-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C6LnX8a7/I7WIOAY7/g7dN9D3hSKt4enrfsNPT3LOtDxn3gmTQiSvzTxp0DacWvb qQXS0clQOHuNWUxgmNw08g== 0000950147-01-501054.txt : 20010606 0000950147-01-501054.hdr.sgml : 20010606 ACCESSION NUMBER: 0000950147-01-501054 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010605 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM GNMA INCOME FUND INC CENTRAL INDEX KEY: 0000059140 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 222013958 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02401 FILM NUMBER: 1654134 BUSINESS ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2018457300 MAIL ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON GNMA INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON INCOME FUND INC DATE OF NAME CHANGE: 19810210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC/MD CENTRAL INDEX KEY: 0000061448 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 136066974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-01939 FILM NUMBER: 1654135 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQUARE 40 N CENTRAL STREET 2: STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC DATE OF NAME CHANGE: 19950503 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM MAGNACAP FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MAGNACAP FUND INC DATE OF NAME CHANGE: 19850701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM MUTUAL FUNDS CENTRAL INDEX KEY: 0000895430 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07428 FILM NUMBER: 1654136 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQUARE STREET 2: 40 NORTH CENTRAL AVE #1200 CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQUARE STREET 2: 40 NORTH CENTRAL AVE #1200 CITY: PHOENIX STATE: AZ ZIP: 85004 FORMER COMPANY: FORMER CONFORMED NAME: NICHOLAS APPLEGATE MUTUAL FUNDS DATE OF NAME CHANGE: 19930328 N-30D 1 e-6953.txt ANNUAL REPORT DATED 3/31/2001 [LOGO] ING PILGRIM Annual Report March 31, 2001 Class Q INCOME FUNDS Pilgrim GNMA Income Pilgrim Strategic Income Pilgrim High Yield Pilgrim High Yield II - ------- Pilgrim Funds - ------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- Letter to Shareholders ............................... 1 Portfolio Managers' Reports .......................... 2 Index Descriptions ................................... 10 Shareholder Meeting Results .......................... 11 Report of Independent Accountants .................... 15 Statements of Assets and Liabilities ................. 16 Statements of Operations ............................. 18 Statements of Changes in Net Assets .................. 21 Financial Highlights ................................. 24 Notes to Financial Statements ........................ 28 Portfolios of Investments ............................ 41 Tax Information ...................................... 53 - ------- Pilgrim Funds - ------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- Dear Shareholders: We are pleased to present the March 31, 2001 Annual the Pilgrim Funds which offered Q classes as of March 31, 2001. On September 1, 2000, ING Groep N.V. (NYSE: ING) acquired ReliaStar Financial Corp., the indirect parent company of Pilgrim Investments, Inc., Adviser to the Funds, Pilgrim Securities, Inc., Distributor to the Funds and Pilgrim Group, Inc., Administrator to the Funds. In conjunction with the acquisition, the Adviser, Distributor and Administrator changed their names to ING Pilgrim Investments, Inc., ING Pilgrim Securities, Inc. and ING Pilgrim Group, Inc., respectively, effective September 8, 2000. Subsequently, in February 2001, ING Pilgrim Group, Inc. and ING Pilgrim Investments, Inc. became ING Pilgrim Group, LLC and ING Pilgrim Investments, LLC, respectively. Our fund family now has many funds of varying types which provide core investment choices for the serious investor. There are four Income Funds included in this Annual Report. At ING Pilgrim, we are dedicated to providing core investments for the serious investor. We believe that the key to success is matching quality core investments to the Report for 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 experience.(SM) Sincerely, ING Pilgrim Group, LLC May 4, 2001 1 - ------ Income Funds - ------ Portfolio PILGRIM GNMA INCOME FUND Managers' Report - -------------------------------------------------------------------------------- Management Team: Denis P. Jamison C.F.A., Roseann G. McCarthy, Co-Portfolio Managers, ING Pilgrim Investments, LLC. Goal: The Pilgrim GNMA Income Fund (the "Fund") seeks to generate a high level of current income with an investment portfolio that stresses liquidity and a high level of safety of principal. The Fund only purchases securities whose interest and principal payments are guaranteed by the United States Government or its agencies. These securities include mortgage-backed securities issued by the Government National Mortgage Agency (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and U.S. Treasury bonds, notes, and bills. Normally, at least 80% of the Fund's assets are invested in GNMA mortgages. The principal risks to which shareholders are exposed relate to changes in general market interest rates. When interest rates rise, mortgage and bond prices decline and this tends to reduce the net asset value of the Fund. If interest rates suddenly decline, mortgage prepayments will increase; this tends to limit the upside price performance of mortgages and the Fund. Management seeks to mitigate these risks through correct mortgage selection and adjusting the asset mix between mortgages and U.S. Treasury bonds. Market Overview: Bond investors have been well rewarded over the last twelve months. The economy slowed from a 5%-plus rate of growth in the first half of 2000 to a mere 1% by the final quarter of the year. Many economists think the economy will actually shrink during the first half of this year. Bond and stock investors saw the writing on the wall long before the Federal Reserve governors. Stocks tumbled; domestic and foreign investors sought refuge in fixed income securities. The Lehman Brothers Aggregate Bond Index gained 12.5% during the year ended March 31st, including a 3.0% up tick in the first quarter. By January, the Federal Reserve began to recognize the need to lower interest rates and revive credit expansion. Since January 1st, they have reduced short-term interest rates from 6.5% to 5.0%. Liquidity is beginning to flow again. Money supply growth (M2) has accelerated from about 6.5% to better than 10% in the last two months. The initial phase of the bond market rally (from March 31, 2000 to year-end) raised all ships. The latest gains, however, have all been in the shorter end of the curve. We think this disparity is a harbinger of tougher times ahead for the bond market. Performance: For the period from inception (02/26/01) through March 31, 2001, the Fund's Class Q shares provided a total return of 1.41% compared to the Lehman Brothers Mortgage-Backed Securities Index ("LBMBS Index") which returned 0.58% for the same period. The Fund's yield on March 31st was 5.47% Portfolio Specifics: During much of last year, we extended the portfolio's average maturity as the bond market rallied. This was accomplished through the addition of lower coupon, prepayment-protected, multifamily mortgages. During January and February, we added a position in long-term U.S. Treasury bonds. However, it became increasingly clear that the bond market's valuation problems were beginning to outweigh the positives of declining short-term interest rates and a weakening economy. We sold much of our U.S. Treasury bond holdings in late March. Short-term U.S. Treasury bills were purchased and now account for 9% of total Fund assets. We are concerned about the increases in both hourly wages and the Consumer Price Index. If these trends persist, we are likely to add to our current 2% holding in U.S. Treasury Inflation Protected Bonds (TIPS). The principal value of these securities is indexed to the rate of inflation while providing a modest semi-annual income return. Market Outlook: Bonds are very expensive. For example, the yield of ten-year U.S. Treasury bonds now is a mere 1.4% higher than the rate of inflation. Investors would have to look back to the period of hyper-inflation in the early Eighties to see such low real rates of return. Three factors have pushed valuations to this extreme: (1) a weak stock market; (2) a strong dollar; and (3) the prospect of slowing economic growth. The bear market in stocks is beginning to look a little long in the tooth. Growth prospects in Euroland appear better than here in the U.S. That should help the Euro versus the U.S. Dollar. Without the tailwind of currency gains, dollar-denominated bonds won't appear as attractive to foreign investors. Finally, slowing U.S. economic growth is yesterday's news. We've been in a slump for six months. The Federal Reserve is pumping liquidity into the system and the Federal government is planning tax cuts. We believe we may turn the corner in a few months. So, we think bond yields are heading higher. 2 Portfolio Managers' Report PILGRIM GNMA INCOME FUND - -------------------------------------------------------------------------------- 2/26/01 3/31/01 ------- ------- Pilgrim GNMA Income Fund Class Q 10,000 10,141 Lehman Brothers Mortgage-Backed Securities Index 10,000 10,058 Average Annual Total Returns for the Period Ended March 31, 2001 ---------------------------- Since Inception 02/26/01 -------- Class Q 1.41% Lehman Brothers Mortgage-Backed Securities Index 0.58%(1) Based on a $10,000 initial investment, the graph and table above illustrate the total return of Pilgrim GNMA Income Fund against the Lehman Brothers Mortgage-Backed Securities Index. The Index has an inherent performance advantage over the Fund since it has no cash in its portfolio, imposes no sales charges and incurs no operating expenses. An investor cannot invest directly in an index. The Fund's performance is shown both with and without the imposition of sales charges. Performance data represents past performance and is no assurance of future results. Investment return and principal value of an investment in the Fund will fluctuate. Shares, when sold, may be worth more or less than their original cost. This report contains statements that may be "forward-looking" statements. Actual results may differ materially from those projected in the "forward-looking" statements. The views expressed in this report reflect those of the portfolio manager, only through the end of the period as stated on the cover. The manager's views are subject to change at any time based on market and other conditions. Portfolio holdings are subject to change daily. (1) Since inception performance for index is shown from 3/1/01. Principal Risk Factor(s): Exposure to financial and interest rate risks and prepayment risk of mortgage related securities. Fluctuations in the value of the Fund's share can be expected in response to changes in interest rates. The value of an investment in the Fund is not guaranteed and will fluctuate. See accompanying index descriptions on page 10. 3 - ------ Income Funds - ------ Portfolio PILGRIM STRATEGIC INCOME FUND Managers' Report - -------------------------------------------------------------------------------- Portfolio Management: Robert K. Kinsey, Vice President, Edwin Schriver, Senior Vice President, ING Pilgrim Investments, LLC. Goals: The Pilgrim Strategic Income Fund (the "Fund") seeks maximum total return by investing at least 60% of its total assets in debt securities issued by U.S. and foreign corporations, U.S. and foreign governments and their agencies that are rated in one of the top four categories by a nationally recognized statistical rating agency. Market Overview: The investment grade bond market posted handsome returns in the first quarter of 2001. Repeated Fed easings triggered a dramatic rally in credit sensitive securities and the front end of the yield curve; however, long-dated Treasuries did not fare as well as the curve steepened. Sell-offs in the equity markets also provided for rallies in shorter maturities. A few more corporate issuers entered the ranks of the credit-impaired. Motorola and Comdisco suffered from the troubles in the technology sector, while California utilities plummeted into a morass of political and financial difficulties. Although new issue volume set multi-year records, the market did face some headwinds in the later part of the quarter and equity market volatility buffeted the bond markets with disturbing frequency. The high yield market exhibited very high volatility during the first quarter as investor sentiment shifted rapidly regarding the future direction of the U.S. economy. For the quarter, the Lehman Brothers High Yield Bond Index returned 6.36% and the Merrill Lynch High Yield Bond Index returned 5.78%. Entering 2001, we believe the high yield market offered very attractive investment opportunities. Yields reflected expectations of a severe recession and very high defaults, and many securities traded well below liquidation values. Following Federal Reserve action in January to cut interest rates twice by 50 basis points each time, the market rallied as portfolio managers scrambled to invest large excess cash positions. February brought a large number of higher quality new issues, absorbing excess cash and limiting further appreciation. In March, equity investors reacted very negatively to revised growth projections in the telecommunications and technology sectors, leading to an unprecedented decline in the NASDAQ market index. With sharply lower equity valuations effectively shutting off access to equity markets, there was a spillover effect in the high yield market. Companies lacking sufficient funding to fully execute their business strategy were severely punished. Many of the other sectors that had underperformed in late 2000, notably steel, automotive and retailing, outperformed in the first quarter as sales data, inventory levels and consumer confidence all pointed to somewhat brighter prospects than had previously been envisioned. Performance: For the nine-month period ended March 31, 2001, the Fund's Class Q shares provided a total return of 3.00% compared to the Lehman Brothers Aggregate Bond Index which returned 10.60% for the same period. Portfolio Specifics: We increased the Fund's high yield allocation following the Fed's first cut in rates in January, and the subsequent turnaround in the high yield market propelled the Fund into the top 14% of Morningstar multi-sector funds in the first quarter of 2001. The investment grade component of the Fund also posted positive returns, but the results were not as compelling due in large part to our style of taking credit risk in the front of the curve. Fortunately, we liquidated our position in Motorola early in the quarter, and we avoided the California utility debacle entirely. We added Norfolk Southern, Occidental Petroleum, some FNMA debentures, and a new issue CMBS deal. The merger with the ING International Bond and the Pilgrim Global Income Funds also presented some unique challenges. The non-dollar portion of the Fund is now hedged, and we moved to reduce that exposure by selling Government of Canada and Queensland Treasury paper. Moreover, we unwound a Euro-denominated barbell by selling cash equivalent notes and French OAT zeroes. Market Outlook: U.S. domestic investment bond markets appear to have factored in several more aggressive Fed easings. Overall interest rates have dropped appreciably, and we are now concerned about the potential for a rise in rates especially in the front-end of the curve. We anticipate trimming our duration sometime in the 2nd quarter, and expect that Europe may provide a better duration play as the ECB plays catch-up with the Fed. We plan to maintain our non-dollar hedges, and we intend to keep our overweight to spread product with an eye to adding cyclicals, banks, and autos. With respect to high yield, we believe that credit specific factors will be the key to returns in 2001 as companies prove or disprove their ability to compete in a slower growth economy. Defaults will likely remain an issue in high yield in 2001, although many of the probable bankruptcy candidates are already trading close to or below liquidation values. High defaults are not inconsistent with high returns in the high yield market, as evidenced by 1991 when the default rate peaked at 13%, yet the Merrill Lynch Cash-Pay High Yield Index returned 34.6%. Most investors remain cautious regarding truly distressed credits, preferring instead to add liquid first and second-tier securities more likely to survive a significant downturn. While the high yield market is likely to experience continued volatility until the economic outlook becomes clearer, we believe that now is an excellent time to invest in high yield and that long-term investors will be very well compensated for risks taken. The high yield portion of the Fund will remain fully invested in a diversified portfolio of total return investments that should perform well in an improving high yield market. 4 Portfolio Managers' Report PILGRIM STRATEGIC INCOME FUND - -------------------------------------------------------------------------------- 7/27/98 3/31/99 3/31/00 3/31/01 ------- ------- ------- ------- Pilgrim Strategic Income Fund Class Q 10,000 10,365 10,451 10,936 Lehman Brothers Aggregate Bond Index 10,000 10,384 10,578 11,904 Average Annual Total Returns for the Periods Ended March 31, 2001 ------------------------------------ Since Inception 1 Year 7/27/98 ------ ------- Class Q 4.64% 3.40% Lehman Brothers Aggregate Bond Index 12.53% 6.75%(1) Based on a $10,000 initial investment, the graph and table above illustrate the total return of Pilgrim Strategic Income Fund against the Lehman Brothers Aggregate Bond Index. The Index has an inherent performance advantage over the Fund since it has no cash in its portfolio, imposes no sales charges and incurs no operating expenses. An investor cannot invest directly in an index. The Fund's performance is shown both with and without the imposition of sales charges. Total returns reflect the fact that the Investment Adviser has contractually agreed to waive or defer its management fee and to pay other operating expenses otherwise payable by the Fund, subject to possible later reimbursement during a three-year period. Total returns would have been lower had there been no deferral to the Fund. Performance data represents past performance and is no assurance of future results. Investment return and principal value of an investment in the Fund will fluctuate. Shares, when sold, may be worth more or less than their original cost. This letter contains statements that may be "forward-looking" statements. Actual results may differ materially from those projected in the "forward-looking" statements. The views expressed in this report reflect those of the portfolio manager, only through the end of the period as stated on the cover. The portfolio manager's views are subject to change at any time based on market and other conditions. Portfolio holdings are subject to change daily. (1) Since inception performance for index is shown from 08/01/98. Principal Risk Factor(s): High yield bonds have exposure to financial, market and interest rate risks. High yields reflect the higher credit risks associated with certain lower rated securities in the Fund's portfolio, and in some cases, the lower market prices for those instruments. The Fund's investments in mortgage-related securities may entail prepayment risk. The Fund may invest up to 30% of its total assets in securities payable in foreign currencies. International investing does pose special risks, including currency fluctuation and political risks not found in domestic investments. See accompanying index descriptions on page 10. 5 - ------ Income Funds - ------ Portfolio PILGRIM HIGH YIELD FUND Managers' Report - -------------------------------------------------------------------------------- Management Team: Edwin Schriver, Russ Stiver, Andy Mitchell, Co-Portfolio Managers, ING Pilgrim Investments, LLC. Goal: The Pilgrim High Yield Fund (the "Fund" or "High Yield") seeks to provide a high level of current income, with capital appreciation as a secondary objective, by investing in high yield debt securities. Market Overview: The high yield market exhibited very high volatility during the 9 months ended March 31, 2001, as investor sentiment shifted rapidly as to the future direction of the U.S. economy. Both the volatility and returns in high yield were between those of equities and investment grade bonds, which is appropriate given the underlying investment characteristics. The last half of 2000 was marked by slowing economic growth. Telecommunications, the largest industry sector within the high yield market, came under increasing pressure due to concerns regarding the ability of companies to fund their business plans in a tight credit market. Other sectors, including automotive suppliers, steel and retailing, struggled with excess inventories and weaker consumer demand. By the end of the year, yield in the high yield market reflected expectations of a 12% default rate for a sustained period of time, and the bonds of many companies traded well below estimates of their underlying asset values. Following a brief January rally triggered by a surprise 50 basis point Federal Reserve rate cut, falling NASDAQ stock prices spilled over to another round of telecommunications default speculation in March. Many of the other sectors that had underperformed in late 2000, notably steel, automotive and retailing, outperformed in the first quarter as sales data, inventory levels and consumer confidence all pointed to somewhat brighter prospects than had previously been envisioned. Performance: For the nine months ended March 31, 2001, the Fund's Class Q shares provided a total return of -16.43% compared to the Lehman Brothers High Yield Bond Index which returned 1.35% and the Credit Suisse First Boston High Yield Bond Index which returned 0.31% for the same period. Portfolio Specifics: The Fund's underperformance over the past nine months was primarily due to significant overweighting of telecommunications companies in the third and fourth quarters of 2000. Following a management change in late October of 2000, new management undertook a plan to restore stability to the portfolio. Telecommunications exposure was reduced by selling lower quality credits with significant downside remaining. Maximum position sizes were reduced in order to provide greater diversification and reduce the potential impact of negative event risk. Cash holdings, which were 20% in October, were reduced to 5%. Buying activities were focused on first- and second-tier companies in previously under-represented industries with attractive risk-reward tradeoffs. The telecommunications industry now represents approximately 19% of the portfolio, while the largest single issuer represents just over 2%. We are generally comfortable with these levels, but will continue to increase diversification as attractive opportunities are identified. Cash has recently grown to 7%, which we intend to gradually invest in second-tier non-telecommunications credits and first-tier telecommunications credits. Market Outlook: Despite a brief rally early in 2001, yields and credit spreads remain at historically high levels, reflecting an expectation that default rates will rise from the current rate of around 8% to over 11% annually, and maintain that level for an extended period of time. It is our expectation that default rates will likely peak sometime in 2001 before declining to historical norms of 3-4%. Merrill Lynch recently reduced their default rate projection for 2001 from 9.0% to 7.6%, providing optimism that bond prices will eventually adjust to reflect lower defaults, providing the impetus for substantial return to long-term investors. High defaults are not inconsistent with high returns, as evidenced by the fact that defaults last peaked in 1991, a year in which High Yield returns exceeded 35%. Management believes that the brief rally in January of this year, in which the Fund returned 7.64%, provided an indication of what could happen once it becomes clear that the economy has bottomed and stronger economic growth lies ahead. We believe that this will occur sometime during 2001. In the meantime, many companies will substantially outperform the market thereby distinguishing themselves as survivors. 6 Portfolio Managers' Report PILGRIM HIGH YIELD FUND - -------------------------------------------------------------------------------- 6/17/99 3/31/00 3/31/01 ------- ------- ------- Pilgrim High Yield Fund Class Q 10,000 9,745 8,115 Credit Suisse First Boston High Yield Bond Index 10,000 9,915 9,991 Lehman Brothers High Yield Bond Index 10,000 9,785 10,032 Average Annual Total Returns for the Periods Ended March 31, 2001 -------------------------------- Since Inception 1 Year 6/17/99 ------ ------- Class Q -16.72% -11.01% Credit Suisse First Boston High Yield Bond Index 0.77% -0.02%(1) Lehman Brothers High Yield Bond Index 2.52% 0.06%(1) Based on a $10,000 initial investment, the graph and table above illustrate the total return of Pilgrim High Yield Fund against the Credit Suisse First Boston High Yield Bond Index and the Lehman Brothers High Yield Bond Index. The Indices have an inherent performance advantage over the Fund since they have no cash in their portfolio, impose no sales charges and incur no operating expenses. An investor cannot invest directly in an index. The Fund's performance is shown both with and without the imposition of sales charges. Total returns reflect the fact that the Investment Adviser has contractually agreed to waive or defer its management fee and to pay other operating expenses otherwise payable by the Fund, subject to possible later reimbursement during a three-year period. Total returns would have been lower had there been no deferral to the Fund. Performance data represents past performance and is no assurance of future results. Investment return and principal value of an investment in the Fund will fluctuate. Shares, when sold, may be worth more or less than their original cost. This letter contains statements that may be "forward-looking" statements. Actual results may differ materially from those projected in the "forward-looking" statements. The views expressed in this report reflect those of the portfolio manager, only through the end of the period as stated on the cover. The portfolio manager's views are subject to change at any time based on market and other conditions. Portfolio holdings are subject to change daily. (1) Since inception performance for the index is shown from 6/1/99. Principal Risk Factor(s): Exposure to financial, market and interest rate risks. Higher yields reflect the higher credit risks associated with certain lower rated securities in the Fund's portfolio, and in some cases, the lower market prices for those instruments. See accompanying index descriptions on page 10. 7 - ------ Income Funds - ------ Portfolio Managers' Report PILGRIM HIGH YIELD FUND II - -------------------------------------------------------------------------------- Management Team: Edwin Schriver, Russ Stiver, Andy Mitchell, Co-Portfolio Managers, ING Pilgrim Investments, LLC. Goal: The Pilgrim High Yield Fund II (the "Fund" or "High Yield II") seeks to provide total returns in the form of both dividends and capital appreciation, by investing in high yield debt securities. Market Overview: The high yield market exhibited very high volatility during the nine months ended March 31, 2001, as investor sentiment shifted rapidly as to the future direction of the U.S. economy. Both the volatility and returns in high yield were between those of equities and investment grade bonds, which is appropriate given the underlying investment characteristics. The last half of 2000 was marked by the fallout from the dot-com meltdown and slowing economic growth. Telecommunications, the largest industry sector within the high yield market, came under increasing pressure due to concerns regarding the ability of companies to fund their business plans in a tight credit market. Other sectors, including automotive suppliers, steel and retailing, struggled with excess inventories and weaker consumer demand. By the end of the year, yield in the high yield market reflected expectations of a 12% default rate for a sustained period of time, and the bonds of many companies traded well below estimates of their underlying asset values. Following a brief January rally triggered by a surprise 50 basis point Federal Reserve rate cut, falling NASDAQ stock prices spilled over to another round of telecommunications default speculation in March. Many of the other sectors that had underperformed in late 2000, notably steel, automotive and retailing, outperformed in the first quarter as sales data, inventory levels and consumer confidence all pointed to somewhat brighter prospects than had previously been envisioned. Performance: For the nine months ended March 31, 2001, the Fund's Class Q shares provided a total return of -11.80% compared to the Lehman Brothers High Yield Bond Index which returned 1.35% and the Merrill Lynch High Yield Bond Index which returned 1.38% for the same period. For the three months ended March 31, 2001, the Fund's Class A shares, excluding sales charges, earned a total return of 5.61% compared to the Lehman Brothers High Yield Bond Index which returned 6.36% and the Merrill Lynch High Yield Bond Index which returned 5.78% for the same period. This places the Fund in the top 10% of its peer group for the quarter, based on Lipper surveys. Portfolio Specifics: The Fund's underperformance over the past nine months was primarily due to a significant overweighting of telecommunications companies in the third and fourth quarters of 2000. Following a management change in October of 2000, new management undertook a plan to restore stability to the portfolio. Telecommunications exposure was reduced by selling lower quality credits with significant downside remaining. Maximum position sizes were reduced in order to provide greater diversification and reduce the potential impact of negative event risk. Cash holdings, which exceeded 20% in October, were reduced to less than 2%. Buying activities were focused on first, second, and third-tier companies in previously under-represented industries with attractive risk-reward tradeoffs. The telecommunications industry still represents a substantial portion of the portfolio and is in line with competing mutual funds. Currently, the largest single issuer in any industry represents just over 2% of the portfolio. We are generally comfortable with these levels, but will continue to increase diversification as attractive opportunities are identified. Cash has recently grown to 6%, which we intend to invest in non-telecommunications credits. Market Outlook: Despite a brief rally early in 2001, yields and credit spreads remain at historically high levels, reflecting an expectation that default rates will rise from the current rate of around 8% to over 11% annually, and maintain that level for an extended period of time. It is our expectation that default rates will likely peak sometime in 2001 before declining to historical norms of 3-4%. Merrill Lynch recently reduced their default rate projection for 2001 from 9.0% to 7.6%, providing optimism that bond prices will eventually adjust to reflect lower defaults, providing the impetus for substantial return to long-term investors. High defaults are not inconsistent with high returns, as evidenced by the fact that defaults last peaked in 1991, a year in which High Yield returns exceeded 35%. Management believes that the brief rally in January of this year, in which the Fund returned 11.93%, provided an indication of what could happen once it becomes clear that the economy has bottomed and stronger economic growth lies ahead. We believe that this will occur sometime during 2001. In the meantime, many companies will substantially outperform the market thereby distinguishing themselves as survivors. 8 Portfolio Managers' Report PILGRIM HIGH YIELD FUND II - --------------------------------------------------------------------------------
3/27/98 3/31/98 3/31/99 3/31/00 3/31/01 ------- ------- ------- ------- ------- Pilgrim High Yield Fund II Class Q 10,000 10,016 10,156 10,665 9,471 Lehman Brothers High Yield Bond Index 10,000 10,000 10,038 9,856 10,104
Average Annual Total Returns for the Periods Ended March 31, 2001 -------------------------------- Since Inception 1 Year 3/27/98 ------ ------- Class Q -11.19% -1.79% Lehman Brothers High Yield Bond Index 2.52% 0.35%(1) Based on a $10,000 initial investment, the graph and table above illustrate the total return of Pilgrim High Yield II Fund against the Lehman Brothers High Yield Bond Index. The Index has an inherent performance advantage over the Fund since it has no cash in its portfolio, imposes no sales charges and incurs no operating expenses. An investor cannot invest directly in an index. The Fund's performance is shown both with and without the imposition of sales charges. Total returns reflect the fact that the Investment Adviser has contractually agreed to waive or defer its management fee and to pay other operating expenses otherwise payable by the Fund, subject to possible later reimbursement during a three-year period. Total returns would have been lower had there been no deferral to the Fund. Performance data represents past performance and is no assurance of future results. Investment return and principal value of an investment in the Fund will fluctuate. Shares, when sold, may be worth more or less than their original cost. This letter contains statements that may be "forward-looking" statements. Actual results may differ materially from those projected in the "forward-looking" statements. The views expressed in this report reflect those of the portfolio manager, only through the end of the period as stated on the cover. The portfolio manager's views are subject to change at any time based on market and other conditions. Portfolio holdings are subject to change daily. (1) Since inception performance for index is shown from 04/01/98. Principal Risk Factor(s): Exposure to financial, market and interest rate risks. Higher yields reflect the higher credit risks associated with certain lower rated securities in the Fund's portfolio and in some cases, the lower market price for those instruments. Up to 35% of total assets may be invested in foreign securities. International investing does pose special risks, including currency fluctuation and political risks not found in investments that are solely domestic. Risks of foreign investing are generally intensified for investments in emerging markets. See accompanying index descriptions on page 10. 9 - ------- Pilgrim Funds - ------- INDEX DESCRIPTIONS - -------------------------------------------------------------------------------- The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index comprised of 520 mortgage-backed securities with an average yield of 7.58%. The average coupon of the index is 6.85%. The Lehman Brothers Aggregate Bond Index is widely recognized, unmanaged index of publicly issued fixed rate U.S. government, investment grade mortgage-backed and corporate debt securities. The Lehman Brothers High Yield Bond Index is comprised of non-investment grade bonds with maturities between seven and ten years. The Merrill Lynch High Yield Bond Index is comprised of over 1,300 high yield bonds, intended to be representative of the high yield market as a whole. The NASDAQ Composite Index is a broad-based capitalization-weighted index of all NASDAQ National Market & SmallCap stocks. The Merrill Lynch Cash-Pay High Yield Index is comprised of over 1,200 high yield bonds currently paying cash coupons therefore excluding deferred income securities. The Credit Suisse First Boston High Yield Bond Index is an index of high yield bonds rated BB or below. All indices are unmanaged. An investor cannot invest directly in an index. 10 SHAREHOLDER MEETING (Unaudited) - -------------------------------------------------------------------------------- A special meeting of shareholders of the Lexington GNMA Income Fund, Inc. was held in Saddle Brook, New Jersey on July 21, 2000. A brief description of each matter voted upon as well as the results are outline below:
Shares voted Shares against or Shares Broker Total voted for withheld abstained non-vote shares voted --------- -------- --------- --------- ------------ 1. To elect eleven (11) Directors or Trustees, as the case may be, to hold office until the election and qualification of their successors. Lexington GNMA Income Fund, Inc. Al Burton 23,821,867 1,537,835 -- -- 25,359,702 Paul Doherty 23,860,354 1,499,348 -- -- 25,359,702 Robert Goode 23,842,553 1,517,149 -- -- 25,359,702 Alan Gosule 23,867,533 1,492,169 -- -- 25,359,702 Walter May 23,866,042 1,493,660 -- -- 25,359,702 Jock Patton 23,871,717 1,487,985 -- -- 25,359,702 David Putnam 23,857,383 1,502,319 -- -- 25,359,702 John Smith 23,825,330 1,534,372 -- -- 25,359,702 Robert Stallings 23,826,289 1,533,413 -- -- 25,359,702 John Turner 23,829,873 1,529,829 -- -- 25,359,702 David Wallace 23,827,715 1,531,987 -- -- 25,359,702 2. Approve a new Investment Management Agreement between each Fund and Pilgrim Investments, Inc. ("Pilgrim"), an indirect, wholly-owned subsidiary of ReliaStar Financial Corp. ("ReliaStar"), to take effect upon the completion of the proposed acquisition of Lexington Global Asset Managers, Inc. by ReliaStar. Lexington GNMA Income Fund, Inc. 21,958,684 1,875,250 1,525,768 -- 25,359,702 3. Approve a new Investment Management Agreement between each Fund and Pilgrim to take effect upon the completion of the proposed acquisition of ReliaStar by ING Groep N.V. ("ING"). Lexington GNMA Income Fund, Inc. 21,934,897 1,867,135 1,557,670 -- 25,359,702 8. Ratify the selection of KPMG LLP as each Fund's independent public accounts for the fiscal year ending December 31, 2000. Lexington GNMA Income Fund, Inc. 23,489,561 519,374 1,350,767 -- 25,359,702 9. Approve a new Service and Distribution Plan for Lexington GNMA Income Fund, Inc. which would impose on each Fund a fee on an annualized basis of 0.25% of the average daily net assets. Lexington GNMA Income Fund, Inc. 18,354,691 1,968,168 1,635,603 3,401,240 25,359,702 10. Approve Amended and Restated Articles of Incorporation for Lexington GNMA Income Fund, Inc., a Maryland corporation.(a) Lexington GNMA Income Fund, Inc. 28,125,266 1,964,466 2,349,641 1,581,310 34,020,683
- ---------- (a) The Special Meeting of Shareholder for Lexington GNMA Income Fund, Inc. was adjourned until September 20, 2000 to permit the further solicitation of shareholders for their proxies relating to this proposal. See Accompanying Notes to Financial Statements 11 SHAREHOLDER MEETING (Unaudited) - -------------------------------------------------------------------------------- A special meeting of shareholders of the Pilgrim Funds was held in Phoenix, Arizona on August 18, 2000. A brief description of each matter voted upon as well as the results are outline below:
Shares voted Shares against or Shares Broker Total voted for withheld abstained non-vote shares voted --------- -------- --------- --------- ------------ 1. For shareholders of the Pilgrim High Total Return Fund and Pilgrim High Total Return Fund II (series of Pilgrim Mayflower Trust), to elect eleven Trustees to serve until their successors are elected and qualified. Pilgrim High Total Return Fund Al Burton 66,019,186 1,328,683 -- -- 67,347,870 Paul Doherty 66,079,591 1,268,278 -- -- 67,347,870 Robert Goode 66,070,313 1,277,556 -- -- 67,347,870 Alan Gosule 66,081,252 1,266,617 -- -- 67,347,870 Walter May 66,089,163 1,258,706 -- -- 67,347,870 Jock Patton 66,075,525 1,272,344 -- -- 67,347,870 David Putnam 66,073,507 1,274,362 -- -- 67,347,870 John Smith 66,000,826 1,347,043 -- -- 67,347,870 Robert Stallings 66,093,043 1,254,826 -- -- 67,347,870 John Turner 66,073,507 1,274,362 -- -- 67,347,870 David Wallace 66,028,933 1,318,936 -- -- 67,347,870 Pilgrim High Total Return Fund II Al Burton 21,890,679 334,844 -- -- 22,225,523 Paul Doherty 21,892,442 333,081 -- -- 22,225,523 Robert Goode 21,892,442 333,081 -- -- 22,225,523 Alan Gosule 21,919,264 306,259 -- -- 22,225,523 Walter May 21,918,083 307,440 -- -- 22,225,523 Jock Patton 21,919,264 306,259 -- -- 22,225,523 David Putnam 21,915,875 309,648 -- -- 22,225,523 John Smith 21,917,501 308,022 -- -- 22,225,523 Robert Stallings 21,919,264 306,259 -- -- 22,225,523 John Turner 21,919,264 306,259 -- -- 22,225,523 David Wallace 21,901,260 324,263 -- -- 22,225,523 2. Approve new Investment Management Agreements between the Funds and Pilgrim Investments, Inc. ("Pilgrim Investments") to reflect the acquisition of Pilgrim Investments by ING Groep N.V. ("ING"), with no change in the advisory fees payable to Pilgrim Investments. Pilgrim High Yield Fund 48,696,511 499,651 1,457,730 -- 50,653,892 Pilgrim High Yield Fund II 15,875,341 164,824 291,208 -- 16,331,373 Pilgrim Strategic Income Fund 701,286 3,170 13,607 -- 718,063 Pilgrim Government Securities Income Fund 7,930,229 253,044 297,122 -- 8,480,395 Pilgrim High Total Return Fund 64,431,458 1,213,070 1,703,342 -- 67,347,870 Pilgrim High Total Return Fund II 21,446,390 302,061 477,072 -- 22,225,523 4. For shareholders of the Pilgrim High Total Return and Pilgrim High Total Return II (series of Pilgrim Mayflower Trust), to ratify the appointment of PricewaterhouseCoopers LLP as independent auditors for the Funds for the fiscal year ending October 31, 2000. Pilgrim High Total Return Fund 65,868,942 396,074 1,082,854 -- 67,347,870 Pilgrim High Total Return Fund II 21,742,068 144,118 339,337 -- 22,225,523
A special meeting of shareholders of the Pilgrim Government Securities Income Fund, Inc. was held in Scottsdale, Arizona on February 23, 2001. A brief description of each matter voted upon as well as the results are outline below:
Shares voted Shares against or Shares Broker Total voted for withheld abstained non-vote shares voted --------- -------- --------- --------- ------------ 1. Approve an Agreement and Plan of Reorganization providing for the acquisition of all of the assets and liabilities of Pilgrim Government Securities Income Fund, Inc. by the Pilgrim GNMA Income Fund. Pilgrim Government Securities Income Fund 4,598,115 303,578 403,659 -- 5,305,352
See Accompanying Notes to Financial Statements 12 SHAREHOLDER MEETING (Unaudited) - -------------------------------------------------------------------------------- A special meeting of shareholders of the Pilgrim High Total Return Fund and Pilgrim High Total Return Fund II was held in Scottsdale, Arizona on February 23, 2001, and adjourned until March 15, 2001 to permit the further solicitation of shareholders. A brief description of each matter voted upon as well as the results are outline below:
Shares voted Shares against or Shares Broker Total voted for withheld abstained non-vote shares voted --------- -------- --------- --------- ------------ 1. To approve an Agreement and Plan of Reorganization providing for the acquisition of all of the assets and liabilities of the Pilgrim High Total Return Fund by the Pilgrim High Yield Fund II. Pilgrim High Total Return Fund 30,454,570 634,458 1,399,701 -- 32,488,729 2. To approve an Agreement and Plan of Reorganization providing for the acquisition of all of the assets and liabilities of the Pilgrim High Total Return Fund II by the Pilgrim High Yield Fund II. Pilgrim High Total Return Fund II 10,536,584 196,896 440,224 -- 11,173,704
See Accompanying Notes to Financial Statements 13 (THIS PAGE INTENTIONALLY LEFT BLANK) 14 - ------- Pilgrim Funds - ------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of the Pilgrim Mutual Funds, Pilgrim Investment Funds, Inc., and Pilgrim GNMA Income Fund, Inc.: In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Pilgrim Strategic Income Fund and Pilgrim High Yield Fund II, two of the twelve funds comprising Pilgrim Mutual Funds (collectively, "PMF"), Pilgrim High Yield Fund, one of the two funds comprising Pilgrim Investment Funds, Inc. ("PIF"), and Pilgrim GNMA Income Fund, Inc., at March 31, 2001, and the results of each of their operations for the periods then ended, the changes in each of their net assets and financial highlights for each of the periods presented except as described below, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of PMF, PIF and Pilgrim GNMA Income Fund, Inc; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2001 by correspondence with the custodians and brokers, provide a reasonable basis for our opinion. For all periods ending prior to and including December 31, 2000 for Pilgrim GNMA Income Fund, Inc., the statements of operations, changes in net assets and financial highlights were audited by other auditors whose reports dated February 26, 2001 expressed unqualified opinions on those financial statements and financial highlights. For all periods ending prior to and including June 30, 2000 for Pilgrim Strategic Income Fund, Pilgrim High Yield Fund II and Pilgrim High Yield Fund, the statements of operations, changes in net assets and financial highlights were audited by other auditors whose report dated August 4, 2000 expressed unqualified opinions on those financial statements and financial highlights. /s/ PricewaterhouseCoopers LLP Denver, CO May 25, 2001 15 - ------ Income Funds - ------ STATEMENTS OF ASSETS AND LIABILITIES as of March 31, 2001 - --------------------------------------------------------------------------------
Pilgrim Pilgrim Pilgrim Pilgrim GNMA Income Strategic High Yield High Yield II Fund Income Fund Fund Fund ------------- ------------- ------------- ------------- ASSETS: Investments in securities at value* $ 506,804,362 $ 51,068,331 $ 192,507,101 $ 268,817,768 Short-term investments at amortized cost 50,371,855 3,638,000 14,585,000 10,291,000 Cash 86,116 84,428 15,091 2,611,239 Receivables: Investment securities sold -- -- 530,842 4,916,125 Fund shares sold 3,040,553 49,575 657,642 454,904 Dividends and interest 3,083,712 1,121,044 6,744,803 9,971,969 Other 30,960 36,575 -- -- Unrealized appreciation on forward foreign currency contracts -- 400,454 -- -- Prepaid expenses 150,285 44,247 36,861 14,562 Reimbursement due from manager -- 21,276 22,283 32,949 ------------- ------------- ------------- ------------- Total assets 563,567,843 56,463,930 215,099,623 297,110,516 ------------- ------------- ------------- ------------- LIABILITIES: Payable for investment securities purchased 31,999,307 2,611,253 3,358,006 1,470,673 Unrealized depreciation on forward foreign currency contracts -- 75,438 -- -- Payable for fund shares redeemed 1,912,534 15,609 2,749,668 2,583,602 Payable to affiliates 399,736 36,019 222,385 241,996 Other accrued expenses and liabilities 276,401 294,879 299,650 1,395,035 ------------- ------------- ------------- ------------- Total liabilities 34,587,978 3,033,198 6,629,709 5,691,306 ------------- ------------- ------------- ------------- NET ASSETS $ 528,979,865 $ 53,430,732 $ 208,469,914 $ 291,419,210 ============= ============= ============= ============= NET ASSETS WERE COMPRISED OF: Paid-in capital $ 525,738,281 $ 61,603,410 $ 375,973,215 $ 851,745,982 Undistributed (distributions in excess of) net investment income 3,111,865 662,982 -- (1,416,713) Accumulated net realized gain (loss) on investments and foreign currencies (15,969,429) (7,556,262) (150,989,513) (360,318,100) Net unrealized appreciation (depreciation) of investments and foreign currencies 16,099,148 (1,279,398) (16,513,788) (198,591,959) ------------- ------------- ------------- ------------- NET ASSETS $ 528,979,865 $ 53,430,732 $ 208,469,914 $ 291,419,210 ============= ============= ============= ============= * Cost of securities $ 490,705,214 $ 52,629,692 $ 209,020,889 $ 467,315,030
See Accompanying Notes to Financial Statements 16 - ------ Income Funds - ------ STATEMENTS OF ASSETS AND LIABILITIES as of March 31, 2001 - --------------------------------------------------------------------------------
Pilgrim Pilgrim Pilgrim Pilgrim GNMA Income Strategic High Yield High Yield II Fund Income Fund Fund Fund ------------ ------------ ------------ ------------ Class A: Net Assets $449,460,471 $ 39,104,552 $ 55,704,125 $ 55,229,639 Shares authorized 780,000,000 unlimited 80,000,000 unlimited Par Value $ 0.01 $ 0.00 $ 0.00 $ 0.00 Shares outstanding 52,073,029 3,316,091 14,274,861 6,355,696 Net asset value and redemption price per share $ 8.63 $ 11.79 $ 3.90 $ 8.69 Maximum offering price per share (4.75%)(1) $ 9.06 $ 12.38 $ 4.10 $ 9.12(1) Class B: Net Assets $ 47,406,006 $ 8,894,196 $140,183,327 $181,175,049 Shares authorized 100,000,000 unlimited 80,000,000 unlimited Par Value $ 0.01 $ 0.00 $ 0.00 $ 0.00 Shares outstanding 5,506,973 771,220 36,017,637 20,789,782 Net asset value and redemption price per share(2) $ 8.61 $ 11.53 $ 3.89 $ 8.71 Maximum offering price per share $ 8.61 $ 11.53 $ 3.89 $ 8.71 Class C: Net Assets $ 13,743,672 $ 5,195,903 $ 5,504,965 $ 33,462,696 Shares authorized 50,000,000 unlimited 20,000,000 unlimited Par Value $ 0.01 $ 0.00 $ 0.00 $ 0.00 Shares outstanding 1,596,171 431,180 1,416,261 3,841,255 Net asset value and redemption price per share(2) $ 8.61 $ 12.05 $ 3.89 $ 8.71 Maximum offering price per share $ 8.61 $ 12.05 $ 3.89 $ 8.71 Class M: Net Assets $ 247,128 n/a $ 7,077,475 n/a Shares authorized 10,000,000 n/a 5,000,000 n/a Par Value $ 0.01 n/a $ 0.00 n/a Shares outstanding 28,630 n/a 1,816,220 n/a Net asset value and redemption price per share $ 8.63 n/a $ 3.90 n/a Maximum offering price per share (3.25%)(3) $ 8.92 n/a $ 4.03 n/a Class Q: Net Assets $ 475,605 $ 236,081 $ 22 $ 3,041,372 Shares authorized 50,000,000 unlimited 20,000,000 unlimited Par Value $ 0.01 $ 0.00 $ 0.00 $ 0.00 Shares outstanding 55,100 21,123 6 349,105 Net asset value and redemption price per share $ 8.63 $ 11.18 $ 3.89 $ 8.71 Maximum offering price per share $ 8.63 $ 11.18 $ 3.89 $ 8.71 Class T: Net Assets $ 17,646,983 n/a n/a $ 18,510,454 Shares authorized 10,000,000 n/a n/a unlimited Par Value $ 0.01 n/a n/a $ 0.00 Shares outstanding 2,045,391 n/a n/a 2,127,555 Net asset value and redemption price per share(2) $ 8.63 n/a n/a $ 8.70 Maximum offering price per share $ 8.63 n/a n/a $ 8.70
- ---------- (1) Maximum offering price is computed at 100/95.25 of net asset value. On purchases of $50,000 or more, the offering price is reduced. (2) Redemption price per share may be reduced for any applicable contingent deferred sales charge. (3) Maximum offering price is computed at 100/96.75 of net asset value. On purchases of $50,000 or more, the offering price is reduced. See Accompanying Notes to Financial Statements 17 - ------ Income Funds - ------ STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Pilgrim GNMA Income Fund ------------------------------------- Three Months Ended Year Ended March 31, December 31, 2001 2000 ------------ ------------ INVESTMENT INCOME: Interest $ 7,393,546 $ 27,343,268 ------------ ------------ Total investment income 7,393,546 27,343,268 ------------ ------------ EXPENSES: Investment management fees 565,984 1,949,162 Distribution and service fees: Class A 248,850 377,532 Class B 44,553 819 Class C 11,343 2,634 Class M 195 -- Class Q 109 -- Class T 11,318 -- Transfer agent fees 142,267 631,637 Shareholder reporting fees 27,533 229,673 Registration and filing fees 27,111 82,813 Recordkeeping and pricing fees 5,489 -- Professional fees 20,500 32,946 Custody fees 13,590 77,000 Shareholder servicing fees -- 1,151 Directors' fees 7,800 104,275 Insurance fees 991 -- Miscellaneous fees 11,800 181,173 Administrative fees 106,940 151,465 Merger fees 47,913 -- ------------ ------------ Total expenses 1,294,286 3,822,280 ------------ ------------ Less: Waived and reimbursed fees -- -- ------------ ------------ Net expenses 1,294,286 3,822,280 ------------ ------------ Net investment income 6,099,260 23,520,988 ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments 2,155,030 (3,100,065) Net change in unrealized appreciation of investments 10,658,686 14,939,928 ------------ ------------ Net realized and unrealized gain on investments 12,813,716 11,839,863 ------------ ------------ Increase in net assets resulting from operations $ 18,912,976 $ 35,360,851 ============ ============
See Accompanying Notes to Financial Statements 18 - ------ Income Funds - ------ STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Pilgrim Strategic Income Fund ------------------------------------- Nine Months Ended Year Ended March 31, June 30, 2001 2000 ----------- ----------- INVESTMENT INCOME: Dividends $ 45,732 $ 65,811 Interest (net of foreign withholding tax)* 1,007,496 1,073,053 ----------- ----------- Total investment income 1,053,228 1,138,864 ----------- ----------- EXPENSES: Investment management fees 60,425 59,874 Distribution and service fees: Class A 20,448 10,355 Class B 30,821 37,680 Class C 24,750 38,579 Class Q 439 444 Transfer agent fees 65,689 110,300 Shareholder reporting fees 9,316 6,894 Registration and filing fees 43,807 76,124 Recordkeeping and pricing fees 7,641 10,474 Professional fees 3,562 4,341 Custody fees 4,528 6,768 Shareholder servicing fees -- 4,683 Directors' fees 849 961 Insurance fees 428 247 Miscellaneous fees 94 7,570 Interest and credit facility fees 4,932 1,218 Administrative fees -- -- Merger fees 16,087 -- ----------- ----------- Total expenses 293,816 376,512 ----------- ----------- Less: Waived and reimbursed fees 119,001 208,068 Earnings credits -- 174 ----------- ----------- Net expenses 174,815 168,270 ----------- ----------- Net investment income 878,413 970,594 ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES: Net realized loss on investments (457,477) (763,126) Net realized loss on foreign currencies (20,536) (1,151) Net change in unrealized appreciation (depreciation) of: Investments (1,352,115) 133,421 Foreign currencies 281,963 -- ----------- ----------- Net realized and unrealized loss on investments and foreign currencies (1,548,165) (630,856) ----------- ----------- Increase (decrease) in net assets resulting from operations $ (669,752) $ 339,738 =========== =========== *Foreign withholding tax $ 23,382 --
See Accompanying Notes to Financial Statements 19 - ------ Income Funds - ------ STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Pilgrim High Yield Fund Pilgrim High Yield Fund II ------------------------------ ------------------------------ Nine Nine Months Ended Year Ended Months Ended Year Ended March 31, June 30, March 31, June 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- INVESTMENT INCOME: Dividends $ -- $ 4,556 $ 135,152 $ 110,519 Interest 21,165,666 41,985,263 15,816,091 12,270,565 ------------- ------------- ------------- ------------- Total investment income 21,165,666 41,989,819 15,951,243 12,381,084 ------------- ------------- ------------- ------------- EXPENSES: Investment management fees 1,082,525 2,204,503 755,481 634,448 Distribution and service fees: Class A 122,176 272,149 83,146 60,360 Class B 1,205,884 2,354,893 677,560 570,886 Class C 39,120 42,730 142,256 193,491 Class M 52,749 140,963 -- -- Class Q 19 -- 7,403 9,563 Class T -- -- 118,637 53,509 Transfer agent fees 275,121 512,832 195,423 168,720 Shareholder reporting fees 98,640 132,754 45,446 48,679 Registration and filing fees 64,105 141,878 105,148 65,175 Recordkeeping and pricing fees 62,198 82,633 36,696 23,058 Professional fees 44,114 58,764 26,066 27,764 Custody fees 52,608 65,868 9,176 20,371 Shareholder servicing fees -- 17,387 -- 5,385 Directors' fees 17,262 23,000 5,754 5,957 Insurance fees 4,934 17,921 1,370 1,844 Miscellaneous fees 7,120 95,047 7,174 9,369 Interest and credit facility fees -- 19,712 -- 6,241 Merger fees -- -- 30,331 77,210 ------------- ------------- ------------- ------------- Total expenses 3,128,575 6,183,034 2,247,067 1,982,030 ------------- ------------- ------------- ------------- Less: Waived and reimbursed fees 170,488 423,592 280,311 218,609 ------------- ------------- ------------- ------------- Net expenses 2,958,087 5,759,442 1,966,756 1,763,421 ------------- ------------- ------------- ------------- Net investment income 18,207,579 36,230,377 13,984,487 10,617,663 ------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES: Net realized loss on investments (84,180,612) (25,618,407) (30,313,380) (5,014,882) Net realized loss on foreign currencies (1,040) -- -- -- Net change in unrealized appreciation (depreciation) of: Investments 24,598,891 (31,769,051) (171,629,272) (2,564,989) Foreign currencies -- -- (94,697) -- ------------- ------------- ------------- ------------- Net realized and unrealized loss on investments and foreign currencies (59,582,761) (57,387,458) (202,037,349) (7,579,871) ------------- ------------- ------------- ------------- Increase (decrease) in net assets resulting from operations $ (41,375,182) $ (21,157,081) $(188,052,862) $ 3,037,792 ============= ============= ============= =============
See Accompanying Notes to Financial Statements 20 - ------ Income Funds - ------ STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Pilgrim GNMA Income Fund ----------------------------------------------------- Three Year Year Months Ended Ended Ended March 31, December 31, December 31, 2001 2000 1999 ------------- ------------- ------------- Increase in net assets from operations: Net investment income $ 6,099,260 $ 23,520,988 $ 20,453,437 Net realized gain (loss) on investments 2,155,030 (3,100,065) (1,512,537) Net change in unrealized appreciation (depreciation) of investments 10,658,686 14,939,928 (17,574,398) ------------- ------------- ------------- Net increase in net assets resulting from operations 18,912,976 35,360,851 1,366,502 ------------- ------------- ------------- Distributions to shareholders: Net investment income Class A (5,337,765) (20,940,972) (20,595,801) Class B (15,248) -- -- Class C (21,052) -- -- ------------- ------------- ------------- Total distributions (5,374,065) (20,940,972) (20,595,801) ------------- ------------- ------------- Capital Share Transactions: Net proceeds from sale of shares 100,862,198 125,118,144 220,636,961 Net proceeds from shares issued in merger 121,277,768 -- -- Shares resulting from dividend reinvestments 4,928,490 19,059,996 18,731,683 ------------- ------------- ------------- 227,068,456 144,178,140 239,368,644 Cost of shares redeemed (82,941,057) (163,864,918) (117,150,009) ------------- ------------- ------------- Net increase (decrease) in net assets resulting from capital share transactions 144,127,399 (19,686,778) 122,218,635 ------------- ------------- ------------- Net increase (decrease) in net assets 157,666,310 (5,266,899) 102,989,336 ------------- ------------- ------------- Net assets, beginning of period 371,313,555 376,580,454 273,591,118 ------------- ------------- ------------- Net assets, end of period $ 528,979,865 $ 371,313,555 $ 376,580,454 ============= ============= ============= Undistributed net investment income $ 3,111,865 $ 2,580,016 $ 411 ============= ============= =============
See Accompanying Notes to Financial Statements 21 - ------ Income Funds - ------ STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Pilgrim Strategic Income Fund -------------------------------------------------- Nine Year Three Months Months Ended Ended Ended March 31, June 30, June 30, 2001 2000 1999 ------------ ------------ ------------ Increase (decrease) in net assets from operations: Net investment income $ 878,413 $ 970,594 $ 388,563 Net realized gain (loss) on investments and foreign currencies (478,013) (764,277) (459,604) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (1,070,152) 133,421 (72,404) ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations (669,752) 339,738 (143,445) ------------ ------------ ------------ Distributions to shareholders: Net investment income Class A (146,883) -- -- Class B (247,615) -- -- Class C (202,833) -- -- Class Q (14,262) -- -- Retail Classes -- (951,573) (187,766) Advisory and Institutional Classes -- (14,213) (121,982) ------------ ------------ ------------ Total distributions (611,593) (965,786) (309,748) ------------ ------------ ------------ Capital Share Transactions: Net proceeds from sale of shares 18,837,830 17,563,244 24,148,535 Net proceeds from shares issued in merger 38,298,220 -- -- Shares resulting from dividend reinvestments 154,206 496,450 108,053 ------------ ------------ ------------ 57,290,256 18,059,694 24,256,588 Cost of shares redeemed (13,958,363) (22,583,786) (43,838,394)(1) ------------ ------------ ------------ Net increase (decrease) in net assets resulting from capital share transactions 43,331,893 (4,524,092) (19,581,806) ------------ ------------ ------------ Net increase (decrease) in net assets 42,050,548 (5,150,140) (20,034,999) ------------ ------------ ------------ Net assets, beginning of period 11,380,184 16,530,324 36,565,323 ------------ ------------ ------------ Net assets, end of period $ 53,430,732 $ 11,380,184 $ 16,530,324 ============ ============ ============ Undistributed (distributions in excess of) net investment income $ 662,982 $ 491,239 $ 138,021 ============ ============ ============
- ---------- (1) Includes the redemption of 1,436,000 shares of Class I with a cost of $17,917,765. See Accompanying Notes to Financial Statements 22 - ------ Income Funds - ------ STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Pilgrim High Yield Fund ----------------------------------------------------- Nine Year Year Months Ended Ended Ended March 31, June 30, June 30, 2001 2000 1999 ------------- ------------- ------------- Increase (decrease) in net assets from operations: Net investment income $ 18,207,579 $ 36,230,377 $ 32,082,228 Net realized loss on investments and foreign currencies (84,181,652) (25,618,407) (39,880,708) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 24,598,891 (31,769,051) (9,008,796) ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations (41,375,182) (21,157,081) (16,807,276) ------------- ------------- ------------- Distributions to shareholders: Net investment income Class A (5,135,551) -- -- Class B (11,970,081) -- -- Class C (384,454) -- -- Class M (715,679) -- -- Class Q (774) -- -- Class T -- -- -- Retail Classes -- (36,230,374) (33,382,295) Advisory and Institutional Classes -- (3) -- Tax return of capital (4,442,387) (2,218,003) (604,370) ------------- ------------- ------------- Total distributions (22,648,926) (38,448,380) (33,986,665) ------------- ------------- ------------- Capital Share Transactions: Net proceeds from sale of shares 98,580,483 169,075,396 338,787,788 Net proceeds from shares issued in merger -- -- -- Shares resulting from dividend reinvestments 7,751,412 14,545,896 15,394,375 ------------- ------------- ------------- 106,331,895 183,621,292 354,182,163 Cost of shares redeemed (137,899,986) (237,672,115) (162,095,950) Equalization (85,563) -- -- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from capital share transactions (31,653,654) (54,050,823) 192,086,213 ------------- ------------- ------------- Net increase (decrease) in net assets (95,677,762) (113,656,284) 141,292,272 ------------- ------------- ------------- Net assets, beginning of period 304,147,676 417,803,960 276,511,688 ------------- ------------- ------------- Net assets, end of period $ 208,469,914 $ 304,147,676 $ 417,803,960 ============= ============= ============= Distributions in excess of net investment income $ -- $ -- $ -- ============= ============= ============= Pilgrim High Yield Fund II ----------------------------------------------------- Nine Year Three Months Months Ended Ended Ended March 31, June 30, June 30, 2001 2000 1999 ------------- ------------- ------------- Increase (decrease) in net assets from operations: Net investment income $ 13,984,487 $ 10,617,663 $ 2,117,917 Net realized loss on investments and foreign currencies (30,313,380) (5,014,882) (1,651,059) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (171,723,969) (2,564,989) 1,222,666 ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations (188,052,862) 3,037,792 1,689,524 ------------- ------------- ------------- Distributions to shareholders: Net investment income Class A (2,817,607) -- -- Class B (7,662,538) -- -- Class C (1,602,144) -- -- Class M -- -- -- Class Q (339,297) -- -- Class T (2,078,844) -- -- Retail Classes -- (10,642,507) (1,816,752) Advisory and Institutional Classes -- (408,689) (243,368) Tax return of capital -- -- -- ------------- ------------- ------------- Total distributions (14,500,430) (11,051,196) (2,060,120) ------------- ------------- ------------- Capital Share Transactions: Net proceeds from sale of shares 225,162,311 52,761,331 5,060,774 Net proceeds from shares issued in merger 157,469,063 142,232,354 -- Shares resulting from dividend reinvestments 5,223,248 4,467,190 636,667 ------------- ------------- ------------- 387,854,622 199,460,875 5,697,441 Cost of shares redeemed (93,091,171) (72,762,619) (24,199,756)(1) Equalization -- -- -- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from capital share transactions 294,763,451 126,698,256 (18,502,315) ------------- ------------- ------------- Net increase (decrease) in net assets 92,210,159 118,684,852 (18,872,911) ------------- ------------- ------------- Net assets, beginning of period 199,209,051 80,524,199 99,397,110 ------------- ------------- ------------- Net assets, end of period $ 291,419,210 $ 199,209,051 $ 80,524,199 ============= ============= ============= Distributions in excess of net investment income $ (1,416,713) $ -- $ (193,920) ============= ============= =============
- ---------- (1) Includes the redemption of 907,000 shares of Class I with a cost of $11,636,641. See Accompanying Notes to Financial Statements 23 Financial Highlights PILGRIM GNMA INCOME FUND - -------------------------------------------------------------------------------- Selected data for a share of beneficial interest outstanding throughout each period. Class Q ------------ February 26, 2001(1) to March 31, 2001 ------------ Per Share Operating Performance: Net asset value, beginning of period $ 8.51 Income from investment operations: Net investment income $ 0.04 Net realized and unrealized gain on investments $ 0.08 Total from investment operations $ 0.12 Net asset value, end of period $ 8.63 Total Return(2): % 1.41 Ratios/Supplemental Data: Net assets, end of period (000's) $ 476 Ratios to average net assets: Expenses(3) % 1.14 Net investment income(3) % 5.42 Portfolio turnover % 33 - ---------- (1) Commencement of offering shares. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. See Accompanying Notes to Financial Statements 24 Financial PILGRIM STRATEGIC INCOME FUND Highlights - -------------------------------------------------------------------------------- Selected data for a share of beneficial interest outstanding throughout each period.
Class Q ------------------------------------------------- Nine months Year Three months July 27 ended ended ended 1998(1) to March 31, June 30, June 30, March 31, 2001(6) 2000 1999(2) 1999 ------- ---- ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 11.45 11.99 12.26 12.43 Income from investment operations: Net investment income $ 0.50 0.94 0.25 0.48 Net realized and unrealized loss on investments $ (0.17) (0.54) (0.38) (0.04) Total from investment operations $ 0.33 0.40 (0.13) 0.44 Less distributions from: Net investment income $ 0.60 0.94 0.14 0.50 Net realized gains on investments $ -- -- -- 0.11 Total distributions $ 0.60 0.94 0.14 0.61 Net asset value, end of period $ 11.18 11.45 11.99 12.26 Total Return(3): % 3.00 3.55 1.16 5.78 Ratios/Supplemental Data: Net assets, end of period (000's) $ 236 228 171 314 Ratios to average net assets: Net expenses after expense reimbursement(4)(5) % 1.00 0.86 0.71 0.69 Gross expenses prior to expense reimbursement(4) % 2.06 2.54 1.37 1.74 Net investment income (loss) after expense reimburse- ment(4)(5) % 7.17 7.79 6.07 6.03 Portfolio turnover rate % 132 168 69 274
- ---------- (1) The Fund commenced operations on July 27, 1998. (2) Effective May 24, 1999, Pilgrim Investments, LLC, became the Investment Manager of the Fund and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (6) The Fund changed its fiscal year end to March 31. See Accompanying Notes to Financial Statements 25 Financial Highlights PILGRIM HIGH YIELD FUND - -------------------------------------------------------------------------------- Selected data for a share of beneficial interest outstanding throughout each period.
Class Q ---------------------------------------- Nine months Year From June 17 ended ended 1999(1) thru March 31, June 30, June 30, 2001(5)(6) 2000 1999 ---------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 5.60 5.93 5.91 Income (loss) from investment operations: Net investment income $ 0.11 0.60 0.02 Net realized and unrealized gain (loss) on investments $ (1.39) (0.33) -- Total from investment operations $ (1.28) (0.27) 0.02 Less distributions from: Net investment income $ 0.43 0.60 -- Total distributions $ 0.43 0.60 -- Net asset value, end of period $ 3.89 5.60 5.93 Total Return(2): % (23.11) (5.29) 0.34 Ratios/Supplemental Data: Net assets, end of period (000's) $ -- -- -- Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 1.07 1.05 -- Gross expenses prior to expense reimbursement(3) % 1.16 1.17 -- Net investment income (loss) after expense reimbursement(3)(4) % 10.61 10.41 -- Portfolio turnover rate % 100 89 184
- ---------- (1) Commencement of offering shares. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (5) The Fund changed its fiscal year end to March 31. (6) Per share calculations for the period were based on average shares outstanding. See Accompanying Notes to Financial Statements 26 Financial PILGRIM HIGH YIELD FUND II Highlights - -------------------------------------------------------------------------------- Selected data for a share of beneficial interest outstanding throughout each period.
Class Q ------------------------------------------------------------ Nine months Year Three months Year March 27, ended ended ended ended 1998(1) to March 31, June 30, June 30, March 31, March 31, 2001(6) 2000 1999(2) 1999 1998 ------- ---- ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 10.82 11.59 11.68 12.72 12.70 Income (loss) from investment operations: Net investment income $ 0.83 1.20 0.30 1.16 0.01 Net realized and unrealized gains (loss) on securities and foreign currency $ (2.07) (0.76) (0.11) (1.01) 0.01 Total from investment operations $ (1.24) 0.44 0.19 0.15 0.02 Less distributions from: Net investment income $ 0.87 1.21 0.28 1.19 -- Total distributions $ 0.87 1.21 0.28 1.19 -- Net asset value, end of period $ 8.71 10.82 11.59 11.68 12.72 Total Return(3): % (11.80) 4.04 1.63 1.40 0.16 Ratios/Supplemental Data: Net assets, end of period (000's) $ 3,041 6,882 3,229 6,502 567 Ratios to average net assets: Net expenses after expense reimbursement(4)(5) % 1.00 1.08 0.90 0.87 0.97 Gross expenses prior to expense reimbursement(4) % 1.22 1.27 1.17 1.28 0.97 Net investment income after expense reimbursement(4)(5) % 11.28 10.73 9.88 10.01 7.53 Portfolio turnover rate % 113 113 44 242 484
- ---------- (1) The Fund commenced operations on March 27, 1998. (2) Effective May 24, 1999, Pilgrim Investments, LLC, became the Investment Manager of the Fund and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year (5) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses (6) The Fund changed its fiscal year end to March 31. See Accompanying Notes to Financial Statements 27 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 - -------------------------------------------------------------------------------- NOTE 1 -- ORGANIZATION Organization. Pilgrim GNMA Income Fund, Inc., Pilgrim Mutual Funds ("PMF") and Pilgrim Investment Funds, Inc. ("PIF") are each open-end investment management companies registered under the Investment Company Act of 1940, as amended. Pilgrim GNMA Income Fund ("GNMA Fund") is the single series of Pilgrim GNMA Income Fund, Inc., a Maryland Corporation organized on August 15, 1973. PMF is a Delaware business trust organized in 1992 and consists of twelve separately managed portfolios. Two of the Portfolios in this report are Pilgrim Strategic Income Fund ("Strategic Income Fund") and Pilgrim High Yield Fund II ("High Yield Fund II"). PIF is a Maryland Corporation organized in July 1969 and consists of two separately managed portfolios. One of the Portfolios in this report is the Pilgrim High Yield Fund ("High Yield Fund"). The investment objective of each Fund is described in each Fund's prospectus. Each Fund offers at least two of the following classes of shares: Class A, Class B, Class C, Class I, Class M, Class Q and Class T. This report covers only the Funds that offer Class Q. The separate classes of shares differ principally in the applicable sales charges (if any), distribution fees and shareholder servicing fees. Shareholders of each class also bear certain expenses that pertain to that particular class. All shareholders bear the common expenses of the Fund and earn income from the portfolio pro rata based on the average daily net assets of each class, without distinction between share classes. Dividends are determined separately for each class based on income and expenses allocable to each class. Realized gains are allocated to each class pro rata based on the net assets of each class on the date of distribution. No class has preferential dividend rights. Differences in per share dividend rates generally result from the relative weighting of pro rata income and realized gain allocations and from differences in separate class expenses, including distribution, and shareholder servicing fees. Class B shares, along with their pro rata reinvested dividend shares, automatically convert to Class A shares approximately eight years after purchase. On September 1, 2000, ING Group N.V. (NYSE:ING) acquired ReliaStar Financial Corp., the indirect parent company of Pilgrim Investments, Inc., Adviser to some of the Funds, Pilgrim Securities, Inc., Distributor to the Funds and Pilgrim Group, Inc., Administrator to the Funds. In conjunction with the acquistions, the Adviser, Distributor and Administrator changed their names to ING Pilgrim Investments, Inc., ING Pilgrim Securities, Inc. and ING Pilgrim Group, Inc. effective September 8, 2000. Effective February 26, 2001, ING Pilgrim Investments, Inc. was merged into the newly formed ING Pilgrim Investments, LLC. Effective February 27, 2001, ING Pilgrim Group, Inc. was merged into the newly formed ING Pilgrim Group, LLC ("IPG"). Reorganizations. Before a shareholder approved reorganization effective July 24, 1998, the funds comprising PMF invested all of their assets in corresponding portfolios of Nicholas-Applegate Investment Trust, an arrangement known as a "master/feeder" structure. Upon the reorganization, the Institutional Portfolio series of the Trust were renamed Funds and were authorized to issue multiple classes of shares, and their outstanding shares were classified as Class I shares. At the same time, the A, B, C and Advisory Portfolios of the Trust transferred their assets to the corresponding Funds, and their shareholders received Class A, B, C and Q shares of the Funds on a tax-free basis. Effective May 7, 1999 and concurrent with the change in investment adviser from Nicholas Applegate Capital Management to Pilgrim Investments, Inc., the Institutional Classes of PMF were transferred in a tax-free reorganization to new funds being managed by Nicholas-Applegate Capital Management. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are consistently followed by the Funds in the preparation of their financial statements, and such policies are in conformity with generally accepted accounting principles for investment companies. A. Security Valuation. Investments in equity securities traded on a national securities exchange or included on the NASDAQ National Market System are valued 28 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- at the last reported sale price. Securities traded on an exchange or NASDAQ for which there has been no sale and securities traded in the over-the-counter-market are valued at the mean between the last reported bid and ask prices. All investments quoted in foreign currencies will be valued daily in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the time such valuation is determined by each Fund's custodian. Debt securities are valued at bid prices (High Yield Fund, including securities sold short, is valued at the mean between the bid and ask prices) obtained from independent services or from one or more dealers making markets in the securities and may be adjusted based on the Fund's valuation procedures. U.S. Government obligations are valued by using market quotations or independent pricing services that use prices provided by market-makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Securities for which market quotations are not readily available are valued at their respective fair values as determined in good faith and in accordance with policies set by the Board of Directors. Investment in the Primary Reserve Institutional Fund is valued at the net asset value as reported by the underlying Fund. Investments in securities maturing in less than 60 days are valued at cost, which, when combined with accrued interest, approximates market value. At March 31, 2001, the Strategic Income Fund, High Yield Fund and High Yield Fund II contained one, four, and 19 securities, respectively, for which bid prices obtained from one or more dealers making markets in the securities were adjusted based on the Funds' valuation procedures. These securities had a total value of $87,500 (represents 0.16% of net assets), $4,895,121 (represents 2.35% of net assets) and $22,384,963 (represents 7.68% of net assets), for the Strategic Income Fund, High Yield Fund and High Yield Fund II, respectively. In addition, at March 31, 2001, the High Yield Fund II contained three securities for which market quotations were not readily available and which were valued at their fair value as determined in good faith and in accordance with policies set by the Board of Directors. These securities had a total value of $2,922,964 (represents 1.00% of net assets) for the High Yield Fund II. B. Security Transactions and Revenue Recognition. Securities transactions are accounted for on the trade date. Realized gains and losses are reported on the basis of identified cost of securities delivered. Interest income is recorded on an accrual basis. Dividend income is recorded on the ex-dividend date, or for certain foreign securities, when the information becomes available to the funds. Premium amortization and discount accretion are determined by the effective yield method. C. Foreign Currency Translation. The books and records of the funds are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis: (1) Market value of investment securities, other assets and liabilities -- at the exchange rates prevailing at the end of the day. (2) Purchases and sales of investment securities, income and expenses -- at the rates of exchange prevailing on the respective dates of such transactions. Although the net assets and the market values are presented at the foreign exchange rates at the end of the day, the Funds do not isolate the portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains or losses from investments. For securities which are subject to foreign withholding tax upon disposition, liabilities are recorded on the statement of assets and liabilities for the estimated tax withholding based on the securities' current market values. Upon disposition, realized gains or losses on such securities are recorded net of foreign withholding tax. Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference 29 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund'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. Foreign security and currency transactions may involve certain considerations and risks not typically associated with investing in U.S. companies and the U.S. Government. These risks include but are not limited to re-evaluation of currencies and future adverse political and economic developments which could cause securities and their markets to be less liquid and prices more volatile than those of comparable U.S. companies and the U.S. Government. D. Foreign Currency Transactions. Certain funds may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to and from the U.S. dollar in connection with the planned purchases or sales of securities. The Funds either enter into these transactions on a spot basis at the spot rate prevailing in the foreign currency exchange market or use forward foreign currency contracts to purchase or sell foreign currencies. When the contract is fulfilled or closed, gains or losses are realized. Until then, the gain or loss is included in unrealized appreciation or depreciation. Risks may arise upon entering into forward contracts from the potential inability of counterparties to meet the terms of their forward contracts and from the potential inability of counterparties to meet the terms of their forward contracts and from unanticipated movements in the value of foreign currencies relative to the U.S. dollar. Each Fund may enter into futures contracts involving foreign currency, interest rates, securities and securities indices, for hedging purposes only. A futures contract obligates the seller of the contract to deliver and the purchaser of the contract to take delivery of the type of foreign currency, financial instrument or security called for in the contract at a specified future time for a specified price. Upon entering into such a contract, a Fund is required to deposit and maintain as collateral such initial margin as required by the exchange on which the contract is traded. Pursuant to the contract, a Fund agrees to receive from or pay to the broker an amount equal to the daily fluctuations in the value of the contract. Such receipts or payments are known as variation margins and are recorded as unrealized gains or losses by the Fund. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. None of the Funds had open futures contracts at March 31, 2001. E. Distributions to Shareholders. The Funds record distributions to their shareholders on ex-date. High Yield Fund II declares and goes ex-dividend daily and pays dividends monthly. GNMA Fund, Strategic Income Fund and High Yield Fund declare and go ex-dividend monthly and pay dividends monthly. Each Fund distributes capital gains, to the extent available, annually. The amount of distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. Key differences are the treatment of short-term capital gains, foreign currency transactions, organization costs and other temporary differences. To the extent that these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassifications. Distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes, are reported as distributions in excess of net investment income and/or net realized capital gains. To the extent distributions exceed net investment income and/or net realized capital gains for tax purposes, they are reported as distributions of paid-in capital. 30 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Accordingly, the following amounts have been increased (decreased) through reclassification as of March 31, 2001:
Accumulated Undistributed net realized Paid-in (distributions in excess of) gains (losses) capital net investment income on investments ------- --------------------- -------------- GNMA Fund $12,279,338 $ (193,346) $ (12,085,992) Strategic Income Fund 5,830,355 (95,077) (5,735,278) High Yield Fund (4,442,387) 4,441,347 1,040 High Yield Fund II 321,091,423 (643,817) (320,447,606)
F. Federal Income Taxes. It is the policy of the Funds to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute substantially all of their net investment income and any net realized capital gains to their shareholders. Therefore, a federal income tax or excise tax provision is not required. In addition, by distributing during each calendar year substantially all of its net investment income and net realized capital gains, each Fund intends not to be subject to any federal excise tax. The Board of Director/Trustees intends to offset any net capital gains with any available capital loss carryforward until each carryforward has been fully utilized or expires. In addition, no capital gain distribution shall be made until the capital loss carryforward has been fully utilized or expires. G. Use of Estimates. Management of the Funds has made certain estimates and assumptions relating to the reporting of assets, liabilities, income, and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. H. Repurchase Agreements. Each Fund may invest in repurchase agreements only with government securities dealers recognized by the Board of Governors of the Federal Reserve System or with member banks of the Federal Reserve System. Under such agreements, the seller of the security agrees to repurchase it at a mutually agreed upon time and price. The resale price is in excess of the purchase price and reflects an agreed upon interest rate for the period of time the agreement is outstanding. The period of the repurchase agreements is usually short, from overnight to one week, while the underlying securities generally have longer maturities. Each Fund will always receive as collateral securities with market values equal to at least 100% of the amount being invested by the Fund. If the seller defaults, a Fund may incur a delay in the realization of proceeds, it may incur a loss if the value of the collateral securing the repurchase agreement declines, and it may incur disposition costs in liquidating the collateral. I. Securities Lending. Each Fund had the option to temporarily loan 331|M/3% of its total assets to brokers, dealers or other financial institutions in exchange for a negotiated lender's fee. The borrower is required to fully collateralize the loans with cash, letters of credit or U.S. Government securities. J. Equalization. High Yield Fund follows the accounting practice known as equalization, by which a portion of the proceeds from sales and costs of purchases of Fund shares, equivalent on a per share basis to the amount of distributable investment income on the date of the transaction, is credited or charged to undistributed income. As a result, undistributed investment income per share is unaffected by sales or redemptions of Fund shares. K. Principles of Presentation. Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation. L. Recently Issued Accounting Standards. In November 2000, a revised AICPA Audit and Accounting Guide (the "Guide"), Audits of Investment Companies, was issued, and is effective for fiscal years beginning after 31 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- December 15, 2000. The revised Guide requires Funds to classify gains and losses realized on principal paydowns received on mortgaged-backed securities previously included in realized gains/loss, as part of interest income. Adopting this principle does not affect the Funds' net asset value but does change the classification between interest income and realized gain/loss in the statements of operations. The adoption of this principle is not material to the financial statements. NOTE 3 -- INVESTMENT TRANSACTIONS For the period ended March 31, 2001, the cost of purchases and proceeds from the sales of securities, excluding short-term securities, were as follows: Purchases Sales ------------ ------------ GNMA Fund $293,409,850 $145,785,084 Strategic Income Fund 67,517,033 25,383,690 High Yield Fund 212,815,144 243,397,271 High Yield Fund II 481,583,452 193,070,894 NOTE 4 -- INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES GNMA Income Fund, Strategic Income Fund, High Yield Fund and High Yield Fund II have entered into an Investment Management Agreement with ING Pilgrim Investments, LLC (the "Manager", the "Investment Manager" or the "Adviser"), a wholly-owned subsidiary of ING Groep N.V. The investment management agreement compensates the Manager with a fee, computed daily and payable monthly, based on the average daily net assets of each Fund, at the following annual rates: For GNMA Income Fund -- 0.60% for the first $150 million, 0.50% of the next $250 million, 0.45% of the next $400 million and 0.40% in excess of $800 million; for Strategic Income Fund -- 0.45% for the first $500 million, 0.40% of the next $250 million and 0.35% in excess of $750 million; for High Yield Fund and High Yield II Fund -- 0.60%. IPG (the "Administrator"), serves as administrator to each Fund. The GNMA Income Fund pays the Administrator a fee calculated at an annual rate of 0.10% of its average daily net assets. NOTE 5 -- DISTRIBUTION AND SERVICE FEES Each share class of the Funds (except as noted below) has adopted a Plan pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans"), whereby ING Pilgrim Securities, Inc. (the "Distributor") is reimbursed or compensated (depending on the class of shares) by the Funds for expenses incurred in the distribution of each Funds' shares ("Distribution Fees"). Pursuant to the 12b-1 Plans, the Distributor is entitled to payment each month for actual expenses incurred in the distribution and promotion of each Fund's shares, including expenses incurred in printing prospectuses and reports used for sales purposes, expenses incurred in preparing and printing sales literature and other such distribution related expenses, including any distribution or shareholder servicing fees ("Service Fees") paid to securities dealers who have executed a distribution agreement with the Distributor. Under the 12b-1 Plans, each class of shares of the Fund pays the Distributor a combined Distribution and Service Fee based on average daily net assets at the following annual rates:
Class A Class B Class C Class I Class M Class Q Class T ------- ------- ------- ------- ------- ------- ------- GNMA Fund 0.25% 1.00% 1.00% N/A 0.75% 0.25% 0.65% Strategic Income Fund 0.35% 0.75% 0.75% N/A N/A 0.25% N/A High Yield Fund 0.25% 1.00% 1.00% N/A 0.75% 0.25% N/A High Yield Fund II 0.35% 1.00% 1.00% N/A N/A 0.25% 0.65%
In addition, each of the Funds has entered into a Service Agreement with IPG whereby IPG will act as Shareholder Service Agent for each Fund. The agreement provides that IPG will be compensated for incoming and outgoing shareholder telephone calls and letters, and all reasonable out-of-pocket expenses incurred in connection with the performance of such services. 32 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- For the period ended March 31, 2001, the Distributor has retained $45,631 as sales charges from the proceeds of Class A Shares sold, $6,778 from the proceeds of Class C Shares redeemed, and $557 from the proceeds of Class M Shares sold. NOTE 6 -- OTHER TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES At March 31, 2001, the Funds had the following amounts recorded in payable to affiliates on the accompanying Statements of Assets and Liabilities (see Notes 4 and 5):
Accrued Accrued Shareholder Investment Accrued Services and Management Administrative Distribution Fees Fees Fees Total ---- ---- ---- ----- GNMA Fund $227,040 $14,892 $157,804 $399,736 Strategic Income Fund 20,112 -- 15,907 36,019 High Yield Fund 109,385 -- 113,000 222,385 High Yield Fund II 102,349 -- 139,647 241,996
NOTE 7 -- EXPENSE LIMITATIONS For the following Funds, the Investment Manager has voluntarily agreed to limit expenses, excluding interest, taxes, brokerage and extraordinary expenses to the following annual expenses to average daily net assets ratios:
Class A Class B Class C Class I Class M Class Q Class T ------- ------- ------- ------- ------- ------- ------- GNMA Fund 1.29% 2.04% 2.04% N/A N/A 1.29% N/A Strategic Income Fund 0.95% 1.35% 1.35% N/A N/A 0.85% N/A High Yield Fund 1.10% 1.85% 1.85% N/A 1.60% 1.10% N/A High Yield Fund II 1.10% 1.75% 1.75% N/A N/A 1.00% 1.40%
Each Fund will at a later date reimburse the Investment Manager for management fees waived and other expenses assumed by the Investment Manager during the previous 36 months, but only if, after such reimbursement, the Fund's expense ratio does not exceed the percentage described above. Waived and reimbursed fees and any recoupment by the Investment Manager of such waived and reimbursed fees are reflected on the accompanying Statements of Operations for each Fund. NOTE 8 -- LINE OF CREDIT Strategic Income Fund, High Yield Fund and High Yield Fund II, in addition to certain other funds managed by the Adviser, have entered into an unsecured committed revolving line of credit agreement (the "Credit Agreement") with State Street Bank and Trust Company for an aggregate amount of $125,000,000. The proceeds may be used only to: (1) temporarily finance the purchase and sale of securities; (2) finance the redemption of shares of an investor in the Funds; and (3) enable the Funds to meet other emergency expenses as defined in the Credit Agreement. The Funds to which the line of credit is available pay a commitment fee equal to 0.08% per annum on the daily unused portion of the committed line amount payable quarterly in arrears. During the period ended March 31, 2001, the Funds did not have any loans outstanding. NOTE 9 -- WHEN ISSUED SECURITIES (GNMA FUND) The GNMA 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. NOTE 10 -- CONSTRUCTION LOAN SECURITIES (GNMA FUND) The GNMA Fund may purchase contruction loan securities, which are issued to finance building costs. The 33 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- 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. NOTE 11 -- CAPITAL SHARES Transactions in capital shares and dollars were as follows:
Class A Shares Class B Shares Class C Shares -------------------------------------------- ------------------------ ------------------------ Three Three Three Months Ended Year Ended Year Ended Months Ended Period Ended Months Ended Period Ended March 31, December 31, December 31, March 31, December 31, March 31, December 31, 2001 2000 1999 2001 2000(1) 2001 2000(2) ------------ ------------- ------------- ----------- --------- ----------- ---------- GNMA Fund (Number of Shares) Shares sold 9,936,676 15,011,381 26,323,658 1,097,963 103,659 923,217 243,137 Shares issued in merger 6,943,491 -- -- 4,553,567 -- 673,255 -- Shares issued as reinvestment of dividends 578,344 2,343,091 2,253,632 1,539 455 2,350 1,667 Shares redeemed (9,201,160) (20,138,470) (14,047,603) (249,233) (977) (220,849) (26,606) ------------ ------------- ------------- ----------- --------- ----------- ---------- Net increase (decrease) in shares outstanding 8,257,351 (2,783,998) 14,529,687 5,403,836 103,137 1,377,973 218,198 ============ ============= ============= =========== ========= =========== ========== GNMA Fund ($) Shares sold $ 84,029,800 $ 122,250,526 $ 220,636,961 $ 8,930,188 $ 858,288 $ 7,833,790 $2,009,330 Shares issued in merger 59,085,277 -- -- 38,677,635 -- 5,719,720 -- Shares issued as reinvestment of dividends 4,895,626 19,042,463 18,731,683 13,021 3,763 19,843 13,770 Shares redeemed (78,707,194) (163,634,919) (117,150,009) (2,134,765) (8,207) (1,879,617) (221,792) ------------ ------------- ------------- ----------- --------- ----------- ---------- Net increase (decrease) $ 69,303,509 $ (22,341,930) $ 122,218,635 $45,486,079 $ 853,844 $11,693,736 $1,801,308 ============ ============= ============= =========== ========= =========== ========== Class M Shares Class Q Shares Class T Shares -------------- -------------- -------------- Period Ended Period Ended Period Ended March 31, March 31, March 31, 2001(3) 2001(3) 2001(3) --------- --------- ----------- GNMA Fund (Number of Shares) Shares sold -- 7,106 1,580 Shares issued in merger 34,197 50,391 2,061,429 Shares redeemed (5,567) (2,397) (17,618) --------- --------- ----------- Net increase in shares outstanding 28,630 55,100 2,045,391 ========= ========= =========== GNMA Fund ($) Shares sold $ -- $ 54,840 $ 13,580 Shares issued in merger 311,809 428,802 17,054,525 Shares redeemed (47,654) (20,517) (151,310) --------- --------- ----------- Net increase $ 264,155 $ 463,125 $16,916,795 ========= ========= ===========
- ---------- (1) Class B commenced operations on October 6, 2000. (2) Class C commenced operations of October 13, 2000. (3) Class M, Q and T commenced operations on February 26, 2001. 34 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - --------------------------------------------------------------------------------
Class A Shares Class B Shares ------------------------------------------- ----------------------------------------- Nine Three Nine Three Months Ended Year Ended Months Ended Months Ended Year Ended Months Ended March 31, June 30, June 30, March 31, June 30, June 30, 2001 2000 1999 2001 2000 1999 ------------ ----------- ------------ ----------- ----------- ----------- Strategic Income Fund (Number of Shares) Shares sold 518,725 604,669 1,744,498 408,264 235,490 65,960 Shares issued in merger 3,150,703 -- -- 92,272 -- -- Shares issued as reinvestment of dividends 4,630 11,483 1,712 4,913 16,764 3,737 Shares redeemed (583,744) (607,655) (1,797,320) (112,217) (333,238) (137,015) ------------ ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in shares outstanding 3,090,314 8,497 (51,110) 393,232 (80,984) (67,318) ============ =========== ============ =========== =========== =========== Strategic Income Fund ($) Shares sold $ 7,106,388 $ 7,329,922 $ 22,358,564 $ 4,695,326 $ 2,807,321 $ 827,887 Shares issued in merger 37,188,186 -- -- 1,064,000 -- -- Shares issued as reinvestment of dividends 54,593 139,358 21,991 56,288 199,456 47,004 Shares redeemed (6,920,354) (7,363,256) (23,052,137) (1,297,614) (3,971,439) (1,710,716) ------------ ----------- ------------ ----------- ----------- ----------- Net increase (decrease) $ 37,428,813 $ 106,024 $ (671,582) $ 4,518,000 $ (964,662) $ (835,825) ============ =========== ============ =========== =========== =========== Class C Shares Class Q Shares ------------------------------------------- ----------------------------------------- Nine Three Nine Three Months Ended Year Ended Months Ended Months Ended Year Ended Months Ended March 31, June 30, June 30, March 31, June 30, June 30, 2001 2000 1999 2001 2000 1999 ------------ ----------- ------------ ----------- ----------- ----------- Strategic Income Fund (Number of Shares) Shares sold 546,942 594,925 72,888 38,536 5,652 816 Shares issued in merger 3,821 -- -- -- -- -- Shares issued as reinvestment of dividends 3,185 11,584 2,829 462 1,233 168 Shares redeemed (445,234) (905,931) (77,064) (37,766) (1,293) (12,262) ------------ ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in shares outstanding 108,714 (299,422) (1,347) 1,232 5,592 (11,278) ============ =========== ============ =========== =========== =========== Strategic Income Fund ($) Shares sold $ 6,606,970 $ 7,361,851 $ 952,054 $ 429,146 $ 64,150 $ 10,030 Shares issued in merger 46,034 -- -- -- -- -- Shares issued as reinvestment of dividends 38,209 143,424 37,021 5,116 14,212 2,037 Shares redeemed (5,322,378) (11,234,101) (1,006,028) (418,017) (14,990) (151,748) ------------ ----------- ------------ ----------- ----------- ----------- Net increase (decrease) $ 1,368,835 $(3,728,826) $ (16,953) $ 16,245 $ 63,372 $ (139,681) ============ =========== ============ =========== =========== ===========
35 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - --------------------------------------------------------------------------------
Class A Shares Class B Shares ---------------------------------------------- ---------------------------------------------- Nine Nine Months Ended Year Ended Year Ended Months Ended Year Ended Year Ended March 31, June 30, June 30, March 31, June 30, June 30, 2001 2000 1999 2001 2000 1999 ------------ ------------- ------------- ------------- ------------- ------------ High Yield Fund (Number of Shares) Shares sold 15,745,272 18,403,831 23,077,399 5,309,475 10,007,643 28,533,861 Shares issued as reinvestment of dividends 646,613 992,628 1,012,788 995,556 1,441,815 1,285,173 Shares redeemed (19,153,331) (24,529,807) (16,689,544) (9,975,735) (15,933,643) (7,951,333) ------------ ------------- ------------- ------------- ------------- ------------ Net increase (decrease) in shares outstanding (2,761,446) (5,133,348) 7,400,643 (3,670,704) (4,484,185) 21,867,701 ============ ============= ============= ============= ============= ============ High Yield Fund ($) Shares sold $ 66,608,855 $ 97,912,317 $ 146,786,361 $ 22,503,028 $ 55,282,605 $177,876,596 Shares issued as reinvestment of dividends 2,819,377 5,460,638 6,265,752 4,335,584 7,894,426 7,911,056 Shares redeemed (82,304,218) (131,398,105) (106,793,532) (43,506,185) (86,943,865) (48,182,705) ------------ ------------- ------------- ------------- ------------- ------------ Net increase (decrease) $(12,875,986) $ (28,025,150) $ 46,258,581 $ (16,667,573) $ (23,766,834) $137,604,947 ============ ============= ============= ============= ============= ============ Class C Shares -------------------------------------------- Nine Months Ended Year Ended Period Ended March 31, June 30, June 30, 2001 2000 1999(1) ------------ ------------ ------------ High Yield Fund (Number of Shares) Shares sold 2,026,872 2,837,111 93,124 Shares issued as reinvestment of dividends 34,886 28,522 -- Shares redeemed (1,825,857) (1,778,397) -- ------------ ------------- ------------- Net increase (decrease) in shares outstanding 235,901 1,087,236 93,124 ============ ============= ============= High Yield Fund ($) Shares sold $ 9,115,727 $ 15,174,843 $ 549,513 Shares issued as reinvestment of dividends 151,350 153,864 58 Shares redeemed (8,303,880) (9,243,746) -- ------------ ------------- ------------- Net increase (decrease) $ 963,197 $ 6,084,961 $ 549,571 ============ ============= ============= Class M Shares Class Q Shares -------------------------------------------- ------------------------------------------- Nine Nine Months Ended Year Ended Year Ended Months Ended Year Ended Period Ended March 31, June 30, June 30, March 31, June 30, June 30, 2001 2000 1999 2001 2000 1999(2) ------------ ------------ ------------ ------------ ------------ ------------ High Yield Fund (Number of Shares) Shares sold 95,583 127,747 2,189,902 3,863 -- 30 Shares issued as reinvestment of dividends 101,388 188,400 196,691 218 -- -- Shares redeemed (909,049) (1,858,983) (1,173,862) (4,080) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in shares outstanding (712,078) (1,542,836) 1,212,731 1 -- 30 ============ ============ ============ ============ ============ ============ High Yield Fund ($) Shares sold $ 395,381 $ 705,631 $ 13,575,288 $ 19,119 $ -- $ 5 Shares issued as reinvestment of dividends 444,144 1,036,966 1,217,509 957 2 -- Shares redeemed (3,916,982) (10,086,399) (7,119,713) (15,911) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) $ (3,077,457) $ (8,343,802) $ 7,673,084 $ 4,165 $ 2 $ 5 ============ ============ ============ ============ ============ ============
- ---------- (1) Class C Shares commenced operations on May 27, 1999. (2) Class Q Shares commenced operations June 17, 1999. 36 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - --------------------------------------------------------------------------------
Class A Shares Class B Shares ---------------------------------------------- ---------------------------------------------- Nine Three Nine Three Months Ended Year Ended Months Ended Months Ended Year Ended Months Ended March 31, June 30, June 30, March 31, June 30, June 30, 2001 2000 1999 2001 2000 1999 ------------- ------------- ------------ ------------- ------------- ----------- High Yield Fund II (Number of Shares) Shares sold 3,446,818 2,024,176 126,155 1,020,908 696,890 191,304 Shares issued in merger 3,571,051 1,920,197 -- 12,288,479 6,815,662 -- Shares issued as reinvestment of dividends 147,603 85,848 13,470 217,419 173,796 20,903 Shares redeemed (3,995,119) (2,296,078) (175,029) (2,284,363) (1,757,346) (279,006) ------------- ------------- ------------ ------------- ------------- ----------- Net increase (decrease) in shares outstanding 3,170,353 1,734,143 (35,404) 11,242,443 5,929,002 (66,799) ============= ============= ============ ============= ============= =========== High Yield Fund II ($) Shares sold $ 68,146,350 $ 22,289,353 $ 1,487,541 $ 118,247,344 $ 7,778,149 $ 2,244,780 Shares issued in merger 31,382,187 21,258,924 -- 108,181,979 75,437,662 -- Shares issued as reinvestment of dividends 1,393,773 948,687 158,555 2,064,653 1,923,761 246,357 Shares redeemed (37,459,282) (25,459,352) (2,045,836) (21,596,811) (19,459,549) (3,269,300) ------------- ------------- ------------ ------------- ------------- ----------- Net increase (decrease) $ 63,463,028 $ 19,037,612 $ (399,740) $ 206,897,165 $ 65,680,023 $ (778,163) ============= ============= ============ ============= ============= =========== Class C Shares --------------------------------------------- Nine Three Months Ended Year Ended Months Ended March 31, June 30, June 30, 2001 2000 1999 ------------- ------------ ------------ High Yield Fund II (Number of Shares) Shares sold 1,019,125 835,807 91,597 Shares issued in merger 2,033,709 876,081 -- Shares issued as reinvestment of dividends 38,546 60,087 11,731 Shares redeemed (1,406,811) (1,223,652) (310,405) ------------- ------------ ------------ Net increase (decrease) in shares outstanding 1,684,569 548,323 (207,077) ============= ============ ============ High Yield Fund II ($) Shares sold $ 29,857,628 $ 9,284,852 $ 1,078,810 Shares issued in merger 17,904,896 9,698,640 -- Shares issued as reinvestment of dividends 365,478 667,948 138,399 Shares redeemed (13,234,360) (13,540,976) (3,633,914) ------------- ------------ ------------ Net increase (decrease) $ 34,893,642 $ 6,110,464 $ (2,416,705) ============= ============ ============ Class Q Shares Class T Shares -------------------------------------------- ---------------------------- Nine Three Nine Months Ended Year Ended Months Ended Months Ended Period Ended March 31, June 30, June 30, March 31, June 30, 2001 2000 1999 2001 2000(1) ------------ ------------ ------------ ------------ ------------ High Yield Fund II (Number of Shares) Shares sold 953,432 1,176,601 21,272 3,731 42,193 Shares issued in merger -- -- -- -- 3,237,823 Shares issued as reinvestment of dividends 30,998 38,331 7,915 115,386 45,794 Shares redeemed (1,271,213) (857,666) (307,466) (890,992) (426,380) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in shares outstanding (286,783) 357,266 (278,279) (771,875) 2,899,430 ============ ============ ============ ============ ============ High Yield Fund II ($) Shares sold $ 8,874,061 $ 12,941,570 $ 249,643 $ 36,929 $ 467,407 Shares issued in merger -- -- -- -- 35,837,128 Shares issued as reinvestment of dividends 300,645 431,200 93,356 1,098,699 495,594 Shares redeemed (12,170,488) (9,622,674) (3,614,065) (8,630,230) (4,680,068) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) $ (2,995,782) $ 3,750,096 $ (3,271,066) $ (7,494,602) $ 32,120,061 ============ ============ ============ ============ ============
- ---------- (1) Class T Shares commenced operations on March 31, 2000. 37 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- NOTE 12 -- FORWARD FOREIGN CURRENCY CONTRACTS At March 31, 2001, the Strategic Income Fund had the following forward foreign currency contracts: Currency In Net Unrealized to Settlement Exchange Appreciation Sell Date For Value$ (Depreciation) ---- ---- --- ------ -------------- Danish Krone USD DKK 15,441,000 05/18/01 1,879,839 $1,819,621 $ 60,218 Euro USD EUR 3,888,000 05/18/01 3,527,194 3,421,429 105,765 EUR 490,000 05/18/01 463,172 431,198 31,974 EUR 1,755,000 05/18/01 1,657,597 1,544,395 113,202 British Pound USD GBP 2,730,000 05/18/01 3,935,022 3,871,533 63,489 Swedish Kona USD SEK 9,271,000 05/18/01 920,290 894,484 25,806 United States Dollar EUR USD 2,051,032 05/18/01 2,245,000 1,975,594 (75,438) --------- $ 325,016 ========= NOTE 13 -- CREDIT RISK AND DEFAULTED SECURITIES Although each Fund has a diversified portfolio, High Yield Fund II had 28% of its portfolio invested in lower rated and comparable quality unrated high yield securities. Investments in high yield securities are accompanied by a greater degree of credit risk and such lower rated securities tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities, because such securities are generally unsecured and are often subordinated to other creditors of the issuer. At March 31, 2001, the High Yield Fund II held SA Telecommunications, Inc., US Interactive, Poland Telecom, ICG Services, Inc. and Russell Stanley defaulted securities. The aggregate value for these securities was $3,976,764 at March 31, 2001. For financial reporting purposes, it is each Fund's accounting practice to discontinue the accrual of income and to provide an estimate for probable losses due to unpaid interest income on defaulted bonds for the current reporting period. NOTE 14 -- FEDERAL INCOME TAX -- CAPITAL LOSS CARRYFORWARD At March 31, 2001, capital loss carryforwards were as follows: Expiration Amount Dates ----------- ------------ GNMA Fund $15,944,450 2003 to 2008 Strategic Income Fund 7,375,189 2006 to 2009 High Yield Fund 106,986,801 2002 to 2009 High Yield Fund II 348,293,074 2004 to 2009 During the period ended March 31, 2001, $1,301,325 of capital loss carryforwards of High Yield Fund II expired. Under the current tax law, capital and currency losses realized after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. For the period ended March 31, 2001, the Funds elected to defer losses occurring between November 1, 2000 and March 31, 2001 as follows: Post October capital/currency Fund losses deferred ---- --------------- Strategic Income Fund $ 166,952 High Yield Fund 43,400,212 High Yield Fund II 11,203,875 38 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- NOTE 15 -- CHANGES IN THE FUND'S YEAR-END Effective March 31, 2001 the Funds changed their fiscal year-end to March 31 from June 30 for Strategic Income Fund, High Yield Fund and High Yield Fund II and from December 31 for GNMA Income Fund. This change was done to facilitate the administration of the Funds. NOTE 16 -- REORGANIZATIONS On February 23, 2001 and March 23, 2001, certain Funds, as listed below (each an: "Acquiring Fund"), acquired the assets and certain liabilities of other Funds, also listed below (each an "Acquired Fund"), in a tax-free reorganization in exchange for shares of the Acquiring Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders. The number and value of shares issued by the Acquiring Fund are presented in Note 11 -- Capital Shares. Net assets and unrealized appreciation/(depreciation) as of the reorganization date were as follows:
Acquired Fund Unrealized Acquiring Acquired Total net assets of Total net assets of appreciation Fund Fund Acquired Fund (000) Acquiring Fund (000) (depreciation)(000) ---- ---- ------------------- -------------------- ------------------- GNMA Pilgrim Government Securities Income Fund Income Fund $121,742 $391,489 $ 2,145 Strategic Pilgrim Global Income Fund 14,716 13,785 (104) Income Fund Pilgrim International Bond Fund 23,582 13,785 (799) High Yield Pilgrim High Total Return Fund I 106,620 140,145 (135,704) Fund II Pilgrim High Total Return Fund II 50,849 140,145 (28,974)
The net assets of GNMA Income Fund, Strategic Income Fund and High Yield Fund II after the acquisition were approximately $513,231,000, $52,083,000 and $297,614,000, respectively. On March 31, 2000, the High Yield Fund II ("Acquiring Fund"), acquired the assets and certain liabilities of Pilgrim High Yield III Fund ("Acquired Fund") in a tax-free reorganization in exchange for shares of the Acquiring Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders. The number and value of shares issued by the Acquiring Fund is presented in Note 11 -- Capital Shares. The net assets and unrealized depreciation of the Acquired Fund was $142,232,353 and $(755,931), respectively. The Acquiring Funds net assets prior to and immediately after the acquisition was $67,494,309 and $209,726,662, respectively. 39 - ------- Pilgrim Funds - ------- NOTES TO FINANCIAL STATEMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- NOTE 17 -- SUBSEQUENT EVENTS (Unaudited) Merger involving Managers. On April 30, 2001, ING Mutual Funds Management, LLC merged into ING Pilgrim Investments, LLC. All contracts, obligations and assets of ING Mutual Funds Management, LLC were assumed by ING Pilgrim Investments, LLC pursuant to the merger. Dividends. Subsequent to March 31, 2001 the following Funds declared dividends from net investment income of: Per Share Amount Payable Date Record Date ------ ------------ ----------- GNMA Income Fund Class A $0.0390 April 04, 2001 March 30, 2001 Class B $0.0350 April 04, 2001 March 30, 2001 Class C $0.0350 April 04, 2001 March 30, 2001 Class M $0.0360 April 04, 2001 March 30, 2001 Class Q $0.0390 April 04, 2001 March 30, 2001 Class T $0.0360 April 04, 2001 March 30, 2001 Class A $0.0400 May 03, 2001 April 30, 2001 Class B $0.0360 May 03, 2001 April 30, 2001 Class C $0.0360 May 03, 2001 April 30, 2001 Class M $0.0370 May 03, 2001 April 30, 2001 Class Q $0.0400 May 03, 2001 April 30, 2001 Class T $0.0370 May 03, 2001 April 30, 2001 Pilgrim Strategic Income Fund Class A $0.0540 April 04, 2001 March 30, 2001 Class B $0.0500 April 04, 2001 March 30, 2001 Class C $0.0500 April 04, 2001 March 30, 2001 Class Q $0.0550 April 04, 2001 March 30, 2001 Class A $0.0540 May 03, 2001 April 30, 2001 Class B $0.0500 May 03, 2001 April 30, 2001 Class C $0.0500 May 03, 2001 April 30, 2001 Class Q $0.0540 May 03, 2001 April 30, 2001 Pilgrim High Yield Fund Class A $0.0450 April 04, 2001 March 30, 2001 Class B $0.0430 April 04, 2001 March 30, 2001 Class C $0.0430 April 04, 2001 March 30, 2001 Class M $0.0430 April 04, 2001 March 31, 2001 Class Q $0.0460 April 04, 2001 March 30, 2001 Class A $0.0450 May 03, 2001 April 30, 2001 Class B $0.0430 May 03, 2001 April 30, 2001 Class C $0.0430 May 03, 2001 April 30, 2001 Class M $0.0430 May 03, 2001 April 30, 2001 Class Q $0.0460 May 03, 2001 April 30, 2001 Pilgrim High Yield Fund II Class A $0.1600 May 01, 2001 Daily Class B $0.1520 May 01, 2001 Daily Class C $0.1540 May 01, 2001 Daily Class Q $0.1610 May 01, 2001 Daily Class T $0.1550 May 01, 2001 Daily 40 Pilgrim GNMA Income Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATIONS: 91.29% Federal Home Loan Mortgage Corportation: 4.80% $ 9,573,938 6.500% due 06/01/16 $ 9,666,712 3,595,284 7.000% due 11/01/14 3,676,177 9,465,722 7.500% due 12/01/14 - 01/01/30 9,725,155 2,228,771 8.000% due 01/01/30 2,300,492 ------------- 25,368,536 ------------- Federal National Mortgage Corportation: 2.50% 3,348,948 6.500% due 06/01/14 - 12/01/18 3,369,816 1,636,015 7.000% due 03/01/15 1,675,683 1,814,982 7.500% due 05/01/28 1,855,819 6,075,039 8.500% due 08/01/11 - 09/01/15 6,316,164 ------------- 13,217,482 ------------- Government National Mortgage Association: 83.99% 233,983 5.500% due 04/20/29 222,508 574,650 5.650% due 07/15/29 570,755 54,919,358 6.000% due 07/15/28 - 02/15/31 53,923,296 4,747,797 6.250% due 04/15/26 - 04/15/28 4,683,165 140,093 6.340% due 02/15/29 141,623 588,157 6.350% due 09/15/33 588,028 5,929,429 6.400% due 10/15/33 - 08/15/38 5,944,292 1,198,189 6.470% due 09/15/33 1,205,808 39,560,999 6.500% due 02/15/22 - 02/15/40 39,663,845 15,669,852 6.625% due 07/15/33 - 01/15/40 15,892,326 6,973,052 6.650% due 12/15/13 - 11/15/39 7,048,913 3,572,840 6.670% due 01/15/40 3,628,436 6,294,014 6.688% due 07/15/40 6,435,932 398,178 6.700% due 08/15/14 - 12/15/14 396,104 16,967,537(1) 6.750% due 12/15/01 - 05/15/40 17,038,289 2,894,673 6.810% due 07/15/39 2,967,481 3,187,483 6.820% due 04/15/34 3,278,946 1,831,307 6.870% due 03/15/39 1,821,006 9,174,120 6.875% due 01/15/29 - 02/15/40 9,456,035 2,990,221 6.950% due 12/15/29 3,066,552 20,425,651 7.000% due 09/15/23 - 06/15/34 20,811,530 984,393 7.050% due 07/15/29 997,313 5,674,000(1) 7.100% due 08/15/01 5,840,674 9,081,808 7.125% due 09/15/39 9,488,280 2,279,793 7.200% due 04/15/34 2,399,687 5,791,725 7.250% due 05/15/22 - 06/15/29 5,862,795 18,668,492 7.450% due 03/15/29 19,333,557 51,582,564 7.500% due 04/15/13 - 05/15/31 52,967,528 1,996,431 7.600% due 06/15/40 2,052,029 12,633,763 7.625% due 08/15/14 - 07/15/38 13,542,702 27,500,642(1) 7.650% due 09/15/02 - 05/15/26 28,972,481 687,902 7.700% due 08/15/13 712,646 6,138,526 7.750% due 06/15/14 - 01/15/36 6,553,702 1,238,069(1) 7.800% due 10/15/02 - 07/15/19 1,312,649 10,256,689 7.875% due 09/15/29 - 04/15/38 11,102,786 25,701,640(1) 8.000% due 08/15/01 - 06/15/40 27,270,400 611,648 8.050% due 07/15/19 - 04/15/21 633,478 1,597,875 8.100% due 06/15/12 - 07/15/12 1,626,994 5,046,076 8.125% due 05/15/38 5,458,355 9,138,674 8.150% due 12/15/11 - 09/15/15 9,317,112 7,534,488 8.200% due 10/15/11 - 05/15/13 7,707,574 7,676,801(1) 8.250% due 07/15/01 - 12/15/37 7,948,798 12,121,782 8.500% due 04/15/12 - 04/15/32 12,280,881 6,749,308 8.750% due 11/15/17 - 06/15/27 7,098,890 2,255,196 9.000% due 05/15/20 - 12/15/34 2,439,318 1,402,983 9.250% due 06/15/30 1,472,256 996,071 10.250% due 08/15/29 1,138,177 ------------- 444,315,932 ------------- Total U.S. Government Agency Obligations (Cost $467,077,778) 482,901,950 ------------- U.S. TREASURY NOTES: 4.52% 10,000,000 3.500% due 01/15/11 10,228,380 13,000,000 5.750% due 11/15/05 - 08/15/10 13,674,032 ------------- Total U.S. Treasury Notes (Cost $ 23,627,436) 23,902,412 ------------- Total Long-Term Investments (Cost $490,705,214) 506,804,362 ------------- See Accompanying Notes to Financial Statements 41 Pilgrim GNMA Income Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- SHORT TERM INVESTMENTS: 9.52% U.S. Treasury Obligations: 9.52% $ 300,000 U.S. Treasury Bill, 4.900% due 04/12/01 $ 299,551 17,100,000 U.S. Treasury Bill, 4.800% due 04/19/01 17,058,960 25,000,000 U.S. Treasury Bill, 4.870% due 04/19/01 24,939,125 7,500,000 U.S. Treasury Bill, 5.020% due 04/19/01 7,481,175 600,000 U.S. Treasury Bill, 5.640% due 06/14/01 593,044 ------------- Total Short-Term Investments (Cost $ 50,371,855) 50,371,855 ------------- Total Investments in Securities (Cost $541,077,069)* 105.33% 557,176,217 Other Assets and Liabilities-Net -5.33% (28,196,352) ------- ------------- Net Assets 100.00% $ 528,979,865 ======= ============= * Cost for federal income tax purposes is $541,102,046. Net unrealized appreciation consists of: Gross Unrealized Appreciation $ 16,812,666 Gross Unrealized Depreciation (738,495) ------------- Net Unrealized Appreciation $ 16,074,171 ============= - ---------- (1) Some or all of this security are construction loan securities issued on a when-issued basis (see Note 10). See Accompanying Notes to Financial Statements 42 Pilgrim Strategic Income Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- CORPORATE BONDS: 45.24% Aerospace/Defense: 0.16% $ 175,000 XX Simula, Inc., 8.000%, due 05/01/04 $ 87,500 ---------- Airlines: 0.11% 60,000 Atlas Air Worldwide Holdings, Inc., 9.375%, due 11/15/06 60,600 ---------- Banks: 6.82% 155,000 @@ Banco Santander-Chile, 6.500%, due 11/01/05 157,618 450,000(1) @@ Bank Nederlandse Gemeenten, 7.750%, due 08/13/03 673,028 700,000(1) @@ European Investment Bank, 7.000%, due 12/08/03 1,035,886 730,000(1) @@ KFW International Finance, 6.000%, due 10/27/03 1,052,622 4,557,000(2) @@ Realkredit Danmark A/S, 6.000%, due 10/01/29 522,049 200,000 Wachovia Corp., 6.605%, due 10/01/25 204,150 ---------- 3,645,353 ---------- Chemicals: 0.20% 225,000 Sterling Chemicals, Inc., 11.750%, due 08/15/06 105,188 ---------- Commercial Banks -- Non U.S.: 0.72% 3,352,000(2) @@ Danske Kredit, 6.000%, due 10/01/29 384,202 ---------- Commercial Services: 1.57% 475,000 Mail-Well, Inc., 8.750%, due 12/15/08 406,125 815,000 Neff Corp., 10.250%, due 06/01/08 346,375 25,000 United Rentals, Inc., 8.800%, due 08/15/08 22,000 75,000 United Rentals, Inc., 9.000%, due 04/01/09 66,750 ---------- 841,250 ---------- Computers: 0.06% 100,000 Globix Corp., 12.500%, due 02/01/10 29,500 ---------- Diversified Financial Services: 1.48% 60,000 @@# Cerro Negro Finance Ltd, 7.330%, due 12/01/09 54,854 200,000 Citigroup, Inc., 5.700%, due 02/06/04 202,021 200,000 Household Finance Corp., 8.000%, due 05/09/05 214,350 440,000 Madison River Capital LLC/Madison River Finance Corp, 13.250%, due 03/01/10 319,000 1,000(2) @@ Unikredit Realkredit, 6.000%, due 07/01/29 115 ---------- 790,340 ---------- Electric: 2.80% 300,000 AES Corp., 9.375%, due 09/15/10 315,000 405,000 Calpine Corp., 8.625%, due 08/15/10 418,964 350,000 CMS Energy Corp., 9.875%, due 10/15/07 374,900 100,000 East Coast Power LLC, 7.536%, due 06/30/17 98,342 20,000 Enersis S.A. (Chile), 6.600%, due 12/01/26 19,848 250,000 TNP Enterprises, Inc., 10.250%, due 04/01/10 271,250 ---------- 1,498,304 ---------- Electronics: 0.18% 95,000 @@ Celestica International, Inc., 10.500%, due 12/31/06 98,325 ---------- Environmental Control: 0.24% 125,000 # Allied Waste North America, 8.875%, due 04/01/08 128,750 ---------- Food: 0.76% 390,000 # Fleming Companies, Inc., 10.125%, due 04/01/08 403,650 ---------- Forest Products & Paper: 0.90% 500,000 @@ Doman Industries Ltd., 8.750%, due 03/15/04 282,500 200,000 Buckeye Technologies, Inc., 9.250%, due 09/15/08 199,000 ---------- 481,500 ---------- Healthcare-Services: 0.09% 50,000 HCA -- The Healthcare Company, 7.250%, due 05/20/08 48,965 ---------- Holding Companies -- Diversified: 0.10% 50,000 # Kansas City Southern Railway, 9.500%, due 10/01/08 51,500 ---------- Home Builders: 0.15% 25,000 Lennar Corp., 7.625%, due 03/01/09 24,094 50,000 Lennar Corp., 9.950%, due 05/01/10 53,750 ---------- 77,844 ---------- Internet: 0.11% 100,000 + Amazon.Com, Inc., 0/10.000%, due 05/01/08 58,500 ---------- Iron/Steel: 0.09% 25,000 AK Steel Corp., 7.875%, due 02/15/09 23,250 25,000 Armco, Inc., 9.000%, due 09/15/07 23,250 ---------- 46,500 ---------- Leisure Time: 0.75% 600,000 Trump Atlantic City Associates, 11.250%, due 05/01/06 399,000 ---------- Lodging: 0.78% 25,000 Prime Hospitality Corp., 9.750%, due 04/01/07 25,250 375,000 Station Casinos, Inc., 9.875%, due 07/01/10 390,000 ---------- 415,250 ---------- See Accompanying Notes to Financial Statements 43 Pilgrim Strategic Income Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- Machinery -- Construction & Mining: 0.03% $ 15,000 Terex Corp., 8.875%, due 04/01/08 $ 14,100 ----------- Media: 3.56% 85,000 Adelphia Communications, 10.875%, due 10/01/10 90,525 350,000 + Charter Communications Holdings LLC, 0/11.750%, due 01/15/10 238,000 675,000 Classic Cable, Inc., 10.500%, due 03/01/10 408,375 425,000 Echostar DBS Corp., 9.250%, due 02/01/06 426,594 600,000 Northland Cable Television, Inc., 10.250%, due 11/15/07 423,000 400,000 +@@ Telewest Communications PLC, 0/11.375%, due 02/01/10 234,000 250,000 +@@ United Pan-Europe Communications, N.V., 0/13.750%, due 02/01/10 82,500 ----------- 1,902,994 ----------- Oil & Gas: 2.33% 300,000 Clark Refining and Marketing, Inc., 8.375%, due 11/15/07 232,500 400,000 Energy Corp. Of America, 9.500%, due 05/15/07 329,000 350,000 @@ Northern Oil ASA, 10.000%, due 05/15/05 248,500 285,000 Occidental Petroleum Corp., 7.650%, due 02/15/06 303,300 200,000 United Refining Co., 10.750%, due 06/15/07 132,250 ----------- 1,245,550 ----------- Packaging & Containers: 0.21% 135,000 Owens-Illinois, Inc., 7.850%, due 05/15/04 112,050 ----------- Retail: 0.75% 625,000 Hollywood Entertainment Corp., 10.625%, due 08/15/04 403,125 ----------- Sovereign: 9.72% 860,000(3) @@ Bundesobligation, 4.125%, due 08/27/04 753,554 7,270,000(2) @@ Denmark Government Bond, 6.000%, due 11/15/02 873,721 990,000(3) @@ Deutsche Bundesrepublik, 5.625%, due 01/04/28 900,688 894,000(3) @@ Deutsche Bundesrepublik, 6.000%, due 07/04/07 850,469 $ 200,000 @@ Dominican Republic International Bond, 7.5625%, due 08/30/24 132,000 916,000(3) @@ Netherlands Government Bond, 5.250%, due 07/15/08 831,994 8,700,000(4) @@ Sweden Government Bond, 5.500%, due 04/12/02 851,097 ----------- 5,193,523 ----------- Telecommunications: 9.40% 500,000 @@ Call-Net Enterprises, Inc., 8.000%, due 08/15/08 154,375 500,000 @@ Call-Net Enterprises, Inc., 9.375%, due 05/15/09 137,500 400,000 Crown Castle International Corp., 9.500%, due 08/01/11 399,000 250,000 FLAG Telecom Holdings Ltd., 11.625%, due 03/30/10 191,250 260,000 Global Crossing Holding Ltd, 9.500%, due 11/15/09 245,050 350,000 Hyperion Telecom, Inc., 12.000%, due 11/01/07 222,250 250,000 + Intermedia Communications, 0/12.250%, due 03/01/09 178,750 300,000 ITC Deltacom, Inc., 8.875%, due 03/01/08 235,500 250,000 + Level 3 Communications, Inc., 0/12.875%, due 03/15/10 96,250 250,000 McLeodUSA, Inc., 11.375%, due 01/01/09 245,000 275,000 Metromedia Fiber Network, Inc., 10.000%, due 12/15/09 229,625 495,000 MGC Communications Inc./MPower Communications , 13.000%, due 04/01/10 195,525 275,000 Natural Microsystems Corp., 5.000%, due 10/15/05 152,625 300,000 + Nextel Communications, Inc., 0/9.950%, due 02/15/08 204,750 900,000 Northeast Optic Communications, Inc., 12.750% , due 08/15/08 409,500 500,000 + NTL, Inc. 0/9.750%, due 04/01/08 288,750 250,000 @@ Tricom SA, 11.375%, due 09/01/04 235,625 400,000 + US Unwired, Inc., 0/13.375%, due 11/01/09 204,000 500,000 @@ VersaTel Telecom International N.V., 11.875%, due 07/15/09 297,500 2,000,000 + Viatel, Inc., 0/12.500%, due 04/15/08 285,000 200,000 Williams Communications Group, 10.875%, due 10/01/09 147,000 1,000,000 && WinStar Communications, Inc., 12.750%, due 04/15/10 265,000 ----------- 5,019,825 ----------- Textiles: 0.75% 400,000 Simmons Co., 10.250%, due 03/15/09 400,000 ----------- Transportation: 0.42% 25,000 Gulfmark Offshore, Inc., 8.750%, due 06/01/08 25,063 200,000 Norfolk Southern Corp., 6.750%, due 02/15/11 201,258 ----------- 226,321 ----------- Total Corporate Bonds (Cost $27,421,920) 24,169,509 ----------- See Accompanying Notes to Financial Statements 44 Pilgrim Strategic Income Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS: 33.52% $ 2,075,000 U.S. Treasury Bond, 6.125%, due 08/15/29 $ 2,228,363 1,240,000 U.S. Treasury Inflation Index Bond, 3.500%, due 01/15/11 1,268,319 2,062,000 U.S. Treasury Inflation Index Bond, 3.875%, due 01/15/09 2,283,152 4,400,000 U.S. Treasury Note, 4.750%, due 01/31/03 4,439,455 2,000,000 U.S. Treasury Note, 5.750%, due 10/31/02 2,047,076 1,800,000 U.S. Treasury Note, 5.750%, due 11/15/05 1,887,467 1,000,000 U.S. Treasury Note, 5.750%, due 08/15/10 1,054,370 1,250,000 U.S. Treasury Note, 6.500%, due 02/15/10 1,380,862 6,000,000 U.S. Treasury Strip (Principal Only), 0.000%, due 11/15/27 1,323,354 ------------- Total U.S. Treasury Obligations (Cost $17,456,241) 17,912,418 ------------- U.S. GOVERNMENT AGENCY OBLIGATIONS: 13.53% Federal Home Loan Mortgage Corporation: 2.56% 170,030 5.500%, due 01/01/14 166,948 87,364 5.500%, due 02/01/14 85,780 1,056,698 7.000%, due 06/01/29 1,070,237 8,721 9.000%, due 06/01/06 9,209 26,857 9.500%, due 11/01/05 27,914 9,740 10.000%, due 10/01/03 10,197 ------------- 1,370,285 ------------- Federal National Mortgage Association: 9.46% 274,026 6.350%, due 01/01/04 286,699 75,519 6.500%, due 02/01/09 76,440 583,268 6.500%, due 08/01/15 590,192 1,900,000 6.625%, due 10/15/07 2,021,429 715,000(1) 6.875%, due 06/07/02 1,033,529 303,415 7.000%, due 03/01/15 310,241 500,000 7.250%, due 01/15/10 552,655 127,472 8.000%, due 08/01/30 131,456 10,602 9.500%, due 06/01/05 11,235 10,941 9.500%, due 07/01/06 11,594 13,789 9.500%, due 05/01/07 14,612 13,031 10.000%, due 10/01/05 14,001 ------------- 5,054,083 ------------- Government National Mortgage Association: 1.51% 378,166 6.500%, due 06/15/29 378,045 284,465 7.500%, due 11/15/29 291,576 128,874 8.000%, due 07/15/30 133,226 3,468 8.500%, due 02/15/21 3,628 312 11.500%, due 02/15/13 341 630 11.500%, due 07/15/13 704 ------------- 807,520 ------------- Total U.S. Government Agency Obligations (Cost $5,897,180) 7,231,888 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET-BACKED SECURITIES: 2.36% Mortgage - Commercial: 1.78% 210,000 # Allied Capital Commercial Mortgage Trust, 6.710%, due 12/25/04 213,938 450,000 First Union National Bank-Bank of America Commercial Mortgage Trust, 6.136%, due 12/15/10 452,250 274,438 GMAC Commercial Mortgage Securities, Inc., 6.974%, due 05/15/08 285,967 ------------- 952,155 ------------- Mortgage -- Residential: 0.58% 300,000 Emergent Home Equity Loan Trust, 7.080%, due 12/15/28 307,673 ------------- Total CMO's and Asset Backed Securities (Cost $1,224,380) 1,259,828 ------------- Shares Security Value - -------------------------------------------------------------------------------- PREFERRED STOCK: 0.93% Telecommunications: 0.93% 8,000 & Adelphia Business Solutions, Inc. $ 400,000 3,030 & XO Communications, Inc. 94,688 ------------- 494,688 ------------- Total Preferred Stock (Cost $630,471) 494,688 ------------- Total Long-Term Investments (Cost $52,629,692) 51,068,331 ------------- Principal Amount Security Value - -------------------------------------------------------------------------------- SHORT TERM INVESTMENTS: 6.81% Repurchase Agreement: 6.81% $ 3,638,000 State Street Repurchase Agreement dated 03/30/01, 5.18% due 04/02/01, $3,639,570 to be received upon repurchase (Collateralized by $3,750,000 U.S. Treasury Note, 5.375% Market Value $3,712,500, due 02/15/31) 3,638,000 ------------- Total Short-Term Investments (Cost $3,638,000) 3,638,000 ------------- Total Investments in Securities (Cost $56,267,692)* 102.39% $ 54,706,331 ------- ------------- Other Assets and Liabilities-Net -2.39% (1,275,599) ------- ------------- Net Assets 100.00% $ 53,430,732 ------- ------------- # Securities with purchases pursuant to Rule 144A, under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. + Step-up basis bonds. Interest rates shown reflect current and future coupon rates. @@ Foreign Issuer & Payment-in-kind && Became a defaulted security subsequent to March 31, 2001. XX Value of securities obtained from one or more dealers making markets in the securities have been adjusted based on the Fund's valuation procedures. (1) Principal Amount presented in British Pounds. (2) Principal Amount presented in Danish Kroner. (3) Principal Amount presented in EURO. (4) Principal Amount presented in Swedish Kronor. * Cost for federal income tax purposes is $56,281,813. Net unrealized depreciation consists of: Gross Unrealized Appreciation $ 968,070 Gross Unrealized Depreciation (2,543,552) ------------- Net Unrealized Depreciation $ (1,575,482) ============= See Accompanying Notes to Financial Statements 45 Pilgrim High Yield Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- CORPORATE BONDS: 92.34% Aerospace: 0.73% $ 1,500,000 # Sequa Corp., 8.875%, due 04/01/08 $ 1,513,125 ------------- Airlines: 2.41% 1,125,000 Amtran, Inc., 10.500%, due 08/01/04 978,750 4,000,000 Atlas Air, Inc., 9.375%, due 11/15/06 4,040,000 ------------- 5,018,750 ------------- Automotive: 1.94% 4,050,000 Lear Corp., 8.110%, due 05/15/09 4,051,782 ------------- Building Materials: 1.31% 1,700,000 Dayton Superior Corp., 13.000%, due 06/15/09 1,759,500 1,000,000 Nortek, Inc., 8.875%, due 08/01/08 967,500 ------------- 2,727,000 ------------- Cable: 8.87% 2,500,000 Adelphia Communications Corp., 10.875%, due 10/01/10 2,662,500 2,500,000 Charter Communications Holdings, 8.625%, due 04/01/09 2,418,750 2,000,000 Charter Communications Holdings, 11.125%, due 01/15/11 2,145,000 2,000,000 Echostar DBS Corp., 9.250%, due 02/01/06 2,007,500 2,000,000 Echostar DBS Corp., 9.375%, due 02/01/09 2,015,000 2,000,000 XX Hyperion Telecommunications, Inc., 12.000%, due 11/01/07 1,230,000 1,400,000 Northland Cable Television, Inc., 10.250%, due 11/15/07 987,000 3,750,000 @@ Star Choice Communications, 13.000%, due 12/15/05 4,087,500 1,000,000 @@ Telewest Communications, 9.875%, due 02/01/10 945,000 ------------- 18,498,250 ------------- Capital Goods: 1.86% 595,000 Terex Corp., 8.875%, due 04/01/08 562,275 2,440,000 Terex Corp., 8.875%, due 04/01/08 2,305,800 1,000,000 # Terex Corp., 10.375%, due 04/01/11 1,015,000 ------------- 3,883,075 ------------- Chemicals: 3.33% 2,000,000 Buckeye Cellulose Corp., 9.250%, due 09/15/08 1,990,000 3,000,000 Lyondell Chemical Co., 9.875%, due 05/01/07 3,082,500 2,000,000 Sterling Chemicals, Inc., 12.375%, due 07/15/06 1,870,000 ------------- 6,942,500 ------------- Conglomerates: 1.08% 2,900,000 Blount, Inc., 7.000%, due 06/15/05 2,262,000 ------------- Consumer Products: 1.87% 1,900,000 French Fragrances, Inc., 10.375%, due 05/15/07 1,895,250 2,000,000 Simmons Co., 10.250%, due 03/15/09 2,000,000 ------------- 3,895,250 ------------- Containers: 0.46% 1,160,000 Owens-Illinois, Inc., 7.850%, due 05/15/04 968,600 ------------- Electrical Utilities: 4.70% 900,000 AES Corp., 9.500%, due 06/01/09 954,000 2,675,000 AES Corp., 9.375%, due 09/15/10 2,822,125 3,225,000 Calpine Corp., 8.625%, due 08/15/10 3,341,545 1,500,000 CMS Energy Corp., 9.875%, due 10/15/07 1,606,715 1,000,000 TNP Enterprises, Inc., 10.250%, due 04/01/10 1,085,000 ------------- 9,809,385 ------------- Energy: 9.09% 1,360,000 Clark Refining and Marketing, Inc., 8.375%, due 11/15/07 1,054,000 378,000 Cliffs Drilling Co., 10.250%, due 05/15/03 390,758 1,325,000 #@@ Compagnie Generale de Geophysique, 10.625%, due 11/15/07 1,414,437 5,575,000 Energy Corp of America, 9.500%, due 05/15/07 4,613,312 3,055,000 Gulfmark Offshore, Inc., 8.750%, due 06/01/08 3,077,912 3,425,000 Parker Drilling Co., 9.750%, due 11/15/06 3,544,875 1,500,000 RBF Finance Co., 11.000%, due 03/15/06 1,865,625 1,000,000 United Rentals, Inc., 9.500%, due 06/01/08 915,000 3,100,000 United Roofing Co., 10.750%, due 06/15/07 2,065,375 ------------- 18,941,294 ------------- Entertainment: 0.62% 2,000,000 Hollywood Entertainment Corp., 10.625%, due 08/15/04 1,290,000 ------------- Environmental: 1.43% 2,900,000 Allied Waste of North America, 10.000%, due 08/01/09 2,972,500 ------------- Finance: 3.65% 3,000,000 NEFF Corp., 10.250%, due 06/01/08 1,275,000 3,000,000 Penhall International Corp., 12.000%, due 08/01/06 2,970,000 325,000 United Rentals, Inc., 8.800%, due 08/15/08 287,625 1,400,000 United Rentals, Inc., 9.250%, due 01/15/09 1,267,000 2,025,000 United Rentals, Inc., 9.000%, due 04/01/09 1,812,375 ------------- 7,612,000 ------------- See Accompanying Notes to Financial Statements 46 Pilgrim High Yield Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- Food/Beverage: 0.74% $ 1,775,000 Packaged Ice, Inc., 9.750%, due 02/01/05 $ 1,544,250 ------------- Gaming: 6.10% 1,750,000 Anchor Gaming, 9.875%, due 10/15/08 1,868,125 1,000,000 Hollywood Casino Shreveport, 13.000%, due 08/01/06 1,075,000 1,000,000 International Game Technology, 8.375%, due 05/15/09 1,030,000 3,250,000 Park Place Entertainment Corp., 8.875%, due 09/15/08 3,323,125 1,000,000 Stations Casinos, Inc., 9.750%, due 04/15/07 1,030,000 1,675,000 Stations Casinos, Inc., 9.875%, due 07/01/10 1,750,375 1,500,000 Trump Atlantic City Associates, Inc., 11.250%, due 05/01/06 997,500 1,600,000 Venetian Casino Resort LLC, 14.250%, due 11/15/05 1,648,000 ------------- 12,722,125 ------------- Health Care: 1.98% 2,100,000 Columbia/HCA Healthcare Corp. 7.250%, due 05/20/08 2,059,359 2,000,000 Tenet Healthcare Corp., 8.125%, due 12/01/08 2,065,000 ------------- 4,124,359 ------------- Homebuilders/Real Estate: 2.74% 3,000,000 DR Horton, Inc., 8.375%, due 06/15/04 3,015,000 1,125,000 Lennar Corp., 7.625%, due 03/01/09 1,085,785 1,500,000 Lennar Corp., 9.950%, due 05/01/10 1,620,000 ------------- 5,720,785 ------------- Hotels: 2.45% 900,000 HMH Properties, Inc., 7.875%, due 08/01/08 859,500 2,900,000 # Meristar Hospitality Corp., 9.125%, due 01/15/11 2,972,500 1,250,000 Prime Hospitality Corp., 9.750%, due 04/01/07 1,268,750 ------------- 5,100,750 ------------- Paper: 1.48% 2,175,000 @@ Doman Industries Ltd., 8.750%, due 03/15/04 1,228,875 900,000 # Stone Container Corp., 9.750%, due 02/01/11 922,500 900,000 #@@ Tembec Industries, Inc., 8.500%, due 02/01/11 927,000 ------------- 3,078,375 ------------- Publishing: 0.92% 2,250,000 Mail-Well Corp., 8.750%, due 12/15/08 1,923,750 ------------- Rail Transport: 0.99% 2,000,000 # Kansas City Southern Railway Co., 9.500%, due 10/01/08 2,070,000 ------------- Specialty Retail: 3.20% 2,000,000 Big 5 Corp., 10.875%, due 11/15/07 1,850,000 1,875,000 JoAnn Stores, Inc., 10.375%, due 05/01/07 1,209,375 1,000,000 Musicland Group, Inc., 9.875%, due 03/15/08 1,050,000 3,088,000 XX Tuesday Morning Corp., 11.000%, due 12/15/07 2,563,040 ------------- 6,672,415 ------------- Steel: 3.09% 3,205,000 AK Steel Corp., 9.125%, due 12/15/06 3,205,000 875,000 AK Steel Corp., 7.875%, due 02/15/09 818,125 325,000 Armco, Inc., 9.000%, due 09/15/07 303,875 2,950,000 Metals USA, Inc., 8.625%, due 02/15/08 2,109,250 ------------- 6,436,250 ------------- Supermarkets: 0.36% 720,000 # Fleming Companies, Inc., 10.125%, due 04/01/08 745,200 ------------- Technology: 4.99% 2,500,000 # Amkor Technology, Inc., 9.250%, due 02/15/08 2,387,500 500,000 Amkor Technology, Inc., 10.500%, due 05/01/09 482,500 1,975,000 Fairchild Semiconductor Corp., 10.125%, due 03/15/07 1,866,375 700,000 # Fairchild Semiconductor Corp., 10.500%, due 02/01/09 675,500 1,050,000 @@ Filtronic PLC, 10.000%, due 12/01/05 813,750 2,795,000 @@ Flextronics International Ltd., 8.750%, due 10/15/07 2,655,250 4,675,000 Zilog, Inc., 9.500%, due 03/01/05 1,519,375 ------------- 10,400,250 ------------- See Accompanying Notes to Financial Statements 47 Pilgrim High Yield Fund PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- Telecommunications: 19.05% $ 5,000,000 @@ Call Net Enterprises, Inc., 9.375%, due 05/15/09 $ 1,375,000 2,350,000 Crown Castle International Corp., 9.500%, due 08/01/11 2,344,125 2,000,000 Exodus Communications, Inc., 11.250%, due 07/01/08 1,610,000 4,000,000 Flag Telecommunication Holdings LTD, 11.625%, due 03/30/10 3,060,000 3,000,000 Global Crossing Holdings Ltd., 9.625%, due 05/15/08 2,842,500 1,000,000 Global Crossing Holdings Ltd., 9.500%, due 11/15/09 942,500 1,925,000 Globix Corp., 12.500%, due 02/01/10 567,875 4,100,000 Intermedia Communications, Inc., 9.500%, due 03/01/09 4,079,500 2,000,000 ITC Delta Communications, Inc., 9.750%, due 11/15/08 1,610,000 4,350,000 Level 3 Communications, Inc., 9.125%, due 05/01/08 3,110,250 4,000,000 Madison River Capital LLC, 13.250%, due 03/01/10 2,900,000 2,100,000 McLeodUSA, Inc., 11.375%, due 01/01/09 2,068,500 4,000,000 Metromedia Fiber Network, Inc., 10.000%, due 11/15/08 3,340,000 2,000,000 MGC Communications, Inc., 13.000%, due 04/01/10 790,000 2,850,000 Nextel Communications, 9.375%, due 11/15/09 2,429,625 4,500,000 Nextlink Communications, 10.750%, due 11/15/08 2,677,500 2,790,000 XX Northeast Optic, 12.750%, due 08/15/08 1,102,050 5,250,000 Rhythms Netconnections, Inc., 12.750%, due 04/15/09 682,500 2,275,000 Williams Communications Group, 10.875%, due 10/01/09 1,672,125 1,900,000 Winstar Communication, Inc., 12.500%, due 04/15/08 503,500 ------------- 39,707,550 ------------- Textiles: 0.42% 900,000 Norton McNaughton, Inc., 12.500%, due 06/01/05 877,500 ------------- Transportation excluding Air/Rail: 0.48% 1,000,000 # Travelcenters America, Inc., 12.750%, due 05/01/09 995,000 ------------- Total Corporate Bonds (Cost $208,986,150) $ 192,504,070 ------------- Number of Market Warrants Security Value - -------------------------------------------------------------------------------- WARRANTS: 0.00% Building Materials: 0.00% 3,100 @# Dayton Superior XX Corp., Exp. 06/15/09 31 ------------- Transportation excluding Air/Rail: 0.00% 3,000 @# Travelcenters America, Inc., Exp. 11/14/01 3,000 ------------- Total Warrants (Cost $34,739) 3,031 ------------- Total Long-Term Investments (Cost $209,020,889) 192,507,101 ------------- Principal Amount Security Value - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS: 7.00% Repurchase Agreement: 7.00% $14,585,000 State Street Repurchase Agreement dated 03/30/01, 5.180% due 04/02/01, $14,591,296 to be received upon repurchase (Collateralized by $14,375,000 U.S. Treasury Note, 5.625% Market Value $14,878,125, due 09/30/01) $ 14,585,000 ------------- Total Investments in Securities (Cost $ 223,605,889)* 99.34% $ 207,092,101 Other Assets and Liabilities-Net 0.66% 1,377,813 ------- ------------- Net Assets 100.00% $ 208,469,914 ======= ============= @ Non-income producing security # Securities with purchases pursuant to Rule 144A, under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. XX Value of securities obtained from one or more dealers making markets in the securities have been adjusted based on the Fund's valuation procedures. @@ Foreign Issuer * Cost for federal income tax purposes is $224,208,389. Net unrealized depreciation consists of: Gross Unrealized Appreciation $ 4,892,831 Gross Unrealized Depreciation (22,009,119) ------------- Net Unrealized Depreciation $(17,116,288) ============= See Accompanying Notes to Financial Statements 48 Pilgrim High Yield Fund II PORTFOLIO OF INVESTMENTS as of March 31, 2001 - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- CORPORATE BONDS: 86.81% Aerospace: 0.51% $ 3,000,000 XX Simula, Inc., 8.000%, due 05/01/04 $ 1,500,000 ------------- Airlines: 1.80% 1,375,000 Amtran, Inc., 10.500%, due 08/01/04 1,196,250 4,000,000 Atlas Air, Inc., 9.375%, due 11/15/06 4,040,000 ------------- 5,236,250 ------------- Broadcasting: 0.77% 5,300,000 XX Brill Media Co., LLC, 12.000%, due 12/15/07 2,252,500 ------------- Building Materials: 0.50% 1,400,000 Dayton Superior Corp., 13.000%, due 06/15/09 1,449,000 Cable: 12.96% 1,005,000 Adelphia Communications Corp., 10.875%, due 10/01/10 1,070,325 4,000,000 Century Communications Corp., 0.000%, due 01/15/08 1,920,000 4,750,000 Charter Communications Holdings, 11.125%, due 01/15/11 5,094,375 4,500,000 Classic Cable, Inc., 9.375%, due 08/01/09 2,700,000 3,075,000 Classic Cable, Inc., 10.500%, due 03/01/10 1,860,375 4,450,000 Echostar Communications Corp., 9.250%, due 02/01/06 4,466,688 3,200,000 Intermedia Communications, Inc., 9.500%, due 03/01/09 3,184,000 5,625,000 Northland Cable Television, Inc., 10.250%, due 11/15/07 3,965,625 5,825,000 + NTL, Inc., 0/9.750%, due 04/01/08 3,363,938 2,775,000 @@ Star Choice Communications, 13.000%, due 12/15/05 3,024,750 5,000,000 +@@ Telewest PLC, 0/11.375%, due 02/01/10 2,925,000 2,340,000 United International Holdings, 10.750%, due 02/15/08 1,134,900 9,100,000 +@@ United Pan-Europe Communications NV, 0/13.750%, due 02/01/10 3,048,500 ------------- 37,758,476 ------------- Capital Goods: 1.37% 4,075,000 Terex Corp., 8.875%, due 04/01/08 3,850,875 155,000 Terex Corp., 8.875%, due 04/01/08 146,475 ------------- 3,997,350 ------------- Chemicals: 1.19% 1,150,000 Buckeye Cullulose Corp., 9.250%, due 09/15/08 1,144,250 4,975,000 Sterling Chemicals, Inc., 11.750%, due 08/15/06 2,325,813 ------------- 3,470,063 ------------- Conglomerates: 1.21% 4,500,000 Blount, Inc., 7.000%, due 06/15/05 3,510,000 ------------- Consumer Products: 1.48% 1,050,000 French Fragrances, Inc., 10.375%, due 05/15/07 1,047,375 3,250,000 Simmons Co., 10.250%, due 03/15/09 3,250,000 ------------- 4,297,375 ------------- Containers: 1.51% 4,290,000 Owens Illinois, Inc., 7.850%, due 05/15/04 3,582,150 5,000,000 ** Russel Stanley XX Holdings, Inc., 10.875%, due 02/15/09 825,000 ------------- 4,407,150 ------------- Diversified Media: 0.73% 8,700,000 +XX DIVA Systems Corp., 0/12.625%, due 03/01/08 1,899,210 4,750,000 XX Source Media, Inc., 12.000%, due 11/01/04 225,625 ------------- 2,124,835 ------------- Electrical Utilities: 5.43% 1,050,000 AES Corp., 9.500%, due 06/01/09 1,113,000 4,530,000 AES Corp., 9.375%, due 09/15/10 4,779,150 5,670,000 Calpine Corp., 8.625%, due 08/15/10 5,874,902 3,800,000 CMS Energy Corp., 9.875%, due 10/15/07 4,070,343 ------------- 15,837,395 ------------- See Accompanying Notes to Financial Statements 49 Pilgrim High Yield Fund II PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- Energy: 10.11% $ 3,200,000 Clark Refining & Marketing , Inc., 8.375%, due 11/15/07 $ 2,480,000 2,100,000 #@@ Compagnie Generale de Geophysique, 10.625%, due 11/15/07 2,241,750 8,110,000 Energy Corp of America, 9.500%, due 05/15/07 6,711,025 2,815,000 Gulfmark Offshore, Inc., 8.750%, due 06/01/08 2,836,113 1,848,367 #@@ Hurricane Hydrocarbons, 16.000%, due 12/31/01 1,799,847 7,300,000 @@ Northerm Offshore ASA, 10.000%, due 05/15/05 5,219,500 3,275,000 Parker Drilling Co., 9.750%, due 11/15/06 3,389,625 1,500,000 RBF Finance Co., 11.000%, due 03/15/06 1,866,253 4,400,000 United Refining Co., 10.750%, due 06/15/07 2,931,500 ------------- 29,475,613 ------------- Entertainment: 1.73% 5,000,000 Hollywood Entertainment Corp., 10.625%, due 08/15/04 3,225,000 2,100,000 + Ascent Entertainment Group, Inc., 0/11.875%, due 12/15/04 1,827,000 ------------- 5,052,000 ------------- Environmental: 1.11% 3,150,000 Allied Waste of North America, 10.000%, due 08/01/09 3,228,750 ------------- Finance: 3.64% 5,130,000 NEFF Corp., 10.250%, due 06/01/08 2,180,250 3,000,000 NEFF Corp., 10.250%, due 06/01/08 1,275,000 2,000,000 Penhall International Corp., 12.000%, due 08/01/06 1,980,000 550,000 United Rentals, Inc., 8.800%, due 08/15/08 486,750 1,450,000 United Rentals, Inc., 9.250%, due 01/15/09 1,312,250 3,600,000 United Rentals, Inc., 9.000%, due 04/01/09 3,222,000 500,000 #XX Westways Funding II LTD, 22.125%, due 01/29/03 150,000 ------------- 10,606,250 ------------- Food/Beverage: 1.78% 1,925,000 Packaged Ice, Inc., 9.750%, due 02/01/05 1,674,750 3,850,000 Standard Commercial Corp., 8.875%, due 08/01/05 3,522,750 ------------- 5,197,500 ------------- Gaming: 7.24% 750,000 Anchor Gaming, 9.875%, due 10/15/08 800,625 4,000,000 Hollywood Casino Shreveport, 13.000%, due 08/01/06 4,300,000 5,500,000 Park Place Entertainment Corp., 8.875%, due 09/15/08 5,623,750 975,000 Station Casinos, Inc., 9.750%, due 04/15/07 1,004,250 4,450,000 Station Casinos, Inc., 9.875%, due 07/01/10 4,650,250 4,000,000 Trump Atlantic City Associates, Inc., 11.250%, due 05/01/06 2,660,000 2,000,000 Venetian Casino Resort LLC, 14.250%, due 11/15/05 2,060,000 ------------- 21,098,875 ------------- Health Care: 0.87% 2,575,000 Columbia/HCA Healthcare Corp., 7.250%, due 05/20/08 2,525,166 ------------- Homebuilders/Real Estate: 1.04% 1,725,000 Lennar Corp., 7.625%, due 03/01/09 1,664,870 1,275,000 Lennar Corp., 9.950%, due 05/01/10 1,377,000 ------------- 3,041,870 ------------- Hotels: 0.70% 2,000,000 Prime Hospitality Corp., 9.750%, due 04/01/07 2,030,000 ------------- Paper: 1.28% 6,575,000 @@ Doman Industries Ltd., 8.750%, due 03/15/04 3,714,875 ------------- Publishing: 1.45% 4,925,000 Mail-Well Corp., 8.750%, due 12/15/08 4,210,875 ------------- Rail Transportation: 0.98% 2,750,000 # Kansas City Southern Railway Co., 9.500%, due 10/01/08 2,846,250 ------------- Specialty Retail: 1.51% 1,600,000 Amazon.Com, Inc., 10.000%, due 05/01/08 936,000 1,000,000 Big 5 Corp., 10.875%, due 11/15/07 925,000 2,400,000 JoAnn Stores, Inc., 10.375%, due 05/01/07 1,548,000 950,000 Musicland Group, Inc., 9.875%, due 03/15/08 997,500 ------------- 4,406,500 ------------- See Accompanying Notes to Financial Statements 50 Pilgrim High Yield Fund II PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Principal Amount Security Value - -------------------------------------------------------------------------------- Steel: 1.62% $ 715,000 AK Steel Corp., 9.125%, due 12/15/06 $ 715,000 1,925,000 AK Steel Corp., 7.875%, due 02/15/09 1,799,875 550,000 Armco, Inc., 9.000%, due 09/15/07 514,250 2,350,000 Metals USA, Inc., 8.625%, due 02/15/08 1,680,250 ------------- 4,709,375 ------------- Supermarkets: 0.44% 890,000 # Fleming Companies, Inc., 10.125%, due 04/01/08 921,150 4,250,000 XX Richmont Marketing Specialists, 10.125%, due 12/15/07 361,250 ------------- 1,282,400 ------------- Technology: 1.51% 3,400,000 Natural Microsystems Corp., 5.000%, due 10/15/05 1,887,000 7,750,000 Zilog, Inc., 9.500%, due 03/01/05 2,518,750 ------------- 4,405,750 ------------- Telecommunications: 19.66% 700,000 @@ Call Net Enterprises, Inc., 8.000%, due 08/15/08 216,125 14,500,000 +@@ Call Net Enterprises, Inc., 0/8.940%, due 08/15/08 2,537,500 7,500,000 # Colo Com, 13.875%, due 03/15/10 1,312,500 1,750,000 Flag Telecommunications Holdings LTD, 11.625%, due 03/30/10 1,338,750 3,350,000 Global Crossing Holdings LTD, 9.500%, due 11/15/09 3,157,375 5,780,000 Globix Corp, 12.500%, due 02/01/10 1,705,100 3,600,000 +** ICG Services, Inc., 0/10.000%, due 02/15/08 216,000 900,000 ITC DeltaCom Inc., 8.875%, due 03/01/08 706,500 1,000,000 ITC DeltaCom Inc., 9.750%, due 11/15/08 805,000 8,000,000 + Level 3 Communications, Inc., 0/12.875%, due 03/15/10 3,080,000 6,200,000 Madison River Capital LLC, 13.250%, due 03/01/10 4,495,000 1,675,000 Mcleodusa, Inc., 11.375%, due 01/01/09 1,649,875 3,000,000 Metromedia Fiber Network, Inc., 10.000%, due 11/15/08 2,505,000 1,900,000 Metromedia Fiber Network, Inc., 10.000%, due 12/15/09 1,586,500 10,195,500 XX Metromedia International Group, Inc., 10.500%, due 09/30/07 2,293,987 10,100,000 MGC Communications, Inc., 13.000%, due 04/01/10 3,989,500 5,500,000 + Nextel Communications, Inc., 0/9.950%, due 02/15/08 3,753,750 8,000,000 + Nextlink Communications, Inc., 0/12.250% due 06/01/09 2,840,000 7,900,000 XX Northeast Optic, 12.750%, due 08/15/08 3,120,500 9,000,000 @@ Poland ** Telecommunications Finance BV, 14.000%, due 12/01/07 135,000 10,500,000 Rhythms Netconnections, Inc., 12.750%, due 04/15/09 1,365,000 1,300,000 Rhythms Netconnections, Inc., 14.000%, due 02/15/10 136,500 8,500,000 #** SA Telecommunications, Inc., 10.000%, due 08/15/06 -- 3,800,000 #** SA Telecommunications, Inc., 10.000%, due 08/15/06 -- 5,000,000 #** SA Telecommunications, Inc.,10.000%, due 08/15/06 -- 8,267,451 **X US Interactive, 12.000%, due 04/17/05 2,800,764 5,225,000 + US Unwired, Inc., 0/13.375%, due 11/01/09 2,664,750 5,500,000 @@ Versatel Telecommunications International, 11.875%, due 07/15/09 3,272,500 17,500,000 +&& Viatel, Inc., 0/12.500%, due 04/15/08 2,493,750 2,000,000 Williams Communications Group, 10.875%, due 10/01/09 1,470,000 6,250,000 && Winstar Communications, Inc., 12.750%, due 04/15/10 1,656,250 ------------- 57,303,476 ------------- Transportation excluding Air/Rail: 0.68% 2,000,000 Travelcenters America, Inc., 12.750%, due 05/01/09 1,990,000 ------------- Total Corporate Bonds (Cost $348,965,181) 252,965,919 ------------- Shares Security Value - -------------------------------------------------------------------------------- COMMON STOCK: 0.57% Conglomerates: 0.04% 2,350 @X Jordan Telecommunications 122,200 ------------- Energy: 0.15% 866,408 @ Orion Refining Corp. 451,840 ------------- Healthcare: 0.19% 250,000 @ Trinity Biotech PLC ADR 562,500 ------------- Restaraunts: 0.00% 1,219 @ International Fast Food Corp. 5,179 ------------- Telecommunications: 0.18% 61,806 @ Adelphia Business Solutions 293,579 89,000 @XX Completel Europe NV 208,260 483,445 @ International Wireless Communications 4,834 ------------- 506,673 ------------- Transportation excluding Air/Rail: 0.01% 2,000 @ CHC Helicopter Corp. 17,750 ------------- Total Common Stock (Cost $ 57,021,117) 1,666,142 ------------- See Accompanying Notes to Financial Statements 51 Pilgrim High Yield Fund II PORTFOLIO OF INVESTMENTS as of March 31, 2001 (Continued) - -------------------------------------------------------------------------------- Shares Security Value - -------------------------------------------------------------------------------- PREFERRED STOCK: 4.57% Consumer Products: 0.02% 100,000 XX Commemorative Brands, Inc. $ 50,000 ------------- Food/Beverage: 1.64% 953,239 XX North Atlantic Trading, Inc. 4,766,194 ------------- Restaraunts: 0.00% 144,883 @X International Fastfood Corp. -- ------------- Steel: 0.14% 10,000 @@ International Utility Structures, Inc. 402,500 456 @@# International Utility Structures, Inc. 18,353 ------------- 420,853 ------------- Telecommunications: 2.77% 94,526 XX Adelphia Business Solutions 4,679,056 16,500 @@ Global Crossing Ltd. 2,598,750 25,770 XO Communications, Inc. 805,312 ------------- 8,083,118 ------------- Total Preferred Stock (Cost $59,848,741) 13,320,165 ------------- Number of Warrants Security Value - -------------------------------------------------------------------------------- WARRANTS: 0.30% Convenience Stores: 0.01% 28,631 @ Dairy Mart Convenience Stores, Exp. 12/01/01 $ 17,179 ------------- Diversified Media: 0.02% 26,100 @XX Diva Sysytems Corp., Exp. 03/01/08 52,200 ------------- Energy: 0.00% 1,500,000 @ Mexico (UTD MEX ST), Exp. 06/30/03 -- ------------- Finance: 0.00% 5,000 @XX Olympic Financial LTD, Exp. 03/15/07 50 ------------- Food/Beverage: 0.16% 6,100 @XX North Atlantic Trading, Inc., Exp. 06/15/07 61 21,705 @ Packaged Ice, Inc., Exp. 04/15/04 455,805 ------------- 455,866 ------------- Services: 0.00% 92,950 @XX Comforce Corp., Exp. 12/01/09 930 ------------- Specialty Retail: 0.00% 100 @ Electronic Retailing Systems International, Exp. 02/01/04 100 ------------- Steel: 0.00% 12,500 @ Sheffield Steel Corp., Exp. 11/01/01 -- ------------- Telecommunications: 0.09% 10,000 @ CellNet Data Systems, Inc. Exp. 09/15/07 5,000 7,500 @ Colo Com, Exp. 03/15/10 75 177,000 @ Geotek Communications, Inc., Exp. 06/20/01 1,770 6,600 @ ICG Communications, Inc. Exp. 09/15/05 827 9,500 @ McCaw International LTD Exp. 04/15/07 267,187 7,000 @XX Poland Telekom, Exp. 06/01/06 70 7,000 @XX Poland Telekom, Exp. 03/31/03 70 9,000 @ Poland Telecommunications Finance BV, Exp. 12/01/07 1,125 9,300 @ UNIFI Commmunications Exp. 12/31/03 93 3,833 @** US Interactive, Exp. 03/31/05 -- ------------- 276,217 ------------- Transportation excluding Air/Rail: 0.02% 6,000 @ Travelcenters America, Inc., Exp. 03/14/10 63,000 ------------- Total Warrants (Cost $ 1,479,991) 865,542 ------------- Total Long-Term Investments (Cost $467,315,030) 268,817,768 ------------- Principal Amount Security Value - -------------------------------------------------------------------------------- SHORT TERM INVESTMENTS: 3.53% Repurchase Agreement: 3.53% $10,291,000 State Street Repurchase Agreement dated 03/30/01, 5.180% due 04/02/01, $10,295,442 to be received upon repurchase (Collateralized by $10,370,000 U.S. Treasury Notes, 4.750% due 02/15/04, Market Value $10,499,625) $ 10,291,000 ------------- Total Investments in Securities (Cost $477,606,030)* 95.78% $ 279,108,768 Other Assets and Liabilities-Net 4.22% 12,310,442 ------- ------------- Net Assets 100.00% $ 291,419,210 ======= ============= @ Non-income producing security # Securities with purchases pursuant to Rule 144A, under the Securties Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. + Step-up basis bonds. Interest rates shown reflect current and future coupon rates. @@ Foreign issuer ** Defaulted security && Became a defaulted security subsequent to March 31, 2001. X Fair value determined by Pilgrim Valuation Committee appointed by the Fund's Board of Directors. XX Value of securities obtained from one or more dealers making markets in the securities have been adjusted based on the Fund's valuation procedures. * Cost for federal income tax purposes is $478,427,181. Net unrealized depreciation consists of: Gross Unrealized Appreciation $ 7,530,803 Gross Unrealized Depreciation (206,849,216) ------------- Net Unrealized Depreciation $(199,318,413) ============= See Accompanying Notes to Financial Statements 52 - ------- Pilgrim Funds - ------- TAX INFORMATION (Unaudited) - -------------------------------------------------------------------------------- Dividends paid during the period ended March 31, 2001 were as follows: Fund Name Type Per Share Amount - --------- ---- ---------------- GNMA Fund Class A NII $0.1207 Class B NII $0.1094 Class C NII $0.1090 Strategic Income Fund Class A NII $0.5917 Class B NII $0.5547 Class C NII $0.5513 Class Q NII $0.5983 High Yield Fund Class A NII $0.4275 Class B NII $0.4022 Class C NII $0.4024 Class M NII $0.4102 Class Q NII $0.4305 High Yield Fund II Class A NII $0.8602 Class B NII $0.8109 Class C NII $0.8111 Class T NII $0.8372 Class Q NII $0.8653 - ---------- NII -- Net investment income The above figure may differ from those cited elsewhere in this report due to differences in the calculation of income and gains for Securities and Exchange Commissions (book) purposes and Internal Revenue Service (tax) purposes. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their Investments in the Funds. In January 2001, shareholders, excluding corporate shareholders, received an IRS Form 1099 DIV regarding the federal tax status of the dividends and distributions received by them in calendar 2000. 53 INVESTMENT MANAGER ING Pilgrim Investments, LLC 7337 E. Doubletree Ranch Road Scottsdale, Arizona 85258 ADMINISTRATOR ING Pilgrim Group, LLC 7337 E. Doubletree Ranch Road Scottsdale, Arizona 85258 DISTRIBUTOR ING Pilgrim Securities, Inc. 7337 E. Doubletree Ranch Road Scottsdale, Arizona 85258-2034 1-800-334-3444 TRANSFER AGENT DST Systems, Inc. P.O. Box 419368 Kansas City, Missouri 64141-6368 CUSTODIANS State Street Bank & Trust 801 Pennsylvania Avenue Kansas City, Missouri 64105 State Street Bank & Trust One Heritage Drive North Quincy, Massachusetts 02171 LEGAL COUNSEL Dechert 1775 Eye Street, N.W. Washington, D.C. 20006 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1670 Broadway, Suite 1000 Denver, Colorado 80202 Prospectus containing more complete information regarding the Funds, including charges and expenses, may be obtained by calling ING Pilgrim Securities, Inc. Distributor at 1-800-334-3444. Please read the prospectus carefully before you invest or send money. QINCANN033101-052901 GRAPHICS DESCRIPTION APPENDIX The cover of the prospectuses has an image of the earth set behind the type similar to a watermark that crosses over on both the front and back cover pages. The ING Pilgrim Logo which is a lion at rest between the words ING and Pilgrim appears at the top of the outside front cover. There are four icon sized graphics used throughout the prospectus as follows: 1. In the sections describing the objective of the Funds, the graphic icon is that of a dart in the bullseye of a target. 2. In the sections describing the investment strategy of the Funds, the graphic icon is that of a compass pointing due north. 3. In the sections describing the risks of the Funds, the graphic icon is that of an old fashioned scale tilting heavy on the left side. 4. In the sections describing the performance history of the Funds, the graphic icon is that of a stack of US currency bills. 5. On the bottom footer of every odd numbered page (right hand page), the graphic icon is that of a telephone by the 800 number of the fund to call for information. -----END PRIVACY-ENHANCED MESSAGE-----