Pilgrim Baxter and Associates Settlement Summary

On June 21, 2004, the SEC instituted administrative and cease-and-desist proceedings against Pilgrim Baxter & Associates, Ltd. The SEC alleged that PBA, the registered investment adviser to the PBHG family of mutual funds, participated in a scheme involving short-term trading ("market timing") of the PBHG Funds, reaping profits and diluting the value of the funds to the detriment of long-term investors.

Also, on November 17, 2004, the SEC instituted administrative and cease-and-desist proceedings against Gary L. Pilgrim and Harold J. Baxter. Mr. Pilgrim is the former President, Chief Investment Officer, and Director of PBA, and the portfolio manager of the PBHG Growth Fund. Mr. Baxter is the former Chief Executive Officer and Chairman of the Board of Directors of Pilgrim Baxter & Associates, Ltd., the investment adviser to the PBHG family of mutual funds.

The Commission found that, contrary to the disclosures made in the prospectuses of all PBHG Funds since at least 1996, PBA, acting through Mr. Pilgrim and Mr. Baxter, allowed various account holders to engage in transactions that violated the fund's prospectus disclosures from at least June 1998 through December 2001. Specifically, these prospectuses disclosed that investors were limited to not more than 4 exchanges per year into the PBHG Cash Reserves Fund from any other PBHG fund. Furthermore, the prospectuses did not indicate that there would be any exceptions to this policy. The Commission also found that PBA, acting through Mr. Pilgrim and Mr. Baxter, allowed various account holders to make more than 4 exchanges per year into the PBHG Cash Reserves Fund from other PBHG Funds.

Simultaneous with their settlements with the SEC, each party settled related litigation with the New York Attorney General. The terms of the SEC Settlements have been incorporated into the respective settlements with the New York Attorney General.

Under the terms of the settlement, the three defendants collectively agreed to make a total payment of $250 million. PBA was ordered to pay $40 million in disgorgement and $50 million in a civil penalty for distribution to affected shareholders. Also, Mr. Pilgrim and Mr. Baxter each were ordered to pay $60 million in disgorgement and $20 million in a civil penalty for distribution to affected shareholders.

In addition, in settlement of the separate but related action filed by the New York Attorney General, PBA agreed to reduce management fees by 3.16% over a five-year period, a reduction valued at $10 million.

In September 2004, Dr. Kenneth Lehn was retained by PBA and approved by the Commission as the Independent Distribution Consultant (IDC). Dr. Lehn is the Samuel A. McCullough Professor of Finance in the Katz School of Business at the University of Pittsburgh. The role of the IDC is to develop a plan for distributing the total $250 million settlement payment to shareholders in PBHG Funds who may have been affected by the alleged market timing described in the June 21, 2004 SEC Administrative proceeding and the subsequent Administrative Proceedings dated November 17, 2004 involving Mr. Pilgrim and Mr. Baxter. The Distribution Plan requires SEC approval.

The recipients of the settlement are eligible shareholders who held their shares in any of the funds listed below between June 1, 1998 and December 31, 2001 and who were determined by the IDC to have been adversely affected by the alleged actions of the market timers. The methodology utilized is based upon specific criteria stipulated by the IDC and approved by the SEC.

PBHG Core Growth Fund PBHG Emerging Growth Fund PBHG Focused Fund PBHG Global Technology & Comm. Fund PBHG Growth Fund PBHG International Fund PBHG Large Cap Fund PBHG Large Cap Growth Concentrated Fund

PBHG Large Cap Growth Fund PBHG Limited Fund PBHG Mid-Cap Fund PBHG New Opportunities Fund PBHG Select Growth Fund PBHG Small Cap Fund PBHG Strategic Small Company Fund PBHG Technology & Comm. Fund

For additional information, please refer to the “Links to Related Documents” section of this Website.

If you have any questions, please refer to the “Frequently Asked Questions” (F.A.Q.) section of this Website or call the Administrator of the Distribution Plan at (800) 920-5408, Monday through Friday, 8:00 a.m. - 7:00 p.m. Eastern Time.