.39
United Kingdom 11,911,780 7.68
United States 4,800,000 3.09
Total $155,136,600 100.00%
Mortgage-Backed Securities Portfolio
- --------------------------------------------------------------
Description of Issue Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (20.56%)
FHLMC 5.50% 2/1/2024-3/1/2024 $ 505,068 $ 452,417
FHLMC 6.00 4/1/2024 99,884 92,448
FHLMC 6.50 12/1/2013-8/1/2029 412,198 393,212
FHLMC 7.50 1/15/2030 100,000 99,031
Total FHLMC Certificates 1,037,108
Federal National Mortgage Association (FNMA)
Certificates (19.22%)
FNMA 6.25 4/1/2026 234,027 220,034
FNMA 7.00 8/1/2023 768,908 749,695
Total FNMA Certificates 969,729
Government National Mortgage Association (GNMA)
Certificates (57.04%)
GNMA I 5.50 6/15/2014 179,507 166,175
GNMA I 6.50 1/15/2024 1,042,086 988,590
GNMA I 7.50 6/15/2023-9/15/2023 325,866 324,159
GNMA II 5.50 3/20/2026 175,559 155,731
GNMA II 6.00 9/20/2023-5/20/2026 1,076,319 985,213
GNMA II 6.50 10/20/2025 273,088 257,678
Total GNMA Certificates 2,877,546
Federal Agency Short-Term Obligations (0.64%)
Investment in Joint Trade Account,
Federal Home Loan Bank System;
1.50%; 1/3/2000 32,105 32,105
Total Portfolio Investments (97.46%) 4,916,488
Cash, receivables and other assets,
net of liabilities (2.54%) 128,356
Total Net Assets (100.00%) $5,044,844
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.
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING
MARKETS PORTFOLIO 1999 1998 1997(a)
- ------------------------------------------------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $8.21 $10.14 $9.94
Income from Investment Operations:
Net Investment Income............................... .09 .17 .01
Net Realized and Unrealized Gain (Loss) on Investments 5.10 (1.91) .21
Total from Investment Operations 5.19 (1.74) .22
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.09) (.17) (.02)
Excess Distributions from Net Investment Income..... (.08) -- --
Distributions from Capital Gains.................... -- (.02) --
Total Dividends and Distributions (.17) (.19) (.02)
Net Asset Value, End of Period......................... $13.23 $8.21 $10.14
Total Return........................................... 63.37% (17.21)% 1.40%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $129,575 $79,481 $32,488
Ratio of Expenses to Average Net Assets............. 1.15% 1.15% 1.15%(c)
Ratio of Net Investment Income to Average Net Assets .94% 2.11% .91%(c)
Portfolio Turnover Rate............................. 107.5% 36.5% 12.3%(c)
<CAPTION>
INTERNATIONAL SECURITIES PORTFOLIO 1999 1998 1997 1996 1995
- ------------------------------------------------------- -------- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $14.90 $14.45 $13.67 $11.70 $11.29
Income from Investment Operations:
Net Investment Income............................... .40 .24 .24 .31 .19
Net Realized and Unrealized Gain on Investments..... 3.60 1.12 1.46 2.46 1.11
Total from Investment Operations 4.00 1.36 1.70 2.77 1.30
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.41) (.23) (.24) (.16) (.10)
Excess Distributions from Net Investment Income..... -- -- -- (.07) (.07)
Distributions from Capital Gains.................... (1.66) (.68) (.68) (.57) (.72)
Excess Distributions from Capital Gains............. (.19) -- -- -- --
Total Dividends and Distributions (2.26) (.91) (.92) (.80) (.89)
Net Asset Value, End of Period......................... $16.64 $14.90 $14.45 $13.67 $11.70
Total Return........................................... 27.89% 9.55% 12.55% 24.12% 12.02%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $61,341 $47,912 $37,684 $28,161 $17,251
Ratio of Expenses to Average Net Assets............. .90% .90% .90% .90% .90%
Ratio of Net Investment Income to Average Net Assets 2.74% 1.60% 1.73% 1.90% 1.79%
Portfolio Turnover Rate............................. 71.4% 36.7% 30.8% 25.5% 46.0%
<CAPTION>
INTERNATIONAL SMALLCAP PORTFOLIO 1999 1998 1997(a)
- ------------------------------------------------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $11.06 $9.97 $9.86
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.01) .07 .01
Net Realized and Unrealized Gain on Investments..... 9.25 1.11 .12
Total from Investment Operations 9.24 1.18 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.07) (.02)
Distributions from Capital Gains.................... (1.46) (.02) --
Total Dividends and Distributions (1.46) (.09) (.02)
Net Asset Value, End of Period......................... $18.84 $11.06 $9.97
Total Return........................................... 85.93% 11.92% 1.59%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $154,892 $83,330 $31,968
Ratio of Expenses to Average Net Assets............. 1.00% 1.00% 1.00%(c)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.06)% .78% .91%(c)
Portfolio Turnover Rate............................. 236.3% 88.5% 30.3%(c)
<CAPTION>
MORTGAGE-BACKED SECURITIES PORTFOLIO 1999 1998 1997 1996 1995
- ------------------------------------------------------- -------- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.39 $10.27 $9.93 $10.17 $9.11
Income from Investment Operations:
Net Investment Income............................... .63 .65 .64 .64 .65
Net Realized and Unrealized Gain (Loss) on Investments (.60) .12 .34 (.24) 1.06
Total from Investment Operations .03 .77 .98 .40 1.71
Less Dividends from Net Investment Income.............. (.63) (.65) (.64) (.64) (.65)
Net Asset Value, End of Period......................... $9.79 $10.39 $10.27 $9.93 $10.17
Total Return........................................... .30% 7.74% 10.18% 4.20% 19.26%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $5,045 $14,861 $13,796 $14,968 $14,253
Ratio of Expenses to Average Net Assets............. .45% .45% .45% .45% .45%
Ratio of Net Investment Income to Average Net Assets 6.24% 6.28% 6.37% 6.51% 6.66%
Portfolio Turnover Rate................................ 17.0% 13.8% 15.5% 28.7% 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, 1999, 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 auditing standards generally accepted
in the United States. 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, 1999, 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, 1999, 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 accounting principles generally accepted in the
United States.
/S/ Ernst & Young LLP
Des Moines, Iowa
January 21, 2000
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, 1999
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 2/5/99 $.0021 00.00%
Emerging Markets 12/23/99 .1700 00.00%
Portfolio $.1721 $ .1721
International 2/5/99 $.0044 00.00% 2/5/99 $ .2342 $.0000
Securities 12/23/99 .4049 00.00% 12/23/99 1.4500 .1689
Portfolio $.4093 $1.8531 $2.2624
International 2/5/99 $.0008 00.00% 2/5/99 $.0196 $.2087
SmallCap 12/23/99 .4134 .8211
Portfolio $1.4628 $1.4636
</TABLE>
<TABLE>
Per Share Income Dividend Distributions/Payable Date
<CAPTION>
1/29/99 2/26/99 3/31/99 4/30/99 5/28/99 6/30/99 7/30/99 8/31/99 9/30/99 10/29/99 11/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed
Securities Portfolio $.0468 $.0530 $.0500 $.0589 $.0484 $.0541 $.0546 $.0444 $.0544 $.0532 $.0539 $.0578
<FN>
* Percent qualifying for deduction by shareholders who are corporations.
** Taxable as long-term capital gain.
*** Taxable at ordinary income rates.
</FN>
</TABLE>
