Semiannual Report to Shareholders dated June 30, 1997 for:
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Mortgage-Backed Securities Portfolio
<PAGE>
A MESSAGE FROM THE PRESIDENT
Dear Shareholder
Equity and fixed income markets showed continued strength in 1997. A robust
economy and few, if any, inflationary worries have resulted in large stock gains
and stable bond prices so far this year. Most international markets turned in
positive performances, as well. During the first six months of the year, The
Principal Special Markets Fund--Mortgage- Backed Securities Portfolio and
International Securities Portfolio--rewarded investors with a positive return.
Through June 30, the two portfolios returned 3.66% and 18.55%, respectively. As
always, shareholders are reminded that past performance is not a guarantee of
future results.
Marty Schafer--Mortgage-Backed Securities Portfolio
"Currently, all signs of inflation remain benign. However, investors should
recognize that the Fed may again choose to raise interest rates to control
growth. Assuming this happens, short-term investors may suffer disappointing
results. But, long-term investors will be rewarded with an excellent opportunity
to accumulate fixed-income assets."
Scott Opsal--International Securities Portfolio
"Developments in international equity markets have focused heavily on a strong
U.S. dollar. The strong dollar results in foreign imports appearing cheaper and
more attractive to U.S. buyers which improves prospects for companies and
countries selling goods to the U.S. During the first half of the year, this
phenomenon translated into impressive gains in European markets. Our strategy
centers on finding companies with consistent earnings growth at reasonable
prices. As a result of strong advances in Europe, we are now looking more
closely at markets outside Europe."
We thank you for helping us to enjoy another successful year and look forward to
serving your future investment needs. We hope that your find this Semiannual
Report useful and informative.
Sincerely
/s/ Stephan L. Jones
Stephan L. Jones
President
INDEX TO REPORT FOR
PRINCIPAL SPECIAL MARKETS FUND, INC.
Page
Statements of Assets and Liabilities................ 2
Statements of Operations ........................... 3
Statements of Changes in Net Assets................. 4
Notes to Financial Statements....................... 5
Schedules of Portfolio Investments ................. 8
Financial Highlights................................ 12
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<TABLE>
<CAPTION>
June 30, 1997
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
(unaudited) Portfolio Portfolio
<S> <C> <C>
Investments in Securities -- at cost............................. $29,234,103 $15,128,548
Assets
Investment in securities -- at value (Note 4).................... 38,716,990 15,002,700
Cash............................................................. 26,466 360,647
Receivables:
Investment securities sold.................................... 49,328 --
Dividends and interest receivable............................. 138,353 84,670
Other assets..................................................... 581 7,690
Total Assets 38,931,718 15,455,707
Liabilities
Accrued expenses................................................. 14,918 6,393
Payables:
Dividends to shareholders..................................... -- 12,482
Investment securities purchased............................... 1,493,994 --
Total Liabilities 1,508,912 18,875
Net Assets Applicable to Outstanding Shares...................... $37,422,806 $15,436,832
Capital Stock (par value: $.01 a share)
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 2,316,558 1,548,520
Net Asset Value Per Share........................................ $16.15 $9.97
Net Assets Consist of:
Capital Stock.................................................... $ 23,166 $ 15,485
Additional paid-in capital....................................... 26,980,171 16,647,668
Accumulated undistributed net investment income.................. 400,806 --
Accumulated undistributed net realized gain (loss) from:
Investment transactions....................................... 541,068 (1,100,473)
Foreign currency transactions................................. (4,250) --
Net unrealized appreciation (depreciation) of investments........ 9,482,887 (125,848)
Net unrealized appreciation/depreciation on translation of
assets and liabilities in foreign currencies.................. (1,042) --
Total Net Assets $37,422,806 $15,436,832
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
(unaudited) Portfolio Portfolio
Net Investment Income
Income:
<S> <C> <C>
Dividends....................................................... $ 553,499 $ --
Less: Withholding tax on foreign dividends...................... 67,354 --
Interest........................................................ 43,857 515,289
Total Income 530,002 515,289
Expenses:
Management and investment advisory fees (Note 3)................ 135,189 33,458
Net Investment Income 394,813 481,831
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency
Net realized gain (loss) from:
Investment transactions......................................... 548,792 --
Foreign currency transactions................................... (4,250) --
Net increase (decrease) in unrealized appreciation/depreciation on:
Investments..................................................... 4,367,367 64,767
Translation of assets and liabilities in foreign currencies..... (1,175) --
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency 4,910,734 64,767
Net Increase in Net Assets
Resulting from Operations $5,305,547 $546,598
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
(unaudited) Portfolio Portfolio
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income .......................................... $ 394,813 $ 394,151 $ 481,831 $ 939,015
Net realized gain (loss) from investment transactions............ 548,792 951,597 -- (25,440)
Net realized (loss) from foreign currency transactions........... (4,250) (4,388) -- --
Net increase (decrease) in unrealized
appreciation/depreciation on investments and translation
of assets and liabilities in foreign currencies............... 4,366,192 3,301,549 64,767 (318,191)
Net Increase in Net Assets
Resulting from Operations 5,305,547 4,642,909 546,598 595,384
Dividends and Distributions to Shareholders
From net investment income....................................... (4,531) (296,191) (481,831) (939,015)
Excess distribution of net investment income (Note 1)............ -- (154,476) -- --
From net realized gain on investments and
foreign currency transactions................................. (95,781) (1,043,459) -- --
(100,312) (1,494,126) (481,831) (939,015)
Capital Share Transactions (Note 5)
Shares sold...................................................... 4,010,600 7,000,000 -- --
Shares issued in reinvestment of dividends
and distributions............................................. 61,353 963,318 403,807 788,841
Shares redeemed.................................................. (15,006) (202,611) -- --
Net Increase in Net Assets from
Capital Share Transactions 4,056,947 7,760,707 403,807 788,841
Total Increase 9,262,182 10,909,490 468,574 445,210
Net Assets
Beginning of period.............................................. 28,160,624 17,251,134 14,968,258 14,523,048
End of period (including undistributed net investment
income as set forth below).................................... $37,422,806 $28,160,624 $15,436,832 $14,968,258
Undistributed Net Investment Income.............................. $ 400,806 $ 10,524 $ -- $ --
See accompanying notes.
</TABLE>
<PAGE>
June 30, 1997
NOTES TO FINANCIAL STATEMENTS
(unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
Note 1 -- Significant Accounting Policies
Principal Special Markets Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company and operates in the mutual fund industry. The Fund
currently consists of two portfolios (known as the International Securities and
Mortgage-Backed Securities Portfolios).
The Fund values securities for which market quotations are readily available at
market value, which is determined using the last reported sale price or, if no
sales are reported, as is regularly the case for some securities traded
over-the-counter, the last reported bid price. When reliable market quotations
are not considered to be readily available, which may be the case, for example,
with respect to certain debt securities and preferred stocks, the investments
are valued by using market quotations, prices provided by market makers or
estimates of market values obtained from yield data and other factors relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to the International Securities Portfolio, the value of foreign
securities in foreign currency amounts are expressed in U.S. Dollars at the
closing daily rate of exchange. Shares listed on the Korean Stock Exchange (KSE)
which are traded by foreign investors in foreign over-the-counter transactions
generally are valued at prices the Manager believes would be obtained if such
shares were sold, provided that the Board determines that such valuations are
accurate; otherwise such KSE shares will be valued using the procedures for
listed securities. 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 on valuation
date.
Since the carrying amount of the foreign securities of the International
Securities Portfolio is determined based on the exchange rate and market values
at the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The Fund 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 Fund's cash balances to be deposited into a single joint
account along with the cash of other registered investment companies managed by
Princor Management Corporation. These balances may be invested in one or more
short-term instruments.
The Fund records investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. The Fund records dividend income on the ex-dividend date, except
dividend income from certain foreign securities whereby the ex-dividend date has
passed; such dividends are recorded as soon as the Fund is 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 securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the portfolio's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
With respect to the Mortgage-Backed Securities Portfolio, all net investment
income is declared as a dividend daily to shareholders of record as of that day,
and all distributions of realized gains from investment transactions are
recorded on the ex-dividend date. Dividends and distributions to shareholders of
the International Securities Portfolio are recorded on the ex-dividend date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investments and foreign currency transactions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for the year ended December 31, 1996, were not material.
Due to the timing of dividend distributions and the differences in accounting
for net income for financial statement and federal income tax purposes, the
fiscal year in which amounts are distributed may differ from the year in which
the net income is recorded for financial statement purposes by the portfolio.
The difference between the net income distributed on a book versus tax basis is
shown as excess distributions of net investment income in the accompanying
Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because the Fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
Note 3 -- Management Agreement and Transactions With Affiliates
The Fund has agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager") and to
Invista Capital Management, Inc. ("Invista"), an indirect wholly-owned
subsidiary of Principal Mutual Life Insurance Company, pursuant to a
sub-advisory agreement. Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Fund in return for the
advisory fee paid by the Fund and to reimburse the Manager for the other costs
it incurs under the management agreement. The annual rate used in this
calculation for the International Securities Portfolio and the Mortgage-Backed
Securities Portfolio is .90% and .45%, respectively, of the average daily value
of each portfolio's net assets.
Brokerage commissions were paid to an affiliate by the International Securities
Portfolio in the amount of $723 and $1,655 for the six months ended June 30,
1997, and the year ended December 31, 1996, respectively.
At June 30, 1997, Principal Mutual Life Insurance Company owned shares of
International Securities Portfolio and Mortgage-Backed Portfolio in the amount
of 1,240,722 and 1,301,648, respectively.
Note 4 -- Investment Transactions
For the six months ended June 30, 1997,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 Securities Portfolio $9,557,340 $6,072,525
Mortgage-Backed Securities Portfolio 369,030 420,172
At June 30, 1997, 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 Securities Portfolio $9,947,567 $(464,680) $9,482,887
Mortgage-Backed Securities Portfolio 88,310 (214,158) (125,848)
</TABLE>
At June 30, 1997, International Securities Portfolio held the following
securities which were purchased in private placement transactions and may
require registration in order to effect a sale in the ordinary course of
business.
<TABLE>
<CAPTION>
Value at Value as a
Date of June 30, Percentage of
Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C>
Alfa SA; Convertible
Subordinated Debentures 9/26/95 $199,250 $ 290,500 .78%
Fokus Bank 10/3/96 79,958 118,566 .32
Hyundai Motor 10/3/96 94,600 83,850 .22
Kemira OY 12/10/96 286,318 216,970 .58
2/24/97 88,695 72,638 .19
4/11/97 95,955 85,845 .23
Royal Group Technologies Ltd. 11/23/94 58,057 190,423 .51
Voest-Alpine Stahl 10/27/95 103,583 154,041 .41
1/11/96 54,207 77,021 .21
3/27/96 55,366 77,021 .21
12/9/96 109,873 140,449 .38
---------- ----
$1,507,324 4.04
</TABLE>
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
while the International Securities Portfolio's investments are with various
issuers in various industries. The Schedules of Investments contained herein
summarize the concentration of credit risk for Mortgage-Backed Securities
Portfolio by issuers and International Securities Portfolio by industry and
issuer.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by portfolio were as follows:
International Mortgage-Backed
Securities Portfolio Securities Portfolio
Six Months Ended June 30, 1997:
Shares sold....................... 253,324 --
Shares issued in reinvestment of
dividends and distributions...... 4,373 40,945
Shares redeemed................... (955) --
Net Increase 256,742 40,945
Year Ended December 31, 1996:
Shares sold....................... 528,303 --
Shares issued in reinvestment of
dividends and distributions...... 73,625 80,137
Shares redeemed................... (16,274) --
Net Increase 585,654 80,137
Note 6 -- Line of Credit
The Fund has an unsecured line of credit with a bank which allows each portfolio
to borrow up to $500,000. Borrowings are made solely to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Interest is
charged to each portfolio, based on its borrowings, at a rate equal to the
bank's Fed Funds Unsecured Rate plus 100 basis points. Additionally, a
commitment fee is charged at the annual rate of .25% on the line of credit. At
June 30, 1997, the Fund had no outstanding borrowings under the line of credit.
<PAGE>
June 30, 1997
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Shares
Held Value
Common Stocks (95.43%)
Advertising (1.78%)
WPP Group PLC 162,700 $ 667,477
Beverages (1.42%)
Lion Nathan 70,000 176,955
PanAmerican Beverages 10,800 355,050
532,005
Blast Furnace & Basic
Steel Products (1.82%)
British Steel PLC 93,000 230,622
Voest-Alpine Stahl 9,900(a)(b) 448,532
679,154
Broadwoven Fabric Mills,
Cotton (0.50%)
Roda Vivatex 480,000 187,539
Central Reserve Depositories (3.17%)
Banco Totta & Acores 9,600 160,610
Ergo Bank 73 4,388
National Westminster Bank 31,600 424,680
Wing Hang Bank 98,400 594,417
1,184,095
Chewing & Smoking Tobacco (1.34%)
Imperial Tobacco Group PLC 78,000 501,737
Combination Utility Services (1.58%)
ABB AG 390 591,213
Commercial Banks (10.61%)
ABN-AMRO Holdings NV 31,488 588,194
Bank of Ireland 85,436 940,589
Barclays PLC 22,900 454,301
Fokus Bank 14,000(b) 118,566
Istituto Mobiliare Italiano 34,000 305,730
National Australia Bank Ltd. 37,655 535,126
Royal Bank of Canada 11,600 525,951
Svenska Handelsbanken AB Free 17,050 502,743
3,971,200
Communication Services, NEC (1.02%)
KPN Royal PTT Nederland 9,714 381,753
Computer & Office Equipment (0.15%)
Canon, Inc. 2,000 54,531
Construction & Related Machinery (0.56%)
Powerscreen International PLC 19,400 211,321
Consumer Products (1.59%)
Imasco Ltd. 20,500 594,393
Crude Petroleum & Natural Gas (0.94%)
Hardy Oil & Gas 63,000 350,726
Deep Sea Foreign Transportation
of Freight (0.80%)
Van Ommeren NV 7,642 $ 297,205
Department Stores (0.94%)
Vendex International 6,414 351,910
Drugs (6.86%)
Elan Corp. PLC ADR 10,500(a) 475,125
Galenica Holdings AG 350(a) 164,454
Novartis AG 578 925,371
Pharmacia & Upjohn, Inc. 16,500 573,375
Teva Pharmaceutical ADR 6,600 427,350
2,565,675
Electric Light & Wiring
Equipment (0.19%)
Clipsal Industries Holdings 20,000 70,800
Electric Services (0.38%)
Korea Electric Power Corp. 4,800 143,243
Electronic Components &
Accessories (2.52%)
Amtek Engineering 78,500 137,801
Elec & Eltek International 96,000 537,600
Murata Mfg. 2,000 79,700
Varitronix 111,000 188,408
943,509
Electronic Distribution
Equipment (2.15%)
Phillips Electronics 11,200 803,706
Engines & Turbines (3.39%)
Mabuchi Motor 1,100 63,926
PT United Tractors 123,000 455,274
Radex-Heraklith 8,900 376,731
Scapa Group PLC 106,000 372,237
1,268,168
Farm & Garden Machinery (1.26%)
New Holland NV 17,200 470,850
Finance Services (0.72%)
MBF Capital Berhad 146,000 268,399
Functions Closely Related
to Banking (0.66%)
Liechtenstein Global Trust AG 400 245,567
Gas Production & Distribution (1.25%)
OMV AG 3,650 467,644
General Industrial Machinery (1.00%)
SKF AB 'B' Free 14,400 372,460
Holding Offices (1.08%)
First Pacific Co., Ltd. 314,893 402,391
Household Appliances (0.63%)
Fisher & Paykel 60,263 234,841
Industrial Inorganic Chemicals (2.82%)
Bayer AG 10,500 $ 404,927
Kemira OY 39,800(b) 375,453
Rhone Poulenc 6,700 273,892
1,054,272
Investment Offices (1.46%)
Amvescap PLC 93,400 544,837
Life Insurance (1.17%)
QBE Insurance Group Ltd. 73,000 437,501
Meat Products (5.71%)
Danisco AS 11,200 685,778
Davomas Abadi 270,000(a) 333,128
Orkla B Ordinary Shares 7,900 536,322
Unilever NV 2,750 579,945
2,135,173
Miscellaneous Chemical Products (1.27%)
Hoechst AG 11,200 474,986
Miscellaneous Converted Paper
Products (0.55%)
Bunzl PLC 64,000 207,172
Miscellaneous Durable Goods (0.84%)
Hagemeyer NV 6,102 315,794
Miscellaneous Furniture &
Fixtures (0.00%)
PT Surya Toto 200 378
Miscellaneous Manufacturers (0.28%)
Carter Holt Harvey Ltd. 41,000 105,868
Miscellaneous Non-Durable
Goods (1.99%)
Grand Metropolitan PLC 76,985 745,054
Miscellaneous Plastics
Products, NEC (0.51%)
Royal Group Technologies Ltd. 7,100(a)(b) 190,423
Miscellaneous Textile Goods (1.35%)
Espirit Holdings Ltd. 714,000 506,888
Miscellaneous Transportation
Equipment (1.25%)
Autoliv Inc. 12,000 469,500
Miscellaneous Wood Products (0.40%)
Enso OY 16,300 150,628
Motor Vehicles & Equipment (1.89%)
E.C.I.A. - Equipment & Composants 1,900 289,971
Hyundai Motor Co. Ltd. 8,600(b) 83,850
UMW Holdings Berhad 71,000 334,746
708,567
Newspapers (1.31%)
Publishing & Broadcasting Ltd. 86,000 491,574
Oil & Gas Field Services (0.70%)
Eni SPA 46,000 $ 260,212
Petroleum Refining (3.20%)
Repsol Petroleo SA 14,700 622,703
YPF Sociedad Anonima ADR 18,700 575,025
1,197,728
Photographic Equipment &
Supplies (1.42%)
PT Bunas Finance Indonesia 365,000 532,901
Plastic Materials & Synthetics (0.82%)
Astra AB 17,333 308,222
Pulp Mills (2.39%)
Lassila & Tikanoja Ltd. OY 4,400 368,484
UPM-Kymmene OY 22,700 524,426
892,910
Security & Commodity Services (1.12%)
Corporacion Bancaria de Espania SA 7,500 420,718
Security Brokers & Dealers (1.55%)
Peregrine Investment Holdings 279,000 574,402
Peregrine Investment - Warrants 14,800(a) 6,495
580,897
Soap, Cleaners, & Toilet Goods (1.68%)
Reckitt & Colman PLC 42,292 630,312
Special Industry Machinery (0.38%)
IHC Caland NV 2,500 136,910
Rauma Group 312 7,148
144,058
Sugar & Confectionary Products (2.54%)
Nestle 610 805,885
Tate & Lyle 19,500 144,907
950,792
Telephone Communication (5.96%)
Nokia Corp. Class A ADR 6,800 501,500
Tele Danmark B 2,900 150,889
Telecom Corp. of New Zealand Ltd. 120,000 609,957
Telecom Italia-DI 203,000 401,466
Telefonica de Espana SA 19,600 567,729
2,231,541
Water Transportation of
Freight, NEC (0.56%)
ICB Shipping AB 'B' Free 20,466 209,097
Total Common Stock 35,711,515
Preferred Stocks (0.51%)
Commercial Banks (0.51%)
National Australia Bank ECU Convertible 6,800 189,975
Bonds (0.77%)
Fire, Marine & Casualty
Insurance (0.77%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $ 200,000(b) $ 290,500
Commercial Paper (6.75%)
Personal Credit Institutions (6.75%)
Associates Corp.;
6.25%; 7/1/97 1,025,000 1,025,000
Ford Motor Credit;
5.50%; 7/1/97 1,500,000 1,500,000
Total Commercial Paper 2,525,000
Total Portfolio Investments (103.46%) 38,716,990
Liabilities, net of cash, receivables and other
assets (-3.46%) (1,294,184)
Total Net Assets (100.00%) $37,422,806
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Notes 4 to the financial statements.
International Securities Portfolio
Investments by Country
Total Market Percentage of Total
Country Value Market Value
Argentina $ 575,025 1.49%
Australia 1,654,175 4.27
Austria 1,292,906 3.34
Canada 1,310,768 3.39
Denmark 836,667 2.16
Finland 1,927,639 4.98
France 563,862 1.46
Germany 879,914 2.27
Greece 4,388 .01
Hong Kong 2,273,001 5.87
Indonesia 1,509,220 3.90
Israel 427,350 1.10
Italy 967,408 2.50
Japan 198,156 .51
Korea 227,093 .59
Malaysia 603,145 1.56
Mexico 290,500 .75
Netherlands 3,926,268 10.14
New Zealand 1,127,620 2.91
Norway 654,888 1.69
Portugal 160,610 .41
Singapore 746,201 1.93
Spain $ 1,611,151 4.16
Sweden 1,862,021 4.81
Switzerland 2,732,492 7.06
United Kingdom 6,901,097 17.82
United States 3,453,425 8.92
Total Market Value $38,716,990 100.00%
Mortgage-Backed Securities Portfolio
Description of Issue Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (34.57%)
FNMA 6.00% 1/1/23-3/1/26 $1,086,672 $ 1,014,285
FNMA 6.25 4/1/26 394,839 372,799
FNMA 7.00 8/1/23 3,191,392 3,147,472
FNMA 7.50 6/1/23 796,042 802,435
Total FNMA Certificates 5,336,991
Government National Mortgage Association (GNMA)
Certificates (57.63%)
GNMA I 6.00 2/15/23-1/15/24 1,027,732 961,506
GNMA I 6.50 2/15/23-1/15/24 2,548,343 2,456,570
GNMA I 7.50 6/15/23-3/15/27 1,319,702 1,330,516
GNMA II 5.50 3/20/26 182,267 160,792
GNMA II 6.00 1/20/23-9/20/26 3,916,150 3,620,694
GNMA II 6.50 10/20/25 383,386 365,869
Total GNMA Certificates 8,895,947
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (4.99%)
FHLMC 5.50 2/1/24-3/1/24 673,629 616,542
FHLMC 6.00 4/1/24 163,523 153,220
Total FHLMC Certificates 769,762
Total Portfolio Investments (97.19%) 15,002,700
Cash, receivables and other assets,
net of liabilities (2.81%) 434,132
Total Net Assets (100.00%) $15,436,832
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
------------------------------- -------------------------------------------------
Net Realized
and Excess
Net Asset Net Unrealized Total Dividends Distributions Distribu-
Value at Invest- Gain from from Net from Net tions Total
Beginning ment (Loss) on Investment Investment Investment from Capital Distribu-
of Period Income Investments Operations Income Income Gains tions
INTERNATIONAL SECURITIES PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $13.67 $.17 $2.36 $2.53 $ -- $ -- $(.05) $(.05)
Year Ended December 31,
1996 11.70 .31 2.46 2.77 (.16) (.07) (.57) (.80)
1995 11.29 .19 1.11 1.30 (.10) (.07) (.72) (.89)
1994 12.87 .13 (.95) (.82) (.12) (.13) (.51) (.76)
Period Ended December 31, 1993(a) 10.01 .07 2.91 2.98 (.10) -- (.02) (.12)
MORTGAGE-BACKED SECURITIES PORTFOLIO
Six Months Ended June 30, 1997 9.93 .32 .04 .36 (.32) -- -- (.32)
Year Ended December 31,
1996 10.17 .64 (.24) .40 (.64) -- -- (.64)
1995 9.11 .65 1.06 1.71 (.65) -- -- (.65)
1994 10.10 .63 (.99) (.36) (.63) -- -- (.63)
Period Ended December 31, 1993(a) 10.01 .34 .09 .43 (.34) -- -- (.34)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
INTERNATIONAL SECURITIES PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $16.15 18.55%(c) 37,423 .90% 2.63% 40.8%(b) $.0168
Year Ended December 31,
1996 13.67 24.12% 28,161 .90% 1.90% 25.5% .0187
1995 11.70 12.02% 17,251 .90% 1.79% 46.0% N/A
1994 11.29 (6.45)% 15,542 .90% .94% 37.0% N/A
Period Ended December 31, 1993(a) 12.87 29.95%(c) 16,838 .90%(b) 1.21%(b) 6.9%(b) N/A
MORTGAGE-BACKED SECURITIES PORTFOLIO
Six Months Ended June 30, 1997 9.97 3.66%(c) 15,437 .45%(b) 6.50%(b) 9.4%(b) N/A
Year Ended December 31,
1996 9.93 4.20% 14,968 .45% 6.51% 28.7% N/A
1995 10.17 19.26% 14,253 .45% 6.66% 9.9% N/A
1994 9.11 (3.60)% 14,714 .45% 6.56% 41.8% N/A
Period Ended December 31, 1993(a) 10.10 4.47%(c) 24,309 .45%(b) 5.23%(b) 9.6%(b) N/A
<FN>
(a) Period from May 7, 1993, date shares first offered to the public, through
December 31, 1993. Net investment income, aggregating $.01 per share for
the International Securities Portfolio and $.01 per share for the
Mortgage-Backed Securities Portfolio for the period from the initial
purchase of shares on April 26, 1993 through May 6, 1993, was recognized,
none of which was distributed from the International Securities Portfolio
and all of which was distributed from the Mortgage-Backed Securities
Portfolio to the sole shareholder, Principal Mutual Life Insurance Company,
during the period. Additionally, the Mortgage-Backed Securities Portfolio
incurred unrealized gains on investments of $.01 per share during the
intitial interim period. This represented activities of each portfolio
prior to the initial offering.
(b) Computed on an annualized basis.
(c) Total return amounts have not been annualized.
</FN>
</TABLE>
