Scheme Booklet. Your directors unanimously recommend that Challenger Shareholders vote in favour of the Merger, in the absence of a superior proposal.

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Transcription:

Challenger International Limited for the Scheme of Arrangement between Challenger International Limited (ABN 50 002 993 302) and the holders of ordinary shares in Challenger International Limited in relation to the proposed Merger with CPH Investment Corp (ARSN 091 545 185) Your directors unanimously recommend that Challenger Shareholders vote in favour of the Merger, in the absence of a superior proposal. Your directors who hold Challenger Shares intend to vote in favour of the Merger, in the absence of a superior proposal. The Independent Expert has concluded that the Merger is in the best interests of Challenger Shareholders in the absence of a superior proposal. THIS IS AN IMPORTANT DOCUMENT AND REQUIRES YOUR IMMEDIATE ATTENTION. IT SHOULD BE READ IN ITS ENTIRETY. IF YOU ARE IN DOUBT AS TO WHAT YOU SHOULD DO, YOU SHOULD CONSULT YOUR INVESTMENT OR OTHER PROFESSIONAL ADVISER. Financial adviser to Challenger Legal adviser to Challenger

Corporate Directory Directors GMJ Hoskins (Chairman) WEB Ireland CM Bell JG Service BM Shanahan Secretary DH Slatyer Auditor PricewaterhouseCoopers 201 Sussex Street Sydney NSW 2000 Legal Advisors Mallesons Stephen Jaques Level 60 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Principal registered office in Australia Level 41 Aurora Place 88 Phillip Street Sydney NSW 2000 Financial Advisors N M Rothschild & Sons Level 16 1 O Connell Street Sydney NSW 2000 Share register ASX Perpetual Registrars Limited Level 8, 580 George Street Sydney NSW 2000 (Locked Bag A14, Sydney South NSW 1232) Actuary Ernst & Young 321 Kent Street Sydney NSW 2000

Contents IMPORTANT NOTICES 3 CHAIRMAN S LETTER 5 IMPORTANT DATES 6 THE MERGER YOUR QUESTIONS ANSWERED 7 HOW TO VOTE 11 1 Key features of the proposed Merger 13 1.1 Background 14 1.2 Summary of the proposed Merger 14 1.3 Reasons to vote for or against the Merger 15 1.4 Share Scheme Approvals 16 1.5 Effective Date 17 1.6 Trading on the ASX 17 1.7 Tax considerations 17 1.8 Foreign Shareholders 17 2 Matters relevant to your vote 19 2.1 Directors recommendation 20 2.2 Why Challenger Shareholders should vote in favour of the Share Scheme 20 2.3 Reasons why Challenger Shareholders may consider voting against the Share Scheme 23 2.4 Implications if the Merger does not proceed and alternatives considered by the directors of Challenger 25 3 Overview of Challenger 29 3.1 Background 30 3.2 Challenger group structure 30 3.3 Business overview 31 3.4 Challenger group financial overview 32 3.5 Challenger s issued securities 35 3.6 Directors of Challenger 35 4 Profile of CPHIC 37 4.1 Profile of CPHIC 38 4.2 Directors 39 4.3 Operations 40 4.4 Recent financial position and Performance of CPHIC 43 4.5 Current Capital Structure of CPHIC 45 5 Profile of the Merged Entity 47 5.1 Rationale for the Merger 48 5.2 Profile of the Merged Entity 48 5.3 Board of Challenger 52 5.4 CPH Management s intentions regarding Challenger Notes and Challenger Options 55 5.5 Capital Structure of CPHIC after implementation of the Merger 56 5.6 Investment policy and strategy 58 5.7 CPHIC Distributions 59 1

6 Pro forma financial Information Merged Entity 61 6.1 Financial Information 62 6.2 Accounting Policies 66 7 Risk factors 71 7.1 General risks applicable to Challenger and CPHIC 72 7.2 Risks relating to Challenger s business 73 7.3 Risks relating to CPHIC 75 7.4 Risks relating to the Merger process 76 8 Taxation implications for Challenger Shareholders 77 8.1 Introduction 78 8.2 Proposed changes to Tax Rules 78 8.3 Taxation consequences of the disposal of Challenger Shares and receipt of CPHIC Units 79 8.4 Non-resident Challenger Shareholders 81 8.5 Holding CPHIC Units: Resident Unitholders 81 9 Rights and liabilities attaching to CPHIC Units and CPHIC corporate governance 83 9.1 Rights of CPHIC Unitholders and statutory framework 84 9.2 Summary of Terms of CPHIC Constitution 88 9.3 Summary of Terms of CPHIC Compliance Plan 92 9.4 Corporate Governance 95 10 Additional information 99 10.1 Details of the Merger 100 10.2 Implementation Agreement and Due Diligence Process 100 10.3 Summary of the Implementation Agreement and Deed Poll 100 10.4 Scheme consideration 103 10.5 Determination of persons entitled to Scheme Consideration 103 10.6 Steps for implementing the Merger 103 10.7 Fees payable to CPH Management 105 10.8 Dealings in securities by Challenger and associates 112 10.9 Dealings in securities by CPH Management and associates 113 10.10 Other information involving Challenger 114 10.11 Other information involving CPHIC 116 10.12 Information disclosed to ASX and documents lodged with ASIC 118 10.13 Supplementary information 119 10.14 Other 119 11 Glossary of defined terms 121 Appendix I Independent Expert s Report 127 Appendix II Implementation Agreement 239 Appendix III Deed Poll (Share Scheme) 264 Appendix IV Share Scheme 270 Appendix V Notice of meeting for Share Scheme Meeting 279 Appendix VI Challenger announcements to ASX 281 Appendix VII CPHIC announcements to ASX 284 2

IMPORTANT NOTICES Defined Terms Capitalised terms used in this are defined in the Glossary in section 11. This This is the explanatory statement required to be sent to Challenger Shareholders, in relation to the Merger under Part 5.1 of the Corporations Act 2001 (Cwlth). You should read this in its entirety before making a decision as to how to vote on the resolutions to be considered at the Share Scheme Meeting. Challenger Information and the CPHIC Information and is the responsibility of CPH Management except to the extent that it is based on the Challenger Information. Neither Challenger nor its advisers assume any responsibility for the accuracy or completeness of the information concerning the Merged Entity except to the extent that it is based on the Challenger Information. ASIC and ASX Involvement A copy of this has been examined by ASIC. ASIC has been requested to provide a statement in accordance with Section 411(17)(b) of the Corporations Act that ASIC has no objection to the Share Scheme. If ASIC provides that statement, then it will be produced to the Court at the Second Court Date. Responsibility for information The information concerning Challenger contained in this (other than the Independent Expert s Report), including financial information and information as to the opinions and decisions of the directors of Challenger has been provided by Challenger ( Challenger Information ) and is the responsibility of Challenger. Neither CPH Management, CPHIC nor their advisers assume any responsibility for the accuracy or completeness of the Challenger Information. The information concerning CPHIC contained in this, including information as to the opinions and decisions of the directors of CPH Management, has been provided by CPH Management ( CPHIC Information ) and is the responsibility of CPH Management. Neither Challenger nor its advisers assume any responsibility for the accuracy or completeness of the CPHIC Information. The information concerning the Merged Entity contained in this has been prepared by CPH Management based on the A copy of this has been provided to ASX. Neither ASIC, ASX nor any of their respective officers takes any responsibility for the contents of this. Disclosure regarding forward looking statements This contains both historical and forward-looking statements in connection with Challenger and CPHIC. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. All forward-looking statements in this Scheme Booklet are not based on historical facts, but rather reflect the current expectations of Challenger and CPH Management concerning future results and events and generally may be identified by the use of forward-looking words or phrases such as believe, aim, expect, anticipated, intending, foreseeing, likely, should, planned, may, estimated, potential, or other similar words and phrases. 3

Similarly, statements that describe Challenger s and CPH Management s objectives, plans, goals or expectations are or may be forwardlooking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause either Challenger s or CPHIC s actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forwarding-looking statements. Challenger Shareholders should review carefully all of the information, including the financial information, included in this. Notice to Challenger Shareholders in jurisdictions outside Australia This document complies with disclosure requirements of Australia which may be different to those in other countries. Financial information included in this document has been prepared in accordance with Australian Accounting Standards. These standards may differ from those in other countries. Date This is dated 9 May 2003. The risk factors described in section 7 could affect future results, causing these results to differ materially from those expressed, implied or projected in any forward-looking statements. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any forwardlooking statements. Other unknown or unpredictable factors also could have material adverse effects on future results. The forwardlooking statements included in this are made only as of the date of this Scheme Booklet. Neither Challenger nor CPH Management can assure Challenger Shareholders that projected or implied results or events will be achieved. All subsequent written and oral forward-looking statements attributable to Challenger, CPH Management or any person acting on their behalf are qualified by this cautionary statement. 4

FINANCIAL SERVICES GROUP Level 41, Aurora Place CHAIRMAN S LETTER 88 Phillip Street Sydney NSW 2000 Australia 9 May 2003 GPO Box 3698 Sydney NSW 2001 Dear Investor, T 61 2 9994 7000 F 61 2 9994 7777 On 20 January 2003, the boards of Challenger and CPH Management (in its capacity as responsible entity of CPH Investment Corp) announced the intention to merge Challenger and CPHIC through a scheme of arrangement (the Share Scheme). If approved, the Merger will strengthen Challenger s standing as a major Australian diversified financial services group with increased growth potential through access to a more substantial capital base. Under the proposed Merger Challenger Shareholders will receive 4.5 CPHIC Units for every Challenger Share. There will also be two separate schemes of arrangement for Challenger Optionholders and Challenger Noteholders, under which, if approved: Challenger Optionholders will receive 4.5 CPHIC Units for every Challenger Share issued on exercise of a Challenger Option after the Effective Date; and ABN 50 002 993 302 Challenger Noteholders will be entitled to elect to receive either: 5.5 CPHIC Units in exchange for each Challenger Note transferred to CPH Management on the Effective Date; or 4.5 CPHIC Units in exchange for each Challenger Share issued on conversion of a Challenger Note after the Effective Date. The Merger is not dependent on the approval of the Options Scheme or the Notes Scheme. Your directors believe the Merger is in the best interests of Challenger Shareholders. Your directors unanimously recommend that, in the absence of a superior proposal, Challenger Shareholders approve the Share Scheme. The reasons behind your directors recommendations are set out in section 2 of this. Each of your directors intends to vote all Challenger Shares controlled by them in favour of the relevant resolutions. Grant Samuel & Associates Pty Limited was appointed by the directors of Challenger as the independent expert to assess the merits of the proposed Schemes. Grant Samuel concluded that the Merger is in the best interests of Challenger Shareholders in the absence of a superior proposal. Grant Samuel s report is included in Appendix I of this. If you have queries about the Merger, please call the information line on 1300 302 106 or for overseas callers on + 61 2 9240 7460 between the hours of 9.00 am and 5.00 pm Australian eastern standard time from Monday to Friday. A message bank service will take messages outside these hours. Challenger will also post information on the Challenger website at www.challengergroup.com. Your directors urge you to read this in its entirety and to vote at the Scheme Meeting. If you are in any doubt as to how you should vote, you should consult your investment or other professional adviser. I look forward to seeing you at the Share Scheme Meeting at City Recital Hall, Angel Place Sydney at 10.00 am on Monday, 16 June 2003. Yours sincerely, Gil Hoskins Chairman 5

IMPORTANT DATES In order for the Merger to proceed, a meeting of Challenger Shareholders and two Court hearings are required. The first Court hearing has been held. Challenger Shareholders are now being asked to vote and approve the Merger at the Share Scheme Meeting. Following the Share Scheme Meeting and provided that the Merger has been approved at the Share Scheme Meeting by the requisite majority, the second Court hearing will occur. The Merger is also conditional on a meeting of CPHIC Unitholders approving, pursuant to ASX Listing Rules 10.1 and 11.1.2 and the Corporations Act, the acquisition of Challenger Shares and Challenger Notes from Cavalane Holdings Pty Limited under the Share Scheme and the Notes Scheme and the change in the nature and scale of CPHIC s activities. Cavalane Holdings Pty Limited is a wholly owned subsidiary of CPH, which is the parent company of CPH Management. Details of these approvals are set out in section 10.11. The key dates are: Saturday, 14 June 2003, 10.00am Date and time for determining eligibility to vote at the Share Scheme Meeting Saturday, 14 June 2003, 10.00am Latest date and time for lodgements of proxies Monday, 16 June 2003, 10.00am Share Scheme Meeting Tuesday, 17 June 2003 CPHIC Unitholders meeting Friday, 27 June 2003 Court hearing for approval of Scheme (Second Court Date) Tuesday, 1 July 2003 Effective Date Tuesday, 1 July 2003 Last Day of trading in Challenger Shares Wednesday, 2 July 2003 Commencement of trading of CPHIC Units on a deferred settlement basis Tuesday, 8 July 2003, 7.00pm Record date for determining entitlements to the Scheme Consideration Tuesday, 15 July 2003 Despatch of holding statements for CPHIC Units All dates following the date of the Share Scheme Meeting are indicative only and are subject to the Court approval process, ASX approval and the satisfaction, or where possible, waiver of the conditions precedent to the implementation of the Merger. Any changes to the above timetable will be notified on Challenger s website at www.challengergroup.com. 6

THE MERGER YOUR QUESTIONS ANSWERED This section provides summary answers to some basic questions that Challenger Shareholders may have. It should be read in conjunction with the whole (including the reasons for your directors recommendation set out in section 2) before deciding how to vote at the Share Scheme Meeting. Questions about the Merger consideration Q1 What will I receive if the Merger is approved? If you hold Challenger Shares, and the Share Scheme is approved, you will receive 4.5 CPHIC Units in exchange for each Challenger Share held as at the Record Date. The CPHIC Units issued under the Schemes will rank equally with other CPHIC Units on issue. Q2 If the Merger is implemented, will I be taxed? Under current taxation laws, you will generally be taxed on any gain upon exchange of your Challenger Shares for CPHIC Units (generally in the financial year ending 30 June 2004). However, the Government has announced proposed changes in the tax law. If those changes become law, then it is expected that Challenger Shareholders who hold their shares on capital account and who would make a capital gain on the exchange should be eligible for rollover relief. This will allow such shareholders to defer the taxing point, generally until they sell their CPHIC Units. Ultimately, this will depend on the form of the changes (if any) as enacted. Although it is expected that the proposed changes will become law, there is no certainty. Refer to section 8 for further details. Q3 When will I receive my CPHIC Units? Holding statements in respect of the CPHIC Units due to you will be despatched to you on 15 July 2003. Q4 Can I trade CPHIC Units on ASX? Yes. CPHIC Units trade on ASX. It is a condition to the Share Scheme that CPH Management applies for quotation of the CPHIC Units to be issued under the Merger. CPH Management has no reason to believe that quotation of those Units will not be granted. You will be able to trade the CPHIC Units on a deferred settlement basis from the day after the Effective Date. Q5 How will fractional units be treated? If, pursuant to the Merger, you become entitled to a fraction of a CPHIC Unit, the number of CPHIC Units to which you are entitled will be rounded up. For further details see section 10.10. Q6 Will I have to pay brokerage fees or stamp duty? You will not have to pay brokerage or stamp duty in connection with the Merger. Questions about voting Q7 When and where will the Share Scheme Meeting be held? The Share Scheme Meeting will be held on Monday, 16 June 2003 at City Recital Hall, Angel Place, Sydney commencing at 10.00 am. Q8 Am I entitled to vote? If you are registered as a holder of Challenger Shares by the Challenger Share Registry as at 7

10.00am on Saturday, 14 June 2003, you will be entitled to vote at the Share Scheme Meeting. You may vote in person at the meeting or by completing and lodging the proxy form accompanying this. Q9 Are interests associated with CPH entitled to vote at the Scheme Meetings? Interests associated with CPH hold approximately 18% of the issued Challenger Shares and 40% of the issued Challenger Notes and are entitled to vote at the Share Scheme Meeting and Notes Scheme Meeting. Q12 What do the directors of Challenger recommend? Your Challenger directors believe that the proposed Merger is in the best interests of Challenger Shareholders and your directors unanimously recommend that, in the absence of a superior proposal, Challenger Shareholders should vote in favour of the Share Scheme. Q13 What is the opinion of the Independent Expert? The Independent Expert has concluded that, the Share Scheme is in the best interests of Challenger Shareholders in the absence of a superior proposal. Q10 What voting majority is required to approve the Share Scheme proposal? The voting majority to approve the Share Scheme requires votes in favour of the Share Scheme to be received from: a majority in number (more than 50%) of Challenger Shareholders present and voting at the Share Scheme Meeting (in person, by proxy, by attorney or, in the case of corporate Challenger Shareholders, by corporate representative); and Challenger Shareholders who together hold at least 75% of the total number of Challenger Shares voted at the Share Scheme Meeting. Q14 Should I vote? You do not have to vote. However, your directors believe that the Merger is important to all Challenger Shareholders and urge you to read this carefully and to vote in favour of the Merger. Q15 When will the result of the Scheme Meetings be known? The result of the votes cast at the Scheme Meetings will be available shortly after the conclusion of each of the Scheme Meetings and will be announced to the ASX once available. The results will also be published on Challenger s website on the next Business Day following the Scheme Meetings. Q11 What happens if I do not vote, or if I vote against the Share Scheme proposal? If you are a Challenger Shareholder as at the Record Date and the Share Scheme proposal is implemented, your Challenger Shares will be transferred pursuant to the Share Scheme and you will receive the Scheme Consideration notwithstanding that you did not vote or voted against the Share Scheme. You should be aware that each of the Schemes is subject to the approval of the Court. The Court hearing for approving the Schemes is expected to be held on Friday, 27 June 2003. Q16 What happens if the Share Scheme is not approved? If the Share Scheme is not approved: Challenger will remain a listed company; and 8

Challenger Shareholders will retain their Challenger Shares. Challenger shareholder information line on: 1300 302 106 Australia only; or The implications of the Merger not proceeding are detailed in section 2.4 of this. In particular, Challenger will be required to implement one or more of a number of alternatives considered by your directors. Q17 What if the Share Scheme is approved but either the Options Scheme or the Notes Scheme is not approved? If the Share Scheme is approved by the requisite majority of Challenger Shareholders and by the Court at the second Court hearing and all other conditions to the Merger are satisfied, then the Merger will go ahead notwithstanding that either the Options Scheme or the Notes Scheme is not approved by the requisite majorities of Challenger Optionholders, Challenger Noteholders or the Court. If the Share Scheme becomes Effective but either or both of the Options Scheme and Notes Scheme are not approved, Challenger Shares will be wholly owned as an asset of CPHIC and Challenger Shareholders will receive CPHIC Units in exchange for their Challenger Shares held as at the Record Date. Q18 What if the Share Scheme is not implemented by 31 July 2003? If the Share Scheme is not implemented on or before 31 July 2003, either Challenger or CPH Management may terminate the Implementation Agreement. If this occurs, the Merger will not proceed. Q19 Who can help answer my questions about the Merger? If you have any questions about the Merger, or you would like additional copies of this Scheme Booklet or the proxy form, please contact the + 61 2 9240 7460 outside Australia, between 9.00 am and 5.00 pm on Monday to Friday or consult your legal, financial or other professional adviser. Questions about the Merged Entity Q20 Who is CPH Management? CPH Management is the Responsible Entity of CPHIC and is a wholly owned subsidiary of CPH. Q21 What will be the new name of the Merged Entity? The new name of the Merged Entity will be Challenger Financial Services Group. Q22 What businesses will the Merged Entity comprise? Challenger will be the main business of the Merged Entity comprising approximately 60% of the underlying value of the Merged Entity (based on the mid point of each valuation range for CPHIC and Challenger as determined by the Independent Expert). CPHIC's assets contributed into the Merged Entity essentially comprise around $400 million in cash and liquid assets including listed investments, and around $80 million in unlisted investments. CPHIC will contribute $235 million in cash and liquid assets to recapitalise the Life Companies in accordance with CPH Management s Capital Management Plan (see section 5.2). Q23 Who will be the CEO? Mr Bill Ireland announced on 9 April 2003 that he had stepped down as Managing Director of Challenger. Mr Chris Cuffe was seconded to Challenger on that date as acting Chief Executive Officer. Mr Cuffe is the Chief Executive Officer of 9

CPH Management and was formerly the Chief Executive Officer of Colonial First State Investments, the Australian funds management operations of the Commonwealth Bank. Q24 Who will be on the board of directors of CPH Management? If the Merger proceeds, the board of CPH Management will comprise: James Packer, Chairman Chris Cuffe, Managing Director and Chief Executive Officer Russell Hooper Ashok Jacob Peter Polson James Service Brenda Shanahan Michael Tilley Q25 What are CPH Management s intentions in relation to the business, assets and employees of Challenger if the Merger proceeds? Information relating to CPHIC s intentions is set out in section 5. 10

HOW TO VOTE Your vote is important For the Merger to take place, it is required that the requisite majority of Challenger Shareholders vote in favour of the Share Scheme. By mail: Challenger Share Registry ASX Perpetual Registrars Limited Locked Bag A14 South Sydney NSW 1232 OR If at 10.00am on Saturday, 14 June 2003 you are registered as the holder of Challenger Shares: You will be entitled to vote on the resolution to approve the Share Scheme at the Share Scheme Meeting. By hand delivery: Challenger Share Registry ASX Perpetual Registrars Limited Level 8, 580 George Street Sydney NSW 2000 To vote in person, Challenger Shareholders should attend the Share Scheme Meeting on Monday, 16 June 2003 at City Recital Hall, Angel Place, 10 Bridge Street, Sydney at 10.00am. A copy of the notice of meeting for the Share Scheme Meeting is set out in Appendix V. If you wish to appoint a proxy to attend and vote at the Share Scheme Meeting on your behalf, use the pink proxy form accompanying this and follow the instructions below. Queries If you have queries about the Merger, please call the information line on 1300 302 106 or for overseas callers on + 61 2 9240 7460 between the hours of 9.00am and 5.00pm Australian eastern standard time from Monday to Friday. A message bank service will take messages outside these hours. Challenger will also post information on the Challenger website at www.challengergroup.com. If you are in doubt as to what you should do, you should consult your investment or other professional adviser. PROXY FORMS MUST BE RECEIVED BY THE CHALLENGER SHARE REGISTRY BY NO LATER THAN 10.00AM ON SATURDAY, 14 JUNE 2003 You must return them to the Challenger Share Registry by posting them in the reply paid envelope provided, delivering them to the address below, or by faxing them to (02) 8280 7646. 11

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Section 1 Key features of the proposed Merger 1

1.1 Background On 20 January 2003, Challenger announced a merger proposal which will result in Challenger becoming a wholly owned asset of CPHIC if approved by Challenger Shareholders and the Court and subject to certain conditions detailed in section 1.2 below and section 10.3. In view of the substantial interests that CPH has in both Challenger and CPH Management and the perception that those interests could give rise to conflicts, Mr Kerry Packer, Mr James Packer and Mr Ashok Jacob resigned as directors of Challenger on 20 January 2003. They remained as directors of CPH Management. Mr Lloyd Williams also resigned as a director of Challenger on 20 January 2003. Challenger and CPH Management entered into the Implementation Agreement on 9 April 2003 following each party conducting detailed due diligence on the other. For further details of the due diligence process and the Implementation Agreement, see sections 10.2 and 10.3. On 9 April 2003, Challenger announced the secondment of Mr Chris Cuffe by CPH Management to Challenger to the position of acting Chief Executive Officer. On 10 April 2003, Mr Cuffe announced the appointment of a new senior management team of Challenger with immediate effect. 1.2 Summary of the proposed Merger Overview Challenger proposes to merge with CPHIC through three schemes of arrangement, namely: the Share Scheme to transfer all of the Challenger Shares to CPH Management to be held as assets of CPHIC; the Options Scheme for the issue of CPHIC Units to Challenger Optionholders on exercise of their Challenger Options; and the Notes Scheme for the issue of CPHIC Units to Challenger Noteholders either, at the election of the Noteholder, on transfer of their Challenger Notes to CPH Management on the Effective Date or later on a subsequent conversion of Challenger Notes. For the purposes of the Merger, Challenger Optionholders and Challenger Noteholders are treated by the Court as two separate classes of creditors of Challenger. Separate explanatory statements in relation to the Options Scheme and the Notes Scheme have been sent to the Challenger Optionholders and Challenger Noteholders, respectively. Challenger Shareholders may obtain a copy of these explanatory statements from Challenger free of charge. See section 10.12 for further details. Conditions for Implementing the Merger The Merger is conditional on a number of matters which are set out in section 10.3 and include: approval of the Share Scheme by Challenger Shareholders and the Court; CPHIC Unitholders approving the Merger and the acquisition of Challenger Shares and Challenger Notes from related entities of CPH (see section 10.11 for more details); approval of the Federal Treasurer under the Financial Sector (Shareholdings) Act 1998 and, as required, under the Insurance Acquisitions and Takeovers Act 1991; approval of the Financial Services Authority is granted in accordance with the Financial Services and Markets Act (UK); 14

no material adverse change affecting either Challenger or CPHIC; and APRA reconfirming to CPH Management immediately prior to the Second Court Date that it is satisfied with CPH Management s Capital Management Plan for Challenger. Effect of the Share Scheme The Share Scheme, if implemented, will have the following effects: the transfer to CPH Management as responsible entity of CPHIC of all the Challenger Shares; Challenger becoming a wholly owned asset of CPHIC; and Challenger Shareholders holding approximately 59% of the total number of CPHIC Units on issue (assuming all Challenger Noteholders retain their Challenger Notes). A copy of the Share Scheme is set out in Appendix IV of this. Scheme Consideration If each of the three Schemes is implemented: Challenger Shareholders will receive 4.5 CPHIC Units in exchange for each Challenger Share held by them on the Record Date; Challenger Optionholders will receive 4.5 CPHIC Units in exchange for each Challenger Share issued on exercise of each Challenger Option after the Effective Date; and Challenger Noteholders will elect to receive either: - 5.5 CPHIC Units in exchange for each Challenger Note transferred to CPH Management on the Effective Date; or - 4.5 CPHIC Units in exchange for each Challenger Share issued on conversion of a Challenger Note after the Effective Date. Steps for implementing the Share Scheme Details of the steps for implementing the Share Scheme are set out in section 10.6. 1.3 Reasons to vote for or against the Merger Director s recommendation Your directors recommend that you should vote in favour of the Merger in the absence of a superior proposal. Your directors believe that there are a number of important matters that Challenger Shareholders need to consider in making a decision on how to vote on the proposed Share Scheme. Your directors believe that the advantages of the proposed Merger outweigh the disadvantages. Advantages of the Merger The reasons why Challenger Shareholders should vote in favour of the Merger are set out in section 2.2 and include: the offer represents a premium to the Challenger share price at the time the Merger was announced; the Independent Expert has assessed the merits of the proposed Merger and has concluded that the Share Scheme is in the best interests of Challenger Shareholders in the absence of a superior proposal; the Merger will improve the financial strength of Challenger which is likely to increase the confidence of Challenger s customers in its products and reduce the risks assumed by its creditors; the Merger will provide Challenger with access to a more substantial capital base enabling it to take advantage of additional opportunities for growth; 15

the Merger will improve the quality of capital of the Life Companies; the Merged Entity is likely to attract additional investor and market interest; and the Merged Entity will combine the business of Challenger with the management team provided by CPH Management. Disadvantages of the Merger The reasons why Challenger Shareholders may consider voting against the Merger and the risk factors facing Challenger are set out in sections 2.3 and 7 respectively, and include: under the proposed Merger, Challenger Shareholders will exchange their Challenger Shares for CPHIC Units. Under existing tax law, they may be taxed on any gain made on the exchange (generally in the financial year ending 30 June 2004). However, the government has announced changes in the tax law. If those changes become law as announced, then Challenger Shareholders who hold their shares on capital account may be able to defer being taxed, generally until they sell their CPHIC Units; management and other fees will be payable by CPHIC to CPH Management in respect of the value of CPHIC s investment in Challenger; the proposed Merger was announced when Challenger s share price was trading at relatively low levels; no cash consideration is being provided under the proposed Merger; Challenger Shareholders will reduce their direct interests in Challenger; the Merged Entity will include CPHIC s existing investments, and Challenger Shareholders will be exposed to the risks and benefits of those investments; and CPHIC is not under an obligation to hold annual general meetings. Independent Expert s opinion Grant Samuel & Associates Pty Limited was appointed by the directors of Challenger as the independent expert to assess the merits of the Merger for Challenger Shareholders. It is the Independent Expert s opinion that the Merger is in the best interests of Challenger Shareholders in the absence of a superior proposal. A copy of the Independent Expert s report is included in Appendix 1. 1.4 Share Scheme Approvals The Merger is subject to the approval of the requisite majority of Challenger Shareholders, the approval of the Court and the approval of CPHIC unitholders. In summary: Challenger Shareholders are being asked to approve the Share Scheme at a meeting to be held on Monday, 16 June 2003. For the Share Scheme to be approved by Challenger Shareholders: - a majority in number (more than 50%) of Challenger Shareholders voting at the Share Scheme Meeting (in person or by proxy) must be in favour of the Share Scheme; and - those who vote in favour of the Share Scheme must hold at least 75% of the total number of Challenger Shares voted at the Share Scheme Meeting. 16

CPHIC Unitholders are being asked to approve the Merger at a meeting to be held on Tuesday, 17 June 2003. For the Merger to be approved by CPHIC unitholders: - those who vote in favour of the Merger must hold at least 50% of the total number of CPHIC Units voted at the meeting of CPHIC unitholders; and - CPH and its associated entities are unable to vote at that meeting. More information on the CPHIC unitholder resolutions is contained in section 10.11. If the Share Scheme is approved by the Challenger Shareholders and CPHIC Unitholders, the Court will be asked to approve the Share Scheme. This is expected to occur on or about 27 June 2003. Challenger will notify ASX upon the Share Scheme becoming Effective. Once the Share Scheme becomes Effective, Challenger and CPH Management will become bound to take the steps required for: CPH Management to become the holder of all the Challenger Shares; and Challenger Shareholders to receive their Scheme Consideration. 1.6 Trading on the ASX If the proposed Merger is implemented, CPH Management will cause CPHIC Units to be issued to Challenger Shareholders and to be quoted for trading on ASX. CPHIC Units are expected to commence trading on ASX on a deferred settlement basis on 2 July 2003 (being the next trading day after the Effective Date). If the Share Scheme is approved by the Challenger Shareholders and either or both of the Options Scheme or the Notes Scheme is not approved by the Challenger Optionholders or Challenger Noteholders respectively and assuming the Merger is approved by CPHIC Unitholders, the Court will be asked to approve the Share Scheme and, subject to that Court approval, the Merger will proceed notwithstanding either or both the Options Scheme or the Notes Scheme has not been approved. 1.5 Effective Date The Merger will become Effective on the date when an office copy of the Court order approving the Share Scheme is lodged with ASIC or such earlier date as the Court determines and specifies in the Court order. Challenger does not intend to lodge a copy of the Court order with ASIC until 1 July 2003. 1.7 Tax considerations Taxation considerations that are relevant to your decision on how to vote on the Share Scheme are discussed in Section 8. Each Challenger Shareholder is advised to consult their own tax adviser. 1.8 Foreign Shareholders CPH Management is not obliged to issue CPHIC Units to any Challenger Shareholder who is a citizen or resident of a jurisdiction outside Australia or New Zealand or whose address in the Challenger Share Register is outside Australia and its external territories or New Zealand, unless CPH Management has received advice or that Challenger Shareholder has provided evidence so that CPH Management is satisfied, before the Effective Date, that it is not precluded from lawfully allotting and issuing CPHIC Units to that Challenger Shareholder, either unconditionally or after compliance with conditions which CPH 17

Management in its sole discretion regards as acceptable and not unduly onerous. If CPH Management does not issue CPHIC Units to a Challenger Shareholder because they are a Foreign Shareholder, then the CPHIC Units that would have been issued to the Foreign Shareholder will be issued to a nominee selected by CPH Management at the same time as CPHIC Units are issued to Scheme Members who are not Foreign Shareholders. The nominee will sell the CPHIC Units issued to it as soon as is reasonably practicable and account to the Foreign Shareholder for the net proceeds of the sale. 18

Section 2 Matters relevant to your vote 2

2.1 Directors recommendation Your directors believe that the proposed Merger is in the best interests of Challenger Shareholders and your directors unanimously recommend that, in the absence of a superior proposal, Challenger Shareholders should vote in favour of the Share Scheme. Each of your directors considers themselves justified in making a recommendation in relation to the Share Scheme. Your directors believe that there are significant positive reasons for Challenger Shareholders to vote in favour of the Share Scheme. These are set out below. The offer represents a premium to Challenger Shareholders If the proposed Merger is implemented, Challenger Shareholders will receive 4.5 CPHIC Units in exchange for each Challenger Share held by them at the Record Date. All directors who hold Challenger Shares intend to vote in favour of the Share Scheme. The reasons for your directors recommendations are outlined below. You should also read the Independent Expert s Report which is set out in Appendix I of this. 2.2 Why Challenger Shareholders should vote in favour of the Share Scheme There are a number of important matters that Challenger Shareholders need to consider in making a decision on how to vote on the proposed resolution at the Share Scheme Meeting. These include a number of advantages and disadvantages, some of which will be dependent upon the individual financial and taxation circumstances of each Challenger Shareholder. The tax implications of the Share Scheme are described in section 8 Challenger Shareholders should consider any advantages and disadvantages in relation to the Merger in the context of their individual financial and taxation circumstances, and should read this in its entirety and seek investment or other professional advice if necessary. The directors of Challenger believe that the exchange ratio of one Challenger Share for 4.5 CPHIC Units is fair and reasonable to Challenger Shareholders. The Independent Expert confirmed this on the basis that: the exchange ratio favours Challenger Shareholders in terms of the relative contribution of the market value of Challenger and CPHIC, at least based on recent market prices. In other words, Challenger Shareholders are receiving a premium; and the exchange ratio in terms of relative contribution of the underlying value of each of Challenger and CPHIC is equitable. Both Challenger and CPHIC are contributing value commensurate with their share in the Merged Entity. Independent Expert s opinion The Independent Expert has concluded that the Share Scheme is in the best interests of Challenger Shareholders in the absence of a superior proposal. The Independent Expert viewed the Merger in three ways and came to the following conclusions: As a major capital raising exercise, the Independent Expert s opinion is that the Merger therefore provides Challenger (which will be the main business of the combined 20

entity) with access to a much more substantial liquid capital base, freeing it from its current capital issues and enabling it to vigorously pursue growth opportunities across its chosen areas within the financial services sector. As a wholly scrip based equity swap, the Independent Expert s opinion is that the exchange ratio favours Challenger shareholders in terms of the relative contribution of market value, at least based on recent market prices. In other words, Challenger shareholders are receiving a premium and the exchange ratio in terms of the relative contribution of the underlying value is equitable. Both groups are contributing value commensurate with their share of the merged entity. As a takeover, the Independent Expert s opinion is that the market value of the consideration offered by CPHIC is equivalent to approximately $2.16 - $2.39 per Challenger share, which is broadly equivalent to Grant Samuel s estimate of the underlying value of Challenger, including a premium for control, of $2.00 - $2.48. In this respect the offer by CPHIC is fair and reasonable. CPH Management has provided APRA with a capital management plan for the Life Companies. The key aspects of the CPH Management Capital Management Plan include: $235 million in liquid assets will be injected into the statutory fund of CLL2; The aggregate value of the income and capital units held by the Life Companies will be written down to a value equivalent to the current net market value of the underlying properties, after deducting outstanding debt and other obligations. This write down is reflected in the proforma statement of financial position of the Merged Entity in section 6; and CLL2 s investment in Synergy Capital Management Pty Limited will be transferred out of the statutory fund of CLL2 while approximately $77 million of private equity investments currently held by CPHIC will be transferred into the shareholders fund of CLL2. The additional funds injected into CLL2 will be in the form of liquid assets with a significant equity component. The Independent Expert also notes that the essential question for Challenger Shareholders is whether the greater growth opportunities and reduced risk profile compensate for the change of control, the dilution of returns and upside potential and other disadvantages. In Grant Samuel s view, they do by a significant margin. If the Merger is not implemented, Challenger Shares are likely to trade at levels below the current price range of $2.00 to $2.30 in the absence of any alternative transaction providing a similar value proposition. On 4 April 2003, APRA advised CPH Management that, having reviewed the capital management plan proposed by CPH Management as set out above, it would not raise any objection from a prudential perspective to the capital injection. A condition of the Merger, as set out in the Implementation Agreement and discussed in section 10.3 of this, requires APRA to confirm its view, as set out above, not earlier than five Business Days before the Second Court Date. Access to greater capital resources Challenger s regulatory capital requirements are discussed in section 2.4. The Capital Management Plan was prepared by CPH Management without the involvement of the directors of Challenger and does not reflect the 21

views of the directors of Challenger. In the event that the Merger does not proceed, the directors of Challenger will continue preparation of their own capital management plan that may not include any of the elements in the CPH Management Capital Management Plan. Further details of CPH Management s Capital Management Plan are set out in section 5.2. The Merger will improve the quality of Challenger s regulatory capital The Life Companies currently offer short-term, long-term and life time annuities, personal superannuation and allocated pension products. Over the past three years, annuities have been the most popular product. The Life Companies are regulated as life insurance companies and accordingly are required to maintain adequate capital reserves to support their obligations under the annuity and other products. The Life Companies capital reserves predominantly comprise property assets. Following the Merger, the Life Companies capital reserves will be strengthened through the injection of liquid assets as discussed above. Your directors believe that it is prudent to augment Challenger s capital base by increasing the proportion of regulatory capital which Challenger holds in the form of liquid assets. This portion of capital held in liquid assets is designed to allow a life company to withstand adverse significant events or shocks with regard to its investment portfolio and can be referred to as quality of capital. An increase in the quality of capital is part of the capital management plan for the Merged Entity which was formulated by CPH Management having regard to current policies of APRA and after consultation with APRA. Potential growth in Challenger products Challenger believes that there is significant potential growth in the market for its products for the following key reasons: Compulsory superannuation contribution of 9% this is expected to provide continuing and growing demand for wealth management and investment products and services. Advantages to investors certain annuities provide a way to defer or eliminate lump sum tax on superannuation benefits and can enhance pensioners eligibility to receive social security benefits. The additional liquid capital resources available to Challenger after the Merger will better enable Challenger to take advantage of this potential growth. The Merged Entity is likely to attract additional investor and market interest On implementation of the Merger, the Merged Entity will be capitalised at over $1.1 billion based on Challenger s and CPHIC s closing prices on ASX on 17 April 2003, making it a top 100 entity on the ASX by market capitalisation. A larger market capitalisation, improved capital position and likely greater market liquidity is likely to make the Merged Entity more attractive to investors. At present, Challenger is a member of the S&P/ASX 200 index. At present CPHIC is not a member of any of the Standard & Poor s / ASX indices, while Challenger represents 0.08% of the S&P/ASX 200 index. The increased market capitalisation of the Merged Entity may lead to increased index weighting by Standard & Poor s. However, inclusion in any of the S&P/ASX indices is at Standard & Poor s discretion and will depend on the liquidity factor for the Merged Entity, as defined by Standard & Poor s. 22

Given that many institutions and fund managers invest based on index weightings, any increased index weighting is likely to increase the level of institutional interest and investment in the Merged Entity. The larger market capitalisation, greater profile and potentially higher index weighting may also lead to increased coverage from research analysts. The Merged Entity will combine the business of Challenger and the management team provided by CPH Management Challenger management have built a strategy and business model which has significant competitive advantages and has played an important role in building Challenger into a leading financial services group. CPH Management has assembled a management team around Mr Chris Cuffe, the former Chief Executive Officer of Colonial First State Investments, the Australian funds management operations of the Commonwealth Bank, with extensive experience and expertise in the financial services sector (see section 5.3 for further details). 2.3 Reasons why Challenger Shareholders may consider voting against the Share Scheme Challenger Shareholders should also be aware of reasons as to why they may decide to vote against the Share Scheme. Although your directors acknowledge the potential disadvantages of the Merger, they believe that these are more than outweighed by the benefits it would deliver. The potential disadvantages Challenger Shareholders should be aware of are set out below. Taxation implications Under existing tax law, Challenger Shareholders will generally be taxed on any gain made on the exchange of Challenger Shares for CPHIC Units in connection with the Merger (generally in the financial year ending 30 June 2004). However, the Government has announced changes in the tax law. If those proposed changes become law, then it is expected that Challenger Shareholders who hold their shares on capital account and who would make a capital gain on the exchange should be eligible for rollover relief. This will allow such shareholders to defer the taxing point, generally until they sell their CPHIC Units. Ultimately, this will depend on the form of the changes (if any) as enacted. Although it is expected that the proposed changes will become law, there is no certainty. Refer to section 8 for further details. Payment of Management Fees and Performance fees to CPH Management From the date of the Merger, CPH Management will be entitled to receive Management Fees and Performance Fees in respect of the value of CPHIC s investment in Challenger. This is in addition to management and other fees CPH Management is entitled to with respect to its other assets and investments. CPH Management has agreed to waive its annual Management Fee in relation to the value of its investment in Challenger (as distinct from capital directly contributed by CPHIC to a Challenger subsidiary) as at the Effective Date until such time as the VWAP (Volume Weighted Average Price) of CPHIC Units on ASX exceeds $0.60 over ten consecutive trading days. In this event CPH Management is entitled to a base Management Fee in relation to Challenger amounting to approximately $9 million per annum initially. Currently, there is no equivalent Management Fee payable to any party in relation to the value of the Challenger business. CPH Management will continue to receive a Management Fee based on its other assets which is not subject to the $0.60 threshold referred to above. 23