<PAGE>
--------------------------------------------------------------------------------
Semi-Annual
[GRAPHIC] Report
June 30, 2000
(unaudited)
--------------------------------------------------------------------------------
Pilgrim Mutual Funds
--------------------------------------------------------------------------------
PILGRIM GNMA
INCOME FUND, INC.
-----------------------------------------
Investment Objective: High Current Income
<PAGE>
Chairman's Message
-------------------------------------------------------------------------------
Dear Shareholders:
Welcome to the Pilgrim Mutual Funds family. We are pleased to present the
Semi-Annual Report for Pilgrim GNMA Income Fund, Inc. (formerly Lexington GNMA
Income Fund, Inc.).
On July 26, 2000, ReliaStar Financial Corp. ("ReliaStar") acquired Lexington
Management Corporation and all of its subsidiaries. In conjunction with the
acquisition, Pilgrim Investments, Inc., a subsidiary of ReliaStar, was
appointed to the role of Investment Adviser to the Fund. As a shareholder in
the Pilgrim family of funds, you now have access to more funds with varying
investment objectives. As a Lexington Fund shareholder as of July 26th, you
can now exchange into any Pilgrim Fund A shares without paying a sales load.
Our fund family has 41 varying types of mutual funds which provide more core
investment choices for the serious investor. We believe that the key to
success is matching quality core investments to the individual needs of
investors. Core investments are the foundation of every portfolio and the
basis of other important investment decisions. Pilgrim prides itself on
providing a family of core investments designed to help you reach your
financial goals. Our goal is for every investor to have a successful
investment experienceSM.
If you have any questions regarding your account, or any other Pilgrim Fund
you can access, please call us at 800-992-0180 or visit our website at
www.pilgrimfunds.com.
Sincerely,
/s/ Robert W. Stallings
Robert W. Stallings
Chairman and Chief Executive Officer
Pilgrim Group, Inc.
August, 2000
<PAGE>
Dear Shareholders:
-------------------------------------------------------------------------------
The Pilgrim GNMA Income Fund, Inc. (formerly Lexington GNMA Income Fund,
Inc.) returned 3.8%* during the first half of 2000. This was an expected
turnaround compared with the relatively flat results for 1999. Reflecting the
weak performance of our GNMA-guaranteed multi-family mortgage loans last year,
our twelve months return lags that of our peer group by about sixty basis
points. However, the Pilgrim GNMA Income Fund's performance ranks either first
or second for the last three-, five-, and ten-year periods. We are confident
that our shorter-term relative performance will improve by year-end.
Morningstar continues to accord us a Five-Star performance rating within the
Fund's investment category.
The bond market rally broadened during the June quarter. U.S. Treasury
securities led the way earlier in the year as government buybacks and the
prospect of future large budget surpluses added "scarcity" value to these
bonds. The positive price action, however, was confined to the long-end of the
yield curve because the Federal Reserve steadily raised money market yields in
an effort to both slow the economy and curb asset inflation (a.k.a. higher
stock prices). In May and June, it became apparent that their efforts were
paying off. A slower economy will moderate private sector credit demand and
improve the supply-demand balance for mortgages and corporate debt securities.
With this development in prospect, investors increased their purchases of such
securities during the June quarter and the yield spread between these bonds
and U.S. Treasury obligations stabilized. Given their status as "full faith
and credit" government obligations, GNMA's were especially strong performers
during the quarter. We anticipate more of the same in the months ahead and,
accordingly, have increased our mortgage holdings to effectively 100% of the
total portfolio.
We increased our project loan investments in recent months. These
securities are GNMA-guaranteed mortgages on apartment buildings, nursing
homes, and similar multi-unit properties. These securities have superior
investment characteristics relative to single family mortgages because project
loans have various provisions that restrict prepayment regardless of changes
in interest rates. Historically, project loans have been our largest holdings
and they likely account for our excellent long-term results. However, in
recent years, they became expensive compared with single family mortgages. By
the end of 1999, they had fallen to 52% of total fund investments. During the
first half of 2000, however, value came back into project loans, partially as
a result of the strong relative showing of single family mortgages. We are
able to add to our project loan holdings and they now account for 72% of total
investments. As project loans increase as a percentage of our total portfolio,
we think the Fund's performance prospects improve.
As you are aware, Lexington Global Asset Managers, Inc., the parent company
of Lexington Management Corporation was acquired by ReliaStar Financial Corp.
(NYSE:RLR) the parent company of Pilgrim Investments, Inc., and investment
management and mutual fund company with $17 billion of assets under
management.
1
<PAGE>
On May 1, ReliaStar announced that it agreed to be acquired by ING Groep
N.V. ("ING Group") in a transaction that, subject to certain approvals, is
expected to close in the third quarter of this year. ING Group is a global
financial institution that is active in the field of insurance, banking, and
asset management in more than 60 countries.
We wish to thank you for your continued support.
Sincerely,
/s/ Roseann G. McCarthy
/s/ Denis P. Jamison
Denis P. Jamison Roseann G. McCarthy
Portfolio Manager Portfolio Manager
August, 2000 August, 2000
* 3.61%, 6.67%, and 7.61% are the one, five, and ten year average annual
standard total returns, respectively, for the period ended June 30, 2000.
Investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than at
their original cost. Total return represents past performance and is not
predictive of future results. There is no guarantee that the Fund can
achieve its objective.
For the period ended June 30, 2000, the Fund, according to Lipper, Inc. was
ranked number 47 in a universe of 54 GNMA Funds for the one year period. It
was ranked number 2 out of 45 for the 3 year period, ranked number 1 out of 40
for the 5 year period and ranked number 2 out of 23 for the 10 year period.
2
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Statement of Net Assets
(Including the Portfolio of Investments)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Stated Principal Value
Coupon Maturity Amount (Note 1)
--------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 107.1%
<S> <C> <C> <C>
10.25% 8/2029 $ 1,000,130 $ 1,082,320
9.25 6/2030 1,409,424 1,478,133
9.00 5/2020-12/2034 2,266,683 2,355,922
8.75 11/2017-6/2027 6,839,565 7,098,169
8.50 4/2012-4/2032 14,321,461 14,876,417
8.25/1/ 5/2041 951,000 960,510
8.25/3/ 11/2017-5/2041 5,967,706 6,112,780
8.20 10/2011-5/2013 7,812,631 7,990,837
8.15 12/2011-9/2015 9,488,324 9,683,973
8.125 5/2038 5,059,821 5,159,398
8.10 6/2012-2/2038 4,128,167 4,205,569
8.05 7/2019-4/2021 669,626 685,851
8.00/1/ 1/2014-11/2038 473,818 473,871
8.00/3/ 3/2024-11/2038 34,087,291 34,566,221
7.90 4/2029 5,806,374 5,848,064
7.875 6/2021-7/2038 14,646,619 14,811,393
7.80 5/2019-7/2019 357,091 362,112
7.75 8/2014-1/2036 6,167,315 6,198,329
7.70 8/2013 728,862 732,958
7.65/1/ 5/2041 16,412,760 15,940,893
7.65 12/2012-5/2041 11,126,336 10,931,309
7.625 8/2014-7/2038 12,695,413 12,608,995
7.50/3/ 4/2013-5/2031 5,680,432 5,651,760
7.45 3/2029 18,806,315 18,471,186
7.25 5/2022-6/2029 5,292,140 5,156,827
7.20 4/2034 2,291,272 2,218,227
7.125 9/2039 9,112,341 8,756,322
7.10/1/ 6/2034 503,554 479,791
7.10 6/2034 5,170,446 4,926,453
7.05/1/ 7/2029 195,183 185,484
7.05 7/2029 3,478,376 3,301,192
7.00/2/,/3/ 1/2027-2/2039 48,909,885 47,629,024
6.95 12/2029 3,013,015 2,875,531
6.875 1/2029-2/2040 9,231,058 8,720,396
6.87 3/2039 1,837,929 1,693,193
6.82 4/2034 3,204,815 3,035,537
6.81 7/2039 2,905,417 2,745,619
6.75/1/ 8/2030-12/2031 665,719 621,402
6.75 6/2013-6/2039 20,515,723 19,296,933
6.70 8/2014-12/2014 410,874 386,603
6.687 2/2030 6,313,600 5,845,952
6.67 1/2040 3,585,534 3,346,845
6.65 12/2013-11/2039 7,056,742 6,556,137
6.625 7/2033-1/2040 12,471,503 11,559,462
6.50/3/ 2/2022-2/2040 34,758,270 32,355,393
6.35 9/2033 591,917 537,715
6.34 2/2029 141,373 125,733
6.25 4/2026-4/2028 5,139,532 4,824,025
</TABLE>
<TABLE>
<CAPTION>
Stated Principal Value
Coupon Maturity Amount (Note 1)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6.00/3/ 7/2028-10/2028 $ 18,407,985 $ 16,984,574
5.65 7/2029 580,422 483,016
5.50 4/2029 242,863 215,845
------------
TOTAL GNMA CERTIFICATES
(cost $388,495,052)................................ 383,150,201
------------
<CAPTION>
Principal Value
Security Amount (Note 1)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS: 0.7%
U.S. Treasury Bills,
6.02%, due 12/07/00.......... $ 1,500,000 $ 1,461,345
U.S. Treasury Bonds,
5.875%, due 11/15/04......... 1,000,000 984,390
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(cost $2,443,750).................................. 2,445,735
------------
TOTAL INVESTMENTS: 107.8%
(cost $390,938,802+) (Note 1)...................... 385,595,936
Liabilities in excess of other assets: (7.8%)....... (27,757,262)
------------
TOTAL NET ASSETS: 100.0%
(equivalent to $8.12 per share on 44,054,738 shares
outstanding)....................................... $357,838,674
============
</TABLE>
-------
/1/Construction loan securities issued on a when-issued basis (Note 1).
/2/When-issued securities (Note 1).
/3/Some or all of this security is segregated for construction loan and when-
issued securities (Note 1).
+ Aggregate cost for Federal income tax purposes is identical.
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Statement of Assets and Liabilities
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost $390,938,802) (Note 1).............. $385,595,936
Cash............................................................ 112,649
Receivable for shares sold...................................... 1,084,101
Interest receivable............................................. 2,266,204
------------
Total Assets................................................. 389,058,890
============
Liabilities
Due to Lexington Management Corporation (Note 2)................ 158,211
Payable for investment securities purchased..................... 29,948,883
Payable for shares redeemed..................................... 623,625
Distributions payable........................................... 189,963
Accrued expenses................................................ 299,534
------------
Total Liabilities............................................ 31,220,216
------------
Net Assets (equivalent to $8.12 per share on 44,054,738 shares
outstanding) (Note 3).......................................... $357,838,674
============
Net Assets consist of:
Capital stock -- authorized 100,000,000 shares, $.01 par value
per share...................................................... $ 440,547
Additional paid-in-capital...................................... 368,151,678
Undistributed net investment income............................. 331
Accumulated net realized loss on investments.................... (5,411,016)
Unrealized depreciation of investments.......................... (5,342,866)
------------
Total Net Assets............................................. $357,838,674
============
</TABLE>
Pilgrim GNMA Income Fund, Inc.
Statement of Operations
Six months ended June 30, 2000 (unaudited)
<TABLE>
<S> <C> <C>
Investment Income
Interest Income...................................... $13,499,414
Expenses
Investment advisory fee (Note 2)..................... $ 964,694
Transfer agent and shareholder servicing expenses
(Note 2)............................................ 482,901
Accounting expenses (Note 2)......................... 115,043
Directors' fees and expenses......................... 98,243
Registration fees.................................... 55,425
Printing and mailing expenses........................ 31,818
Custodian expenses................................... 26,977
Professional fees.................................... 18,874
Computer processing fees............................. 11,015
Other expenses....................................... 27,529
-----------
Total expenses....................................... 1,832,519
-----------
Net investment income................................ 11,666,895
Realized and Unrealized Gain (Loss) on Investments
(Note 4)
Net realized loss on investments..................... (2,472,614)
Net change in unrealized depreciation of
investments......................................... 4,156,600
-----------
Net realized and unrealized gain..................... 1,683,986
-----------
Increase in Net Assets Resulting from Operations...... $13,350,881
===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 Year ended
(unaudited) December 31, 1999
---------------- -----------------
<S> <C> <C>
Operations:
Net investment income........................ $ 11,666,895 $ 20,453,437
Net realized loss from investments........... (2,472,614) (1,512,537)
Net change in unrealized appreciation
(depreciation) of investments............... 4,156,600 (17,574,398)
------------- -------------
Net increase in net assets resulting from
operations................................ 13,350,881 1,366,502
------------- -------------
Distributions to Shareholders: (Note 1)
Distributions to shareholders from net
investment income........................... (11,666,564) (20,595,801)
------------- -------------
Capital Share Transactions: (Note 3)
Proceeds from sale of shares................. 72,129,871 220,636,961
Reinvested dividends......................... 10,541,416 18,731,683
Cost of shares redeemed...................... (103,097,384) (117,150,009)
------------- -------------
Net increase (decrease) in net assets from
capital share transactions................ (20,426,097) 122,218,635
------------- -------------
Net increase (decrease) in net assets........ (18,741,780) 102,989,336
Net Assets:
Beginning of period.......................... 376,580,454 273,591,118
------------- -------------
End of period (including undistributed net
investment income of $331 and $0 in 2000 and
1999, respectively)......................... $ 357,838,674 $ 376,580,454
============= =============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
-------------------------------------------------------------------------------
Pilgrim GNMA Income Fund, Inc.
Notes to Financial Statements
June 30, 2000 (unaudited) and December 31, 1999
1.Significant Accounting Policies
Pilgrim GNMA Income Fund, Inc. (formerly Lexington GNMA Income Fund, Inc.),
(the "Fund") is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended. The Fund's
investment objective is to seek a high level of current income, consistent
with liquidity and safety of principal, through investment primarily in
mortgage-backed GNMA ("Ginnie Mae") certificates that are guaranteed as to the
timely payment of principal and interest by the United States Government. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements:
Investments Securities transactions are accounted for on a trade date basis.
Realized gains and losses from investment transactions are reported on the
identified cost basis. Securities are valued at the last reported bid price as
of the last business day of the period or, if no current bid price is
available, by the valuation as determined by the Fund's management in good
faith under the direction of the Fund's Board of Directors. Short-term
securities having a maturity of 60 days or less are stated at amortized cost,
which approximates market value. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income, adjusted
for amortization of premiums and accretion of discounts, is accrued as earned.
5
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Notes to Financial Statements
June 30, 2000 (unaudited) and December 31, 1999 (continued)
1.Significant Accounting Policies (continued)
When-Issued Securities The Fund, at times, may purchase GNMA certificates on
a delayed delivery, forward or when-issued basis with payment and delivery
often taking place a month or more after the initiation of the transaction. It
is the Fund's policy to record when-issued GNMA certificates (and the
corresponding obligation to pay for the securities) at the time the purchase
commitment becomes fixed--generally on the trade date. It is also the Fund's
policy to segregate assets to cover its commitments for when-issued securities
on trade date.
Construction Loan Securities The Fund may purchase construction loan
securities which are issued to finance building costs. The funds are disbursed
as needed or in accordance with a prearranged plan. The securities provide for
the timely payment to the registered holder of interest at the specified rate
plus scheduled installments of principal. Upon completion of the construction
phase, the construction loan securities are terminated, and project loan
securities are issued. It is the Fund's policy to record these GNMA
certificates on trade date, and to segregate assets to cover its commitments
on trade date as well.
Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies"
and to distribute all of its taxable income to its shareholders. Therefore, no
provision for Federal income taxes is required.
Distributions Dividends from net investment income are normally declared and
paid monthly and dividends from net realized capital gains are normally
declared and paid annually. However, the Fund may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code. The character of income and gains to be distributed are
determined in accordance with income tax regulations, which may differ from
generally accepted accounting principles. At December 31, 1999,
reclassifications were made to the Fund's capital accounts to reflect
permanent book/tax differences and income and gains available for distribution
under income tax regulations. Net investment income, net realized gains and
net assets were not affected by this change.
Use of Estimates 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 increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
2.Investment Advisory Fee and Other Transactions with Affiliate
The Fund paid an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 0.60% of the Fund's average daily net assets up
to $150 million and in decreasing stages to 0.40% of average daily net assets
in excess of $800 million. In accordance with the investment advisory
agreement, the adviser is required to reimburse the Fund for any expenses,
excluding interest, taxes and extraordinary expenses which exceed 1.50% of the
first $30 million of the Fund's average daily net assets and 1.00% thereafter.
No reimbursement was required for the six months ended June 30, 2000.
6
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Notes to Financial Statements
June 30, 2000 (unaudited) and December 31, 1999 (continued)
2.Investment Advisory Fee and Other Transactions with Affiliate (continued)
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $229,990, which were incurred by the Fund, but
paid by LMC.
3.Capital Stock
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 Year ended
(unaudited) December 31, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold............. 8,931,459 $ 72,129,871 26,323,658 $ 220,636,961
Shares issued on
reinvestment of
dividends.............. 1,308,630 10,541,416 2,253,632 18,731,683
----------- ------------- ----------- -------------
10,240,089 82,671,287 28,577,290 239,368,644
Shares redeemed......... (12,785,029) (103,097,384) (14,047,603) (117,150,009)
----------- ------------- ----------- -------------
Net increase
(decrease)............. (2,544,940) $ (20,426,097) 14,529,687 $ 122,218,635
=========== ============= =========== =============
</TABLE>
4.Investment Transactions
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 2000, excluding short-term securities, were $197,336,621 and
$206,420,074, respectively.
At June 30, 2000, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$2,666,614 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $8,009,480.
5. Subsequent Events
Effective on July 26, 2000, Lexington Global Asset Managers, Inc. was acquired
by ReliaStar Financial Corp. ("ReliaStar"). In conjunction with the
acquisition and following approval by the Fund's Board of Directors and
shareholders, Pilgrim Investments, Inc., an indirect, wholly owned subsidiary
of ReliaStar, was appointed to the role of investment adviser to the Fund
effective July 26, 2000. Pilgrim Securities, Inc., also an indirect, wholly
owned subsidiary of ReliaStar, was appointed distributor to the Fund on that
date as well.
On May 1, 2000, ReliaStar Financial Corp. (NYSE:RLR), the indirect parent
company of Pilgrim Investments, Inc., Adviser to the Funds, and Pilgrim
Securities, Inc., Distributor to the Funds, entered into an agreement under
which it will be acquired by ING Groep N.V. (NYSE:ING). ING Groep N.V. is a
global financial institution active in the field of insurance, banking, and
asset management in more than 60 countries, with almost 90,000 employees.
Completion of the acquisition is contingent upon, among other things, approval
by the Directors/Trustees of the Pilgrim Funds and certain shareholder and
regulatory approvals. The closing of the acquisition is expected to occur
during the third quarter of 2000.
7
<PAGE>
Pilgrim GNMA Income Fund, Inc.
Financial Highlights
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six months ended Year ended December 31,
June 30, 2000 --------------------------------------
(unaudited) 1999 1998 1997 1996
---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $8.08 $8.53 $8.40 $8.12 $8.19
-------- -------- -------- -------- --------
Income (loss) from in-
vestment operations:
Net investment income.. 0.27 0.50 0.48 0.51 0.53
Net realized and
unrealized gain (loss)
on investments........ 0.04 (0.45) 0.13 0.29 (0.08)
-------- -------- -------- -------- --------
Total income from
investment operations.. 0.31 0.05 0.61 0.80 0.45
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income..... (0.27) (0.50) (0.48) (0.52) (0.52)
-------- -------- -------- -------- --------
Net asset value, end of
period................. $8.12 $8.08 $8.53 $8.40 $8.12
======== ======== ======== ======== ========
Total return............ 7.74%* 0.58% 7.52% 10.20% 5.71%
Ratio to average net as-
sets:
Expenses............... 1.03%* 0.99% 1.01% 1.01% 1.05%
Net investment income.. 6.55%* 6.04% 5.85% 6.28% 6.56%
Portfolio turnover
rate................... 103.41%* 25.10% 54.47% 134.28% 128.76%
Net assets, end of
period (000's
omitted)............... $357,839 $376,580 $273,591 $158,071 $133,777
</TABLE>
--------
* Annualized.
8
<PAGE>
PILGRIM GNMA INCOME FUND, INC.
Investment Adviser
Pilgrim Investments, Inc.
40 North Central Avenue
Suite 1200
Phoenix, Arizona 85004-4408
Distributor
Pilgrim Securities, Inc.
40 North Central Avenue
Suite 1200
Phoenix, Arizona 85004-4408
www.lexingtonfunds.com
All Shareholder requests for services of any kind should be sent to:
Transfer Agent
Lexington Funds
c/o DST Systems, Inc.
P.O. Box 219368
Kansas City, Missouri 64121-6368
Or call toll free
Service and Sales: 1-800-526-0056
This report has been prepared for the information of the shareholders of Pilgrim
GNMA Income Fund, Inc. and is authorized for distribution to the public only if
it is accompanied or preceded by a currently effective prospectus which sets
forth expenses and other material information. LEX274-SAR6/00
