This week, Pilgrim Baxter & Associates, investment advisor to the PBHG Funds, confirmed that the firm has reached agreements with the U.S. Securities and Exchange Commission (SEC) and the Office of the New York State Attorney General to settle charges related to past trading activity.

The settlement agreements address past trading activity in the PBHG Funds, which led to the appointment of new leadership at Pilgrim Baxter in November 2003. Under the terms of the settlements, the Company has agreed to the following provisions:

• Payment of $40 million in disgorgement and $50 million in civil penalties, all of which will be paid as restitution to fund shareholders according to a plan to be developed by an independent consultant; and

• Reduction of approximately $10 million in mutual fund management fees over the next five years.

In addition to the settlement terms, Pilgrim Baxter, in conjunction with the Board of Trustees of the PBHG Funds, has instituted in recent months the following significant reforms, all of which provide additional protections to benefit fund shareholders:

• To deter market timers, 2% redemption fees are being applied as outlined in the prospectus effective June 1 for PBHG Funds shares sold within 10 days of purchase, with all fees paid directly into the affected funds;

• Prospectuses for the PBHG Funds have been amended to include detailed disclosure of the firm's stringent anti-market timing protocols and practices to combat market timing;

• An enhanced Code of Ethics governing all employees at Pilgrim Baxter has been adopted to prohibit investments by employees that could create conflicts of interest with fund shareholders, including mandatory minimum holding periods for investments in PBHG Funds;
• The capacity of Pilgrim Baxter's legal and compliance staff has been expanded to ensure that sufficient resources are dedicated to oversight of employee investments and overall compliance monitoring;

• A new uniform policy on the disclosure of fund holdings has been adopted, with full portfolio holdings for the PBHG Funds made publicly available on the PBHG Funds website 15 days after each quarter-end; and

• An independent audit of the company's internal controls and procedures has been conducted to ensure the adequacy of the firm's key practices and procedures.